Dril-Quip Inc – IPO: ‘424B1’ on 10/23/97

As of:  Thursday, 10/23/97   ·   Accession #:  899243-97-2007   ·   File #:  333-33447

in

this entire Filing. an “Entity” Search.

Show

Documents searched

and

each “hit”. the 1st “hit”.

↓↑Hints

Initial Public Offering (IPO):  Prospectus   —   Rule 424(b)(1)
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 424B1       Definitive Prospectus                                 72    394K 

Document Table of Contents

424B1
1st Page of 72
TOC
↑Top
Previous
Next
↓Bottom
Just 1st
 
                                              FILED PURSUANT TO RULE 424(b)(1)

                                                    REGISTRATION NO. 333-33447

PROSPECTUS                                                                      

5,000,000 Shares  

[LOGO OF DRIL-QUIP APPEARS HERE]  

COMMON STOCK  

----------------  

OF  THE 5,000,000  SHARES OF  COMMON STOCK BEING  OFFERED HEREBY,  2,500,000  
SHARES  ARE BEING SOLD  BY THE  COMPANY AND  2,500,000 SHARES ARE  BEING  
SOLD  BY  THE  SELLING  STOCKHOLDERS.  SEE  "PRINCIPAL  AND  SELLING  
STOCKHOLDERS." THE COMPANY WILL NOT  RECEIVE ANY OF THE PROCEEDS  
FROM THE SALE  OF SHARES BY THE  SELLING STOCKHOLDERS. PRIOR  
TO THIS OFFERING,  THERE HAS  BEEN NO  PUBLIC MARKET FOR  
THE COMMON STOCK OF  THE COMPANY. SEE "UNDERWRITERS"  
FOR  A  DISCUSSION OF  THE FACTORS  CONSIDERED  IN  
DETERMINING   THE   INITIAL  PUBLIC   OFFERING  
PRICE.  

----------------  

THE COMMON STOCK HAS BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK EXCHANGE 
UNDER THE SYMBOL "DRQ." 

----------------  

SEE "RISK FACTORS" COMMENCING ON PAGE 7 HEREOF FOR INFORMATION THAT 
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.  

----------------  

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES  AND 
EXCHANGE  COMMISSION  OR  ANY  STATE  SECURITIES  COMMISSION  NOR  HAS  THE 
SECURITIES AND  EXCHANGE COMMISSION  OR ANY  STATE SECURITIES  COMMISSION 
PASSED  UPON  THE  ACCURACY  OR   ADEQUACY  OF  THIS  PROSPECTUS.   ANY 
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.   

----------------  

PRICE $24 A SHARE 

----------------  

                                                                [Download Table]

                                          UNDERWRITING              PROCEEDS TO 
                              PRICE TO   DISCOUNTS AND  PROCEEDS TO   SELLING   
                               PUBLIC    COMMISSIONS(1) COMPANY(2)  STOCKHOLDERS
                            ------------ -------------- ----------- ------------
                                                                                
Per Share..................    $24.00        $1.68        $22.32       $22.32   
Total(3)................... $120,000,000   $8,400,000   $55,800,000 $55,800,000 

--------                                                                        
(1) The Company and the Selling Stockholders have agreed to indemnify the   
Underwriters against certain liabilities, including under the       
Securities Act of 1933, as amended. See "Underwriters."             
(2) Before deducting expenses payable by the Company estimated at $800,000. 
(3) The Company and the Selling Stockholders have granted to the            
  Underwriters an option, exercisable within 30 days of the date hereof,
to purchase up to an aggregate of 750,000 additional Shares at the  
price to public less underwriting discounts and commissions for the 
purpose of covering over-allotments, if any. If the Underwriters    
 exercise such option in full, the total price to public, underwriting
  discounts and commissions, proceeds to Company and proceeds to Selling
Stockholders will be $138,000,000, $9,660,000, $64,170,000 and      
$64,170,000, respectively. See "Underwriters."                      

----------------  

The Shares are offered, subject to prior sale, when, as and if accepted by  
the Underwriters named herein and subject to approval of certain legal matters  
by Andrews & Kurth L.L.P., counsel for the Underwriters. It is expected that    
delivery of the Shares will be made on or about October 28, 1997 at the office  
of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor  
in immediately available funds.                                                 

----------------  

MORGAN STANLEY DEAN WITTER                                                      
                                                  DONALDSON, LUFKIN & JENRETTE
                                                  Securities Corporation

October 22, 1997                                                                

424B1
2nd Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 2nd
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE 
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN AS CONTAINED IN THIS  
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST     
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY ANY SELLING     
STOCKHOLDER OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN       
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE  
COMMON STOCK OFFERED HEREBY NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A        
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY TO ANY PERSON IN  
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION  
TO SUCH PERSONS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE  
MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION HEREIN  
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.                        

----------------  

UNTIL NOVEMBER 16, 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),   
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT          
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.    
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO        
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR      
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.                                             

----------------  

TABLE OF CONTENTS 

                                                                [Download Table]

                                                                            PAGE
                                                                            ----
                                                                                
Prospectus Summary........................................................    3 
Risk Factors..............................................................    7 
Use of Proceeds...........................................................   12 
Dividend Policy...........................................................   12 
Dilution..................................................................   13 
Capitalization............................................................   14 
Selected Financial Data...................................................   15 
Management's Discussion and Analysis of Financial Condition and Results of      
 Operations...............................................................   16 
Business..................................................................   23 
Management................................................................   39 
Certain Transactions......................................................   44 
Principal and Selling Stockholders........................................   45 
Shares Eligible for Future Sale...........................................   46 
Description of Capital Stock..............................................   47 
Underwriters..............................................................   54 
Legal Matters.............................................................   56 
Experts...................................................................   56 
Additional Information....................................................   56 
Index to Consolidated Financial Statements................................  F-1 

----------------  

The Company intends to furnish to its stockholders annual reports containing
audited consolidated financial statements examined by an independent            
accounting firm and quarterly reports for the first three quarters of each      
fiscal year containing interim unaudited consolidated financial information.    

----------------  

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS    
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.    
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,   
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.   
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."                      

2 

424B1
3rd Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 3rd
[Map showing the locations of Dril-Quip's (i) manufacturing, engineering,       
sales and service operations, (ii) sales and service operations and (iii)       
sales representatives. Photographs of Dril-Quip's World Headquarters, Europe    
Headquarters, Asia-Pacific Headquarters and Eldridge Road Facility.]            

i 

424B1
4th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 4th
[Illustrations of jack-up, platform, floating rig, tension leg platform and     
spar installations, accompanied by a list of Dril-Quip products used in each    
installation appear on pages ii-iv. The illustrations show where each product   
is utilized. Illustrations of platform wellheads, mudline hanger systems,       
platform production trees, diverters, specialty connectors, subsea wellheads,   
wellhead connectors, subsea production trees and drilling and production riser  
systems are also included.]                                                     

424B1
5th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 5th
PROSPECTUS SUMMARY

 The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and financial statements,        
including the notes thereto, appearing elsewhere in this Prospectus. Unless     
otherwise indicated, the information in this Prospectus (i) gives effect to the 
Company's 14.3686 for one stock split and its expected reorganization as a      
Delaware corporation prior to the consummation of the Offering, and (ii)        
assumes that the Underwriters' over-allotment option will not be exercised.     
Unless otherwise indicated by the context, references herein to the "Company"   
or "Dril-Quip" mean Dril-Quip, Inc., a Delaware corporation that is the issuer  
of the Common Stock offered hereby, its predecessor and its subsidiaries.       

THE COMPANY 

Dril-Quip is one of the world's leading manufacturers of highly engineered  
offshore drilling and production equipment which is well suited for use in      
deepwater, harsh environment and severe service applications. The Company       
designs and manufactures subsea equipment, surface equipment and offshore rig   
equipment for use by major integrated, large independent and foreign national   
oil and gas companies in offshore areas throughout the world. The Company's     
principal products consist of subsea and surface wellheads, subsea and surface  
production trees, mudline hanger systems, specialty connectors and associated   
pipe, drilling and production riser systems, wellhead connectors and diverters. 
The Company also provides installation and reconditioning services and rents    
running tools for use in connection with the installation and retrieval of its  
products. In 1996, the Company derived 82.1% of its revenues from the sale of   
its products and 17.9% of its revenues from services.                           

 Dril-Quip has developed its broad line of subsea equipment, surface equipment
and offshore rig equipment exclusively through its internal product development 
efforts. The Company believes that it has achieved significant market share and 
brand name recognition with respect to its established products due to the      
technological capabilities, reliability, cost effectiveness and operational     
timesaving features of these products. In particular, the Company's Quik-       
Thread(R) and Quik-Stab(R) specialty connectors, MS-15(R) mudline hanger        
systems and SS-10(R) and SS-15(R) subsea wellheads are among the most widely    
used in the industry. The Company believes that, as of June 1, 1997, its subsea 
wellhead equipment was being used on approximately 70% of the wells being       
drilled in waters deeper than 3,000 feet worldwide. Since 1991, the Company has 
introduced a number of new products, including diverters, wellhead connectors,  
dual-bore and single-bore subsea production trees, subsea and platform valves,  
platform wellheads, platform trees, drilling risers and Spar and tension leg    
platform ("TLP") production risers.                                             

The Company has grown consistently since its inception in 1981 and has been 
profitable in every year since 1983. As a result of new product introductions,  
increased market share in established product lines and increased offshore      
drilling and production activity, the Company's revenues have increased from    
$65.2 million in 1992 to $115.9 million in 1996 (an annual growth rate of       
15.4%), and its net income has increased from $1.7 million in 1992 to $9.1      
million in 1996 (an annual growth rate of 52.1%). From 1995 to 1996, the        
Company's revenues and net income grew by 7% and 38%, respectively. For the six 
months ended June 30, 1997, the Company's revenues were $68.7 million and its   
net income was $5.1 million, representing a 24% increase in revenues and a 26%  
increase in net income from the comparable period in 1996.                      

The Company has experienced increased demand for its products due to the    
increased drilling and production activity in offshore areas throughout the     
world during the last several years, particularly in deeper waters. The         
increase in offshore drilling and production activity has been driven by a      
number of factors, including (i) the prospect for relatively larger hydrocarbon 
discoveries in deepwater areas and (ii) recent technological advances in        
offshore drilling and production equipment (including those introduced by Dril- 
Quip), seismic data collection and interpretation techniques, and drilling      
techniques, which have enhanced the economics of offshore drilling and          
production. In addition, several foreign national oil companies have recently   
opened offshore areas for exploration and development by other parties,         
including major integrated and large                                            

3 

424B1
6th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 6th
independent oil and gas companies. These factors have contributed to the        
increase in the Company's backlog from approximately $56 million at December    
31, 1996 to approximately $101 million at June 30, 1997, an 80% increase. The   
Company intends to use the proceeds from the Offering to expand its             
manufacturing capacity in order to satisfy the increased demand for its         
products.                                                                       

Dril-Quip markets its products through its offices and sales representatives
located in all of the major international energy markets throughout the world.  
In 1996, the Company generated approximately 68% of its revenues from foreign   
sales. The Company manufactures its products at its facilities located in       
Houston, Texas; Aberdeen, Scotland; and Singapore, and maintains additional     
facilities for fabrication and/or reconditioning in Norway, Denmark and         
Australia. Dril-Quip's manufacturing operations are vertically integrated, with 
the Company performing substantially all of its forging, heat treating,         
machining, fabrication, inspection, assembly and testing at its own facilities. 
Unlike essentially all of the Company's competitors, which depend on outside    
sources for forging and heat treatment services, Dril-Quip owns a forge and     
heat treatment facility that handles virtually all of the Company's             
requirements. This vertically integrated manufacturing capability provides      
Dril-Quip with competitive advantages because the Company is able to (i)        
control the quality of its products from initial stages, (ii) control the costs 
of its production and (iii) assure timely delivery of high-volume and           
customized orders.                                                              

The Company was co-founded in 1981 by the current Board of Directors, Larry 
E. Reimert, Gary D. Smith, J. Mike Walker and Gary W. Loveless (the             
"Founders"). Together, Messrs. Reimert, Smith and Walker have over 75 years of  
combined experience in the oilfield equipment industry, essentially all of      
which has been with the Company and its major competitors. In addition, key     
department managers have been with the Company over 10 years, on average. See   
"Management." After the Offering, the Founders will collectively beneficially   
own approximately 70% of the outstanding Common Stock (approximately 67% if the 
over-allotment option is exercised in full).                                    

STRATEGY                                                                        

The Company's goal is to expand its existing market position in the offshore
oil and gas equipment and services sector while at the same time increasing its 
earnings and cash flow per share to enhance overall stockholder value. Key      
elements of the Company's strategy for achieving this goal are to:              

. CONTINUE TO DEVELOP NEW PRODUCTS. The Company plans to utilize its        
 technological expertise to continue to develop and introduce new products
and product enhancements in both its existing product lines and new     
product lines. For example, the Company has recently received purchase  
orders for drilling risers, production risers and deepwater subsea      
production trees. The Company believes that the strong brand name       
recognition and reputation of its existing products will assist it in   
successfully introducing new products to customers.                     

. INCREASE MANUFACTURING CAPACITY. To maintain and improve market share in  
its major product lines, the Company plans to expand its manufacturing  
capacity by approximately 90% during the three year period 1997 through 
1999, approximately two-thirds of which is expected to be completed by  
 the end of 1998. The Company has been operating at close to full capacity
in recent years, and believes that this expansion is essential in order 
to meet customer demand for its existing products and to continue its   
strategy of developing new products.                                    

. CONTINUE TO REDUCE COSTS AND INCREASE OPERATIONAL EFFICIENCIES. The       
Company controls its costs through such activities as performing its own
 forging and heat treatment, rebuilding quality used machine tools (rather
than purchasing new machine tools) and optimizing manufacturing         
operations to increase the rate of production. Dril-Quip also plans to  
expand its forging capacity to begin marketing forgings to third parties
in addition to supplying its own forging requirements. The Company      
expects that this will provide additional cost efficiencies as well as  
additional revenues, thereby contributing to profits.                   

4 

424B1
7th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 7th
. CONTINUE EXPANSION INTO SELECTED INTERNATIONAL MARKETS. The Company's     
products are currently utilized primarily in the Gulf of Mexico, the    
North Sea and in selected markets in Southeast Asia, Australia and South
America. The Company has recently engaged international sales           
representatives in several additional markets, including Mexico, West   
Africa and the Middle East. The Company believes that there is          
significant potential for increased sales through focused marketing     
efforts in other active offshore areas in the world, such as China,     
Argentina and the Caspian Sea.                                          

. CAPITALIZE ON STRONG BALANCE SHEET. The Company plans to use a portion of 
the net proceeds from the Offering initially to repay its existing      
indebtedness. The Company believes that its strong balance sheet will   
provide it with the financial flexibility to carry out its strategy to  
design and develop new products, significantly increase manufacturing   
capacity and expand its international presence.                         

THE OFFERING

                                                                [Download Table]
                                                                               
Common Stock offered by:                                                       
  The Company...................... 2,500,000 shares                           
  The Selling Stockholders......... 2,500,000 shares                           
    Total.......................... 5,000,000 shares                           
Common Stock to be outstanding                                                 
 after the Offering................ 16,870,000 shares (1)                      
Use of Proceeds.................... To increase manufacturing capacity, improve
                                    and expand facilities, and manufacture     
                                    additional running tools for rental. See   
                                    "Use of Proceeds."                         
New York Stock Exchange Symbol..... DRQ                                        

--------                                                                        
(1) Excludes an aggregate of 419,250 shares of Common Stock reserved for        
   issuance upon exercise of stock options to be granted at the closing of the
Offering under the Company's 1997 Incentive Plan (the "Incentive Plan").
See "Management--Incentive Plan," "Shares Eligible for Future Sale" and 
Notes to the Company's Consolidated Financial Statements.               

RISK FACTORS

Prospective purchasers should consider all of the information contained in  
this Prospectus before making an investment in shares of Common Stock. In       
particular, prospective purchasers should consider the factors set forth herein 
under "Risk Factors."                                                           

5 

424B1
8th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 8th
SUMMARY FINANCIAL DATA

                                                                [Download Table]

                                                                SIX MONTHS     
                                  YEAR ENDED DECEMBER 31,     ENDED JUNE 30,   
                                 ---------------------------  ---------------- 
                                  1994      1995      1996     1996     1997   
                                 -------  --------  --------  -------  ------- 
                                    (IN THOUSANDS, EXCEPT PER SHARE AND        
                                              INDUSTRY DATA)                   
                                                                (UNAUDITED)    
                                                                               
STATEMENT OF OPERATIONS DATA:                                                  
Revenues........................ $80,548  $108,390  $115,864  $55,346  $68,669 
Cost of sales...................  58,604    76,471    77,863   37,602   47,725 
Selling, general and                                                           
 administrative expenses........  11,673    13,597    15,031    7,253    7,839 
Engineering and product                                                        
 development expenses...........   6,069     5,769     6,971    3,245    4,109 
                                 -------  --------  --------  -------  ------- 
                                  76,346    95,837    99,865   48,100   59,673 
Operating income................   4,202    12,553    15,999    7,246    8,996 
Interest expense................   2,273     2,944     2,647    1,301    1,400 
                                 -------  --------  --------  -------  ------- 
Income before income taxes......   1,929     9,609    13,352    5,945    7,596 
Income tax provision............     635     3,023     4,234    1,885    2,483 
                                 -------  --------  --------  -------  ------- 
Net income...................... $ 1,294  $  6,586  $  9,118  $ 4,060  $ 5,113 
                                 =======  ========  ========  =======  ======= 
Earnings per share.............. $   .09  $    .46  $    .63  $   .28  $   .36 
Weighted average shares                                                        
 outstanding....................  14,370    14,370    14,370   14,370   14,370 
STATEMENT OF CASH FLOWS DATA:                                                  
Net cash provided by operating                                                 
 activities..................... $ 2,422  $  6,466  $  5,185  $ 1,374  $ 2,437 
Net cash used in investing ac-                                                 
 tivities.......................  (4,524)   (5,659)   (7,006)  (2,756)  (3,379)
Net cash provided by (used in)                                                 
 financing activities...........   2,668       560     1,261     (351)       4 
OTHER DATA:                                                                    
EBITDA (1)...................... $ 8,069  $ 17,201  $ 20,387  $ 9,646  $11,604 
Depreciation and amortization...   3,867     4,648     4,388    2,400    2,608 
Capital expenditures............   4,614     6,184     7,228    2,832    3,603 
OFFSHORE INDUSTRY DATA (2):                                                    
Worldwide average contracted                                                   
 offshore rig count.............   535.8     540.5     572.0    561.5    592.3 
Worldwide average contracted                                                   
 floating rig count (3).........   143.0     139.4     152.8    150.7    159.0 

                                                                [Download Table]

                                                           AS OF JUNE 30, 1997  
                                                         -----------------------
                                                          ACTUAL  AS ADJUSTED(4)
                                                         -------- --------------
                                                             (IN THOUSANDS)     
                                                               (UNAUDITED)      
                                                                                
BALANCE SHEET DATA:                                                             
Working capital......................................... $ 52,877    $ 78,910   
Total assets............................................  113,823     136,334   
Total debt..............................................   32,489          --   
Total stockholders' equity..............................   54,911     109,911   

--------                                                                        
(1) EBITDA, or "earnings from continuing operations before interest expense,    
interest income, income taxes, depreciation and amortization," is not a 
generally accepted accounting principle measure, but is a supplemental  
financial measurement used by the Company in the evaluation of its      
   business. EBITDA should not be construed as an alternative to net income or
to cash flow from operations or any other measure of performance in     
  accordance with generally accepted accounting principles, and is presented
solely as supplemental disclosure. EBITDA is a supplemental financial   
measure commonly used by investors in the oil services industry and is  
being presented because management believes that EBITDA provides        
supplemental information about the Company's ability to meet its future 
requirements for debt service, capital expenditures and working capital.
  Management monitors the trends in EBITDA closely, as well as the trends in
revenues and net income, to aid it in managing the business, controlling
costs and increasing revenues. Management believes that the recent      
increases in EBITDA are indicative of the increased level of profitable 
   business activity experienced by the Company. Because EBITDA excludes some,
 but not all, items that affect net income and this measure may vary among
companies, the EBITDA data presented above may not be comparable to     
similarly titled measures of other companies.                           
(2) Data obtained from Offshore Data Services.                                  
(3) Includes semisubmersible and drillship-type rigs.                           
(4) Adjusted to give effect to the Offering and the application of the net      
   proceeds to the Company therefrom of approximately $55 million. See "Use of
Proceeds" and "Capitalization."                                         

6 

424B1
9th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 9th
RISK FACTORS  

In addition to the other information in this Prospectus, the following risk 
factors should be considered carefully in evaluating the Company and its        
business before purchasing the Common Stock offered hereby. All statements      
other than statements of historical facts included in this Prospectus,          
including, without limitation, statements regarding the Company's business      
strategy, plans and objectives of management of the Company for future          
operations and future industry conditions are forward-looking statements.       
Although the Company believes that the expectations reflected in such forward-  
looking statements are reasonable, it can give no assurance that such           
expectations will be met. Important factors that could cause actual results to  
differ materially from the Company's expectations are disclosed below and       
elsewhere in this Prospectus.                                                   

VOLATILITY OF OIL AND NATURAL GAS PRICES AND CYCLICALITY OF THE OIL AND GAS     
INDUSTRY                                                                        

The Company's business is substantially dependent upon the condition of the 
oil and gas industry and, in particular, the willingness of oil and gas         
companies to make capital expenditures on exploration, drilling and production  
operations offshore. The level of capital expenditures is generally dependent   
on the prevailing view of future oil and gas prices, which are influenced by    
numerous factors affecting the supply and demand for oil and gas, including     
worldwide economic activity, interest rates and the cost of capital,            
environmental regulation, tax policies, coordination by the Organization of     
Petroleum Exporting Countries ("OPEC"), the cost of exploring for and           
producing oil and gas, the sale and expiration dates of offshore leases in the  
United States and overseas, the discovery rate of new oil and gas reserves in   
offshore areas and technological advances. Oil and gas prices and the level of  
offshore drilling and production activity have been characterized by            
significant volatility in recent years. Although hydrocarbon prices have        
improved in recent years and the level of offshore exploration, drilling and    
production activity has increased, there can be no assurance that such price    
and activity levels will be sustained and that there will not be continued      
volatility in the level of drilling and production related activities. A        
significant and prolonged decline in hydrocarbon prices would likely have a     
material adverse effect on the Company's results of operations. See             
"Management's Discussion and Analysis of Financial Condition and Results of     
Operations--Overview."                                                          

INTERNATIONAL OPERATIONS                                                        

The Company has substantial international operations, with approximately    
two-thirds of its revenues derived from foreign sales in each of 1994, 1995     
and 1996. The Company operates its business and markets its products and        
services in all of the significant oil and gas producing areas in the world     
and is, therefore, subject to the risks customarily attendant to international  
operations and investments in foreign countries. These risks include            
nationalization, expropriation, war and civil disturbance, restrictive action   
by local governments, limitation on repatriation of earnings, change in         
foreign tax laws and change in currency exchange rates, any of which could      
have an adverse effect on either the Company's ability to manufacture its       
products in its facilities abroad or the demand in certain regions for the      
Company's products or both. To date, the Company has not experienced any        
significant problems in foreign countries arising from local government         
actions or political instability, but there is no assurance that such problems  
will not arise in the future. Interruption of the Company's international       
operations could have a material adverse effect on its overall operations.      

The Company conducts a portion of its business in currencies other than the 
United States dollar, and the Company's operations are subject to fluctuations  
in foreign currency exchange rates. The Company has generally endeavored to     
protect itself against substantial foreign currency fluctuations by limiting    
the amount of sales denominated in currencies other than United States dollars  
and by contractual purchase price adjustments based on an exchange rate         
formula related to U.S. dollars. There is no assurance that the Company will    
be able to protect itself against such fluctuations in the future.              
Historically, the Company has not conducted business in countries that limit    
repatriation of earnings. However, as the Company expands its international     
operations, it may begin operating in countries that have such limitations.     
Further, there can be no assurance that the countries in which the Company      
currently operates will not adopt policies limiting repatriation of earnings    
in the future. See "Management's Discussion and Analysis of Financial           
Condition and Results of Operations--Currency Risk."                            

7 

424B1
10th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 10th
OPERATING RISKS                                                                 

Potential Liabilities. Certain products of the Company are used in          
potentially hazardous drilling, completion and production applications that     
can cause personal injury, product liability and environmental claims.          
Litigation arising from a catastrophic occurrence at a location where the       
Company's equipment and/or services are used may in the future result in the    
Company being named as a defendant in lawsuits asserting potentially large      
claims. To the extent available, the Company maintains insurance coverage that  
it believes is customary in the industry. Such insurance does not, however,     
provide coverage for all liabilities (including liability for certain events    
involving pollution), and there is no assurance that its insurance coverage     
will be adequate to cover claims that may arise or that the Company will be     
able to maintain adequate insurance at rates it considers reasonable. The       
occurrence of an event not fully covered by insurance could have a material     
adverse effect on the financial condition and results of operations of the      
Company.                                                                        

Competitive Project Bids. A portion of the Company's business consists of   
designing, manufacturing, selling and installing equipment for major projects   
pursuant to competitive bids, and the number of such projects in any year       
fluctuates. The Company's profitability on such projects is critically          
dependent on making accurate and cost effective bids and performing             
efficiently in accordance with bid specifications. Various factors can          
adversely affect the Company's performance on individual projects, with         
potential adverse effects on project profitability.                             

