<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 13, 1997.
REGISTRATION NO. 333-19413
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
PRE-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
DAWSON PRODUCTION SERVICES, INC.
TAYLOR COMPANIES, INC.
DAWSON PRODUCTION SERVICES DE MEXICO, S.A.
(Exact name of registrant as specified in its charter)
---------------------
<TABLE>
<S> <C> <C>
TEXAS 1389 74-2231546
TEXAS 1389 75-2445316
MEXICO 1389 N.A.
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
901 N.E. LOOP 410, SUITE 700 MR. MICHAEL E. LITTLE
SAN ANTONIO, TEXAS 78209 PRESIDENT AND CHIEF EXECUTIVE OFFICER
(210) 828-1838 DAWSON PRODUCTION SERVICES, INC.
(Address, including zip code, and 901 N.E. LOOP 410, SUITE 700
telephone number, including area code, SAN ANTONIO, TEXAS 78209
of registrant's principal executive offices) (210) 828-1838
(Name, address, including zip code, and
telephone number, including area code,
of agent for service)
</TABLE>
---------------------
Copies to:
<TABLE>
<S> <C>
J. ROWLAND COOK, ESQ. CHARLES L. STRAUSS, ESQ.
DEIDRE L. TREADWELL, ESQ. FULBRIGHT & JAWORSKI L.L.P.
JENKENS & GILCHRIST, P.C. 1301 MCKINNEY STREET, SUITE 5100
600 CONGRESS AVENUE, SUITE 2200 HOUSTON, TEXAS 77010-3095
AUSTIN, TEXAS 78701 (713) 651-5151
(512) 499-3800
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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TITLE OF EACH AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SECURITY(1) OFFERING PRICE(1) FEE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
% Senior Notes due 2007....... $110,000,000 100% $130,000,000 $39,394(2)
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Guarantees(3)..................... (4) (4) (4) (3)(4)
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Common Stock, $.01 par value per
share........................... 4,025,000(5) $13.25(6) $ 53,331,250(6) $18,067(7)
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Common Stock, $.01 par value per
share........................... 1,387,828(8) $13.25(6) $ 18,388,721(6) $ 6,151(9)
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Total.................... -- -- $201,719,971 $63,612
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) An amount of $33,334 was paid as the registration fee upon filing the
initial Form S-1 Registration Statement on January 8, 1997.
(3) Guarantees by Taylor Companies, Inc. and Dawson Production Services de
Mexico, S.A. are also being registered hereby. Pursuant to Rule 457(n) under
the Securities Act of 1933, no registration fee is required with respect to
the Guarantees.
(4) No separate consideration will be received for the Guarantees from the
purchasers of the Notes.
(5) Includes 525,000 shares of Common Stock subject to the Underwriters'
over-allotment option.
(6) Calculated pursuant to Rule 457(a) under the Securities Act of 1933 based
upon the average of the high and low sales prices of the Common Stock as
reported on the Nasdaq National Market on February 12, 1997.
(7) An amount of $20,648 was paid as the registration fee upon filing the
initial Form S-1 Registration Statement on January 8, 1997, calculated
pursuant to Rule 457(a) at a proposed maximum offering price per security of
$14.813.
(8) Includes 181,021 shares of Common Stock subject to the Underwriters'
over-allotment option.
(9) Paid upon filing Amendment No. 1 to Form S-1 Registration Statement on
January 23, 1997, and calculated pursuant to Rule 457(a) at a proposed
maximum offering price per security of $14.625.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains two forms of Prospectus, one to be
used in connection with the offering of % Senior Notes due 2007 (the "Debt
Prospectus") and the other to be used in connection with a concurrent offering
of Common Stock (the "Equity Prospectus"). The closing of the offering being
made pursuant to the Debt Prospectus and the closing of the offering being made
pursuant to the Equity Prospectus are conditioned upon the simultaneous closing
of the other and upon the simultaneous closing of the Pride Acquisition (as
defined herein).
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 13, 1997
PROSPECTUS
$130,000,000
DAWSON PRODUCTION SERVICES, INC.
[DAWSON INC. LOGO]
% SENIOR NOTES DUE 2007
------------------------
The % Senior Notes due February 1, 2007 (the "Notes") are being
offered (the "Debt Offering") by Dawson Production Services, Inc. ("Dawson" or
the "Company"). The Notes will bear interest from February , 1997 at the rate
per annum set forth above, payable semi-annually on February 1 and August 1 of
each year, commencing August 1, 1997. The Notes will mature on February 1, 2007
and will be redeemable at the option of the Company, in whole or in part, at any
time on or after February 1, 2002, at the redemption prices set forth herein,
together with accrued and unpaid interest to the date of redemption. See
"Description of Notes -- Optional Redemption." Upon a Change of Control (as
defined herein), the holders of the Notes may require the Company to purchase
all or a portion of the Notes at a price equal to 101% of the aggregate
principal amount thereof, together with accrued and unpaid interest to the date
of purchase. See "Description of Notes -- Certain Covenants."
Concurrently with the Debt Offering, the Company is offering 3,500,000
shares, and certain selling shareholders (the "Selling Shareholders") are
offering 1,206,807 shares, of common stock of the Company (the "Common Stock")
pursuant to a separate prospectus (the "Equity Offering" and, together with the
Debt Offering, the "Offerings"). The Company will use approximately $135.9
million of the aggregate net proceeds from the Offerings to purchase the U.S.
land-based well servicing operations (the "Pride Acquisition") of Pride
Petroleum Services, Inc. ("Pride"), approximately $12.3 million to prepay
certain indebtedness (including accrued interest) of the Company and the
remainder for fees and expenses of the Pride Acquisition, working capital and
general corporate purposes. See "Use of Proceeds" and "Pride Acquisition." The
closing of the Debt Offering and the Equity Offering are each conditioned upon
the simultaneous closing of the other and upon the simultaneous closing of the
Pride Acquisition.
The Notes will be senior unsecured obligations of the Company, ranking pari
passu in right of payment with all senior Indebtedness (as defined herein) of
the Company and senior to all Subordinated Indebtedness (as defined herein) of
the Company. The Notes will be unconditionally guaranteed (the "Subsidiary
Guarantees") on a senior unsecured basis by the Company's principal operating
subsidiaries (the "Subsidiary Guarantors"), and the Subsidiary Guarantees will
rank pari passu in right of payment with any future senior Indebtedness of the
Subsidiary Guarantors and senior to any future Subordinated Indebtedness of the
Subsidiary Guarantors. The Subsidiary Guarantees may be released under certain
circumstances. The Notes and the Subsidiary Guarantees will be effectively
subordinated to secured Indebtedness of the Company and the Subsidiary
Guarantors, including any Indebtedness under the Credit Facility (as defined
herein), which is secured by liens on certain assets of the Company and its
Subsidiaries (as defined herein). At September 30, 1996, pro forma for the Pride
Acquisition and the Offerings, the Notes and the Subsidiary Guarantees would not
have been subordinated to any secured Indebtedness (excluding letters of credit)
of the Company or the Subsidiary Guarantors. The indenture governing the Notes
(the "Indenture") will permit the Company and its subsidiaries to incur
additional Indebtedness in the future, subject to certain limitations. See "Risk
Factors -- Restrictions Imposed by Lenders."
The Company does not intend to list the Notes on any securities exchange.
No assurance can be given that any market for the Notes will develop or, if any
such market develops, as to the liquidity of such market. See "Risk
Factors -- Absence of Public Market for the Notes."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY POTENTIAL 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.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
--------- ------------ -----------
<S> <C> <C> <C>
Per Note.............................................. % % %
Total................................................. $ $ $
</TABLE>
- ---------------
(1) Plus accrued interest, if any, from the date of issuance.
(2) The Company and the Subsidiary Guarantors have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated to be $700,000.
------------------------
The Notes are offered by the Underwriter, subject to prior sale, when, as
and if delivered to and accepted by the Underwriter. The Underwriter reserves
the right to reject orders in whole or in part. It is expected that delivery of
the Notes will be made in book-entry form through the facilities of The
Depository Trust Company in New York, New York, on or about February , 1997.
------------------------
JEFFERIES & COMPANY, INC.
February , 1997
<PAGE> 4
GRAPHIC TO COME
IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OR THE
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and the consolidated financial
statements of the Company and notes thereto appearing elsewhere in this
Prospectus. Unless otherwise indicated, the information in this Prospectus
assumes that the Underwriters' over-allotment option in connection with the
Equity Offering will not be exercised. Unless the context otherwise requires,
references in this Prospectus to the "Company" or "Dawson" mean Dawson
Production Services, Inc., its predecessors, and its and their subsidiaries.
Unless the context otherwise requires, pro forma information contained herein
gives effect to the Taylor Acquisition (as defined herein) in July 1996, the
Pride Acquisition and the Offerings.
THE COMPANY
Dawson Production Services, Inc. is a leading provider of a broad range of
workover, liquid and production services used in the production of oil and gas.
The Company's services are utilized by major oil and gas companies as well as
independent producers to optimize performance of oil and gas wells. The Company
recently entered into an agreement to acquire the U.S. land-based well servicing
operations of Pride Petroleum Services, Inc. in a transaction that will position
Dawson as the second largest provider of workover rigs in the United States.
The Company commenced operations in 1951. In 1982, the current management
team joined the Company and initiated a strategy to expand and diversify the
Company's workover rig services. Since 1982, the Company has grown from four
workover rigs in a single yard to 91 workover rigs in 10 yards through a series
of strategic acquisitions of businesses and assets. Upon the closing of the
Pride Acquisition, the Company will own and operate 498 workover rigs. In
addition, in November 1994 the Company broadened the array of services it
provides by acquiring the liquid services and production services businesses of
Well Solutions, Inc. and expanded such businesses in July 1996 with the
acquisition of Taylor Companies, Inc. The Company believes that it generally has
been successful in acquiring businesses and assets and subsequently reducing
overhead, enhancing internal controls, improving marketing and related
operations through management incentives and improving the utilization of its
assets by redeploying equipment.
BUSINESS STRATEGY
The Company's strategy emphasizes diversification and expansion through
acquisitions and internal growth. In recent years, there has been significant
industry consolidation activity in the Company's principal businesses. The
Company has been an active participant in this industry consolidation and plans
to continue to pursue strategic acquisitions of businesses and assets which
enhance or expand its market presence or complement its existing businesses.
Upon the closing of the Pride Acquisition, the Company intends to expand the
range of services offered at its locations and increase its presence, through
redeployment of underutilized assets, within the geographic regions in which the
Company will then operate. The Company believes that its ability to offer a wide
range of services over a large operating base will provide it with a competitive
advantage by allowing its customers to consolidate their procurement of
workover, liquid and production services by utilizing fewer vendors. The Company
believes that this consolidation may allow customers to lower their costs by
streamlining production decisions and increasing operational efficiencies. The
Company also believes that its strategy will allow it to take advantage of
cross-marketing opportunities for its services and to appeal to a broader
customer base by enhancing its position as a one-stop source for workover,
liquid and production services.
PRIDE ACQUISITION
Consistent with its business strategy, on December 23, 1996 the Company
entered into a purchase agreement to acquire substantially all of Pride's U.S.
land-based well servicing operations for approximately $135.9 million in cash.
The Pride Acquisition will significantly increase the size and geographic scope
of the Company's workover rig services business. Pride's U.S. land-based fleet
consists of 407 workover rigs and related operations in 28 locations in the
Texas and Louisiana Gulf Coasts, the Permian Basin areas of West
3
<PAGE> 6
Texas and New Mexico, and California. Upon completion of the Pride Acquisition,
the Company will be the largest provider of workover rigs in Texas and the
second largest provider in the United States. The Company will seek to generate
improved profit margins for the acquired assets through increased operating
efficiencies and cost savings resulting from overhead reductions and the
consolidation of certain overlapping yard locations. In addition, the Company
will seek to expand its liquid and production services businesses into new
markets through certain of the acquired yard locations and to redeploy certain
of the acquired workover rigs to areas with greater rig demand. See "Pride
Acquisition."
For the year ended March 31, 1996, the Company's pro forma revenue and
EBITDA (as defined herein) were approximately $182.2 million and $26.5 million,
respectively, compared to historical revenue and EBITDA of approximately $52.4
million and $9.1 million, respectively. For the six months ended September 30,
1996, the Company's pro forma revenue and EBITDA were approximately $100.2
million and $14.8 million, respectively, compared to historical revenue and
EBITDA of approximately $33.8 million and $6.5 million, respectively.
MOBLEY ACQUISITION
On January 20, 1997, Dawson acquired the liquid services assets of Mobley
Environmental Services, Inc. for approximately $5.0 million in cash and a $0.5
million five year subordinated note (the "Mobley Acquisition"). These assets
generated revenues of approximately $4.4 million and $3.2 million for the 12
months ended December 31, 1995 and the nine months ended September 30, 1996,
respectively.
OPERATIONS
Workover Rig Services. The Company provides workover rig services to oil
and gas exploration and production companies through the use of mobile well
servicing workover rigs together with crews of three to four workers. As of
January 15, 1997, the Company operated 89 land workover rigs, two barge-mounted
workover rigs and ancillary equipment from 10 yards in Texas and Louisiana. Upon
the closing of the Pride Acquisition, the Company will expand its workover rig
fleet to 498 rigs located in Texas, Louisiana, California and New Mexico.
Workover rig services are used throughout the life of a well and are
categorized by the type of job performed: completion, maintenance, workover and
plugging and abandonment. Completion services prepare newly drilled wells for
production. Newly drilled wells are frequently completed by well servicing rigs
to minimize the use of higher cost drilling rigs. Maintenance services are
required on producing oil and gas wells to ensure efficient and continuous
operation. In addition to periodic maintenance, producing oil and gas wells
occasionally require major repairs or modifications called "workovers." Workover
rigs are also used in the plugging and abandonment of oil and gas wells no
longer capable of producing in economic quantities. For the six months ended
September 30, 1996, workover rig services contributed approximately 46% of the
Company's revenues (75% on a pro forma basis).
Liquid Services. The Company uses its vacuum trucks, frac tanks and salt
water injection wells to provide an integrated mix of liquid services to well
site customers. The Company owns and operates 175 vacuum trucks and will acquire
an additional 10 vacuum trucks in connection with the Pride Acquisition. Vacuum
trucks are used to extract fluids from pits, tanks and other storage facilities
and to transport water for frac tanks, produced salt water to injection wells
and brine and other drilling fluids to and from well locations. Vacuum truck
services are generally provided to oilfield operators within a 30-mile radius of
the Company's nearest yard. The Company owns 696 frac tanks, which are used
during all phases of the life of a producing well to store various fluids at the
well site. The Company also owns or leases 22 salt water injection wells. In
Texas and Arkansas, salt water produced from oil and gas wells is generally
required by law to be disposed of in salt water injection wells. For the six
months ended September 30, 1996, liquid services contributed approximately 38%
of the Company's revenues (20% on a pro forma basis).
4
<PAGE> 7
Production Services. The Company's production services consist of
production testing services, slickline wireline services, fishing and rental
tool services and pipe testing. The Company owns 21 gas production testing units
which are used to perform deliverability tests required upon the initial
completion of a well and periodically during the productive life of a gas well.
In addition, the Company offers slickline wireline services which are used to
simplify completion operations and in connection with regular maintenance on
producing wells. The Company also provides a complete line of cased hole fishing
and rental tools to oilfield operators and service companies, and operates nine
pipe testing units along the Texas Gulf Coast. This testing equipment is used
during completion and recompletion operations for leak detection in the internal
pipe systems of oil and gas wells. For the six months ended September 30, 1996,
production services contributed approximately 16% of the Company's revenues (5%
on a pro forma basis).
THE DEBT OFFERING
Securities Offered......... $130,000,000 principal amount of % Senior
Notes due 2007.
Maturity Date.............. February 1, 2007.
Interest Rate and Payment
Dates.................... The Notes will bear interest at a rate of %
per annum. Interest on the Notes will accrue from
the date of issuance thereof and will be payable
semi-annually on February 1 and August 1 of each
year, commencing August 1, 1997.
Optional Redemption........ The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or
after February 1, 2002, at the redemption prices
set forth herein, together with accrued and unpaid
interest to the date of redemption. In the event
the Company consummates a Public Equity Offering
(as defined herein) on or prior to February 1,
2000, the Company may at its option use all or a
portion of the proceeds from such offering to
redeem up to $45.5 million principal amount of the
Notes at a redemption price equal to % of the
aggregate principal thereof, together with accrued
and unpaid interest to the date of redemption,
provided that at least $84.5 million in aggregate
principal amount of Notes remain outstanding
immediately after such redemption. See "Description
of Notes -- Optional Redemption."
Repurchase Obligation
Upon Change of Control... Upon the occurrence of a Change of Control, each
holder of Notes will have the right to require the
Company to purchase all or a portion of such
holder's Notes at a price equal to 101% of the
aggregate principal amount thereof, together with
accrued and unpaid interest to the date of
purchase. See "Description of Notes -- Repurchase
at the Option of Holders -- Change of Control."
Guarantees................. The Notes will be unconditionally guaranteed on a
senior unsecured basis by each of the Company's
principal operating subsidiaries, and such
Subsidiary Guarantees will rank pari passu in right
of payment with all senior Indebtedness of the
Subsidiary Guarantors. The Subsidiary Guarantees
may be released under certain circumstances. See
"Description of Notes -- Subsidiary Guarantees."
5
<PAGE> 8
Ranking.................... The Notes will be senior unsecured obligations of
the Company, ranking pari passu in right of payment
with all senior Indebtedness of the Company and
senior to all Subordinated Indebtedness of the
Company. The Notes and the Subsidiary Guarantees
will be effectively subordinated to secured
Indebtedness of the Company and the Subsidiary
Guarantors, including any Indebtedness under the
Credit Facility which is secured by liens on
certain assets of the Company. At September 30,
1996, on a pro forma basis, the Notes and the
Subsidiary Guarantees would not have been
subordinated to any secured Indebtedness (excluding
letters of credit) of the Company or the Subsidiary
Guarantors. Subject to certain limitations, the
Company may incur additional indebtedness in the
future. See "Management's Discussion and Analysis
of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and
"Description of Notes -- General."
Certain Covenants.......... The Indenture relating to the Notes will contain
certain covenants, including covenants that limit:
(i) indebtedness; (ii) restricted payments; (iii)
issuances and sales of capital stock of restricted
subsidiaries; (iv) sale/leaseback transactions; (v)
transactions with affiliates; (vi) liens; (vii)
asset sales; (viii) dividends and other payment
restrictions affecting restricted subsidiaries;
(ix) conduct of business; and (x) mergers,
consolidations or sales of assets. See "Description
of Notes -- Certain Covenants."
Use of Proceeds............ The net proceeds to the Company from the sale of
the Notes are estimated to be approximately $125.4
million. The Company will use the net proceeds from
the sale of the Notes, together with the estimated
net proceeds to the Company from the Equity
Offering of approximately $43.3 million, to fund
the approximately $135.9 million purchase price of
the Pride Acquisition, to prepay certain existing
indebtedness (including accrued interest) of the
Company, and for fees and expenses of the Pride
Acquisition, working capital and general corporate
purposes. See "Use of Proceeds."
Equity Offering............ Concurrently with the Debt Offering, the Company
and the Selling Shareholders are offering 4,706,807
shares (5,412,828 shares if the underwriters'
over-allotment option is exercised in full) of
Common Stock for sale to the public, of which
3,500,000 shares will be sold by the Company. The
Company will not receive any proceeds from the sale
of shares of Common Stock by the Selling
Shareholders in the Equity Offering. The closing of
the Debt Offering and the Equity Offering are each
conditioned upon the simultaneous closing of the
other and upon the simultaneous closing of the
Pride Acquisition.
6
<PAGE> 9
SUMMARY OF CONSOLIDATED FINANCIAL DATA
The following table presents for the periods indicated certain historical
consolidated and certain pro forma combined financial data for the Company. The
following information should be read together with "Pro Forma Condensed
Consolidated Financial Statements," "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements, including the notes thereto, included
elsewhere in this Prospectus. The results for the six months ended September 30,
1996 are not necessarily indicative of results for the full year. The pro forma
information is presented for illustrative purposes only and is not necessarily
indicative of the results of operations and financial position that would have
been achieved had the transactions reflected therein been consummated on the
dates indicated.
<TABLE>
<CAPTION>
AT OR FOR SIX MONTHS
AT OR FOR YEARS ENDED MARCH 31, ENDED SEPTEMBER 30,
---------------------------------------------------------- ----------------------------
1996 1996
PRO PRO
1992 1993 1994 1995 1996 FORMA(1) 1995 1996 FORMA(1)
------- ------- ------- ------- ------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............................. $15,784 $20,822 $27,942 $36,005 $52,391 $182,219 $25,888 $33,811 $100,229
Costs and expenses:
Operating.......................... 11,440 14,772 19,937 24,241 34,320 131,052 16,875 21,893 71,994
General and administrative......... 2,443 3,040 3,854 5,574 8,937 24,676 4,238 5,469 13,480
Depreciation and amortization...... 1,062 1,374 1,707 2,608 4,396 19,204 2,016 2,876 9,692
------- ------- ------- ------- ------- -------- ------- ------- --------
Operating income..................... 839 1,636 2,444 3,582 4,738 7,287 2,759 3,573 5,063
Interest expense..................... 352 301 282 789 1,848 12,610 953 296 6,305
Other (income) expense............... (8) 84 (61) (41) (129) (1,490) (27) (252) (201)
Minority interest.................... -- 358 902 1,092 937 937 787 -- --
------- ------- ------- ------- ------- -------- ------- ------- --------
Income (loss) before income taxes and
extraordinary item................. 495 893 1,321 1,742 2,082 (3,833) 1,046 3,529 (1,041)
Provision for income taxes........... 236 320 525 681 709 (1,860) 398 1,354 (406)
------- ------- ------- ------- ------- -------- ------- ------- --------
Income (loss) before extraordinary
item............................... 259 573 796 1,061 1,373 (2,910) 648 2,175 (635)
Extraordinary item(2)................ 38 -- (92) -- (514) (514) -- -- --
------- ------- ------- ------- ------- -------- ------- ------- --------
Net income (loss).................... 297 573 704 1,061 859 (3,424) 648 2,175 (635)
Preferred stock dividends............ 101 101 101 101 88 88 50 -- --
------- ------- ------- ------- ------- -------- ------- ------- --------
Net income (loss) applicable to
common stock....................... $ 196 $ 472 $ 603 $ 960 $ 771 $ (3,512) $ 598 $ 2,175 $ (635)
======= ======= ======= ======= ======= ======== ======= ======= ========
Primary earnings (loss) per share.... $ .11 $ .23 $ .29 $ .45 $ .27 $ (.55) $ .25 $ .33 $ (.06)
Fully diluted earnings (loss) per
share.............................. $ .11 $ .23 $ .29 $ .42 $ .27 $ (.55) $ .23 $ .33 $ (.06)
Average number of shares
outstanding --
primary............................ 1,768,613 2,020,664 2,052,168 2,155,380 2,931,234 6,382,896 2,384,359 6,510,428 9,890,984
Average number of shares
outstanding -- fully diluted....... 1,768,613 2,020,664 2,450,791 2,648,740 3,207,622 6,382,896 3,095,826 6,527,796 9,890,984
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 400 $ 1,139 $ 2,172 $ 2,797 $13,863 $ 9,364 $ 28,393
Net property and equipment........... 6,261 8,625 8,978 25,321 29,115 39,209 145,859
Total assets......................... 11,685 15,828 16,714 40,525 56,368 74,092 235,071
Long-term debt and other obligations,
net of current portion............. 1,938 1,722 1,623 15,989 3,695 4,609 132,750
Total shareholders' equity........... 5,487 6,009 6,720 10,098 45,694 47,933 91,226
OTHER FINANCIAL DATA:
Ratio of earnings to fixed
charges(3)......................... 2.3x 3.6x 5.0x 3.1x 2.1x 0.6x 2.1x 10.9x 0.8x
EBITDA(4)............................ $ 1,901 $ 3,010 $ 4,151 $ 6,190 $ 9,134 $ 26,491 $ 4,775 $ 6,449 $ 14,755
Ratio of EBITDA to interest
expense............................ 5.4x 10.0x 14.7x 7.9x 4.9x 2.1x 5.0x 21.8x 2.3x
</TABLE>
- ---------------
(1) Adjusted, in the case of the income statement data, to reflect the
consummation of the Pride Acquisition, the Taylor Acquisition and the
Offerings, as if each had occurred on April 1, 1995, and in the case of
balance sheet data at September 30, 1996, to reflect the consummation of the
Pride Acquisition and the Offerings as if they had been completed at such
date. See "The Company." Does not give effect to certain estimated
consolidation cost savings and operational efficiencies that the Company
anticipates can be achieved in connection with the Pride Acquisition,
primarily resulting from the consolidation of certain facilities and the
reduction of personnel. Assuming that such consolidation cost savings had
occurred at the beginning of the year ended March 31, 1996 and the beginning
of the six month period ended September 30, 1996, results of operations
(after taking into consideration the tax effect of such consolidation cost
savings) would have been a net loss of $0.5 million and net income of $0.9
million, respectively, and EBITDA would have been $31.3 million and $17.2
million, respectively. There can be no assurance with respect to the amount
or timing of any such consolidation cost savings by the Company or that any
such consolidation cost savings will not be offset in part by additional
operating expenses resulting from the Pride Acquisition.
(2) Includes a $92,000 charge in fiscal 1994 to reflect the cumulative effect of
change in accounting principle.
(3) For purposes of computing the ratio of earnings to fixed charges, earnings
are computed as income before income taxes, extraordinary item and
cumulative effect of a change in accounting principle, plus fixed charges.
Fixed charges consist of interest, whether expensed or capitalized,
amortization of debt issuance costs and an estimated portion of rentals
representing interest costs. On a pro forma basis, earnings were inadequate
to cover fixed charges for the periods ended March 31, 1996 and September
30, 1996 by $4.8 million and $1.0 million, respectively.
(4) EBITDA is defined as earnings before interest expense, taxes, depreciation
and amortization, minority interest and other (income) expense and is
presented because it is a widely accepted financial indication of a
company's ability to incur and service debt. EBITDA should not be considered
as an alternative to earnings as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity.
7
<PAGE> 10
RISK FACTORS
Prospective purchasers of the securities offered hereby should carefully
consider the following factors in addition to the other information in this
Prospectus. See "Disclosure Regarding Forward-Looking Statements."
INCURRENCE OF SUBSTANTIAL INDEBTEDNESS
At September 30, 1996, on a pro forma basis and giving effect to
application of the net proceeds of the Offerings as set forth herein under "Use
of Proceeds," the Company would have had approximately $133.3 million in total
indebtedness, compared with total actual indebtedness of $15.6 million at such
date. The Company historically has operated at substantially lower levels of
debt than will be outstanding after giving effect to the Offerings. The
Company's level of indebtedness will have several important effects on its
future operations, including, without limitation, (i) a substantial portion of
the Company's cash flow from operations must be dedicated to the payment of
interest and principal on its indebtedness, (ii) the Company's leveraged
position will substantially increase its vulnerability to adverse changes in
general economic and industry conditions, as well as to competitive pressure,
and (iii) the Company's ability to obtain additional financing for working
capital, capital expenditures, acquisitions, general corporate and other
purposes may be limited. The Company's ability to meet its debt service
obligations and to reduce its total indebtedness will be dependent upon the
Company's future performance, which will be subject to general economic
conditions, industry cycles and financial, business and other factors affecting
the operations of the Company, many of which are beyond its control. There can
be no assurance that the Company's business will continue to generate cash flow
at or above current levels. If the Company is unable to generate sufficient cash
flow from operations in the future to service its debt, it may be required,
among other things, to seek additional financing in the debt or equity markets,
to refinance or restructure all or a portion of its indebtedness, including the
Notes, or to sell selected assets or reduce or delay planned capital
expenditures or acquisitions. There can be no assurance that any such measures
would be sufficient to enable the Company to service its debt or that any such
financing, refinancing or sale of assets would be available on economically
favorable terms.
EFFECTIVE SUBORDINATION
The Notes will be effectively subordinated in right of payment to all
existing and future senior Indebtedness of the Company, which will include any
future draws under the Credit Facility. As of September 30, 1996, after giving
pro forma effect to the Offerings and the application of the net proceeds
therefrom, the Company would have no senior Indebtedness outstanding but expects
that it would have up to $60.0 million available under the Credit Facility
(comprised of a $50.0 million working capital line of credit and a $10.0 million
acquisition line of credit) which, if borrowed, would be included as senior
Indebtedness. The Credit Facility will be secured by liens on certain assets of
the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources." Accordingly, the
lenders under the Credit Facility have claims with respect to the assets
constituting collateral for any indebtedness thereunder that will be satisfied
prior to the unsecured claims of holders of the Notes. See "Description of
Notes -- General." In the event of a default on the Notes or a bankruptcy,
liquidation or reorganization of the Company, such assets will be available to
satisfy obligations with respect to the indebtedness secured thereby before any
payment therefrom could be made on the Notes. Thus, the Notes and the Subsidiary
Guarantees will be effectively subordinated to claims of the lenders under the
Credit Facility to the extent of such pledged collateral. At September 30, 1996,
pro forma for the Pride Acquisition and the Offerings, the Notes and the
Subsidiary Guarantees would not have been subordinated to any secured
Indebtedness (excluding letters of credit) of the Company or the Subsidiary
Guarantors.
PAYMENT UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of the Notes may
require the Company to repurchase all or a portion of such holder's Notes at
101% of the principal amount of the Notes, together with accrued and unpaid
interest, if any, to the date of repurchase. The Indenture will require that
prior to such a repurchase, the Company must either prepay all outstanding
senior Indebtedness or obtain any required
8
<PAGE> 11
consents to such repurchase. The occurrence of a Change of Control may result in
a default under the Credit Facility. If a Change of Control were to occur, the
Company may not have the financial resources to prepay all of the senior
Indebtedness, the Notes and the other Indebtedness that would become payable
upon the occurrence of such Change of Control or may be prohibited from
repurchasing the Notes. See "Description of Notes -- Repurchase at the Option of
Holders -- Change of Control."
RESTRICTIONS IMPOSED BY LENDERS
The Credit Facility and the Indenture will contain a number of covenants
that will restrict the ability of the Company to dispose of assets, merge or
consolidate with another entity, incur additional indebtedness, create liens,
make capital expenditures or other investments or acquisitions and otherwise
restrict corporate activities. The Credit Facility will also contain
requirements that the Company maintain certain financial ratios and may restrict
the Company from prepaying the Company's other indebtedness. The ability of the
Company to comply with such provisions may be affected by events that are beyond
the Company's control. The breach of any of these covenants could result in a
default under the Credit Facility and the Indenture and a subsequent
acceleration of such indebtedness. In addition, as a result of these covenants,
the ability of the Company to respond to changing business and economic
conditions and to secure additional financing, if needed, may be significantly
restricted, and the Company may be prevented from engaging in transactions that
might otherwise be considered beneficial to the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Description of Notes -- Certain Covenants."
FRAUDULENT CONVEYANCE
Management of the Company believes that the indebtedness represented by the
Notes and the Subsidiary Guarantees is being incurred for proper purposes and in
good faith, and that, based on present forecasts, asset valuations and other
financial information, after the consummation of the Offerings, the Company will
be solvent, will have sufficient capital for carrying on its business and will
be able to pay its debts as they mature. See, however, "-- Incurrence of
Substantial Indebtedness." Notwithstanding management's belief, if a court of
competent jurisdiction in a suit by an unpaid creditor or a representative of
creditors (such as a trustee in bankruptcy or a debtor-in-possession) were to
find that, at the time of the incurrence of such indebtedness, the Company or
any of the Subsidiary Guarantors was insolvent, was rendered insolvent by reason
of such incurrence, was engaged in a business or transaction for which its
remaining assets constituted unreasonably small capital, intended to incur, or
believed that it would incur, debts beyond its ability to pay such debts as they
matured, or intended to hinder, delay or defraud its creditors, and that the
indebtedness was incurred for less than reasonably equivalent value, then such
court could, among other things, (i) void all or a portion of the Company's or
the Subsidiary Guarantors' obligations to the holders of the Notes, the effect
of which would be that the holders of the Notes may not be repaid in full,
and/or (ii) subordinate the Company's or the Subsidiary Guarantors' obligations
to the holders of the Notes to other existing and future indebtedness of the
Company to a greater extent than would otherwise be the case, the effect of
which would be to entitle such other creditors to be paid in full before any
payment could be made on the Notes or the Subsidiary Guarantees. See
"Description of Notes -- Subsidiary Guarantees."
DEPENDENCE ON VOLATILE OIL AND GAS INDUSTRY
Demand for the Company's services depends substantially upon the level of
activity in the oil and gas industry, which in turn depends in part on oil and
gas prices, expectations about future prices, the cost of exploring for,
producing and delivering oil and gas, the discovery rate of new oil and gas
reserves in land areas, the level of drilling and workover activity, domestic
and international political, military, regulatory and economic conditions and
the ability of oil and gas companies to raise capital. Prices for oil and gas
historically have been extremely volatile and have reacted to changes in the
supply of and demand for oil and natural gas, domestic and worldwide economic
conditions and political instability in oil producing countries. No assurance
can be given that current levels of oil and gas activities will be maintained or
that demand for the Company's services will reflect the level of such
activities. Prices for oil and natural gas are expected to continue to be
volatile and affect the demand for and pricing of the Company's services. A
material decline in oil or natural
9
<PAGE> 12
gas prices or activities could materially adversely affect the demand for the
Company's services and the Company's results of operations. Industry conditions
will continue to be influenced by numerous factors over which the Company has no
control. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Customers."
The volatility of the oil and gas industry and the consequent impact
thereof on exploration activity could adversely impact certain of the Company's
customers. The Company, therefore, could be subject to special credit risks as
to certain of its customers. While the Company endeavors not to take unjustified
credit risks, it is necessary from time to time to extend trade credit to
long-term customers and others where some risks of nonpayment or late payment
could exist.
ACQUISITION RISKS
The Company completed the Taylor Acquisition in July 1996 and the Mobley
Acquisition in January 1997. Most of the net proceeds from the Offerings will be
used to fund the Pride Acquisition. See "Use of Proceeds." Pursuant to the Pride
Acquisition, the Company will acquire 407 workover rigs, which is more than four
times the number of workover rigs Dawson currently operates. As a result of the
Pride Acquisition, the Company will acquire significant operations in
California, a market in which the Company does not currently operate.
Furthermore, Pride has advised the Company that 89 of the 407 workover rigs to
be acquired from Pride were not operated during the 12 months preceding December
23, 1996, the effective date of the Purchase Agreement. The Company believes
that a majority of these 89 rigs will be reactivated only if market demand
justifies the incremental cost, and the Company does not expect the remainder of
such rigs to be restored to operating condition. There can be no assurance that
the Company will be successful in reactivating or redeploying rigs acquired from
Pride. In addition, no assurance can be given that the Company will be
successful in achieving consolidation savings or managing and incorporating the
businesses and assets acquired in the Pride Acquisition, the Mobley Acquisition
or the Taylor Acquisition into the Company's existing operations or that such
activities will not require a disproportionate amount of management's attention.
In connection with the Pride Acquisition, the Company will purchase
substantially all of Pride's U.S. land-based well servicing operations (the
"Pride Assets") "as is, where is." The Company has undertaken a limited amount
of investigation of the condition of the Pride Assets, particularly the workover
rigs, in an effort to determine that their condition appears to be sufficient to
sustain the operations previously conducted by Pride with those assets. The
Company has not, however, thoroughly investigated all material items of
equipment due to limitations of time, cost and geographic disbursement.
The Purchase Agreement provides that Pride and the Company shall treat the
sale as not subject to sales and use taxes in all jurisdictions. However, it
further provides that if, contrary to the foregoing, it shall be finally
determined that the sale, or any other transaction consummated pursuant to the
closing, is subject to such tax, such tax shall be borne equally by Pride and
the Company. Certain ambiguities under existing tax laws of the states in which
assets of Pride are located, and the issue of what transactions are "consummated
pursuant to the closing," could result in substantial liability to the Company.
In connection with the Pride Acquisition, it is expected that the Company
will acquire approximately 14 properties in fee simple and will receive an
assignment or sublease of approximately 14 leased properties. With respect to
all parcels of real estate, Dawson has conducted only limited environmental
studies and investigations. There can be no assurance that Dawson will not
acquire properties that have latent environmental risks and concurrent financial
exposure. Moreover, Pride has not made any warranties and representations
concerning the environmental aspects of any properties that would survive the
closing.
The Company's failure to achieve consolidation savings, to incorporate the
acquired businesses and assets into its existing operations successfully, or to
minimize any unexpected costs or liabilities in the acquired businesses, could
have a material adverse effect on the Company. See "Pride Acquisition."
10
<PAGE> 13
LIQUIDITY NEEDS; ABILITY TO REPAY NOTES
The Company may from time to time fund a portion of its working capital
needs and capital expenditure requirements from external financing. In addition,
the Company expects that in order to repay the principal amount of the Notes at
maturity or upon acceleration, or to purchase the Notes upon a Change of
Control, it will likely be required to seek additional financing or engage in
asset sales or similar transactions. There can be no assurance that sufficient
funds for any of the foregoing purposes would be available to the Company at the
time they are required on favorable terms. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Description of Notes."
SUBSTANTIAL COMPETITION
The Company experiences intense competition in its markets. Such markets
are highly competitive and no one competitor is dominant. Some of the Company's
competitors have greater financial and other resources than the Company. See
"Business -- Competition."
OPERATING RISKS AND INSURANCE
The Company's operations are subject to hazards inherent in the oil and gas
industry, such as blowouts, explosions, craterings, fires and oil spills, that
can cause personal injury or loss of life, damage to or destruction of property,
equipment, the environment and marine life and suspension of operations. In
addition, claims for loss of oil and gas production and damage to formations can
occur in the workover business. Litigation arising from a catastrophic
occurrence at a location where the Company's equipment and services are used may
in the future result in the Company being named as a defendant in lawsuits
asserting potentially large claims.
The Company maintains insurance coverage that it believes to be customary
in the industry against these hazards. However, there can be no assurance that
the Company will be able to maintain adequate insurance in the future at rates
it considers reasonable or that insurance will continue to be available on terms
as favorable as the Company's existing arrangements. In addition, the insurance
is subject to coverage limits and certain policies exclude coverage for damages
resulting from environmental contamination. The occurrence of a significant
event or adverse claim in excess of the insurance coverage limits maintained by
the Company or which is not covered by insurance could have a materially adverse
effect on the Company's financial condition and results of operations. See
"Business -- Operating Risks and Insurance."
RISKS RELATING TO INJECTION WELLS
The Company's injection operations pose certain risks of environmental
liability to the Company. Although the Company monitors the injection process,
any leakage from the subsurface portions of the wells could cause degradation of
fresh groundwater resources, potentially resulting in cancellation of operation
of the well, fines and penalties from governmental agencies, expenditures for
remediation of the affected resource, and liability to third parties for
property damages and personal injuries. In addition, the sale by the Company of
residual crude oil collected as part of the saltwater injection process could
impose liability on the Company in the event the entity to which the oil was
transferred fails to manage the material in accordance with applicable
environmental health and safety laws.
RISK OF ENVIRONMENTAL COSTS AND LIABILITIES
The Company's operations are subject to governmental laws and regulations
governing the management and disposal of waste materials or otherwise relating
to the protection of the environment or of public health and safety. Many of the
Company's operations take place in or near ecologically sensitive areas, such as
the Texas Gulf Coast and Louisiana inland waters. Numerous local, state and
federal environmental laws impose liability for causing pollution in inland and
coastal waters. Local, state and federal legislation also provides special
protection to water quality and animal and marine life that could be affected by
some of the Company's activities. The regulations applicable to the Company's
operations include certain regulations controlling the discharge of hazardous or
toxic materials into the environment, requiring removal or remediation of
pollutants, requiring permits or licenses issued by regulatory agencies and
imposing civil and
11
<PAGE> 14
criminal penalties for violations. Some of the statutory and regulatory programs
that apply to the Company's operations also authorize private suits, the
recovery of natural resource damages by the government, injunctive relief and
cease and desist orders.
Some environmental statutes impose strict liability, rendering a person or
entity liable for environmental damage without regard to negligence or fault on
the part of such person or entity. As a result, the Company could be liable,
under certain circumstances, for environmental damage caused by others or for
acts of the Company that were in compliance with all applicable laws at the time
such acts were performed.
The clear trend in environmental regulation has been to impose more
restrictions and limitations on activities that may impact the environment,
including the generation and disposal of wastes and the use and handling of
chemical substances. These restrictions and limitations have increased operating
costs for both the Company and its customers. Any regulatory changes that impose
additional environmental restrictions or requirements on the Company and its
customers could adversely affect the Company through increased operating costs,
capital expenditures to meet new regulatory requirements and potential decreased
demand for the Company's services.
In this regard, the Resource Conservation and Recovery Act ("RCRA"), the
principal federal statute governing the disposal of solid and hazardous wastes,
includes a statutory exemption that allows oil and gas exploration and
production wastes to be classified as non-hazardous waste. A similar exemption
is contained in many of the state counterparts to RCRA, including the state
statutes in Texas and Louisiana. If oil and gas exploration and production
wastes were required to be managed and disposed of as hazardous waste, either as
a result of changes in RCRA or the imposition of more stringent state
regulations, the Company could be required to make significant unanticipated
capital and operating expenditures or to cease or curtail certain operations.
Further, if such wastes were required to be managed and disposed of as hazardous
waste, domestic oil and gas producers, including many of the Company's
customers, could be required to incur substantial obligations with respect to
such waste. Because of the potential impact on the Company's customers, any
regulatory changes that impose additional restrictions or requirements on the
disposal of oil and gas wastes could adversely affect demand for the Company's
services. See "Business -- Environmental Regulation."
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success will depend to a significant extent
upon the continued services of certain key individuals, particularly Michael E.
Little, Chairman of the Board, President and Chief Executive Officer, and Joseph
B. Eustace, Vice President of Operations and Chief Operating Officer. The loss
of the services of either of these individuals could have a material adverse
effect on the Company. See "Management."