Percentage-of-Completion Accounting. Some of the Company's revenues are     
earned on a percentage-of-completion basis generally based on the ratio of      
costs incurred to the total estimated costs. Accordingly, purchase order price  
and cost estimates are reviewed periodically as the work progresses, and        
adjustments proportionate to the percentage of completion are reflected in the  
period when such estimates are revised. To the extent that these adjustments    
result in a reduction or elimination of previously reported profits, the        
Company would have to recognize a charge against current earnings, which could  
be significant depending on the size of the project or the adjustment. See      
"Management's Discussion and Analysis of Financial Condition and Results of     
Operations--Overview."                                                          

DEPENDENCE ON KEY EMPLOYEES                                                     

The Company depends to a large extent on the services of the Company's      
executive management team, Mr. Larry E. Reimert, Mr. Gary D. Smith and Mr. J.   
Mike Walker, the loss of any of whom could have a material adverse effect on    
the Company's operations. Prior to the completion of the Offering, the Company  
will enter into employment agreements with each of Messrs. Reimert, Smith and   
Walker. See "Management--Employment Agreements."                                

DEPENDENCE ON SKILLED MACHINISTS AND TECHNICAL PERSONNEL                        

The Company believes that its success is dependent upon its ability to      
continue to employ and retain skilled machinists and technical personnel. The   
Company's ability to expand its operations depends in part on its ability to    
increase its skilled labor force. The demand for such workers is high and the   
supply is limited. While the Company believes that its wage rates are           
competitive and that its relationship with its skilled labor force is good, a   
significant increase in the wages paid by competing employers could result in   
a reduction of the Company's skilled labor force, increases in the wage rates   
paid by the Company or both. If either of these events were to occur, in the    
near-term, the profits realized by the Company from work in progress would be   
reduced and, in the long-term, the production capacity and profitability of     
the Company could be diminished and the growth potential of the Company could   
be impaired.                                                                    

RELIANCE ON PRODUCT DEVELOPMENT AND POSSIBLE TECHNOLOGICAL OBSOLESCENCE         

The Company's ability to develop new products and maintain technological    
advantages is important to its future success. There can be no assurance that   
the Company will be able to develop new products, successfully differentiate    
itself from its competitors or adapt to evolving markets and technologies.      

8 

424B1
11th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 11th
The Company's ability to compete effectively will also depend on its ability
to continue to obtain patents on its proprietary technology and products. As    
of June 30, 1997 the Company held 36 U.S. patents and 77 foreign patents.       
Although the Company does not consider any single patent to be material to its  
business as a whole, the inability to protect its future innovations through    
patents could have a material adverse effect on the Company.                    

CONTROL BY CERTAIN STOCKHOLDERS                                                 

Upon completion of the Offering, the Founders collectively will beneficially
own approximately 70% (67% if the Underwriters' over-allotment option is        
exercised in full) of the outstanding shares of Common Stock. As a result,      
they will be able to influence significantly and possibly control the outcome   
of certain matters requiring a stockholder vote, including the election of      
directors. Such ownership of Common Stock may have the effect of delaying or    
preventing a change of control of the Company and may adversely affect the      
voting and other rights of other stockholders. In addition, Messrs. Reimert,    
Smith and Walker have entered into a 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 each of the other     
parties. See "Principal and Selling Stockholders" and "Certain Transactions--   
Stockholders Agreement."                                                        

GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS                               

Many aspects of the Company's operations are affected by political          
developments and are subject to both domestic and foreign governmental          
regulations, including those relating to oilfield operations, worker safety     
and the protection of the environment. In addition, the Company depends on the  
demand for its services from the oil and gas industry and, therefore, is        
affected by changing taxes, price controls and other laws and regulations       
relating to the oil and gas industry generally, including those specifically    
directed to offshore operations. The adoption of laws and regulations           
curtailing exploration and development drilling for oil and gas for economic    
or other policy reasons could adversely affect the Company's operations by      
limiting demand for the Company's products. The Company cannot determine the    
extent to which its future operations and earnings may be affected by new       
legislation, new regulations or changes in existing regulations.                

The Company's operations are affected by numerous foreign, federal, state   
and local environmental laws and regulations. The technical requirements of     
these laws and regulations are becoming increasingly expensive, complex and     
stringent. These laws may provide for "strict liability" for damages to         
natural resources or threats to public health and safety, rendering a party     
liable for environmental damage without regard to negligence or fault on the    
part of such party. 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  
strict liability for remediation of spills and releases of hazardous            
substances. In addition, 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. Such laws and regulations   
may also expose the Company to liability for the conduct of or conditions       
caused by others, or for acts of the Company that were in compliance with all   
applicable laws at the time such acts were performed. See "Business--           
Governmental Regulations."                                                      

COMPETITION                                                                     

The Company faces significant competition from other manufacturers of       
drilling and production equipment. Several of its primary competitors are       
diversified multinational companies with substantially larger operating staffs  
and greater capital resources than those of the Company and which, in some      
instances, have been engaged in the manufacturing business for a much longer    
time than the Company. See "Business--Competition."                             

RELIANCE ON SIGNIFICANT CUSTOMERS                                               

The Company's business is dependent on securing and maintaining customers by
promptly delivering reliable, high-performance products. For the year ended     
December 31, 1996, one of the Company's customers, the Royal Dutch Shell Group  
of Companies (aggregating orders placed by all of its worldwide affiliates),    

9 

424B1
12th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 12th
accounted for approximately 19% of revenues. The products that the Company may  
sell to any particular customer depend on the size of that customer's capital   
expenditure budget devoted to offshore drilling plans in a particular year and  
on the results of competitive bids for major projects. Consequently, a          
customer that accounts for a significant portion of revenues in one fiscal      
year may represent an immaterial portion of revenues in subsequent years. See   
"--Operating Risks--Competitive Project Bids." While the Company is not         
dependent on any one customer or group of customers, the loss of one or more    
of its significant customers could, at least on a short-term basis, have an     
adverse effect on the Company's results of operations. See "Business--          
Customers."                                                                     

SHARES ELIGIBLE FOR FUTURE SALE                                                 

Upon the completion of the Offering, the Company will have a total of       
16,870,000 shares of Common Stock outstanding. Of these shares, the 5,000,000   
shares of Common Stock offered hereby (5,750,000 shares if the Underwriters'    
over-allotment option is exercised in full) will be freely tradeable without    
restrictions or registration under the Securities Act of 1933, as amended (the  
"Securities Act"), by persons other than "affiliates" of the Company, as        
defined under the Securities Act. The remaining 11,870,000 shares of Common     
Stock outstanding will be restricted securities as that term is defined by      
Rule 144 as promulgated under the Securities Act. In addition, 419,250 shares   
of Common Stock may be issued pursuant to options that will be issued under     
the Company's incentive plan at an exercise price equal to the initial public   
offering price in the Offering. See "Management--Executive Compensation."       

Under Rule 144 (and subject to the conditions thereof, including volume     
limitations), all of the 11,870,000 restricted shares will become eligible for  
sale 90 days after the Offering. The directors and officers of the Company      
have agreed that they will not, directly or indirectly, sell any shares of      
Common Stock for a period of 180 days from the date of this Prospectus without  
the prior written consent of Morgan Stanley & Co. Incorporated. The Company     
will enter into a Registration Rights Agreement upon the consummation of the    
Offering whereby it will agree to register under the Securities Act shares of   
Common Stock held by Messrs. Reimert, Smith, Walker and Loveless and certain    
of their related family limited partnerships to facilitate the sales thereof.   
See "Certain Transactions--Registration Rights Agreement." Future sales of      
substantial amounts of Common Stock in the public market following the          
Offering could adversely affect the market price of the Common Stock. For       
further information concerning Common Stock available for resale after the      
Offering, see "Shares Eligible for Future Sale" and "Underwriters."             

NO INTENTION TO PAY DIVIDENDS                                                   

The Company currently intends to retain any earnings for the future         
operation and development of its business and does not currently anticipate     
paying any dividends in the foreseeable future. The Company's existing credit   
facilities restrict the payment of dividends. See "Dividend Policy,"            
"Management's Discussion and Analysis of Financial Condition and Results of     
Operations--Liquidity and Capital Resources" and Notes to the Company's         
Consolidated Financial Statements.                                              

CERTAIN ANTI-TAKEOVER PROVISIONS                                                

The Company's Certificate of Incorporation and Bylaws, among other things,  
provide for a classified Board of Directors with staggered terms, restrict the  
ability of stockholders to take action by written consent, impose certain       
supermajority voting requirements and authorize the Board of Directors to set   
the terms of Preferred Stock. In addition, the Company's Certificate of         
Incorporation and the Delaware General Corporation Law contain provisions that  
impose restrictions on business combinations with interested parties. The       
Company has also adopted a stockholder rights plan. The stockholder rights      
plan, the provisions of the Company's Certificate of Incorporation and Bylaws   
and the Delaware General Corporation Law may have the effect of delaying or     
preventing a change of control of the Company. See "Description of Capital      
Stock."                                                                         

10  

424B1
13th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 13th
ABSENCE OF PRIOR PUBLIC MARKET                                                  

Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined by negotiation between     
the Company and the Underwriters and may not be indicative of the price at      
which the Common Stock will trade following the completion of the Offering.     
See "Underwriters" for a discussion of the factors to be considered in          
determining the initial public offering price. The completion of the Offering   
provides no assurance that an active trading market for the Common Stock will   
develop or, if developed, that it will be sustained. The market price of the    
Common Stock could also be subject to significant fluctuation and may be        
influenced by many factors, including variations in results of operations,      
variations in natural gas and oil prices, investor perceptions of the Company   
and the oil and natural gas industry, and general economic and other            
conditions.                                                                     

DILUTION                                                                        

Purchasers of Common Stock in the Offering will experience immediate and    
substantial dilution in the net tangible book value of their stock of $17.49    
per share. See "Dilution."                                                      

11  

424B1
14th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 14th
USE OF PROCEEDS 

The net proceeds to the Company from the Offering, after deducting          
underwriting discounts, commissions and estimated expenses, are approximately   
$55 million ($63 million if the Underwriters' over-allotment option is          
exercised in full). The Company intends to use the net proceeds for capital     
expenditures to increase manufacturing capacity, improve and expand facilities  
and manufacture additional running tools for rental. Dril-Quip expects that     
these expenditures will be incurred over a three-year period and that total     
capital expenditures for these purposes will be approximately $11 million in    
1997 and approximately $23 million in 1998. In particular, the Company expects  
to spend approximately $16 million to complete the planned expansion at its     
Eldridge site in Houston, Texas, which is expected to be completed in 1999.     
The Company plans to spend approximately $4.5 million in 1997 to add machine    
tools at its existing facilities, most of which will be moved to the new        
facilities upon their completion. Pending application of the proceeds for       
these purposes, the Company intends to use approximately $32 million to repay   
its bank indebtedness in full and the balance will be used for working          
capital. Excess cash will be invested in short term investment grade            
securities.                                                                     

The Company's credit facilities with Bank One, Texas, National Association  
("Bank One") are provided through a Credit Agreement dated March 30, 1994, as   
amended (the "Bank One Credit Facilities"), and currently consist of (i) a $25  
million revolving credit facility bearing interest at a rate of 1/4% over Bank  
One's base rate from day to day (this facility terminates on June 1, 1999),     
(ii) a $3 million advancing credit facility for the purchase of land and        
equipment and improvements to facilities bearing interest at a rate of 1/2%     
over Bank One's base rate from day to day (this facility terminates on October  
1, 2001), and (iii) a $10.7 million term loan bearing interest at 1/2% over     
Bank One's base rate from day to day that matures on July 1, 1999.              
Indebtedness under the term loan was used for the purchase of land, buildings,  
equipment and improvements to facilities, as well as other capital              
expenditures. At June 30, 1997, $29.0 million was outstanding under the Bank    
One Credit Facilities, bearing interest at an average rate of 8.85%, and        
approximately $7.7 million was available for drawdown under the revolving       
facility.                                                                       

The Company has three term loans with the Bank of Scotland: a June 7, 1996  
loan, a September 19, 1994 loan and a December 12, 1991 loan. Each loan has a   
120-month maturity. The June 7, 1996 and September 19, 1994 loans each bear     
interest at 1.75% over the Bank of Scotland's base rate, and the December 12,   
1991 loan bears interest at 1.5% over the Bank of Scotland's base rate.         
Indebtedness under the Bank of Scotland term loans was used for the purchase    
of land and buildings and to improve the Company's Aberdeen manufacturing       
facilities. At June 30, 1997, $700,000, $600,000 and $1.7 million were          
outstanding under the Bank of Scotland term loans, respectively. See            
"Management's Discussion and Analysis of Financial Condition and Results of     
Operations--Liquidity and Capital Resources."                                   

DIVIDEND POLICY 

The Company paid dividends of $.004 and $.007 per share of Common Stock in  
1995 and 1996, respectively. However, the Company does not intend to pay cash   
dividends on its Common Stock in the foreseeable future. The Company currently  
intends to retain any earnings for the future operation and development of its  
business. The Board of Directors will review this policy on a regular basis in  
light of the Company's earnings, financial condition and market opportunities.  
The Company's existing credit facilities restrict the payment of dividends.     
See "Management's Discussion and Analysis of Financial Condition and Results    
of Operations--Liquidity and Capital Resources."                                

12  

424B1
15th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 15th
DILUTION  

As of June 30, 1997, the net tangible book value of the Company was         
approximately $54.8 million, or approximately $3.81 per share of Common Stock.  
Net tangible book value per share represents the amount of the Company's        
tangible book value (total book value of tangible assets less total             
liabilities) divided by the total number of shares of Common Stock              
outstanding. After giving effect to the receipt of the estimated net proceeds   
from the Offering (net of underwriting discounts and commissions and Offering   
expenses), the pro forma net tangible book value of the Common Stock            
outstanding at June 30, 1997 would have been $6.51 per share, representing an   
immediate increase in net tangible book value of $2.70 per share to current     
stockholders and an immediate dilution of $17.49 per share (the difference      
between the initial public offering price and the net tangible book value per   
share after the Offering) to persons purchasing Common Stock at the initial     
public offering price. The following table illustrates such per share           
dilution:                                                                       

                                                                [Download Table]
                                                                                
Initial public offering price per share...........................        $24.00
  Net tangible book value per share before the Offering...........  $3.81       
  Increase in net tangible book value per share attributable to                 
   new investors..................................................   2.70       
                                                                    -----       
Pro forma net tangible book value per share after giving effect to              
 the Offering.....................................................          6.51
                                                                          ------
Dilution in net tangible book value per share to new investors....        $17.49
                                                                          ======

The following table sets forth, on a pro forma basis as of June 30, 1997,   
differences between the number of shares of Common Stock acquired from the      
Company, the total consideration price and the average price per share paid to  
the Company by existing stockholders and investors purchasing shares in the     
Offering.                                                                       

                                                                [Download Table]

                                        SHARES                           AVERAGE
                                     PURCHASED(1)    TOTAL CONSIDERATION  PRICE 
                                  ------------------ -------------------   PER  
                                    NUMBER   PERCENT   AMOUNT    PERCENT  SHARE 
                                  ---------- ------- ----------- ------- -------
                                                                                
Current stockholders(2).......... 14,370,000   85.2% $   144,000     .2% $  .01 
New investors(2).................  2,500,000   14.8   60,000,000   99.8  $24.00 
                                  ----------  -----  -----------  -----         
  Total.......................... 16,870,000  100.0% $60,144,000  100.0%        
                                  ==========  =====  ===========  =====         

--------                                                                        
(1) Does not include approximately 419,250 shares of Common Stock issuable      
  pursuant to options to be granted to officers and employees of the Company
  at the closing of the Offering. The exercise of such stock options will be
dilutive to the interests of new investors. See "Management--Incentive  
Plan."                                                                  
(2) Sales by the Selling Stockholders in the Offering will reduce the number    
 of shares of Common Stock held by existing stockholders to 11,870,000, or
70.4% of the shares of Common Stock outstanding after the Offering. New 
 investors will hold 29.6% of the shares of Common Stock outstanding after
the Offering.                                                           

13  

424B1
16th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 16th
CAPITALIZATION  

The following table sets forth the consolidated short-term debt and total   
capitalization of the Company (i) as of June 30, 1997 and (ii) as adjusted for  
the sale of the 2,500,000 shares of Common Stock offered by the Company hereby  
and the application of the net proceeds to the Company therefrom (after         
deducting underwriting discounts and commissions and estimated Offering         
expenses payable by the Company). See "Use of Proceeds." This table should be   
read in conjunction with the Company's Consolidated Financial Statements and    
the related Notes thereto included elsewhere in this Prospectus.                

                                                                [Download Table]

                                                            AS OF JUNE 30, 1997
                                                            -------------------
                                                            ACTUAL  AS ADJUSTED
                                                            ------- -----------
                                                              (IN THOUSANDS)   
                                                                               
Short-term debt:                                                               
  Current maturities of long-term debt:.................... $ 3,522  $    --   
                                                            =======  ========  
Long-term debt, less current maturities:................... $28,967  $    --   
Stockholders' equity(1):                                                       
  Preferred stock, $0.01 par value, 10,000,000 shares                          
   authorized, none issued and outstanding.................     --        --   
  Common stock, $0.01 par value, 50,000,000 shares                             
   authorized, 14,370,000 shares issued and outstanding                        
   (actual), 16,870,000 shares outstanding (as adjusted)...     144       169  
  Additional paid-in capital...............................     --     54,975  
  Retained earnings........................................  54,765    54,765  
  Foreign currency translation adjustment..................       2         2  
                                                            -------  --------  
    Total stockholders' equity.............................  54,911   109,911  
                                                            -------  --------  
      Total capitalization................................. $83,878  $109,911  
                                                            =======  ========  

--------                                                                        
(1) Does not include approximately 419,250 shares of Common Stock issuable      
  pursuant to options to be granted to officers and employees of the Company
at the closing of the Offering. See "Management--Incentive Plan."       

14  

424B1
17th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 17th
SELECTED FINANCIAL DATA 

The selected financial data as of and for each of the years ended December  
31, 1994, 1995 and 1996 are derived from the audited consolidated financial     
statements of the Company included elsewhere in this Prospectus. The selected   
financial data presented below as of and for the years ended December 31, 1992  
and 1993 are derived from audited consolidated financial statements of the      
Company not included in this Prospectus. The selected consolidated financial    
data as of and for the six-month periods ended June 30, 1996 and 1997 are       
derived from the unaudited consolidated financial statements of the Company     
that in the opinion of the Company's management reflect all adjustments,        
consisting only of normal recurring adjustments, necessary for a fair           
presentation of its financial condition and results of operations as of such    
dates and for such periods. The results for the six-month period ended June     
30, 1997 are not necessarily indicative of the results that may be expected     
for the entire year. The information set forth below should be read in          
conjunction with "Management's Discussion and Analysis of Financial Condition   
and Results of Operations" and the Consolidated Financial Statements and Notes  
thereto included elsewhere in this Prospectus.                                  

                                                        [Enlarge/Download Table]

                                                                         SIX MONTHS ENDED   
                                  YEAR ENDED DECEMBER 31,                    JUNE 30,       
                         ---------------------------------------------  --------------------
                          1992     1993     1994      1995      1996     1996       1997    
                         -------  -------  -------  --------  --------  -------  -----------
                           (IN THOUSANDS, EXCEPT PER SHARE DATA)            (UNAUDITED)     
                                                                                            
STATEMENT OF OPERATIONS                                                                     
 DATA:                                                                                      
Revenues................ $65,172  $82,553  $80,548  $108,390  $115,864  $55,346   $ 68,669  
Cost of sales...........  48,120   61,704   58,604    76,471    77,863   37,602     47,725  
Selling, general and                                                                        
 administrative                                                                             
 expenses...............   8,074   10,907   11,673    13,597    15,031    7,253      7,839  
Engineering and product                                                                     
 development expenses...   4,494    5,152    6,069     5,769     6,971    3,245      4,109  
                         -------  -------  -------  --------  --------  -------   --------  
                          60,688   77,763   76,346    95,837    99,865   48,100     59,673  
Operating income........   4,484    4,790    4,202    12,553    15,999    7,246      8,996  
Interest expense........   1,915    1,494    2,273     2,944     2,647    1,301      1,400  
                         -------  -------  -------  --------  --------  -------   --------  
Income before income                                                                        
 taxes..................   2,569    3,296    1,929     9,609    13,352    5,945      7,596  
Income tax provision....     916      886      635     3,023     4,234    1,885      2,483  
                         -------  -------  -------  --------  --------  -------   --------  
Net income.............. $ 1,653  $ 2,410  $ 1,294  $  6,586  $  9,118  $ 4,060   $  5,113  
                         =======  =======  =======  ========  ========  =======   ========  
Earnings per share...... $   .12  $   .17  $   .09  $    .46  $    .63  $   .28   $    .36  
Weighted average shares                                                                     
 outstanding............  14,370   14,370   14,370    14,370    14,370   14,370     14,370  
STATEMENT OF CASH FLOWS                                                                     
 DATA:                                                                                      
Net cash provided by                                                                        
 operating activities... $   776  $ 3,182  $ 2,422  $  6,466  $  5,185  $ 1,374   $  2,437  
Net cash used in                                                                            
 investing activities...  (3,487)  (6,413)  (4,524)   (5,659)   (7,006)  (2,756)    (3,379) 
Net cash provided by                                                                        
 (used in) financing                                                                        
 activities.............   3,914    1,448    2,668       560     1,261     (351)         4  
OTHER DATA:                                                                                 
EBITDA(1)............... $ 8,050  $ 8,549  $ 8,069  $ 17,201  $ 20,387  $ 9,646   $ 11,604  
Depreciation and                                                                            
 amortization...........   3,566    3,759    3,867     4,648     4,388    2,400      2,608  
Capital expenditures....   4,283    6,592    4,614     6,184     7,228    2,832      3,603  

                                    AS OF DECEMBER 31,                              AS OF   
                         ---------------------------------------------            JUNE 30,  
                          1992     1993     1994      1995      1996                1997    
                         -------  -------  -------  --------  --------           -----------
                                      (IN THOUSANDS)                             (UNAUDITED)
                                                                                            
BALANCE SHEET DATA:                                                                         
Working capital......... $30,135  $30,913  $34,099  $ 40,682  $ 49,524            $ 52,877  
Total assets............  65,712   70,346   79,208    93,186   114,777             113,823  
Total debt..............  26,659   28,100   30,416    31,052    32,536              32,489  
Total stockholders'                                                                         
 equity.................  28,048   30,267   32,903    39,501    50,882              54,911  

-------                                                                         
(1) EBITDA, or "earnings from continuing operations before interest expense,    
interest income, income taxes, depreciation and amortization," is not a 
generally accepted accounting principle measure, but is a supplemental  
financial measurement used by the Company in the evaluation of its      
business. EBITDA should not be construed as an alternative to net income
or to cash flow from operations or any other measure of performance in  
  accordance with generally accepted accounting principles, and is presented
solely as a supplemental disclosure. EBITDA is a supplemental financial 
measure commonly used by investors in the oil services industry and is  
being presented because management believes that EBITDA provides        
supplemental information about the Company's ability to meet its future 
requirements for debt service, capital expenditures and working capital.
  Management monitors the trends in EBITDA closely, as well as the trends in
revenues and net income, to aid it in managing the business, controlling
costs and increasing revenues. Management believes that recent increases
in EBITDA are indicative of the increased level of profitable business  
  activity experienced by the Company. Because EBITDA excludes some, but not
all, items that affect net income and this measure may vary among       
companies, the EBITDA data presented above may not be comparable to     
similarly titled measures of other companies.                           

15  

424B1
18th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 18th
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

The following information should be read in conjunction with the Company's  
Consolidated Financial Statements and Notes thereto presented elsewhere in      
this Prospectus.                                                                

OVERVIEW                                                                        

Dril-Quip manufactures highly engineered offshore drilling and production   
equipment which is well suited for use in deepwater, harsh environment and      
severe service applications. The Company designs and manufactures subsea        
equipment, surface equipment and offshore rig equipment for use by major        
integrated, large independent and foreign national oil and gas companies in     
offshore areas throughout the world. The Company's principal products consist   
of subsea and surface wellheads, subsea and surface production trees, mudline   
hanger systems, specialty connectors and associated pipe, drilling and          
production riser systems, wellhead connectors and diverters. Dril-Quip also     
provides installation and reconditioning services and rents running tools for   
use in connection with the installation and retrieval of its products.          