DEPENDENCE ON MAJOR CUSTOMERS
During the six months ended September 30, 1996, the Company derived
approximately 23.0% of its revenues (9.5% on a pro forma basis) from its largest
customer. While the Company believes that its relationship with this customer is
good, the loss of such customer, or a significant reduction in business done
with the Company by this customer, if not offset by sales to new or existing
customers, could have a material adverse effect on the Company's business,
results of operations and prospects.
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Notes are a new issue of securities that the Company does not intend to
list on any securities exchange. There can be no assurance that an active
trading market will develop for the Notes, or that holders of the Notes will be
able to sell their Notes on acceptable terms. Jefferies & Company, Inc. has
indicated that it intends to make a market in the Notes; however, it is not
obligated to do so, and any such market-making may be discontinued at any time
without notice. If the Notes are traded after their initial issuance, they may
trade at a discount from the initial public offering price depending upon
prevailing interest rates, the market price for similar securities and other
factors.
12
<PAGE> 15
THE COMPANY
The Company is engaged in the business of providing: (i) workover rig
services, including completion of new wells, maintenance and recompletion of
existing wells (including horizontal recompletions) and plugging and abandonment
of wells at the end of their useful lives; (ii) liquid services, including
vacuum truck services, frac tank rental and salt water injection; and (iii)
production services, including well test analysis, pipe testing, slickline
wireline services and fishing and rental tool services. For the six months ended
September 30 1996, the Company derived approximately 46%, 38% and 16% (75%, 20%
and 5% on a pro forma basis) of its revenues from its workover rig services,
liquid services and production services, respectively. The Company's services
are utilized by major oil and gas companies as well as independent producers to
optimize performance of oil and gas wells.
The Company commenced operations in 1951. In 1982, the current management
team joined the Company and initiated a strategy to expand and diversify the
Company's workover rig services. Since 1982, the Company has grown from four
workover rigs in a single yard to 91 workover rigs in 10 yards through a series
of strategic acquisitions of businesses and assets. The majority of this growth
has occurred since 1992. The Company formed Dawson WellTech, L.C. (the "LLC") in
1992 as a majority owned and operated subsidiary of the Company, which in
November 1994 acquired substantially all of the assets of Well Solutions, Inc.
for approximately $18.1 million (the "Well Solutions Acquisition"). In 1995, the
Company acquired the remaining interest in the LLC. See "Certain Relationships
and Related Transactions."
In July 1996, the Company acquired 70 vacuum trucks, 314 frac tanks and 11
salt water injection wells for approximately $12.8 million pursuant to the
purchase of all of the issued and outstanding stock of Taylor Companies, Inc.
(the "Taylor Acquisition"). During 1996, the Company also acquired 18 additional
vacuum trucks, six workover rigs and one production testing unit.
In March 1996, the Company completed an initial public offering (the "IPO")
of 2,616,250 shares of Common Stock at $10.00 per share, with net proceeds to
the Company of approximately $23.5 million. Simultaneously with the IPO, the
Common Stock began trading on the Nasdaq National Market under the symbol
"DPSI."
On January 20, 1997, the Company acquired the liquid services assets of
Mobley Environmental Services, Inc. for approximately $5.0 million in cash and a
$0.5 million five year subordinated note. On December 23, 1996 the Company
entered into a purchase agreement to acquire Pride's U.S. land-based well
servicing operations, which includes 407 workover rigs, 10 vacuum trucks and
ancillary equipment, for approximately $135.9 million. The closing of the Pride
Acquisition is conditioned upon the simultaneous closing of the Offerings.
The Company's principal executive office is located at 901 N.E. Loop 410,
Suite 700, San Antonio, Texas 78209, and its telephone number is (210) 828-1838.
RECENT DEVELOPMENTS
On February 11, 1997, the Company issued a release announcing earnings for
the third fiscal quarter ended December 31, 1996. The release states that
revenues in the third quarter of fiscal 1997 increased by 72% to $22.5 million,
compared to the $13.0 million in the third quarter of fiscal 1996. Net income of
$1.5 million increased 631% from the third quarter of fiscal 1996. Similarly,
primary earnings per share of $0.24 on 6,548,000 average shares outstanding
increased from $.06 on 2,971,000 average shares outstanding for the prior year.
13
<PAGE> 16
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). All statements other than statements
of historical information provided herein are forward-looking and may contain
information about financial results, economic conditions, trends and known
uncertainties. The Company cautions the reader that actual results could differ
materially from those expected by the Company, depending on the outcome of
certain factors, including, without limitation, (i) factors discussed under
"Risk Factors" such as fluctuations in the prices of oil and natural gas,
competition, operating risks, acquisition risks, liquidity and capital
requirements and the effects of governmental and environmental regulation, (ii)
adverse changes in the operations acquired in the Pride Acquisition or the
failure of the Company to achieve anticipated consolidation cost savings in
connection with the Pride Acquisition and (iii) adverse changes in the market
for the Company's services. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to release publicly the result of any revisions
to these forward-looking statements which may be made to reflect events or
circumstances after the date hereof, including, without limitation, changes in
the Company's business strategy or planned capital expenditures, or to reflect
the occurrence of unanticipated events.
EQUITY OFFERING
Concurrently with the Debt Offering, the Company and the Selling
Shareholders are offering 3,500,000 shares and 1,206,807 shares, respectively,
of Common Stock to the public. In addition, in the Equity Offering the Company
has granted the underwriters an option to purchase up to 706,021 additional
shares of Common Stock to cover over-allotments. The consummation of the Debt
Offering and the Equity Offering are each conditioned upon the simultaneous
closing of the other and upon the simultaneous closing of the Pride Acquisition.
USE OF PROCEEDS
The net proceeds to the Company from the issuance and sale of the Notes
offered hereby, after deducting the underwriting discount and expenses of the
Debt Offering, are estimated to be approximately $125.4 million. The net
proceeds to the Company from the sale of the shares of Common Stock offered by
the Company pursuant to the Equity Offering are estimated to be approximately
$43.3 million (approximately $52.1 million if the underwriters' over-allotment
option in connection with the Equity Offering is exercised in full), assuming an
offering price of $13.25 per share and after deducting the underwriting discount
and expenses of the Equity Offering payable by the Company.
The following table illustrates the sources and uses of the gross proceeds
to the Company, as estimated by the Company's management, in connection with the
Offerings (dollars in millions):
<TABLE>
<S> <C>
SOURCES
- --------------------------------------------
Notes (Debt Offering)............... $130.0
Common Stock (Equity Offering)...... 46.4
------
Total Sources............. $176.4
======
USES
- --------------------------------------------
Pride Acquisition -- Purchase
Price(1).......................... $135.9
Prepayment of Existing Debt(2)...... 12.3
Working Capital..................... 19.1
Fees and Expenses................... 9.1
------
Total Uses................ $176.4
======
</TABLE>
- ---------------
(1) The Pride Acquisition purchase price is subject to certain adjustments.
(2) Consists of a balance as of September 30, 1996 of approximately $7.0 million
on the loan incurred as a result of the Taylor Acquisition, $3.2 million of
capitalized lease obligations and $2.1 million of other indebtedness. The
$7.0 million loan bears interest at a rate of 7.75% and matures on March 31,
1997. The capitalized lease obligations bear interest at rates ranging from
5% to 9% and are due in monthly installments of approximately $136,000. The
other indebtedness consists of approximately $2.0 million of term notes that
were assumed in connection with the Taylor Acquisition, bear interest at
rates ranging from 6% to 10% and have maturity dates ranging from one to
five years after July 29, 1996, the date of assumption.
Pending application of the net proceeds of the Offerings, the Company will
invest such net proceeds in short-term interest-bearing, investment grade
securities.
14
<PAGE> 17
CAPITALIZATION
The following table sets forth the cash and cash equivalents, current debt
and capitalization of the Company at September 30, 1996, and as adjusted to give
effect to the Offerings and the application of the net proceeds therefrom as set
forth under "Use of Proceeds." This table should be read in conjunction with the
financial statements and the notes thereto included elsewhere in this Prospectus
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 9,364 $ 28,393
======= ========
Current portion of long-term debt........................... $ 9,247 $ 500
Current portion of obligations under capital leases......... 1,708 --
------- --------
Total current debt................................ $10,955 $ 500
======= ========
Long-term debt, net of current portion:
Notes payable............................................. $ 380 $ --
Senior Notes due 2007..................................... -- 130,000
Subordinated notes........................................ 2,750 2,750
------- --------
Total notes, net of current portion............... 3,130 132,750
Obligations under capital leases, net of current
portion................................................ 1,478 --
------- --------
Total long-term debt, net of current portion...... 4,608 132,750
Shareholders' equity:
Preferred stock, no par value, 560,600 shares authorized,
none issued and outstanding............................ -- --
Common stock, $.01 par value, 20,560,600 shares
authorized, 6,391,126 shares issued and outstanding,
9,891,126 shares issued and outstanding as
adjusted(1)............................................ 64 99
Paid-in capital........................................... 41,522 84,780
Retained earnings......................................... 6,489 6,489
Notes receivable from officers............................ (142) (142)
------- --------
Total shareholders' equity........................ 47,933 91,226
------- --------
Total capitalization.............................. $52,541 $223,976
======= ========
</TABLE>
- ---------------
(1) Excludes 552,950 outstanding stock options, exercisable at various prices
ranging from $4.65 to $11.375 per share (with a weighted average price of
$9.15 per share), of which 167,779 were exercisable.
15
<PAGE> 18
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The table below sets forth the unaudited pro forma condensed consolidated
financial statements of the Company. With respect to statements of income data,
the adjustments give effect to (i) the Pride Acquisition, (ii) the Taylor
Acquisition and (iii) the Offerings, as if each had occurred at the beginning of
the periods presented. With respect to balance sheet data, the adjustments give
effect to (i) the Pride Acquisition and (ii) the Offerings, as if they had been
completed as of the date presented. The unaudited pro forma financial statements
may not be indicative of the results that actually would have occurred if the
transactions described above had been in effect during the periods indicated or
which may be obtained in the future. The unaudited financial statements should
be read in conjunction with the audited financial statements and related notes
of the Company, Taylor and Pride contained elsewhere herein.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PRIDE PRO FORMA
DAWSON TAYLOR ACQUISITION COMBINED
SIX MONTHS ACQUISITION SIX MONTHS SIX MONTHS
ENDED APRIL 1 - ENDED ENDED
SEPTEMBER 30, JULY 29, SEPTEMBER 30, SEPTEMBER 30,
1996 1996 1996 ADJUSTMENTS 1996 (A)
------------- ----------- ------------- ----------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues...................................... $33,811 $6,988 $59,430 $ -- $100,229
Operating costs............................... 21,893 5,272 45,929 (1,100)(B) 71,994
General and administrative expenses........... 5,469 979 7,468 (436)(C) 13,480
Depreciation and amortization................. 2,876 384 2,659 3,773(D) 9,692
------- ------ ------- ------- --------
Operating income.............................. 3,573 353 3,374 (2,237) 5,063
Interest expense.............................. 296 194 986 4,829(E) 6,305
Other (income) expense........................ (252) 218 (167) -- (201)
------- ------ ------- ------- --------
Income (loss) before income taxes............. 3,529 (59) 2,555 (7,066) (1,041)
Provision for income taxes.................... 1,354 65 1,007 (2,832)(F) (406)
------- ------ ------- ------- --------
Net income (loss)............................. $ 2,175 $ (124) $ 1,548 $(4,234) $ (635)
======= ====== ======= ======= ========
Primary earnings (loss) per share............. $ .33 $ (.06)
Fully diluted earnings (loss) per share....... $ .33 $ (.06)
Average shares outstanding -- primary......... 6,510,428 3,380,556(G) 9,890,984
Average shares outstanding -- fully diluted... 6,527,796 3,363,188(G) 9,890,984
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1996
--------------------------------------------------------------------
DAWSON TAYLOR PRIDE PRO FORMA
HISTORICAL ACQUISITION ACQUISITION ADJUSTMENTS COMBINED(A)
---------- ----------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues........................................ $52,391 $16,713 $113,115 $ -- $182,219
Operating costs................................. 34,320 12,755 86,177 (2,200)(B) 131,052
General and administrative expenses............. 8,937 2,290 14,504 (1,055)(C) 24,676
Depreciation and amortization................... 4,396 1,607 5,385 7,816(D) 19,204
------- ------- -------- -------- --------
Operating income................................ 4,738 61 7,049 (4,561) 7,287
Interest expense................................ 1,848 461 821 9,480(E) 12,610
Other (income) expense.......................... (129) (101) (1,260) -- (1,490)
Minority interest............................... 937 -- -- -- 937
------- ------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item............................ 2,082 (299) 7,488 (14,041) (4,770)
Provision for income taxes...................... 709 (158) 2,873 (5,284)(F) (1,860)
------- ------- -------- -------- --------
Income (loss) before extraordinary item......... 1,373 (141) 4,615 (8,757) (2,910)
Extraordinary item.............................. (514) -- -- -- (514)
------- ------- -------- -------- --------
Net income (loss)............................... 859 (141) 4,615 (8,757) (3,424)
Preferred stock dividends....................... (88) -- -- -- (88)
------- ------- -------- -------- --------
Net income (loss) applicable to common stock.... $ 771 $ (141) $ 4,615 $ (8,757) $ (3,512)
======= ======= ======== ======== ========
Primary earnings (loss) per share............... $ .27 $ (.55)
Fully diluted earnings (loss) per share......... $ .27 $ (.55)
Average shares outstanding -- primary........... 2,931,234 3,451,662(G) 6,382,896
Average shares outstanding-- fully diluted...... 3,207,622 3,175,274(G) 6,382,896
</TABLE>
16
<PAGE> 19
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
------------------------------------------------------
PRIDE PRO FORMA PRO
HISTORICAL ACQUISITION ADJUSTMENTS FORMA
---------- ----------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 9,364 $ 1,638 $ 17,391(H) $ 28,393
Trade and other receivables................................. 14,260 19,247 (19,247)(H) 14,260
Prepaid expenses and other.................................. 883 6,368 (6,368)(H) 883
Net property and equipment.................................. 39,209 43,041 63,609(H)(I) 145,859
Goodwill and other assets................................... 10,376 2,006 33,294(H)(I) 45,676
------- ------- -------- --------
Total assets........................................ $74,092 $72,300 $ 88,679 $235,071
======= ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities......................................... $18,306 $18,351 $(28,806)(H)(J) $ 7,851
Long-term debt, net of current portion...................... 3,130 36,885 92,735(H)(J) 132,750
Obligations under capital leases, net of current portion.... 1,479 2,066 (3,545)(H)(J) --
Deferred income taxes....................................... 3,244 11,384 (11,384)(H) 3,244
Shareholders' equity........................................ 47,933 3,614 39,679(G)(H) 91,226
------- ------- -------- --------
Total liabilities and shareholders' equity.......... $74,092 $72,300 $ 88,679 $235,071
======= ======= ======== ========
</TABLE>
- ---------------
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
(A) Does not give effect to certain estimated consolidation cost savings and
operational efficiencies that the Company anticipates can be achieved in
connection with the Pride Acquisition, primarily resulting from the
consolidation of certain facilities and the reduction of personnel. Assuming
that such consolidation cost savings had occurred at the beginning of the
year ended March 31, 1996 and the beginning of the six month period ended
September 30, 1996, results of operations (after taking into consideration
the tax effect of such consolidation cost savings) would have been a net
loss of $0.5 million and net income of $0.9 million, respectively. There can
be no assurance with respect to the amount or timing of any such
consolidation cost savings by the Company or that any such consolidation
cost savings will not be offset in part by additional operating expenses
resulting from the Pride Acquisition.
(B) To record the elimination of approximately $2.2 million of Pride's
operating lease expenses ($1.1 million for the six month period).
(C) To reflect the elimination of certain general corporate cost allocations
that will not be assumed by the Company in connection with the Pride
Acquisition.
(D) To reflect the additional depreciation of property and equipment and
amortization of goodwill (goodwill using a 25-year life) resulting from the
Taylor Acquisition and the Pride Acquisition and a covenant not to compete
(using a five-year life) from the Pride Acquisition, as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
MARCH 31, SEPTEMBER 30,
1996 1996
---------- -------------
<S> <C> <C>
Pride Acquisition.......................... $6,807 $3,437
Taylor Acquisition......................... 1,009 336
------ ------
Total............................ $7,816 $3,773
====== ======
</TABLE>
(E) To adjust interest expense to reflect the issuance of $130.0 million of
Notes at an assumed interest rate of 9.5% per annum, adjusted for the
retirement of existing bank debt and capital leases.
(F) To record the tax effect of pro forma adjustments based on the effective
tax rate of the Company.
(G) To record the issuance of 3,500,000 shares to be issued in the Equity
Offering, adjusted for the elimination of certain antidilutive common stock
equivalents.
(H) To record the Pride Acquisition for $135.9 million, such amount to be
financed using a portion of the proceeds to the Company from the Offerings.
(I) To record Pride's property and equipment at estimated fair market value
($106.7 million), covenant not to compete ($5.0 million) and goodwill and
other assets ($29.7 million) at the date of acquisition.
(J) To reflect the retirement of the Company's existing debt and capital leases
totaling approximately $12.3 million.
17
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company for the periods indicated. The selected consolidated financial data for
all fiscal years presented have been derived from the audited consolidated
financial statements of the Company. The selected consolidated financial data
for the Company for the six months ended September 30, 1995 and 1996 have been
derived from the unaudited consolidated financial statements of the Company for
such periods, which, in the opinion of management, include all adjustments,
consisting of only normal recurring adjustments, necessary to state fairly the
data included therein in accordance with generally accepted accounting
principles for such periods. Interim results are not necessarily indicative of
financial results of the Company for the full fiscal year. The selected
financial data should be read in conjunction with, and is qualified in its
entirety by, the consolidated financial statements of the Company and related
notes and other financial information included elsewhere in this Prospectus and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
AT OR FOR SIX
MONTHS ENDED
AT OR FOR YEARS ENDED MARCH 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............................................... $15,784 $20,822 $27,942 $36,005 $52,391 $25,888 $33,811
Costs and expenses:
Operating............................................ 11,440 14,772 19,937 24,241 34,320 16,875 21,893
General and administrative........................... 2,443 3,040 3,854 5,574 8,937 4,238 5,469
Depreciation and amortization........................ 1,062 1,374 1,707 2,608 4,396 2,016 2,876
------- ------- ------- ------- ------- ------- -------
Operating income....................................... 839 1,636 2,444 3,582 4,738 2,759 3,573
Interest expense....................................... 352 301 282 789 1,848 953 296
Other (income) expense................................. (8) 84 (61) (41) (129) (27) (252)
Minority interest...................................... -- 358 902 1,092 937 787 --
------- ------- ------- ------- ------- ------- -------
Income before income taxes and extraordinary item...... 495 893 1,321 1,742 2,082 1,046 3,529
Provision for income taxes............................. 236 320 525 681 709 398 1,354
------- ------- ------- ------- ------- ------- -------
Income before extraordinary item....................... 259 573 796 1,061 1,373 648 2,175
Extraordinary item(1).................................. 38 -- (92) -- (514) -- --
------- ------- ------- ------- ------- ------- -------
Net income............................................. 297 573 704 1,061 859 648 2,175
Preferred stock dividends.............................. 101 101 101 101 88 50 --
------- ------- ------- ------- ------- ------- -------
Net income applicable to common stock.................. $ 196 $ 472 $ 603 $ 960 $ 771 $ 598 $ 2,175
======= ======= ======= ======= ======= ======= =======
Primary earnings per share............................. $ .11 $ .23 $ .29 $ .45 $ .27 $ .25 $ .33
Fully diluted earnings per share....................... $ .11 $ .23 $ .29 $ .42 $ .27 $ .23 $ .33
Average number of shares outstanding -- primary........ 1,768,613 2,020,664 2,052,168 2,155,380 2,931,234 2,384,359 6,510,428
Average number of shares outstanding -- fully
diluted.............................................. 1,768,613 2,020,664 2,450,791 2,648,740 3,207,622 3,095,826 6,527,796
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 400 $ 1,139 $ 2,172 $ 2,797 $13,863 $ 9,364
Net property and equipment............................. 6,261 8,625 8,978 25,321 29,115 39,209
Total assets........................................... 11,685 15,828 16,714 40,525 56,368 74,092
Long-term debt and other obligations, net of current
portion.............................................. 1,938 1,722 1,623 15,989 3,695 4,609
Total shareholders' equity............................. 5,487 6,009 6,720 10,098 45,694 47,933
OTHER FINANCIAL DATA:
Ratio of earnings to fixed charges(2).................. 2.3x 3.6x 5.0x 3.1x 2.1x 2.1x 10.9x
EBITDA(3).............................................. $ 1,901 $ 3,010 $ 4,151 $ 6,190 $ 9,134 $ 4,775 $ 6,449
Ratio of EBITDA to interest expense.................... 5.4x 10.0x 14.7x 7.9x 4.9x 5.0x 21.8x
</TABLE>
- ---------------
(1) Includes a $92,000 charge in fiscal 1994 to reflect the cumulative effect of
change in accounting principle.
(2) For purposes of computing the ratio of earnings to fixed charges, earnings
are computed as income before income taxes, extraordinary item and
cumulative effect of a change in accounting principle, plus fixed charges.
Fixed charges consist of interest, whether expensed or capitalized,
amortization of debt issuance costs and an estimated portion of rentals
representing interest costs.
(3) EBITDA is defined as earnings before interest expense, taxes, depreciation
and amortization, minority interest and other (income) expense and is
presented because it is a widely accepted financial indication of a
company's ability to incur and service debt. EBITDA should not be considered
as an alternative to earnings as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity.
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical information provided herein are
forward-looking and may contain information about financial results, economic
conditions, trends and known uncertainties. The Company cautions the reader that
actual results could differ materially from those expected by the Company,
depending on the outcome of certain factors, including, without limitation, (i)
factors discussed under "Risk Factors" such as fluctuations in the prices of oil
and natural gas, competition, operating risks, acquisition risks, liquidity and
capital requirements and the effects of governmental and environmental
regulation, (ii) adverse changes in the operations acquired in the Pride
Acquisition or the failure of the Company to achieve anticipated consolidation
cost savings in connection with the Pride Acquisition and (iii) adverse changes
in the market for the Company's services. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. The Company undertakes no obligation to release publicly the result
of any revisions to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof, including, without
limitation, changes in the Company's business strategy or planned capital
expenditures, or to reflect the occurrence of unanticipated events.
GENERAL
The Company's operations and future results will be significantly impacted
by the Pride Acquisition. As a result of the Pride Acquisition, the Company will
increase its workover rig fleet to over five times its current size to become
the second largest provider of workover rigs in the United States. In addition,
the Company will acquire significant operations in California, a market in which
it does not currently operate. The Company also will seek to expand its liquid
and production services into Pride's current land-based well servicing areas.
Other than the Pride Acquisition, the Company does not have any current
understanding, arrangement or agreement to acquire other businesses or assets.
There can be no assurance that attractive acquisitions will be available to the
Company at prices it believes to be reasonable or that any acquisition achieved
will ultimately prove to be a successful undertaking by the Company.
The Company will experience substantial revenue growth as a result of the
Pride Acquisition and, to a lesser extent, the Taylor Acquisition. On a pro
forma basis for the year ended March 31, 1996 and for the six months ended
September 30, 1996, the Company would have generated operating revenues of
approximately $182.2 million and $100.2 million, respectively, as compared to
historical operating revenues for the Company of $52.4 million and $33.8
million, respectively.
The Company derives its revenues from workover rig services, liquid
services and production services. Workover rig services are billed at hourly
rates that are generally determined by the type of equipment required, market
conditions in the region in which the rig operates, the ancillary equipment
provided on the rig and the necessary personnel. The Company charges its
customers for liquid services either on an hourly basis or on a per barrel basis
depending on the services offered, while production services are primarily
billed on an hourly basis. The base rates for the Company's services have
generally been stable over the past three years.
The Company's operating costs are comprised primarily of labor and
maintenance costs. Labor costs generally are variable and are incurred only
while a workover rig is operating or liquid services or production services are
being provided; however, the Company employs rig personnel to perform
maintenance and other services who are paid even when rigs are not operating.
The Company's administrative staff at the yard level and in the corporate office
are accounted for as general and administrative expense. Insurance costs
generally are fixed costs and relate to the number of active rigs, trucks and
other equipment in the Company's fleet. The Company's workers' compensation
insurance costs have declined over the past two years due to its favorable
safety record.
19
<PAGE> 22
RESULTS OF OPERATIONS
Six Months Ended September 30, 1996 Compared to Six Months Ended September 30,
1995
Revenues. Revenues were $33.8 million for the six months ended September
30, 1996, a 31% increase compared with revenues of $25.9 million for the six
months ended September 30, 1995. Compared to the same period in 1995, revenues
for the six months ended September 30, 1996 increased by 13%, 81% and 8% in the
workover, liquid and production services lines of business, respectively. The
increase in revenues was attributable primarily to the Taylor Acquisition in
July 1996, the addition of 11 vacuum trucks in March 1996, the acquisition of
six workover rigs in May 1996 and a general increase in demand in the workover,
liquid services and production services lines of business.
Operating Costs. Operating costs for the six months ended September 30,
1996 were $21.9 million, an increase of 30% from $16.9 million for the six
months ended September 30, 1995, which was proportional to the increase in
revenues for the same period and due to the same factors which affected
revenues. Operating costs as a percentage of revenues were 65% for each of the
six month periods ended September 30, 1996 and 1995.
General and Administrative Expenses. General and administrative expenses
for the six months ended September 30, 1996 were $5.5 million, an increase of
29% from $4.2 million for the six months ended September 30, 1995. This increase
was due primarily to the higher general and administrative expenses associated
with the addition of four new yard locations in connection with the Taylor
Acquisition. As a percentage of revenues, general and administrative expenses
remained constant at 16% for each of the six month periods ended September 30,
1996 and 1995.
Depreciation and Amortization. Depreciation and amortization expense for
the six months ended September 30, 1996 was $2.9 million, an increase of 43%
from $2.0 million for the six months ended September 30, 1995. The increase was
due to the additional depreciation on equipment and amortization of goodwill
related to the Taylor Acquisition, the purchase of 11 vacuum trucks in May 1996,
the acquisition of six workover rigs in May 1996, and depreciation related to
normal and ongoing purchases of additional and replacement equipment.
Interest Expense. Interest expense for the six months ended September 30,
1996 was $0.3 million compared with $1.0 million for the corresponding period in
1995. The decrease of $0.7 million was attributable to the retirement of debt
with a portion of the proceeds from the IPO in March 1996.
Minority Interest. The elimination of the minority interest expense in the
six month period ended September 30, 1996 was due to the acquisition of
WellTech, Inc.'s 39% minority interest (the "Minority Interest Acquisition") in
the LLC in November 1995.
Year Ended March 31, 1996 Compared to the Year Ended March 31, 1995
Revenues. Revenues for the year ended March 31, 1996 were $52.4 million, an
increase of 46% from $36.0 million for the year ended March 31, 1995. This
increase was due primarily to the Well Solutions Acquisition in November 1995.
Revenues from workover rig services were slightly higher for the year ended
March 31, 1996 compared to the prior year due to increased demand for horizontal
recompletion services and the introduction of a second barge-mounted workover
rig in August 1995.
Operating Costs. Operating costs for the year ended March 31, 1996 were
$34.3 million, an increase of 42% from $24.2 million for the year ended March
31, 1995. This increase was due primarily to the Well Solutions Acquisition.
Operating costs as a percentage of revenues decreased to 65% for the year ended
March 31, 1996 compared to 67% for the prior year, which reflects the higher
margin characteristics of the liquid services and production services businesses
acquired in the Well Solutions Acquisition compared to the Company's workover
rig services business.
General and Administrative Expenses. General and administrative expenses
for the year ended March 31, 1996 were $8.9 million, an increase of 60% from
$5.6 million for the year ended March 31, 1995. This increase was due primarily
to the higher general and administrative expenses associated with the Well
Solutions
20
<PAGE> 23
Acquisition, which significantly increased the Company's fixed cost base with
the addition of seven new yard locations. As a percentage of revenues, general
and administrative expenses increased to 17% for the year ended March 31, 1996,
compared to 15% for the prior year. In fiscal year 1996, the Company granted
bonuses of $336,000 in connection with exercises of non-statutory stock options
by certain of the Company's current and former officers, directors and employees
with regard to federal tax liability they incurred related to such exercises.
The Company does not anticipate granting bonuses for such purposes in the
future.
Depreciation and Amortization. Depreciation and amortization expense for
the year ended March 31, 1996 was $4.4 million, an increase of 69% from $2.6
million for the year ended March 31, 1995. This increase was due to a
substantial increase in the Company's asset base resulting from the Well
Solutions Acquisition.
Interest Expense. Interest expense for the year ended March 31, 1996 was
$1.8 million compared to $0.8 million for the year ended March 31, 1995, due to
the incurrence, in connection with the Well Solutions Acquisition, of $13.0
million of debt with a 10.81% interest rate. The approximately $11.4 million of
debt remaining in March 1996 relating to the Well Solutions Acquisition was
prepaid with a portion of the proceeds from the IPO.
Minority Interest. Minority interest for the year ended March 31, 1996 was
$0.9 million, a decrease of 12% from $1.1 million for the year ended March 31,
1995. This decrease was a result of the Minority Interest Acquisition in
November 1995.
Extraordinary Item. As a result of the prepayment of approximately $11.4
million of debt related to the Well Solutions Acquisition, the Company recorded
an extraordinary expense for the year ended March 31, 1996 amounting to
approximately $0.5 million (net of taxes). This amount represents prepayment
penalties, reimbursement to the lender for its costs and expenses resulting from
the prepayment and the write-off of fees incurred at loan origination (net of
taxes).
Year Ended March 31, 1995 Compared to the Year Ended March 31, 1994
Revenues. Revenues for the year ended March 31, 1995 were $36.0 million, an
increase of 29% from $27.9 million for the year ended March 31, 1994. This
increase was due primarily to the inclusion following the Well Solutions
Acquisition of the results of operations of Well Solutions, Inc. for four months
of the year ended March 31, 1995. Revenues from workover rig services were
slightly higher for the year ended March 31, 1995 compared to the prior year due
to an increase in billable hours resulting from improved demand for horizontal
recompletion services and the introduction of the Company's first barge-mounted
workover rig.
Operating Costs. Operating costs for the year ended March 31, 1995 were
$24.2 million, an increase of 22% from $19.9 million for the year ended March
31, 1994. This increase was due primarily to the Well Solutions Acquisition.
Operating costs as a percentage of revenues decreased to 67% for the year ended
March 31, 1995 compared to 71% for the prior year, which reflects the higher
margin characteristics of the liquid services and production services businesses
acquired in the Well Solutions Acquisition compared to the Company's workover
rig services business.
General and Administrative Expenses. General and administrative expenses
for the year ended March 31, 1995 were $5.6 million, an increase of 44% from
$3.9 million for the year ended March 31, 1994. This increase was due primarily
to the higher general and administrative expenses associated with the liquid
services and production services businesses acquired in November 1994. As a
percentage of revenues, general and administrative expenses increased to 16% for
the year ended March 31, 1995, compared to 14% for the prior year.
Depreciation and Amortization. Depreciation and amortization expense for
the year ended March 31, 1995 was $2.6 million, an increase of 53% from $1.7
million for the year ended March 31, 1994. This increase was due to a
substantial increase in the Company's asset base resulting from the Well
Solutions Acquisition.
Interest Expense. Interest expense for the year ended March 31, 1995 was
$0.8 million compared to $0.3 million for the year ended March 31, 1994, due to
the incurrence, in connection with the Well Solutions Acquisition, of $13.0
million of debt with a 10.81% interest rate in the year ended March 31, 1995.
21
<PAGE> 24
Minority Interest. Minority interest for the year ended March 31, 1995 was
$1.1 million, an increase of 22% from $0.9 million for the year ended March 31,
1994. This increase was due to higher pretax income of the LLC resulting from
the Well Solutions Acquisition.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of approximately $9.4 million at
September 30, 1996 compared to approximately $13.9 million at March 31, 1996.
Working capital was approximately $6.2 million and approximately $16.8 million
at September 30, 1996 and March 31, 1996, respectively. The Company used a net
amount of approximately $15.1 million for investing activities in the six months
ended September 30, 1996, primarily for the Taylor Acquisition and for other
capital expenditures of approximately $2.2 million. The Company anticipates that
capital expenditures (excluding acquisitions) for the second six months of the
fiscal year ending March 31, 1997 will be approximately $3.0 to $4.0 million for
improvements to its equipment and for capital additions. Acquisitions of
additional assets and businesses are expected to continue to be an important
part of the Company's strategy. Under certain circumstances, the Company would
need to obtain additional financing to fund such acquisitions.
On January 20, 1997, the Company completed the Mobley Acquisition. The
Company paid approximately $5.0 million of the acquisition price from its
existing cash. The remainder of the purchase price consisted of a $0.5 million
five year subordinated note.
The Company has available a $4.0 million revolving line of credit (the
"Revolver"), which matures on March 31, 1997, with the Frost National Bank (the
"Bank") to finance temporary working capital requirements and to support the
issuance of letters of credit. The Revolver is secured by a first lien security
interest on the Company's accounts receivable. Borrowings against the Revolver
bear interest at the Bank's prime lending rate (8.25% as of January 28, 1997).
At January 15, 1997, no amounts were drawn in cash under the Revolver, but $0.4
million was being utilized to support the issuance of letters of credit related
to the Company's workers' compensation coverage.
In July 1996, to finance a portion of the Taylor Acquisition, the Company
obtained a loan from a bank in the amount of $7.0 million. The promissory note
carries an annual interest rate of 7.75% and has a maturity date of March 31,
1997. In September 1996, the Company obtained a take-out commitment for a term
loan in the amount of $7.0 million to replace the promissory note. The Company,
however, intends to prepay the loan with a portion of the proceeds from the
Offerings and thus has decided to not take advantage of the take-out commitment.
Also in connection with the Taylor Acquisition, the Company assumed $0.6
million of bank debt owed by the principal Taylor stockholder, and guaranteed
payment of additional bank indebtedness of approximately $1.5 million owed by
Taylor. The Company intends to prepay both of these obligations with a portion
of the proceeds of the Offerings.
The Company had approximately $3.2 million of capitalized lease obligations
outstanding as of September 30, 1996, bearing interest at rates ranging from 5%
to 9% and due in monthly installments of approximately $136,000. The Company
intends to prepay these capitalized lease obligations in full with a portion of
the proceeds of the Offerings.
In March 1996, the Company sold 2,616,250 shares of Common Stock at $10 per
share in the IPO, which yielded net proceeds of approximately $23.5 million. The
Company used approximately $11.4 million of the net proceeds from the IPO to
prepay indebtedness outstanding from the Well Solutions Acquisition and
approximately $0.5 million (net of taxes) to pay prepayment penalties and
reimburse the lender for its costs and expenses resulting from the prepayment.
The remainder of the proceeds were used for acquisitions and working capital.
In preparation for the IPO, effective February 19, 1996, 60,600 outstanding
shares of the Company's Series A 10% Cumulative Convertible Preferred Stock (the
"Series A Preferred Stock") were converted into 260,580 shares of Common Stock.
Also in February 1996, approximately $2.5 million of convertible debt was
converted into 356,900 shares of Common Stock. The remaining $1.5 million of
convertible debt, represented
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<PAGE> 25
by the debenture held by Well Solutions, bears interest at 8%, matures on
November 30, 1999, is prepayable without penalty at any time, and may be
converted at any time, at the option of the holder, into 37,634 shares of Common
Stock, subject to adjustment to prevent dilution. The Company does not currently
intend to prepay the debenture but may decide to do so in the future if interest
rates decline.
The Company generated cash from operating activities of approximately $6.6
million during the year ended March 31, 1996. The Company's principal uses of
cash during the year ended March 31, 1996 were to prepay the indebtedness from
the Well Solutions Acquisition and to fund approximately $4.5 million of capital
expenditures for upgrading and purchasing equipment.
The Company believes that the combination of internally generated cash
flow, the net proceeds from the Offerings and availability under the Credit
Facility should provide the Company with sufficient financing to fund the
Company's operations for at least the next 12 months. There can be no assurance,
however, that the Company will not need additional financing or that such
financing will be available on economically acceptable terms.
Description of Credit Facility
Prior to the closing of the Offerings, the Company expects to replace the
Revolver with a working capital line of credit (the "Working Line"). The Company
received a commitment on September 13, 1996 from the Bank for the Working Line
and an acquisition line of credit (the "Acquisition Line" and, together with the
Working Line, the "Credit Facility"). The Credit Facility has not yet been
finalized; however, the Company anticipates that certain significant terms of
the Credit Facility will be as follows. The maximum availability under the
Working Line would be the lesser of (i) $10.0 million or (ii) 80% of eligible
accounts receivable that have been outstanding less than 90 days. The Working
Line would be secured by a first lien security interest on all the Company's
accounts receivable and inventory. Borrowings under the Working Line would
mature two years from the date of any such borrowings and would bear interest at
the lesser of (i) the Bank's prime rate of interest or (ii) a varying percentage
rate ranging from 1.75% to 2.75%, based on the total funded debt to cash flow
ratio, over the Company's choice of the 30, 90 or 180-day LIBOR rate of
interest. Under the Acquisition Line, up to $20.0 million would be available
solely to fund up to 100% of the purchase price of acquisitions by the Company
during the first two years of the term of the Acquisition Line. From the third
year until maturity, the Acquisition Line would be secured by assets of the
Company with a loan to collateral value ratio of not less than 70%. Borrowings
under the Acquisition Line would mature seven years from the date of any such
borrowings and would bear interest at the lesser of (i) the Bank's prime rate of
interest or (ii) a varying percentage rate ranging from 2% to 3%, based on the
total funded debt to cash flow ratio, over the 180-day LIBOR rate of interest.
Under the terms of the commitment, the Company must maintain minimum working
capital, tangible net worth, current ratios and debt to capital ratios. The
foregoing description does not purport to be a complete description of all terms
of the Credit Facility, and the negotiation of the definitive agreements may
result in additional terms that are significant to the Company. There can be no
assurance, however, that definitive agreements will be executed.
Due to the pendency of the Pride Acquisition, the Company has requested
from the Bank a modification to its commitment to increase the maximum
availability of funds under the Working Line to the lesser of (i) $50.0 million
or (ii) 80% of eligible accounts receivable that have been outstanding less than
90 days. Based on discussions with the Bank to date, management expects to
receive a commitment from the Bank to such increase and to close the Working
Line prior to and subject to the consummation of the Pride Acquisition. In
addition, management expects that the maximum availability of funds under the
Acquisition Line would be reduced to $10.0 million.
INFLATION AND SEASONALITY
Inflation has not had a significant impact on the Company's operations to
date and the Company's operating revenues have not historically been subject to
significant seasonal changes.
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<PAGE> 26
NEW ACCOUNTING PRONOUNCEMENTS -- ACCOUNTING FOR ASSET IMPAIRMENT; ACCOUNTING FOR
STOCK-BASED COMPENSATION
During March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of "
("FAS 121"). The Company adopted FAS 121 effective April 1, 1996. FAS 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Adoption of this pronouncement had no material effect on the
financial statements.
In October 1995, FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). FAS 123 defines
a fair value based method of accounting for employee stock options or similar
equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. Under the fair
value based method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period of the award, which
is usually the vesting period. However, FAS 123 also allows entities to continue
to measure compensation costs for employee stock compensation plans using the
intrinsic value method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Entities electing to
remain with the accounting prescribed by APB 25 must make pro forma disclosures
of net income and earnings per share as if the fair value based method
recommended by FAS 123 had been applied. The accounting requirements of FAS 123
are effective for transactions entered into in years that begin after December
15, 1995, though they may be adopted on issuance. The disclosure requirements of
FAS 123 are effective for financial statements for years beginning after
December 15, 1995. The Company intends to continue measuring compensation costs
using APB 25 and to provide pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting under FAS 123 had been
applied beginning with its financial statements for the year ending March 31,
1997.
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<PAGE> 27
BUSINESS
GENERAL
Dawson Production Services, Inc. is a leading provider of a broad range of
workover, liquid and production services used in the production of oil and gas.
The Company's services are utilized by major oil and gas companies as well as
independent producers to optimize performance of oil and gas wells. The Company
recently entered into an agreement to acquire the U.S. land-based well servicing
operations of Pride in a transaction that will position Dawson as the second
largest provider of workover rigs in the United States.
The Company commenced operations in 1951. In 1982, the current management
team joined the Company and initiated a strategy to expand and diversify the
Company's workover rig services. Since 1982, the Company has grown from four
workover rigs in a single yard to 91 workover rigs in 10 yards through a series
of strategic acquisitions of businesses and assets. Upon the closing of the
Pride Acquisition, the Company will own and operate 498 workover rigs. In
addition, in November 1994 the Company broadened the array of services it
provides by acquiring the liquid services and production services businesses of
Well Solutions, Inc. and expanded such businesses in July 1996 with the Taylor
Acquisition. The Company believes that it generally has been successful in
acquiring businesses and assets and subsequently reducing overhead, enhancing
internal controls, improving marketing and related operations through management
incentives and improving the utilization of its assets by redeploying equipment.
BUSINESS STRATEGY
The Company's strategy emphasizes diversification and expansion through
acquisitions and internal growth. In recent years, there has been significant
industry consolidation activity in the Company's principal businesses. The
Company has been an active participant in this industry consolidation and plans
to continue to pursue strategic acquisitions of businesses and assets which
enhance or expand its market presence or complement its existing businesses.
Upon the closing of the Pride Acquisition, the Company intends to expand the
range of services offered at its locations and increase its presence, through
redeployment of underutilized assets, within the geographic regions in which the
Company will then operate. The Company believes that its ability to offer a wide
range of services over a large operating base will provide it with a competitive
advantage by allowing its customers to consolidate their procurement of
workover, liquid and production services by utilizing fewer vendors. The Company
believes that this consolidation may allow customers to lower their costs by
streamlining production decisions and increasing operational efficiencies. The
Company also believes that its strategy will allow it to take advantage of
cross-marketing opportunities for its services and to appeal to a broader
customer base by enhancing its position as a one-stop source for workover,
liquid and production services.
Consistent with its business strategy, on December 23, 1996 the Company
entered into a Purchase Agreement to acquire substantially all of Pride's U.S.
land-based well servicing operations for approximately $135.9 million in cash.
The Pride Acquisition will significantly increase the size and geographic scope
of the Company's workover rig service business. Pride's U.S. land-based fleet
consists of 407 workover rigs and related operations in 28 locations in the
Texas and Louisiana Gulf Coasts, the Permian Basin areas of West Texas and New
Mexico, and California. Upon completion of the Pride Acquisition, the Company
will be the largest provider of workover rigs in Texas and the second largest
provider in the United States. The Company will seek to generate improved profit
margins for the acquired assets through increased operating efficiencies and
cost savings resulting from overhead reductions and the consolidation of certain
overlapping yard locations. In addition, the Company will seek to expand its
liquid and production services businesses into new markets through certain of
the acquired yard locations and also to redeploy certain of the acquired
workover rigs to areas with greater rig demand. See "Pride Acquisition."
The Company believes that the high quality of its equipment, employees and
services combined with its favorable safety record enables it to maintain its
position as a leader in its principal markets. In that regard, the Company has
committed substantial capital to an ongoing workover rig refurbishment program
to maintain the Company's equipment in good working condition. The Company has
invested, and plans to continue to
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invest, in quality management and safety programs. The Company believes that
many smaller competitors have not undertaken comparable maintenance or training
programs and do not have the financial resources to enable them to do so. The
Company believes that a number of its customers place significant importance on
their contractors' safety records and quality management systems in their
screening and selection processes, and that such factors will gain further
importance in the future.
OVERVIEW OF SERVICES
Workover Rig Services
The Company provides workover rig services to oil and gas exploration and
production companies through the use of mobile well servicing workover rigs
together with crews of three to four workers. Additional equipment such as
pumps, tanks, blowout preventers and power swivels are provided by the Company
as may be required for a particular job. The Company also provides trucking
services for moving large equipment to and from the job sites of its customers.
The Company charges its customers an hourly rate for its workover rig services,
which varies based on a number of considerations including market conditions in
each region, the type of rig, the amount of ancillary equipment required and the
necessary personnel. The Company gives its yard managers considerable
flexibility to negotiate with customers and, through compensation arrangements,
seeks to provide incentives to its managers to maximize both revenues and
profitability. For the six months ended September 30, 1996, workover rig
services contributed approximately 46% of the Company's revenues (75% on a pro
forma basis).
As of January 15, 1997, the Company operated 89 land workover rigs, two
barge-mounted workover rigs and ancillary equipment from 10 yards in Texas and
Louisiana. Upon the closing of the Pride Acquisition, the Company will operate
496 land workover rigs, two barge-mounted workover rigs and ancillary equipment
from yards in Texas, Louisiana, California and New Mexico. The Company's land
workover rigs are mobile units that generally operate within a radius of
approximately 75 to 100 miles from their respective bases. Swab rigs are used
for swabbing, or cleaning, wells at depths of up to approximately 16,000 feet.
Pole rigs are used for swabbing and rod and tubing workovers and repairs on
wells at depths of up to approximately 4,000 feet. Rigs having between 150 and
250 horsepower are used for services on wells to maximum depths of between 4,000
and 6,000 feet and work primarily on rod and tubing workovers and repairs. Rigs
having between 251 and 350 horsepower are used for services on wells to maximum
depths of between 10,000 and 12,000 feet and also work primarily on rod and
tubing workovers and repairs. Rigs having between 351 and 550 horsepower are
used for deeper workovers and more complicated procedures such as deepening of
existing well bores, recompletions and complicated fishing operations. These
rigs operate at maximum depths of between 16,000 and 18,000 feet. Rigs having
between 551 and 750 horsepower are used in wells with maximum depths of
approximately 20,000 feet. Rigs having between 751 and 900 horsepower are
generally used for horizontal drilling or recompletion jobs and deep workovers
at depths of up to approximately 25,000 feet. These rigs are almost always
operated for continuous 24-hour periods as contrasted to the Company's other
rigs that typically operate during daylight hours only.
The Company operates two barge-mounted workover rigs in the Louisiana
inland waters. These rigs typically are outfitted by moving a land workover rig
onto the barge, with operating crews housed on the barge, and have the
capability to operate for continuous 24-hour periods. In addition to hourly
charges for the workover rigs, when market conditions permit, the Company
charges its customers for auxiliary equipment, travel time, mobilization and
other related items.
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Set forth below is certain information pertaining to the Company's
land-based workover rigs currently owned and to be acquired in the Pride
Acquisition.
<TABLE>
<CAPTION>
PRIDE
DESCRIPTION DAWSON ACQUISITION TOTAL
----------- ------ ----------- -----
<S> <C> <C> <C>
Swab....................................................... 2 17 19
Pole....................................................... -- 1 1
150-250 hp................................................. -- 71 71
251-350 hp................................................. 71 214 285
351-550 hp................................................. 13 95 108
551-750 hp................................................. 1 6 7
751-900 hp................................................. 2 3 5
-- ---- ----
89 407 496
</TABLE>
The Company operated 82 of its 91 workover rigs during 1996. Pride has
advised the Company that 89 of its 407 workover rigs were not operated during
the 12 months preceding December 23, 1996, the effective date of the Purchase
Agreement. The Company believes that a majority of these 89 rigs will be
reactivated only if market demand justifies the incremental cost, and the
Company does not expect the remainder of such rigs to be restored to operating
condition. The Company's stacked rigs will be refurbished, used for spare parts
or liquidated.
Workover rig services are categorized by the type of job performed:
completion, maintenance, workover and plugging and abandonment.
Completion Services. Completion services prepare a newly drilled well for
production. The completion process may involve selectively perforating the well
casing to access producing zones, stimulating and testing these zones and
installing downhole equipment. The Company provides a workover rig to assist in
this completion process. Newly drilled wells are frequently completed by well
servicing rigs to minimize the use of higher cost drilling rigs. The completion
process typically requires a few days to several weeks, depending on the nature
and type of the completion, and generally requires additional auxiliary
equipment.
The demand for well completion services is directly related to drilling
activity levels, which are sensitive to expectations relating to and changes in
oil and gas prices. During periods of weak drilling demand, drilling contractors
frequently price well completion work competitively compared to a workover rig
so that the drilling rig stays on the job. Thus, excess drilling capacity will
serve to reduce the amount of completion work available to the well servicing
industry.
Maintenance Services. Maintenance services are required on producing oil
and gas wells to ensure efficient and continuous operation. These services
consist of routine mechanical repairs necessary to maintain production from the
well, such as repairing parted sucker rods or defective downhole pumps in an oil
well or replacing defective tubing in a gas well. The Company provides the
workover rigs, equipment and crews for these maintenance services. Many of these
workover rigs also have pumps and tanks that can be used for circulating fluids
into and out of the well. Maintenance jobs are often performed on a series of
wells in proximity to each other and typically take less than 48 hours per well.
Maintenance services are generally required throughout the life of a well.
The need for these services does not depend on the level of drilling activity
and is generally independent of short-term fluctuations in oil and gas prices.
Accordingly, maintenance services are generally the most stable type of workover
rig services activity. The general level of maintenance, however, is affected by
changes in the total number of producing oil and gas wells in the Company's
geographic service area.
Workover Services. In addition to periodic maintenance, producing oil and
gas wells occasionally require major repairs or modifications called
"workovers." Workover services include extensions of existing wells to drain new
formations either through deepening well bores or through drilling of horizontal
laterals. In less extensive workovers, the Company's rigs are used to drill out
plugs and packers in existing well bores to access previously bypassed
productive zones. The Company's workover rigs are also used to convert producing
wells
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<PAGE> 30
to injection wells during enhanced recovery operations. Workover services also
include major subsurface repairs such as casing repair or replacement, recovery
of tubing and removal of foreign objects in the well bore. These extensive
workover operations are normally performed by a workover rig with additional
specialized auxiliary equipment, which may include rotary drilling equipment,
mud pumps, mud tanks and blowout preventers, depending upon the particular type
of workover operation. Most of the Company's workover rigs are designed and
equipped to perform complex workover operations. A workover may last from a few
days to several weeks.
The demand for workover services is more sensitive to expectations relating
to and changes in oil and gas prices than the demand for maintenance services,
but not as sensitive as the demand for completion services. When oil and gas
prices are low, there is little incentive to perform workovers on wells to
increase production and well operators tend to defer workover services. As oil
and gas prices increase, the level of workover activity tends to increase as
operators seek to increase production by enhancing the efficiency of their
wells.
Plugging and Abandonment Services. Workover rigs are also used in the
plugging and abandonment of oil and gas wells no longer capable of producing in
economic quantities. The demand for well plugging services is not impacted
significantly by levels of demand for oil and gas.
Liquid Services
The Company provides liquid services, which are comprised of vacuum truck
services, frac tank rentals and salt water injection services. The Company uses
its vacuum trucks, frac tanks and salt water injection wells to provide an
integrated mix of liquid services to well site customers. For the six months
ended September 30, 1996, liquid services contributed approximately 38% of the
Company's revenues (20% on a pro forma basis).
Vacuum Truck Services. The Company owns and operates 175 vacuum trucks and
will acquire an additional 10 vacuum trucks in connection with the Pride
Acquisition. A vacuum truck is a tractor trailer with a fluid hauling capacity
of 130 barrels. A large vacuum pump mounted on each truck extracts fluids from
pits, tanks and other storage facilities. The vacuum trucks also are used for
the following purposes: to transport water to fill frac tanks on well locations,
including frac tanks provided by the Company and by others; to transport
produced salt water to injection wells, including injection wells owned and
operated by the Company; and to transport brine and other drilling fluids to and
from well locations. In conjunction with the rental of its frac tanks, the
Company generally uses its vacuum trucks to transport water for use in
fracturing operations. Following completion of fracturing operations, the
Company's vacuum trucks are used to transport salt water produced as a result of
the fracturing operations from the well site to injection wells. Vacuum truck
services are generally provided to oilfield operators within a 30-mile radius of
the Company's nearest yard.
Frac Tank Rentals. The Company owns 696 frac tanks located primarily at the
Company's yards in Bryan, Giddings and Kilgore, Texas. Each frac tank can store
up to 500 barrels of fluid and is used by oilfield operators to store various
fluids at the well site, including water, drilling mud, acid and brine. The
Company transports frac tanks on its trucks to well locations which are usually
within a 30-mile radius of the Company's nearest yard. Frac tanks are used
during all phases of the life of a producing well. The Company generally rents
frac tanks at daily rates for a minimum of four days. A typical fracturing
operation, absent complications, can be completed within four days using 20 to
100 frac tanks.
Injection Well Services. The Company owns or leases 22 injection wells that
are authorized to dispose of salt water and incidental non-hazardous oil and gas
wastes, each with an injection capacity of 2,000 to 21,000 barrels per day. The
Company's injection wells are strategically located in close proximity to its
customers' producing wells. These wells are utilized primarily to dispose of
salt water produced from oil and gas wells. Most oil and gas wells ultimately
produce varying amounts of salt water and, particularly in vertically fractured
formations such as those common in the Austin Chalk trend, produce salt water at
increasing rates throughout their productive lives. In addition, these wells are
utilized for the disposal of incidental, non-hazardous oil and gas wastes. In
Texas and Arkansas, oil and gas wastes and salt water produced from oil and gas
wells are required by law to be disposed of in authorized facilities, including
permitted injection wells. Injection wells are licensed by state authorities and
are completed in permeable formations below the fresh water table.
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<PAGE> 31
The Company utilizes its injection wells primarily for the disposal of salt
water and incidental, non-hazardous oil and gas waste transported from the well
site by vacuum trucks owned and operated by the Company. Although the Company is
authorized to inject salt water and non-hazardous oil and gas wastes transported
by other licensed vacuum truck operators, the Company does not currently permit
such uses by third parties. The Company also maintains separators at each of its
injection wells permitting it to salvage residual crude oil, which is later sold
for the account of the Company.
The Company's injection operations pose certain risks of environmental
liability to the Company. Although the Company monitors the injection process,
any leakage from the subsurface portions of the wells could cause degradation of
fresh groundwater resources, potentially resulting in cancellation of operation
of the well, fines and penalties from governmental agencies, expenditures for
remediation of the affected resource, and liability to third parties for
property damages and personal injuries. In addition, the sale by the Company of
residual crude oil collected as part of the saltwater injection process could
impose liability on the Company in the event the entity to which the oil was
transferred fails to manage the material in accordance with applicable
environmental health and safety laws.
Production Services
The Company provides production services, which are comprised of production
testing services, slickline wireline services, fishing and rental tool services
and pipe testing. For the six months ended September 30, 1996, production
services contributed approximately 16% of the Company's revenues (5% on a pro
forma basis).
Production Testing Services. The Company owns 21 gas production testing
units that are used to provide services to oil and gas wells located onshore and
in inland waters. The Company performs production testing services for oil and
gas producers primarily along the Texas Gulf Coast. In addition, the Company is
bidding on a multi-year contract for services in northern Mexico.
The Company's equipment includes several trailer-mounted manifolds,
separators, heater treaters, sand separators, light generators and slickline
wireline units. Manifolds are used to reduce the flowing pressure of the well
stream to a rate which will easily flow through the production testing
equipment. After the appropriate well stream rate is achieved, a separator is
used to divide the well stream into its respective components -- oil, gas and
water. For gas wells, a heater is used to prevent the gas from freezing during
flowbacks. Slickline wireline equipment generally is used to lower measurement
equipment into a well for several days to retrieve data to determine the
characteristics of the reservoir.
The Company uses its production testing units to perform deliverability
tests required upon the initial completion of a well and periodically during the
productive life of a gas well to determine the maximum production allowable
under certain rules of the Texas Railroad Commission, the state oil and gas
regulatory agency. In addition, these units are used to clean and test
stimulated wells and to measure the pressure, volume and quality of gas and
liquids produced by the well. These units also are used to determine the most
efficient production flow rate, to run pressure build-up tests that measure the
rate of increase of shut-in gas pressure to determine reservoir characteristics
and to determine whether a producing formation has been damaged.
Slickline Wireline Services. The Company owns seven slickline wireline
units and will acquire three additional units upon the closing of the Pride
Acquisition. The mechanical downhole wireline or "slickline" services are used
to simplify completion operations and in connection with regular maintenance on
producing wells. In some cases, slickline wireline services may be used instead
of workover rigs to provide workover services. By using slickline wireline
services, workover services can be performed under 15,000 psi of pressure
without shutting-in the well. The Company also provides slickline wireline
consulting services where unusual conditions exist.
Fishing and Rental Tools. The Company provides a complete line of cased
hole fishing and rental tools to oilfield operators and well service companies
from two yards in the Texas Panhandle. The Company's rental tool inventory
includes both air compressor equipment, which is used in drilling and workover
activities, and
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<PAGE> 32
fishing tools, which are used to mill or retrieve loose or broken equipment or
other material in the well bore or to free stuck pipe and other tools, such as
slips, elevators and casing cutters. The Company rents the equipment to its
customers at daily rates and, in the case of air compressors and fishing tools,
generally conducts or supervises the operations.
Pipe Testing. The Company operates nine pipe testing units along the Texas
Gulf Coast. The Company's testing equipment is used during completion and
recompletion operations for leak detection in the internal pipe systems of oil
and gas wells.
CUSTOMERS
The Company had approximately 1,050 customers during the 12 months ended
September 30, 1996. For the six months ended September 30, 1996, the Company's
largest customer, Union Pacific Resources Company ("UPRC"), accounted for
approximately 23% of the Company's revenues (approximately 9.5% on a pro forma
basis). The Company has a contract with UPRC to provide liquid and workover rig
services, which expires in February 1999 (with respect to liquid services) and
August 1997 (with respect to workover rig services). The Company is required to
maintain established levels of insurance and to indemnify UPRC against all
losses arising in whole or in part from the Company's negligence, whether or not
UPRC and its agents were contributorily negligent. While the Company believes
that its relationship with UPRC is good, the loss of UPRC, or a significant
reduction in business done with the Company by UPRC, if not offset by sales to
new or existing customers, could have a material adverse effect on the Company's
business, results of operations and prospects. No other customer accounted for
more than 10% of the Company's revenues during the six months ended September
30, 1996.
OPERATING RISKS AND INSURANCE
The Company's operations are subject to hazards inherent in the oil and gas
industry, such as blowouts, explosions, craterings, fires and oil spills, that
can cause personal injury or loss of life, damage to or destruction of property,
equipment, the environment and marine life, and suspension of operations. In
addition, claims for loss of oil and gas production and damage to formations can
occur in the workover business. If a serious accident was to occur at a location
where the Company's equipment and services are used, it could result in the
Company being named as a defendant in lawsuits asserting potentially large
claims.
Because the Company's vacuum truck and frac tank rentals involve the
transportation of heavy equipment and materials, the Company may experience
traffic accidents which may result in spills, property damage and personal
injury. Despite the Company's efforts to maintain high safety standards, the
Company from time to time has suffered losses in the past and anticipates that
it could experience further losses in the future. Moreover, the frequency and
severity of such incidents affect the Company's operating costs and
insurability, and its relationship with customers, employees and regulators. Any
significant increase in the frequency or severity of such incidents, or the
general level of compensation awards with respect thereto, could adversely
affect the cost of, or ability of the Company to obtain, workers' compensation
and other forms of insurance, and could have other material adverse effects on
the Company's financial condition and results of operations.
As a protection against operating hazards, the Company maintains broad
insurance coverage, including physical damage, employer's liability,
comprehensive commercial general liability and workers' compensation insurance.
The Company believes that it is adequately insured for public liability and
property damage to others with respect to its operations, and that its insurance
coverage is comparable to that which is customary in the industry against such
hazards. However, such insurance may not be sufficient to protect the Company
against liability for all consequences of well disasters, extensive fire damage,
damage to personal property, injuries to or deaths of persons or damage to the
environment. In addition, certain insurance policies exclude coverage for
damages resulting from environmental contamination. The Company also carries
insurance to cover physical damage to or loss of its workover rigs. No assurance
can be given that the Company will be able to maintain the type and amount of
coverage that it considers adequate at rates that it considers reasonable or
that insurance will continue to be available on terms as favorable as the
Company's existing arrangements.
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<PAGE> 33
In addition to insurance, the Company conducts training programs designed
to promote the safe operation of all equipment and to minimize accidents
occurring on job sites. The Company gives its managers incentives, through
compensation arrangements, to take all reasonable steps possible to promote
safety. The Company monitors safety closely and has carefully designed safety
programs to reduce costs associated with accidents. However, there can be no
assurance that the Company's insurance or safety programs will be adequate to
protect against liability for accidents occurring on the job site or affecting
the Company's equipment.
COMPETITION
The workover rig and production services industry is highly competitive and
fragmented and includes a number of small companies capable of competing
effectively on a local basis and several large companies which possess
substantially greater financial and other resources than the Company. Pool
Energy Services Co. ("Pool"), Pride and Key Energy Group, Inc. ("Key"), all of
which currently provide workover rig and liquid services, are the largest
companies in the domestic well servicing market. Pool, Pride and Key operate in
multiple geographic regions and currently have significantly more domestic
workover rigs than the Company. Upon the closing of the Pride Acquisition, the
Company will be the second largest provider of workover rigs in the United
States behind Pool. The Company has numerous regional competitors for each of
the services it provides. The Company believes that it is competitive in terms
of pricing, performance, equipment, safety, availability of equipment to meet
customer needs and availability of experienced, skilled personnel in those areas
in which it operates.
Excess capacity in the well servicing industry has resulted in severe price
competition throughout much of the past decade. In the well servicing market, an
important competitive factor in establishing and maintaining long-term customer
relationships is having an experienced and skilled work force. In recent years,
many of the Company's larger customers have placed an emphasis not only on
pricing, but also on safety records and quality management systems of
contractors. The Company believes that such factors will gain further importance
in the future. The Company has directed substantial resources toward employee
safety and quality management training programs as well as its employee review
process. While the Company's efforts in these areas are not unique, many
competitors, particularly small contractors, have not undertaken similar
training programs for their employees. The Company expects competition and
pricing pressures to continue in the foreseeable future.
ENVIRONMENTAL REGULATION
Many of the Company's operations take place in or near ecologically
sensitive areas, such as the Texas Gulf Coast and the Louisiana inland waters.
In addition, the Company's operations routinely involve the handling of
significant amounts of waste materials, some of which are classified as
hazardous substances. The Company's operations and facilities are thus subject
to numerous local, state and federal environmental and public health and safety
laws, rules and regulations, including laws concerning the containment and
disposal of hazardous materials, oilfield waste and other waste materials, the
use of underground storage tanks and the use of underground injection wells. The
regulations applicable to the Company's operations include certain regulations
controlling the discharge of hazardous or toxic materials into the environment,
requiring removal or remediation of pollutants, requiring permits or licenses
issued by regulatory agencies and imposing civil and criminal penalties for
violations. Some of the statutory and regulatory programs that apply to the
Company's operations also authorize private suits, the recovery of natural
resource damages by the government, injunctive relief and cease and desist
orders. Moreover, environmental laws typically expose the Company to "strict
liability" rendering a person or entity liable for environmental damage without
regard to negligence or fault on the part of such person or entity. As a result,
the Company could be liable for cleanup costs, even if the situation resulted
from previous acts by the Company that were lawful at the time or from the
improper conduct of, or conditions caused by, previous property owners, lessees
or other persons not associated with the Company. Environmental laws have become
more stringent in recent years and are expected to become even more so in the
future.
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<PAGE> 34
Cleanup costs associated with environmental claims or capital expenditures
or increased operating costs associated with changes in environmental laws and
regulations could be substantial and could have a material adverse effect on the
Company's financial condition and results of operations. However, the cost of
environmental compliance has not had any material adverse effect on the
Company's operations, financial condition or competitive position in the past,
and management is not currently aware of any situation or condition that it
believes is likely to have any such material adverse effect or require any
material capital expenditure in the foreseeable future. In addition to
management personnel who are responsible for monitoring environmental compliance
and arranging for remedial actions as required from time to time, the Company
also employs outside experts to advise and assist the Company's environmental
compliance efforts.
In addition to having a direct effect on the Company, local, state and
federal environmental regulations also may negatively impact oil and gas
exploration and production companies which in turn could have a material adverse
effect on the Company. To the extent laws are enacted or other governmental
action is taken that prohibits or restricts drilling or imposes environmental
protection requirements that result in increased costs to the oil and gas
industry in general and the drilling industry in particular, the financial
condition and results of operations of the Company could be adversely affected.
In this regard, RCRA, the principal federal statute governing the disposal
of solid and hazardous wastes, includes a statutory exemption that allows oil
and gas exploration and production wastes to be classified as nonhazardous
waste. A similar exemption is contained in many of the state counterparts to
RCRA, including the state statutes in Texas and Louisiana. If oil and gas
exploration and production wastes were required to be managed and disposed of as
hazardous waste, either as a result of changes in RCRA or the imposition of more
stringent state regulations, the Company could be required to make significant
unanticipated capital and operating expenditures or to cease or curtail certain
operations. Further, if such wastes were required to be managed and disposed of
as hazardous waste, domestic oil and gas producers, including many of the
Company's customers, could be required to incur substantial obligations with
respect to such waste. Because of the potential impact on the Company's
customers, any regulatory changes that impose additional restrictions or
requirements on the disposal of oil and gas wastes could adversely affect demand
for the Company's services.
EMPLOYEES
As of January 15, 1997, the Company employed approximately 1,050 people, of
whom approximately 850 were employed on an hourly basis. The Company's future
success will depend partially on its ability to attract, retain and motivate
qualified personnel. The Company is not a party to any collective bargaining
agreements and has not experienced any strikes or work stoppages. The Company
considers its relations with employees to be generally satisfactory.
LEGAL PROCEEDINGS
From time to time, the Company is a party to litigation or other legal
proceedings that the Company considers to be a part of the ordinary course of
its business. The Company currently is not involved in any legal proceedings
that could reasonably be expected to have a material adverse effect on the
Company's financial condition or results of operations. See "-- Operating Risks
and Insurance."
PROPERTIES
The principal office of the Company is located in San Antonio, Texas. The
Company operates 23 yards, 11 of which it owns and 12 of which it leases. Of the
Company's 23 yards, 20 yards are located in Texas and three yards are located in
Louisiana. The Company also operates 21 injection wells in Texas and one in
Arkansas, five of which it owns and 17 of which it leases. The Company believes
that its leased and owned properties, none of which individually is material to
the Company, are adequate for its current needs.
32
<PAGE> 35
PRIDE ACQUISITION
On December 23, 1996, the Company entered into a purchase agreement (the
"Purchase Agreement") to acquire substantially all of Pride's U.S. land-based
well servicing operations for approximately $135.9 million in cash. The Pride
Acquisition will significantly increase the size and geographic scope of the
Company's workover rig services business. Pride's U.S. land-based fleet consists
of 407 workover rigs and related operations in 28 locations in the Texas and
Louisiana Gulf Coasts, the Permian Basin areas of West Texas and New Mexico, and
California. Upon completion of the Pride Acquisition, the Company will be the
largest provider of workover rigs in Texas and the second largest provider in
the United States. The Company will seek to generate improved profit margins for
the acquired assets through increased operating efficiencies and cost savings
resulting from overhead reductions and the consolidation of certain overlapping
yard locations. In addition, the Company will also seek to expand its liquid and
production services businesses into new markets through certain of the acquired
yard locations and also to redeploy certain of the acquired workover rigs to
areas with greater rig demand.
Pursuant to the Purchase Agreement, the Company will purchase the Pride
Assets "as is, where is." Dawson has undertaken a limited amount of
investigation of the condition of the Pride Assets, particularly the workover
rigs, in an effort to determine that their condition appears to be sufficient to
sustain the operations previously conducted by Pride with those assets. The
Company has not, however, thoroughly investigated all material items of
equipment due to limitations of time, cost and geographic disbursement.
The Purchase Agreement provides that Pride and the Company shall treat the
sale as not subject to sales and use taxes in all jurisdictions. However, it
further provides that if, contrary to the foregoing, it shall be finally
determined that the sale, or any other transaction consummated pursuant to the
closing, is subject to such tax, such tax shall be borne equally by Pride and
the Company. Certain ambiguities under existing tax laws of the states in which
assets of Pride are located, and the issue of what transactions are "consummated
pursuant to the closing," could result in substantial liability to the Company.
With regard to real property, it is expected that the Company will acquire
approximately 14 properties in fee simple and will receive an assignment or
sublease of approximately 14 leased properties. With respect to all parcels of
real estate, Dawson has conducted only limited environmental studies and
investigations. The Company has obtained Phase I reports on the properties and
has had the opportunity to review the books and records of Pride concerning
environmental compliance aspects of each of those properties. As to each such
property, Dawson has the option of acquiring Pride's interest therein, of
declining to accept the property (resulting in a reduction of the purchase
price) or of leasing the property with an option to buy. There can be no
assurance that Dawson will not acquire properties that have latent environmental
risks and concurrent financial exposure. Moreover, Pride has not made any
warranties and representations concerning the environmental aspects of any
properties that would survive the closing.
The Company expects to employ approximately 1,940 employees of Pride
immediately following consummation of the Pride Acquisition. All such employees
of Pride will continue their employment following the closing as "at will"
employees of the Company. Approximately 146 salaried employees will be entitled
to certain severance benefits if their employment with the Company is
terminated, other than for cause, within 18 months of the closing. To facilitate
certain transitional issues, the Company also has obtained an agreement from
Pride that it will provide reasonable access to its headquarters office in
Houston for the use of the Company and its employees for six months at no cost
to the Company. This is intended to help facilitate and implement a transfer of
bookkeeping and accounting functions with respect to the acquired operations.
Pursuant to the Purchase Agreement, Pride is required to indemnify and hold
harmless the Company with respect to damages, losses or third party warranty
claims accruing or arising prior to the date of closing and for breaches of only
certain limited warranties and representations. With respect to
misrepresentations and breaches of such warranties and representations and
certain covenants, the Company will bear the first $2.0 million of losses or
damages, with Pride being liable for losses in excess thereof. The Purchase
Agreement also provides for a $5.0 million break-up fee, payable by the Company
if it is not able to obtain financing and the Pride Acquisition is not closed on
or before March 17, 1997, and a five year non-compete agreement imposed upon
Pride with respect to U.S. land-based well servicing operations. At the option
of the Company,
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<PAGE> 36
$4.0 million of the break-up fee may be paid in unregistered shares of Common
Stock, provided that Pride would receive registration rights relating to such
shares of Common Stock.
The closing of the Debt Offering and the Equity Offering are each
conditioned upon the simultaneous closing of the other and upon the simultaneous
closing of the Pride Acquisition.
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<PAGE> 37
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their respective
ages and positions are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael E. Little(1)...................... 42 Chairman of the Board, President and
Chief Executive Officer
Joseph B. Eustace......................... 41 Vice President of Operations and Chief
Operating Officer
P. Mark Stark............................. 41 Chief Financial Officer
Russell Banks(1).......................... 77 Director
J. Michael Bell(2)........................ 57 Director
Wm. Ward Greenwood(1)..................... 43 Director
Douglas D. Lewis(2)....................... 51 Director
Paul E. McCollam(2)....................... 51 Director
Stephen F. Oakes(3)....................... 47 Director
Lawrence C. Petrucci(3)................... 37 Director
</TABLE>
- ---------------
(1) Member of the Nominations Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
Michael E. Little has been President, Chief Executive Officer and a
director of the Company since 1982 and Chairman of the Board since 1983. From
1980 to 1982, he was vice president of Cambern Engineering, Inc., a company that
provided drilling and completion consulting services in the Texas Gulf Coast
area. From 1976 to 1980, he was employed by Chevron USA as a drilling foreman in
Midland, Texas and as a drilling engineer in New Orleans, Louisiana. Mr. Little
received his Bachelor of Science degree in Petroleum Engineering in 1978 from
Texas Tech University.
Joseph B. Eustace has served as the Vice President of Operations and Chief
Operating Officer of the Company since March 1983. From June 1981 to March 1982,
he served as assistant manager of ServRigs, Inc., the Company's largest
competitor at the time. Mr. Eustace received his Bachelor of Arts degree in
Agribusiness in 1978 from Texas Tech University.
P. Mark Stark has served as Chief Financial Officer of the Company since
January 1996. From 1991 through 1995, he was chief financial officer of the Y.O.
Ranch and family holdings of the Schreiner family which has interests in
agribusiness, tourism, lodging and retail and real estate development. From 1979
through 1991, Mr. Stark was employed by Shelton Ranch Corporation and its
successor, Texas Hill Country Orchards, LLP, serving as chief financial officer
from 1984 through 1991. His duties with Shelton Ranch Corporation included
serving as treasurer of Shelton Energy Resources, Ltd., an oil and gas
exploration and production partnership among Shelton Ranch Corporation,
Prudential Insurance Company of America and Shell Oil Company. Mr. Stark
received his Bachelor of Business Administration degree in Finance from the
University of Texas in 1977, and his Master of Business Administration degree in
1978 from Southern Methodist University.
Russell Banks has been a director of the Company since April 1996. From
1962 to 1995, Mr. Banks was president and chief executive officer of Grow Group,
Inc., which was a New York Stock Exchange company that produced coatings, paints
and household products. Since 1995, Mr. Banks has been a principal of Russell
Banks & Co., Ltd., a financial consulting firm. Mr. Banks is also on the board
of directors of GVC Venture Corporation. Mr. Banks is a past president of the
National Paint and Coatings Association and has served on the executive
committee of the board of directors of the American Management Association and
is currently
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<PAGE> 38
on its general management council. Mr. Banks has been named as a defendant in
certain litigation relating to his service as a director of another company. All
other directors of such company were also named as defendants. Counsel to such
company has taken the position that all the claims against that company and Mr.
Banks are without merit and will be vigorously defended. Mr. Banks was
designated to succeed a former director, Kevin P. Collins, to the Board of
Directors pursuant to a letter agreement that provided Mr. Collins the right,
upon his departure from the Board, to designate a successor Board member,
subject to the approval of such successor by the Board.
J. Michael Bell has been a director of the Company since 1982. For more
than the past five years, he has served as the president of Southwest Venture
Management Company, a firm that provides investment management and advisory
services to three venture capital funds. Mr. Bell also serves as the managing
general partner of each of these funds, one of which is HixVen Partners, a
shareholder of the Company.
Wm. Ward Greenwood has been a director of the Company since 1983. Mr.
Greenwood served as Chief Financial Officer of the Company from December 1994
through December 1995. Mr. Greenwood has been since 1990, and is currently, the
president and sole shareholder of Nueces Ventures, Inc. ("Nueces"), a firm that
provides financial consulting services with respect to acquisitions and capital
formation. Since October 1995, he has also served as a principal of First
Capital Group of Texas II, L.P., a private equity fund. Since 1982, Mr.
Greenwood has provided financial consulting services to the Company, most
recently through Nueces. See "Certain Relationships and Related Transactions."
Douglas D. Lewis has been a director of the Company since 1982. Since 1972,
Mr. Lewis has been in the real estate construction, development and management
business, most recently as principal of Vanguard Development, Inc., which he
formed in 1987.
Paul E. McCollam has been a director of the Company since 1991. Since 1985,
he has been a managing director of Resource Investors Management Company Limited
Partnership, a full service investment management company specializing in the
energy industry that serves as the general partner of the RIMCO Parties (as
defined herein). Mr. McCollam serves as a director of the Company pursuant to
the 1991 agreement described below.
Stephen F. Oakes has been a director of the Company since 1994. Since 1996,
Mr. Oakes has served on the board of directors of Universal Seismic Associates,
Inc., a company engaged in the acquisition of seismic data and the exploration
and production of oil and gas. From 1989 to 1992, he served as managing director
of Robert Fleming, Inc., an investment banking company. Since 1992, he has been
associated with Resource Investors Management Company Limited Partnership, a
full service investment management company specializing in the energy industry
that serves as the general partner of the RIMCO Parties, serving as managing
director since 1993. Mr. Oakes serves as a director of the Company pursuant to
the 1994 Voting Agreement (as defined herein).
Lawrence C. Petrucci has been a director of the Company since March 1996.
Since 1991, Mr. Petrucci has served as vice president of First Albany
Corporation, a provider of investment banking, financial advisory and brokerage
services. From April 1990 through June 1991, Mr. Petrucci was a portfolio
manager with Westinghouse Credit Corporation, a financial services company. Mr.
Petrucci is a member of the Audit Committee.
In March 1996, the Company entered into a letter agreement that provided
Mr. Collins, a director of the Company at that time, with the right, upon his
departure from the Board of Directors prior to the Company's next Annual Meeting
of Shareholders, to designate a successor Board member, subject to the approval
of such successor by the Board of Directors. Mr. Banks was designated Mr.
Collins' successor to the Board pursuant to this letter agreement.
A Voting Agreement dated November 28, 1994 (the "1994 Voting Agreement")
among the RIMCO Parties, L.P., RIMCO Partners, L.P. II, RIMCO Partners, L.P.
III, and RIMCO Partners, L.P. IV (the "RIMCO Parties"), Triad Ventures Limited
II and Mr. Little provides that the parties to the 1994 Voting Agreement will
vote the shares of Common Stock held by them in favor of two nominees of the
RIMCO Parties to the Company's Board of Directors. The 1994 Voting Agreement
continues as long as the RIMCO
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<PAGE> 39
Parties own at least 10% of the issued and outstanding shares of Common Stock,
on a fully diluted basis. In addition, pursuant to a 1991 agreement, as long as
the RIMCO Parties own 5% of the issued and outstanding shares of Common Stock or
shares of Common Stock with a value of $500,000, the Company is required to use
its best efforts to elect Mr. McCollam (or a designee of the parent company of
the RIMCO Parties) to the Company's Board. Messrs. McCollam and Oakes were
reelected to the Board pursuant to these agreements. These agreements have been
terminated and superseded by a subsequent agreement. See "Certain Relationships
and Related Transactions."
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established standing Audit, Compensation and
Nominations Committees. The Audit Committee annually recommends to the Board the
appointment of independent certified public accountants as auditors for the
Company, discusses and reviews the scope of and fees for the prospective annual
audit and reviews the results with the auditors, reviews the Company's
compliance with its existing accounting and financial policies, reviews the
adequacy of the financial organization of the Company and considers comments by
the auditors regarding internal controls and accounting procedures and
management's response to those comments. The Audit Committee currently is
comprised of Messrs. Oakes and Petrucci. One vacancy exists on this committee.
The Compensation Committee reviews and make recommendations to the Board
regarding salaries, compensation and benefits of executive officers and
employees of the Company and administers the Company's 1995 Incentive Plan (the
"Incentive Plan"). The Compensation Committee currently is comprised of Messrs.
Bell, Lewis and McCollam.
The Nominations Committee is responsible for recommending to the Board
those persons who will be nominated as management's nominees for positions on
the Board. The Nominations Committee is currently comprised of Messrs. Little,
Greenwood and Banks.
COMPENSATION OF DIRECTORS
For the year ended March 31, 1996, the Company granted each of its
non-employee directors an option under the Incentive Plan to purchase 4,300
shares of Common Stock, at an exercise price per share of $7.44, which was
determined by the Board to be the fair market value of the Common Stock on the
date of grant, for his services as a director. Additionally, all directors were
reimbursed for their reasonable travel expenses incurred in attending meetings
of the Board. Commencing April 1, 1996, each non-employee director received, and
on each April 1 thereafter until and including April 1, 2003 will receive, an
annual grant of an option under the Incentive Plan to purchase 4,300 shares of
Common Stock with an exercise price per share equal to the fair market value of
the Common Stock on the date of grant and reimbursement of reasonable travel
expenses for attending Board or committee meetings. See "Management -- 1995
Incentive Plan."
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<PAGE> 40
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information for the year ended March
31, 1996 with respect to the compensation paid to the President and Chief
Executive Officer, Mr. Little, and the Vice President of Operations and Chief
Operating Officer, Mr. Eustace (collectively, the "Named Executive Officers").
No other executive officers of the Company received annual compensation
(including salary and bonuses earned) which exceeded $100,000 for the year ended
March 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION
------------------------------- ----------------------------
YEAR SECURITIES
ENDED UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION MARCH 31, SALARY BONUS OPTIONS COMPENSATION(2)
--------------------------- --------- -------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Michael E. Little.................. 1996 $150,000 $ 50,000(3) 51,600 --
President and Chief 241,000(4)
Executive Officer 1995 138,125 75,000 64,500 $500
1994 105,000 30,000
Joseph B. Eustace.................. 1996 96,200 20,000(3) 17,200 --
Vice President of Operations 24,000(4)
and Chief Operating Officer 1995 80,000 15,000 21,500 500
1994 80,000 12,000
</TABLE>
- ---------------
(1) The value of perquisites and personal benefits are excluded because the
aggregate amount thereof did not exceed the lesser of $50,000 or 10% of the
total annual salary and bonus reported for each Named Executive Officer.
(2) All other compensation consists entirely of employer contributions to the
Company's 401(k) Plan made by the Company in 1996 as a result of 1995
earnings.
(3) Bonuses are awarded annually in the discretion of the Compensation Committee
with respect to performance in the year indicated; the amount of the bonuses
is determined and paid in the following year.
(4) In the year ended March 31, 1996, in addition to standard bonuses, the Board
of Directors declared special bonuses in the amount of $241,000 for Mr.
Little and $24,000 for Mr. Eustace, each of whom exercised stock options and
incurred federal income tax liability in connection with such exercise.
STOCK OPTION GRANTS IN 1996
The following table shows information concerning individual grants of
options during the year ended March 31, 1996 to the Named Executive Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(1)
OPTIONS EMPLOYEES PRICE EXPIRATION -----------------------
NAME GRANTED IN YEAR ($/SHARE)(2) DATE 5% 10%
---- ---------- ---------- ------------ --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael E. Little(3)... 51,600 52% $7.44 October 6, 2005 $241,435 $611,844
Joseph B. Eustace(3)... 17,200 17% $7.44 October 6, 2005 $ 80,478 $203,948
</TABLE>
- ---------------
(1) The exercise price of the options represents the fair market value of the
Common Stock on the date of grant as determined by the Board of Directors.
Potential realizable values are based on the assumption that the Common
Stock will appreciate in value from the date of grant to the end of the
option terms at the stated annualized rates. Such assumed rates of
appreciation and potential realizable values are not necessarily indicative
of appreciation, if any, that may be realized in future periods.
(2) The exercise price of the option was set equal to the fair market value of
the Common Stock as determined by the Board of Directors on the date of
grant. In establishing the exercise price, the Board
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<PAGE> 41
considered recent sales of the Company's securities, and the terms and
conditions of such sales, the book value of the Company's outstanding shares
of Common Stock and the Company's financial performance at the time of such
grants.
(3) The options granted to Mr. Little and to Mr. Eustace become exercisable
annually and ratably over a three-year period, which began June 30, 1996.
STOCK OPTION EXERCISES AND HOLDINGS
The following table sets forth information concerning the exercise of stock
options during the year ended March 31, 1996, and the number and value of
unexercised stock options held as of the end of the year ended March 31, 1996,
by the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT YEAR OPTIONS AT YEAR
ACQUIRED VALUE END EXERCISABLE/ END EXERCISABLE/
NAME ON EXERCISE REALIZED(1) UNEXERCISABLE UNEXERCISABLE(1)
---- ----------- ----------- ---------------- --------------------
<S> <C> <C> <C> <C>
Michael E. Little.................... 33,681 $286,599 21,500/94,600 $131,150/$433,096
Joseph B. Eustace.................... 1,431 $ 15,054 7,310/31,390 $ 44,591/$143,491
</TABLE>
- ---------------
(1) In calculating the value realized and the value of unexercised in-the-money
options at year end, the Company used the closing price on March 31, 1996 of
$10.75 per share.
OUTSTANDING OPTIONS AND CERTAIN PRIOR EXERCISES
As of January 15, 1997, the Company had outstanding options granted under
the Incentive Plan to purchase 441,150 shares of Common Stock at prices ranging
from $7.44 to $12.25 per share, of which 84,574 were exercisable as of such
date. Of the total options granted pursuant to the Incentive Plan that were
outstanding as of January 15, 1997, Mr. Little held options to acquire 138,980
shares of Common Stock at prices of $7.44 and $11.375 per share, of which 17,200
were exercisable at a price of $7.44 per share, and Mr. Eustace held options to
acquire 80,720 shares of Common Stock at prices of $7.44 and $11.375 per share,
of which 5,736 were exercisable at a price of $7.44 per share.