The market for offshore drilling and production equipment and services is   
fundamentally driven by the exploration, development and production spending    
of oil and gas companies, particularly with respect to offshore activities      
worldwide. The Company has experienced increased demand for its products due    
to the increased drilling and production activity in offshore areas throughout  
the world during the last several years, particularly in deeper waters. The     
recent increase in offshore drilling and production activity has been driven    
by a number of factors, including (i) the prospect for relatively larger        
hydrocarbon discoveries in deepwater areas and (ii) recent technological        
advances in offshore drilling and production equipment (including those         
introduced by Dril-Quip), seismic data collection and interpretation            
techniques, and drilling techniques, which have enhanced the economics of       
offshore drilling and production. In addition, several foreign national oil     
companies have recently opened offshore areas for exploration and development   
by other parties, including major integrated and large independent oil and gas  
companies. These factors have contributed to the increase in the Company's      
backlog from approximately $56 million at December 31, 1996 to approximately    
$101 million at June 30, 1997, an 80% increase. See "Business--Industry         
Overview."                                                                      

The Company intends to use the proceeds from the Offering for a three-year  
capital expansion program to increase manufacturing capacity, improve and       
expand facilities and manufacture additional running tools for rental. The      
Company plans to expand its manufacturing capacity by approximately 90% during  
the three year period 1997 through 1999, approximately two-thirds of which is   
expected to be completed by the end of 1998. The Company believes that its      
increased capacity and improved facilities will enable the Company to achieve   
higher sales volumes. In connection with the capacity expansion, the Company    
plans to hire additional workers. See "Use of Proceeds" and "Business--         
Strategy."                                                                      

Revenues. Dril-Quip's revenues are generated by its two operating groups:   
the Product Group and the Service Group. The Product Group manufactures         
offshore drilling and production equipment, and the Service Group provides      
installation and reconditioning services as well as rental running tools for    
installation and retrieval of its products. In 1996, the Company derived 82.1%  
of its revenues from the sale of its products and 17.9% of its revenues from    
services. Revenues from the Service Group generally correlate to revenues from  
product sales, as increased product sales generate increased revenues from      
installation services and rental running tools. Revenues have increased over    
the last three years principally as a result of increased sales volumes of the  
Company's established products and services, the introduction of new products   
and product enhancements and price increases for the Company's products and     
services. These price increases have occurred due to an increase in demand and  
capacity constraints experienced by the Company and its competitors.            
Substantially all of Dril-Quip's sales are made on a purchase order basis.      
Purchase orders are subject to change and/or termination at the option of the   
customer. In case of a change or termination, the customer is required to pay   
the Company for work performed and other costs necessarily incurred as a        
result of the change or termination.                                            

16  

424B1
19th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 19th
Historically, Dril-Quip recognized revenues upon the delivery of a completed
product. As the Company has begun manufacturing larger and more complex         
projects that have longer manufacturing times, the Company has begun to         
account for purchase orders covering such projects on a percentage of           
completion basis. The Company expects that such larger and more complex         
projects will increase the Company's sales and revenues and afford the Company  
certain economies of scale because such projects generally utilize the          
Company's products as component parts. The Company also expects that such       
projects may have a stabilizing effect on the Company's operations, as the      
Company will have a longer period of time over which to plan and to allocate    
its resources. Finally, the Company expects to receive certain periodic         
payments associated with such projects, rather than payment upon delivery.      
Because the Company has only recently become involved in such manufacturing     
projects, the use of percentage of completion accounting does not affect the    
comparability of financial information to earlier periods. No purchase orders   
would have been accounted for using the percentage of completion method prior   
to 1997. For the first six months of 1997, one project representing 8.7% of     
the Company's revenues was accounted for using percentage of completion         
accounting. The Company expects that this percentage may increase in the        
future. Revenues accounted for in this manner are generally recognized on the   
ratio of costs incurred to the total estimated costs. Accordingly, price and    
cost estimates are reviewed periodically as the work progresses, and            
adjustments proportionate to the percentage of completion are reflected in the  
period when such estimates are revised. Amounts received from customers in      
excess of revenues recognized are classified as a current liability. The        
Company historically has experienced some seasonality, with revenues and        
operating income slightly lower during the first and third quarters compared    
to the second and fourth quarters. The Company's revenues are affected by its   
customers' capital expenditure budgeting process, which generally results in    
lower revenues in the first quarter and higher revenues in the fourth quarter.  
The increase in revenues recognized using percentage of completion accounting   
may result in less fluctuation in revenues recognized from quarter to quarter.  
See "Risk Factors--Operating Risks--Percentage of Completion Accounting."       

As part of its capacity expansion, the Company plans to expand its capacity 
for forging and heat treatment by adding additional facilities and machinery.   
In the future, the Company plans to market forgings to third parties to the     
extent its capacity allows, an activity which it expects will be an additional  
source of revenues.                                                             

Foreign sales represent a significant portion of the Company's business. In 
the six months ended June 30, 1997 and in each of fiscal 1996, 1995 and 1994,   
the Company generated approximately two-thirds of its revenues from foreign     
sales. In each period, approximately two-thirds of all products sold were       
manufactured in the United States.                                              

Cost of Sales. The principal elements of cost of sales are labor, raw       
materials and manufacturing overhead. Variable costs, such as labor, raw        
materials, supplies and energy, generally account for approximately two-thirds  
of the Company's cost of sales. The Company has experienced increased labor     
costs over the past few years due to the limited supply of skilled workers.     
See "Risk Factors--Dependence on Skilled Machinists and Technical Personnel."   
Fixed costs, such as the fixed portion of manufacturing overhead, constitute    
the remainder of the Company's cost of sales. The Company continually seeks to  
improve its efficiency and cost position. See "Business--Strategy." Cost of     
sales as a percentage of revenues is also influenced by the product mix sold    
in any particular quarter and market conditions. The Company's costs related    
to its foreign operations do not significantly differ from its domestic costs.  

Products and services are closely correlated. The Company's Service Group   
generates revenue from the installation of Product Group items, rental of       
running tools used to install the Company's Product Group items, and            
reconditioning services of the Company's Product Group items. Although the      
Company attempts to keep margins consistent between the components of an        
order, products and services are generally marketed as a package, and customer  
or market requirements can result in significant differences between margins    
on products versus services. As a result, the Company only focuses and          
evaluates performance based on the overall margin for the total order.          

Selling, General and Administrative Expenses. Selling, general and          
administrative expenses include the costs associated with sales and marketing,  
general corporate overhead, compensation expense, legal expenses and other      
related administrative functions.                                               

17  

424B1
20th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 20th
Engineering and Product Development Expenses. Engineering and product       
development expenses consist of new product development and testing, as well    
as application engineering related to customized products.                      

Income Tax Provision. Dril-Quip's marginal tax rate has historically been   
lower than the statutory rate due to benefits from its foreign sales            
corporation. The Company expects that its marginal tax rate will rise slightly  
as its income increases.                                                        

RESULTS OF OPERATIONS                                                           

The following table sets forth, for the periods indicated, certain statement
of operations data expressed as a percentage of net revenues:                   

                                                                [Download Table]

                                                                  SIX MONTHS   
                                                YEAR ENDED        ENDED JUNE   
                                               DECEMBER 31,           30,      
                                             -------------------  ------------ 
                                             1994   1995   1996   1996   1997  
                                             -----  -----  -----  -----  ----- 
                                               %      %      %      %      %   
                                                                               
Revenues:                                                                      
  Product Group.............................  83.0%  83.7%  82.1%  81.1%  85.6%
  Service Group.............................  17.0   16.3   17.9   18.9   14.4 
                                             -----  -----  -----  -----  ----- 
    Total................................... 100.0  100.0  100.0  100.0  100.0 
Cost of sales...............................  72.8   70.6   67.2   67.9   69.5 
Selling, general and administrative                                            
 expenses...................................  14.5   12.5   13.0   13.1   11.4 
Engineering and product development                                            
 expenses...................................   7.5    5.3    6.0    5.9    6.0 
                                             -----  -----  -----  -----  ----- 
Operating income............................   5.2   11.6   13.8   13.1   13.1 
Interest expense............................   2.8    2.7    2.3    2.4    2.0 
                                             -----  -----  -----  -----  ----- 
Income before income taxes..................   2.4    8.9   11.5   10.7   11.1 
Income tax provision........................   0.8    2.8    3.6    3.4    3.6 
                                             -----  -----  -----  -----  ----- 
Net income..................................   1.6%   6.1%   7.9%   7.3%   7.4%
                                             =====  =====  =====  =====  ===== 

SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996     

Revenues. Revenues increased by $13.4 million, or 24%, to $68.7 million in  
the six months ended June 30, 1997 from $55.3 million in the six months ended   
June 30, 1996. This increase was primarily due to strong market demand, along   
with increased manufacturing capacity, price increases and an increase in       
project related sales of new products.                                          

Cost of Sales. Cost of sales increased $10.1 million, or 27%, to $47.7      
million for the six months ended June 30, 1997 from $37.6 million for the same  
period in 1996. As a percentage of revenues, cost of sales increased from 68%   
in 1996 to 69% in 1997. This increase in cost of sales as a percentage of       
revenues was primarily due to sales of new products, which tend to initially    
have lower margins, and higher labor costs, which was partially offset by       
improved pricing.                                                               

Selling, General and Administrative Expenses. In the first six months of    
1997, selling, general and administrative expenses increased by $586,000, or    
8%, to $7.8 million from $7.3 million in the 1996 period. The increase was due  
to an increased number of personnel to support higher sales volumes and         
increased labor costs. Selling, general and administrative expenses decreased   
as a percent of revenues from 13% to 11%.                                       

Engineering and Product Development Expenses. In the first six months of    
1997, engineering and product development expenses increased by $864,000, or    
27%, to $4.1 million from $3.2 million in the same period in 1996. The          
increase primarily reflects an increased number of personnel and, to a lesser   
extent, increased development testing related to new products.                  

Interest Expense. Interest expense for the six months ended June 30, 1997   
was approximately $1.4 million, an increase of $100,000 as compared to the      
corresponding period in the prior year.                                         

Net Income. Net income increased by approximately $1.0 million, or 24%, from
$4.1 million in the first six months in 1996 to $5.1 million in 1997 for the    
reasons set forth above.                                                        

18  

424B1
21st Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 21st
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995         

Revenues. Revenues increased by $7.5 million, or approximately 7%, to $115.9
million in 1996 from $108.4 million in 1995. This increase was primarily due    
to a small volume increase plus a slight increase in prices in the last half    
of the year. There was continued strong market demand for the Company's         
products and services, but revenues were limited by manufacturing capacity      
constraints. Domestic sales accounted for $4.8 million, or 64% of the           
increase.                                                                       

Cost of Sales. Cost of sales increased $1.4 million, or 2%, to $77.9 million
for the year ended December 31, 1996 from $76.5 million for the year ended      
December 31, 1995. Cost of sales increased due to higher sales volumes, offset  
in part by decreases in costs. As a percentage of revenues, cost of sales       
decreased from 71% in 1995 to 67% in 1996. This decrease was primarily due to   
the effect of increased forging operations which resulted in lower per unit     
costs than in the comparable prior period when more of the Company's forgings   
were outsourced. In addition, price increases in the last half of the year      
contributed to the decrease in cost of sales as a percentage of revenues.       

Selling, General and Administrative Expenses. For the year ended December   
31, 1996, selling, general and administrative expenses increased by $1.4        
million, or 10%, to $15.0 million from $13.6 million in 1995, but remained at   
approximately 13% of revenues in each year. This increase was primarily due to  
the increased number of personnel on a worldwide basis required to meet sales   
demand.                                                                         

Engineering and Product Development Expenses. For the year ended December   
31, 1996, engineering and product development expenses increased by $1.2        
million, or 21%, to $7.0 million from $5.8 million in the same period in 1995.  
The increase was due primarily to the addition of personnel needed to expand    
new product development.                                                        

Interest Expense. Interest expense for the year ended December 31, 1996 was 
$2.6 million, a decrease of $300,000, or 10%, from interest expense of $2.9     
million for the prior year. The decrease was due to lower bank interest rates.  

Net Income. Net income increased by $2.5 million, or 38%, from $6.6 million 
for the year ended December 31, 1995 to $9.1 million in 1996 for the reasons    
set forth above.                                                                

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994         

Revenues. Revenues increased by $27.9 million, or 35%, to $108.4 million in 
1995 from $80.5 million in 1994. This increase was due to increased sales       
volumes of the Company's products and services. Foreign sales accounted for     
$23.6 million, or 85%, of this increase.                                        

Cost of Sales. Cost of sales increased $17.9 million, or 31%, to $76.5      
million for the year ended December 31, 1995 from $58.6 million for the year    
ended December 31, 1994. Cost of sales increased due to higher sales volumes    
offset in part by decreases in costs. As a percentage of revenues, cost of      
sales decreased from 73% in 1994 to 71% in 1995. This decrease was primarily    
due to efficiencies associated with increased manufacturing volume, which       
allowed allocation of fixed cost over a larger sales base, and increased        
utilization of the Company's forging and heat treatment facilities, which       
supplied all of the Company's heat treating requirements and a portion of its   
forgings in 1995.                                                               

Selling, General and Administrative Expenses. For the year ended December   
31, 1995, selling, general and administrative expenses increased by $1.9        
million, or 16%, to $13.6 million from $11.7 million in 1994. The increase was  
due to the increased number of personnel on a worldwide basis required to meet  
sales demand and, to a lesser extent, increases in wages paid to personnel.     

Engineering and Product Development Expenses. For the year ended December   
31, 1995, engineering and product development expenses decreased by $300,000,   
or 5%, to $5.8 million from $6.1 million in the same period in 1994. The        
decrease was attributable to the large increase in revenues in 1995, which      
delayed a portion                                                               

19  

424B1
22nd Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 22nd
of the Company's new product development and testing. However, the Company      
continued its product development program with respect to SingleBore(TM) and    
dual bore subsea trees, platform wellheads and TLP equipment.                   

Interest Expense. Interest expense for the year ended December 31, 1995 was 
$2.9 million, an increase of $600,000, or 30%, from interest expense of $2.3    
million for the prior year. The increase was due to increased bank debt and     
higher interest rates.                                                          

Net Income. Net income increased by $5.3 million, or 408%, from $1.3 million
for the year ended December 31, 1994 to $6.6 million in 1995 for the reasons    
set forth above.                                                                

LIQUIDITY AND CAPITAL RESOURCES                                                 

The primary liquidity needs of the Company are to fund capital expenditures,
such as increasing manufacturing capacity, improving and expanding facilities   
and manufacturing additional rental running tools; to fund payments of          
principal and interest on indebtedness; and to fund working capital. The        
Company's principal sources of funds have been cash flow from operations and    
bank indebtedness.                                                              

Net cash provided by operating activities was $2.4 million in 1994, $6.5    
million in 1995 and $5.2 million in 1996. For the six months ended June 30,     
1997, net cash provided by operating activities was $2.4 million. Improvements  
in cash flow from operating activities are principally the result of improved   
operating results, offset in 1995, 1996 and 1997 by increased working capital   
requirements attributable to increases in accounts receivable and inventory     
due to increased sales. Accounts receivable at December 31, 1996 increased 27%  
over December 31, 1995 levels compared to a 7% increase in revenues for the     
year. The disproportionate increase in accounts receivable was due to timing    
of cash receipts. Subsequent to December 31, 1996, accounts receivables as a    
percentage of sales returned to levels more consistent with past periods.       

Capital expenditures by the Company were $4.6 million, $6.2 million, $7.2   
million and $3.6 million in 1994, 1995, 1996 and the six months ended June 30,  
1997, respectively. Principal payments on long-term debt were $2.7 million,     
$2.8 million, $3.2 million and $1.8 million in 1994, 1995, 1996 and the six     
months ended June 30, 1997, respectively.                                       

The Company has planned to spend approximately $50 million over a three-year
period for a capital expenditure program to increase manufacturing capacity,    
improve and expand facilities and manufacture additional rental running tools.  
Dril-Quip expects that total capital expenditures for these purposes will be    
approximately $11 million in 1997 and approximately $23 million in 1998. In     
particular, the Company expects to spend approximately $16 million to complete  
the planned expansion at its Eldridge site in Houston, Texas, which is          
expected to be completed in 1999. The Company plans to spend approximately      
$4.5 million in 1997 to add machine tools at its existing facilities, most of   
which will be moved to the new facilities upon their completion. The Company    
plans to use the net proceeds from the Offering to fund these capital           
expenditures. Pending application of the proceeds for these purposes, the       
Company intends to use approximately $32 million to repay its bank              
indebtedness in full and the balance will be used for working capital. Excess   
cash will be invested in short-term investment grade securities. See "Use of    
Proceeds."                                                                      

The Bank One Credit Facilities currently consist of (i) a $25 million       
revolving credit facility bearing interest at a rate of 1/4% over Bank One's    
base rate from day to day (this facility terminates on June 1, 1999), (ii) a    
$3 million advancing credit facility for the purchase of land and equipment     
and improvements to facilities bearing interest at a rate of 1/2% over Bank     
One's base rate from day to day (this facility terminates on October 1, 2001),  
and (iii) a $10.7 million term loan bearing interest at 1/2% over Bank One's    
base rate from day to day that matures on July 1, 1999. Indebtedness under the  
term loan was used for the purchase of land, buildings, equipment and           
improvements to facilities, as well as other capital expenditures. At June 30,  
1997, $29.0 million was outstanding under the Bank One Credit Facilities,       
bearing interest at an average rate of 8.85%, and approximately $7.7 million    
was available for drawdown under the revolving facility.                        

20  

424B1
23rd Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 23rd
In addition, the Company has three term loans with the Bank of Scotland to  
finance land, buildings and improvements for its Aberdeen manufacturing         
facility: a June 7, 1996 loan, a September 19, 1994 loan and a December 12,     
1991 loan. Each loan has a 120-month maturity. The June 7, 1996 and             
September 19, 1994 loans each bear interest at 1.75% over the Bank of           
Scotland's base rate, and the December 12, 1991 loan bears interest at 1.5%     
over the Bank of Scotland's base rate. At June 30, 1997, $700,000, $600,000     
and $1.7 million were outstanding under these term loans, respectively.         

BACKLOG                                                                         

Backlog consists of firm customer orders for which a purchase order has been
received, satisfactory credit or financing arrangements exist and delivery is   
scheduled. The Company's backlog at December 31, 1996 and June 30, 1997 was     
approximately $56 million and approximately $101 million, respectively. The     
Company expects to fill approximately 50% of the June 30, 1997 backlog by       
December 31, 1997. The remaining backlog at June 30, 1997 consists of longer-   
term projects that will be designed and manufactured to customer                
specifications rather than sold out of inventory. All of the Company's          
projects currently included in backlog are subject to change and/or             
termination at the option of the customer. In the case of a change or           
termination, the customer is required to pay the Company for work performed     
and other costs necessarily incurred as a result of the change or termination.  

GEOGRAPHIC AREAS                                                                

The Company's operations are divided into three geographic areas based upon 
the locations of its manufacturing facilities: the United States (Houston,      
Texas); Europe, Middle East and Africa (Aberdeen, Scotland) and Asia-Pacific    
(Singapore). The United States area includes sales to both North and South      
America. The area of Europe, Middle East and Africa includes primarily sales    
to the North Sea with lesser sales to the Middle East and Africa. The Asia-     
Pacific area includes sales primarily to Australia, Thailand, Malaysia and      
Indonesia.                                                                      

Revenues for each of these areas are dependent upon the ultimate sale of    
products and services to the Company's customers. Revenues of the United        
States area are also influenced by its sale of products to the European and     
Asia-Pacific subsidiaries. Accordingly, the operating incomes of each area are  
closely tied to third-party sales, and the operating income of the United       
States area is also dependent upon its level of intercompany sales.             

Total revenues increased by $27.9 million, or approximately 35%, to $108.4  
million in 1995 from $80.5 million in 1994. This increase was primarily due to  
revenue increases of $18.3 million in the Europe, Middle East and Africa area   
and $8.1 million in the Asia-Pacific area, partially offset by a decrease in    
export sales by the United States area of $2.6 million. Total revenues          
increased by $7.5 million, or approximately 7%, to $115.9 million in 1996 from  
$108.4 million in 1995. Domestic sales increases in the United States area      
accounted for $4.8 million, or approximately 64%, of the increase.              

Total operating income increased by $8.4 million to $12.6 million in 1995   
from $4.2 million in 1994. Of this increase, $7.3 million, or approximately     
87%, was due to the United States area, which experienced a modest increase in  
third party sales coupled with an increase of $17.8 million, or approximately   
143%, in intercompany sales. Total operating income rose by $3.4 million, or    
approximately 27%, to $16.0 million in 1996 from $12.6 million in 1995. This    
increase was primarily due to the United States area which contributed $2.7     
million, or approximately 79%, of the gain. Most of the increase resulted from  
an increase of $4.8 million in the United States area's domestic sales.         

CURRENCY RISK                                                                   

Through its subsidiaries, the Company conducts a portion of business in     
currencies other than the United States dollar, principally the British pound   
sterling and the Norwegian kroner. The Company generally attempts to minimize   
its currency exchange risk by seeking international contracts payable in local  
currency in amounts                                                             

21  

424B1
24th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 24th
equal to the Company's estimated operating costs payable in local currency and  
in U.S. dollars for the balance of the contract and by contractual purchase     
price adjustments based on an exchange rate formula related to U.S. dollars.    
Because of this strategy, the Company has not experienced significant           
transaction gains or losses associated with changes in currency exchange rates  
and does not anticipate such exposure to be material in the future. Exchange    
losses were approximately $167,000 in 1994 and $0 in 1995, net of income        
taxes. In 1996, the Company had an exchange gain of $163,000. The Company also  
has significant investments in countries other than the United States,          
principally its manufacturing operations in Aberdeen, Scotland and, to a        
lesser extent, Singapore. The functional currency of these foreign operations   
is the local currency and, accordingly, financial statement assets and          
liabilities are translated at current exchange rates. Resulting translation     
adjustments are reflected as a separate component of stockholders' equity and   
have no current effect on earnings or cash flow. See "Risk Factors--            
International Operations."                                                      

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS                                       

In October 1995, the Financial Accounting Standards Board issued SFAS No.   
123, which establishes alternative methods of accounting and disclosure for     
employee stock-based compensation arrangements. The Company intends to account  
for anticipated stock options using the intrinsic value method of accounting    
which, based on the expected stock option plan design, will not result in the   
recognition of compensation expense as the anticipated exercise price of the    
options will equal or exceed the fair market value of the stock on the date of  
grant. The Company will provide pro forma disclosure of net income and          
earnings per share in the notes to the consolidated financial statements as if  
the fair value based method of accounting had been applied.                     

22  

424B1
25th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 25th
BUSINESS  

GENERAL                                                                         

Dril-Quip is one of the world's leading manufacturers of highly engineered  
offshore drilling and production equipment which is well suited for use in      
deepwater, harsh environment and severe service applications. The Company       
designs and manufactures subsea equipment, surface equipment and offshore rig   
equipment for use by major integrated, large independent and foreign national   
oil and gas companies in offshore areas throughout the world. The Company's     
principal products consist of subsea and surface wellheads, subsea and surface  
production trees, mudline hanger systems, specialty connectors and associated   
pipe, drilling and production riser systems, wellhead connectors and            
diverters. The Company also provides installation and reconditioning services   
and rents running tools for use in connection with the installation and         
retrieval of its products. In 1996, the Company derived 82.1% of its revenues   
from the sale of its products and 17.9% of its revenues from services.          

Dril-Quip has developed its broad line of subsea equipment, surface         
equipment and offshore rig equipment exclusively through its internal product   
development efforts. The Company believes that it has achieved significant      
market share and brand name recognition with respect to its established         
products due to the technological capabilities, reliability, cost               
effectiveness and operational timesaving features of these products. In         
particular, the Company's Quik-Thread(R) and Quik-Stab(R) specialty             
connectors, MS-15(R) mudline hanger systems and SS-10(R) and SS-15(R) subsea    
wellheads are among the most widely used in the industry. The Company believes  
that, as of June 1, 1997, its subsea wellhead equipment was being used on       
approximately 70% of the wells being drilled in waters deeper than 3,000 feet   
worldwide. Since 1991, the Company has introduced a number of new products,     
including diverters, wellhead connectors, dual-bore and single-bore subsea      
production trees, subsea and platform valves, platform wellheads, platform      
trees, drilling risers and Spar and TLP production risers.                      

The Company has grown consistently since its inception in 1981 and has been 
profitable in every year since 1983. As a result of new product introductions,  
increased market share in established product lines and increased offshore      
drilling and production activity, the Company's revenues have increased from    
$65.2 million in 1992 to $115.9 million in 1996 (an annual growth rate of       
15.4%), and its net income has increased from $1.7 million in 1992 to $9.1      
million in 1996 (an annual growth rate of 52.1%). From 1995 to 1996, the        
Company's revenues and net income grew by 7% and 38%, respectively. For the     
six months ended June 30, 1997, the Company's revenues were $68.7 million and   
its net income was $5.1 million, representing a 24% increase in revenues and a  
26% increase in net income from the comparable period in 1996.                  

The Company has experienced increased demand for its products due to the    
increased drilling and production activity in offshore areas throughout the     
world during the last several years, particularly in deeper waters. The         
increase in offshore drilling and production activity has been driven by a      
number of factors, including (i) the prospect for relatively larger             
hydrocarbon discoveries in deepwater areas and (ii) recent technological        
advances in offshore drilling and production equipment (including those         
introduced by Dril-Quip), seismic data collection and interpretation            
techniques, and drilling techniques, which have enhanced the economics of       
offshore drilling and production. In addition, several foreign national oil     
companies have recently opened offshore areas for exploration and development   
by other parties, including major integrated and large independent oil and gas  
companies. These factors have contributed to the increase in the Company's      
backlog from approximately $56 million at December 31, 1996 to approximately    
$101 million at June 30, 1997, an 80% increase. The Company intends to use the  
proceeds from the Offering to expand its manufacturing capacity in order to     
satisfy the increased demand for its products. See "Use of Proceeds."           

Dril-Quip markets its products through its offices and sales representatives
located in all of the major international energy markets throughout the world.  
In 1996, the Company generated approximately 68% of its revenues from foreign   
sales. The Company manufactures its products at its facilities located in       
Houston, Texas; Aberdeen, Scotland; and Singapore, and maintains additional     
facilities for fabrication and/or reconditioning in Norway, Denmark and         
Australia. Dril-Quip's manufacturing operations are vertically integrated,      
with the                                                                        

23  

424B1
26th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 26th
Company performing substantially all of its forging, heat treating, machining,  
fabrication, inspection, assembly and testing at its own facilities. Unlike     
essentially all of the Company's competitors, which depend on outside sources   
for forging and heat treatment services, Dril-Quip owns a forge and heat        
treatment facility that handles virtually all of the Company's requirements.    
This vertically integrated manufacturing capability provides Dril-Quip with     
competitive advantages because the Company is able to (i) control the quality   
of its products from initial stages, (ii) control the costs of its production   
and (iii) assure timely delivery of high-volume and customized orders.          

The Company was co-founded in 1981 by the current Board of Directors, Larry 
E. Reimert, Gary D. Smith, J. Mike Walker and Gary W. Loveless. Together,       
Messrs. Reimert, Smith and Walker have over 75 years of combined experience in  
the oilfield equipment industry, essentially all of which has been with the     
Company and its major competitors. In addition, key department managers have    
been with the Company over 10 years, on average. See "Management." After the    
Offering, the Founders will collectively beneficially own approximately 70% of  
the outstanding Common Stock (approximately 67% if the over-allotment option    
is exercised in full).                                                          

The Company was incorporated as a Delaware corporation on August 12, 1997.  
The Company's operations represent the original business, which was             
incorporated as a Texas corporation on March 12, 1981. The Company's principal  
executive offices are located at 13550 Hempstead Highway, Houston, Texas 77040  
and its telephone number is (713) 939-7711.                                     

INDUSTRY OVERVIEW                                                               

The market for offshore drilling and production equipment and services is   
fundamentally driven by the exploration, development and production spending    
of oil and gas companies, particularly with respect to offshore activities      
worldwide. Industry exploration, development and production spending primarily  
depends on the cash flow of oil and gas producers, which is a function of       
current and anticipated future oil and gas production volumes and prices and    
operating costs of oil and gas producers. Oil and gas prices are influenced     
significantly by a variety of factors beyond the control of oil and gas         
companies, including worldwide demand for oil and gas, production levels,       
governmental policies regarding exploration and development of reserves and     
political factors in production countries. Fundamental economics in the oil     
and gas sector have improved in recent years and supply and demand for crude    
oil and natural gas is currently relatively balanced with demand rising and     
inventories comparatively low. Much of the incremental supply in recent years   
has come from areas outside OPEC, particularly in offshore regions such as the  
North Sea, the Gulf of Mexico and offshore Southeast Asia. These factors have   
contributed to generally higher, and relatively more stable, oil and gas        
prices during the last several years.                                           

Since 1995, offshore exploration, development and production activity has   
increased considerably due to, among other factors, (i) favorable oil and gas   
prices, (ii) significant improvement in the financial condition of many oil     
and gas companies in recent years, (iii) increasing worldwide demand for        
hydrocarbons, (iv) the potential for relatively large oil and gas discoveries   
in various offshore areas, particularly previously unexplored deepwater areas,  
(v) the opening of new offshore areas for foreign investment, including areas   
offshore of Brazil, China and West Africa, and (vi) royalty relief granted by   
the U.S. government for oil and gas produced from wells drilled in newly        
acquired deepwater blocks in the Gulf of Mexico. In addition, technological     
advances in exploration, development and production techniques, including       
seismic data collection and interpretation (particularly with respect to 3-D    
seismic data), drilling techniques (such as the use of deviated, horizontal     
and multilateral wells), subsea completion and production equipment, and        
mobile production units have contributed to increased offshore activity by oil  
and gas companies. These factors have facilitated exploration for and           
development of new reserves in deepwater and harsh environment offshore areas,  
allowed the development of oil and gas fields that were considered              
commercially marginal and extended development and production of reserves from  
existing fields.                                                                

The increased exploration, development and production activity in offshore  
areas has resulted in significant increases in the amount of oil and gas        
produced from offshore areas in recent years. According to the                  

24  

424B1
27th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 27th
International Energy Agency, (i) worldwide non-OPEC offshore oil production     
grew 41% from 10.9 million barrels of oil per day (mmbopd) in 1990 to 15.3      
mmbopd in 1996, and (ii) worldwide non-OPEC offshore oil production is          
anticipated to grow an additional 26% from 15.3 mmbopd in 1996 to 19.3 mmbopd   
in 2000. This increased activity has resulted in increased demand for drilling  
and production equipment and services, as evidenced by the increase in the      
average worldwide contracted utilization rate for all marketed offshore         
drilling rigs from 76% for the year ended December 31, 1992 to 93% for the      
first six months of 1997. Increased interest in offshore exploration,           
development and production is also evidenced by the significant rise in         
activity in the Gulf of Mexico lease sales held by the Department of the        
Interior's Mineral Management Service. In the most recent Central Gulf of       
Mexico lease sale held in March 1997, there were a record 1,790 bids received   
for 1,032 blocks (out of 5,059 blocks available) at an average price of         
approximately $799,000 per block. This compares to the May 1995 Central Gulf    
of Mexico lease sale when only 880 bids were received on 588 blocks (out of     
5,810 blocks available) at an average of approximately $523,000 per block.      

Recently, several offshore drilling contractors have announced plans to     
upgrade existing rigs to equip them with the capability to drill in deeper      
water and harsher environments or to build new deepwater capable rigs. At June  
30, 1997, there were approximately 31 semisubmersible rigs and ten drillship-   
type rigs worldwide capable of drilling in greater than 2,450 feet of water.    
Based on reports from Offshore Data Services related to new drilling rig        
construction, it is anticipated that by the year 2000 there will be 48          
semisubmersible-rigs and 22 drillship-type rigs capable of this deepwater       
drilling. In addition, there are four new TLPs and three new Spars planned or   
under construction for utilization by the year 2000. At the end of 1996, there  
were only six TLPs and one Spar in operation worldwide. In addition, based on   
industry reports related to new floating production, storage and offloading     
monohulled moored vessel ("FPSO") construction, the number of FPSO ships will   
increase from 63 FPSOs in operation worldwide at the end of 1996 to 110 by the  
year 2001 and the number of floating production semisubmersibles will increase  
from 33 to 51 over the same period. An increase in the number of wells drilled  
and produced in deepwater or harsh environments should likewise increase the    
demand for deepwater offshore equipment and services. The foregoing statements  
concerning future industry conditions are forward-looking statements, and,      
although the Company believes that the expectations reflected in such forward-  
looking statements are reasonable, it can give no assurance that such           
expectations will be met. See "Risk Factors."                                   

STRATEGY                                                                        

The Company's goal is to expand its existing market position in the offshore
oil and gas equipment and services sector while at the same time increasing     
its earnings and cash flow per share to enhance overall stockholder value. Key  
elements of the Company's strategy for achieving this goal are to:              

.  CONTINUE TO DEVELOP NEW PRODUCTS. The Company plans to utilize its         
technological expertise to continue to develop and introduce new products 
 and product enhancements in both its existing product lines and new product
lines. For example, the Company has recently received purchase orders for 
drilling risers, production risers and deepwater subsea production trees. 
In 1996, approximately 30% of the Company's revenues were derived from the
sale of products and product enhancements introduced since 1991. Of the   
 Company's approximately $101 million backlog at June 30, 1997, at least 45%
was attributable to orders for products and product enhancements developed
since 1991. The Company intends to focus its future new product           
 developments and product enhancements on areas where it believes it will be
able to achieve a significant market position. The Company believes that  
the strong brand name recognition and reputation of its existing products 
will assist it in successfully introducing new products to customers.     

.  INCREASE MANUFACTURING CAPACITY. To maintain and improve market share in   
its major product lines, Dril-Quip plans to expand its manufacturing      
capacity by approximately 90% during the three-year period 1997 through   
1999, approximately two-thirds of which is expected to be completed by the
end of 1998. The Company has been operating at close to full capacity in  
recent years, and believes that this expansion is essential in order to   
 meet customer demand for its existing products and to continue its strategy
of developing new products. The Company owns a 218-acre site in Houston,  
Texas where it plans to build additional manufacturing facilities during  
the three-year period 1997 through 1999. To increase                      

25  

424B1
28th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 28th
manufacturing capacity while the construction of the new facilities is in 
progress, the Company is adding machine tools at its existing facilities, 
  most of which will be transported to and utilized at the new facilities when
they are completed.                                                       

.  CONTINUE TO REDUCE COSTS AND INCREASE OPERATIONAL EFFICIENCIES. Dril-Quip  
 has historically controlled its costs through such activities as performing
its own forgings and heat treatment, rebuilding quality used machine tools
(rather than purchasing new machine tools) and optimizing manufacturing   
operations to increase the rate of production. Although it will need to   
purchase some new machine tools in order to expand its manufacturing      
  capacity as rapidly as planned, the Company has an inventory of used machine
tools that it will continue to rebuild and upgrade in order to control    
overall costs. Dril-Quip also plans to expand its forging capacity and to 
begin marketing forgings to third parties in addition to supplying its own
 forging requirements. The Company expects that this will provide additional
cost efficiencies as well as additional revenues, thereby contributing to 
profits.                                                                  

.  CONTINUE EXPANSION INTO SELECTED INTERNATIONAL MARKETS. The Company's      
products are currently utilized primarily in the Gulf of Mexico, the North
 Sea and in selected markets in Southeast Asia, Australia and South America.
The Company has recently engaged international sales representatives in   
several additional markets, including Mexico, West Africa and the Middle  
East. Dril-Quip believes that there is significant potential for increased
sales through focused marketing efforts in other active offshore areas in 
the world, such as China, Argentina and the Caspian Sea.                  

.  CAPITALIZE ON STRONG BALANCE SHEET. The Company plans to use a portion of  
the net proceeds from the Offering initially to repay its existing        
indebtedness. The Company believes that its strong balance sheet will     
provide it with the financial flexibility to carry out its strategy to    
design and develop new products, significantly increase manufacturing     
  capacity and expand its international presence. In addition, the Company may
 investigate potential acquisition opportunities as they arise. However, the
  Company currently has not identified any such acquisition opportunities, and
there can be no assurance that any will arise in the future.              

PRODUCTS AND SERVICES                                                           

PRODUCT GROUP                                                               

Dril-Quip designs, manufactures, fabricates, inspects, assembles, tests and 
markets subsea equipment, surface equipment and offshore rig equipment. The     
Company's products are used to explore for oil and gas on offshore drilling     
rigs, such as floating rigs and jack-ups, and for drilling and production of    
oil and gas wells on offshore platforms, TLPs, Spars and moored vessels such as 
FPSOs. TLPs are floating production platforms that are connected to the ocean   
floor via vertical mooring tethers (called tension legs). A Spar is a floating  
cylindrical structure approximately six or seven times longer than its diameter 
that is anchored in place (like a Spar buoy). FPSOs are floating production,    
storage and offloading monohull moored vessels. Major oil companies are         
actively pursuing TLPs, Spars and FPSOs as cost-effective means of producing    
oil and gas from water depths in excess of 1,000 feet. The Company believes     
that sales of its equipment in connection with TLPs, Spars and FPSOs are        
potentially important sources of future revenues. The following table           
illustrates the Company's products and their uses in various methods of         
exploration, development and production:                                        

26

424B1
29th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 29th
SUBSEA EQUIPMENT                                                                

SUBSEA WELLHEADS                                                                

The subsea wellhead is installed at the ocean floor and is interconnected       
during drilling to the structure/vessel through the drilling riser. The         
wellhead system provides a means of supporting and sealing each of the          
multiple casing strings for well control. Major components include a guide      
structure, wellhead housing, casing hangers, and seal assemblies configured     
to specific well requirements.                                                  

[DIAGRAM OF SUBSEA WELLHEAD APPEARS HERE]   

Subsea Wellhead                                                                 

MUDLINE HANGER SYSTEMS                                                          

The mudline hanger system supports the weight of multiple casing strings at     
the ocean floor while drilling a well. The mudline hanger system                
incorporates disconnect features for abandonment after the drilling phase       
and reconnect features for tie-back to a platform or subsea tree for the        
production phase.                                                               

[DIAGRAM OF MUDLINE HANGER SYSTEM APPEARS HERE]   

Mudline Hanger System                                                           

EXPLORATION                                                                     
OR PRODUCTION                                                                   
STRUCTURE/                                                                      
VESSEL                                                                          

. Floating Rigs                                                               
. TLPs                                                                        
. Spars                                                                       

. Jack-up Rigs                                                                
. Platforms                                                                   

27

424B1
30th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 30th
SUBSEA EQUIPMENT (CONTINUED)                                                    

SPECIALTY CONNECTORS                                                            

Specialty connectors are used to join lengths of large diameter conductor       
or casing used in offshore drilling operations. The specialty connector is      
welded to the pipe prior to shipment offshore and provides fast, easy make-     
up.                                                                             

[DIAGRAM APPEARS HERE]  

Quik-Thread/Multi-Thread                                                        
Connectors                                                                      

[DIAGRAM APPEARS HERE]  

Quik-Stab Connector                                                             

SUBSEA PRODUCTION TREES                                                         

The subsea production tree is used to control the flow of oil and gas from      
a production well. The main components are remotely controlled valves,          
wellhead connector, flowline connector, control equipment and tree cap          
specially designed and configured into an assembly which is installed onto      
the subsea wellhead at the ocean floor. Subsea production trees                 
typically produce back via flowlines to a central control point located         
on a production structure/vessel.                                               

[DIAGRAM APPEARS HERE]  

Single Bore Subsea Production Tree                                              

[DIAGRAM APPEARS HERE]  

Dual Bore Subsea Production Tree                                                

EXPLORATION                                                                     
OR PRODUCTION                                                                   
STRUCTURE/                                                                      
VESSEL                                                                          

. Jack-up Rigs                                                                
. Platforms                                                                   
. Floating Rigs                                                               
. TLPs                                                                        
. Spars                                                                       

. Platforms                                                                   
. TLPs                                                                        
. Spars                                                                       
. FPSOs                                                                       

28

424B1
31st Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 31st
SURFACE EQUIPMENT                                                               

PLATFORM WELLHEADS                                                              

The platform wellhead is installed at the surface on a platform or              
production structure/vessel during drilling and provides a means of             
supporting and sealing each of the multiple casing strings for well             
control. The system includes a wellhead housing, casing hangers, seal           
assemblies, and valves which are configured to specific well requirements.      

[DIAGRAM APPEARS HERE]  

PLATFORM PRODUCTION TREES                                                       

The platform production tree is located on the production deck of the           
platform or production structure/vessel and is used to control the flow of      
oil and gas from a producing well. The main components are surface              
controlled valves, manual wellhead connector, controls and tree cap, which      
are designed and configured into an assembly specific to the well               
requirements.                                                                   

[DIAGRAM APPEARS HERE]  

EXPLORATION                                                                     
OR PRODUCTION                                                                   
STRUCTURE/                                                                      
VESSEL                                                                          

Platform Wellhead                                                               

. Jack-up Rigs                                                                
. Platforms                                                                   
. TLPs                                                                        
. Spars                                                                       

Platform Production Trees                                                       

. Platforms                                                                   
. TLPs                                                                        
. Spars                                                                       

29

424B1
32nd Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 32nd
OFFSHORE RIG EQUIPMENT                                                          

DRILLING AND PRODUCTION RISER SYSTEMS                                           

Drilling riser systems provide the vertical conduit between the floating        
drilling vessel and the subsea wellhead. Through the riser, equipment is        
guided into the well and drilling fluids are returned to the surface. The       
drilling riser also provides a means of well control through auxiliary integral 
high pressure tubes attached to the main riser body.                            

Drilling Riser                                                                  

[DIAGRAM APPEARS HERE]  

Production riser systems provide the vertical conduit from the subsea wellhead  
to the floating production platform. Oil and gas flows to the surface for       
processing through the production riser.                                        

[DIAGRAM APPEARS HERE]  

Production Riser                                                                

WELLHEAD CONNECTOR                                                              

The wellhead connector provides remote connection of the drilling               
riser to the blowout preventer stack (BOP), and the BOP to the wellhead.        
The wellhead connector is also used to connect the subsea production tree       
or production riser to the subsea wellhead.                                     

[DIAGRAM APPEARS HERE]  

Wellhead Connector                                                              

DIVERTERS                                                                       

The diverter is located at the surface and diverts gases off the rig during     
the drilling operation to provide protection from shallow gas blowouts.         

[DIAGRAM APPEARS HERE]  

Diverter                                                                        

EXPLORATION                                                                     
OR PRODUCTION                                                                   
STRUCTURE/                                                                      
VESSEL                                                                          

. Floating Rigs                                                               
. TLPs                                                                        
. Spars                                                                       

. TLPs                                                                        
. Spars                                                                       

. Floating Rigs                                                               
. TLPs                                                                        
. Spars                                                                       

. Jack-up Rigs                                                                
. Floating Rigs                                                               
. Platforms                                                                   
. TLPs                                                                        
. Spars                                                                       

30

424B1
33rd Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 33rd
Subsea Equipment. Subsea equipment is used in the drilling and production of
offshore oil and gas wells around the world. Included in the subsea equipment   
product line are subsea wellheads, mudline hanger systems, specialty            
connectors and associated pipe, subsea production trees, valves and TLP and     
Spar well systems. Management believes that, based solely upon its internal     
analysis, the Company has achieved a current market share of approximately 30%  
in its subsea wellhead, mudline hanger system and specialty connector markets.  
Dril-Quip's subsea production tree sales have increased steadily since their    
introduction in 1992.                                                           

Subsea wellheads are pressure-containing forged and machined metal housings 
in which casing hangers are landed and sealed subsea to suspend casing          
(downhole pipe). As drilling depth increases, successively smaller diameter     
casing strings are installed, each suspended by an independent casing hanger.   
Subsea wellheads are utilized when drilling from floating drilling rigs,        
either semi-submersible or drillship types, and TLPs and Spars. Management      
believes that Dril-Quip's SS-15(R) and SS-10(R) wellheads are two of the most   
widely used subsea wellheads in the world. Competitive advantages of the        
Company's subsea wellheads include proprietary metal-to-metal seal technology   
and simple installation procedures. These features are ideally suited to        
subsea applications when a combination of high pressures, elevated              
temperatures and corrosive environments are present. The Company generally      
supplies subsea wellheads to customers from inventory.                          

Mudline hanger systems are used in jack-up drilling operations to support   
the weight of the various casing strings at the ocean floor while drilling a    
well. They also provide a method to disconnect the casing strings in an         
orderly manner at the ocean floor after the well has been drilled, and          
subsequently reconnect to enable production of the well by either tying it      
back vertically to a subsequently-installed platform or by installing a subsea  
tree. Dril-Quip's MS-15(R) mudline hanger systems are technologically advanced  
products designed for simple operation while providing high load and high       
pressure capacity. The Company believes many customers prefer its mudline       
hanger systems to those manufactured by its competitors because of their        
higher pressure and load capacity and field-proven reliability. The Company     
generally supplies mudline hanger systems to customers from inventory.          

Large diameter weld-on specialty connectors (threaded or stab type) are used
in offshore wells drilled from floating drilling rigs, jack-ups, fixed          
platforms, TLPs and Spars. Specialty connectors join lengths of conductor or    
large diameter (16-inch or greater) casing. Specialty connectors provide a      
more rapid connection than other methods of connecting lengths of pipe, and,    
although more expensive, their use becomes economically attractive when time    
savings are considered, particularly as the rig day rate charged by offshore    
drilling contractors increases. Connectors may be sold individually or as an    
assembly after being welded to sections of Company or customer supplied pipe.   
Dril-Quip's weld-on specialty connectors are designed to prevent cross          
threading and provide a quick, convenient method of joining casing joints with  
structural integrity compatible with casing strength. The Company generally     
supplies specialty connectors individually or specialty connectors welded to    
pipe from inventory.                                                            

A subsea production tree is an assembly composed of valves, a wellhead      
connector, control equipment and various other components installed on a        
subsea wellhead or a mudline hanger system and used to control the flow of oil  
and gas from a producing well. Subsea trees may be either stand alone           
satellite type or template mounted cluster arrangements. Both types typically   
produce via flowlines to a central control point located on a platform, TLP,    
Spar or FPSO. The use of subsea production trees has become an increasingly     
important method for producing wells located in hard-to-reach deepwater areas   
or economically marginal fields located in shallower waters. The Company is an  
established manufacturer of more complicated dual-bore production trees, which  
are used in severe service applications. In addition, Dril-Quip manufactures a  
patented single bore (SingleBore(TM)) subsea completion system which features   
a hydraulic mechanism instead of a wireline-installed mechanism that allows     
the operator to plug the tubing hanger annulus remotely from the surface via a  
hydraulic control line and subsequently unplug it when the well is put on       
production. This mechanism eliminates the need for an expensive multibore       
installation and workover riser, thereby saving both cost and installation      
time. The Company's subsea production trees are generally custom designed and   
manufactured to customer specifications.                                        

31  

424B1
34th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 34th
Surface Equipment. Surface equipment is principally used for flow control on
offshore production platforms, TLPs and Spars. Included in the Company's        
surface equipment product line are platform wellheads and platform production   
trees. Dril-Quip's development of platform wellheads and platform production    
trees was facilitated by adaptation of its existing subsea wellhead and tree    
technology to surface wellheads and trees.                                      

Platform wellheads are pressure-containing forged and machined metal        
housings in which casing hangers are landed and sealed at the platform deck to  
suspend casings. The Company emphasizes the use of metal-to-metal sealing       
wellhead systems with operational time-saving features which can be used in     
high pressure, high temperature and corrosive drilling and production           
applications. Dril-Quip believes that its SU-90(R) unitized platform wellheads  
are superior to typical industry wellheads because they offer time savings,     
safety and technological benefits to its customers.                             

After installation of the wellhead, platform production trees, consisting of
gate valves, a wellhead connector, controls, tree cap and associated            
equipment, are installed on the wellhead to control and regulate oil or gas     
production. Platform production trees are similar to subsea production trees    
but utilize less complex equipment and more manual, rather than hydraulically   
activated, valves and connectors. Platform wellheads and platform production    
trees and associated equipment are designed and manufactured in accordance      
with customer specifications.                                                   

Offshore Rig Equipment. Offshore rig equipment includes drilling and        
production riser systems, wellhead connectors and diverters. The drilling       
riser system consists of (i) lengths of riser pipe and associated riser         
connectors that secure one to another; (ii) the telescopic joint, which         
connects the entire drilling riser system to the diverter at the rig and        
provides a means to compensate for vertical motion of the rig relative to the   
ocean floor; and (iii) the wellhead connector, which provides a means for       
remote connection and disconnection of the drilling riser system to and from    
the BOP stack. Production risers provide a vertical conduit from the subsea     
wellhead to a TLP, Spar or FPSO. The wellhead connector also provides remote    
connection/disconnection of the BOP stack, production tree or production riser  
to/from the wellhead. Diverters are used to provide protection from shallow     
gas blowouts and to divert gases off of the rig during the drilling operation.  

Wellhead connectors and drilling and production riser systems are also used 
on both TLPs and Spars, which are being installed more frequently in deepwater  
applications. The Company believes that its diverter is the simplest and most   
reliable currently on the market, and that its DX(R) wellhead connector offers  
the best combination of structural integrity and operational features of any    
connector currently on the market. The Company has recently introduced          
drilling and production risers as new product lines. The principal market for   
offshore rig equipment is new rigs, rig upgrades, TLPs and Spars. Diverters,    
drilling and production risers and wellhead connectors are generally designed   
and manufactured to customer specifications.                                    

SERVICE GROUP                                                               

Dril-Quip's Service Group provides field installation services,             
reconditioning of its products which are customer-owned, and rental running     
tools for installation and retrieval of its products. These services are        
provided from the Company's worldwide locations and represented approximately   
18% of revenues in 1996.                                                        

Field Installation. Dril-Quip provides field installation services through  
the use of its technicians. These technicians assist in the onsite              
installation of Company products and are available on a 24-hour call out from   
the Company's facilities located in Houston, Texas; Aberdeen, Scotland;         
Stavanger, Norway; Esbjerg, Denmark; Singapore; and Perth, Australia.           

Reconditioning. The Company provides reconditioning of its products at its  
facilities in Houston, Texas; Aberdeen, Scotland; Stavanger, Norway; and        
Singapore.                                                                      

Rental. The Company rents running and installation tools for use in         
installing its products. These tools are used to install and retrieve Company   
products which are purchased by customers. Running tools are available from     
Dril-Quip's locations in Houston, Texas; Aberdeen, Scotland; Stavanger,         
Norway; Esbjerg, Denmark; Singapore; and Perth, Australia.                      