As of January 15, 1997, the Company also had outstanding nonstatutory
options to purchase 107,500 shares of Common Stock, which were granted prior to
the adoption of the Incentive Plan. The exercise price per share of these
options is $4.65, with options to acquire 78,905 shares being exercisable as of
January 15, 1997. Of the total of such options outstanding as of such date, Mr.
Little held options to acquire 64,500 shares of Common Stock, of which 43,000
were exercisable, and Mr. Eustace held options to acquire 21,500 shares of
Common Stock, of which 14,405 were exercisable. Mr. Little exercised options in
February 1996 to acquire 32,250 shares of Common Stock at $2.33 per share.
Messrs. Little and Eustace each exercised options in March 1996 to acquire 1,431
shares of Common Stock at $0.23 per share.
In February 1996, the Company granted bonuses of an aggregate of
approximately $336,000 to certain current and former officers, directors and
employees who had exercised nonstatutory stock options and incurred federal
income tax liability in connection with such exercises. Of this amount, Mr.
Little received a bonus of approximately $241,000 and Mr. Eustace received a
bonus of approximately $24,000.
1995 INCENTIVE PLAN
The Incentive Plan was adopted by the Board of Directors and approved by
the shareholders in October 1995. A total of 537,500 shares of Common Stock have
been reserved for issuance pursuant to the Incentive Plan. The Incentive Plan
provides for the grant to employees, including officers of the Company, of
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), nonstatutory stock options, stock
appreciation rights and restricted shares of Common Stock (collectively, the
"Awards"). In addition, nonemployee directors (the "Outside Directors") and
consultants are eligible to receive nonstatutory stock options.
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<PAGE> 42
The Incentive Plan provides that Awards may be granted to employees
(including officers), consultants and directors of the Company and its majority
owned subsidiaries. The Incentive Plan is not a qualified deferred compensation
plan under Section 401(a) of the Code and is not subject to the provisions of
the Employee Retirement Income Security Act of 1974, as amended.
The Incentive Plan is required to be administered by the Board or by a
committee of the Board. The Incentive Plan is currently administered by the
Compensation Committee of the Board. Subject to special provisions relating to
Outside Directors, the Board or its designated committee selects the employees
to which Awards may be granted and the type of Award to be granted and
determines, as applicable, the number of shares to be subject to each Award, the
exercise price and the vesting. In making such determination, the Board or its
designated committee takes into account the employee's present and potential
contributions to the success of the Company and other relevant factors.
401(K) PLAN
The Company has adopted a defined contribution retirement plan which
complies with Section 401(k) of the Code (the "401(k) Plan"). Substantially all
employees with at least one year of continuous service are eligible to
participate and may contribute up to the lesser of $9,500 or 15% of their annual
compensation. The Board made no matching contributions for employee
contributions made in the year ended March 31, 1996, and has not made a decision
regarding matching contributions for employee contributions made in the year
ending March 31, 1997. Company contributions vest over a four-year period in
increments of 25% per year.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Little,
Eustace and Stark. Mr. Little's agreement is for a three-year term, which
commenced April 1, 1996, and provides for an annual base salary of $175,000 in
the first year, increasing to $200,000 in the second year and to $225,000 in the
third year. The agreement does not provide for a mandatory bonus, but the Board
of Directors may, in its discretion, award an annual bonus of up to 50% of Mr.
Little's compensation without regard to the special bonus described in the
footnotes to the Summary Compensation Table. If Mr. Little's employment is
terminated without cause in the first, second or third year of the agreement, he
will be entitled to severance compensation in an amount equal to his then
current annual base salary rate for 14, 15 or 16 months, respectively. If Mr.
Little's employment is terminated in connection with a change of control of the
Company (as defined in the employment agreement), he will be entitled to
severance compensation in an amount equal to three times his then current annual
base salary. If Mr. Little's employment is constructively terminated in
connection with a change of control of the Company, he will be entitled to
severance compensation in an amount equal to two times his then current base
salary.
Mr. Eustace's employment agreement is for a three-year term, which
commenced April 1, 1996, and provides for an annual base salary of $125,000 in
the first year, increasing to $132,500 in the second year and to $140,000 in the
third year. The Board of Directors may, in its discretion, award Mr. Eustace an
annual cash bonus without regard to the special bonus described in the footnotes
to the Summary Compensation Table. If Mr. Eustace's employment is terminated
without cause, he will be entitled to severance compensation in an amount equal
to his then current annual base salary rate. If Mr. Eustace's employment is
terminated in connection with a change of control of the Company (as defined in
the employment agreement), he will be entitled to severance compensation in an
amount equal to 1.5 times his then current annual base salary. If Mr. Eustace's
employment is constructively terminated in connection with a change of control
of the Company, he will be entitled to severance compensation in an amount equal
to his then current annual base salary.
Mr. Stark's employment agreement is for a two-year term, which commenced
April 1, 1996, and provides for an annual base salary of $80,000 in the first
year and $90,000 in the second year. The Board of Directors may, in its
discretion, award Mr. Stark an annual cash bonus. If Mr. Stark's employment is
terminated without cause in the first or second year of the agreement, he will
be entitled to severance compensation in an amount equal to one or two months'
salary, respectively, at his then current annual base salary rate. If
40
<PAGE> 43
Mr. Stark's employment is terminated in connection with a change of control of
the Company (as defined in the employment agreement), he will be entitled to
severance compensation in an amount equal to his then current annual base
salary. If Mr. Stark's employment is constructively terminated in connection
with a change of control of the Company, he will be entitled to severance
compensation in an amount equal to six months' salary at his then current annual
base salary rate.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1990, the Company issued 80,000 shares of Series A Preferred Stock for
$12.50 per share to Triad Ventures Limited II and NationsBanc Capital
Corporation. In connection with such issuance, Nueces received 800 shares of
Series A Preferred Stock from the Company as a portion of a finder's fee for
services rendered in negotiating the issuance of such stock. H.A. Abshier, a
director of the Company until June 1996, was a general partner of Triad II
Management Company, L.P., which is the general partner of Triad Ventures Limited
II. Mr. Greenwood, a director of the Company, is the sole shareholder of Nueces.
Holders of the Series A Preferred Stock elected, pursuant to their rights under
the Certificate of Designation of Series A Preferred Stock, to convert 20,200
shares of such stock into 86,860 shares of Common Stock, effective October 18,
1995. Pursuant to the Agreement for the Conversion of Securities dated November
1, 1995 (the "Conversion Agreement"), the remaining 60,600 shares of Series A
Preferred Stock converted into 260,580 shares of Common Stock effective February
19, 1996 (the conversion of all shares of Series A Preferred Stock to Common
Stock being referred to herein as the "Series A Preferred Stock Conversion
Transaction"). Purchasers under the Preferred Purchase Agreement were entitled
to appoint one person to the Board as long as they owned an aggregate of at
least 86,860 shares of Common Stock received on conversion of Series A Preferred
Stock. Mr. Abshier, who resigned as a director in June 1996, was elected to the
Board pursuant to this agreement. This agreement has subsequently been
terminated. Purchasers of the Series A Preferred Stock received certain
registration rights in connection with that transaction. See "Description of
Capital Stock -- Registration Rights."
In August 1992, the Company entered into an agreement (the "Nueces
Agreement") with Nueces, pursuant to which Nueces received a commission upon the
consummation by the Company of certain acquisition and financing transactions.
Mr. Greenwood, a director of the Company, is the sole shareholder of Nueces.
Pursuant to the Nueces Agreement, the Company paid Nueces $50,070, $25,416 and
$46,466 in the years ended March 31, 1996, 1995, and 1994, respectively. Of the
amount paid to Nueces in the year ended March 31, 1996, $34,000 was paid upon
the consummation of the IPO. In addition, Jefferies & Company, Inc. paid to
affiliates of Mr. Greenwood in the year ended March 31, 1995, a finder's fee of
$122,500 from the fee it received from the Company in connection with the Well
Solutions Acquisition. Mr. Greenwood has continued to provide consulting
services to the Company during the fiscal year ending March 31, 1997 and may
continue to do so in the future. See "Management -- Executive Officers and
Directors."
In November 1992, the Company and WellTech, Inc. ("WellTech") formed the
LLC by contributing their respective workover rig service businesses in the
Texas Gulf Coast area, for which the Company received a 61% interest and
WellTech received a 39% interest in the LLC. Effective November 1, 1995, the
Company acquired WellTech's 39% minority interest in the LLC in exchange for the
issuance of 1,329,495 shares of the Common Stock to WellTech. In connection with
the Minority Interest Acquisition, the Company granted certain registration
rights to WellTech. See "Description of Capital Stock -- Registration Rights."
The purchase price paid by the Company for WellTech's minority interest in the
LLC was a result of arms-length negotiation and reflected the illiquidity of the
minority interest, the lack of control over the LLC operations by the minority
interest holder and other factors deemed relevant by the parties. The Minority
Interest Acquisition benefitted the Company by removing the Company's need to
get consent of the minority interest holder on a number of issues, such as
borrowing money and making capital expenditures, and relieved the Company from
the obligation under a non-competition provision to conduct all of its well
servicing activities in South Texas only through the LLC. On February 16, 1996,
WellTech distributed its 1,329,495 shares of Common Stock to its shareholders
and directors (the "WellTech Distributees"). As long as the WellTech
Distributees own at least 20% of the issued and outstanding shares of Common
Stock, the WellTech Distributees are entitled to recommend five persons to the
Company's Board, two of whom will be nominated
41
<PAGE> 44
by the Company and recommended to the shareholders for election to the Board. As
long as the WellTech Distributees own less than 20% but more than 10% of the
issued and outstanding shares of Common Stock, the Company will nominate and
recommend to the shareholders from a list of persons recommended by the WellTech
Distributees one such person for election to the Board. Mr. Collins, a former
director of WellTech, was elected to the Board pursuant to this provision. This
right, and the right to contractual preemptive rights, terminated upon
consummation of the IPO.
On November 1, 1994, the Company loaned Mr. Little, Chairman of the Board,
President and Chief Executive Officer of the Company, $55,486, which amount
bears interest at 7.5% per annum, provides for annual payments of interest and
for one principal payment at the end of the six-year term of the note. The loan
was made to enable Mr. Little to acquire 33,699 shares of Common Stock and is
secured by those shares. The entire principal balance of such loan was
outstanding as of November 30, 1996. In February 1996, the Company loaned Mr.
Little $75,000, which amount bears interest at 7.5% per annum, provides for
annual payments of interest and for one principal payment at the end of the
six-year term of the note. This loan was made to enable Mr. Little to exercise
options to acquire 32,250 shares of Common Stock and is secured by those shares.
The entire principal balance of such loan was outstanding as of November 30,
1996. In addition, on November 1, 1994, the Company loaned Mr. Eustace, Vice
President of Operations and Chief Operating Officer of the Company, $11,392,
which amount bears interest at 7.5% per annum, provides for annual payments of
interest and for one principal payment at the end of the six-year term of the
note. The loan was made to enable Mr. Eustace to acquire 6,919 shares of Common
Stock and is secured by those shares. The entire principal balance on such loan
was outstanding as of November 30, 1996.
In November 1994, the Company consummated the Well Solutions Acquisition
for approximately $18.1 million. In connection with this transaction, and as
part of the purchase price, the Company issued to Well Solutions, Inc. a $1.5
million convertible debenture, which bears interest at 8% per annum and matures
November 30, 1999. The debenture is convertible at any time, at the option of
Well Solutions, Inc., into 37,634 shares of Common Stock (an effective
conversion price of $39.86 per share). If more or less than $1.5 million of
principal and accrued interest is outstanding under the debenture at the time of
such conversion, Well Solutions is entitled to a proportionately increased or
decreased amount of Common Stock. The Company does not currently intend to
prepay the debenture but may decide to do so in the future if interest rates
decline. In addition to this debenture, to consummate the Well Solutions
Acquisition, the Company utilized a portion of the $2.4 million received from
the issuance of subordinated debt and the $2.4 million received from the
issuance of 344,000 shares of Common Stock to RIMCO Partners, L.P. IV described
below, and a $13.0 million term loan to provide the funding required. The terms
upon which the Company issued the Common Stock and the subordinated debt are
further described below.
Also in November 1994, the Company issued $2.4 million of subordinated debt
to RIMCO Partners, L.P., RIMCO Partners, L.P. II, RIMCO Partners, L.P. III and
Triad Ventures Limited II. The subordinated debt bore interest at 10% per annum,
with a maturity date of December 1, 1999. Pursuant to the Conversion Agreement,
the subordinated debt converted into Common Stock at the rate of one share of
Common Stock for each $6.98 in principal amount of subordinated debt effective
February 19, 1996. In November 1994 and January 1995, RIMCO Partners, L.P. IV
purchased 344,000 shares of Common Stock at $6.98 per share. In addition, Triad
Ventures Limited II held a promissory note issued by the Company with a
principal balance of $75,000 and maturing June 27, 1997, which note converted,
in February 1996, into 12,900 shares of Common Stock (conversion of this debt
and the $2.4 million of subordinated debt being referred to herein as the "Debt
Conversion Transaction" and together with the Series A Preferred Stock
Conversion Transaction, the "Conversion Transactions"). The RIMCO Parties and
Triad Ventures Limited II received certain registration rights in connection
with that transaction. See "Description of Capital Stock -- Registration
Rights."
The Conversion Agreement was entered into, effective November 1, 1995,
among the RIMCO Parties, Triad Ventures Limited II, NationsBanc Capital
Corporation, Nueces and the Company, and provided that the parties to that
agreement would convert all shares of Series A Preferred Stock and the $2.4
million subordinated debt owned by such parties into Common Stock on the
earliest of March 31, 1996, the consummation by the Company of an initial public
offering or notice of the distribution by WellTech of the Common Stock it owned
to the WellTech Distributees, which notice was given on February 19, 1996.
42
<PAGE> 45
In 1990, the Company issued a promissory note to an unrelated party in
connection with an asset acquisition. The promissory note, which was acquired by
Triad Ventures Limited II, provided for conversion into Common Stock, at the
rate of one share of Common Stock for each $5.81 of principal due on the note,
at the discretion of Triad Ventures Limited II. In February 1996, Triad Ventures
Limited II converted the promissory note, which had a principal balance of
$75,000, into 12,900 shares of Common Stock.
Effective October 17, 1990, NationsBanc Capital Corporation, Triad Ventures
Limited II and Mr. Greenwood entered into a Voting Agreement (the "1990 Voting
Agreement") pursuant to which the parties agreed to vote the shares of Series A
Preferred Stock held by them, and any Common Stock into which such Series A
Preferred Stock is converted, in the manner directed by Triad Ventures Limited
II and NationsBanc Capital Corporation. Such voting agreement was terminated in
August 1996 by holders of two-thirds of the shares covered by the 1990 Voting
Agreement.
A voting agreement dated November 28, 1994 (the "1994 Voting Agreement")
among the RIMCO Parties, Triad Ventures Limited II and Michael E. Little
provided that the parties to the 1994 Voting Agreement would vote the shares of
Common Stock held by them in favor of two nominees of the RIMCO Parties to the
Board. The 1994 Voting Agreement continues as long as the RIMCO Parties own at
least 10% of the issued and outstanding shares of Common Stock, on a fully
diluted basis. Messrs. McCollam and Oakes were elected to serve on the Board
pursuant to a 1991 agreement and the 1994 Voting Agreement. See
"Management -- Directors and Executive Officers."
On November 21, 1996, the 1994 Voting Agreement and the 1990 Voting
Agreement were terminated concurrent with the execution by the Company of a new
voting agreement. Under the current agreement, the Company agrees to nominate
and seek to elect two nominees of the RIMCO Parties if they own an aggregate of
10% or more of the Company's outstanding Common Stock, one nominee if such
ownership is less than 10% but more than 5% and no nominees if such ownership is
less than 5%.
In March 1996, the Company entered into a letter agreement that provided
Mr. Collins, a director of the Company at that time, with the right, upon his
departure from the Board prior to the Company's next Annual Meeting of
Shareholders, to designate a successor Board member, subject to the approval of
such successor by the Board. Mr. Banks was designated Mr. Collins' successor to
the Board pursuant to this letter agreement.
Gene Little, the father of Michael E. Little, serves as an operations
consultant to the Company and received fees and expense reimbursements of
$63,857, $54,491 and $44,480 in the years ended March 31, 1996, 1995 and 1994,
respectively. Gene Little has continued to serve as an operations consultant for
the Company during the fiscal year ending March 31, 1997.
Jefferies & Company, Inc. has in the past provided investment banking
services to the Company and also acted as an underwriter in the IPO. Jefferies &
Company, Inc. performed investment banking services for the Company in
connection with the Well Solutions Acquisition in November 1994 for which
Jefferies & Company, Inc. received usual and customary fees in the amount of
$295,000. Jefferies & Company, Inc. paid to affiliates of Mr. Greenwood in the
year ended March 31, 1995, a finder's fee of $122,500 from the fee it received
from the Company in connection with the Well Solutions Acquisition. Jefferies &
Company, Inc. also has acted as financial advisor to the Company in connection
with the Pride Acquisition for which it will be paid a fee of approximately $1.2
million, and is being reimbursed for its reasonable out-of-pocket expenses in
connection therewith.
Jefferies & Company, Inc. is serving as one of the representatives of the
underwriters for purposes of the Equity Offering. The underwriters of the Equity
Offering will receive customary compensation for such underwriting consisting of
the underwriting discount.
43
<PAGE> 46
SECURITY OWNERSHIP OF MANAGEMENT
AND PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of January 15, 1997, and as adjusted to reflect
the sale of Common Stock in the Equity Offering, by (i) each director of the
Company, (ii) each Named Executive Officer, (iii) each person known or believed
by the Company to own beneficially 5% or more of the Common Stock, (iv) all
directors and executive officers as a group and (v) the Selling Shareholders.
Unless otherwise indicated, each person has sole voting and dispositive power
with respect to such shares.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
BEFORE THE EQUITY OFFERING(1) AFTER THE EQUITY OFFERING(1)
----------------------------- ----------------------------
SHARES OF SHARES TO SHARES OF
NAME OF BENEFICIAL OWNER COMMON STOCK PERCENT BE SOLD COMMON STOCK PERCENT
------------------------ -------------- ---------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Michael E. Little.................. 198,345(2) 3.1% -- 198,345(2) 2.0%
Russell Banks...................... 5,300(3) * -- 5,300(3) *
J. Michael Bell.................... 60,200(4) * -- 60,200(4) *
Joseph B. Eustace.................. 42,138(5) * -- 42,138(5) *
Wm. Ward Greenwood................. 21,804(6) * -- 21,804(6) *
Douglas D. Lewis................... 19,633(7) * -- 19,633(7) *
Paul E. McCollam................... 1,063,033(8) 16.6% -- 1,063,033(8) 10.7%
Stephen F. Oakes................... 1,058,733(9) 16.5% -- 1,058,733(9) 10.7%
Lawrence C. Petrucci............... 4,300(10) * -- 4,300(10) *
All executive officers and
directors as a group (9
persons)......................... 1,423,353(11) 22.3% -- 1,423,353(11) 14.2%
RIMCO Partners, L.P.
RIMCO Partners, L.P. II
RIMCO Partners, L.P. III
RIMCO Partners, L.P. IV.......... 1,050,133(12) 16.4% -- 1,050,133(11) 10.6%
Belmont Capital Partners II,
L.P.............................. 608,321(13) 10.0% 608,231 -- --
Fidelity Summer Street Trust:
Fidelity Capital & Income Fund... 117,536(14) 1.8% 117,536 -- --
Triad Ventures Limited II.......... 94,600 1.5% 94,600 -- --
Belmont Fund, L.P.................. 86,903(13) 1.4% 86,903 -- --
Boston Safe Deposit FBO 303
Virginia......................... 57,450(15) * 57,450 -- --
Atwell & Company FBO Detroit
Policeman/Fireman................ 47,713(15) * 47,713 -- --
Trussal & Company FBO MERS of
Michigan......................... 46,150(15) * 46,150 -- --
Ell & Company FBO NCR.............. 43,375(15) * 27,136 16,239 *
Lark & Company FBO Arkansas Teacher
Retirement....................... 39,050(15) * 39,050 -- --
Ell & Company FBO AT&T Corp........ 38,625(15) * 38,625 -- --
How & Company FBO Columbia
Healthcare....................... 12,650(15) * 12,650 -- --
NSCC FBO Pontiac Police/Fire
Department....................... 5,200(15) * 5,200 -- --
Topworks & Company FBO Montgomery
County Growth.................... 5,050(15) * 5,050 -- --
H. A. Abshier, Jr.................. 4,300 * 4,300 -- --
Boston Safe Deposit FBO Fairfax
County Public Schools............ 4,000(15) * 4,000 -- --
Ell & Company FBO Newell Co........ 2,250(15) * 2,250 -- --
</TABLE>
44
<PAGE> 47
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
BEFORE THE EQUITY OFFERING(1) AFTER THE EQUITY OFFERING(1)
----------------------------- ----------------------------
SHARES OF SHARES TO SHARES OF
NAME OF BENEFICIAL OWNER COMMON STOCK PERCENT BE SOLD COMMON STOCK PERCENT
------------------------ -------------- ---------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Bost. & Company FBO Bush
Foundation....................... 1,300(15) * 1,300 -- --
Iowa State University Foundation... 1,200(15) * 1,200 -- --
Salkeld & Company FBO Robinson
Co............................... 1,200(15) * 1,200 -- --
Siglar & Company FBO Marion Bradley
Glass via Part Trust............. 1,100(15) * 1,100 -- --
Siglar & Company FBO Marion Bradley
Glass Trust...................... 1,100(15) * 1,100 -- --
Pitt & Company FBO Tracor, Inc..... 850(15) * 850 -- --
MAC & Company FBO SEIU............. 750(15) * 750 -- --
NSCC FBO City of Pontiac General... 750(15) * 750 -- --
Arik Y. Prawer..................... 623 * 623 -- --
Pitt & Company FBO GCIU Employer... 500(15) * 500 -- --
Siglar & Company FBO Iron Workers.. 500(15) * 500 -- --
---------
1,206,807
=========
</TABLE>
- ---------------
* Less than 1%
(1) Shares of Common Stock that are not outstanding but that can be acquired by
a person within 60 days upon exercise of an option or similar right are
included in the number of shares beneficially owned and in computing the
percentage for such person but are not included in the number of shares
beneficially owned and in computing the percentage for any other person.
(2) Includes immediately exercisable options to purchase 60,200 shares of
Common Stock.
(3) Includes immediately exercisable options to purchase 4,300 shares of Common
Stock.
(4) Includes 43,000 shares owned by HixVen Partners, of which Mr. Bell, a
director of the Company, is the managing general partner, and with respect
to which shares he exercises sole voting and investment power. Also
includes immediately exercisable options for the purchase of 12,900 shares
of Common Stock, and 4,300 shares of Common Stock owned by Mr. Bell's wife
as to which Mr. Bell disclaims any beneficial ownership.
(5) Includes immediately exercisable options to purchase 20,141 shares of
Common Stock.
(6) Includes 4,081 shares held by Nueces, of which Mr. Greenwood is the sole
shareholder, and immediately exercisable options held by Mr. Greenwood to
purchase 12,900 shares of Common Stock.
(7) Includes immediately exercisable options to purchase 12,900 shares of
Common Stock.
(8) Includes 1,050,133 shares of Common Stock beneficially owned by the RIMCO
Parties and immediately exercisable options to purchase 12,900 shares of
Common Stock. Mr. McCollam intends to direct to the RIMCO Parties the
economic benefit of any options he has acquired in his capacity as a
director of the Company. Mr. McCollam's address is c/o RIMCO Associates,
Inc., 600 Travis Street, Suite 6875, Houston, Texas 77002.
(9) Includes 1,050,133 shares of Common Stock beneficially owned by the RIMCO
Parties and immediately exercisable options to purchase 8,600 shares of
Common Stock. Mr. Oakes intends to direct to the RIMCO Parties the economic
benefit of any options he has acquired in his capacity as a director of the
Company. Mr. Oakes' address is c/o RIMCO Associates, Inc., 22 Waterville
Road, Avon, Connecticut 06001.
(10) Represents immediately exercisable options to purchase shares of Common
Stock.
(11) Includes immediately exercisable options to purchase 149,141 shares of
Common Stock.
(12) The RIMCO Parties are limited partnerships; the general partner of each is
Resource Investors Management Company Limited Partnership, and its general
partner is RIMCO Associates, Inc. Their address is 22 Waterville Road,
Avon, Connecticut 06001. Voting and investment power over the shares held
by the RIMCO Parties is exercised by the managing directors of Resource
Investors Management Company Limited Partnership, and by the officers and
directors of RIMCO Associates, Inc. Messrs. McCollam and Oakes, directors
of the Company, are managing directors of Resource Investors Management
Company Limited Partnership. Does not include shares of Common Stock that
may be purchased by one or more affiliates of the RIMCO Parties in the
Equity Offering. See "Underwriting."
45
<PAGE> 48
(13) This is a private investment limited partnership which is managed by
Fidelity Management Trust Company ("FMTC"). FMTC is a wholly-owned
subsidiary of FMR Corp. ("FMR") and a bank as defined in Section 3(a)(6) of
the Exchange Act. FMR's address is 82 Devonshire, E20E, Boston,
Massachusetts 02109.
(14) The entity is either an investment company or a portfolio of an investment
company registered under Section 8 of the Investment Company Act of 1940,
as amended, or a private investment account advised by Fidelity Management
& Research Company ("FMR Co."). FMR Co. is an investment advisor registered
under Section 203 of the Investment Advisors Act of 1940, as amended, and
provides investment advisory services to the entity mentioned above, and to
other registered investment companies and to certain other funds which are
generally offered to a limited group of investors. FMR Co. is a
wholly-owned subsidiary of FMR.
(15) Represents shares owned of record by Kennedy Capital Management, held for
the benefit of the named Selling Shareholder. Kennedy Capital Management
will continue to be the record and beneficial owner of 16,239 shares of
Common Stock after the Equity Offering.
DESCRIPTION OF NOTES
GENERAL
The Notes will be issued under an indenture to be dated as of February ,
1997 (the "Indenture"), between the Company and U.S. Trust Company of Texas,
N.A., as trustee (the "Trustee"). The terms of the Notes include those stated in
the Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and the Trust Indenture Act for a statement thereof. The following summary of
certain provisions of the Indenture does not purport to be complete and is
qualified in its entirety by reference to the Indenture, including the
definitions therein of certain terms used below. A copy of the proposed form of
Indenture is available as set forth under "-- Available Information." The
definitions of certain terms used in the following summary are set forth below
under "-- Certain Definitions." As used below in this "Description of Notes,"
the "Company" means Dawson Production Services, Inc., but not any of its
Subsidiaries.
The Notes will rank senior in right of payment to all Subordinated
Indebtedness of the Company issued in the future, if any. The Notes will rank
pari passu in right of payment with all senior Indebtedness of the Company,
including borrowings under the Credit Facility or any future senior Indebtedness
of the Company. However, the Notes will be unsecured obligations of the Company
and the borrowings under (i) the Working Line are expected to be secured by
Liens on the accounts receivable and inventory of the Company and its
Subsidiaries and (ii) the Acquisition Line are expected to be secured by Liens
on assets of the Company and its Subsidiaries with a loan to collateral value
ratio of not less than 70%. As a result, the Indebtedness under the Credit
Facility or under future secured Indebtedness will effectively rank senior to
the Notes to the extent of the security therefor. The Notes will be
unconditionally guaranteed on a senior unsecured basis by the Subsidiary
Guarantors. See "-- Subsidiary Guarantees."
As of the date of the Indenture, all of the Company's Subsidiaries will be
Restricted Subsidiaries. Subject to the requirements of the Indenture, the
Company will be able to designate future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to the restrictive
covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited in aggregate principal amount to $130.0 million
and will mature on February 1, 2007. Interest on the Notes will accrue at the
rate of % per annum and will be payable semi-annually in arrears on
February 1 and August 1 commencing on August 1, 1997, to Holders of record on
the immediately preceding January 15 and July 15. Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of original issuance. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, and interest on the Notes will be payable at the
office or agency of the Company maintained for such purpose
46
<PAGE> 49
within the City and State of New York or in the case of Notes not in book-entry
form, at the option of the Company, payment of interest may be made by check
mailed to the Holders of the Notes at their respective addresses set forth in
the register of Holders of Notes; provided that all payments with respect to
Notes in book-entry form, and with respect to Notes in certificated form, the
Holders of which have given wire transfer instructions to the Company, will be
required to be made by wire transfer of immediately available funds to the
accounts specified by the Holders thereof. See "-- Book-Entry, Delivery and
Form." Until otherwise designated by the Company, the Company's office or agency
in New York will be the office of the Trustee maintained for such purpose. The
Notes will be issued in denominations of $1,000 and integral multiples thereof.
OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to February
1, 2002. Thereafter, the Notes will be subject to redemption at the option of
the Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest thereon to the applicable
redemption date, if redeemed during the 12-month period beginning on February 1,
of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002........................................................ %
2003........................................................ %
2004........................................................ %
2005 and thereafter......................................... 100.00%
</TABLE>
Notwithstanding the foregoing, at any time on or prior to February 1, 2000,
the Company may redeem up to an aggregate of $45.5 million principal amount of
Notes at a redemption price of % of the principal amount thereof, plus accrued
and unpaid interest thereon to the redemption date, with the net proceeds of a
Public Equity Offering; provided that at least $84.5 million in aggregate
principal amount of Notes remain outstanding immediately after the occurrence of
such redemption; and, provided, further, that such redemption shall occur within
60 days of the date of the closing of such Public Equity Offering.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee on a pro rata basis, by lot or
by such method as the Trustee shall deem fair and appropriate; provided that no
Notes of $1,000 or less shall be redeemed in part. Notices of redemption shall
be mailed by first class mail at least 30 but not more than 60 days before the
redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
ceases to accrue on Notes or portions of them called for redemption.
MANDATORY REDEMPTION
Except as set forth below under "-- Repurchase at the Option of Holders,"
the Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
SUBSIDIARY GUARANTEES
Each of the Company's Significant Subsidiaries on the Issue Date and each
other Restricted Subsidiary that provides a guarantee under the Credit Facility
will become a Subsidiary Guarantor under the Indenture. Upon consummation of the
Pride Acquisition, the principal entities acquired will become Subsidiary
Guarantors. Each Subsidiary Guarantor will unconditionally guarantee on a senior
basis, jointly and severally, the full and prompt performance of the Company's
obligations under the Indenture and the Notes, including the payment of
principal and interest on the Notes. The obligations of each Subsidiary
Guarantor under its
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<PAGE> 50
Subsidiary Guarantee will be limited to the maximum amount as will, after giving
effect to all other contingent and fixed liabilities of such Subsidiary
Guarantor and after giving effect to any collections from or payments made by or
on behalf of any other Subsidiary Guarantor in respect of the obligations of
such other Subsidiary Guarantor under its Subsidiary Guarantee or pursuant to
its contribution obligations under the Indenture, result in the obligations of
such Subsidiary Guarantor under the Subsidiary Guarantee not constituting a
fraudulent conveyance or fraudulent transfer under federal or state law. The
terms of the Subsidiary Guarantees will provide that, for purposes of such
limitations and the applicable fraudulent conveyance laws, any indebtedness of a
Subsidiary Guarantor incurred from time to time pursuant to the Credit Facility
and secured by a perfected Lien on the assets of such Subsidiary Guarantor
(assuming, for purposes of such determination, that the incurrence of any such
indebtedness and the granting of any such security interest did not violate any
such fraudulent conveyance laws) shall be deemed, to the extent of the value of
the assets subject to such Lien, to have been incurred prior to the incurrence
by such Subsidiary Guarantor of liability under its Subsidiary Guarantee. See
"Risk Factors -- Fraudulent Conveyance."
The Indenture will provide that no Subsidiary Guarantor may consolidate
with or merge with or into (whether or not such Subsidiary Guarantor is the
surviving Person) another Person (other than the Company or another Subsidiary
Guarantor), whether or not affiliated with such Subsidiary Guarantor, unless (i)
subject to the provisions of the following paragraph, the Person formed by or
surviving any such consolidation or merger (if other than such Subsidiary
Guarantor) shall execute a Subsidiary Guarantee and deliver an opinion of
counsel in accordance with the terms of the Indenture; (ii) immediately after
giving effect to such transaction, no Default or Event of Default exists; (iii)
such Subsidiary Guarantor, or any Person formed by or surviving any such
consolidation or merger, would have Consolidated Net Worth (immediately after
giving effect to such transaction), equal to or greater than the Consolidated
Net Worth of such Subsidiary Guarantor immediately preceding the transaction;
(iv) the Company would be permitted by virtue of the Company's pro forma Fixed
Charge Coverage Ratio, immediately after giving effect to such transaction, to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the covenant described below under the caption
"-- Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred
Stock;" and (v) such transaction does not violate any of the covenants described
under "-- Certain Covenants."
The Indenture will provide that in the event of (i) the designation of any
Subsidiary Guarantor as an Unrestricted Subsidiary or (ii) a sale or other
disposition of all or substantially all of the properties or assets of any
Subsidiary Guarantor to a third party or an Unrestricted Subsidiary, by way of
merger, consolidation or otherwise, or a sale or other disposition of all of the
capital stock of any Subsidiary Guarantor, in either case, in a transaction or
manner that does not violate any of the covenants in the Indenture, then such
Subsidiary Guarantor (in the event of such a designation or a sale or other
disposition, by way of such a merger, consolidation or otherwise, of all of the
capital stock of such Subsidiary Guarantor) or the Person acquiring the property
(in the event of a sale or other disposition of all or substantially all of the
properties or assets of such Subsidiary Guarantor) will be released from and
relieved of any obligations under its Subsidiary Guarantee, provided that any
Net Proceeds of such sale or other disposition are applied in accordance with
the covenant described under the caption "-- Repurchase at the Option of
Holders -- Asset Sales," and provided, further, however, that any such
termination shall occur only to the extent that all obligations of such
Subsidiary Guarantor under all of its guarantees of, and under all of its
pledges of assets or other security interests that secure, any other
Indebtedness of the Company or its Restricted Subsidiaries shall also terminate
upon such release, sale or disposition.
The Indenture will provide that (i) if the Company or any of its Restricted
Subsidiaries shall, after the Issue Date, (a) transfer or cause to be
transferred, any assets, businesses, divisions, real property or equipment
having an aggregate fair market or book value in excess of $1.0 million to any
Restricted Subsidiary that is not a Subsidiary Guarantor or (b) make any
Investment having an aggregate fair market or book value in excess of $1.0
million in any Restricted Subsidiary that is not a Subsidiary Guarantor or (ii)
if, after the Issue Date, any Restricted Subsidiary that is not a Subsidiary
Guarantor shall own any assets or properties having an aggregate fair market or
book value in excess of $1.0 million, then the Company shall cause such
Restricted Subsidiary to execute a Subsidiary Guarantee and deliver an opinion
of counsel, in accordance with the terms
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<PAGE> 51
of the Indenture. In addition, the Company shall not permit any of its
Restricted Subsidiaries, other than a Subsidiary Guarantor, directly or
indirectly, to (i) incur, guarantee or secure through the granting of Liens the
payment of any Indebtedness of the Company or (ii) pledge any intercompany notes
representing obligations of any of its Restricted Subsidiaries to secure the
payment of any Indebtedness of the Company, in each case, unless the Company
shall cause such Restricted Subsidiary to execute a Subsidiary Guarantee and
deliver an opinion of counsel in advance in accordance with the terms of the
Indenture.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes on a Business Day (the
"Change of Control Payment Date") not more than 70 nor less than 30 days
following such Change of Control, pursuant to the offer described below (the
"Change of Control Offer") at an offer price in cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest thereon to
the date of purchase (the "Change of Control Payment").
Within 30 days following any Change of Control, the Company will mail a
notice to each Holder describing the transaction or transactions that constitute
the Change of Control and offering to repurchase all of the Notes then
outstanding pursuant to the procedures required by the Indenture and described
in such notice. The Company will comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and regulations thereunder
to the extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of a Change of Control. The Change of
Control Offer is required to remain open for at least 20 Business Days and until
the close of business on the fifth Business Day prior to the Change of Control
Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
The occurrence of a Change of Control may result in a default under the
Credit Facility and give the lenders thereunder the right to require the Company
to repay all Indebtedness outstanding thereunder. There can be no assurance that
the Company will have available funds sufficient to repay all Indebtedness owing
under the Credit Facility or to fund the repurchase of the Notes upon a Change
of Control. In the event a Change of Control occurs at a time when the Company
does not have available funds sufficient to pay for all of the Notes delivered
by Holders seeking to accept the Company's repurchase offer, an Event of Default
would occur under the Indenture.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of Notes to require the Company to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
Asset Sales
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, engage in an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case
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<PAGE> 52
may be) receives consideration at the time of such Asset Sale at least equal to
the fair market value (evidenced by a resolution of the Board of Directors set
forth in an Officers' Certificate delivered to the Trustee) of the assets or
Equity Interests issued or sold or otherwise disposed of and (ii) at least 75%
of the consideration therefor received by the Company or such Restricted
Subsidiary is in the form of cash or Cash Equivalents; provided that the amount
of (x) any liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet) of the Company or any Restricted
Subsidiary (other than contingent liabilities and liabilities that are
Subordinated Indebtedness or otherwise by their terms subordinated to the Notes
or the Subsidiary Guarantees) that are assumed by the transferee of any such
assets pursuant to a novation agreement that releases the Company or such
Restricted Subsidiary from further liability and (y) any notes or other
obligations received by the Company or any such Restricted Subsidiary from such
transferee that are converted by the Company or such Restricted Subsidiary into
cash within 180 days of closing such Asset Sale (to the extent of the cash
received), shall be deemed to be cash for purposes of this provision.
Within 365 days after the receipt of any Net Proceeds from any Asset Sale,
the Company may (i) apply all or any of the Net Proceeds therefrom to repay
Indebtedness (other than Subordinated Indebtedness) of the Company or any
Restricted Subsidiary, provided, in each case, that the related loan commitment
of any revolving credit facility or other borrowing (if any) is thereby
permanently reduced by the amount of such Indebtedness so repaid or (ii) invest
all or any part of the Net Proceeds thereof in properties and other capital
assets that replace the properties or other capital assets that were the subject
of such Asset Sale or in other properties or other capital assets that will be
used in the business of the Company and its Restricted Subsidiaries or in
entities engaged in such business, subject in such latter instance to the
obligations set out in the Indenture to become a Subsidiary Guarantor or
Restricted Subsidiary, as applicable. Pending the final application of any such
Net Proceeds, the Company may temporarily reduce borrowings under any revolving
credit facility or otherwise invest such Net Proceeds in any manner that is not
prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not
applied or invested as provided in the first sentence of this paragraph will be
deemed to constitute "Excess Proceeds." When the aggregate amount of Excess
Proceeds equals or exceeds $15.0 million, the Company will be required to make
an offer to all holders of Notes (an "Asset Sale Offer") to purchase the maximum
principal amount of Notes that may be purchased out of the Excess Proceeds at an
offer price in cash in an amount equal to 100% of the principal amount thereof
plus accrued and unpaid interest thereon to the date of purchase in accordance
with the procedures set forth in the Indenture. To the extent that the aggregate
amount of Notes tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Company may use any remaining Excess Proceeds for general
corporate purposes. If the aggregate principal amount of Notes surrendered by
Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select
the Notes to be purchased on a pro rata basis. Upon completion of such Asset
Sale Offer, the amount of Excess Proceeds shall be reset at zero.
The Company will not permit any Restricted Subsidiary to enter into or
suffer to exist any agreement that would place any restriction of any kind
(other than pursuant to law or regulation) on the ability of the Company to make
an Asset Sale Offer following any Asset Sale. The Company will comply with Rule
14e-1 under the Exchange Act, and any other securities laws and regulations
thereunder, if applicable, in the event that an Asset Sale occurs and the
Company is required to make an Asset Sale Offer.
CERTAIN COVENANTS
Restricted Payments
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or
pay any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (including,
without limitation, any payment in connection with any merger or consolidation
involving the Company) or to the direct or indirect holders of the Company's
Equity Interests in their capacity as such (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of the
Company or dividends or distributions payable to the Company or any Wholly Owned
Restricted Subsidiary of the Company); (ii) purchase, redeem or otherwise
acquire or retire for value any Equity Interests of the Company or any
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<PAGE> 53
Affiliate of the Company (other than (A) any such Equity Interests owned by the
Company or any Wholly Owned Restricted Subsidiary of the Company that is a
Subsidiary Guarantor and (B) Employee Stock Repurchases); (iii) make any
principal payment on, or purchase, redeem, defease or otherwise acquire or
retire for value any Subordinated Indebtedness (other than $3.75 million of
Subordinated Indebtedness which is Existing Indebtedness, provided that such
Subordinated Indebtedness is redeemed or repaid at or below par), except in
accordance with the mandatory redemption or repayment provisions set forth in
the documentation governing such Indebtedness or (iv) make any Restricted
Investment (all such payments and other actions set forth in clauses (i) through
(iv) above being collectively referred to as "Restricted Payments"), unless, at
the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness (in addition
to Permitted Indebtedness) pursuant to the Fixed Charge Coverage Ratio test
set forth in the first paragraph of the covenant described below under the
caption "Incurrence of Indebtedness and Issuance of Preferred Stock;" and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the Issue Date (excluding Restricted Payments permitted by clauses
(x) and (y) of the next succeeding paragraph, but including the Restricted
Payment permitted by clause (z) of the next succeeding paragraph), is less
than the sum of (i) 50% of the Consolidated Net Income of the Company for
the period (taken as one accounting period) from the beginning of the first
quarter commencing after the Issue Date to the end of the Company's most
recently ended quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate Net Equity Proceeds (A) received by the Company
from the issue or sale, subsequent to the Issue Date, of Qualified Capital
Stock of the Company or (B) of any other Equity Interests or debt
securities of the Company that have been issued subsequent to the Issue
Date and that have been converted into such Qualified Capital Stock (other
than any Qualified Capital Stock sold to a Restricted Subsidiary of the
Company) plus (iii) to the extent not otherwise included in Consolidated
Net Income, the net reduction in Investments in Unrestricted Subsidiaries
resulting from dividends, repayments of loans or advances, or other
transfers of assets, in each case to the Company or a Restricted Subsidiary
after the Issue Date from any Unrestricted Subsidiary or from the
redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary
(valued as provided below), plus (iv) $10.0 million.
The foregoing provisions will not prohibit any of the following: (w) the
payment of any dividend within 60 days after the date of declaration thereof, if
at said date of declaration such payment would have complied with the provisions
of the Indenture; (x) the redemption, repurchase, retirement or other
acquisition of any Equity Interests of the Company in exchange for, or out of
the Net Equity Proceeds of, the substantially concurrent sale (other than to a
Restricted Subsidiary of the Company) of Qualified Capital Stock of the Company
(other than any Disqualified Stock); provided that the amount of any such Net
Equity Proceeds that are utilized for any such redemption, repurchase,
retirement or other acquisition shall be excluded from clause (c)(ii) of the
preceding paragraph and (y) the defeasance, redemption or repurchase of
Subordinated Indebtedness with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness or the substantially concurrent sale (other
than to a Restricted Subsidiary of the Company) of Qualified Capital Stock of
the Company; provided that the amount of any such net cash proceeds that are
utilized for any such redemption, repurchase, retirement or other acquisition
shall be excluded from clause (c)(ii) of the preceding paragraph.
For purposes of the foregoing provisions, the amount of any Restricted
Payment (other than cash) shall be the fair market value (evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) on the date of the Restricted Payment of the asset(s)
proposed to be
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<PAGE> 54
transferred by the Company or such Restricted Subsidiary, as the case may be,
pursuant to the Restricted Payment. Not later than five days following the date
of making any Restricted Payment, the Company shall deliver to the Trustee an
Officers' Certificate stating that such Restricted Payment is permitted and
setting forth the basis upon which the calculations required by this "Restricted
Payments" covenant were computed, which calculations may be based upon the
Company's latest available financial statements.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would be permitted by the provisions
of this "Restricted Payments" covenant and if such Restricted Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary. For purposes of
making such determination, all outstanding Investments by the Company and its
Restricted Subsidiaries (except to the extent repaid in cash prior to such
designation) in the Restricted Subsidiary so designated will be deemed to be
Restricted Payments at the time of such designation and will reduce the amount
available for Restricted Payments under paragraph (c) of this covenant. All such
outstanding Investments will be deemed to constitute Investments in an amount
equal to the Fair Market Value of such Investments at the time of such
designation.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Indebtedness but excluding any Permitted
Indebtedness) and that the Company will not issue any Disqualified Stock and
will not permit any of its Restricted Subsidiaries to issue any shares of
preferred stock; provided, however, that the Company may incur Indebtedness
(including Acquired Indebtedness) or issue shares of Disqualified Stock, and any
Restricted Subsidiary may incur Indebtedness (including Acquired Indebtedness),
if the Fixed Charge Coverage Ratio for the Company's most recently ended four
full fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is incurred
or such Disqualified Stock is issued would have been at least (i) 2.0 to 1.0 if
such date occurs on or after the Issue Date and on or prior to March 31, 1998,
or (ii) 2.25 to 1.0 if such date occurs after March 31, 1998, determined on a
pro forma basis (including a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Stock had been issued, as the case may be, at the beginning of such
four-quarter period.
The Indenture will also provide that neither the Company nor any Subsidiary
Guarantor will, directly or indirectly, in any event incur any Indebtedness that
by its terms (or by the terms of any agreement governing such Indebtedness) is
subordinated to any other Indebtedness of the Company or such Subsidiary
Guarantor, as the case may be, unless such Indebtedness is also by its terms (or
by the terms of any agreement governing such Indebtedness) made expressly
subordinate to the Notes or the Subsidiary Guarantee of such Subsidiary
Guarantor, as the case may be, to the same extent and in the same manner as such
Indebtedness is subordinated pursuant to subordination provisions that are most
favorable to the holders of any other Indebtedness of the Company or such
Subsidiary Guarantor, as the case may be.
Liens
The Indenture will provide that the Company will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, create, incur, assume,
affirm or suffer to exist or become effective any Lien of any kind, except for
Permitted Liens, upon any of their respective property or assets, whether now
owned or acquired after the Issue Date, or any income, profits or proceeds
therefrom, to secure (a) any Indebtedness of the Company or such Restricted
Subsidiary (if it is not also a Subsidiary Guarantor), unless prior to, or
contemporaneously therewith, the Notes are equally and ratably secured or (b)
any Indebtedness of any Subsidiary Guarantor, unless prior to, or
contemporaneously therewith, the Subsidiary Guarantees are equally and ratably
secured; provided, however, that if such Indebtedness is expressly subordinated
to the Notes or the Subsidiary Guarantees, the Lien securing such Indebtedness
will be subordinated and junior to the Lien securing the Notes or the Subsidiary
Guarantees, as the case may be, with the same relative priority as such
Indebtedness has with respect to the Notes or the Subsidiary Guarantees. The
foregoing covenant will not
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apply to any Lien securing Acquired Indebtedness, provided that any such Lien
extends only to the property or assets that were subject to such Lien prior to
the related acquisition by the Company or such Restricted Subsidiary and was not
created, incurred or assumed in contemplation of such transaction. The
incurrence of additional secured Indebtedness by the Company and its Restricted
Subsidiaries is subject to further limitations on the incurrence of Indebtedness
as described under "-- Incurrence of Indebtedness and Issuance of Preferred
Stock."
Sale-and-Leaseback Transactions
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, enter into any sale-and-leaseback
transaction; provided that the Company or any Restricted Subsidiary, as
applicable, may enter into a sale-and-leaseback transaction if (i) the Company
could have (a) incurred Indebtedness in an amount equal to the Attributable
Indebtedness relating to such sale-and-leaseback transaction pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "-- Incurrence of Additional
Indebtedness and Issuance of Preferred Stock" and (b) incurred a Lien to secure
such Indebtedness pursuant to the covenant described above under the caption
"-- Liens," (ii) the gross cash proceeds of such sale-and-leaseback transaction
are at least equal to the fair market value (as determined in good faith by the
Board of Directors and set forth in an Officers' Certificate delivered to the
Trustee) of the property that is the subject of such sale-and-leaseback
transaction and (iii) the transfer of assets in such sale-and-leaseback
transaction is permitted by, and the Company applies the proceeds of such
transaction in compliance with, the covenant described above under the caption
"-- Repurchase at the Option of Holders -- Asset Sales."
Transactions with Affiliates
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, (a) sell, lease, transfer or otherwise
dispose of any of its properties, assets or securities to, (b) purchase or lease
any property, assets or securities from, (c) make any Investment in or (d) enter
into or suffer to exist any other transaction or series of related transactions
with, or for the benefit of, any Affiliate of the Company unless (i) such
transaction or series of transactions is on terms that are no less favorable to
the Company or such Restricted Subsidiary, as the case may be, than those that
would be available in a comparable arm's length transaction with an unrelated
third party, (ii) with respect to any one transaction or series of related
transactions involving aggregate payments in excess of $1.0 million, the Company
delivers an Officers' Certificate to the Trustee certifying that such
transaction or series of related transactions complies with clause (i) above,
and (iii) with respect to a transaction or series of related transactions
involving payments in excess of $10.0 million, the Company delivers an Officers'
Certificate to the Trustee certifying that (A) such transaction or series of
related transactions complies with clause (i) above and (B) such transaction or
series of related transactions has been approved by a majority of the
Disinterested Directors of the Company; provided, however, that the foregoing
restriction shall not apply to (u) any arrangements in effect on the Issue Date,
(v) transactions between or among the Company and its Wholly Owned Restricted
Subsidiaries, (w) loans or advances to officers, directors and employees of the
Company or any Restricted Subsidiary made in the ordinary course of business and
consistent with past practices of the Company and its Restricted Subsidiaries in
an aggregate amount not to exceed $1.0 million outstanding at any one time, (x)
indemnities of officers, directors and employees of the Company or any
Restricted Subsidiary permitted by bylaw or statutory provisions, (y) the
payment of reasonable and customary regular fees to directors of the Company or
any of its Restricted Subsidiaries who are not employees of the Company or any
Affiliate and (z) the Company's employee compensation and other benefit
arrangements.
Issuances and Sales of Capital Stock of Wholly Owned Subsidiaries
The Indenture will provide that the Company (i) will not, and will not
permit any Wholly Owned Restricted Subsidiary of the Company to, transfer,
convey, sell or otherwise dispose of any Capital Stock of any Wholly Owned
Restricted Subsidiary of the Company to any Person (other than the Company or a
Wholly Owned Restricted Subsidiary of the Company), unless (a) such transfer,
conveyance, sale or other
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disposition is of all the Capital Stock of such Wholly Owned Restricted
Subsidiary and (b) the cash Net Proceeds from such transfer, conveyance, sale or
other disposition are applied in accordance with the covenant described above
under the caption "-- Repurchase at the Option of Holders -- Asset Sales," and
(ii) will not permit any Wholly Owned Restricted Subsidiary of the Company to
issue any of its Equity Interests to any Person other than to the Company or a
Wholly Owned Restricted Subsidiary of the Company; except, in the case of both
clauses (i) and (ii) above, with respect to dispositions or issuances by a
Wholly Owned Restricted Subsidiary of the Company as contemplated in clauses (i)
and (ii) of the definition of "Wholly Owned Restricted Subsidiary."
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (i) (a) pay dividends
or make any other distributions to the Company or any of its Restricted
Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest
or participation in, or measured by, its profits or (b) pay any indebtedness
owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or
advances to the Company or any of its Restricted Subsidiaries or (iii) transfer
any of its properties or assets to the Company or any of its Restricted
Subsidiaries, except for such encumbrances or restrictions existing under or by
reason of (r) Existing Indebtedness as in effect on the date of the Indenture,
(s) the Credit Facility as in effect as of the date of the Indenture, and any
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings thereof, provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacement or refinancings are no more restrictive with respect to such
dividend and other payment restrictions than those contained in the Credit
Facility as in effect on the date of the Indenture, (t) the Indenture and the
Notes, (u) applicable law, (v) any instrument governing Indebtedness or Capital
Stock of a Person acquired by the Company or any of its Restricted Subsidiaries
as in effect at the time of such acquisition (except to the extent such
Indebtedness was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, provided that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the Indenture to
be incurred, (w) by reason of customary nonassignment provisions in leases
entered into in the ordinary course of business and customary provisions in
other agreements that restrict assignment of such agreements or rights
thereunder, (x) customary restrictions contained in asset sale agreements
limiting the transfer of such assets pending the closing of such sale, (y)
purchase money obligations for property acquired in the ordinary course of
business that impose restrictions of the nature described in clause (iii) above
on the property so acquired or (z) Permitted Refinancing Indebtedness with
respect to any indebtedness referred to in clauses (r), (t) and (v) above,
provided that the restrictions contained in the agreements governing such
Permitted Refinancing Indebtedness are no more restrictive than those contained
in the agreements governing the Indebtedness being refinanced.
Merger, Consolidation or Sale of Assets
The Indenture will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
Person unless (i) the Company is the surviving corporation or the Person formed
by or surviving any such consolidation or merger (if other than the Company) or
to which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the Person to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made assumes all the obligations
of the Company under the Notes and the Indenture pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee; (iii) except in the
case of a merger of the Company with or into a Wholly Owned Subsidiary of the
Company, immediately after such transaction no Default or Event of Default
exists, and (iv) except in the case of a
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merger of the Company with or into a Wholly Owned Subsidiary of the Company, the
Company or the Person formed by or surviving any such consolidation or merger
(if other than the Company), or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made (A) will have Consolidated
Net Worth immediately after the transaction equal to or greater than the
Consolidated Net Worth of the Company immediately preceding the transaction and
(B) will, at the time of such transaction and after giving pro forma effect
thereto as if such transaction had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of additional
Indebtedness (in addition to Permitted Indebtedness) pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described above under the caption "-- Incurrence of Indebtedness and Issuance of
Preferred Stock."
Business Activities
The Indenture will provide that the Company will not, and will not permit
any Restricted Subsidiary to, engage in any business other than (i) the Oil
Service Business, (ii) such other businesses as the Company or its Restricted
Subsidiaries are engaged in on the Issue Date and (iii) such other business
activities as are reasonably related or incidental thereto.
REPORTS
The Indenture will provide that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Holders of Notes (i) either the actual Forms 10-Q and 10-K
filed with the Commission, or all quarterly and annual financial information
that would be required to be contained in a filing with the Commission on Forms
10-Q and 10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that describes the consolidated financial condition and results of
operations of the Company and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (ii)
either any actual Form 8-K filed with the Commission or all information that
would be required to be contained in a filing with the Commission on Form 8-K if
the Company were required to file such Form. In addition, whether or not
required by the rules and regulations of the Commission, the Company will file a
copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest on the
Notes; (ii) default in payment when due of the principal of or premium, if any,
on the Notes; (iii) failure by the Company to comply with the provisions
described under the caption "-- Repurchase at the Option of Holders" or
"-- Certain Covenants -- Merger, Consolidation or Sale of Assets;" (iv) failure
by the Company for 45 days after notice to comply with any of its other
agreements in the Indenture or the Notes; (v) default under any mortgage,
indenture or instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness for money borrowed by the Company or any
of its Restricted Subsidiaries (or the payment of which is guaranteed by the
Company or any of its Restricted Subsidiaries) whether such Indebtedness or
guarantee now exists, or is created after the date of the Indenture, which
default (A) is caused by a failure to pay principal of or premium, if any, or
interest on such Indebtedness prior to the expiration of the grace period
provided in such Indebtedness on the date of such default (a "Payment Default")
or (B) results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under which
there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $5.0 million or more for any single Indebtedness or a
total of $10.0 million or more for all such Indebtedness and provided, further,
that if any such default is cured or waived or any such acceleration rescinded,
or such Indebtedness is repaid, within a period of 10 days from the continuation
of such default beyond the applicable grace period or the occurrence of such
acceleration, as the case may be, such Event of Default under the Indenture and
any consequential
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acceleration of the Notes shall be automatically rescinded, so long as such
rescission does not conflict with any judgment or decree; (vi) failure by the
Company or any of its Subsidiaries to pay final judgments aggregating in excess
of $5.0 million, which judgments are not paid, discharged or stayed for a period
of 60 days; (vii) any Subsidiary Guarantee shall for any reason cease to be, or
be asserted by the Company or any Subsidiary Guarantor, as applicable, not to
be, in full force and effect (except pursuant to the release of any Subsidiary
Guarantee in accordance with the Indenture) and (viii) certain events of
bankruptcy or insolvency with respect to the Company or any of its Restricted
Subsidiaries that constitute a Significant Subsidiary or any group of Restricted
Subsidiaries that, taken together, would constitute a Significant Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in aggregate principal amount of the then outstanding
Notes may declare all the Notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to the Company, any
Restricted Subsidiary that constitutes a Significant Subsidiary or any group of
Restricted Subsidiaries that, taken together, would constitute a Significant
Subsidiary, all outstanding Notes will become due and payable without further
action or notice. Holders of the Notes may not enforce the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitations,
Holders of a majority in aggregate principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from Holders of the Notes notice of any continuing Default or Event
of Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
No director, officer, employee, incorporator or shareholder of the Company
or any Subsidiary Guarantor, as such, shall have any liability for any
obligations of the Company or such Subsidiary Guarantor under the Notes, the
Indenture or the Subsidiary Guarantees, as the case may be, or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each Holder of Notes by accepting a Note waives and releases all such liability.
The waiver and release are part of the consideration for issuance of the Notes
and the Subsidiary Guarantees. Such waiver may not be effective to waive
liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of the
obligations of itself and the Subsidiary Guarantors discharged with respect to
the outstanding Notes ("Legal Defeasance") except for (i) the rights of Holders
of outstanding Notes to receive payments in respect of the principal of,
premium, if any, and interest on such Notes when such payments are due from the
trust referred to below, (ii) the Company's obligations with respect to the
Notes concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights, powers,
trusts, duties and immunities of the Trustee, and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment,
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bankruptcy, receivership, rehabilitation and insolvency events) described under
the caption "-- Events of Default and Remedies" will no longer constitute an
Event of Default with respect to the Notes.
To exercise either Legal Defeasance or Covenant Defeasance, (i) the Company
must irrevocably deposit with the Trustee, in trust, for the benefit of the
Holders of the Notes, cash in U.S. dollars, non-callable Government Securities,
or a combination thereof, in such amounts as will be sufficient, in the opinion
of a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the outstanding Notes on the
stated maturity or on the applicable redemption date, as the case may be, and
the Company must specify whether the Notes are being defeased to maturity or to
a particular redemption date; (ii) in the case of Legal Defeasance, the Company
shall have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred; (iii) in the
case of Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under, any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company must have delivered to the Trustee an opinion of counsel
to the effect that after the 91st day following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (vii) the
Company must deliver to the Trustee an Officers' Certificate stating that the
deposit was not made by the Company with the intent of preferring the Holders of
Notes over the other creditors of the Company with the intent of defeating,
hindering, delaying or defrauding creditors of the Company or others and (viii)
the Company must deliver to the Trustee an Officers' Certificate and an opinion
of counsel, which, taken together, state that all conditions precedent provided
for relating to the Legal Defeasance or the Covenant Defeasance have been
complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in aggregate principal amount of the Notes then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in aggregate principal
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amount of the then outstanding Notes (including consents obtained in connection
with a tender offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver; (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption
"-- Repurchase at the Option of Holders"); (iii) reduce the rate of or change
the time for payment of interest on any Note; (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration); (v) make any Note payable
in money other than that stated in the Notes; (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or the rights
of Holders of Notes to receive payments of principal of or premium, if any, or
interest on the Notes; (vii) waive a redemption payment with respect to any Note
(other than a payment required by one of the covenants described above under the
caption "-- Repurchase at the Option of Holders"); (viii) alter the ranking of
the Notes relative to other Indebtedness of the Company or (ix) make any change
in the foregoing amendment and waiver provisions. In addition, without the
consent of Holders of not less than 66 2/3% in aggregate principal amount of the
Notes then outstanding, no such amendment, supplement or waiver may amend,
change or modify the obligation of the Company to make and consummate a Change
of Control Offer in the event of a Change of Control or make and consummate an
Asset Sale Offer with respect to any Asset Sale or modify any of the provisions
or definitions with respect thereto.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to (i) cure any ambiguity, defect or inconsistency, (ii) provide for
uncertificated Notes in addition to or in place of certificated Notes, (iii)
provide for the assumption of the Company's obligations to Holders of Notes in
the case of a merger or consolidation, (iv) make any change that would provide
any additional rights or benefits to the Holders of Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, (v)
secure the Notes pursuant to the requirements of the "Liens" covenant or
otherwise or (vi) comply with requirements of the Commission to effect or
maintain the qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in aggregate principal amount of the then
outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured), the Trustee will be required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any Holder of Notes, unless such Holder shall have offered to
the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
GOVERNING LAW
The Indenture, the Notes and the Subsidiary Guarantees will provide that
they will be governed by the laws of the State of New York.
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BOOK-ENTRY, DELIVERY AND FORM
The Notes to be resold as set forth herein will initially be issued in the
form of one or more fully registered global Notes (collectively, the "Global
Note"). The Global Note will be deposited on the Issue Date with, or on behalf
of, The Depository Trust Company, New York, New York (the "Depository") and
registered in the name of Cede & Co., as nominee of the Depository (such nominee
being referred to herein as the "Global Note Holder").
The Depository is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depository's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depository's
Participants include securities brokers and dealers (including the Underwriter),
banks and trust companies, clearing corporations and certain other
organizations. Access to the Depository's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants" or the "Depository's Indirect Participants") that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depository only through the Depository's
Participants or the Depository's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depository (i) upon deposit of the Global Note, the Depository will credit the
accounts of Participants designated by the Underwriter with portions of the
principal amount of the Global Note and (ii) ownership of the Notes evidenced by
the Global Note will be shown on, and the transfer of ownership thereof will be
effected only through, records maintained by the Depository (with respect to the
interests of the Depository's Participants), the Depository's Participants and
the Depository's Indirect Participants. Prospective purchasers are advised that
the laws of some states require that certain persons take physical delivery in
definitive form of securities that they own. Consequently, the ability to
transfer Notes evidenced by the Global Note will be limited to such extent.
So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole Holder under the Indenture of any
Notes evidenced by the Global Note. Except as provided below, beneficial owners
of Notes evidenced by the Global Note will not be entitled to have the Notes
registered in their names, will not receive or be entitled to receive physical
delivery of the Notes in definitive form and will not be considered the owners
or Holders thereof under the Indenture for any purpose, including with respect
to the giving of any directions, instructions or approvals to the Trustee
thereunder. Neither the Company nor the Trustee will have any responsibility or
liability for any aspect of the records of the Depository or for maintaining,
supervising or reviewing any records of the Depository relating to the Notes.
Payments in respect of the principal of, premium, if any, and interest on
any Notes registered in the name of the Global Note Holder on the applicable
record date will be made by the Company through the Paying Agent to or at the
direction of the Global Note Holder in its capacity as the registered Holder
under the Indenture. Under the terms of the Indenture, the Company and the
Trustee may treat the persons in whose names Notes, including the Global Note,
are registered as the owners thereof for the purpose of receiving such payments.
Consequently, neither the Company nor the Trustee has or will have any
responsibility or liability for the payment of such amounts to beneficial owners
of Notes. The Company believes, however, that it is currently the policy of the
Depository to immediately credit the accounts of the relevant Participants with
such payments, in amounts proportionate to their respective holdings of
beneficial interests in the relevant security as shown on the records of the
Depository. Payments by the Depository's Participants and the Depository's
Indirect Participants to the beneficial owners of Notes will be governed by
standing instructions and customary practice and will be the responsibility of
the Depository's Participants or the Depository's Indirect Participants.
As long as the Notes are represented by a Global Note, the Depository's
nominee will be the Holder of the Notes and therefore will be the only entity
that can exercise a right to repurchase the Notes. See "Certain Covenants" and
"-- Repurchase at the Option of Holders." Notice by Participants or Indirect
Participants or by owners of beneficial interests in a Global Note held through
such Participants or Indirect Participants of the exercise of the option to
elect repurchase of beneficial interests in Notes represented by Global Note
must
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be transmitted to the Depository in accordance with its procedures on a form
required by the Depository and provided to Participants. To ensure that the
Depository's nominee will timely exercise a right to repurchase with respect to
a particular Note, the beneficial owner of such Note must instruct the broker or
other Participant or Indirect Participant through which it holds an interest in
such Note to notify the Depository of its desire to exercise a right to
repurchase. Different firms have different cut-off times for accepting
instructions from their customers and, accordingly, each beneficial owner should
consult the broker or other Participant or Indirect Participant through which it
holds an interest in a Note in order to ascertain the cut-off time by which such
an instruction must be given in order for timely notice to be delivered to the
Depository. The Company will not be liable for any delay in delivery to the
Paying Agent of notices of the exercise of any option to elect repurchase.
If (i) the Company notifies the Trustee in writing that the Depository is
no longer willing or able to act as a depository and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
the form of Certificated Securities under the Indenture, then, upon surrender by
the Global Note Holder of its Global Note, Notes in such form will be issued to
each person that the Global Note Holder and the Depository identify as being the
beneficial owner of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depository in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depository for all purposes.
Same-Day Settlement and Payment
The Indenture will require that payments in respect of the Notes
represented by the Global Note (including principal, premium, if any, and
interest) be made by wire transfer of immediately available funds to the
accounts specified by the Global Note Holder. With respect to Certificated
Securities, the Company will make all payments of principal, premium, if any,
and interest by wire transfer of immediately available funds to the accounts
specified by the Holders thereof or, if no such account is specified, by mailing
a check to each such Holder's registered address. The Notes represented by the
Global Note are expected to trade in the Depository's Same-Day Funds Settlement
System, and any permitted secondary market trading activity in such Notes will,
therefore, be required by the Depository to be settled in immediately available
funds. The Company expects that secondary trading in Certificated Securities
will also be settled in immediately available funds.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Indebtedness" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary to such specified Person and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Acquisition Line" means the loan facility under the credit agreement to be
entered into with the Bank for the purpose of acquisitions of assets or
businesses, as amended, modified, supplemented, extended, restated or renewed
from time to time.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the
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power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise; provided that beneficial ownership of 10% or more of the voting
securities of a Person shall be deemed to be control.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition to any Person other than the Company or any of its Restricted
Subsidiaries (including, without limitation, by means of a sale-and-leaseback
transaction or a merger or consolidation) (collectively, for purposes of this
definition, a "transfer"), directly or indirectly, in one or a series of related
transactions, of (a) any Capital Stock of any Restricted Subsidiary held by the
Company or any other Restricted Subsidiary, (b) all or substantially all of the
properties and assets of any division or line of business of the Company or any
of its Restricted Subsidiaries, (c) any Event of Loss or (d) any other
properties or assets of the Company or any of its Restricted Subsidiaries other
than transfers of cash, Cash Equivalents, accounts receivable, or properties or
assets in the ordinary course of business; provided that the sale, lease,
conveyance or other disposition of all or substantially all of the properties or
assets of the Company and its Restricted Subsidiaries, taken as a whole, will be
governed by the provisions of the Indenture described above under the caption
"-- Repurchase at the Option of Holders -- Change of Control" and/or the
provisions described above under the caption "-- Certain Covenants -- Merger,
Consolidation or Sale of Assets" and not by the provisions of the "Asset Sales"
covenant. For the purposes of this definition, the term "Asset Sale" also shall
not include any of the following: (i) any transfer of properties or assets to an
Unrestricted Subsidiary, if such transfer is permitted under the "Restricted
Payments" covenant described above; (ii) sales of damaged, worn-out or obsolete
equipment or assets that, in the Company's reasonable judgment, are either (A)
no longer used or (B) no longer useful in the business of the Company or its
Restricted Subsidiaries; (iii) any lease of any property entered into in the
ordinary course of business and with respect to which the Company or any
Restricted Subsidiary is the lessor, except any such lease that provides for the
acquisition of such property by the lessee during or at the end of the term
thereof for an amount that is less than the fair market value thereof at the
time the right to acquire such property occurs; (iv) any trade or exchange by
the Company or any Restricted Subsidiary of one or more workover rigs for one or
more other workover rigs owned or held by another Person, provided that (A) the
Fair Market Value of the workover rig or rigs traded or exchanged by the Company
or such Restricted Subsidiary (including any cash or Cash Equivalents, not to
exceed 15% of such Fair Market Value, to be delivered by the Company or such
Restricted Subsidiary) is reasonably equivalent to the Fair Market Value of the
workover rig or rigs (together with any cash or Cash Equivalents, not to exceed
15% of such Fair Market Value) to be received by the Company or such Restricted
Subsidiary and (B) such exchange is approved by a majority of the Disinterested
Directors of the Company; (v) sales of inventory in the ordinary course of
business of the Company and any Subsidiary consistent with past practices; (vi)
the issuance by the Company of its Capital Stock; (vii) a Restricted Payment
permitted under "-- Certain Covenants -- Restricted Payments" and (viii) any
transfers that, but for this clause (viii), would be Asset Sales, if (A) the
Company elects to designate such transfers as not constituting Asset Sales and
(B) after giving effect to such transfers, the aggregate Fair Market Value of
the properties or assets transferred in such transaction or any such series of
related transactions so designated by the Company does not exceed $500,000.
"Attributable Indebtedness" in respect of a sale-and-leaseback transaction
means, at the time of determination, the present value (discounted at the rate
of interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale-and-leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended). As used in the preceding sentence, the "net rental
payments" under any lease for any such period shall mean the sum of rental and
other payments required to be paid with respect to such period by the lessee
thereunder, excluding any amounts required to be paid by such lessee on account
of maintenance and repairs, insurance, taxes, assessments, water rates or
similar charges. In the case of any lease that is terminable by the lessee upon
payment of penalty, such net rental payment shall also include the amount of
such penalty, but no rent shall be considered as required to be paid under such
lease subsequent to the first date upon which it may be so terminated.
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"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited), (iv) in the case of a limited liability
corporation or similar entity, any membership or other similar interests therein
and (v) any other interest or participation that confers on a Person the right
to receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"Cash Equivalents" means (i) any evidence of Indebtedness with a maturity
of 365 days or less issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof (provided that
the full faith and credit of the United States of America is pledged in support
thereof); (ii) demand and time deposits and certificates of deposit or
acceptances with a maturity of 365 days or less of any financial institution
that is a member of the Federal Reserve System having combined capital and
surplus and undivided profits of not less than $500 million; (iii) commercial
paper with a maturity of 270 days or less issued by a corporation that is not an
Affiliate of the Company and is organized under the laws of any state of the
United States or the District of Columbia and rated at least A-2 by Standard and
Poor's Ratings Group (or its successors) or at least P-2 by Moody's Investors
Service, Inc. (or its successors); (iv) repurchase obligations with a term of
not more than seven days for underlying securities of the types described in
clause (i) above entered into with any commercial bank meeting the
specifications of clause (ii) above; (v) overnight bank deposits and bankers'
acceptances at any commercial bank meeting the qualifications specified in
clause (ii) above; (vi) deposits available for withdrawal on demand with any
commercial bank not meeting the qualifications specified in clause (ii) above,
provided all such deposits do not exceed $5.0 million in the aggregate at any
one time; (vii) demand and time deposits and certificates of deposit with any
commercial bank organized in the United States not meeting the qualifications
specified in clause (ii) above, provided that such deposits and certificates
support bond, letter of credit and other similar types of obligations incurred
in the ordinary course of business and (viii) investments in money market or
other mutual funds substantially all of whose assets comprise securities of the
types described in clauses (i) through (v) above.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole to any person (as such term is used in Section 13(d)(3) of the
Exchange Act); (ii) the Company consolidates with or merges into another Person
or any Person consolidates with, or merges into, the Company, in any such event
pursuant to a transaction in which the outstanding voting stock of the Company
is changed into or exchanged for cash, securities or other property, other than
any such transaction where (a) the outstanding voting stock of the Company is
changed into or exchanged for voting stock of the surviving or resulting Person
that is Qualified Capital Stock and (b) the holders of the voting stock of the
Company immediately prior to such transaction own, directly or indirectly, not
less than a majority of the voting stock of the surviving or resulting Person
immediately after such transaction; (iii) the adoption of a plan relating to the
liquidation or dissolution of the Company; (iv) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any person (as defined above) becomes the "beneficial
owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange
Act), directly or indirectly, of more than 50% of the voting stock of the
Company or (v) the first day on which a majority of the members of the Board of
Directors of the Company are not Continuing Directors. For purposes of this
definition, any transfer of an equity interest of an entity that was formed for
the purpose of acquiring voting stock of the Company will be deemed to be a
transfer of such portion of such voting stock as corresponds to the portion of
the equity of such entity that has been so transferred.
"Commission" means the Securities and Exchange Commission.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss
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realized in connection with an Asset Sale (to the extent such losses were
deducted in computing such Consolidated Net Income), plus (ii) provision for
taxes based on income or profits of such Person and its Restricted Subsidiaries
for such period, to the extent that such provision for taxes was included in
computing such Consolidated Net Income, plus (iii) consolidated net interest
expense of such Person and its Restricted Subsidiaries for such period, whether
paid or accrued and whether or not capitalized (including, without limitation,
amortization of original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, imputed interest with
respect to Attributable Indebtedness, commissions, discounts and other fees and
charges incurred in respect of letter of credit or bankers' acceptance
financings, and net payments (if any) pursuant to Interest Rate Protection
Obligations), to the extent that any such expense was deducted in computing such
Consolidated Net Income, plus (iv) depreciation, amortization (including
amortization of goodwill, debt issuance costs and other intangibles but
excluding amortization of prepaid cash expenses that were paid in a prior
period) and other non-cash charges (including any provision for the reduction in
the carrying value of assets recorded in accordance with GAAP but excluding any
such non-cash charge to the extent that it represents an accrual of or reserve
for cash charges in any future period or amortization of a prepaid cash expense
that was paid in a prior period) of such Person and its Restricted Subsidiaries
for such period to the extent that such depreciation, amortization and other
non-cash charges were deducted in computing such Consolidated Net Income, minus
(v) any non-cash items increasing the Consolidated Net Income of such Person and
its Restricted Subsidiaries during such period (excluding any such items that
represent the reversal of any accrual of, or cash reserve for, anticipated cash
charges in any prior period commencing subsequent to the Issue Date), in each
case, on a consolidated basis and determined in accordance with GAAP.
Notwithstanding the foregoing, the provision for taxes on the income or profits
of, and the depreciation and amortization and other non-cash charges of a
Restricted Subsidiary of the referent Person shall be added to Consolidated Net
Income to compute Consolidated Cash Flow only to the extent (and in same
proportion) that the Net Income of such Restricted Subsidiary was included in
calculating the Consolidated Net Income of such Person and only if a
corresponding amount would be permitted at the date of determination to be
dividended to the Company by such Restricted Subsidiary without prior
governmental approval (that has not been obtained), and without direct or
indirect restriction pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Restricted Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted Subsidiary
thereof that is a Subsidiary Guarantor; (ii) the Net Income of any Restricted
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Restricted Subsidiary of that Net
Income is not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its stockholders; (iii) the Net Income of any Person
acquired in a pooling of interests transaction for any period prior to the date
of such acquisition shall be excluded and (iv) the cumulative effect of a change
in accounting principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common shareholders of such Person
and its consolidated Restricted Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date with
respect to any series of preferred stock (other than Disqualified Stock) that by
its terms is not entitled to the payment of cash dividends unless such dividends
may be declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of the Indenture in the book value of
any asset owned by
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such Person or a consolidated Restricted Subsidiary of such Person, (y) all
investments as of such date in unconsolidated Subsidiaries and in Persons that
are not Subsidiaries (except, in each case, Permitted Investments) and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Credit Facility" means, collectively, the Acquisition Line and the Working
Line.
"Currency Hedge Obligations" means, at any time as to any Person, the
obligations of such Person at such time that were incurred in the ordinary
course of business pursuant to any foreign currency exchange agreement, option
or futures contract or other similar agreement or arrangement designed to
protect against or manage such Person's or any of its Subsidiaries' exposure to
fluctuations in foreign currency exchange rates.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Disinterested Director" means, with respect to any transaction or series
of transactions in respect of which the Board of Directors of the Company is
required to deliver a resolution of the Board of Directors under the Indenture,
a member of the Board of Directors of the Company who does not have any material
direct or indirect financial interest (other than an interest arising solely
from the beneficial ownership of Capital Stock of the Company) in or with
respect to such transaction or series of transactions.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
on which the Notes mature.
"Employee Stock Repurchases" means purchases by the Company of any of its
Capital Stock from employees, provided that the aggregate amount of all such
purchases shall not exceed $500,000 during any fiscal year of the Company.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Event of Loss" means, with respect to any workover rig or similar or
related property or asset of the Company or any Restricted Subsidiary, (i) any
damage to such workover rig or similar or related property or asset that results
in an insurance settlement with respect thereto on the basis of a total loss or
a constructive or compromised total loss or (ii) the confiscation, condemnation
or requisition of title to such workover rig or similar or related property or
asset by any government or instrumentality or agency thereof. An Event of Loss
shall be deemed to occur as of the date of the insurance settlement,
confiscation, condemnation or requisition of title, as applicable.
"Existing Indebtedness" means up to $3.75 million in aggregate principal
amount of Indebtedness of the Company and its Subsidiaries (other than
Indebtedness under the Credit Facility) in existence on the Issue Date, until
such amounts are repaid.
"Fair Market Value" means, with respect to any asset or Investment, the
fair market value of such asset or Investment at the time of the event requiring
such determination, and, with respect to any assets or Investment in excess of
$5.0 million (other than cash or Cash Equivalents) as determined by a reputable
appraisal firm that is, in the reasonable judgment of the Board of Directors of
the Company, qualified to perform the task for which such firm has been engaged
and independent with respect to the Company.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person for
such period. In the event that the Company or any of its Restricted Subsidiaries
incurs,
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assumes, guarantees or redeems any Indebtedness (other than revolving credit
borrowings) or issues preferred stock subsequent to the commencement of the
period for which the Fixed Charge Coverage Ratio is being calculated but prior
to the date on which the event for which the calculation of the Fixed Charge
Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage
Ratio shall be calculated giving pro forma effect to such incurrence,
assumption, guarantee or redemption of Indebtedness, or such issuance or
redemption of preferred stock, as if the same had occurred at the beginning of
the applicable four-quarter reference period. In addition, for purposes of
making the computation referred to above, (i) acquisitions of businesses that
have been made by the referent Person or any of its Restricted Subsidiaries,
including through mergers or consolidations and including any related financing
transactions, during the four-quarter reference period or subsequent to such
reference period and prior to the Calculation Date shall be deemed to have
occurred on the first day of the four-quarter reference period; (ii) the
Consolidated Cash Flow attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded; and (iii) the Fixed Charges attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed Charges will
not be obligations of the referent Person or any of its Restricted Subsidiaries
following the Calculation Date.
"Fixed Charges" means, with respect to any Person for any period, the sum
of (i) the consolidated interest expense (net of any interest income) of such
Person and its Restricted Subsidiaries for such period, whether paid or accrued
(excluding amortization of debt issuance costs and including, without
limitation, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
imputed interest with respect to Attributable Indebtedness, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Interest
Rate Protection Obligations); (ii) the consolidated interest expense of such
Person and its Restricted Subsidiaries that was capitalized during such period;
(iii) any interest expense on Indebtedness of another Person that is guaranteed
by such Person or one of its Restricted Subsidiaries or secured by a Lien on
assets of such Person or one of its Restricted Subsidiaries (whether or not such
guarantee or Lien is called upon) and (iv) the product of (A) all cash dividend
payments (and non-cash dividend payments in the case of a Person that is a
Restricted Subsidiary) on any series of preferred stock of such Person, to the
extent such preferred stock is owned by Persons other than such Person or its
Restricted Subsidiaries, times (B) a fraction, the numerator of which is one and
the denominator of which is one minus the then current combined federal, state
and local statutory tax rate of such Person, expressed as a decimal, in each
case, on a consolidated basis and in accordance with GAAP.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession of the United States, which are in effect as of the date of
preparation of a financial statement or the date that a particular action is
taken or event occurs, as applicable.
The term "guarantee" means, as applied to any obligation, (i) a guarantee
(other than by endorsement of negotiable instruments for collection in the
ordinary course of business), direct or indirect, in any manner, of any part or
all of such obligation and (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of nonperformance) of all or any
part of such obligation, including, without limiting the foregoing, the payment
of amounts drawn down under letters of credit. When used as a verb, "guarantee"
has a corresponding meaning.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any obligations in respect of
Currency Hedge Obligations or Interest Rate Protection Obligations,
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except any such balance that constitutes an accrued expense or trade payable, if
and to the extent any of the foregoing indebtedness (other than letters of
credit, Currency Hedge Obligations and Interest Rate Protection Obligations)
would appear as a liability upon a balance sheet of such Person prepared in
accordance with GAAP, as well as all indebtedness of others secured by a Lien on
any asset of such Person (whether or not such indebtedness is assumed by such
Person) and, to the extent not otherwise included, the guarantee by such Person
of any Indebtedness of any other Person.
"Interest Rate Protection Obligations" means the obligations of any Person
pursuant to any arrangement with any other Person whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such Person
calculated by applying a fixed or a floating rate of interest on the same
notional amount and shall include, without limitation, interest rate swaps,
caps, floors, collars and similar agreements or arrangements designed to protect
against or manage such Person's or any of its Subsidiaries' exposure to
fluctuations in interest rates.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that the following shall not constitute Investments: (i) an acquisition
of assets, Equity Interests or other securities by the Company for consideration
consisting of common equity securities of the Company, (ii) extensions of trade
credit or other advances to customers on commercially reasonable terms in
accordance with normal trade practices or otherwise in the ordinary course of
business, (iii) Interest Rate Protection Obligations and Currency Hedge
Obligations, but only to the extent that the same constitute Permitted
Indebtedness and (iv) endorsements of negotiable instruments and documents in
the ordinary course of business. If the Company or any Subsidiary of the Company
sells or otherwise disposes of any Equity Interests of any direct or indirect
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, such Person is no longer a Subsidiary of the Company, the Company
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Equity Interests of such
Subsidiary not sold or disposed of.
"Issue Date" means the date on which the Notes were first issued under the
Indenture.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction other
than a precautionary financing statement respecting a lease not intended as a
security agreement).
"Net Equity Proceeds" means (i) in the case of any sale by the Company of
Qualified Capital Stock of the Company, the aggregate net proceeds received by
the Company, after payment of expenses, commissions and the like incurred in
connection therewith, whether such proceeds are in cash or in other property
(valued as determined reasonably and in good faith by the Board of Directors of
the Company, as evidenced by a written resolution of said Board of Directors, at
the fair market value thereof at the time of receipt) and (ii) in the case of
any exchange, exercise, conversion or surrender of any outstanding Indebtedness
of the Company or any Restricted Subsidiary for or into shares of Qualified
Capital Stock of the Company, the amount of such Indebtedness (or, if such
Indebtedness was issued at an amount less than the stated principal amount
thereof, the accrued amount thereof as determined in accordance with GAAP) as
reflected in the consolidated financial statements of the Company prepared in
accordance with GAAP as of the most recent date next preceding the date of such
exchange, exercise, conversion or surrender (plus any additional amount required
to be paid by the holders of such Indebtedness to the Company or to any Wholly
Owned Restricted Subsidiary of the Company upon such exchange, exercise,
conversion or surrender and less any and all payments made to
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the holders of such Indebtedness, and all other expenses incurred by the Company
in connection therewith), in the case of each of clauses (i) and (ii) to the
extent consummated after the Issue Date.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale-and-leaseback transactions) or other
sale of assets or (b) the disposition of any securities by such Person or any of
its Restricted Subsidiaries or the extinguishment of any Indebtedness of such
Person or any of its Restricted Subsidiaries; (ii) any extraordinary or
nonrecurring item (but not loss), together with any related provision for taxes
on such extraordinary or nonrecurring gain (but not loss) and (iii) any interest
income, together with any related provision for taxes on such interest income.