32  

424B1
35th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 35th
MANUFACTURING                                                                   

Dril-Quip has major manufacturing facilities in Houston, Texas; Aberdeen,   
Scotland; and Singapore. Each location conducts a broad variety of processes,   
including machining, fabrication, inspection, assembly and testing. The         
Houston facility provides forged and heat treated products to all the major     
manufacturing facilities. The manufacturing process is illustrated in the       
following diagram.                                                              

[MANUFACTURING CHART APPEARS HERE]                                              

The Company's Houston and Aberdeen manufacturing plants are ISO 9001 and    
American Petroleum Institute certified. See "--Properties--Major Manufacturing  
Facilities." Dril-Quip maintains its high standards of product quality through  
the use of quality assurance specialists who work with product manufacturing    
personnel throughout the manufacturing process by inspecting and documenting    
equipment as it is processed through the Company's manufacturing facilities.    
The Company has the capability to manufacture various products from each of     
its product lines at its major manufacturing facilities and believes that this  
localized manufacturing capability is essential in order to compete with the    
Company's major competitors.                                                    

The Company's manufacturing process is vertically integrated, performing, in
house, essentially all of its forging, heat treatment, machining, fabrication,  
inspection, assembly and testing. This vertically integrated manufacturing      
capability provides competitive advantages because Dril-Quip is able to (i)     
control the quality of its products from initial stages, (ii) control the cost  
of its production and (iii) assure timely delivery of high-volume and           
customized orders. The Company's primary raw material is cast steel ingots,     
from which it produces steel shaped forgings at its forging and heat treatment  
facility. The Company routinely purchases four different grades of steel        
ingots from approximately four suppliers on a purchase order basis and does     
not have any long-term supply contracts.                                        

33  

424B1
36th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 36th
The Company acquired land and used equipment, and all equipment was rebuilt 
to essentially "like new" condition to provide the Company with a modern        
forging and heat treatment facility in Houston. This was done to reduce costs   
and in anticipation of forging capacity shortages which could result if the     
demand for forgings increased significantly. Dril-Quip now performs             
essentially all of its own heat treatment and produces most of its forging      
requirements. The Company's Houston facility also provides forgings and heat    
treatment for its Aberdeen and Singapore facilities. The Company's major        
competitors depend on outside sources for all or a substantial portion of       
their forging and heat treatment requirements. With the expansion of its        
forging capacity, the Company plans to begin marketing its forgings to third    
party customers.                                                                

Dril-Quip's manufacturing facilities utilize state-of-the-art computer      
numerically controlled ("CNC") machine tools and equipment, which contribute    
to the Company's product quality and timely delivery. The Company has also      
developed a cost effective, in-house machine tool rebuild capability, which     
produces "like new" machine upgrades with customized features to enhance the    
economic manufacture of its specialized products. The Company purchases         
quality used machine tools as they become available and stores them at its      
facilities to be rebuilt and upgraded as the need arises. Purchasing and        
rebuilding used machine tools is a competitive advantage, allowing Dril-Quip    
to add machine tools at lower overall costs than its competitors. Rebuilding    
used machine tools also allows for greater customization suitable for           
manufacturing Dril-Quip proprietary product lines. This provides the added      
advantage of requiring only in-house expertise for repairs and maintenance of   
these machines. A significant portion of the Company's manufacturing capacity   
growth has been through the rebuild/upgrade of quality used machine tools,      
including the replacement of outdated control systems with state-of-the-art     
CNC controls.                                                                   

In the last two years, as demand for offshore exploration and production    
equipment has increased significantly, the Company has been operating at close  
to full capacity. The Company plans to expand its manufacturing capacity by     
approximately 90% during the three-year period 1997 through 1999,               
approximately two-thirds of which is expected to be completed by the end of     
1998. The first of the additional manufacturing facilities is currently under   
construction and is expected to be completed by the end of 1998. The Company    
believes that this capital expansion program will allow it to prudently manage  
its growth in response to customer demand for its products. The Company has     
already begun adding machine tools at its existing facilities that it will      
move to the new facilities when they are completed. In order to expand its      
capacity as rapidly as planned, the Company expects that it will supplement     
its inventory of used machine tools, which it plans to rebuild and upgrade,     
with purchases of new and additional used machine tools.                        

PERCENTAGE OF COMPLETION ACCOUNTING                                             

Historically, Drip-Quip recognized revenues upon the delivery of a completed
product. As the Company has begun manufacturing larger and more complex         
projects that have longer manufacturing times, the Company has begun to         
account for purchase orders covering such projects on a percentage of           
completion basis. The Company expects that such larger and more complex         
projects will increase the Company's sales and revenues and afford the Company  
certain economies of scale because such projects generally utilize the          
Company's products as component parts. The Company also expects that such       
projects may have a stabilizing effect on the Company's operations, as the      
Company will have a longer period of time over which to plan and to allocate    
its resources. Finally, the Company expects to receive certain periodic         
payments associated with such projects, rather than payment upon delivery.      
Because the Company has only recently become involved in such manufacturing     
projects, the use of percentage of completion accounting does not affect the    
comparability of financial information to earlier periods. See "Management's    
Discussion and Analysis of Financial Condition and Results of Operations--      
Overview."                                                                      

CUSTOMERS                                                                       

The Company's principal customers are major integrated oil and gas          
companies, large independent oil and gas companies and foreign national oil     
and gas companies. Offshore drilling contractors and engineering and            
construction companies also represent a minor, but steadily increasing,         
customer base. The Company's customers are generally oil and gas companies      
that are well-known participants in offshore exploration and production, who    

34  

424B1
37th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 37th
depend on high quality, efficient, reliable products, such as those produced    
by Dril-Quip, for their offshore activities, particularly in deepwater areas.   

The Company is not dependent on any one customer or group of customers. In  
1996, the Company's top 15 customers represented approximately 50% of total     
revenues, with the Royal Dutch Shell Group of Companies (aggregating orders     
placed by all of its worldwide affiliates), accounting for approximately 19%    
of revenues. The number and variety of the Company's products required in a     
given year by any one customer depends upon the amount of that customer's       
capital expenditure budget devoted to offshore exploration and production in    
any single year and on the results of competitive bids for major projects.      
Consequently, a customer that accounts for a significant portion of revenues    
in one fiscal year may represent an immaterial portion of revenues in           
subsequent years.                                                               

Due to the demanding operating conditions in the offshore drilling and      
production sector and high costs associated with equipment failure, customers   
prefer manufacturers of highly reliable products, with established              
qualifications and experience, such as Dril-Quip. The Company strives to build  
strong long-term relationships with its customers by maintaining its            
reputation as a manufacturer of high-quality, efficient and reliable products,  
by developing new products to meet its customer's needs and by responding       
promptly to customer orders. See "Risk Factors--Reliance on Significant         
Customers" and "--Competition."                                                 

MARKETING AND SALES                                                             

Dril-Quip markets its products and services throughout the world directly   
through its sales personnel in two domestic and six international locations.    
In addition, in certain foreign markets where the Company does not maintain     
offices, it utilizes independent sales representatives to enhance its           
marketing and sales efforts. Locations in which Dril-Quip has sales             
representatives include the United Arab Emirates, Saudi Arabia, China, Canada,  
the Philippines, Brazil, Indonesia, Malaysia, Kuwait, Brunei, Oman, Qatar and   
West Africa. Although they do not have authority to contractually bind the      
Company, these representatives market the Company's products in their           
respective territories in return for sales commissions. The Company also        
places print advertising from time to time in trade and technical publications  
targeted to its customer base. It also participates in industry conferences     
and trade shows to enhance industry awareness of its products.                  

The Company's customers generally order products on a purchase order basis. 
Orders are typically filled within two weeks to three months after receipt of   
a purchase order, depending on the type of product and whether it is sold out   
of inventory or requires some customization. Contracts for certain of the       
Company's larger, more complex products, such as subsea production trees,       
drilling risers and equipment for TLPs and Spars can take a year or more to     
complete.                                                                       

The primary factors influencing a customer's decision to purchase the       
Company's products are the quality, reliability and reputation of the product,  
price and technologically superior features. Timely delivery of equipment is    
also very important to customer operations and the Company maintains an         
experienced sales coordination staff to help assure such delivery. For large    
drilling and production system orders, project management teams coordinate      
customer needs with engineering, manufacturing and service organizations, as    
well as with subcontractors and vendors.                                        

The Company historically has experienced some seasonality, with revenues and
operating income slightly lower during the first and third quarters compared    
to the second and fourth quarters. The Company's revenues are affected by its   
customers' capital expenditure budgeting process, which generally results in    
lower revenues in the first quarter and higher revenues in the fourth quarter.  

PRODUCT DEVELOPMENT AND ENGINEERING                                             

The technological demands of the oil and gas industry continue to increase  
as offshore exploration and drilling expand into more hostile environments.     
Conditions encountered in these environments include well                       

35  

424B1
38th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 38th
pressures of up to 15,000 psi (pounds per square inch), mixed flows of oil and  
gas under high pressure that may also be highly corrosive and water depths in   
excess of 5,000 feet. Since its founding, Dril-Quip has actively engaged in     
continuing product development to generate new products and improve existing    
products. When developing new products, the Company typically seeks to design   
the most technologically advanced version for a particular application to       
establish its reputation and qualification in that product. Thereafter, the     
Company leverages its expertise in the more technologically advanced product    
to produce less costly and complex versions of the product for less demanding   
applications. The Company also focuses its activities on reducing the overall   
cost to the customer, which includes not only the initial capital cost but      
also operating costs associated with its products. The reliable performance of  
Dril-Quip's products during installation and during the life of the field is    
one of the most important factors to the customer.                              

All of the Company's products have been developed from internally generated 
designs, and the Company has continually introduced new products and product    
enhancements since its founding in 1981. Product developments that began in     
1991 have led to a series of new products, including diverters, wellhead        
connectors, SingleBore(TM) subsea trees, improved severe service dual bore      
subsea trees, subsea and platform valves, platform wellheads, platform trees,   
subsea tree workover riser systems, drilling risers and TLP and Spar            
production riser systems. For the year ended December 31, 1996, more than 30%   
of the Company's total revenues were from the sales of products and product     
enhancements developed since 1991. In addition, of the Company's approximately  
$101 million backlog at June 30, 1997, at least 45% was attributable to orders  
for products and product enhancements developed since 1991.                     

Dril-Quip's product development work is conducted at its facilities in      
Houston, Texas and Aberdeen, Scotland. In addition to the work of its product   
development staff, the Company's application engineering staff provides         
engineering services to customers in connection with the design and sales of    
its products.                                                                   

The Company believes that the success of its business depends more on the   
technical competence, creativity and marketing abilities of its employees than  
on any individual patent, trademark or copyright. Nevertheless, as part of its  
ongoing product development and manufacturing activities, Dril-Quip's policy    
has been to seek patents when appropriate on inventions concerning new          
products and product improvements. As of June 30, 1997, the Company held 36     
United States patents and 77 foreign patents and had applications pending for   
four United States patents and 17 foreign patents. All patent rights for        
products developed by employees are assigned to the Company. Virtually all of   
the Company's products have components that are covered by patents. The         
Company's existing patents expire at various times beginning in 2001.           

Dril-Quip has 12 U.S. registered trademarks, including Dril-Quip(R), Quik-  
Thread(R), Quick-Stab(R), Multi-Thread(R), MS-15(R), SS-15(R), SS-10(R), SU-    
90(R) and DX(R). The Company has registered its trademarks in the countries     
where such registration is deemed material.                                     

Although in the aggregate the Company's patents and trademarks are of       
considerable importance to the manufacturing and marketing of many of its       
products, the Company does not consider any single patent or trademark or       
group of patents or trademarks to be material to its business as a whole,       
except the Dril-Quip(R) trademark. The Company also relies on trade secret      
protection for its confidential and proprietary information. The Company        
routinely enters into confidentiality agreements with its employees and         
suppliers. There can be no assurance, however, that others will not             
independently obtain similar information or otherwise gain access to the        
Company's trade secrets.                                                        

COMPETITION                                                                     

Dril-Quip faces significant competition from other manufacturers of         
exploration and production equipment. Several of its primary competitors are    
diversified multinational companies with substantially larger operating staffs  
and greater capital resources than those of the Company and which, in many      
instances, have been engaged in the manufacturing business for a much longer    
time than the Company. However, Dril-Quip believes it has a significant         
position in its oil and gas drilling and production equipment markets,          
particularly with respect to its high performance and time-saving products. In  
these markets, the Company competes principally with ABB                        

36  

424B1
39th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 39th
Vetco Gray Inc. (a subsidiary of Asea Brown Boveri, more commonly referred to   
as ABB), the petroleum production equipment segment of Cooper Cameron           
Corporation, the Petroleum Equipment Group of FMC Corporation and Kvaerner      
National Ltd. (a division of Kvaerner A.S.).                                    

Because of their relative size and diversity of products, several of these  
companies have the ability to provide "turnkey" services for offshore drilling  
and production applications, which enables them to use their own products to    
the exclusion of Dril-Quip's products. The Company also competes to a lesser    
extent with a number of other companies in various products. The principal      
competitive factors in the petroleum drilling and production equipment markets  
are quality, reliability and reputation of the product, price, technology,      
service and timely delivery. See "Risk Factors--Competition."                   

PROPERTIES                                                                      

MAJOR MANUFACTURING FACILITIES                                              

                                                                [Download Table]

                                        BUILDING                                
                                          SIZE         LAND                     
                                      (APPROXIMATE (APPROXIMATE                 
              LOCATION                SQUARE FEET)   ACREAGE)   OWNED OR LEASED 
              --------                ------------ ------------ ----------------
                                                                                
Houston, Texas                                                                  
  --13550 Hempstead Highway..........   175,000         15           Owned      
                                         12,000         --      Leased (offices)
  --6401 N. Eldridge Parkway.........   280,000        218           Owned      
Aberdeen, Scotland...................   110,000         10           Owned      
                                          9,400         --      Leased (offices)
Singapore............................    13,000        1.8           Leased     

Dril-Quip's manufacturing facilities in Houston and Aberdeen are capable of 
manufacturing each of its products, and the facility in Singapore is capable    
of manufacturing most of the Company's established products. The Company's      
Eldridge site in Houston, Texas consists of 218 acres, of which approximately   
70% is available for additional buildings and machine tools. The Company plans  
to focus its domestic capacity expansion at the Eldridge site.                  

SALES, SERVICE AND RECONDITIONING FACILITIES                                

                                                                [Download Table]

                           BUILDING                                             
                             SIZE         LAND                                  
                         (APPROXIMATE (APPROXIMATE                              
    LEASED LOCATION      SQUARE FEET)   ACREAGE)             ACTIVITY           
    ---------------      ------------ ------------ -----------------------------
                                                                                
New Orleans, Louisiana..     2,300         --              Sales/Service        
Beverwijk, Holland......     5,200        0.2             Sales/Warehouse       
Perth, Australia........    13,300        1.4             Sales/Service/        
                                                     Reconditioning/Warehouse   
Stavanger, Norway.......    15,700        2.4      Sales/Service/Reconditioning/
                                                       Warehouse/Fabrication    
Esbjerg, Denmark........     7,800        0.5      Sales/Service/Reconditioning/
                                                             Warehouse          

The Company also performs sales, service and reconditioning activities at   
its facilities in Houston, Aberdeen and Singapore. As part of its capital       
expansion, the Company plans to expand its facilities in Stavanger to meet      
growing demands for its products and services. Under the Company's existing     
credit facilities, substantially all of the properties and assets of the        
Company are subject to mortgages and security interests in favor of the         
Company's lenders.                                                              

37  

424B1
40th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 40th
EMPLOYEES                                                                       

The total number of the Company's employees as of June 30, 1997 was 926. Of 
these, 580 were located in the United States. The Company's employees are not   
covered by collective bargaining agreements, and the Company considers its      
employee relations to be good.                                                  

GOVERNMENTAL REGULATIONS                                                        

Many aspects of the Company's operations are affected by political          
developments and are subject to both domestic and foreign governmental          
regulations, including those relating to oilfield operations, worker safety     
and the protection of the environment. In addition, the Company depends on the  
demand for its services from the oil                                            
and gas industry and, therefore, is affected by changing taxes, price controls  
and other laws and regulations relating to the oil and gas industry generally,  
including those specifically directed to offshore operations. The adoption of   
laws and regulations curtailing exploration and development drilling for oil    
and gas for economic or other policy reasons could adversely affect the         
Company's operations by limiting demand for the Company's products.             

Recently, increased concern has been raised over the protection of the      
environment. Offshore drilling in certain areas has been opposed by             
environmental groups and, in certain areas, has been restricted. To the extent  
that new laws or other governmental actions prohibit or restrict offshore       
drilling or impose additional environmental protection requirements that        
result in increased costs to the oil and gas industry in general and the        
offshore drilling industry in particular, the business of the Company could be  
adversely affected. The Company cannot determine to what extent its future      
operations and earnings may be affected by new legislation, new regulations or  
changes in existing regulations.                                                

The Company's operations are affected by numerous foreign, federal, state   
and local environmental laws and regulations. The technical requirements of     
these laws and regulations are becoming increasingly expensive, complex and     
stringent. These laws may provide for "strict liability" for damages to         
natural resources or threats to public health and safety, rendering a party     
liable for the environmental damage without regard to negligence or fault on    
the part of such party. 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  
strict liability for remediation of spills and releases of hazardous            
substances. In addition, 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. Such laws and regulations   
may also expose the Company to liability for the conduct of or conditions       
caused by others, or for acts of the Company that were in compliance with all   
applicable laws at the time such acts were performed. Compliance with           
environmental laws and regulations may require the Company to obtain permits    
or other authorizations for certain activities and to comply with various       
standards or procedural requirements. The Company believes that its facilities  
are in substantial compliance with current regulatory standards.                

Based on the Company's experience to date, the Company does not currently   
anticipate any material adverse effect on its business or consolidated          
financial position as a result of future compliance with existing               
environmental laws and regulations controlling the discharge of materials into  
the environment. However, future events, such as changes in existing laws and   
regulations or their interpretation, more vigorous enforcement policies of      
regulatory agencies, or stricter or different interpretations of existing laws  
and regulations, may require additional expenditures by the Company, which may  
be material.                                                                    

LEGAL PROCEEDINGS                                                               

The Company is not a party to, nor is any of its property the subject of,   
any pending legal proceedings, which, in the opinion of management, are         
expected to have a material adverse effect on the Company's consolidated        
results of operations or financial position.                                    

38  

424B1
41st Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 41st
MANAGEMENT  

DIRECTORS AND EXECUTIVE OFFICERS                                                

The following table sets forth the names, ages (as of August 31, 1997) and  
positions of the Company's directors, the person nominated to become a          
director of the Company upon completion of the Offering and the Company's       
executive officers:                                                             

                                                                [Download Table]

                                                                      DIRECTOR'S
                                                                         TERM   
           NAME             AGE               POSITION                  ENDING  
           ----             ---               --------                ----------
                                                                                
Larry E. Reimert...........  50 Co-Chairman of the Board and Director    2000   
Gary D. Smith..............  55 Co-Chairman of the Board and Director    2000   
J. Mike Walker.............  54 Co-Chairman of the Board and Director    1999   
Gary W. Loveless...........  54 Director                                 1999   
James M. Alexander.........  45 Director(1)                              1998   
Jerry M. Brooks............  45 Chief Accounting Officer                        

--------                                                                        
(1) Appointment will become effective upon completion of the Offering.          

The Company's Board of Directors is divided into three classes with         
staggered terms of office, initially ending as set forth above. Thereafter,     
the term for each class will expire on the date of the third annual             
stockholders' meeting for the election of directors following the most recent   
election of directors for such class. Each director holds office until the      
next annual meeting of stockholders for the election of directors of his class  
and until his successor has been duly elected and qualified. Officers serve at  
the discretion of the Board of Directors.                                       

Larry E. Reimert is Co-Chairman of the Board 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 as Vice President of  
Technical Operations, Vice President of Engineering and Manager of              
Engineering. Mr. Reimert holds a BSME degree from the University of Houston     
and a MBA degree from Pepperdine University.                                    

Gary D. Smith is Co-Chairman of the Board 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 as General Manager and    
Vice President of Sales and Service.                                            

J. Mike Walker is Co-Chairman of the Board 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, a MSME degree from the University of Texas at Austin and  
a Ph.D. in mechanical engineering from Texas A&M University.                    

Gary W. Loveless has been an outside director since the Company's inception 
in 1981. From 1986 to 1997, he held various positions with Great Western        
Resources Corporation, most recently as Chief Executive Officer and Director.   
In 1997, Great Western Resources Corporation was purchased by Forcenegy Inc.,   
and Mr. Loveless currently serves as Vice President/Onshore Exploration and     
Production of Forcenegy Inc. He holds a BSME from Texas A&M University and a    
MSME from the University of Texas at Austin.                                    

James M. Alexander will become an outside director of the Company upon      
completion of the Offering. Since December 1996, he has served as the Vice      
President, Chief Financial Officer and Secretary of Spinnaker Exploration       
Company, L.L.C. From November 1995 to December 1996, Mr. Alexander was          
President of                                                                    

39  

424B1
42nd Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 42nd
Alexander Consulting, Inc. He was the Senior Vice President and Chief           
Financial Officer of Enron Global Power & Pipelines L.L.C. from November 1994   
to June 1995, and served as its President from June until November 1995. Prior  
to that time, Mr. Alexander was President of Alexander Corporate Financial      
Consulting, Inc. from June 1992 to November 1994. Mr. Alexander holds a BA      
from Yale College and an MBA from Harvard University.                           

Jerry M. Brooks has been Chief Accounting Officer since he joined the       
Company in 1992. From 1980 to 1991, he held various positions with Chiles       
Offshore Corporation, most recently as Chief Financial Officer, Secretary and   
Treasurer. Mr. Brooks holds a BBA in Accounting and an MBA from the University  
of Texas at Austin. He is a certified public accountant.                        

Upon completion of the Offering, there will be two committees of the Board  
of Directors: an Audit Committee and a Compensation Committee. The initial      
members of the Audit Committee will be Mr. Loveless and Mr. Alexander. The      
Audit Committee will recommend the appointment of independent public            
accountants to conduct audits of the Company's financial statements and review  
with the independent accountants the plan and results of the auditing           
engagement. The Audit Committee will also review the scope and results of       
procedures for internal auditing of the Company and the adequacy of the         
Company's system of internal accounting controls. The initial members of the    
Compensation Committee will be Mr. Loveless and Mr. Alexander. The              
Compensation Committee will approve, or in some cases, recommend to the Board,  
remuneration arrangements and other compensation plans involving the Company's  
directors, executive officers and certain other employees whose compensation    
exceeds specified levels. The Compensation Committee will also act on the       
granting of stock options, including grants made under the Incentive Plan to    
the Company's directors and executive officers.                                 

DIRECTOR COMPENSATION                                                           

Gary W. Loveless, one of the Company's directors, was paid fees totaling    
$25,000 for his services as a director of the Company for the year ended        
December 31, 1996. Commencing with the consummation of the Offering, each       
director who is not an employee of the Company (a "Nonemployee Director") and   
who is elected or appointed on or after completion of the Offering will         
receive an annual fee of $35,000, plus a fee of $1,000 for attendance at each   
Board of Directors meeting and $1,000 for each committee meeting (unless held   
on the same day as a Board of Directors meeting). All directors will be         
reimbursed for out-of-pocket expenses incurred in attending meetings of the     
Board of Directors or committees thereof and for other expenses incurred in     
their capacity as directors. Directors who are employees of the Company will    
not receive additional compensation for serving as directors.                   

OFFICER AND DIRECTOR INDEMNIFICATION                                            

The Company's Bylaws provide for the indemnification of its officers and    
directors, and the advancement to them of expenses in connection with           
proceedings and claims, to the fullest extent permitted by the Delaware         
General Corporation Law. The Bylaws include related provisions meant to         
facilitate the indemnitee's receipt of such benefits. These provisions cover,   
among other things: (i) specification of the method of determining entitlement  
to indemnification and the selection of independent counsel that will in some   
cases make such determination; (ii) specification of certain time periods by    
which certain payments or determinations must be made and actions must be       
taken; and (iii) the establishment of certain presumptions in favor of an       
indemnitee. The benefits of certain of these provisions are available to an     
indemnitee only if there has been a change in control (as defined therein).     
The Company has entered into indemnification agreements with its directors and  
officers that provide for similar protections.                                  

EXECUTIVE COMPENSATION                                                          

Summary Compensation Table. The following table sets forth certain summary  
information concerning the compensation paid or accrued by the Company during   
the year ended December 31, 1996 to the Company's                               

40  

424B1
43rd Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 43rd
executive officers whose combined salary and bonus from the Company during      
such period exceeded $100,000 (collectively, the "named executive officers").   

SUMMARY COMPENSATION TABLE  

                                                                [Download Table]

                                                   ANNUAL                      
                                               COMPENSATION(1)                 
                                              -----------------    ALL OTHER   
         NAME AND PRINCIPAL POSITION           SALARY   BONUS   COMPENSATION(2)
         ---------------------------           ------  -------- ---------------
                                                                               
Larry E. Reimert............................. $413,462 $200,000     $3,000     
 Co-Chairman of the Board                                                      
Gary D. Smith................................ $413,462 $200,000     $3,000     
 Co-Chairman of the Board                                                      
J. Mike Walker............................... $413,462 $200,000     $3,000     
 Co-Chairman of the Board                                                      
Jerry M. Brooks.............................. $107,566 $ 15,000     $2,151     
 Chief Accounting Officer                                                      

--------                                                                        
(1) Other annual compensation for each named executive officer during 1996 did  
 not exceed the lesser of $50,000 or 10% of the annual compensation earned
by such individual.                                                     
(2) The amounts shown represent contributions by the Company under its 401(k)   
Profit Sharing Plan and Company payments of life insurance premiums.    