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of (i) the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), (ii) amounts required to be applied to the repayment of
Indebtedness (other than Indebtedness under the Credit Facility) secured by a
Lien on the asset or assets that were the subject of such Asset Sale, (iii)
amounts required to be paid to any Person (other than the Company or any
Restricted Subsidiary) owning a beneficial interest in the asset or assets that
were the subject of such Asset Sale, (iv) any reserve for adjustment in respect
of the sale price of such asset or assets established in accordance with GAAP
and (v) any adjustment for expenses of discontinuing any operations or line of
business or severance costs, in both cases associated with an Asset Sale;
provided that such adjustment does not exceed 15% of the aggregate cash
proceeds.
"Non-Recourse Indebtedness" means Indebtedness (i) as to which neither the
Company nor any of its Restricted Subsidiaries (A) provides credit support of
any kind (including any undertaking, agreement or instrument that would
constitute Indebtedness), (B) is directly or indirectly liable (as a Subsidiary
Guarantor or otherwise) or (C) constitutes the lender; (ii) no default with
respect to which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity and (iii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock or assets of the
Company or any of its Restricted Subsidiaries.
"Non-Recourse Purchase Money Indebtedness" means Indebtedness or that
portion of Indebtedness of the Company or any Restricted Subsidiary incurred in
connection with the acquisition by the Company or such Restricted Subsidiary,
subsequent to the Issue Date, of any property or assets and as to which (i) the
holders of such Indebtedness agree that they will look solely to the property or
assets so acquired (or, in the case of the acquisition of all of the outstanding
Capital Stock of a Person, the underlying properties and assets of such Person
at the time of such acquisition, including proceeds thereof) and securing such
Indebtedness for payment on or in respect of such Indebtedness, and neither the
Company nor any Restricted Subsidiary (A) provides credit support, including any
undertaking, agreement or instrument that would constitute Indebtedness or (B)
is directly or indirectly liable for such Indebtedness and (ii) no default with
respect to such Indebtedness would permit (after notice or passage of time or
both), according to the terms thereof, any holder of any Indebtedness of the
Company or a Restricted Subsidiary to declare a default on such Indebtedness or
cause the payment thereof to be accelerated or payable prior to its stated
maturity; and, provided however, that any portion of the purchase price of such
property or assets that is not financed through the incurrence of such
Indebtedness, shall be deemed to be a "Restricted Investment" under the
Indenture and shall only be permitted to be expended by the Company or any
Restricted Subsidiary to the extent that the Company would be permitted to make
a Restricted Payment in such amount under the terms of the covenant described
above under "-- Certain Covenants -- Restricted Payments."
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"Oil Service Business" means any businesses related to providing services
for the drilling for, or exploration and production of, oil, gas or other
hydrocarbons, including, but not limited to (i) the well servicing business,
(ii) liquid services and (iii) production services.
"Permitted Indebtedness" means any of the following:
(i) Indebtedness (and any guarantee thereof) under the Working Line in
an aggregate principal amount at any one time outstanding not to exceed the
greater of (A) $35 million, less any amounts derived from Asset Sales and
applied to the permanent reduction of the Indebtedness thereunder as
contemplated by the covenant described above under the caption "Repurchase
at the Option of Holders -- Asset Sales" or (B) the sum of (1) 80% of the
Company's Eligible Accounts Receivable (as defined in the Working Line) and
(2) 50% of the inventory of the Company and its Restricted Subsidiaries
determined in accordance with GAAP (the "Maximum Bank Facility Amount"),
and any renewals, amendments, extensions, supplements, modifications,
deferrals, refinancing or replacements (each, for purposes of this clause
(i), a "refinancing") thereof, including any successive refinancing
thereof, so long as the aggregate principal amount of any such new
Indebtedness, together with the aggregate principal amount of all other
Indebtedness outstanding pursuant to this clause (i), shall not at any one
time exceed the Maximum Bank Facility Amount;
(ii) Indebtedness under the Acquisition Line in an aggregate principal
amount at any one time outstanding not to exceed $20.0 million, and any
renewals, amendments, extensions, supplements, modifications, deferrals,
refinancing or replacements (each for purposes of this clause (ii), a
"refinancing") thereof, including any successive refinancing thereof, so
long as the aggregate principal amount of any such new Indebtedness
hereunder, together with the aggregate principal amount of all other
Indebtedness outstanding pursuant to this clause (ii), shall not at any one
time exceed $20.0 million;
(iii) Indebtedness under the Notes;
(iv) Indebtedness under any Existing Indebtedness and any Indebtedness
under Letters of Credit existing on the Issue Date;
(v) Indebtedness under Interest Rate Protection Obligations, provided
that (A) such Interest Rate Protection Obligations are related to payment
obligations on Permitted Indebtedness or Indebtedness otherwise permitted
by the initial paragraph of the "Incurrence of Indebtedness and Issuance of
Preferred Stock" covenant and (B) the notional principal amount of such
Interest Rate Protection Obligations does not exceed the principal amount
of such Indebtedness to which such Interest Rate Protection Obligations
relate;
(vi) Indebtedness under Currency Hedge Obligations, provided that (A)
such Currency Hedge Obligations are related to payment obligations on
Permitted Indebtedness or Indebtedness otherwise permitted by the initial
paragraph of the "Incurrence of Indebtedness and Issuance of Preferred
Stock" covenant or to the foreign currency cash flows reasonably expected
to be generated by the Company and its Restricted Subsidiaries and (B) the
notional principal amount of such Currency Hedge Obligations does not
exceed the principal amount of such Indebtedness and the amount of such
foreign currency cash flows to which such Currency Hedge Obligations
relate;
(vii) the Subsidiary Guarantees of the Notes (and any assumption of
the obligations guaranteed thereby);
(viii) Indebtedness of the Company to a Wholly Owned Restricted
Subsidiary and Indebtedness of any Restricted Subsidiary of the Company to
the Company or a Wholly Owned Restricted Subsidiary; provided, however,
that upon any subsequent issuance or transfer of any Capital Stock or any
other event that results in any such Wholly Owned Restricted Subsidiary
ceasing to be a Wholly Owned Restricted Subsidiary or any other subsequent
transfer of any such Indebtedness (except to the Company or a Wholly Owned
Restricted Subsidiary), such Indebtedness shall be deemed, in each case, to
be incurred and shall be treated as an incurrence for purposes of the
initial paragraph of the "Incurrence of Indebtedness and Issuance of
Preferred Stock" covenant at the time the Wholly Owned Restricted
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Subsidiary in question ceased to be a Wholly Owned Restricted Subsidiary or
the time such subsequent transfer occurred;
(ix) Indebtedness in respect of bid, performance or surety bonds
issued for the account of the Company or any Restricted Subsidiary thereof
in the ordinary course of business, including guarantees or obligations of
the Company or any Restricted Subsidiary thereof with respect to letters of
credit supporting such bid, performance or surety obligations (in each case
other than for an obligation for money borrowed);
(x) the incurrence by the Company or its Restricted Subsidiaries of
Non-Recourse Purchase Money Indebtedness;
(xi) any Permitted Refinancing Indebtedness incurred by the Company or
a Restricted Subsidiary of any Indebtedness incurred pursuant to clause
(iii) or (iv) of this definition, including any successive refinancing by
the Company or such Restricted Subsidiary;
(xii) Capital Lease Obligations in an aggregate amount not in excess
of $8.0 million at any one time outstanding; and
(xiii) any additional Indebtedness issued pursuant to one or more
credit agreements in an aggregate principal amount for all such credit
agreements not in excess of $5.0 million at any one time outstanding and
any guarantee thereof.
"Permitted Investments" means any of the following: (i) Investments in Cash
Equivalents; (ii) Investments in the Company or any of its Wholly Owned
Restricted Subsidiaries (including repurchases of any of the Notes on the open
market or as otherwise permitted herein); (iii) Investments by the Company or
any of its Restricted Subsidiaries in another Person, if as a result of such
Investment (A) such other Person becomes a Wholly Owned Restricted Subsidiary or
(B) such other Person is merged or consolidated with or into, or transfers or
conveys all or substantially all of its properties and assets to, the Company or
a Wholly Owned Restricted Subsidiary; (iv) Investments permitted under the
covenant described above under the caption "-- Repurchase at the Option of
Holders -- Asset Sales;" (v) Investments made in the ordinary course of business
in prepaid expenses, lease, utility, workers' compensation, performance and
other similar deposits; (vi) Investments in stock, obligations or securities
received in, settlement of debts owing to the Company or any Restricted
Subsidiary as a result of bankruptcy or insolvency proceedings or upon the
foreclosure, perfection or enforcement of any Lien in favor of the Company or
any Restricted Subsidiary, in each case as to debt owing to the Company or any
Restricted Subsidiary that arose in the ordinary course of business of the
Company or any such Restricted Subsidiary, provided that any stocks, obligations
or securities received in settlement of debts that arose in the ordinary course
of business (and received other than as a result of bankruptcy or insolvency
proceedings or upon foreclosure, perfection or enforcement of any Lien) that
are, within 30 days of receipt, converted into cash or Cash Equivalents shall be
treated as having been cash or Cash Equivalents at the time received and (vii)
other Investments in joint ventures, corporations, limited liability companies
or partnerships formed with or organized by third Persons, which joint ventures,
corporations, limited liability companies or partnerships, engage in the Oil
Service Business and are not Unrestricted Subsidiaries at the time of such
Investment, provided all such Investments do not, in the aggregate, exceed $10.0
million.
"Permitted Liens" means the following types of Liens:
(a) Liens existing as of the date of the Indenture;
(b) Liens securing the Notes or the Subsidiary Guarantees;
(c) Liens in favor of the Company;
(d) Liens securing Indebtedness that constitutes Permitted
Indebtedness pursuant to clause (i), (ii) or (iv) of the definition of
Permitted Indebtedness;
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(e) Liens for taxes, assessments and governmental charges or claims
either (i) not delinquent or (ii) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(f) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(g) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, or to secure the payment or performance of
tenders, statutory or regulatory obligations, surety and appeal bonds,
bids, government contracts and leases, performance and return of money
bonds and other similar obligations (exclusive of obligations for the
payment of borrowed money);
(h) judgment Liens not giving rise to an Event of Default so long as
any appropriate legal proceedings that may have been duly initiated for the
review of such judgment shall not have been finally terminated or the
period within which such proceeding may be initiated shall not have
expired;
(i) any interest or title of a lessor under any Capital Lease
Obligation or operating lease;
(j) Liens securing Non-Recourse Purchase Money Indebtedness and other
purchase money Liens; provided, however, that (A) the related Non-Recourse
Purchase Money Indebtedness or other purchase money Indebtedness shall not
be secured by any property or assets of the Company or any Restricted
Subsidiary other than the property or assets so acquired and any proceeds
therefrom and (B) the Lien securing any such Indebtedness shall be created
within 90 days of such acquisition;
(k) Liens securing obligations under or in respect of either Currency
Hedge Obligations or Interest Rate Protection Obligations;
(l) Liens upon specific items of inventory or other goods of any
Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(m) Liens securing reimbursement obligations with respect to
commercial letters of credit that encumber documents and other property or
assets relating to such letters of credit and products and proceeds
thereof; and
(n) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and
set-off.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
provided that: (i) the principal amount (or accreted value, if applicable) of
such Permitted Refinancing Indebtedness does not exceed the principal amount (or
accreted value, if applicable) of the Indebtedness so extended, refinanced,
renewed, replaced, defeased or refunded (plus the amount of reasonable expenses
incurred in connection therewith); (ii) such Permitted Refinancing Indebtedness
has a final maturity date later than the final maturity date of, and has a
Weighted Average Life to Maturity equal to or greater than the Weighted Average
Life to Maturity of, the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; (iii) if the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded is subordinated in right of
payment to the Notes, such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and is subordinated in
right of payment to, the Notes on terms at least as favorable to the Holders of
Notes as those contained in the documentation governing the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded and (iv) with
respect to any such
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Indebtedness of the Company being extended, refinanced, renewed, replaced,
defeased or refunded, such Permitted Refinancing Indebtedness shall not be
incurred by any Restricted Subsidiary.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Public Equity Offering" means an underwritten offer and sale of common
stock of the Company pursuant to a registration statement that has been declared
effective by the Commission pursuant to the Securities Act (other than a
registration statement on Form S-8 or otherwise relating to equity securities
issuable under any employee benefit plan of the Company) or a private sale in
which the Company is obligated to publicly register such common stock for resale
within 120 days of such sale.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Disqualified Stock.
"Restricted Investment" means (without duplication) (i) the designation of
a Subsidiary as an Unrestricted Subsidiary in the manner described in the
definition of Unrestricted Subsidiary, (ii) any Investment other than a
Permitted Investment and (iii) any amount constituting a "Restricted Investment"
as contemplated in the definition of "Non-Recourse Purchase Money Indebtedness."
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Significant Subsidiary" means any (i) Subsidiary that would be a
significant subsidiary as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the date hereof, and (ii) any other Subsidiary that contributed more than 5% of
the Company's Consolidated Cash Flow for the most recent four fiscal quarters
for which financial statements are available.
"Subordinated Indebtedness" means any Indebtedness of the Company or a
Subsidiary Guarantor that is expressly subordinated in right of payment to the
Notes or the Subsidiary Guarantees, as the case may be.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person of one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (A) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (B)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Subsidiary Guarantee" means any guarantee of the Notes by any Subsidiary
Guarantor in accordance with the provisions described under "-- Subsidiary
Guarantees."
"Subsidiary Guarantors" means each of (i) the Company's Significant
Subsidiaries on the Issue Date or any other Restricted Subsidiary that provides
a guarantee under the Credit Facility, (ii) any other Subsidiary that executes a
Subsidiary Guarantee in accordance with the provisions of the Indenture and
(iii) their respective successors and assigns, as required under the Indenture.
"Unrestricted Subsidiary" means any Subsidiary (or any successor to any of
them) that is designated by the Board of Directors as an Unrestricted Subsidiary
pursuant to a resolution of the Board of Directors; but only to the extent that
such Subsidiary (i) has no Indebtedness other than Non-Recourse Indebtedness;
(ii) is not party to any agreement, contract, arrangement or understanding with
the Company or any Restricted Subsidiary of the Company unless the terms of any
such agreement, contract, arrangement or understanding are no less favorable to
the Company or such Restricted Subsidiary than those that might be obtained at
the time from Persons who are not Affiliates of the Company; (iii) is a Person
with respect to which neither the Company nor any of its Restricted Subsidiaries
has any direct or indirect obligation (A) to subscribe for additional Equity
Interests or (B) to maintain or preserve such Person's financial condition or to
cause such
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Person to achieve any specified levels of operating results and (iv) has not
guaranteed or otherwise directly or indirectly provided credit support for any
Indebtedness of the Company or any of its Restricted Subsidiaries.
Any such designation by the Board of Directors shall be evidenced to the
Trustee by filing with the Trustee a certified copy of the resolution of the
Board of Directors giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions and was permitted by the covenant described above under the caption
"Certain Covenants -- Restricted Payments." If, at any time, any Unrestricted
Subsidiary would fail to meet the foregoing requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of the Company as of such date
(and, if such Indebtedness is not permitted to be incurred as of such date under
the covenant described under the caption "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock," the Company shall be in default
of such covenant). The Board of Directors of the Company may at any time
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that such designation shall be deemed to be an incurrence of Indebtedness by a
Restricted Subsidiary of the Company of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation shall only be permitted if (i) such
Indebtedness is permitted under the covenant described under the caption
"-- Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred
Stock" and (ii) no Default or Event of Default would be in existence following
such designation.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (A) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (B) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary to the
extent (i) all of the Capital Stock or other ownership interests in such
Restricted Subsidiary, other than any directors' qualifying shares mandated by
applicable law, is owned directly or indirectly by the Company or (ii) such
Restricted Subsidiary is organized in a foreign jurisdiction and is required by
the applicable laws and regulations of such foreign jurisdiction to be partially
owned by the government of such foreign jurisdiction or individual or corporate
citizens of such foreign jurisdiction in order for such Restricted Subsidiary to
transact business in such foreign jurisdiction, provided that the Company,
directly or indirectly, owns the remaining Capital Stock or ownership interests
in such Restricted Subsidiary and, by contract or otherwise, controls the
management and business of such Restricted Subsidiary and derives the economic
benefits of ownership of such Restricted Subsidiary to substantially the same
extent as if such Restricted Subsidiary were a wholly owned Subsidiary.
"Wholly Owned Subsidiary" means any Subsidiary to the extent (i) all of the
Capital Stock or other ownership interests in such Subsidiary, other than any
directors' qualifying shares mandated by applicable law, is owned directly or
indirectly by the Company or (ii) such Subsidiary is organized in a foreign
jurisdiction and is required by the applicable laws and regulations of such
foreign jurisdiction to be partially owned by the government of such foreign
jurisdiction or individual or corporate citizens of such foreign jurisdiction in
order for such Subsidiary to transact business in such foreign jurisdiction,
provided that the Company, directly or indirectly, owns the remaining Capital
Stock or ownership interests in such Subsidiary and, by contract or otherwise,
controls the management and business of such Subsidiary and derives the economic
benefits of ownership of such Subsidiary to substantially the same extent as if
such Subsidiary were a wholly owned Subsidiary.
"Working Line" means the loan facility under the credit agreement to be
entered into with the Bank prior to the closing of the Offerings for the
purposes of supporting accounts receivable, funding letters of credit and
providing for working capital needs, as amended, modified, supplemented,
extended, restated or renewed from time to time.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,560,600 shares
of Common Stock, $.01 par value, and 560,600 shares of undesignated preferred
stock, no par value per share.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of shareholders voting with the holders of the
Company's preferred stock as a single class, except where class voting is
required by the Texas Business Corporation Act (the "TBCA") or by a Certificate
of Designation adopted by the Board. Cumulative voting in the election of
directors is prohibited. Accordingly, the holders of a majority of the combined
number of outstanding shares of Common Stock and the Company's preferred stock
entitled to vote in any election of directors may elect all of the directors
standing for election except to the extent otherwise provided by various voting
agreements. See "Management -- Directors and Executive Officers" and "Certain
Relationships and Related Transactions."
Holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared by the Board of Directors out of funds legally available
therefor, subject to any preferential dividend rights of outstanding preferred
stock. Upon a liquidation, dissolution or winding up of the Company, the holders
of Common Stock are entitled to receive ratably the net assets of the Company
available after the payment of all debts and other liabilities and subject to
the prior rights of any outstanding preferred stock. The holders of Common Stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of Common Stock are, and the shares issued in the Equity
Offering will be, when issued and paid for, fully paid and nonassessable.
As of January 15, 1997, the outstanding shares of Common Stock were owned
of record by approximately 140 shareholders.
PREFERRED STOCK
There are 560,600 shares of undesignated preferred stock authorized and no
shares of preferred stock issued or outstanding.
REGISTRATION RIGHTS
Pursuant to a Registration Rights Agreement dated as of November 1, 1995 by
and among the Company, WellTech, the RIMCO Parties, Nueces, NationsBanc Capital
Corporation and Triad Ventures Limited II (the "Registration Rights Agreement"),
the Company granted registration rights under the Securities Act with respect to
the shares of Common Stock received by WellTech pursuant to the Minority
Interest Acquisition and with respect to the shares of Common Stock currently
held and to be received by the RIMCO Parties, Nueces, NationsBanc Capital
Corporation and Triad Ventures Limited II (collectively with WellTech, the
"Rights Holders") upon the consummation of the Conversion Transactions. The
Registration Rights Agreement replaced the registration rights previously
granted to certain of the Rights Holders.
In February 1996, WellTech distributed all of the Common Stock it then
owned to its approximately 30 shareholders and to certain of its directors
("WellTech Distributees"). The WellTech Distributees, in addition to the RIMCO
Parties, Triad Ventures Limited II and Nueces (and in each case, their
respective transferees), represent the Rights Holders who are entitled to the
benefits of the Registration Rights Agreement.
Under the Registration Rights Agreement, the Company is obligated,
beginning July 20, 1997, to file a registration statement (the "Shelf
Registration Statement") pursuant to Rule 415 of the Securities Act covering all
of the registrable shares held by the Rights Holders (the "Registrable
Securities"). The holders of a majority of the Registrable Securities can
require that the Shelf Registration Statement be in the form of an underwritten
offering. Additionally, if the Company proposes to register any of its
securities under the Securities Act for its own account or for the account of
the other security holders, the Rights Holders are entitled to notice of such
registration and are entitled to include all or a portion of the Registrable
Securities in such registration, subject to certain exceptions and limitations,
including the right of the underwriters (if any) of any such offering to exclude
for marketing reasons some or all of the Registrable Securities from such
registration. The Company generally is required to pay all of the expenses
relating to the registration of the
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Registrable Securities, except for the Rights Holders' share of any underwriting
discounts and commissions. The Registration Rights Agreement prohibits the
Company from granting any new registration rights under the Securities Act that
would adversely impact the rights of the Rights Holders. Substantially all of
the 1,206,807 shares of Common Stock being offered by the Selling Shareholders
in the Equity Offering are being registered and sold pursuant to the
Registration Rights Agreement for the account of the Rights Holders. See
"Security Ownership of Management and Principal and Selling Shareholders."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Harris Trust
Company of New York.
PROVISIONS HAVING POSSIBLE ANTI-TAKEOVER EFFECT
The Company's Articles of Incorporation and Bylaws contain certain
provisions that are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors of the Company and in the
policies formulated by the Board and to discourage certain types of transactions
which may involve an actual or threatened change of control of the Company. The
provisions are designed to reduce the vulnerability of the Company to an
unsolicited proposal for a takeover of the Company that does not contemplate the
acquisition of all of its outstanding shares or an unsolicited proposal for the
restructuring or sale of all or part of the Company. The provisions also are
intended to discourage certain tactics that may be used in proxy fights.
The Board will have the authority, without further action by the
shareholders, to issue up to 560,600 shares of the Company's preferred stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof, and to issue over 9,000,000 additional shares of Common
Stock after the Equity Offering. The issuance of the Company's preferred stock
or additional shares of Common Stock could adversely affect the voting power of
the purchasers of Common Stock in the Equity Offering and could have the effect
of delaying, deferring or preventing a change in control of the Company.
The Articles of Incorporation also provide that, subject to the terms of
any outstanding preferred stock, any action required or permitted to be taken by
the shareholders of the Company must be taken at a duly called annual or special
meeting of shareholders and may not be taken by written consent unless
previously approved by a majority of the entire Board. In addition, special
meetings may be called only by the President, the Board or by holders of 20% or
more of the combined voting power of the then outstanding shares of capital
stock entitled to vote at the proposed special meeting.
Upon a change of control of the Company, holders of the Notes will have the
right to require the Company to purchase the Notes at a price equal to 101% of
the aggregate principal amount thereof, together with accrued and unpaid
interest to the date of purchase.
INDEMNIFICATION OF OFFICERS AND DIRECTORS; LIMITATION OF DIRECTOR LIABILITY
The Company has entered into indemnification agreements with all of its
directors and executive officers, which, among other things, indemnify directors
of the Company against liability arising from shareholder claims of a breach of
duty by a director if a director votes against a transaction that would result
in a change of control of the Company. The Articles of Incorporation also
provide that its directors shall not be liable for monetary damages caused by an
act or omission occurring in their capacity as directors. This provision does
not eliminate the duty of care, and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available under Texas law. In addition, each director will continue to be
subject to liability for breach of the director's duty of loyalty to the
Company, for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to a director and for acts or omissions for which a director is
made expressly liable by applicable statute, such as the improper payment of
dividends. The limitations on liability provided for in the Articles of
Incorporation do not restrict the availability of non-monetary remedies and do
not affect a director's responsibilities under any other law, such as the
federal securities laws or state or federal environmental laws. The Company
believes that these provisions will assist the Company in attracting and
retaining qualified individuals to serve as executive officers and directors.
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UNDERWRITING
Subject to the terms and upon the conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to Jefferies & Company, Inc. (the
"Underwriter"), and the Underwriter has agreed to purchase, the Notes at the
public offering price less the underwriting discount set forth on the cover page
of this Prospectus. At the request of the Company, the Underwriter has reserved
up to $5.5 million of the Notes offered hereby for sale at the initial public
offering price to one or more affiliates of RIMCO Associates, Inc., which has
expressed an interest in purchasing Notes. In addition, up to 200,000 shares of
the Common Stock offered in the Equity Offering have been reserved for sale at
the initial public offering price to one or more affiliates of RIMCO Associates,
Inc., which has expressed an interest in purchasing shares of Common Stock. The
amount of Notes and the number of shares of Common Stock available to the
general public will be reduced to the extent one or more affiliates of RIMCO
Associates, Inc. purchases the reserved Notes and shares of Common Stock.
The Underwriting Agreement provides that the obligation of the Underwriter
to purchase the Notes offered hereby is subject to certain conditions. Under the
terms and upon the conditions of the Underwriting Agreement, the Underwriter is
committed to purchase all of the Notes offered hereby, if any are purchased. The
Underwriter proposes to offer the Notes to the public initially at the public
offering price set forth on the cover of this Prospectus. After the initial
public offering of the Notes, the public offering price may be changed by the
Underwriter.
The Underwriter proposes to offer the Notes to the public initially at the
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of % of the
principal amount of the Notes. The Underwriter may allow, and such dealers may
reallow, a discount not in excess of % to certain other dealers. After the
Debt Offering commences, the public offering price, the concession to selected
dealers and the reallowance to other dealers may be changed by the Underwriter.
Prior to the Debt Offering, there has been no public market for the Notes.
The initial public offering price for the Notes will be determined by
negotiations between the Company and the Underwriter. Among the principal
factors to be considered in such negotiations will be the financial strength of
the Company in recent periods, prevailing economic prospects, debt offerings of
companies in related businesses, the prospects for the Company and the well
servicing industry, and the general conditions prevailing in the securities
markets. The Underwriter does not intend to confirm sales of the Notes to any
accounts over which it exercises discretionary authority.
The Company has agreed to indemnify the Underwriter against certain
liabilities that may be incurred in connection with the offering of the Notes,
including liabilities under the Securities Act, or to contribute to the payments
that the Underwriter may be required to make in respect thereof.
The Underwriter has advised the Company that it currently intends to make a
market in the Notes after the consummation of the Debt Offering, as permitted by
applicable laws and regulations; however, it is not obligated to do so, and any
such market-making, if commenced, may be discontinued at any time without
notice. Accordingly, there can be no assurance as to the liquidity of the
trading market for the Notes or that any active trading market for the Notes
will develop. See "Risk Factors -- Absence of Public Market for the Notes."
The closing of Debt Offering is conditioned upon the simultaneous closing
of the Equity Offering and the Pride Acquisition.
Jefferies & Company, Inc. has in the past provided investment banking
services to the Company and also acted as an underwriter in the IPO. Jefferies &
Company, Inc. performed investment banking services for the Company in
connection with the Well Solutions Acquisition in November 1994 for which
Jefferies & Company, Inc. received usual and customary fees in the amount of
$295,000. Jefferies & Company, Inc. paid to affiliates of Mr. Greenwood in the
year ended March 31, 1995, a finder's fee of $122,500 from the fee it received
from the Company in connection with the Well Solutions Acquisition. Jefferies &
Company, Inc. also has acted as financial advisor to the Company in connection
with the Pride Acquisition for which it will be
75
<PAGE> 78
paid a fee of approximately $1.2 million, and is being reimbursed for its
reasonable out-of-pocket expenses in connection therewith.
Jefferies & Company, Inc. is serving as one of the representatives of the
underwriters for purposes of the Equity Offering. The underwriters of the Equity
Offering will receive customary compensation for such underwriting consisting of
the underwriting discount.
LEGAL MATTERS
Certain legal matters with respect to the legality of the Notes offered
hereby will be passed upon for the Company by Jenkens & Gilchrist, A
Professional Corporation, Austin, Texas. Fulbright & Jaworski L.L.P., Houston,
Texas, has acted as counsel for the Underwriter in connection with the Debt
Offering and will pass upon certain legal matters relating to the Debt Offering.
EXPERTS
The consolidated financial statements and schedule of the Company as of
March 31, 1995 and 1996 and for each of the years in the three-year period ended
March 31, 1996 included in this Prospectus and elsewhere in the Registration
Statement, of which this Prospectus constitutes a part, have been included
herein and in the Registration Statement in reliance upon the reports of KPMG
Peat Marwick LLP, independent certified public accountants, included elsewhere
herein and in the Registration Statement and upon the authority of said firm as
experts in accounting and auditing. The report of KPMG Peat Marwick LLP covering
the March 31, 1994, financial statements refers to a change in the method of
accounting for income taxes.
The financial statements of the Taylor Acquisition Group as of December 31,
1994 and 1995 and for the years then ended have been audited by Chapman,
Williams & Co., Carthage, Texas, independent certified public accountants. Such
financial statements have been included herein and elsewhere in the Registration
Statement in reliance upon the report of said firm given upon their authority as
experts in accounting and auditing.
The financial statements of the U.S. Land-Based Well Servicing Operations
of Pride as of December 31, 1994 and 1995 and for each of the years in the
three-year period ended December 31, 1995 have been audited by Coopers & Lybrand
L.L.P., independent accountants. Such financial statements have been included in
the Registration Statement in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The financial statements of Well Solutions, Inc., as of March 31, 1994 and
1993 and for each of the three years in the period ended March 31, 1994, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving such reports.
76
<PAGE> 79
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy and information statements,
and other information with the Securities and Exchange Commission (the
"Commission"). These reports, proxy and information statements, and other
information concerning the Company can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549; and at the Commission's regional
offices at Suite 1400, Northwestern Atrium Center, 500 West Madison Avenue,
Chicago, Illinois 60661-2511 and at Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of such material can also be obtained from the
Commission at prescribed rates through its Public Reference Section at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, such
materials filed electronically by the Company with the Commission are available
at the Commission's World Wide Web site at http://www.sec.gov. The Common Stock
is traded on the Nasdaq National Market and such reports, proxy and information
statements, and other information may be inspected at the Nasdaq Stock Market,
1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the securities offered hereby
(including all amendments and supplements thereto, the "Registration
Statement"). This Prospectus, which forms a part of the Registration Statement,
does not contain all the information set forth in the Registration Statement,
certain parts of which have been omitted in accordance with the rules and
regulations of the Commission. Statements contained herein concerning the
provisions of certain documents are not necessarily complete and, in each
instance, reference is made to the copy of such document filed as an exhibit to
the Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference. For further
information with respect to the Company and the securities offered hereby,
reference is made to the Registration Statement, including the exhibits and
schedules thereto. The Registration Statement and the exhibits and schedules
thereto may be inspected, without charge, and copies may be obtained at
prescribed rates, at the public reference facilities and regional offices
referred to above.
77
<PAGE> 80
DAWSON PRODUCTION SERVICES, INC. AND ACQUISITIONS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Dawson Production Services, Inc.
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets at March 31, 1995 and 1996 and
September 30, 1996
(unaudited)............................................ F-3
Consolidated Statements of Income for the years ended
March 31, 1994, 1995 and 1996 and
the six months ended September 30, 1995 and 1996
(unaudited)............................................ F-4
Consolidated Statements of Shareholders' Equity for the
years ended March 31, 1994, 1995
and 1996 and the six months ended September 30, 1996
(unaudited)............................................ F-5
Consolidated Statements of Cash Flows for the years ended
March 31, 1994, 1995 and 1996
and the six months ended September 30, 1995 and 1996
(unaudited)............................................ F-6
Notes to the Consolidated Financial Statements............ F-7
U.S. Land-Based Well Servicing Operations of Pride Petroleum
Services, Inc.
Annual Financial Statements
Report of Independent Accountants...................... F-19
Combined Balance Sheet as of December 31, 1995 and
1994.................................................. F-20
Combined Statement of Operations and Changes in Owner's
Equity for the years ended December 31, 1995, 1994 and
1993.................................................. F-21
Combined Statement of Cash Flows for the years ended
December 31, 1995, 1994 and 1993...................... F-22
Notes to Combined Financial Statements................. F-23
Interim Financial Statements (Unaudited)
Combined Balance Sheet as of September 30, 1996 and
December 31, 1995..................................... F-31
Combined Statement of Operations for the nine months
ended September 30, 1996 and 1995..................... F-32
Combined Statement of Cash Flows for the nine months
ended September 30, 1996 and 1995..................... F-33
Notes to Unaudited Combined Financial Statements....... F-34
Taylor Acquisition Group
Independent Auditor's Report.............................. F-36
Combined Balance Sheet at December 31, 1994 and 1995 and
June 30, 1996 (unaudited).............................. F-37
Combined Statement of Income (Loss) for the years ended
December 31, 1994 and 1995 and the six months ended
June 30, 1995 and 1996 (unaudited)..................... F-38
Combined Statement of Cash Flows for the years ended
December 31, 1994 and 1995 and
the six months ended June 30, 1995 and 1996
(unaudited)............................................ F-39
Combined Statement of Changes in Stockholder's Equity for
the years ended December 31, 1994 and 1995 and the six
months ended June 30, 1996 (unaudited)................. F-40
Notes to the Financial Statements......................... F-41
Well Solutions, Inc.
Report of Independent Public Accountants.................. F-48
Balance Sheets at March 31, 1994 and 1993................. F-49
Statements of Income for the years ended March 31, 1994,
1993 and 1992.......................................... F-50
Statements of Shareholder's Equity for the years ended
March 31, 1994, 1993 and 1992.......................... F-51
Statements of Cash Flows for the years ended March 31,
1994, 1993 and 1992.................................... F-52
Notes to Financial Statements............................. F-53
</TABLE>
F-1
<PAGE> 81
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Dawson Production Services, Inc.:
We have audited the accompanying consolidated balance sheets of Dawson
Production Services, Inc. and subsidiaries as of March 31, 1995 and 1996, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the years in the three-year period ended March 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dawson
Production Services, Inc. and subsidiaries as of March 31, 1995 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended March 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in fiscal 1994.
KPMG Peat Marwick LLP
San Antonio, Texas
June 11, 1996, except as
to note (14) which is as
of December 23, 1996
F-2
<PAGE> 82
DAWSON PRODUCTION SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
-------------------------- SEPTEMBER 30,
1995 1996 1996
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 2,796,540 $13,863,108 $ 9,364,032
Trade receivables (net of allowance for doubtful
accounts of $348,052, $290,839 and $307,236,
respectively).................................. 8,243,705 8,773,156 13,687,635
Other receivables................................. 200,247 95,202 281,536
Income taxes receivable........................... 294,215 740,768 290,768
Prepaid expenses and other........................ 143,985 215,497 882,996
----------- ----------- -----------
Total current assets...................... 11,678,692 23,687,731 24,506,967
Net property and equipment, substantially all
pledged (notes 4 and 5)........................... 25,320,908 29,114,671 39,209,362
Goodwill and other assets........................... 3,525,787 3,565,555 10,375,613
----------- ----------- -----------
Total assets.............................. $40,525,387 $56,367,957 $74,091,942
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 2,929,186 $ 2,909,390 $ 4,114,105
Accrued liabilities............................... 2,315,621 2,825,926 3,237,185
Current portion of long-term debt (note 4)........ 1,611,289 20,055 9,246,947
Current portion of obligations under capital
leases (note 5)................................ 372,308 1,167,384 1,707,665
----------- ----------- -----------
Total current liabilities................. 7,228,404 6,922,755 18,305,902
----------- ----------- -----------
Long-term debt, net of current portion (note 4)..... 15,477,990 1,530,903 3,130,100
Obligations under capital leases, net of current
portion (note 5).................................. 511,254 2,163,610 1,478,405
Deferred income taxes (note 8)...................... 846,072 56,310 3,244,169
Minority interest................................... 5,353,511 -- --
Mandatorily redeemable Series A preferred stock, no
par value, 80,800 shares issued and outstanding in
1995 (note 3)..................................... 1,010,000 -- --
Shareholders' equity (notes 6 and 7):
Preferred stock, no par value 560,600 shares
authorized, none issued and outstanding........ -- -- --
Common stock, $.01 par value, 20,560,600 shares
authorized, 1,682,827, 6,382,526 and 6,391,126
issued, respectively, and 1,681,610, 6,382,526
and 6,391,126 outstanding, respectively........ 16,828 63,826 63,912
Paid-in capital................................... 6,610,595 41,458,254 41,522,152
Retained earnings................................. 3,543,271 4,314,177 6,489,180
Notes receivable from officers.................... (66,878) (141,878) (141,878)
----------- ----------- -----------
10,103,816 45,694,379 47,933,366
Less treasury common stock, at cost............... (5,660) -- --
----------- ----------- -----------
Total shareholders' equity................ 10,098,156 45,694,379 47,933,366
Commitments and contingencies (note 11).............
----------- ----------- -----------
Total liabilities and shareholders'
equity.................................. $40,525,387 $56,367,957 $74,091,942
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 83
DAWSON PRODUCTION SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MARCH 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................. $27,942,484 $36,004,700 $52,391,307 $25,888,387 $33,811,434
----------- ----------- ----------- ----------- -----------
Costs and expenses:
Operating.............................. 19,936,624 24,240,773 34,319,579 16,875,158 21,893,507
General and administrative............. 3,854,336 5,573,978 8,937,502 4,238,011 5,468,804
Depreciation and amortization.......... 1,706,856 2,607,837 4,396,574 2,016,424 2,875,974
----------- ----------- ----------- ----------- -----------
Total costs and expenses....... 25,497,816 32,422,588 47,653,655 23,129,593 30,238,285
----------- ----------- ----------- ----------- -----------
Operating income............... 2,444,668 3,582,112 4,737,652 2,758,794 3,573,149
----------- ----------- ----------- ----------- -----------
Other income and expenses:
Interest expense....................... 281,977 789,276 1,847,678 952,872 296,022
Other income, net...................... (60,530) (40,939) (129,494) (27,207) (251,820)
----------- ----------- ----------- ----------- -----------
Total other income and
expenses..................... 221,447 748,337 1,718,184 925,665 44,202
----------- ----------- ----------- ----------- -----------
Income before minority
interest, income taxes,
extraordinary item and
cumulative effect of change
in accounting principle...... 2,223,221 2,833,775 3,019,468 1,833,129 3,528,947
Minority interest in consolidated
subsidiary............................. 901,707 1,091,717 937,164 787,001 --
----------- ----------- ----------- ----------- -----------
Income before income taxes, extraordinary
item and cumulative effect of change in
accounting principle................... 1,321,514 1,742,058 2,082,304 1,046,128 3,528,947
Provision for income taxes (note 8): 525,281 680,822 709,306 398,000 1,353,944
----------- ----------- ----------- ----------- -----------
Income before extraordinary item and
cumulative effect of change in
accounting principle................... 796,233 1,061,236 1,372,998 648,128 2,175,003
Extraordinary item....................... -- -- (513,819) -- --
Cumulative effect of change in accounting
principle.............................. (92,202) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income............................... 704,031 1,061,236 859,179 648,128 2,175,003
----------- ----------- ----------- ----------- -----------
Preferred stock dividends................ 101,007 101,007 88,273 50,086 --
----------- ----------- ----------- ----------- -----------
Net income applicable to common stock.... $ 603,024 $ 960,229 $ 770,906 $ 598,042 $ 2,175,003
=========== =========== =========== =========== ===========
Earnings per common share:
Primary:
Income before extraordinary item and
cumulative effect of change in
accounting principle................ $ 0.34 $ 0.45 $ 0.44 $ 0.25 $ 0.33
Extraordinary item..................... -- -- (0.17) -- --
Cumulative effect of change in
accounting principle................ (0.05) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income.......................... $ 0.29 $ 0.45 $ 0.27 $ 0.25 $ 0.33
=========== =========== =========== =========== ===========
Average number of shares outstanding... 2,052,168 2,155,380 2,931,234 2,384,359 6,510,428
=========== =========== =========== =========== ===========
Fully diluted:
Income before extraordinary item and
cumulative effect of change in
accounting principle................ $ 0.33 $ 0.42 $ 0.43 $ 0.23 $ 0.33
Extraordinary item..................... -- -- (0.16) -- --
Cumulative effect of change in
accounting principle................ (0.04) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income............................. $ 0.29 $ 0.42 $ 0.27 $ 0.23 $ 0.33
=========== =========== =========== =========== ===========
Average number of shares outstanding... 2,450,791 2,648,740 3,207,622 3,095,826 6,527,796
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 84
DAWSON PRODUCTION SERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK NOTES TOTAL
------------------- TREASURY STOCK RECEIVABLE SHARE-
ISSUED PAID-IN ------------------ RETAINED FROM HOLDERS'
SHARES AMOUNTS CAPITAL SHARES AMOUNTS EARNINGS OFFICERS EQUITY
--------- ------- ----------- ------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT MARCH 31, 1993...... 1,298,548 $12,985 $ 4,093,473 48,732 $(76,994) $1,980,018 $ -- $ 6,009,482
Issuance of common stock in
lieu of interest payments... 2,150 22 7,478 -- -- -- 7,500
Dividends on preferred stock,
paid in common stock........ 7,220 72 25,113 -- -- (25,185) -- --
Dividends on preferred stock,
paid in cash................ -- -- -- -- -- (75,822) -- (75,822)
Conversion of subordinated
convertible note into common
stock....................... 18,430 184 74,816 -- -- -- -- 75,000
Net income.............. -- -- -- -- -- 704,031 -- 704,031
--------- ------- ----------- ------- -------- ---------- --------- -----------
BALANCES AT MARCH 31, 1994...... 1,326,348 13,263 4,200,880 48,732 (76,994) 2,583,042 -- 6,720,191
Purchase of treasury stock.... -- -- -- 16,172 (72,264) -- -- (72,264)
Sale of common stock.......... 282,536 2,826 2,248,576 (63,687) 143,598 -- -- 2,395,000
Dividends on preferred stock,
paid in cash................ -- -- -- -- -- (101,007) -- (101,007)
Exercise of common stock
warrants.................... 57,818 578 86,300 -- -- -- (66,878) 20,000
Conversion of subordinated
convertible note into common
stock....................... 16,125 161 74,839 -- -- -- -- 75,000
Net income.............. -- -- -- -- -- 1,061,236 -- 1,061,236
--------- ------- ----------- ------- -------- ---------- --------- -----------
BALANCES AT MARCH 31, 1995...... 1,682,827 16,828 6,610,595 1,217 (5,660) 3,543,271 (66,878) 10,098,156
Dividends on preferred stock,
paid in cash................ -- -- -- -- -- (88,273) -- (88,273)
Common stock issued --
Initial public offering
(note 6).................. 2,616,202 26,163 23,495,829 -- -- -- -- 23,521,992
Conversion of subordinated
convertible note.......... 371,232 3,712 2,546,288 -- -- -- -- 2,550,000
Issuance of common stock for
minority interest......... 1,329,495 13,295 7,686,705 -- -- -- -- 7,700,000
Conversion of preferred
stock to common stock..... 347,440 3,474 1,006,526 -- -- -- -- 1,010,000
Exercise of stock options..... 36,547 366 75,633 -- -- -- (75,000) 999
Tax benefit realized from
stock options............... -- -- 42,326 -- -- -- -- 42,326
Retirement of treasury
stock....................... (1,217) (12) (5,648) (1,217) 5,660 -- -- --
Net income.............. -- -- -- -- -- 859,179 -- 859,179
--------- ------- ----------- ------- -------- ---------- --------- -----------
BALANCES AT MARCH 31, 1996...... 6,382,526 63,826 41,458,254 -- -- 4,314,177 (141,878) 45,694,379
(the following information is
unaudited)
Exercise of stock options..... 8,600 86 63,898 -- -- -- -- 63,984
Net income.............. -- -- -- -- -- 2,175,003 -- 2,175,003
--------- ------- ----------- ------- -------- ---------- --------- -----------
BALANCES AT SEPTEMBER 30,
1996.......................... 6,391,126 $63,912 $41,522,152 -- -- $6,489,180 $(141,878) $47,933,366
========= ======= =========== ======= ======== ========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 85
DAWSON PRODUCTION SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MARCH 31, SEPTEMBER 30,
----------------------------------------- --------------------------
1994 1995 1996 1995 1996
----------- ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 704,031 $ 1,061,236 $ 859,179 $ 648,128 $ 2,175,003
Adjustments to reconcile net income to net
cash provided by operating activities:
Minority interest in net income of
subsidiary company...................... 901,707 1,091,717 937,164 787,001 --
Depreciation and amortization............. 1,706,856 2,607,837 4,396,574 2,016,424 2,875,974
Allowance for doubtful accounts........... 97,088 157,921 (57,213) (48,088) 53,603
Common stock issued in lieu of interest
payments................................ 7,500 -- -- -- --
Loss (gain) on sale of assets............. (31,762) (22,113) 95,351 (19,176) 81,826
Increase in deferred income taxes......... 256,037 88,740 636,665 26,740 978,192
Decrease (increase) in receivables........ 286,786 (4,338,722) (813,746) (509,666) (721,886)
Decrease (increase) in prepaid expenses
and other............................... 57,571 (11,802) (71,512) (604,779) (463,526)
Decrease (increase) in other assets....... (50,202) (129,336) 170,390 68,092 10,014
Increase (decrease) in accounts payable... 339,887 1,823,552 (19,796) 184,904 378,408
Increase (decrease) in income tax
payable................................. 288,671 (288,671) -- (184,375) (17,980)
Increase in accrued expenses.............. 433,988 1,000,374 510,305 (38,762) (506,176)
----------- ------------ ------------ ----------- ------------
Net cash provided by operating
activities............................ 4,998,158 3,040,733 6,643,361 2,326,443 4,843,452
----------- ------------ ------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions.................................. -- (16,597,550) (125,000) -- (12,958,413)
Additions to property and equipment........... (1,235,963) (2,567,230) (4,522,765) (2,689,532) (2,236,135)
Proceeds from sales of property and
equipment................................... 160,227 65,644 281,841 195,578 65,428
----------- ------------ ------------ ----------- ------------
Net cash used in investing activities... (1,075,736) (19,099,136) (4,365,924) (2,493,954) (15,129,120)
----------- ------------ ------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings.......................... 781,153 16,156,053 1,042,677 170,100 7,261,330
Payments on short-term borrowings............. (965,297) -- -- -- --
Payments on long-term debt.................... (1,058,147) (2,027,649) (14,058,284) (781,757) (462,451)
Capital lease payments........................ (700,673) (593,838) (1,348,564) (320,277) (1,076,271)
Sale of common stock.......................... -- 2,395,000 23,521,992 -- --
Exercise of common stock options and
warrants.................................... -- 20,000 999 -- 63,984
Tax benefit realized from stock options....... -- -- 42,326 -- --
Cost of treasury stock purchased.............. -- (72,264) -- -- --
Cash dividends on preferred stock............. (75,822) (101,007) (88,273) (50,086) --
Investment in subsidiary by minority owner.... -- 1,404,000 -- -- --
Subsidiary distributions to minority owner.... (871,442) (497,026) (323,742) (131,935) --
----------- ------------ ------------ ----------- ------------
Net cash used in financing activities... (2,890,228) 16,683,269 8,789,131 (1,113,955) 5,786,592
----------- ------------ ------------ ----------- ------------
Net increase (decrease) in cash......... 1,032,194 624,866 11,066,568 (1,281,466) (4,499,076)
Cash and cash equivalents at the beginning of
the period.................................. 1,139,480 2,171,674 2,796,540 2,796,540 13,863,108
----------- ------------ ------------ ----------- ------------
Cash and cash equivalents at the end of the
period...................................... $ 2,171,674 $ 2,796,540 $ 13,863,108 $ 1,515,074 $ 9,364,032
=========== ============ ============ =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for:
Interest.................................... $ 275,461 $ 708,234 $ 1,928,993 $ 1,058,823 $ 261,681
Income taxes................................ 100,000 967,208 912,628 640,000 214,000
SUPPLEMENTAL DISCLOSURES OF NON-CASH
TRANSACTIONS:
Assets acquired under capital leases.......... 844,116 645,972 3,823,282 820,292 904,547
Conversion of preferred stock to common
stock....................................... -- -- 1,010,000 75,000 --
Conversion of long-term debt to common
stock....................................... 75,000 75,000 2,550,000 -- --
Issuance of common stock for acquisition of
minority interest........................... -- -- 7,700,000 -- --
Issuance of notes payable for acquisition of
business.................................... -- 1,500,000 -- -- 1,750,000
Issuance of notes receivable for exercise of
stock options............................... -- 66,878 75,000 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 86
DAWSON PRODUCTION SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Dawson Production Services, Inc. (the Company) is engaged in the business
of providing workover rig services, liquid services and production services in
Texas and Louisiana. The Company's primary customers are oil and gas well
operators.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated. (See note 2).
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. While it is believed that such estimates are reasonable,
actual results could differ from those estimates.
CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and short-term
investments with an original maturity of three months or less from the date of
purchase are considered to be cash equivalents.
REVENUE RECOGNITION
The Company generally recognizes revenue when services are rendered.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major renewals and improvements
are capitalized and depreciated over the respective asset's useful life.
Expenditures for repairs and maintenance are charged to expense as incurred.
Property and equipment are depreciated over their estimated useful lives on
the straight-line method as follows:
<TABLE>
<CAPTION>
ESTIMATED
LIFE (YEARS)
------------
<S> <C>
Buildings................................................... 20
Well servicing equipment.................................... 5-12
Vehicles.................................................... 3-5
Office furniture and other equipment........................ 5-12
</TABLE>
INCOME TAXES
Effective April 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
SFAS 109 requires a change from the deferred method of accounting for income
taxes of APB Opinion 11 to the asset and liability method of accounting for
income taxes. Under the asset and liability method of SFAS 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the effect
on deferred
F-7
<PAGE> 87
DAWSON PRODUCTION SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. In connection with the adoption of
SFAS 109, the Company recorded an adjustment to income of $92,202 which
represents the net increase of the deferred tax liability at April 1, 1993. Such
adjustment has been reflected in the 1994 statement of income as the cumulative
effect of change in accounting principle.
INTANGIBLE AND OTHER ASSETS
Goodwill represents the excess purchase price over fair value of net assets
acquired and is amortized on a straight-line basis over twenty years from the
date of acquisition. Other assets consist principally of loan costs and are
amortized on a straight-line basis over the term of the loan.
Intangible assets are reviewed for impairment whenever events or
circumstances provide evidence that suggests that the carrying amount of the
intangible asset may not be recoverable. The Company assesses the recoverability
of the intangible asset by determining whether the carrying amount of the
intangible asset can be recovered through projected undiscounted future cash
flows over the remaining amortization period.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of short-term,
variable rate items or recently issued debt instruments for which management
believes fair value approximates carrying value.
TREASURY STOCK
Treasury stock is recorded under the cost method.
EARNINGS PER SHARE
Primary earnings per share is computed by deducting preferred dividends
from net income in order to determine net income attributable to common
shareholders. This amount is then divided by the weighted average number of
common shares outstanding and common stock equivalents.
Earnings per share assuming full dilution is determined by dividing net
income plus tax effected convertible debt interest by the weighted average
number of common shares outstanding during the year after giving effect for
common stock equivalents arising from stock options and for convertible debt or
preferred stock assumed converted to common stock.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, stock and stock options issued during the twelve months immediately
preceding the Company's initial public offering filing date including those
issued in connection with the minority interest acquisition (see note 2) have
been included in the calculation of common and common equivalent shares using
the treasury stock method and the anticipated public offering price as if they
were outstanding for all periods. Common stock equivalents resulting from the
conversion or exercise of convertible debt or preferred shares and other stock
options are excluded when their result is anti-dilutive.
RECLASSIFICATION
Certain amounts, as previously presented, have been reclassified to conform
with the current year financial statement presentation.
F-8
<PAGE> 88
DAWSON PRODUCTION SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
Accounting for Asset Impairment
During March 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The Company adopted Statement 121
effective April 1, 1996. Statement 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. This new pronouncement had
no material effect on the financial statements upon adoption.
Accounting for Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which sets forth alternative accounting and disclosure
requirements for stock-based compensation arrangements. SFAS 123 does not
rescind the existing accounting for employee stock-based compensation under APB
Opinion No. 25. Companies may continue to follow the current accounting to
measure and recognize employee stock-based compensation; however, SFAS 123
requires disclosure of pro forma net income and earnings per share that would
have been reported under the "fair value" based recognition provisions of SFAS
123. The Company has elected to continue to follow the provisions of APB Opinion
No. 25 for employee stock-based compensation and will disclose the pro forma
information required under SFAS 123 beginning with its consolidated financial
statements for the year ending March 31, 1997.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments
and trade receivables. The Company places its temporary cash investments in U.S.
Government securities and in other high quality financial instruments. By policy
the Company limits the amount of credit exposure to any one financial
institution or issuer. The Company's customer base consists primarily of
independent oil and natural gas producers. During the year ended March 31, 1994
no single customer accounted for 10% or more of the Company's total revenues.
During the years ended March 31, 1995 and 1996, sales to the Company's largest
customer accounted for approximately 16% and 24%, respectively, of the Company's
total operating revenues.
UNAUDITED INFORMATION
The consolidated financial statements as of September 30, 1996 and for the
six months ended September 30, 1996 and 1995, and related footnote disclosures
to the extent they relate to such periods, have been prepared in accordance with
generally accepted accounting principles for interim financial information and
are unaudited. Accordingly, such data does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the six months ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for the year ending March 31, 1997.
(2) ACQUISITIONS
WELL SOLUTIONS, INC.
On November 30, 1994, the Company acquired substantially all of the
property and equipment of Well Solutions, Inc. (Well Solutions), a company
engaged in providing oilfield services, for an aggregate purchase price of
$18,097,550, consisting of $15,895,733 in cash, a convertible note payable of
$1,500,000 and closing costs of $701,817. The acquisition has been accounted for
as a purchase and, accordingly, the operating results
F-9
<PAGE> 89
DAWSON PRODUCTION SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of Well Solutions have been included in the Company's consolidated statements of
income since the date of acquisition. The excess of the aggregate purchase price
over the fair market value of the net assets acquired was recognized as goodwill
and is being amortized over 20 years. The fair value of assets acquired,
including goodwill of $2,451,818, was $18,534,355 and liabilities assumed
totaled $436,805. The funds used to acquire Well Solutions were provided by
long-term borrowings, proceeds of sales of common stock and subordinated debt
and cash from operations.
TAYLOR COMPANIES, INC.
Effective July 29, 1996, the Company acquired all of the issued and
outstanding stock of Taylor Companies, Inc. for an aggregate purchase price of
$12,750,000, consisting of $11,000,000 in cash and a $1,750,000 subordinated
promissory note payable to the selling shareholders. Goodwill recognized on this
transaction amounted to approximately $6,690,000, which is being amortized over
a twenty-year period. The Company reported this acquisition and related pro
forma effects on a current report Form 8-K.
Assuming the purchase of Taylor Companies, Inc. had been consummated as of
the beginning of the fiscal year 1996, unaudited pro forma operating results of
the Company would be as follows:
<TABLE>
<S> <C>
Revenues.................................................... $69,104,000
Net income (loss)........................................... $ (363,000)
Primary earnings (loss) per share........................... $ (0.15)
Fully diluted earnings (loss) per share..................... $ (0.15)
</TABLE>
The pro forma results of operations are not necessarily indicative of the
actual results of operations that would have occurred had the purchase been made
at the beginning of the respective period.
OTHER ACQUISITIONS:
Effective November 1, 1995, the Company acquired the 39% minority interest
in the Company's subsidiary, Dawson WellTech, L.C., from WellTech, Inc. in
exchange for the issuance to WellTech, Inc. of 1,329,495 shares of common stock
for a total purchase price of $7,700,000 based on an independent appraisal of
the common stock. Goodwill recognized on this transaction amounted to $384,847
and is being amortized over 20 years.
Effective March 1, 1996, the Company acquired a portion of the assets of a
small company in Giddings, Texas for an aggregate purchase price of
approximately $1,248,000, consisting of $125,000 in cash and $1,123,000 in
capital leases and a note payable. Goodwill recognized on this transaction
amounted to $97,000 and is being amortized over 20 years.
In April 1996, the Company acquired the assets of two small production
testing companies in Louisiana. The aggregate purchase price was approximately
$673,000. Goodwill and a non-compete agreement were recognized on these
transactions which amounted to approximately $111,000. These items are being
amortized over 20 and five year periods, respectively.
In May 1996, the Company acquired the Texas-based well servicing division
of a non-affiliated company. The aggregate purchase price was $779,000.
In July 1996, the Company acquired the assets of a trucking company in
Louisiana. The aggregate purchase price was approximately $400,000. Goodwill
recognized on the transaction amounted to $50,000, which is being amortized over
a 20-year period.
The acquisitions have been accounted for as purchases and, accordingly, the
operating results have been included in the Company's consolidated statements of
income since the dates of acquisition. Excluding the
F-10
<PAGE> 90
DAWSON PRODUCTION SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Taylor acquisition, the effect on results of operations would not have been
material if such acquisitions had occurred at the beginning of the year.
(3) MANDATORILY REDEEMABLE PREFERRED STOCK
In October 1990, the Company issued 80,800 shares of 10% cumulative
convertible preferred stock for a total price of $1,010,000. Each preferred
shareholder was entitled to receive, in preference to common shareholders,
annual dividends in the amount of $1.25 per share, payable quarterly. At the
discretion of the Company, the dividends could have been declared in either cash
or common stock valued at $3.49 a share. Dividends were cumulative and accrued
from the date of the stock issuance. The Company declared dividends on the
preferred stock in the amount of $101,007 in the years ended March 31, 1994 and
1995 and $88,273 in the year ended March 31, 1996.
Holders of the preferred stock elected to convert 20,200 shares of such
stock into 86,860 shares of common stock, effective October 18, 1995. Pursuant
to a November 1, 1995 Agreement for the Conversion of Securities (the
"Conversion Agreement"), the remaining 60,600 shares of preferred stock
converted into 260,580 shares of common stock effective February 19, 1996.
(4) NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------------ SEPTEMBER 30,
1995 1996 1996
----------- ---------- -------------
<S> <C> <C> <C>
Note payable to a bank with a fixed interest rate of
10.81%. Principal payments of $154,762 plus interest
are due monthly, with a balloon payment at maturity on
November 28, 1999. Collateralized by substantially all
of the Company's property, equipment and
receivables............................................ $13,000,000 $ -- $ --
Promissory note payable to a bank bearing interest at
7.53% per annum. Interest is due monthly; principal is
due February 1997...................................... -- -- 7,000,000
Subordinated convertible notes bearing interest at 10%.
Interest is due quarterly, payable in cash or common
stock at $6.98 per share at the Company's option;
principal is due December 1, 1999. Convertible into
344,000 shares of the Company's common stock........... 2,400,000 -- --
Convertible debenture bearing interest at 8%. Interest is
due quarterly; principal is due November 30, 1999...... 1,500,000 1,500,000 1,500,000
Subordinated promissory note payable to a former Taylor
shareholder bearing interest at 8.0% per annum.
Interest is due quarterly; principal is due in
quarterly installments of $83,333...................... -- -- 1,750,000
Subordinated convertible note bearing interest at 10%.
Interest due quarterly, payable in cash or common stock
at $5.23 per share at the Company's option; principal
is due June 27, 1997................................... 150,000 -- --
Other notes payable to lenders and financing companies
bearing interest at rates ranging from 6% to 10% due in
monthly installments. Secured by various assets of the
Company................................................ 39,279 50,958 2,127,047
----------- ---------- -----------
Total long-term debt..................................... 17,089,279 1,550,958 12,377,047
Less current portion..................................... 1,611,289 20,055 9,246,947
----------- ---------- -----------
Long-term debt, net of current portion................... $15,477,990 $1,530,903 $ 3,130,100
=========== ========== ===========
</TABLE>
F-11
<PAGE> 91
DAWSON PRODUCTION SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In July 1996, to finance a portion of the Taylor acquisition, the Company
obtained a loan from a bank in the amount of $7.0 million. The promissory note
carries an annual interest rate of 7.75% and has a maturity date of March 31,
1997. In September 1996, the Company obtained a take-out commitment for a term
loan in the amount of $7.0 million to replace the promissory note. The Company
subsequently decided to not take advantage of the take-out commitment, and
accordingly, the promissory note has been included as current portion of
long-term debt at September 30, 1996.
In September 1996, the Company signed a commitment letter for an
acquisition line of credit in the amount of up to $20.0 million and a working
capital line of credit with a maximum availability of the lesser of (i) $10.0
million or (ii) 80% of eligible accounts receivable that have been outstanding
less than 90 days. Borrowings under the acquisition line of credit would mature
seven years from the date of any such borrowings and would bear interest at a
per annum rate equal to the lesser of: (i) the prime rate of interest of the
bank as adjusted from time to time or (ii) a varying percentage ranging from 2%
to 3%, based on the total funded debt to cash flow ratio, over the 180-day LIBOR
rate of interest. From the third year until maturity, the acquisition line of
credit would be secured by assets of the Company with a loan to collateral value
ratio of not less than 70%. Borrowings under the working capital line of credit
would mature two years from the date of any such borrowings and would bear
interest at a per annum rate equal to the lesser of: (i) the prime rate of
interest of the bank as adjusted from time to time or (ii) a varying percentage
rate ranging from 1.75% to 2.75%, based on the total funded debt to cash flow
ratio, over the Company's choice of the 30-day, 90-day or 180-day LIBOR rate of
interest. The working capital line of credit would be secured by first lien
security interest on all the Company's accounts receivable and inventory. Under
terms of the commitment, the Company must maintain minimum working capital,
tangible net worth, current ratios and debt to capital ratios.
The Company has requested from its bank a modification to the commitment
letter to increase the maximum availability of funds under the working capital
line of credit to the lesser of (i) $50.0 million or (ii) 80% of eligible
accounts receivable that have been outstanding less than 90 days. The Company
expects to receive a commitment from its bank to such increase.
In March 1996, the Company elected to prepay the $13,000,000 note payable
to a bank. An extraordinary charge of $513,819 (net of income tax benefit of
$264,495) was incurred as a result of the early extinguishment of the note
payable.
Scheduled maturities of principal for long-term debt based on balances
outstanding at March 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDING
MARCH 31, TOTAL
- ------------ ----------
<S> <C> <C>
1997............................................................ $ 20,055
1998............................................................ 21,292
1999............................................................ 9,611
2000............................................................ 1,500,000
----------
$1,550,958
==========
</TABLE>
The Company has a revolving line of credit with a bank in an amount not to
exceed $4,000,000, secured by the Company's receivables, expiring March 31,
1997. The Company has not drawn against the line of credit as of March 31, 1996
but has established a letter of credit in favor of its insurance carrier in the
amounts of $225,000 related to its workers compensation insurance program.
Borrowings against the line bear interest at the prime lending rate and there is
a commitment fee of 0.5% on unfunded amounts. The revolving line of credit
agreement requires the Company to maintain various loan covenants.
F-12
<PAGE> 92
DAWSON PRODUCTION SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the year ended March 31, 1994, 2,150 shares of common stock valued
at $7,500 were issued as payment of the interest on the $150,000 outstanding
under a $300,000 subordinated convertible note payable to a preferred
shareholder. The $150,000 subordinated note is convertible into common stock of
the Company beginning in August 1992 through August 1996 at conversion rates
varying from $4.07 to $5.81 per share. During each of fiscal 1994 and 1995,
$75,000 in principal amount of subordinated notes were converted into 18,430 and
16,125 shares of common stock. During fiscal 1996, $150,000 in principal amount
of subordinated notes were converted into 27,232 shares of common stock.
Also, pursuant to the Conversion Agreement, $2.4 million of the Company's
subordinated debt converted into common stock at the rate of one share of common
stock for each $6.98 in principal amount of subordinated debt effective February
19, 1996.
(5) LEASES AND LEASE COMMITMENTS
The Company leases vehicles and office equipment under capital leases.
Total assets recorded under capital leases at March 31, 1995 and 1996 are
$2,283,951 and $5,197,835, respectively. Amortization expense related to assets
held under capital lease for the years ended March 31, 1994, 1995 and 1996 was
$319,686, $357,363 and $243,558, respectively.
The Company leases certain of its facilities under operating leases. Lease
terms generally range from one to five years. Rent expense for the years ended
March 31, 1994, 1995 and 1996 was approximately $144,830, $174,175 and $251,556,
respectively.
Future minimum lease payments as of March 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
MARCH 31, LEASES LEASES
----------- ---------- ---------
<S> <C> <C>
1997........................................................ $1,406,027 $163,612
1998........................................................ 1,096,233 150,412
1999........................................................ 773,466 95,562
2000........................................................ 429,837 80,262
2001........................................................ 179,986 13,377
---------- --------
Total minimum lease payments................................ $3,885,549 $503,225
========
Less amounts representing interest.......................... (554,555)
----------
Present value of minimum lease payments..................... $3,330,994
==========
</TABLE>
(6) SHAREHOLDERS' EQUITY
(a) Equity Offering
In March 1996, the Company completed an initial public offering (the
"Offering") of 2,616,202 shares (net of 48 fractional shares paid in cash in
connection with the Recapitalization and Stock Split referred to below) of its
common stock for the purpose of raising funds to acquire additional businesses
and to retire debt. Net proceeds to the Company from the Offering, after
deduction of associated expenses, were approximately $23,522,000.
(b) Recapitalization and Stock Split
Effective January 17, 1996, the shareholders approved an amendment to the
Articles of Incorporation which, among other actions, increased the authorized
shares of all classes of capital stock to 20,560,600 and changed the par value
of the common stock to $.01 per share. Share and per share amounts for all
periods presented have been adjusted to reflect these changes. The Board of
Directors approved a 4.3-for-one stock
F-13
<PAGE> 93
DAWSON PRODUCTION SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
split of the common stock which occurred on March 1, 1996. Share and per share
amounts for all periods presented have been adjusted to reflect this stock
split.
(c) Treasury Stock
During fiscal 1996, the Company retired all of the common shares held in
treasury. The cost of acquired shares in excess of par value has been charged to
additional paid-in capital.
(7) STOCK WARRANTS AND OPTIONS
In fiscal 1995, 118,250 common stock warrants were issued by the Company to
several officers and directors of the Company. The warrants have an exercise
price of $4.65 per share. No warrants were exercised or granted during fiscal
1994. During fiscal 1995 and 1996, employees and officers of the Company
exercised their warrants to purchase 40,618 and 36,546 shares, respectively, of
common stock in exchange for notes payable to the Company of $66,878 and
$75,000. The notes are secured by the shares of common stock issued and the
personal guarantees of the officers receiving the stock.
In October 1995, the Company adopted the 1995 Incentive Plan (the "1995
Plan"). Under the 1995 Plan, incentive options, non-statutory options,
restricted stock awards, and/or stock appreciation rights may be granted to key
employees, non-employee directors and consultants to purchase the Company's
common stock at prices not less than the fair market value at the time of grant,
which become exercisable as described in the respective Award Agreement.
Pursuant to the 1995 Plan, an aggregate of 537,500 shares of the Company's
common stock is available for issuance upon the exercise of such options, awards
and rights, which may be granted over a ten-year period. On October 6, 1995,
options to purchase 133,300 shares of common stock at $7.44 per share were
granted under the 1995 Plan.
The following table summarizes the activity of stock options and warrants
granted by the Company:
<TABLE>
<CAPTION>
WARRANT PRICE
SHARES PER SHARE
------ -------------
<S> <C> <C>
OUTSTANDING, MARCH 31, 1994................................ 94,364 $.23 to $2.33
Granted.................................................. 118,250 $4.65
Exercised................................................ (57,818) $1.16 to $1.65
Cancelled................................................ -- --
------- --------------
OUTSTANDING, MARCH 31, 1995................................ 154,796 $.23 to $4.65
Granted.................................................. 133,300 $7.44
Exercised................................................ (36,546) $.23 to $2.33
Cancelled................................................ (10,750) $4.55
-------
OUTSTANDING, MARCH 31, 1996................................ 240,800 $4.65 to $7.44
=======
EXERCISABLE AT END OF YEAR................................. 84,710
=======
</TABLE>
(8) INCOME TAXES
The components of income tax expense applicable to continuing operations
are as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Current............................................ $454,989 $592,082 $ --
Deferred........................................... 70,292 88,740 709,306
-------- -------- --------
$525,281 $680,822 $709,306
======== ======== ========
</TABLE>
F-14
<PAGE> 94
DAWSON PRODUCTION SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As discussed in note 1, the Company adopted SFAS 109 effective April 1,
1993. Income taxes for financial reporting purposes differs from the amount
computed by applying the statutory federal income tax rate of 34% to income
before income taxes as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Expected tax expense at U.S. statutory rate........ $449,315 $592,300 $707,984
Expenses not deductible............................ 15,858 11,220 35,501
State income taxes, net of federal effect.......... 45,663 47,190 (37,116)
Other.............................................. 14,445 30,112 2,937
-------- -------- --------
Provision for income taxes......................... $525,281 $680,822 $709,306
======== ======== ========
</TABLE>
The extraordinary loss of $513,819 in 1996 is net of deferred tax benefits
of $264,495.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at March 31,
1995 and 1996 are presented below:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for uncollectible accounts receivable........... $ 71,020 $ 109,065
State deferred income taxes............................... 55,729 --
Alternative minimum tax credit carryforwards.............. 53,322 435,455
Reserve for worker's compensation......................... -- 347,966
Accrued bonuses........................................... -- 195,110
Net operating loss carryforwards.......................... -- 1,119,522
Other..................................................... 54,309 12,456
---------- ----------
Total gross deferred tax assets................... 234,380 2,219,574
---------- ----------
Deferred tax liabilities:
Property and equipment...................................... 649,181 2,275,884
Investment in Dawson WellTech, L.C. ........................ 431,271 --
---------- ----------
Total gross deferred tax liabilities.............. 1,080,452 2,275,884
---------- ----------
Net deferred tax liability........................ $ 846,072 $ 56,310
========== ==========
</TABLE>
The Company anticipates the reversal of existing taxable temporary
differences will provide sufficient taxable income to realize the benefits of
its deferred tax assets.
For the year ended March 31, 1996, a decrease in deferred income tax
expense resulted primarily from the purchase of the remaining 39% interest in
the Company's majority owned subsidiary, Dawson WellTech, L.C. (note 2), a
reduction in deferred tax liabilities occurred of approximately $1,400,000 as a
result of the differences in basis of assets for financial reporting and income
tax purposes.
At March 31, 1995 and 1996, the Company had $53,322 and $435,455 of
alternative minimum tax credit carryforwards available to reduce regular Federal
income taxes which have no expiration date. The Company also has a tax net
operating loss carryforward of approximately $3,000,000 for federal income tax
purposes which expires in 2010 and 2011. Changes in ownership, as defined by
section 382 of the Internal Revenue Code, will limit the utilization of net
operating loss carryforwards to $2,000,000 per year.
F-15
<PAGE> 95
DAWSON PRODUCTION SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) RELATED PARTY TRANSACTIONS
The Company retains a company owned by a member of the Board of Directors
to provide consulting services and makes payments to that company upon
completion of various financing and acquisition transactions. Payments for fees
and expenses for the years ended March 31, 1994, 1995 and 1996 were $46,466,
$147,916 and $47,475, respectively. The payment for the year ended March 31,
1995 includes $122,500 paid as a finder's fee by an investment banking firm from
the fee it received from the Company in connection with an acquisition.
(10) EMPLOYEE BENEFIT PLANS
The Company has a welfare benefit plan (the "Plan") to provide medical
benefits for eligible employees and their dependents. Contributions to the Plan
are made by the Company and covered employees. The Plan may be terminated at the
discretion of the Company. Contributions to the Plan in the amounts of $571,387
and $686,949 were made in fiscal 1995 and 1996, respectively.
In fiscal 1993, the Company established a 401(k) savings plan. Eligible
employees can make contributions to the plan. The Company may, at its option,
match a portion of the contributions made by the employees. The Company matched
50% of employee contributions up to a limit of $500 per employee in fiscal 1994,
resulting in total payments of $50,140, which amounts were paid in fiscal 1995.
The Company did not match employee contributions made in fiscal 1995 or fiscal
1996.
(11) COMMITMENTS AND CONTINGENCIES
Under the Company's worker's compensation insurance program, the Company
pays the first $300,000 of all claims with no aggregate limit in any one year.
Provision for claims under the program has been made in the financial statements
which represent the expected future payments based on the estimated ultimate
costs for incidents incurred through the end of each period. The insurance
carrier required the Company to make a deposit of $147,663. The deposit has been
included in other assets in the accompanying balance sheet. In addition, the
Company has established a letter of credit in favor of its respective insurance
carriers (note 4) and has entered into an agreement with an insurance carrier
for the guarantee of deductible reimbursement. The amount of the guarantee for
the year ended March 31, 1996 was $500,000.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
F-16
<PAGE> 96
DAWSON PRODUCTION SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) SUPPLEMENTARY BALANCE SHEET DATA
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1995 1996
----------- ------------
<S> <C> <C>
Prepaid expenses and other:
Prepaid expenses.......................................... $ 22,479 $ 108,957
Other current assets...................................... 121,506 106,540
----------- ------------
Total prepaids and other assets................... $ 143,985 $ 215,497
=========== ============
Property and equipment:
Land...................................................... $ 80,000 $ 143,228
Buildings................................................. 814,508 1,087,308
Well servicing equipment.................................. 28,266,102 31,946,106
Automobiles, trucks and other vehicles.................... 5,092,053 8,519,707
Office furniture and other equipment...................... 269,906 354,077
----------- ------------
$34,522,569 $ 42,050,426
Less accumulated depreciation and depletion............... (9,201,661) (12,935,755)
----------- ------------
Net property and equipment........................ $25,320,908 $ 29,114,671
=========== ============
Goodwill and other assets:
Goodwill (net of accumulated amortization of $120,274 and
$216,716).............................................. $ 2,484,280 $ 2,059,696
----------- ------------
Other assets (net of accumulated amortization of $142,065
and
$248,392).............................................. 663,955 1,107,224
Deposits and notes receivable............................. 377,552 398,635
----------- ------------
$ 3,525,787 $ 3,565,555
=========== ============
Accrued liabilities:
Accrued payroll........................................... $ 603,914 $ 839,446
Accrued insurance......................................... 808,941 927,911
Other accrued expenses.................................... 902,766 1,058,569
----------- ------------
$ 2,315,621 $ 2,825,926
=========== ============
</TABLE>
(13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summarized quarterly financial data for 1996 are as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER(a)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues............................ $12,647,883 $13,240,504 $13,058,459 $12,444,461
Operating income.................... 1,338,895 1,419,899 921,093 1,057,765
Net income (loss)................... 326,146 321,982 211,756 (705)(a)
Earnings per share -- primary....... 0.12 0.12 0.06 (0.01)(a)
Earnings per share -- fully
diluted........................... 0.12 0.12 0.06 (0.01)(a)
</TABLE>
- ---------------
(a) See discussion at note 4 regarding extraordinary item.
F-17
<PAGE> 97
DAWSON PRODUCTION SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) RECENT DEVELOPMENTS -- ACQUISITIONS
On November 1, 1996, Dawson signed a letter of intent to acquire the
oilfield service assets of Mobley Environmental Services, Inc. for $5,500,000.
These assets primarily relate to liquid services operations. Pending fulfillment
of certain conditions, the Company expects this acquisition to close during the
quarter ending March 31, 1997.
On December 23, 1996, the Company entered into an Asset Purchase Agreement
pursuant to which the Company will acquire substantially all of Pride's U.S.
land-based well servicing assets for approximately $135,900,000 in cash. The
acquisition is expected to be financed through public offerings of senior
subordinated notes and common stock. The Company also expects the acquisition to
close during the quarter ending March 31, 1997.
F-18
<PAGE> 98
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Pride Petroleum Services, Inc.:
We have audited the combined balance sheet of U.S. Land-Based Well
Servicing Operations of Pride Petroleum Services, Inc. (the "Division") as of
December 31, 1995 and 1994, and the related combined statements of operations
and changes in owner's equity and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Division'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 combined financial position of the U.S. Land-Based
Well Servicing Operations of Pride Petroleum Services, Inc. as of December 31,
1995 and 1994, and the combined results of their operations and their cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
As discussed in Note 6 to the combined financial statements, the Division
changed its method of accounting for income taxes in 1993.
COOPERS & LYBRAND L.L.P.
Houston, Texas
February 26, 1996 (except for the
second paragraph of Note 1 as to which the date
is December 23, 1996)
F-19
<PAGE> 99
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 1,253 $ 1,154
Trade receivables, net of allowance for doubtful accounts
of $426 and $394, respectively......................... 16,055 14,167
Parts and supplies........................................ 2,098 1,586
Deferred income taxes..................................... 2,333 3,858
Other current assets...................................... 2,145 1,548
-------- --------
Total current assets.............................. 23,884 22,313
-------- --------
PROPERTY AND EQUIPMENT, at cost............................. 133,641 126,535
ACCUMULATED DEPRECIATION.................................... (90,717) (91,825)
-------- --------
Net property and equipment........................ 42,924 34,710
-------- --------
OTHER ASSETS................................................ 1,200 642
-------- --------
$ 68,008 $ 57,665
======== ========
LIABILITIES AND OWNER'S EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 5,313 $ 4,460
Accrued expenses.......................................... 7,993 8,884
Current portion of long-term debt......................... 3,132 --
-------- --------
Total current liabilities.............................. 16,438 13,344
-------- --------
OTHER LONG-TERM LIABILITIES................................. 2,804 4,645
LONG-TERM DEBT, net of current portion...................... 8,028 --
DEFERRED INCOME TAXES....................................... 12,289 9,930
COMMITMENTS AND CONTINGENCIES
OWNER'S EQUITY.............................................. 28,449 29,746
-------- --------
$ 68,008 $ 57,665
======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-20
<PAGE> 100
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
COMBINED STATEMENT OF OPERATIONS AND
CHANGES IN OWNER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
-------- ------- --------
<S> <C> <C> <C>
REVENUES.................................................... $113,115 $95,860 $105,865
-------- ------- --------
COSTS AND EXPENSES
Operating costs........................................... 86,177 76,820 85,984
Depreciation and amortization............................. 5,385 4,919 5,092
Selling, general and administrative....................... 14,504 12,772 13,333
-------- ------- --------
Total costs and expenses.......................... 106,066 94,511 104,409
-------- ------- --------
Earnings from operations..................... 7,049 1,349 1,456
OTHER INCOME (EXPENSE)
Other income (expense).................................... 1,260 11 13
Interest expense.......................................... (821) -- --
-------- ------- --------
Total other income, net........................... 439 11 13
-------- ------- --------
EARNINGS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING FOR INCOME TAXES............................ 7,488 1,360 1,469
INCOME TAX PROVISION........................................ 2,873 649 594
-------- ------- --------
NET EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME TAXES............................... 4,615 711 875
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME
TAXES..................................................... -- -- 3,835
-------- ------- --------
NET EARNINGS................................................ 4,615 711 4,710
NET TRANSFERS TO PARENT..................................... (5,912) (4,395) (4,354)
OWNER'S EQUITY, BEGINNING OF YEAR........................... 29,746 33,430 33,074
-------- ------- --------
OWNER'S EQUITY, END OF YEAR................................. $ 28,449 $29,746 $ 33,430
======== ======= ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-21
<PAGE> 101
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings.............................................. $ 4,615 $ 711 $ 4,710
Adjustments to reconcile net earnings to net cash provided
by operating activities --
Depreciation and amortization.......................... 5,385 4,919 5,092
(Gain) loss on sale of assets.......................... (905) (177) 407
Deferred tax provision (benefit)....................... 1,084 296 (548)
Cumulative effect of change in accounting for income
taxes............................................. -- -- (3,835)
Changes in assets and liabilities, net of effects of
acquisitions:
Trade receivables................................. 365 423 1,370
Parts and supplies................................ (302) 23 (74)
Other current and noncurrent assets............... (681) 165 (207)
Accounts payable.................................. 155 (1,161) 1,360
Accrued expenses and other........................ (3,492) (237) (400)
------- ------- -------
Net cash provided by operating activities....... 6,224 4,962 7,875
------- ------- -------
INVESTING ACTIVITIES
Purchase of net assets of acquired entities, including
acquisition costs, less cash acquired.................. (1,990) -- --
Purchases of property and equipment....................... (3,688) (2,272) (549)
Proceeds from sale of property and equipment.............. 1,340 304 231
Other..................................................... (110) -- --
------- ------- -------
Net cash used in investing activities........... (4,448) (1,968) (318)
------- ------- -------
FINANCING ACTIVITIES
Proceeds from debt borrowings............................. 6,600 -- --
Reduction of debt......................................... (2,023) -- --
Net transfers to Parent................................... (6,254) (4,306) (9,330)
------- ------- -------
Net cash used in financing activities........... (1,677) (4,306) (9,330)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 99 (1,312) (1,773)
CASH AND CASH EQUIVALENTS, beginning of period.............. 1,154 2,466 4,239
------- ------- -------
CASH AND CASH EQUIVALENTS, end of period.................... $ 1,253 $ 1,154 $ 2,466
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-22
<PAGE> 102
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The U.S. Land-Based Well Servicing Operations of Pride Petroleum Services,
Inc. (the "Division") consists of the U.S. land-based well servicing operations
of Pride Petroleum Services, Inc. (the "Parent"). In addition, the Division
provides hauling services and downhole tool rentals. The Division's operations
are located in the Texas and Louisiana Gulf Coast, the Permian Basin areas of
West Texas and New Mexico and California, and are principally conducted through
various operating subsidiaries directly or indirectly owned by the Parent.
On December 23, 1996, the Parent and Dawson Production Services, Inc.
entered into a Purchase Agreement whereby Dawson Production Services, Inc. will
acquire the operating subsidiaries comprising the Division for approximately
$135,900,000 in cash. The Parent will retain the Division's working capital
(other than parts and supplies), other long-term liabilities and long-term debt.
The accompanying combined financial statements reflect the financial
position, results of operations and cash flows of these subsidiaries plus
certain allocable corporate activities of the Parent.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
For purposes of the combined balance sheet and combined statement of cash
flows, the Division considers highly liquid debt instruments having maturities
of three months or less at the date of purchase to be cash equivalents.
Parts and Supplies
Parts and supplies consist of spare rig parts and supplies held for use in
operations and are valued at the lower of weighted average cost or estimated
market value.
Property and Equipment
Property and equipment are carried at original cost or adjusted net
realizable value, as applicable. Major renewals and improvements are capitalized
and depreciated over the respective asset's useful life. Maintenance and repair
costs are charged to expense as incurred. During the years ended December 31,
1995, 1994 and 1993, maintenance and repair costs included in operating costs
were $10,640,000, $9,402,000 and $10,710,000, respectively. When assets are sold
or retired, the remaining costs and related accumulated depreciation are removed
from the accounts and any resulting gain or loss is included in income.
For financial reporting purposes, depreciation of property and equipment is
provided using primarily the straight line method based upon expected useful
lives of each class of assets. Estimated useful lives of the assets for
financial reporting purposes are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Rigs and rig equipment...................................... 5-17
Transportation equipment.................................... 3- 7
Buildings and improvements.................................. 10-20
Furniture and fixtures...................................... 5
</TABLE>
F-23
<PAGE> 103
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
The Division recognizes revenue from domestic land well servicing
operations as services are performed based upon actual rig hours worked.
Revenues from related operations are recognized in the period in which such
services are performed.
Income Taxes
The Division joins with the Parent in filing a consolidated federal income
tax return. The Division records income tax expense as though it filed
separately. Effective January 1, 1993, the Division adopted the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the asset is expected to be recovered or the
liability is expected to be settled.
Concentration of Credit Risk
Financial instruments which potentially subject the Division to
concentrations of credit risk consist principally of cash and trade receivables.
By policy, the Company limits the amount of credit exposure to any one financial
institution or issuer. The Division's customer base consists primarily of major
integrated oil companies and smaller independent oil and gas producers.
Management believes the credit quality of its customers is generally high. The
Division provides allowances for potential credit losses when necessary. Bad
debt expense was $174,000 and $116,000 for the years ended December 31, 1995 and
1993, respectively. The Division did not incur any bad debt expense during the
year ended December 31, 1994. During the years ended December 31, 1995, 1994 and
1993, no customer accounted for more than 10% of combined revenue.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. While it is believed that such estimates are reasonable,
actual results could differ from those estimates.
Conditions Affecting Ongoing Operations
Increases and decreases in domestic well servicing activity historically
have had a significant correlation with changes in oil and natural gas prices.