EMPLOYMENT AGREEMENTS                                                           

Prior to the completion of the Offering, the Company expects to enter into  
employment agreements with each of Messrs. Reimert, Smith and Walker. The       
following summary of these agreements, which will be effective on the closing   
of the Offering, does not purport to be complete and is qualified by reference  
to them, copies of which have been filed as exhibits to the Registration        
Statement of which this Prospectus is a part. Each of these agreements          
provides for an annual base salary in an amount not less than $350,000, and     
will entitle the employee to participate in all of the Company's incentive,     
savings, retirement and welfare benefit plans in which other executive          
officers of the Company participate. Each agreement also provides for a bonus   
of $250,000 payable on or before December 31, 1997, and thereafter an annual    
performance bonus 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 (as defined below) 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 of the employment agreements has an initial five-year term, provided   
that at the end of the second year of such initial term and on every            
anniversary thereafter, the term will be automatically extended for one year,   
such that the remaining term of the agreement shall never be less than three    
years. Each agreement will be subject to the right of the Company and the       
employee to terminate the employee's employment at any time. Each agreement     
provides that, upon termination of employment because of death or disability,   
or if employment is terminated by the Company for any reason (except under      
certain limited circumstances defined as "for cause" in the agreement), or if   
employment is terminated by the employee subsequent to a change of control (as  
defined) or with good reason (as defined), the employee will generally be       
entitled to (i) a lump sum cash payment equal to the employee's base salary     
through the date of termination, together with any deferred compensation        
previously awarded and any accrued vacation time, (ii) a lump sum cash payment  
equal to the                                                                    

41  

424B1
44th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 44th
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.                                                               

INCENTIVE PLAN                                                                  

Prior to the completion of the Offering, the Company expects to adopt the   
Incentive Plan. The objectives of the Incentive Plan are (i) to attract and     
retain key employees, (ii) to encourage the sense of proprietorship of these    
persons in the Company and (iii) to stimulate the active interest of these      
persons in the development and financial success of, the Company by making      
awards ("Awards") under the Incentive Plan.                                     

The Company plans to reserve 1,700,000 shares of Common Stock to use in     
connection with the Incentive Plan. Persons eligible for Awards are employees   
holding positions of responsibility with the Company or any of its              
subsidiaries and whose performance can have a significant effect on the         
success of the Company.                                                         

The Board of Directors will administer the Incentive Plan with respect to   
all employees other than executive officers. The Compensation Committee will    
administer the Incentive Plan with respect to executive officers. The Board     
has the exclusive power to administer the Incentive Plan, to take all actions   
specifically contemplated thereby or necessary or appropriate in connection     
with the administration thereof, to interpret the Incentive Plan and to adopt   
such rules, regulations and guidelines for carrying out its purposes as the     
Board may deem necessary or proper, all of which powers will be exercised in    
the best interests of the Company and in keeping with the objectives of such    
plan. The Board may, in its discretion, among other things, (i) extend or       
accelerate the exercisability of, accelerate the vesting of, or eliminate or    
make less restrictive any restrictions contained in, any Award, (ii) waive any  
restriction or other provision of the Incentive Plan or in any Award or (iii)   
otherwise amend or modify any Award in any manner that is either not adverse    
to that participant holding the Award or consented to by that participant. The  
Board also may delegate to certain senior officers of the Company its duties    
under the Incentive Plan.                                                       

The Board of Directors may amend, modify, suspend or terminate the Incentive
Plan for the purpose of addressing any changes in legal requirements or for     
any other lawful purpose, except that no amendment or alteration that would     
adversely affect the rights of any participant under any Award previously       
granted to such participant shall be made without the consent of such           
participant. The Board of Directors may make certain                            

42  

424B1
45th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 45th
adjustments in the event of any subdivision, split or combination of            
outstanding shares of Common Stock, any declaration of a stock dividend         
payable in shares of Common Stock, any recapitalization or capital              
reorganization of the Company, any consolidation or merger of the Company with  
another corporation or entity, any adoption by the Company of any plan of       
exchange affecting the Common Stock or any distribution to holders of Common    
Stock of securities or property (other than normal cash dividends).             

Awards to employees may be in the form of (i) rights to purchase a specified
number of shares of Common Stock at a specified price ("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, units denominated in Common Stock or any other property which are made   
subject to the attainment of one or more performance goals ("Performance        
Awards"). An Option may be either an incentive stock option ("ISO") that        
qualifies, or a nonqualified stock option ("NSO") that does not qualify, with   
the requirements of Section 422 of the Internal Revenue Code. The Committee     
will determine the employees to receive Awards and the terms, conditions and    
limitations applicable to each such Award, which conditions may, but need not,  
include continuous service with the Company, achievement of specific business   
objectives, attainment of specified growth rates, increases in specified        
indices or other comparable measures of performance. 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.     

On the date the Offering closes, Options under the Incentive Plan will be   
granted to certain employees of the Company to purchase a total of              
approximately 419,250 shares of Common Stock at an exercise price per share     
equal to the initial public offering price per share set forth on the cover     
page of this Prospectus. These awards include Options to be granted to each of  
Messrs. Reimert, Smith and Walker to purchase 43,750 shares of Common Stock.    
All such Options will have a term of ten years and become exercisable in        
cumulative annual increments of one-fourth of the total number of shares of     
Common Stock subject thereto, beginning on the first anniversary of the date    
of the grant.                                                                   

The foregoing description summarizes the principal terms and conditions of  
the Incentive Plan, does not purport to be complete and is qualified in its     
entirety by reference to the Incentive Plan, a copy of which has been filed as  
an exhibit to the Registration Statement of which this Prospectus is a part.    

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION                     

Upon completion of the Offering, the Company will establish a Compensation  
Committee. In the past, matters with respect to the compensation of executive   
officers of the Company were determined by the members of the Board of          
Directors as a whole. Messrs. Reimert, Smith and Walker, who were members of    
the Board of Directors, participated in deliberations concerning compensation.  

43  

424B1
46th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 46th
CERTAIN TRANSACTIONS  

REGISTRATION RIGHTS AGREEMENT                                                   

In connection with the Offering, the Company will enter into a registration 
rights agreement among the Company and Messrs. Reimert, Smith, Walker,          
Loveless, Reimert Family Partners, Ltd., Four Smith's Company, Ltd. and         
Loveless Enterprises, Ltd. (the "Registration Rights Agreement"). The           
Registration Rights Agreement will provide 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 to register the Common Stock subject to the agreement        
("Registrable Securities") held by such Requesting Holders and any other        
stockholders who are parties to the Registration Rights Agreement and who       
desire to sell Registrable Securities pursuant to such registration statement,  
subject to a maximum of two requests by each of Messrs. Reimert, Smith and      
Walker or their successors and assigns. The first such request may not be made  
until after 180 days following the closing of the Offering. In addition,        
subject to certain conditions and limitations, the Registration Rights          
Agreement will provide 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 will           
generally be transferable to transferees (whether by assignment or by death of  
the holder) of the Registrable Securities covered thereby. The Registration     
Rights Agreement will terminate when all Registrable Securities have been (i)   
distributed to the public pursuant to a registration statement covering such    
securities that has been declared effective under the Securities Act, or (ii)   
distributed to the public in accordance with the provisions of Rule 144 (or     
any similar provision then in force) under the Securities Act. An aggregate of  
11,870,000 outstanding shares of Common Stock and 131,250 shares of Common      
Stock issuable upon exercise of outstanding options will be subject to the      
Registration Rights Agreement.                                                  

STOCKHOLDERS AGREEMENT                                                          

Messrs. Reimert, Smith, Walker, Reimert Family Partners, Ltd. and Four      
Smith's Company, Ltd. are parties to a stockholders agreement (the              
"Stockholders Agreement") pursuant to which each party has agreed to vote the   
shares of Common Stock held by such party to elect to the Company's Board of    
Directors one designee of Mr. Reimert and Reimert Family Partners, Ltd. (the    
"Reimert Stockholders"), one designee of Mr. Smith and Four Smith's Company,    
Ltd. (the "Smith Stockholders") and one designee of Mr. Walker. The rights      
under the Stockholders Agreement are transferable to any heir or legal          
representative of Messrs. Reimert, Smith or Walker who acquires Common Stock    
upon the death of such stockholder and who agrees to be bound by the            
provisions of such Agreement. In the event the Reimert Stockholders,            
collectively, the Smith Stockholders, collectively, or Mr. Walker (or their     
permitted transferees as described in the preceding sentence), own less than    
10% of the total number of issued and outstanding shares of Common Stock of     
the Company, the rights and obligations of such person under the Stockholders   
Agreement are terminated.                                                       

CONSULTING SERVICES                                                             

In 1996, the Company paid Alexander Consulting, Inc., of which Mr. James M. 
Alexander is the sole shareholder, fees totalling $50,000 for consulting        
services. In 1997, the Company has paid Mr. Alexander fees totalling $85,000    
for certain consulting services rendered to the Company. Mr. Alexander will be  
appointed to the Board of Directors of the Company upon completion of the       
Offering.                                                                       

44  

424B1
47th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 47th
PRINCIPAL AND SELLING STOCKHOLDERS  

The following table sets forth certain information with respect to the      
current beneficial ownership of shares of Common Stock, and as adjusted to      
reflect the sale of shares offered hereby, by (i) each person who is known by   
the Company to own beneficially more than 5% of the Common Stock, (ii) each of  
the Company's directors and named executive officers, (iii) all current         
executive officers and directors as a group and (iv) each of the Selling        
Stockholders. See "Risk Factors--Control by Certain Stockholders."              

                                                                [Download Table]

                            SHARES BENEFICIALLY             SHARES BENEFICIALLY 
                               OWNED BEFORE                     OWNED AFTER     
                                OFFERING(1)      NUMBER OF    OFFERING(1) (2)   
   NAME OF BENEFICIAL      ---------------------  SHARES   ---------------------
       OWNER(3)(4)           NUMBER   PERCENTAGE  OFFERED    NUMBER   PERCENTAGE
   ------------------      ---------- ---------- --------- ---------- ----------
                                                                                
Larry E. Reimert(5)......   4,311,000     30%      750,000  3,561,000   21.11%  
Gary D. Smith(6).........   4,311,000     30       750,000  3,561,000   21.11   
J. Mike Walker...........   4,311,000     30       750,000  3,561,000   21.11   
Gary W. Loveless(7)......   1,437,000     10       250,000  1,187,000    7.04   
James M. Alexander.......         --      --           --         --      --    
Jerry M. Brooks..........         --      --           --         --      --    
All directors and execu-                                                        
 tive officers as a group                                                       
 (6 persons).............  14,370,000    100%    2,500,000 11,870,000   70.37%  

--------                                                                        
(1) Shares of Common Stock subject to options that are expected to become       
exercisable upon the consummation of the Offering are deemed outstanding
  for computing the percentage ownership of the person holding such options,
but are not deemed outstanding for computing the percentage ownership of
any other person.                                                       
(2) Assumes no exercise of the Underwriters' over-allotment option.             
(3) 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.                                                                  
(4) The address of each such person is 13550 Hempstead Highway, Houston, Texas  
77040.                                                                  
(5) Includes 4,310,545 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.                                                                  
(6) Includes 4,310,545 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.                                    
(7) Includes 1,436,848 shares of Common Stock held by Loveless Enterprises,     
Ltd., a limited partnership of which Loveless Enterprises, L.L.C. is the
Managing General Partner. Mr. Loveless is the sole manager of Loveless  
Enterprises, L.L.C., and exercises voting and investment power with     
respect to such shares.                                                 

45  

424B1
48th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 48th
SHARES ELIGIBLE FOR FUTURE SALE 

Upon consummation of the Offering, approximately 16,870,000 shares of Common
Stock will be outstanding. The shares of Common Stock sold in the Offering      
will be freely tradeable without restriction or further registration under the  
Securities Act, except for certain manner of sale, volume limitations and       
other restrictions with respect to any shares purchased in the Offering by an   
affiliate of the Company (a "Company Affiliate"), which will be subject to the  
resale limitations of Rule 144 under the Securities Act. Under Rule 144 under   
the Securities Act, a person is an affiliate of an entity if such person        
directly or indirectly controls or is controlled by or is under common control  
with such entity and may include certain officers and directors, principal      
stockholders and certain other stockholders with special relationships. This    
Prospectus may not be used by Company Affiliates in connection with any resale  
of shares of Common Stock acquired in the manner described above.               

In general, under Rule 144 as currently in effect, if a minimum of one year 
has elapsed since the later of the date of acquisition of the restricted        
securities from the issuer or from an affiliate of the issuer, a person (or     
persons whose shares of Common Stock are aggregated), including persons who     
may be deemed "affiliates" of the Company, would be entitled to sell within     
any three-month period a number of shares of Common Stock that does not exceed  
the greater of (i) 1% of the then-outstanding shares of Common Stock (i.e.,     
168,700 shares immediately after consummation of the Offering) and (ii) the     
average weekly trading volume during the four calendar weeks preceding the      
date on which notice of the sale is filed with the Commission. Sales under      
Rule 144 are also subject to certain provisions as to the manner of sale,       
notice requirements and the availability of current public information about    
the Company. In addition, under Rule 144(k), if a period of at least two years  
has elapsed since the later of the date restricted securities were acquired     
from the Company or the date they were acquired from an affiliate of the        
Company, a stockholder who is not an affiliate of the Company at the time of    
sale and who has not been an affiliate for at least three months prior to the   
sale would be entitled to sell shares of Common Stock in the public market      
immediately without compliance with the foregoing requirements under Rule 144.  
Rule 144 does not require the same person to have held the securities for the   
applicable periods. The foregoing summary of Rule 144 is not intended to be a   
complete description thereof.                                                   

Upon the consummation of the Offering, 11,870,000 shares of Common Stock    
outstanding will be restricted securities as that term is defined by Rule 144,  
and, subject to the conditions thereof, including volume limitations, will      
become eligible for sale 90 days after the Offering. The Company will enter     
into a Registration Rights Agreement upon the consummation of the Offering      
whereby it will agree to register under the Securities Act shares of Common     
Stock held by Messrs. Reimert, Smith, Walker and Loveless and certain of their  
related family limited partnerships. See "Certain Transactions."                

The Company intends to file a registration statement on Form S-8 under the  
Securities Act to register the shares of Common Stock reserved or to be         
available for issuance pursuant to the Incentive Plan. Shares of Common Stock   
issued pursuant to such plan generally will be available for sale in the open   
market by holders who are not Company Affiliates and, subject to the volume     
and other limitations of Rule 144, by holders who are Company Affiliates.       

Subject to certain exceptions, each of the Company and the directors,       
executive officers and certain other stockholders of the Company has agreed     
that, without the prior written consent of Morgan Stanley & Co. Incorporated    
on behalf of the Underwriters, it will not, during the period ending 180 days   
after the date of this Prospectus, (i) offer, pledge, sell, contract to sell,   
sell any option or contract to purchase, purchase any option or contract to     
sell, grant any option, right or warrant to purchase or otherwise transfer,     
lend or dispose of, directly or indirectly, any shares of Common Stock or any   
securities convertible into or exercisable or exchangeable for Common Stock or  
(ii) enter into any swap or other arrangements that transfers to another, in    
whole or in part, any of the economic consequences of ownership of the Common   
Stock, whether any such transaction described in clause (i) or (ii) above is    
to be settled by delivery of Common Stock or other securities, in cash or       
otherwise. See "Underwriters."                                                  

46  

424B1
49th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 49th
Prior to the Offering, there has been no public market for the Common Stock 
and no prediction can be made of the effect, if any, that sales of Common       
Stock or the availability of shares for sale will have on the market price      
prevailing from time to time. Following the Offering, sales of substantial      
amounts of Common Stock in the public market or otherwise, or the perception    
that such sales could occur, could adversely affect the prevailing market       
price for the Common Stock.                                                     

DESCRIPTION OF CAPITAL STOCK  

The Company's authorized capital stock consists of 50,000,000 shares of     
Common Stock, par value $0.01 per share, and 10,000,000 shares of Preferred     
Stock, par value $0.01 per share. Following consummation of the Offering there  
will be approximately 16,870,000 shares of Common Stock outstanding (assuming   
the over-allotment option is not exercised), and no shares of Preferred Stock   
will be outstanding. The following summary does not purport to be complete,     
and reference is made to the more detailed provisions of the Company's          
Certificate of Incorporation (the "Certificate of Incorporation") and Bylaws,   
which are filed as exhibits to the registration statement of which this         
Prospectus is a part.                                                           

COMMON STOCK                                                                    

The Common Stock possesses ordinary voting rights for the election of       
directors and in respect of other corporate matters, each share being entitled  
to one vote. There are no cumulative voting rights, meaning that the holders    
of a majority of the shares voting for the election of directors can elect all  
the directors if they choose to do so. The Common Stock carries no preemptive   
rights and is not convertible, redeemable or assessable, or entitled to the     
benefits of any sinking fund. The holders of Common Stock are entitled to       
dividends in such amounts and at such times as may be declared by the Board of  
Directors out of funds legally available therefor. See "Dividend Policy" for    
information regarding dividend policy.                                          

PREFERRED STOCK                                                                 

The Board of Directors of the Company is empowered, without approval of the 
stockholders, to cause shares of Preferred Stock to be issued in one or more    
series, with the numbers of shares of each series to be determined by it. The   
Board of Directors is authorized to fix and determine the powers,               
designations, preferences and relative, participating, optional or other        
rights (including, without limitation, voting powers, full or limited,          
preferential rights to receive dividends or assets upon liquidation, rights of  
conversion or exchange into Common Stock, Preferred Stock of any Series or      
other securities, redemption provisions and sinking fund provisions) between    
series and between the Preferred Stock or any series thereof and the Common     
Stock, and the qualifications, limitations or restrictions of such rights.      

Although the Company has no present intention to issue shares of Preferred  
Stock, the issuance of shares of Preferred Stock, or the issuance of rights to  
purchase such shares, could be used to discourage an unsolicited acquisition    
proposal. For instance, the issuance of a series of Preferred Stock might       
impede a business combination by including class voting rights that would       
enable the holders to block such a transaction; or such issuance might          
facilitate a business combination by including voting rights that would         
provide a required percentage vote of the stockholders. In addition, under      
certain circumstances, the issuance of Preferred Stock could adversely affect   
the voting power of the holders of the Common Stock. Although the Board of      
Directors is required to make any determination to issue such stock based on    
its judgment as to the best interests of the stockholders of the Company, the   
Board of Directors could act in a manner that would discourage an acquisition   
attempt or other transaction that some or even a majority of the stockholders   
might believe to be in their best interests or in which stockholders might      
receive a premium for their stock over the then market price of such stock.     
The Board of Directors does not at present intend to seek stockholder approval  
prior to any issuance of currently authorized stock, unless otherwise required  
by law or the rules of any market on which the Company's securities are         
traded.                                                                         

47  

424B1
50th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 50th
For purposes of the Rights Agreement described below, the Company Board has 
authorized the creation of a series of Preferred Stock designated as "Series A  
Junior Participating Preferred Stock" (the "Series A Preferred Stock"). An      
aggregate of 500,000 shares of Preferred Stock have been reserved for issuance  
as Series A Preferred Stock. Series A Preferred Stock will rank junior to all   
other series of Preferred Stock that have been or may be established by the     
Company Board with respect to the payment of dividends and the distribution of  
assets upon liquidation. In general, the voting, dividend and liquidation       
rights of Series A Preferred Stock are designed in such a way that one one-     
hundredth of a share of Series A Preferred Stock will be substantially          
equivalent from an economic point of view to one share of Common Stock. For a   
statement of the rights and privileges of Series A Preferred Stock, reference   
is made to the form of Certificate of Designations which is included as an      
exhibit to this Registration Statement.                                         

STOCKHOLDER RIGHTS PLAN                                                         

Each share of Common Stock offered hereby includes one right ("Right") to   
purchase from the Company a unit consisting of one one-hundredth of a share (a  
"Fractional Share") of Series A Preferred Stock at a specified purchase price   
per Fractional Share, subject to adjustment in certain events (the "Purchase    
Price"). The following summary description of the Rights does not purport to    
be complete and is qualified in its entirety by reference to the Rights         
Agreement between the Company and a Rights Agent (the "Rights Agreement"), the  
form of which is filed as an exhibit to the Registration Statement of which     
this Prospectus is a part and is incorporated herein by reference.              

Initially, the Rights will attach to all certificates representing          
outstanding shares of Common Stock, including the shares of Common Stock        
offered hereby, and no separate certificates for the Rights ("Rights            
Certificates") will be distributed. The Rights will separate from the Common    
Stock and a "Distribution Date" will, with certain exceptions, occur upon the   
earlier of (i) 10 days following a public announcement that a person or group   
of affiliated or associated persons (an "Acquiring Person") has acquired, or    
obtained the right to acquire, beneficial ownership of 15% or more of the       
outstanding shares of Common Stock (the date of the announcement being the      
"Stock Acquisition Date") or (ii) 10 business days following the commencement   
of a tender offer or exchange offer that would result in a person's becoming    
an Acquiring Person. Larry E. Reimert, Gary D. Smith, J. Mike Walker, Reimert   
Family Partners, Ltd. and Four Smith's Company, Ltd. (the "Major                
Stockholders"), each of whom will both prior to and, immediately after          
consummation of the Offering be the beneficial owner of more than 15% of the    
outstanding shares of Common Stock, will not be deemed to be an Acquiring       
Person as a result of such ownership position or any subsequent increase in     
ownership position. Additionally, a transferee of Common Stock (an "Individual  
Major Stockholder Transferee") owned by Larry E. Reimert, Gary D. Smith, or J.  
Mike Walker (the "Individual Major Stockholders") who as a result of such       
transfer becomes the beneficial owner of 15% or more of the outstanding Common  
Stock will not be deemed to be an Acquiring Person if (a) such transferee       
receives such Common Stock directly from an Individual Major Stockholder by     
will or intestate succession or (b) such transfer is made (i) directly from an  
Individual Major Stockholder or an Individual Major Stockholder Transferee to   
a spouse, sibling or lineal descendant of an Individual Major Stockholder or    
lineal descendant of a spouse of an Individual Major Stockholder or (ii)        
directly from an Individual Major Stockholder or an Individual Major            
Stockholder Transferee to a trust, family partnership or similar family-        
related or family-controlled entity for estate planning purposes, all of the    
interests of which are owned by an Individual Major Stockholder, a spouse,      
sibling or lineal descendant of an Individual Major Stockholder or lineal       
descendant of a spouse of an Individual Major Stockholder or any distributees   
under the will of any of the foregoing persons, successors of such persons by   
intestate succession or trusts for the benefit of any of the foregoing persons  
(an "Estate Planning Vehicle"), unless and until such Individual Major          
Stockholder Transferee, together with his affiliates and associates, becomes    
the beneficial owner of additional shares of Common Stock constituting 1% or    
more of the then-outstanding shares of Common Stock or any other person who is  
the beneficial owner of at least 1% of the then-outstanding shares of Common    
Stock becomes an affiliate or associate of such Individual Major Stockholder    
Transferee. Reimert Family Partners, Ltd. shall cease to be a Major             
Stockholder at such time as all of the interests in such partnership are not    
owned by Larry E. Reimert, his spouse, siblings, lineal descendants, lineal     
descendants of his spouse, any distributees under the will of any of the        
foregoing persons, successors of such persons by intestate succession, trusts   
for the benefit of any                                                          

48  

424B1
51st Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 51st
of the foregoing persons and Wave Enterprises, Inc. Four Smith's Company, Ltd.  
shall cease to be a Major Stockholder at such time as all of the interests in   
such partnership are not owned by Gary D. Smith, his spouse, siblings, lineal   
descendants, lineal descendants of his spouse, any distributees under the will  
of any of the foregoing persons, successors of such persons by intestate        
succession, and trusts for the benefit of any of the foregoing persons. An      
Estate Planning Vehicle shall cease to be an Individual Major Stockholder       
Transferee at such time as all of the interests therein cease to be owned by    
an Individual Major Stockholder, a spouse, sibling or lineal descendant of an   
Individual Major Stockholder or a lineal descendant of a spouse of an           
Individual Major Stockholder or any distributees under the will of any of the   
foregoing persons, successors of such persons by intestate succession or        
trusts for the benefit of any of the foregoing persons. In certain              
circumstances the Distribution Date may be deferred by the Board of Directors.  
Certain inadvertent acquisitions will not result in a person's becoming an      
Acquiring Person if the person promptly divests itself of sufficient Common     
Stock. Until the Distribution Date, (a) the Rights will be evidenced by the     
Common Stock certificates and will be transferred with and only with those      
certificates, (b) Common Stock certificates will contain a notation             
incorporating the Rights Agreement by reference and (c) the surrender for       
transfer of any certificate for Common Stock also will constitute the transfer  
of the Rights associated with the stock represented by such certificate.        

The Rights are not exercisable until the Distribution Date and will expire  
at the close of business on the date that is the tenth anniversary of the       
adoption of the Rights Plan, unless earlier redeemed or exchanged by the        
Company as described below.                                                     

As soon as practicable after the Distribution Date, Rights Certificates will
be mailed to holders of record of Common Stock as of the close of business on   
the Distribution Date and, from and after the Distribution Date, the separate   
Rights Certificates alone will represent the Rights. All shares of Common       
Stock issued prior to the Distribution Date will be issued with Rights. Shares  
of Common Stock issued after the Distribution Date in connection with certain   
employee benefit plans or upon conversion of certain securities will be issued  
with Rights. Except as otherwise determined by the Board of Directors, no       
other shares of Common Stock issued after the Distribution Date will be issued  
with Rights.                                                                    

In the event (a "Flip-In Event") that a person becomes an Acquiring Person  
(except pursuant to a tender or exchange offer for all outstanding shares of    
Common Stock at a price and on terms that a majority of directors of the        
Company who are unaffiliated with an Acquiring Person or offeror determines to  
be fair to and otherwise in the best interests of the Company and its           
stockholders (a "Permitted Offer")), each holder of a Right will thereafter     
have the right to receive, upon exercise of such Right, a number of shares of   
Common Stock (or, in certain circumstances, cash, property or other securities  
of the Company) having a Current Market Price (as defined in the Rights         
Agreement) equal to two times the exercise price of the Right. Notwithstanding  
the foregoing, following the occurrence of any Triggering Event (as defined     
below), all Rights that are, or (under certain circumstances specified in the   
Rights Agreement) were, beneficially owned by or transferred to an Acquiring    
Person (or by certain related parties) will be null and void in the             
circumstances set forth in the Rights Agreement. Rights are not exercisable     
following the occurrence of any Flip-In Event until such time as the Rights     
are no longer redeemable by the Company as set forth below.                     

In the event (a "Flip-Over Event") that, at any time from and after the time
an Acquiring Person becomes such, (i) the Company is acquired in a merger or    
other business combination transaction (other than certain mergers that follow  
a Permitted Offer) or (ii) 50% or more of the Company's assets or earning       
power is sold or transferred, each holder of a Right (except Rights that are    
voided as set forth above) shall thereafter have the right to receive, upon     
exercise, a number of shares of common stock of the acquiring company having a  
Current Market Price equal to two times the exercise price of the Right. Flip-  
In Events and Flip-Over Events are collectively referred to as "Triggering      
Events."                                                                        

The number of outstanding Rights associated with a share of Common Stock, or
the number of Fractional Shares of Preferred Stock issuable upon exercise of a  
Right and the Purchase Price, are subject to adjustment in the event of a       
stock dividend on, or a subdivision, combination or reclassification of, the    
Common Stock occurring prior to the Distribution Date. The Purchase Price       
payable, and the number of Fractional Shares of                                 

49  

424B1
52nd Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 52nd
Preferred Stock or other securities or property issuable, upon exercise of the  
Rights are subject to adjustment from time to time to prevent dilution in the   
event of certain transactions affecting the Preferred Stock.                    

With certain exceptions, no adjustment in the Purchase Price will be        
required until cumulative adjustments amount to at least 1% of the Purchase     
Price. No fractional shares of Series A Preferred Stock that are not integral   
multiples of a Fractional Share are required to be issued and, in lieu          
thereof, an adjustment in cash may be made based on the market price of the     
Series A Preferred Stock on the last trading date prior to the date of          
exercise. Pursuant to the Rights Agreement, the Company reserves the right to   
require prior to the occurrence of a Triggering Event that, upon any exercise   
of Rights, a number of Rights be exercised so that only whole shares of Series  
A Preferred Stock will be issued.                                               

At any time until 10 days following the first date of public announcement of
the occurrence of a Flip-In Event, the Company may redeem the Rights in whole,  
but not in part, at a price of $.01 per Right, payable, at the option of the    
Company, in cash, shares of the Common Stock or such other consideration as     
the Board of Directors of the Company may determine. Immediately upon the       
effectiveness of the action of the Board of Directors ordering redemption of    
the Rights, the Rights will terminate and the only right of the holders of      
Rights will be to receive the $.01 redemption price.                            

At any time after the occurrence of a Flip-In Event and prior to a person's 
becoming the beneficial owner of 50% or more of the shares of Common Stock      
then outstanding or the occurrence of a Flip-Over Event, the Company may, at    
its option, exchange the Rights (other than Rights owned by an Acquiring        
Person or an affiliate or an associate of an Acquiring Person, which will have  
become void), in whole or in part, at an exchange ratio of one share of Common  
Stock, and/or other equity securities deemed to have the same value as one      
share of Common Stock, per Right, subject to adjustment.                        

Other than the redemption price, any of the provisions of the Rights        
Agreement may be amended by the Board of Directors as long as the Rights are    
redeemable. Thereafter, the provisions of the Rights Agreement other than the   
redemption price may be amended by the Board of Directors in order to cure any  
ambiguity, defect or inconsistency, to make changes that do not materially      
adversely affect the interests of holders of Rights (excluding the interests    
of any Acquiring Person), or to shorten or lengthen any time period under the   
Rights Agreement; provided, however, that no amendment to lengthen the time     
period governing redemption shall be made at such time as the Rights are not    
redeemable. Until a Right is exercised, the holder thereof, as such, will have  
no rights to vote or to receive dividends or any other rights as a stockholder  
of the Company.                                                                 

The Rights will have certain antitakeover effects. They will cause          
substantial dilution to any person or group that attempts to acquire the        
Company without the approval of the Company's Board of Directors. As a result,  
the overall effect of the Rights may be to render more difficult or discourage  
any attempt to acquire the Company, even if such acquisition may be favorable   
to the interests of the Company's stockholders. Because the Board of Directors  
can redeem the Rights or approve a Permitted Offer, the Rights should not       
interfere with a merger or other business combination approved by the Board.    
The Rights are being issued to protect the Company's stockholders from          
coercive or abusive takeover tactics and to afford the Company's Board of       
Directors more negotiating leverage in dealing with prospective acquirors.      

OTHER MATTERS                                                                   

Delaware law authorizes corporations to limit or eliminate the personal     
liability of directors to corporations and their stockholders for monetary      
damages for breach of directors' fiduciary duty of care. The duty of care       
requires that, when acting on behalf of the corporation, directors must         
exercise an informed business judgment based on all material information        
reasonably available to them. Absent the limitations authorized by Delaware     
law, 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 Certificate  
of Incorporation limits the liability of directors of the Company to the        
Company or its stockholders to the fullest extent permitted by Delaware law.    
Specifically, directors of the Company will not be personally liable for        
monetary damages for                                                            

50  

424B1
53rd Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 53rd
breach of a director's fiduciary duty as a director, except for liability (i)   
for any breach of the director's duty of loyalty to the Company 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 Delaware General Corporation Law or (iv) for any          
transaction from which the director derived an improper personal benefit.       

The inclusion of this provision in the Certificate of Incorporation may have
the effect of reducing the likelihood of derivative litigation against          
directors, and may discourage or deter stockholders or management from          
bringing a lawsuit against directors for breach of their duty of care, even     
though such an action, if successful, might otherwise have benefited the        
Company and its stockholders. The Company's Bylaws provide indemnification to   
the Company's officers and directors and certain other persons with respect to  
certain matters, and the Company has entered into agreements with each of its   
directors providing for indemnification with respect to certain matters.        

The Certificate of Incorporation provides that stockholders may act only at 
an annual or special meeting of stockholders and may not act by written         
consent. The Bylaws provide that special meetings of the stockholders can be    
called only by any Chairman of the Board, the President or a majority of the    
Board of Directors of the Company.                                              

Pursuant to the Certificate of Incorporation, certain transactions          
involving, among other persons, any person who is a beneficial owner of 10% or  
more of the aggregate voting power of all outstanding stock of the Company (a   
"related person") require the affirmative vote of the holders of both (i) at    
least 80% of the outstanding voting stock and (ii) at least 66 2/3% of the      
outstanding voting stock not beneficially owned by the related person.          
Transactions subject to such approval include certain mergers or                
consolidations of the Company or sales or transfers of assets and properties    
having an aggregate fair market value of $10 million or more. Notwithstanding   
the foregoing, the Certificate of Incorporation provides that none of the       
Major Stockholders shall be a related person. Additionally, an Individual       
Major Stockholder Transferee who as a result of such transfer becomes the       
beneficial owner of 10% or more of the outstanding Common Stock will not be     
deemed to be a related person if (a) such transferee receives such Common       
Stock directly from an Individual Major Stockholder by will or intestate        
succession or (b) such transfer is made (i) directly from an Individual Major   
Stockholder or from a person that is an Individual Major Stockholder            
Transferee to a spouse, sibling or lineal descendant of an Individual Major     
Stockholder or lineal descendant of a spouse of an Individual Major             
Stockholder or (ii) directly from an Individual Major Stockholder or from a     
person that is otherwise an Individual Major Stockholder Transferee to an       
Estate Planning Vehicle for estate planning purposes, unless and until such     
Individual Major Stockholder Transferee, together with his affiliates and       
associates, becomes the beneficial owner of additional shares of Common Stock   
constituting 1% or more of the then-outstanding shares of Common Stock or any   
other person who is the beneficial owner of at least 1% of the then-            
outstanding shares of Common Stock becomes an affiliate or associate of such    
Individual Major Stockholder Transferee. Reimert Family Partners, Ltd. shall    
cease to be a Major Stockholder at such time as all of the interests in such    
partnership are not owned by Larry E. Reimert, his spouse, siblings, lineal     
descendants, lineal descendants of his spouse, any distributees under the will  
of any of the foregoing persons, successors of such persons by intestate        
succession, trusts for the benefit of any of the foregoing persons and Wave     
Enterprises, Inc. Four Smith's Company, Ltd. shall cease to be a Major          
Stockholder at such time as all of the interests in such partnership are not    
owned by Gary D. Smith, his spouse, siblings, lineal descendants, lineal        
descendants of his spouse, any distributees under the will of any of the        
foregoing persons, successors of such persons by intestate succession, and      
trusts for the benefit of any of the foregoing persons. An Estate Planning      
Vehicle shall cease to be an Individual Major Stockholder Transferee at such    
time as all of the interests therein cease to be owned by an Individual Major   
Stockholder, a spouse, sibling or lineal descendant of an Individual Major      
Stockholder or a lineal descendant of a spouse of an Individual Major           
Stockholder or any distributees under the will of any of the foregoing          
persons, successors of such persons by intestate succession or trusts for the   
benefit of any of the foregoing persons.                                        

The Certificate of Incorporation provides that the Board of Directors shall 
consist of three classes of directors serving for staggered three-year terms.   
As a result, approximately one-third of the Company's Board of                  

51  

424B1
54th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 54th
Directors will be elected each year. The classified board provision could       
prevent a party who acquires control of a majority of the outstanding voting    
stock of the Company from obtaining control of the Board of Directors until     
the second annual stockholders' meeting following the date the acquiror         
obtains the controlling interest. See "Management."                             

The Certificate of Incorporation provides that the number of directors will 
be no greater than 12 and no less than 3. The Certificate of Incorporation      
further provides that directors may be removed only for cause (as defined in    
the Certificate of Incorporation), and then only by the affirmative vote of     
the holders of at least a majority of all outstanding voting stock entitled to  
vote. This provision, in conjunction with the provisions of the Certificate of  
Incorporation authorizing the Board of Directors to fill vacant directorships,  
will prevent stockholders from removing incumbent directors without cause and   
filling the resulting vacancies with their own nominees. In addition, the       
Bylaws provide that the Compensation Committee will consist solely of members   
who are not employees of the Company and the Audit Committee will include at    
least a majority of members who are not employees of the Company.               

The Company is a Delaware corporation and is subject to Section 203 of the  
Delaware General Corporation Law. In general, Section 203 prevents an           
"interested stockholder" (defined generally as a person owning 15% or more of   
a corporation's outstanding voting stock) from engaging in a "business          
combination" (as defined) with a Delaware corporation for three years           
following the date such person became an interested stockholder unless (i)      
before such person became an interested stockholder, the board of directors of  
the corporation approved the transaction in which the interested stockholder    
became an interested stockholder or approved the business combination, (ii)     
upon consummation of the transaction that resulted in the interested            
stockholder becoming an interested stockholder, the interested stockholder      
owned at least 85% of the voting stock of the corporation outstanding at the    
time the transaction commenced (excluding stock held by directors who are also  
officers of the corporation and by employee stock plans that do not provide     
employees with the right to determine confidentially whether shares held        
subject to the plan will be tendered in a tender or exchange offer) or (iii)    
following the transaction in which such person became an interested             
stockholder, the business combination was approved by the board of directors    
of the corporation and authorized at a meeting of stockholders by the           
affirmative vote of the holders of two-thirds of the outstanding voting stock   
of the corporation not owned by the interested stockholder. Under Section 203,  
the restrictions described above also do not apply to certain business          
combinations proposed by an interested stockholder following the announcement   
or notification of one of certain extraordinary transactions involving the      
corporation and a person who had not been an interested stockholder during the  
previous three years or who became an interested stockholder with the approval  
of a majority of the corporation's directors, if such extraordinary             
transaction is approved or not opposed by a majority of the directors who were  
directors prior to any person becoming an interested stockholder during the     
previous three years or were recommended for election or elected to succeed     
such directors by a majority of such directors.                                 

STOCKHOLDER PROPOSALS                                                           

The Company's Bylaws contain provisions requiring that advance notice be    
delivered to the Company of any business to be brought by a stockholder before  
an annual meeting of stockholders, and providing for certain procedures to be   
followed by stockholders in nominating persons for election to the Board of     
Directors of the Company. Generally, such advance notice provisions provide     
that written notice must be given to the Secretary of the Company by a          
stockholder (i) in the event of business to be brought by a stockholder before  
an annual meeting, not less than 90 days prior to the anniversary date of the   
immediately preceding annual meeting of stockholders of the Company (with       
certain exceptions if the date of the annual meeting is different by more than  
specified amounts from the anniversary date) and (ii) in the event of           
nominations of persons for election to the Board of Directors by any            
stockholder, (a) with respect to an election to be held at the annual meeting   
of stockholders, not less than 90 days prior to the anniversary date of the     
immediately preceding annual meeting of stockholders of the Company (with       
certain exceptions if the date of the annual meeting is different by more than  
specified amounts from the anniversary date) and (b) with respect to an         
election to be held at a special meeting of stockholders for the election of    
directors, not later than the close of business on the tenth day following the  

52  

424B1
55th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 55th
day on which notice of the date of the special meeting was mailed to            
stockholders or public disclosure of the date of the special meeting was made,  
whichever first occurs. Such notice must set forth specific information         
regarding such stockholder and such business or director nominee, as described  
in the Company's Bylaws.                                                        

TRANSFER AGENT AND REGISTRAR                                                    

The transfer agent and registrar for the Common Stock is ChaseMellon        
Shareholder Services, L.L.C.                                                    

53  

424B1
56th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 56th
UNDERWRITERS  

Under the terms and subject to conditions contained in an Underwriting      
Agreement dated the date hereof (the "Underwriting Agreement"), the             
Underwriters named below, for whom Morgan Stanley & Co. Incorporated and        
Donaldson, Lufkin & Jenrette Securities Corporation are acting as               
Representatives, have severally agreed to purchase, and the Company and the     
Selling Stockholders have agreed to sell to them, severally, the respective     
number of shares of Common Stock set forth opposite the names of such           
Underwriters below:                                                             

                                                                [Download Table]

                                                                       NUMBER OF
                                 NAME                                   SHARES  
                                 ----                                  ---------
                                                                                
Morgan Stanley & Co. Incorporated..................................... 2,125,000
Donaldson, Lufkin & Jenrette Securities Corporation................... 2,125,000
Howard, Weil, Labouisse, Friedrichs Incorporated......................   250,000
Morgan Keegan & Company, Inc..........................................   250,000
Simmons & Company.....................................................   250,000
                                                                       ---------
  Total............................................................... 5,000,000
                                                                       =========

The Underwriting Agreement provides that the obligations of the several     
Underwriters to pay for and accept delivery of the shares of Common Stock       
offered hereby are subject to the approval of certain legal matters by their    
counsel and to certain other conditions. The Underwriters are obligated to      
take and pay for all of the shares of Common Stock offered hereby (other than   
those covered by the Underwriters' over-allotment option described below) if    
any such shares are taken.                                                      

The Underwriters initially propose to offer part of the shares of Common    
Stock directly to the public at the public offering price set forth on the      
cover page hereof and part to certain dealers at a price that represents a      
concession not in excess of $1.03 a share under the public offering price. Any  
Underwriter may allow, and such dealers may reallow, a concession not in        
excess of $.10 a share to other Underwriters or to certain other dealers.       
After the initial offering of the shares of Common Stock, the offering price    
and other selling terms may from time to time be varied by the                  
Representatives.                                                                

The Company and the Selling Stockholders have granted to the Underwriters an
option, exercisable for 30 days from the date of this Prospectus, to purchase   
up to an aggregate of 750,000 additional shares of Common Stock at the public   
offering price set forth on the cover page hereof, less underwriting discounts  
and commissions. The Underwriters may exercise such option solely for the       
purpose of covering over-allotments, if any, made in connection with the        
offering of the shares of Common Stock offered hereby. To the extent such       
option is exercised, each Underwriter will become obligated, subject to         
certain conditions, to purchase approximately the same percentage of such       
additional shares of Common Stock as the number set forth next to such          
Underwriter's name in the preceding table bears to the total number of shares   
of Common Stock set forth next to the names of all Underwriters in the          
preceding table.                                                                

Morgan Stanley & Co. Incorporated and Donaldson, Lufkin & Jenrette          
Securities Corporation have informed the Company that they do not intend sales  
to discretionary accounts to exceed five percent of the total number of shares  
of Common Stock offered by them.                                                

The Common Stock has been approved for listing on The New York Stock        
Exchange under the symbol "DRQ".                                                

Each of the Company and the directors, executive officers and certain other 
stockholders of the Company has agreed that, without the prior written consent  
of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will     
not, during the period ending 180 days after the date of this Prospectus, (i)   
offer, pledge, sell, contract to sell, sell any option or contract to           
purchase, purchase any option or contract to sell, grant any option, right or   
warrant to purchase or otherwise transfer, lend or dispose of, directly or      
indirectly, any shares of                                                       

54  

424B1
57th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 57th
Common Stock or any securities convertible into or exercisable or exchangeable  
for Common Stock or (ii) enter into any swap or other arrangement that          
transfers to another, in whole or in part, any of the economic consequences of  
ownership of the Common Stock, whether any such transaction described in        
clause (i) or (ii) above is to be settled by delivery of Common Stock or such   
other securities, in cash or otherwise. The restrictions in this paragraph do   
not apply to (w) Common Stock issued or options granted pursuant to the         
Company's Incentive Plan, (x) the sale of Shares to the Underwriters, (y) the   
issuance by the Company of shares of Common Stock upon the exercise of an       
option or warrant or the conversion of a security outstanding on the date of    
this Prospectus of which the Underwriters have been advised in writing or (z)   
transactions by any person other than the Company relating to shares of Common  
Stock or other securities acquired in open market transactions after the        
completion of the Offering of the Shares.                                       

In order to facilitate the offering of the Common Stock, the Underwriters   
may engage in transactions that stabilize, maintain or otherwise affect the     
price of the Common Stock. Specifically, the Underwriters may over-allot in     
connection with the offering, creating a short position in the Common Stock     
for their own account. In addition, to cover over-allotments or to stabilize    
the price of the Common Stock, the Underwriters may bid for, and purchase,      
shares of Common Stock in the open market. Finally, the underwriting syndicate  
may reclaim selling concessions allowed to an Underwriter or a dealer for       
distributing the Common Stock in the Offering, if the syndicate repurchases     
previously distributed Common Stock in transactions to cover syndicate short    
positions, in stabilization transactions or otherwise. Any of these activities  
may stabilize or maintain the market price of the Common Stock above            
independent market levels. The Underwriters are not required to engage in       
these activities, and may end any of these activities at any time.              

The Company, the Selling Stockholders and the Underwriters have agreed to   
indemnify each other against certain liabilities, including liabilities under   
the Securities Act.                                                             

In 1996, the Company paid Alexander Consulting, Inc., of which Mr. James M. 
Alexander is the sole shareholder, fees totalling $50,000 for consulting        
services. In 1997, the Company has paid Mr. Alexander fees totalling $85,000    
for certain consulting services rendered to the Company. Mr. Alexander will be  
appointed to the Board of Directors of the Company upon completion of the       
Offering.                                                                       

PRICING OF THE OFFERING                                                         

Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined by negotiations between    
the Company and the Representatives. Among the factors to be considered in      
determining the initial public offering price will be the future prospects of   
the Company and its industry in general, sales, earnings and certain other      
financial operating information of the Company in recent periods, and the       
price-earnings ratios, price-sales ratios, market prices of securities and      
certain financial and operating information of companies engaged in activities  
similar to those of the Company. The estimated initial public offering price    
range set forth on the cover page of this Preliminary Prospectus is subject to  
change as a result of market conditions and other factors.                      

55  

424B1
58th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 58th
LEGAL MATTERS 

The validity of the shares of Common Stock offered by this Prospectus will  
be passed upon for the Company by Baker & Botts, L.L.P., Houston, Texas.        
Certain legal matters in connection with the sale of the Common Stock offered   
hereby will be passed upon for the Underwriters by Andrews & Kurth L.L.P.,      
Houston, Texas.                                                                 

EXPERTS 

The consolidated financial statements of the Company at December 31, 1996   
and 1995, and for each of the three years in the period ended December 31,      
1996, appearing in this Prospectus and Registration Statement have been         
audited by Ernst & Young LLP, independent auditors, as set forth in their       
report given upon the authority of such firm as experts in accounting and       
auditing.                                                                       

ADDITIONAL INFORMATION  

The Company has not previously been subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Upon      
completion of the Offering, the Company will be subject to the informational    
requirements of the Exchange Act, and in accordance therewith, will be          
required to file periodic reports and other information with the Commission.    
Such information can be inspected without charge after the Offering at the      
public reference facilities of the Commission at Room 1024, Judiciary Plaza,    
450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of   
the Commission located at Suite 1400, Northwest Atrium Center, 500 West         
Madison Street, Chicago, Illinois 60661 and Seven World Trade Center, 13th      
Floor, New York, New York 10048. Copies of such material may also be obtained   
at prescribed rates from the Public Reference Section of the Commission, 450    
Fifth Street, N.W., Washington, D.C. 20549. The Commission also maintains a     
Web site (http://www.sec.gov) that will contain all information filed           
electronically by the Company with the Commission.                              

The Company has filed the Registration Statement with the Commission under  
the Securities Act with respect to the shares of Common Stock offered hereby.   
This Prospectus, which constitutes a part of the Registration Statement, does   
not contain all of the information set forth in the Registration Statement,     
including the exhibits and schedules thereto. For further information with      
respect to the Company and the Common Stock offered hereby, reference is made   
to the Registration Statement, exhibits and schedules. Statements contained in  
this Prospectus as to the contents of any contract or other document are not    
necessarily complete, and, with respect to each such contract or document       
filed as an exhibit to the Registration Statement, reference is made to the     
copy of such contract or document filed as an exhibit to the Registration       
Statement, and each such statement is qualified in all respects by such         
reference. A copy of the Registration Statement, including the exhibits and     
schedules thereto, may be inspected and copies thereof may be obtained as       
described in the preceding paragraph with respect to periodic reports and       
other information to be filed by the Company under the Exchange Act.            

56  

424B1
59th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 59th
INDEX TO FINANCIAL STATEMENTS 

                                                                [Download Table]
                                                                               
Report of Independent Auditors............................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997, and as of        
 June 30, 1997 (unaudited)................................................. F-3
Consolidated Statements of Income for the Three Years in the Period Ended      
 December 31, 1996 and for the Six Months Ended June 30, 1996 and 1997         
 (unaudited)............................................................... F-4
Consolidated Statements of Cash Flows for the Three Years in the Period        
 Ended December 31, 1996 and for the Six Months Ended June 30, 1996 and        
 1997 (unaudited).......................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the Three       
 Years in the Period Ended December 31, 1996 and for the Six Months Ended      
 June 30, 1997 (unaudited)................................................. F-6
Notes to Consolidated Financial Statements................................. F-7

F-1 

424B1
60th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 60th
REPORT OF INDEPENDENT AUDITORS  

Board of Directors                                                              
Dril-Quip, Inc.                                                                 

We have audited the accompanying consolidated balance sheets of Dril-Quip,  
Inc., as of December 31, 1996 and 1995, and the related consolidated            
statements of income, changes in stockholders' 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 Dril-Quip,     
Inc., at December 31, 1996 and 1995, and the consolidated results of its        
operations and its 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                                                                  
April 3, 1997, except Note                                                      
11 as to which the date is                                                      
October 16, 1997                                                                

F-2 

424B1
61st Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 61st
DRIL-QUIP, INC. 

CONSOLIDATED BALANCE SHEETS 

                                                                [Download Table]

                                                DECEMBER 31     (UNAUDITED)
                                              -----------------  JUNE 30,  
                   ASSETS                      1995      1996      1997    
                   ------                     -------  -------- -----------
                                                     (IN THOUSANDS)        
                                                                           
Current assets:                                                            
  Cash....................................... $ 2,579  $  1,361  $    766  
  Trade receivables..........................  20,150    25,514    24,514  
  Inventories................................  38,670    51,571    51,858  
  Deferred taxes.............................   3,088     3,739     3,741  
  Prepaids and other current assets..........     619       789       816  
                                              -------  --------  --------  
    Total current assets.....................  65,106    82,974    81,695  
Property, plant, and equipment, net..........  27,602    31,384    31,675  
Other assets.................................     478       419       453  
                                              -------  --------  --------  
    Total assets............................. $93,186  $114,777  $113,823  
                                              =======  ========  ========  

    LIABILITIES AND STOCKHOLDERS' EQUITY                                   
    ------------------------------------                                   
                                                                           
Current liabilities:                                                       
  Accounts payable........................... $11,807  $ 14,965  $ 11,021  
  Current maturities of long-term debt.......   3,090     3,537     3,522  
  Accrued income taxes.......................   1,753     2,712     2,027  
  Customer prepayments.......................   1,104     7,215     6,610  
  Accrued compensation.......................   2,830     1,887     2,260  
  Other accrued liabilities..................   3,840     3,134     3,378  
                                              -------  --------  --------  
    Total current liabilities................  24,424    33,450    28,818  
Long-term debt...............................  27,962    28,999    28,967  
Deferred taxes...............................   1,299     1,446     1,127  
                                              -------  --------  --------  
    Total liabilities........................  53,685    63,895    58,912  
Stockholders' equity:                                                      
  Preferred stock, 10,000,000 shares                                       
   authorized at $0.01 par value (none                                     
   issued)...................................     --        --        --   
  Common stock:                                                            
   50,000,000 shares authorized at $0.01 par                               
    value (14,370,000 shares issued).........     144       144       144  
  Additional paid-in capital.................     --        --        --   
  Retained earnings..........................  40,634    49,652    54,765  
  Foreign currency translation adjustment....  (1,277)    1,086         2  
                                              -------  --------  --------  
    Total stockholders' equity...............  39,501    50,882    54,911  
                                              -------  --------  --------  
    Total liabilities and stockholders'                                    
     equity.................................. $93,186  $114,777  $113,823  
                                              =======  ========  ========  

The accompanying notes are an integral part of these statements.

F-3 

424B1
62nd Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 62nd
DRIL-QUIP, INC. 

CONSOLIDATED STATEMENTS OF INCOME 

                                                                [Download Table]

                                                                (UNAUDITED)     
                                                             SIX MONTHS ENDED   
                               YEAR ENDED DECEMBER 31             JUNE 30       
                          -------------------------------- ---------------------
                             1994       1995       1996       1996       1997   
                          ---------- ---------- ---------- ---------- ----------
                                   (IN THOUSANDS, EXCEPT SHARE AMOUNTS)         
                                                                                
Revenues................  $   80,548 $  108,390 $  115,864 $   55,346 $   68,669
Cost and expenses:                                                              
  Cost of sales.........      58,604     76,471     77,863     37,602     47,725
  Selling, general, and                                                         
   administrative.......      11,673     13,597     15,031      7,253      7,839
  Engineering and                                                               
   product                                                                      
   development..........       6,069      5,769      6,971      3,245      4,109
                          ---------- ---------- ---------- ---------- ----------
                              76,346     95,837     99,865     48,100     59,673
                          ---------- ---------- ---------- ---------- ----------
Operating income........       4,202     12,553     15,999      7,246      8,996
Interest expense........       2,273      2,944      2,647      1,301      1,400
                          ---------- ---------- ---------- ---------- ----------
Income before income                                                            
 taxes..................       1,929      9,609     13,352      5,945      7,596
Income tax provision....         635      3,023      4,234      1,885      2,483
                          ---------- ---------- ---------- ---------- ----------
Net income..............  $    1,294 $    6,586 $    9,118 $    4,060 $    5,113
                          ========== ========== ========== ========== ==========
Earnings per share......  $     0.09 $     0.46 $     0.63 $     0.28 $     0.36
                          ========== ========== ========== ========== ==========
Weighted average shares.  14,370,000 14,370,000 14,370,000 14,370,000 14,370,000
                          ========== ========== ========== ========== ==========

The accompanying notes are an integral part of these statements.

F-4 

424B1
63rd Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 63rd
DRIL-QUIP, INC. 

CONSOLIDATED STATEMENTS OF CASH FLOWS 

                                                                [Download Table]

                                                                (UNAUDITED)    
                                                                SIX MONTHS     
                                   YEAR ENDED DECEMBER 31      ENDED JUNE 30   
                                  --------------------------  ---------------- 
                                   1994     1995      1996     1996     1997   
                                  -------  -------  --------  -------  ------- 
                                               (IN THOUSANDS)                  
                                                                               
OPERATING ACTIVITIES                                                           
Net income......................  $ 1,294  $ 6,586  $  9,118  $ 4,060  $ 5,113 
Adjustments to reconcile net                                                   
 income to net cash provided by                                                
 operating activities:                                                         
  Depreciation and amortization.    3,867    4,648     4,388    2,400    2,608 
  Loss (gain) on sale of                                                       
   equipment....................      (31)    (111)      (82)      18     (126)
  Deferred income taxes.........     (118)    (426)     (505)    (710)    (336)
  Changes in operating assets                                                  
   and liabilities:                                                            
    Trade receivables...........        8   (4,025)   (4,553)  (2,836)     502 
    Inventories.................   (5,755)  (6,663)  (10,815)  (2,826)  (1,146)
    Prepaids and other assets...     (447)     556      (144)    (464)     (18)
    Trade accounts payable and                                                 
     accrued expenses...........    3,604    5,901     7,778    1,732   (4,160)
                                  -------  -------  --------  -------  ------- 
Net cash provided by operating                                                 
 activities.....................    2,422    6,466     5,185    1,374    2,437 
INVESTING ACTIVITIES                                                           
Purchase of property, plant, and                                               
 equipment......................   (4,614)  (6,184)   (7,228)  (2,832)  (3,603)
Proceeds from sale of equipment.       90      525       222       76      224 
                                  -------  -------  --------  -------  ------- 
Net cash used in investing ac-                                                 
 tivities.......................   (4,524)  (5,659)   (7,006)  (2,756)  (3,379)
FINANCING ACTIVITIES                                                           
Proceeds from revolving line of                                                
 credit and long-term                                                          
 borrowings.....................    5,400    3,436     4,564    1,156    1,773 
Principal payments on long-term                                                
 debt...........................   (2,679)  (2,823)   (3,203)  (1,507)  (1,769)
Dividends paid..................      (53)     (53)     (100)      --       -- 
                                  -------  -------  --------  -------  ------- 
Net cash provided by (used in)                                                 
 financing activities...........    2,668      560     1,261     (351)       4 
Effect of exchange rate changes                                                
 on cash activities.............     (971)    (232)     (658)    (265)     343 
                                  -------  -------  --------  -------  ------- 
Increase (decrease) in cash.....     (405)   1,135    (1,218)  (1,998)    (595)
Cash at beginning of period.....    1,849    1,444     2,579    2,579    1,361 
                                  -------  -------  --------  -------  ------- 
Cash at end of period...........  $ 1,444  $ 2,579  $  1,361  $   581  $   766 
                                  =======  =======  ========  =======  ======= 

The accompanying notes are an integral part of these statements.

F-5 

424B1
64th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 64th
DRIL-QUIP, INC. 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                                                                [Download Table]

                                                            UNREALIZED          
                                   COMMON PAID-IN RETAINED  TRANSLATION         
                                   STOCK  CAPITAL EARNINGS  ADJUSTMENT   TOTAL  
                                   ------ ------- --------  ----------- ------- 
                                                 (IN THOUSANDS)                 
                                                                                
Balance at December 31, 1993......  $144    $--   $32,860     $(2,737)  $30,267 
  Net income......................    --     --     1,294          --     1,294 
  Translation adjustment..........    --     --        --       1,395     1,395 
  Dividends ($.004 per share).....    --     --       (53)         --       (53)
                                    ----    ---   -------     -------   ------- 
Balance at December 31, 1994......   144     --    34,101      (1,342)   32,903 
  Net income......................    --     --     6,586          --     6,586 
  Translation adjustment..........    --     --        --          65        65 
  Dividends ($.004 per share).....    --     --       (53)         --       (53)
                                    ----    ---   -------     -------   ------- 
Balance at December 31, 1995......   144     --    40,634      (1,277)   39,501 
  Net income......................    --     --     9,118          --     9,118 
  Translation adjustment..........    --     --        --       2,363     2,363 
  Dividends ($.007 per share).....    --     --      (100)         --      (100)
                                    ----    ---   -------     -------   ------- 
Balance at December 31, 1996......   144     --    49,652       1,086    50,882 
  Net income (unaudited)..........    --     --     5,113          --     5,113 
  Translation adjustment                                                        
   (unaudited)....................    --     --        --      (1,084)   (1,084)
                                    ----    ---   -------     -------   ------- 
Balance at June 30, 1997 (unau-                                                 
 dited)...........................  $144    $--   $54,765     $     2   $54,911 
                                    ====    ===   =======     =======   ======= 

The accompanying notes are an integral part of these statements.

F-6 

424B1
65th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 65th
DRIL-QUIP, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  

DECEMBER 31, 1996 

1. ORGANIZATION                                                                 

Dril-Quip, Inc. (the "Company"), manufactures offshore drilling and         
production equipment which is well suited for use in deepwater, harsh           
environment and severe service applications. The Company's principal products   
consist of subsea and surface wellheads, subsea and surface production trees,   
mudline hanger systems, specialty connectors and associated pipe, drilling and  
production riser systems, wellhead connectors and diverters for use by major    
integrated, large independent and foreign national oil and gas companies in     
offshore areas throughout the world. Dril-Quip also provides installation and   
reconditioning services and rents running tools for use in connection with the  
installation and retrieval of its products. The Company has three subsidiaries  
that manufacture and market the Company's products abroad. Dril-Quip (Europe)   
Limited is located in Aberdeen, Scotland, with branches in Norway, Holland,     
and Denmark. Dril-Quip Asia Pacific PTE Ltd. is located in Singapore. DQ        
Holdings PTY Ltd. is located in Perth, Australia.                               

2. SIGNIFICANT ACCOUNTING POLICIES                                              

Principles of Consolidation                                                   

The consolidated financial statements include the accounts of the Company   
and its subsidiaries. All material intercompany accounts and transactions have  
been eliminated.                                                                

Interim Information                                                           

In the opinion of management, the unaudited consolidated interim financial  
statements include all adjustments, consisting solely of normal recurring       
adjustments, necessary for a fair presentation of the financial position as of  
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 unaudited interim related disclosures in these financial statements are     
adequate to make the information presented not misleading, certain information  
and footnote disclosures normally included in annual audited financial          
statements prepared in accordance with generally accepted accounting            
principles have been condensed or omitted pursuant to the rules and             
regulations of the Securities and Exchange Commission. The results of           
operations and the cash flows for the six-month period ended June 30, 1997 are  
not necessarily indicative of the results to be expected for the full year.     

Use of Estimates                                                              

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.                                                           

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                                                                   

The Company's inventories are reported at the lower of cost (first-in,      
first-out method) or market.                                                    

F-7 

424B1
66th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 66th
DRIL-QUIP, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

Property, Plant, and Equipment                                                

Property, plant, and equipment are carried at cost, with depreciation       
provided on a straight-line basis over their estimated useful lives.            

Income Taxes                                                                  

The Company accounts for income taxes using the liability method. Deferred  
income taxes are provided on income and expenses which are reported in          
different periods for income tax and financial reporting purposes.              

Revenue Recognition                                                           

The Company delivers most of its products on an as-needed basis by its      
customers and records revenues as the products are shipped. Certain revenues    
are derived from long-term contracts which generally require more than one      
year to fulfill. Revenues and profits on long-term contracts are recognized     
under the percentage-of-completion method based on a cost-incurred basis.       
Losses, if any, on contracts are recognized when they become known. Contracts   
for long-term projects contain provisions for customer progress payments.       
Payments in excess of revenues recognized are included as a customer            
prepayment liability.                                                           

Foreign Currency                                                              

The financial statements of foreign subsidiaries are translated into U.S.   
dollars at current exchange rates except for revenues and expenses, which are   
translated at average rates during each reporting period. Translation           
adjustments are reflected as a separate component of shareholders' equity and   
have no current effect on earnings or cash flows. These adjustments amounted    
to a gain of $1,395,000 in 1994, a gain of $65,000 in 1995, and a gain of       
$2,363,000 in 1996, net of allocated income taxes of $79,000, $37,000, and      
$458,000, respectively.                                                         

Foreign currency exchange transactions are recorded using the exchange rate 
at the date of the settlement. Exchange losses were approximately $167,000 in   
1994 and $-0- in 1995, net of income taxes. In 1996, the Company had an         
exchange gain of $163,000. These amounts are included in the consolidated       
statements of income.                                                           

Earnings Per Share                                                            

Earnings per share amounts are based on weighted average number of shares   
and common stock equivalents outstanding. Earnings per share on a fully         
diluted basis are not presented since the effect is not material.               

3. INVENTORIES                                                                  

Inventories consist of the following:                                       

                                                                [Download Table]

                                                 DECEMBER 31   (UNAUDITED)
                                               ---------------  JUNE 30,  
                                                1995    1996      1997    
                                               ------- ------- ---------- 
                                                     (IN THOUSANDS)       
                                                                          
Raw materials and supplies.................... $10,028 $15,164  $16,851   
Work in progress..............................   7,208  13,356   17,769   
Finished goods and purchased supplies.........  21,434  23,051   17,238   
                                               ------- -------  -------   
                                               $38,670 $51,571  $51,858   
                                               ======= =======  =======   

F-8 

424B1
67th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 67th
DRIL-QUIP, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

4. PROPERTY, PLANT, AND EQUIPMENT                                               

Property, plant, and equipment consist of:                                  

                                                                [Download Table]

                                               ESTIMATED    DECEMBER 31  
                                                USEFUL    ---------------
                                                 LIVES     1995    1996  
                                              ----------- ------- -------
                                                          (IN THOUSANDS) 
                                                                         
Land and improvements........................ 10-25 years $ 5,798 $ 6,910
Buildings.................................... 15-40 years  12,987  14,759
Machinery and equipment......................  3-10 years  34,018  39,051
                                                          ------- -------
                                                           52,803  60,720
Less accumulated depreciation................              25,201  29,336
                                                          ------- -------
                                                          $27,602 $31,384
                                                          ======= =======

5. LONG-TERM DEBT                                                               

Long-term debt consists of the following:                                   

                                                                [Download Table]

                                                            DECEMBER 31  
                                                          ---------------
                                                           1995    1996  
                                                          ------- -------
                                                          (IN THOUSANDS) 
                                                                         
Revolving lines of credit................................ $14,900 $16,600
Notes payable to bank....................................  15,872  15,502
Other....................................................     280     434
                                                          ------- -------
                                                           31,052  32,536
Less current portion.....................................   3,090   3,537
                                                          ------- -------
                                                          $27,962 $28,999
                                                          ======= =======

Subsequent to December 31, 1996, the Company renewed the terms of its       
revolving line of credit. Accordingly, the debt, as of December 31, 1996, is    
classified in accordance with the terms of the new agreement. The Company's     
revolving lines of credit provide for borrowings of up to $25,000,000, with a   
maturity date of June 1, 1999. Additionally, the Company has an advancing       
credit note providing borrowings of up to $3,000,000 at prime plus 1/2% which   
matures on October 1, 2001. At December 31, 1996, there were no borrowings      
under this note.                                                                

Notes payable to bank include a note with an interest rate of prime plus    
1/2%, maturing in July 1999, and a note with an interest rate of the Bank's     
base rate plus 1 1/2% to 1 3/4%, maturing from February 2002 through December   
2006.                                                                           

Substantially all of the Company's assets are pledged under various lending 
agreements. Interest paid on long-term debt for the years ended December 31,    
1994, 1995, and 1996 was $2,352,000, $2,883,000, and $2,695,000, respectively.  

Scheduled maturities of long-term debt are as follows: 1997--$3,537,000;    
1998--$3,486,000; 1999-- $23,592,000; 2000--$623,000; 2001--$528,000; and       
thereafter--$770,000.                                                           

F-9 

424B1
68th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 68th
DRIL-QUIP, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

6. INCOME TAXES                                                                 

Income before income taxes consisted of the following:                      

                                                                [Download Table]

                                                     1994    1995   1996  
                                                    ------  ------ -------
                                                       (IN THOUSANDS)     
                                                                          
Domestic........................................... $2,130  $5,634 $ 9,068
Foreign............................................   (201)  3,975   4,284
                                                    ------  ------ -------
  Total............................................ $1,929  $9,609 $13,352
                                                    ======  ====== =======

The income tax provision consists of the following:                         

                                                                [Download Table]

                                                    1994    1995    1996  
                                                    -----  ------  ------ 
                                                      (IN THOUSANDS)      
                                                                          
Current:                                                                  
  Federal.......................................... $ 620  $2,671  $3,408 
  Foreign..........................................   133     778   1,331 
                                                    -----  ------  ------ 
    Total current..................................   753   3,449   4,739 
Deferred:                                                                 
  Federal..........................................   110    (825)   (505)
  Foreign..........................................  (228)    399      -- 
                                                    -----  ------  ------ 
    Total deferred.................................  (118)   (426)   (505)
                                                    -----  ------  ------ 
                                                     $635  $3,023  $4,234 
                                                    =====  ======  ====== 

The difference between the effective tax rate reflected in the provision for
income taxes and the U.S. federal statutory rate was as follows:                

                                                                [Download Table]

                                                         1994  1995  1996 
                                                         ----  ----  ---- 
                                                                          
Federal income tax statutory rate....................... 34.0% 34.0% 34.0%
Benefit of foreign sales corporation.................... (2.6) (1.4) (1.8)
Other...................................................  1.5  (1.1)  (.5)
                                                         ----  ----  ---- 
Effective tax rate...................................... 32.9% 31.5% 31.7%
                                                         ====  ====  ==== 

Deferred income taxes reflect the net tax effects of temporary differences  
between the carrying amounts of assets and liabilities for financial reporting  
purposes and the amounts used for income tax purposes. Significant components   
of the Company's deferred tax liabilities and assets are as follows:            

                                                                [Download Table]

                                                             DECEMBER 31 
                                                            -------------
                                                             1995   1996 
                                                            ------ ------
                                                                 (IN     
                                                             THOUSANDS)  
                                                                         
Deferred tax liability:                                                  
  Fixed assets............................................. $1,299 $1,446
Deferred tax assets:                                                     
  Deferred profit on intercompany sales....................  1,913  2,499
  Other--net...............................................  1,175  1,240
                                                            ------ ------
Total deferred tax assets..................................  3,088  3,739
                                                            ------ ------
Net deferred tax asset..................................... $1,789 $2,293
                                                            ====== ======

F-10  

424B1
69th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 69th
DRIL-QUIP, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

Undistributed earnings of the Company's foreign subsidiaries are considered 
to be indefinitely reinvested and, accordingly, no provision for U.S. federal   
income taxes has been provided thereon. Upon distribution of those earnings in  
the form of dividends or otherwise, the Company would be subject to both U.S.   
income taxes (subject to an adjustment for foreign tax credits) and             
withholding taxes payable to the various foreign countries. Determination of    
the amount of unrecognized deferred U.S. income tax liability is not            
practicable.                                                                    

The Company paid approximately $1,708,000, $1,909,000, and $4,314,000 in    
income taxes in 1994, 1995, and 1996, respectively.                             

7. EMPLOYEE BENEFIT PLANS                                                       

The Company has a defined-contribution 401(k) plan covering domestic        
employees and a defined-contribution pension plan covering certain foreign      
employees. The Company generally makes contributions to the plans equal to      
each participant's eligible contributions for the plan year up to a specified   
percentage of the participant's annual compensation. The Company's              
contribution expense was $440,000, $501,000, and $548,000 in 1994, 1995, and    
1996, respectively.                                                             

8. COMMITMENTS AND CONTINGENCIES                                                

The Company leases certain office, shop, and warehouse facilities;          
automobiles; and equipment and expenses all lease payments when incurred.       
Total lease expense incurred was $1,076,000, $923,000, and $853,000 in 1994,    
1995, and 1996, respectively. Annual minimum lease commitments at December 31,  
1996 are as follows: 1997--$546,000; 1998--$491,000; 1999--$267,000; and        
2000--$35,000.                                                                  

The Company operates its business and markets its products and services in  
most of the significant oil and gas producing areas in the world and is,        
therefore, subject to the risk customarily attendant to international           
operations and dependency on the condition of the oil and gas industry.         
Additionally, products of the Company are used in potentially hazardous         
drilling, completion, and production applications that can cause personal       
injury, product liability, and environmental claims. Although exposure to such  
risk has not resulted in any significant problems in the past, there can be no  
assurance that future developments will not adversely impact the Company.       

9. STOCKHOLDERS' EQUITY                                                         

In August 1996, the Company revised its capital structure and retired all   
outstanding common stock and issued new common stock. The new common stock      
includes shares with voting and nonvoting rights. These changes in the capital  
structure have been retroactively reflected in the financial statements.        
Earnings per share and dividends per share in prior years have been restated    
to reflect the change in the capital structure.                                 

F-11  

424B1
70th Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 70th
DRIL-QUIP, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

10. GEOGRAPHIC AREAS                                                            

                                                                [Download Table]

                                                     1994      1995      1996   
                                                    -------  --------  -------- 
                                                         (IN THOUSANDS)         
                                                                                
Revenues                                                                        
United States:                                                                  
  Domestic......................................... $27,710  $ 31,945  $ 36,759 
  Export...........................................   8,520     5,938     7,561 
  Intercompany.....................................  12,464    30,243    28,188 
                                                    -------  --------  -------- 
    Total United States............................  48,694    68,126    72,508 
Europe, Middle East, and Africa....................  34,629    52,978    54,728 
Asia-Pacific.......................................  10,005    18,150    16,944 
Eliminations....................................... (12,780)  (30,864)  (28,316)
                                                    -------  --------  -------- 
    Total.......................................... $80,548  $108,390  $115,864 
                                                    =======  ========  ======== 
Operating Income                                                                
United States...................................... $ 3,670  $ 10,944  $ 13,693 
Europe, Middle East, and Africa....................     392     2,948     3,309 
Asia-Pacific.......................................      86     2,113     1,825 
Eliminations.......................................      54    (3,452)   (2,828)
                                                    -------  --------  -------- 
    Total.......................................... $ 4,202  $ 12,553  $ 15,999 
                                                    =======  ========  ======== 
Identifiable Assets                                                             
United States...................................... $42,265  $ 44,627  $ 50,664 
Europe, Middle East, and Africa....................  30,405    39,823    59,564 
Asia-Pacific.......................................   8,621    12,730     9,700 
Eliminations.......................................  (2,083)   (3,994)   (5,151)
                                                    -------  --------  -------- 
    Total.......................................... $79,208  $ 93,186  $114,777 
                                                    =======  ========  ======== 

Export sales from the United States to unaffiliated customers consist of    
sales to South America, Latin America, and Canada. Europe, Middle East and      
Africa area consists of manufacturing operations located in Europe with sales   
primarily to Europe's North Sea and limited export sales to Africa and the      
Middle East. Asia-Pacific's sales are primarily to Australia, Thailand,         
Malaysia, and Indonesia.                                                        

Eliminations of operating profits are related to intercompany inventory     
transfers that are deferred until shipment is made to third-party customers.    
General corporate expense is generally allocated to geographic areas based on   
revenues.                                                                       

One of the Company's customers, the Royal Dutch Shell Group of Companies    
accounted for approximately 12%, 11% and 19% of consolidated sales in 1994,     
1995, and 1996, respectively.                                                   

F-12  

424B1
71st Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 71st
DRIL-QUIP, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

11. INITIAL PUBLIC OFFERING                                                     

The Company filed a registration statement with the Securities and Exchange 
Commission in August 1997 to register the sale of 5,000,000 shares of its       
common stock (the "Offering"). Of the 5,000,000 shares, 2,500,000 shares are    
being sold by the Company and 2,500,000 shares are being sold by Selling        
Stockholders.                                                                   

Before the consummation of the Offering, the Company effected a             
recapitalization wherein each outstanding share of its non-voting common stock  
was converted into 0.95 shares of its voting common stock. Thereafter, each     
outstanding share of its voting common stock was converted into 15.12472        
shares of voting common stock, resulting in 14,370,000 outstanding shares. The  
existing corporation, Dril-Quip, Inc., a Texas corporation ("Dril-Quip--        
Texas"), was merged (the "Merger") into Dril-Quip, Inc., a Delaware             
corporation ("Dril-Quip--Delaware"). The Merger resulted in the Company's       
reincorporation from Texas to Delaware. The Company anticipates authorized      
common stock of 50 million shares, par value $0.01 per share, and 10 million    
shares of preferred stock, par value $0.01 per share. The financial statements  
have been retroactively restated to give effect to the recapitalization.        

In addition, prior to the consummation of the Offering, the Company adopted 
the Dril-Quip, Inc. 1997 Incentive Plan (the "Incentive Plan"). The Company     
has reserved 1,700,000 shares of Common Stock for use in connection with the    
Incentive Plan. Persons eligible for awards under the Incentive Plan are        
employees holding positions of responsibility with the Company or any           
subsidiaries and whose performance can have a significant effect on the         
success of the Company. On the date the Offering closes, Options under the      
Incentive Plan will be granted to certain employees of the Company to purchase  
a total of 419,250 shares of Common Stock at an exercise price per share equal  
to the initial public offering price per share.                                 

F-13  

424B1
Last Page of 72
TOC
1st
Previous
Next
↓Bottom
Just 72nd
Illustrations of Dril-Quip's project capabilities appear here.  

                                  [Logo of Dril-Quip
                               appears here]

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘424B1’ Filing		Date		First		Last			Other Filings
		10/1/01		14		67
		7/1/99		14		22
		6/1/99		14		67
		12/31/97		23		59			10-K
		11/16/97		2
		10/28/97		1
Filed on:		10/23/97
		10/22/97		1					S-1MEF
		10/16/97		60
		8/31/97		41
		8/12/97		26					S-1
		6/30/97		5		65
		6/1/97		5		25
		4/3/97		60
		12/31/96		6		69
		6/30/96		17		65
		6/7/96		14		23
		12/31/95		17		67
		12/31/94		17		67
		9/19/94		14		23
		3/30/94		14
		12/31/93		17		64
		12/31/92		17		27
									List all Filings