Domestic well servicing contracts are typically entered into for one or multiple
wells, but are typically short term and rig rates may be volatile.
F-24
<PAGE> 104
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and 1994 consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 1,448 $ 1,330
Equipment................................................... 125,358 121,058
Buildings and leasehold improvements........................ 3,690 2,849
Furniture and fixtures...................................... 706 599
Construction-in-progress.................................... 2,439 699
-------- --------
133,641 126,535
Accumulated depreciation.................................... (90,717) (91,825)
-------- --------
$ 42,924 $ 34,710
======== ========
</TABLE>
Depreciation expense was $5,114,000, $4,556,000 and $4,642,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
4. ACQUISITIONS
In March 1995, the Division acquired all of the outstanding capital stock
of X-Pert Enterprises, Inc. ("X-Pert") for aggregate consideration of
approximately $10,000,000, consisting of $3,000,000 cash, a note payable to the
selling shareholders in the amount of $5,964,000, and 200,000 shares of the
Parent's common stock.
The assets acquired and liabilities assumed in the X-Pert acquisition were
as follows:
<TABLE>
<CAPTION>
ASSETS (LIABILITIES)
--------------------
(IN THOUSANDS)
<S> <C>
Cash and cash equivalents................................... $ 1,719
Trade receivables........................................... 2,254
Other current assets........................................ 80
Property and equipment...................................... 10,000
Other assets................................................ 725
Accounts payable............................................ (648)
Accrued expenses............................................ (761)
Long-term debt.............................................. (569)
Deferred income taxes....................................... (2,800)
-------
$10,000
=======
</TABLE>
Unaudited pro forma results of operations assuming the acquisition of
X-Pert had occurred on January 1, 1994, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenues.................................................... $115,109 $110,679
Net Earnings................................................ $ 4,720 $ 2,167
</TABLE>
F-25
<PAGE> 105
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma results of operations presented above do not purport to be
indicative of the results of operations of the Division that might have occurred
nor are they indicative of future results.
Also in March 1995, the Division acquired substantially all of the assets
of a fluids hauling business for total consideration of $400,000, consisting of
$350,000 in cash and a note payable to the sellers in the amount of $50,000.
Each of the acquisitions discussed above was recorded using the purchase
method of accounting. The operating results of each acquisition have been
included in combined results of operations from the date of acquisition.
5. DEBT
Long-Term Debt
Long-term debt at December 31, 1995 consists of the following:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Collateralized term loan.................................... $ 5,696
Notes payable............................................... 394
Note payable to selling shareholders........................ 5,070
-------
11,160
Less current portion........................................ 3,132
-------
$ 8,028
=======
</TABLE>
The collateralized term loan is due in annual installments through 1999,
bears interest at prime plus 1/2%, (9.0% as of December 31, 1995), and is
collateralized by certain equipment of the Division. Notes payable includes two
notes payable to lending institutions totaling an aggregate $344,000 which are
collateralized by certain property and equipment and a note payable in the
amount of $50,000 issued to the sellers of certain assets acquired by the
Company during the first quarter of 1995.
In March 1995, the Company entered into a note payable to two individuals
in the amount of $5,964,000 as partial consideration for the acquisition of
X-Pert. The note bears interest at the rate of 8.5% per annum and is repayable
in quarterly installments through March 2000. The note payable to selling
shareholders is collateralized by certain of the property and equipment of the
acquired business.
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
1996........................................................ $3,132
1997........................................................ 2,749
1998........................................................ 2,742
1999........................................................ 2,239
2000........................................................ 298
</TABLE>
The Division has obtained bank commitments which provide for guidance lines
of credit of $18,000,000. As of December 31, 1995, letters of credit totaling
$10,672,000 were outstanding thereunder. Cash and cash equivalents and a portion
of accounts receivable have been pledged as collateral pursuant to these credit
facilities.
F-26
<PAGE> 106
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Based on rates currently available to the Parent for debt with similar
terms and remaining maturities, the Division believes that the recorded value of
long-term debt approximates fair market value at December 31, 1995.
6. INCOME TAXES
Effective January 1, 1993, the Division adopted SFAS 109 and in connection
therewith recorded a non-cash gain in the amount of $3,835,000, which represents
the reduction of the deferred tax liability as of January 1, 1993. The gain has
been recorded in the combined statement of operations as "cumulative effect of
change in accounting for income taxes".
The components of the provision for income taxes were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
------- ----- -------
(IN THOUSANDS)
<S> <C> <C> <C>
United States Federal:
Current................................................... $1,690 $333 $1,079
Deferred.................................................. 1,024 280 (518)
------ ---- ------
2,714 613 561
------ ---- ------
State:
Current................................................... 99 20 63
Deferred.................................................. 60 16 (30)
------ ---- ------
159 36 33
------ ---- ------
Total income tax provision........................ $2,873 $649 $ 594
====== ==== ======
</TABLE>
The difference between the effective federal income tax rate reflected in
the income tax provision and the amounts which would be determined by applying
the statutory federal tax rate to earnings before income taxes is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
U.S. statutory rate......................................... 34.0% 34.0% 34.0%
State and local taxes....................................... 2.0 2.0 2.0
Other (principally nondeductible expenses).................. 2.4 11.7 4.4
---- ---- ----
Effective tax rate.......................................... 38.4% 47.7% 40.4%
==== ==== ====
</TABLE>
F-27
<PAGE> 107
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities and deferred tax assets as of December
31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Depreciation.............................................. $12,239 $ 9,848
Other..................................................... 50 82
------- -------
Total deferred tax liabilities.................... 12,289 9,930
------- -------
Deferred tax assets:
Insurance accruals........................................ (1,891) (3,345)
Bad debts................................................. (153) (142)
Other..................................................... (289) (371)
------- -------
Total deferred tax assets......................... (2,333) (3,858)
------- -------
Net deferred tax liability.................................. $ 9,956 $ 6,072
======= =======
</TABLE>
7. EMPLOYEE BENEFITS
The Parent has a salary deferral plan covering its employees, including
those of the Division, whereby employees may elect to contribute up to 15% of
their annual compensation. The Parent may at its discretion make matching
contributions with respect to an employee's salary contribution of up to $1,000
or 6% of compensation, whichever is less. Total expense charged to the Division
for the years ended December 31, 1995, 1994 and 1993, were $134,000, $87,000 and
$61,000, respectively.
8. COMMITMENTS AND CONTINGENCIES
The Division is routinely involved in litigation incidental to its
business, which often involves claims for significant monetary amounts, some of
which would not be covered by insurance. In the opinion of management, none of
the existing litigation will have any material adverse effect on the Division's
financial position or results of operations.
The Division is self-insured with respect to physical damage or loss to its
domestic vehicles, land rigs, and equipment (except for thirteen of its largest
land rigs). Thirteen of the Division's largest land rigs are insured, with
deductibles of generally $25,000 per occurrence. Presently, the Division has
insurance deductibles of $250,000 per occurrence for workers' compensation
claims, $100,000 per occurrence for automobile liability claims, and $100,000
for general liability claims. The Division further limits its exposure by
maintaining, together with the Parent, an accident and health insurance policy
with respect to its employees with a deductible of $10,000 per occurrence.
In July 1995, one of the Division's land rigs was destroyed in an explosion
and fire. The damaged rig was covered by insurance and the Division received net
insurance proceeds, after repurchasing the salvage, of $1,094,000. The Division
recognized a gain from the insurance recovery of $1,049,000 which is included in
other income in the accompanying consolidated statement of operations.
As of December 31, 1995 and 1994, the Division had accrued approximately
$5,916,000 and $9,706,000, respectively for estimated claims liabilities, of
which $3,112,000 and $5,217,000, respectively, was included in current
liabilities and $2,804,000 and $4,489,000, respectively, was reflected as other
long-term liabilities in the accompanying balance sheet.
F-28
<PAGE> 108
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1995, the Division had letters of credit outstanding
totaling $10,672,000. These letters of credit guarantee principally the funding
of the Division's share of insured claims. Cash and cash equivalents of the
Parent and a portion of trade receivables have been pledged as security for
these letters of credit. The credit facility provides flexibility to reduce the
pledge of the Parent's cash and cash equivalents by pledging additional trade
receivables.
Due to the nature of the Division's business and the structure of its
insurance program, the occurrence of a significant event against which the
Division is not fully insured or a number of lessor events for which the
Division is insured, but subject to substantial deductibles, could significantly
impact the operating results of the Division for a given period.
Rental expense for equipment, vehicles and various facilities of the
Division for the years ended December 31, 1995, 1994 and 1993 was $4,354,000,
$4,233,000 and $3,877,000, respectively. As of December 31, 1995, the Division
did not have any significant future minimum lease payments for operating leases
having initial or remaining noncancelable lease terms longer than one year. The
Division leases vehicles used in its operations under a revolving master lease.
Although any single lease is cancelable by the Division with 60 days notice, the
Division expects to incur this lease expense in increasing amounts for the
foreseeable future. Vehicle lease expense pursuant to the master lease
agreements included in the above rental expense for the years ended December 31,
1995, 1994 and 1993 was $2,218,000, $2,134,000 and $1,809,000, respectively.
9. RELATED PARTY TRANSACTIONS
Selling, general and administrative expense includes allocation of
corporate costs from the Parent of approximately $4,000,000, $4,500,000 and
$4,600,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Those costs relate principally to financial, marketing, management information,
risk management, legal and human resource services and were allocated based on
estimates of time incurred or the cost of the service provided. Although
management believes such methods of allocation are reasonable, they are not able
to determine whether the allocations are indicative of actual expenses that
would have been incurred if the Division operated as a separate entity.
The Division transfers underutilized equipment to the Parent from time to
time using the equipment's net book value. The amount of such transfers were
approximately $660,000, $489,000 and $529,000 for the years ended December 31,
1995, 1994 and 1993, respectively.
10. SUPPLEMENTAL FINANCIAL INFORMATION
Other Current Assets
Other current assets at December 31, 1995 and 1994 consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1994
------ ------
(IN THOUSANDS)
<S> <C> <C>
Other receivables...................................... $ 821 $ 383
Prepaid expenses....................................... 1,324 1,165
------ ------
$2,145 $1,548
====== ======
</TABLE>
F-29
<PAGE> 109
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Accrued Expenses
Accrued expenses at December 31, 1995 and 1994 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1994
------ ------
(IN THOUSANDS)
<S> <C> <C>
Insurance (excluding the long-term portion of $2,804 and
$4,489,
respectively)............................................. $3,112 $5,217
Payroll................................................... 3,454 2,008
Taxes, other than income.................................. 1,101 1,422
Other..................................................... 326 237
------ ------
$7,993 $8,884
====== ======
</TABLE>
Cash Flow Information
Cash paid for interest and income taxes during the years ended December 31,
1995, 1994 and 1993 was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
----- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the year for:
Interest............................................... $786 $ -- $ --
Income taxes........................................... 500 1,893 2
</TABLE>
F-30
<PAGE> 110
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
COMBINED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 1,638 $ 1,253
Trade receivables, net of allowance for doubtful accounts
of $426 and $426, respectively......................... 17,451 16,055
Parts and supplies........................................ 2,045 2,098
Deferred income taxes..................................... 1,796 2,333
Other current assets...................................... 4,323 2,145
-------- --------
Total current assets.............................. 27,253 23,884
-------- --------
PROPERTY AND EQUIPMENT, at cost............................. 134,133 133,641
ACCUMULATED DEPRECIATION.................................... (91,092) (90,717)
-------- --------
Net property and equipment........................ 43,041 42,924
-------- --------
OTHER ASSETS................................................ 2,006 1,200
-------- --------
$ 72,300 $ 68,008
======== ========
LIABILITIES AND OWNER'S EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 5,337 $ 5,313
Accrued expenses.......................................... 3,988 7,993
Current portion of long-term debt......................... 9,026 3,132
-------- --------
Total current liabilities......................... 18,351 16,438
-------- --------
OTHER LONG-TERM LIABILITIES................................. 2,066 2,804
LONG-TERM DEBT, net of current portion...................... 36,885 8,028
DEFERRED INCOME TAXES....................................... 11,384 12,289
COMMITMENTS AND CONTINGENCIES
OWNER'S EQUITY.............................................. 3,614 28,449
-------- --------
$ 72,300 $ 68,008
======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-31
<PAGE> 111
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1995
-------- -------
<S> <C> <C>
REVENUES.................................................... $ 87,290 $85,990
-------- -------
COSTS AND EXPENSES
Operating costs........................................... 67,756 66,390
Depreciation and amortization............................. 4,070 4,017
Selling, general and administrative....................... 11,012 10,870
-------- -------
Total costs and expenses.......................... 82,838 81,277
-------- -------
Earnings from operations........................ 4,452 4,713
OTHER INCOME (EXPENSE)
Other income.............................................. 230 1,264
Interest expense.......................................... (2,244) (551)
-------- -------
Total other income (expense), net................. (2,014) 713
-------- -------
EARNINGS BEFORE INCOME TAXES................................ 2,438 5,426
INCOME TAX PROVISION........................................ 1,008 2,048
-------- -------
NET EARNINGS................................................ 1,430 3,378
NET TRANSFERS TO PARENT..................................... (26,265) (7,574)
OWNER'S EQUITY, beginning of period......................... 28,449 29,746
-------- -------
OWNER'S EQUITY, end of period............................... $ 3,614 $25,550
======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-32
<PAGE> 112
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1995
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings.............................................. $ 1,430 $ 3,378
Adjustments to reconcile net earnings to net cash provided
by operating activities --
Depreciation and amortization........................ 4,070 4,017
Gain on sale of assets............................... (251) (906)
Deferred tax provision............................... 2,974 1,057
Changes in assets and liabilities, net of effects of
acquisitions --
Trade receivables................................. (1,396) (442)
Parts and supplies................................ 53 (358)
Other current and noncurrent assets............... (3,061) (1,671)
Accounts payable.................................. 24 1,068
Accrued expenses and other........................ (4,743) (1,527)
-------- -------
Net cash provided by operating activities....... (900) 4,616
-------- -------
INVESTING ACTIVITIES
Purchase of net assets of acquired entities, including
acquisition costs, less cash acquired.................. (1,850) (1,990)
Purchases of property and equipment....................... (2,778) (2,573)
Proceeds from sales of property and equipment............. 265 1,280
Other..................................................... (43) (110)
-------- -------
Net cash used in investing activities........... (4,406) (3,393)
-------- -------
FINANCING ACTIVITIES
Proceeds from debt borrowings............................. 45,000 6,600
Reduction of debt......................................... (10,249) (1,000)
Net transfers to Parent................................... (29,060) (7,977)
-------- -------
Net cash provided by financing activities....... 5,691 (2,377)
-------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 385 (1,154)
CASH AND CASH EQUIVALENTS, beginning of period.............. 1,253 1,154
-------- -------
CASH AND CASH EQUIVALENTS, end of period.................... $ 1,638 $ 0
======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-33
<PAGE> 113
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
1. GENERAL
The unaudited combined financial statements included herein have been
prepared without audit pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, pursuant to such rules and
regulations. These unaudited combined financial statements should be read in
conjunction with U.S. Land Based Well Servicing Operations of Pride Petroleum
Services, Inc.'s (the "Division's") audited combined financial statements and
notes thereto for the year ended December 31, 1995.
The unaudited combined financial information included herein reflects all
adjustments, consisting only of normal recurring adjustments, which are
necessary, in the opinion of management, for a fair presentation of the
Division's financial position, results of operations and cash flows for the
interim periods presented. The results of operations for the interim periods
presented herein are not necessarily indicative of the results to be expected
for full years.
2. COMMITMENTS AND CONTINGENCIES
The Division is routinely involved in litigation incidental to its
business, which often involves claims for significant monetary amounts, some of
which would not be covered by insurance. In the opinion of management, none of
the existing litigation will have any material adverse effect on the Division's
financial position or results of operations.
The Division is self-insured with respect to physical damage or loss to its
vehicles, land rigs (except for thirteen of its largest land rigs), and other
equipment. Thirteen of the Division's largest land rigs are insured, with
deductibles of generally $25,000 per occurrence. Presently, the Division has
insurance deductibles of $250,000 per occurrence for workers' compensation
claims, $100,000 per occurrence for automobile liability claims, and $100,000
for general liability claims. The Division further limits its exposure by
maintaining an accident and health insurance policy with respect to its
employees with a deductible of $10,000 per occurrence.
As of September 30, 1996 and December 31, 1995, the Division had accrued
approximately $5,918,000 and $5,916,000, respectively, for estimated claims
liabilities, of which $3,852,000 and $3,112,000, respectively, was included in
current liabilities and $2,066,000 and $2,804,000, respectively, was included in
other long-term liabilities in the accompanying unaudited combined balance
sheet. As of September 30, 1996, the Division had letters of credit outstanding
totaling $8,652,000. These letters of credit principally guarantee the funding
of the Division's share of insured claims.
3. ACQUISITIONS
In February 1996, the Division acquired substantially all of the assets of
another operator in Freer, Texas for aggregate consideration of approximately
$1,879,000, consisting of $1,850,000 cash and 4,200 restricted shares of Pride
Petroleum Services, Inc. common stock. The assets acquired included seven
workover rigs, hauling and anchor trucks and other support assets.
The acquisition was recorded using the purchase method of accounting. The
operating results of each acquisition have been included in the Division's
consolidated results of operations from the date of acquisition.
F-34
<PAGE> 114
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. DEBT
Long-Term Debt
Long-term debt at September 30, 1996 and December 31, 1995 consists of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Collateralized term loans.................................. $41,736 $ 5,696
Notes payable.............................................. -- 394
Acquisition note payable................................... 4,175 5,070
------- -------
45,911 11,160
Less: current portion...................................... 9,026 3,132
------- -------
$36,885 $ 8,028
======= =======
</TABLE>
In April 1996, the Division completed two separate financing arrangements
with lending institutions pursuant to which it borrowed an aggregate amount of
$40,000,000, net of repayment of $5,000,000 of borrowings to one of the lenders.
The collateralized term loans bear interest initially at a floating rate of
prime plus 1/2% and are repayable in monthly installments of principal and
interest over a period of five to six years. The Division may elect to convert
the interest payable to a fixed rate basis at any time during the term of the
loans. The loans are collateralized by substantially all of the land-based rig
fleet and ancillary equipment.
F-35
<PAGE> 115
INDEPENDENT AUDITOR'S REPORT
To the Stockholders, Members, and Owners
Taylor Acquisition Group
Carthage, Texas
We have audited the accompanying combined balance sheets of the Taylor
Acquisition Group (the Group) as of December 31, 1995 and 1994, and the related
statements of income, changes in stockholder equity, and cash flows for the
years then ended. These combined financial statements are the responsibility of
the Group's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
The Taylor Acquisition Group is an unincorporated combination of entities
consisting of Taylor Companies, Inc. (a Texas corporation) and its wholly owned
subsidiaries (excluding Cavern Disposal, Inc.), Taylor Water Injections, Inc. (a
Texas corporation), Teague Interests, Inc. (a Texas corporation), Taylor
Caldwell Properties, LLC (a Texas limited liability company), and the
unincorporated land and buildings owned by John Randall Taylor which constitute
the Carthage yard facilities. The wholly owned subsidiaries of Taylor Companies,
Inc. which are included consist of Taylor Interests, Inc., Taylor SWD Operating,
Inc., Taylor Environmental, Inc., Taylor Disposal, Inc., Production Disposal,
Inc., Taylor Injection Systems, Inc., DeBerry SWD, Inc., Tatum SWD, Inc., and
Newton County SWD, Inc. (all Texas corporations).
We conducted our audit 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 assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Taylor Acquisition
Group as of December 31, 1995 and 1994, and the results of their operations and
their cash flows for the years then ended in conformity with generally accepted
accounting principles.
Chapman, Williams & Co.
Certified Public Accountants
Carthage, Texas
May 21, 1996
F-36
<PAGE> 116
TAYLOR ACQUISITION GROUP
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 563,105 $ 283,054 $ 239,160
Accounts receivable -- trade, (net)................. 3,669,784 2,973,206 3,299,590
Accounts receivable -- affiliates................... 81,399 -- --
Accounts receivable -- officer...................... 445,655 164,135 202,628
Accounts receivable -- other........................ 286,256 122,273 298,003
Prepaid expenses.................................... 141,336 110,496 226,058
----------- ----------- -----------
Total current assets........................ 5,187,535 3,653,164 4,265,439
Property, plant and equipment:
Heavy trucks and trailers........................... 2,415,384 2,331,400 2,371,053
Frac tanks.......................................... 3,961,543 3,980,401 3,992,401
Other equipment..................................... 2,776,437 2,667,291 2,707,025
Disposal wells...................................... 2,348,249 2,816,349 2,810,600
Land................................................ 45,953 55,627 55,627
----------- ----------- -----------
11,547,566 11,851,068 11,936,706
Less: accumulated depreciation...................... 6,790,230 8,073,760 8,749,869
Net property, plant and equipment........... 4,757,336 3,777,308 3,186,837
Other assets:
Equipment not in service............................ 87,964 9,528 --
----------- ----------- -----------
Total assets................................ $10,032,835 $ 7,440,000 $ 7,452,276
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Notes payable -- current portion.................... $ 2,497,684 $ 2,026,198 $ 1,469,604
Obligation under capital leases -- current
portion.......................................... 16,941 18,275 18,275
Accounts payable -- trade........................... 916,657 478,519 628,106
Accounts payable -- affiliates...................... -- 89,241 --
Accrued expenses.................................... 745,452 455,912 631,013
Deferred revenues................................... 17,215 48,800 43,959
----------- ----------- -----------
Total current liabilities................... 4,193,949 3,116,945 2,790,957
Long-term debt:
Notes payable....................................... 1,640,936 852,817 820,173
Obligation under capital leases..................... 36,288 18,013 18,013
Subordinated payable to stockholder................. 3,999,610 2,896,201 2,505,629
----------- ----------- -----------
Total long-term debt........................ 5,676,834 3,767,031 3,343,815
Other non-current liabilities:
Deferred revenue.................................... 242,005 193,205 186,398
Deferred taxes...................................... 380,235 224,827 122,484
----------- ----------- -----------
Total non-current liabilities............... 622,240 418,032 308,882
----------- ----------- -----------
Total liabilities........................... 10,493,023 7,302,008 6,443,654
Stockholder's equity:
Common Stock, $1 par value; 30,000 shares
authorized; 15,000 shares issued and
outstanding...................................... 66,100 67,100 67,100
Paid-in surplus..................................... 5,000 743,011 1,129,083
Retained earnings................................... (531,288) (672,119) (187,561)
----------- ----------- -----------
Total stockholder's equity.................. (460,188) 137,992 1,008,622
----------- ----------- -----------
Total liabilities and stockholder's
equity.................................... $10,032,835 $ 7,440,000 $ 7,452,276
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE> 117
TAYLOR ACQUISITION GROUP
COMBINED STATEMENT OF INCOME (LOSS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, ------------------------
-------------------------- JUNE 30, JUNE 30,
1994 1995 1995 1996
----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES................................ $19,651,930 $16,713,246 $8,369,304 $8,943,005
DIRECT COST OF OPERATIONS............... 16,291,016 14,281,231 7,024,849 7,112,371
----------- ----------- ---------- ----------
Gross profit.......................... 3,360,914 2,432,015 1,344,455 1,830,634
General and administrative expenses... 3,443,168 2,831,866 1,167,660 1,086,408
----------- ----------- ---------- ----------
Net operating income (loss)........... (82,254) (399,851) 176,795 744,226
Other income (expense)................ (140,046) 100,896 78,288 3,330
----------- ----------- ---------- ----------
Net income (loss) before tax.......... (222,300) (298,955) 255,083 747,556
Provision for income taxes (benefit)
Current............................ (7,973) (2,716) 135,335 365,341
Deferred........................... 380,235 (155,408) 236,718 (102,343)
----------- ----------- ---------- ----------
372,262 (158,124) 372,053 262,998
----------- ----------- ---------- ----------
Net income (loss)............. $ (594,562) $ (140,831) $ (116,970) $ 484,558
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-38
<PAGE> 118
TAYLOR ACQUISITION GROUP
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------- ---------------------
1994 1995 1995 1996
----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $ (594,562) $ (140,831) $(116,970) $ 484,558
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization............. 1,645,314 1,607,042 839,977 676,109
Gain on sale of assets.................... (15,058) (86,904) (70,454) (1,789)
Decrease (increase) in accounts
receivable............................. (362,011) 696,578 502,441 (502,114)
Decrease (increase) in prepaid expenses
and other assets....................... (57,645) 119,829 (121,101) (106,034)
Decrease (increase) in due to
affiliates............................. (64,354) 170,640 48,668 (89,241)
Decrease (increase) in accounts payable... 265,419 (438,138) (347,550) 149,587
Decrease (increase) in accrued expenses... 147,618 (289,543) (165,235) 175,101
Decrease (increase) in deferred revenue... 259,220 (17,215) (11,535) (11,648)
Decrease (increase) in income tax
receivable............................. (107,973) 75,000 143,308 --
Decrease (increase) in deferred taxes..... 380,235 (155,408) 236,718 (102,343)
Decrease in officer note receivable for
operations............................. -- 105,509 -- --
Decrease in fixed and other assets used
for operations......................... -- 28,924 -- --
----------- ----------- --------- ---------
Net cash provided by operating
activities...................... 1,496,203 1,675,483 938,267 672,186
----------- ----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets.................... (1,143,548) (1,007,592) (875,809) (85,638)
Proceeds on sale of assets.................. 31,415 343,186 313,503 1,789
Advances on officer note receivable......... -- (321,806) (55,908) (38,493)
Collections on officer note receivable...... 259,320 174,474 -- --
Purchase equipment not in service........... (87,964) -- -- --
----------- ----------- --------- ---------
Net cash used in investing
activities...................... (940,777) (811,738) (618,214) (122,342)
----------- ----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
New loans................................... 1,158,560 250,000 342,066 --
Repayment of capital lease.................. (16,961) (16,941) -- --
Repayment of debt........................... (1,674,845) (1,509,605) (997,739) (589,238)
Repayment of note payable -- shareholder.... (326,339) (100,000) -- (4,500)
Loans from shareholder...................... 2,406,574 231,750 11,250 --
Distribution of Subchapter S earnings....... (2,406,574) -- -- --
Issue capital stock......................... 2,000 1,000 1,000 --
----------- ----------- --------- ---------
Net cash used in financing activities..... (857,585) (1,143,796) (643,423) (593,738)
----------- ----------- --------- ---------
Net decrease in cash and cash
equivalents..................... (302,159) (280,051) (323,370) (43,894)
Cash and cash equivalents at the beginning
of the period............................. 865,264 563,105 563,105 283,054
----------- ----------- --------- ---------
Cash and cash equivalents at the end of the
period.................................... $ 563,105 $ 283,054 $ 239,735 $ 239,160
=========== =========== ========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Additional paid-in surplus.................. $ 738,011 $ -- $ 386,072
Reduction in notes payable -- officer....... (738,011) -- (386,072)
----------- --------- ---------
-- -- --
=========== ========= =========
Acquisition of equipment
Cost of equipment........................... $ 1,617,653
Equipment loans............................. (474,105)
-----------
Cash paid for equipment................... $ 1,143,548
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE> 119
TAYLOR ACQUISITION GROUP
COMBINED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
CAPITAL PAID-IN RETAINED
STOCK SURPLUS EARNINGS
------- ---------- -----------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1993.............................. $64,100 $ -- $ 2,589,538
Issue stock: Taylor Companies, Inc.................... 1,000 -- --
Newton SWD, Inc.................................... 1,000 -- --
Capitalize Taylor Caldwell Properties, LLC............ -- 5,000 --
Distribution of Subchapter-S earnings................. -- -- (2,526,264)
Net loss...................................... -- -- (594,562)
------- ---------- -----------
BALANCE, DECEMBER 31, 1994.............................. 66,100 5,000 (531,288)
Issue stock: Teague Interests, Inc.................... 1,000 -- --
Contribution of officer note payable.................. -- 738,011 --
Net loss...................................... -- -- (140,831)
------- ---------- -----------
BALANCE, DECEMBER 31, 1995.............................. 67,100 743,011 (672,119)
Contribution of officer note payable.................. -- 386,072 --
Net income.................................... -- -- 484,558
------- ---------- -----------
BALANCE, JUNE 30, 1996 (UNAUDITED)...................... $67,100 $1,129,083 $ (187,561)
======= ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-40
<PAGE> 120
TAYLOR ACQUISITION GROUP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. The Group was organized for the purpose of providing oil field services
to major oil companies and drilling companies by providing vacuum trucks, frac
tanks, saltwater disposal and other services necessary for the drilling,
completion and production processes. Operational areas exist primarily in the
east, southeast, and central regions of Texas. The Group maintains facilities in
Carthage, Caldwell, Bryan, Giddings, Pineland, Freestone, and Easton, Texas. The
Group had a facility in Laredo, Texas which was closed in December 1994.
B. The combined financial statements include the accounts of Taylor
Companies, Inc. and its wholly owned subsidiaries Taylor Interests, Inc., Taylor
SWD Operating, Inc., Taylor Environmental, Inc., Taylor Disposal, Inc.,
Production Disposal, Inc., Taylor Injection Systems, Inc., DeBerry SWD, Inc.,
Tatum SWD, Inc. and Newton County SWD, Inc. Cavern Disposal, Inc., which is also
a wholly owned subsidiary of Taylor Companies, Inc. is not included. Also
included are Taylor Water Injections, Inc., Teague Interests, Inc., Taylor
Caldwell Properties, LLC and the real property representing the Carthage yard,
all of which are owned by Mr. John Randall Taylor. Intercompany transactions
have been eliminated.
C. Fixed assets are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Virtually
all assets, excluding buildings, are depreciated over an estimated useful life
of five years.
Depreciation expense on equipment, vehicles and disposal wells is included
in cost of operations. Depreciation expense on these assets totaled $1,526,491
and $1,619,505 in 1995 and 1994, respectively. Depreciation expense on office
furnishing and equipment and leasehold improvements totaled $80,551 and $25,809
for 1995 and 1994, respectively. These amounts are included in general and
administrative expenses.
For federal income tax purposes, depreciation is computed using the
modified accelerated cost recovery system. Expenditures for major renewals and
betterments that extend the useful lives of property and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense as
incurred.
D. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
E. Cash and cash equivalents are comprised of checking accounts, savings
accounts, and short-term cash investment accounts maintained at various
financial institutions.
The Group has had monies invested into a special account with Premier Bank
into which excess operating funds are transferred on a daily basis. The monies
in this account earn a floating interest rate and are collateralized by U.S.
Government obligations.
F. As explained in Note 1B, the Group consists of various companies and
assets which do not exist as a taxable entity. However, the tax provisions
reflected in the financial statements have been computed as if the companies and
assets did exist as a single taxable entity.
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the bases of depreciation and bad debt
reserves for financial and income tax reporting. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred taxes also are recognized for operating losses
that are available to offset future federal income taxes.
F-41
<PAGE> 121
TAYLOR ACQUISITION GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 ACCOUNTS RECEIVABLE -- TRADE
The Group's receivables consist of amounts due from major oil companies and
oilfield drilling companies for frac tank and vacuum truck services and disposal
fees. Receivables are uncollateralized with 30 day terms.
<TABLE>
<CAPTION>
1995 1994
---------------- ----------------
AMOUNT % AMOUNT %
---------- --- ---------- ---
<S> <C> <C> <C> <C>
Current.......................................... $1,992,448 65 $2,477,303 66
30 Days.......................................... 712,236 23 895,283 24
60 Days.......................................... 193,362 6 254,940 7
90 Days and Over................................. 186,482 6 117,729 3
---------- --- ---------- ---
$3,084,528 100 $3,745,255 100
========== === ========== ===
</TABLE>
An allowance for doubtful accounts of $111,322 and $75,471 has been
established as of December 31, 1995 and 1994, respectively.
NOTE 3 NOTES PAYABLE
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Installment notes payable to The Associates, secured by frac
tanks and trailers, payable monthly at 7.6% to 8.5%
interest.................................................. $ 162,271 $ 404,744
Installment note payable to The Associates, secured by
vehicles, payable monthly at 8.15% interest............... 8,741 120,635
Installment notes payable to General Motors Acceptance
Corporation, secured by vehicles, payable monthly at
interest rates of 7.9% to 9.5% interests.................. 26,163 58,831
Installment notes payable to insurance companies for current
policies.................................................. 14,689 64,048
Installment notes payable to MetLife Capital Corporation,
secured by frac tanks, certain vacuum trailers and
vehicles, payable monthly at 6.66% to 7.33% interest...... 629,934 970,214
Installment note payable to Premier Bank, secured by frac
tanks, payable in monthly installments floating at 1.5%
over the Chase Manhattan prime rate....................... 258,750 393,750
Installment note payable to Premier Bank, secured by frac
tanks, payable in monthly installments floating at 1.5%
over the Premier Bank prime rate.......................... 61,655 281,250
Line of credit from Premier Bank, secured by equipment, with
interest at prime plus 1.5%............................... 250,000 --
Line of credit from Premier Bank, secured by accounts
receivable, with interest at prime plus 1.5%.............. 1,000,000 1,000,000
Installment note payable to Case Credit, secured by
equipment, payable monthly at 7.31% interest.............. 9,962 21,144
Installment note payable to Panola National Bank, secured by
portable office buildings, payable in monthly installments
at 9.25% interest......................................... 59,266 72,605
Installment note payable to Premier Bank secured by disposal
wells, payable in monthly installments at 1% over the
Premier Bank prime rate................................... -- 58,334
Installment note payable to Texas Workers Compensation
Insurance Fund, payable in monthly installments........... -- 221,432
</TABLE>
F-42
<PAGE> 122
TAYLOR ACQUISITION GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Installment notes payable to Concord Commercial Corporation,
secured by vacuum trailers and frac tanks, at 12.5%
interest.................................................. $ -- $ 7,510
Installment notes payable to U. S. Leasing (formerly Ford
Leasing), secured by frac tanks, at 11.7% interest........ -- 29,991
Installment notes payable to SafeCo, secured by equipment
and vehicles, at 12.25% interest.......................... -- 15,705
Installment notes payable to Panola National Bank secured by
vehicles, payable in monthly installments at 2% over Texas
Commerce Bank, Houston base rate.......................... -- 18,187
Installment note payable to Premier Bank secured by real
estate, payable in monthly installments of $2,500.00 over
a remaining period of 108 months floating at 1% over the
Chase Manhattan prime rate................................ 269,500 302,500
Installment note payable to Citizens State Bank secured by
real estate, payable in monthly installments of $2,230 at
8% interest............................................... 78,084 97,740
Note payable to an individual secured by two winch trucks,
payable in annual installments of $10,000 over a remaining
period of 5 years at 0% interest.......................... 50,000 --
---------- ----------
Total notes payable......................................... 2,879,015 4,138,620
Less: current portion....................................... 2,026,198 2,497,684
---------- ----------
Long-term debt.............................................. $ 852,817 $1,640,936
========== ==========
</TABLE>
Maturities of the above notes are summarized below:
<TABLE>
<S> <C>
1996........................................................ $2,026,198
1997........................................................ 550,084
1998........................................................ 93,223
1999........................................................ 48,775
2000 and thereafter......................................... 160,735
----------
$2,879,015
==========
</TABLE>
Interest expense was $461,326 and $473,448 for 1995 and 1994, respectively.
Taylor Companies, Inc. also has a line of credit available with Premier
Bank of $800,000 for the purchase of new equipment or salt water disposal wells.
The loan agreement contains a restrictive covenant which requires net worth to
be at least $2,740,000 and the ratio of debt to net worth to be less than 2.25
to 1.00.
The Group had loans from its sole shareholder, Randy Taylor, for $2,896,201
and $3,999,610 at December 31, 1995 and 1994 respectively. These loans are
subordinated to the Premier Bank loans and is considered as equity for
determining the debt to net worth ratio required by the Premier covenant.
F-43
<PAGE> 123
TAYLOR ACQUISITION GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 CAPITAL LEASES
In 1992 Taylor Interests, Inc. entered into a capital lease with The
Associates for three vacuum trailers.
The future minimum lease payments under capital leases together with the
present value of the net minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C> <C>
1996 $20,405
1997 20,405
-------
Total minimum lease payments................................ 40,810
Less: amount representing interest.......................... 4,522
-------
Present value of net minimum lease payments................. $36,288
=======
</TABLE>
NOTE 5 FEDERAL INCOME TAXES
As explained in Note 1B, the Group consists of various companies and assets
which do not exist as a taxable entity. However, the tax provisions reflected in
the financial statements have been computed as if the companies and assets did
exist as a single taxable entity.
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the bases of depreciation and bad debt
reserve for financial and income tax reporting. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred taxes also are recognized for operating losses
that are available to offset future federal income taxes.
The Group utilizes different methods of recognizing depreciation expense
and bad debt expense for financial statement and income tax purposes. The Group
also elected to expense certain costs relating to saltwater disposal wells for
tax purposes that have been capitalized under generally accepted accounting
principles.
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Net loss before taxes....................................... $(298,955) $(222,300)
--------- ---------
Temporary differences
Depreciation.............................................. 329,282 137,641
Basis in assets sold...................................... 110,978 4,601
Bad debts................................................. 35,851 47,371
Capitalization policies................................... (180,110) (353,310)
--------- ---------
Total temporary differences....................... 296,001 (163,397)
Permanent differences....................................... 41,186 (72,475)
--------- ---------
Total differences................................. 337,187 (236,172)
--------- ---------
Taxable income.............................................. $ 38,232 $(458,472)
========= =========
Tax at statutory rates...................................... $ 5,735 $ --
Fuel tax credit............................................. 8,451 7,973
--------- ---------
Net tax........................................... $ (2,716) $ (7,973)
========= =========
</TABLE>
F-44
<PAGE> 124
TAYLOR ACQUISITION GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax liability is computed as follows:
<TABLE>
<S> <C> <C>
Depreciation expense (liability).................... $1,251,644 $1,563,124
Bad debt expense (asset)............................ (111,322) (139,018)
Net operating loss (asset).......................... (479,065) (222,300)
---------- ----------
Net differences................................... 661,257 1,201,806
Rate.............................................. 34% 31%
Deferred tax liability.............................. $ 224,827 $ 380,235
========== ==========
</TABLE>
The deferred tax liability for 1994 was recognized as an expense all in 1994
since the companies had previously been taxed as Subchapter S corporations. No
deferral existed in prior years.
NOTE 6 DEFERRED REVENUES
Taylor Interests, Inc. entered into an agreement with a major oil company
whereby that company would contribute $285,900 toward the cost of drilling and
constructing a salt water disposal well. Taylor Interests, Inc., would bear the
remaining cost of placing the facility in operation. The oil company would
receive a credit of $.05 per barrel for each barrel disposed until such time as
its investment of $285,900 was recovered. Taylor Interests, Inc. had disposed of
877,900 barrels under this agreement as of December 31, 1995. Deferred revenues
recognized were $48,800 and $43,895 in 1995 and 1994, respectively.
NOTE 7 EMPLOYEE BENEFIT PLAN
Taylor Interests, Inc. has established a 401(k) savings plan for its
employees. All persons employed by the Company on April 1, 1990, are eligible to
participate regardless of age or length of service. Persons employed after this
date become eligible upon the attainment of age 18 and the completion of six
months of service. At December 31, 1995, a total of 81 employees were
participants in the plan.
This plan is a defined contribution plan in which the Company has the
option to match 50% of each employee's contributions which do not exceed 6% of
the employee's annual compensation. All contributions are paid into a trust fund
which has been established solely for the participants in the plan. Total plan
expense to the Company in 1995 was $101,663 and $53,602 in 1995 and 1994,
respectively.
A valuation of plan assets is prepared by an independent actuary. At
December 31, 1995, plan assets totaled $661,156. The Company has a liability to
the plan in the amount of $30,482 which is reflected in accrued expenses.
F-45
<PAGE> 125
TAYLOR ACQUISITION GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 RELATED PARTY TRANSACTIONS
John Randall Taylor owns 100 percent of the stock of Taylor Companies,
Inc., Taylor Water Injections, Inc., Teague Interests, Inc., and Taylor Caldwell
Properties, LLC. On January 1, 1995, Mr. Taylor exchanged 100% of the stocks of
Newton County SWD, Inc. and Cavern Disposal, Inc. for additional stock in Taylor
Companies, Inc.
Various members of the Group had outstanding notes payable to Mr. Taylor.
The note from Taylor Companies, Inc. is subordinated to the notes payable to
Premier Bank and bears an interest rate of 5% per annum.
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Taylor Companies, Inc....................................... $2,505,629 $2,505,629
Taylor SWD Operating, Inc................................... 5,500 5,000
Teague Interests, Inc....................................... 231,500 --
Taylor Caldwell Properties, LLC............................. 17,000 17,000
Taylor Water Injectors, Inc................................. 137,072 137,072
Taylor Disposal, Inc........................................ -- 243,493
Production Disposal, Inc.................................... -- 109,920
Taylor Injection Systems, Inc............................... -- 65,049
DeBerry SWD, Inc............................................ -- 42,215
Tatum SWD, Inc.............................................. -- 244,371
Newton SWD, Inc............................................. -- 629,861
---------- ----------
$2,896,201 $3,999,610
========== ==========
</TABLE>
Mr. Taylor contributed to paid-in surplus $738,011 of the notes payable
from Taylor Disposal, Inc., Production Disposal, Inc., Taylor Injection Systems,
Inc., DeBerry SWD, Inc., Tatum SWD, Inc., and Newton SWD, Inc. in 1995. The
balance of the notes were distributed to Mr. Taylor.
Taylor Interests, Inc. leases its office and shop facilities in Carthage
from Mr. Taylor. The lease is renewable annually with lease payments of $72,000
per annum. The Company also leases its Caldwell facilities from Taylor Caldwell
Properties, LLC, which is a member of the Group. The Company also leases the
administrative office in Carthage from Tay-Rob Interests, Inc., a company in
which Mr. Taylor is president and sole stockholder. The lease is renewable
annually with lease payments of $12,000 per annum. Taylor SWD Operating, Inc.
also leases its facilities from Mr. Taylor for $12,000 per annum.
NOTE 9 COMMITMENTS AND CONTINGENT LIABILITIES
A. Taylor Interests, Inc. leases certain heavy trucks and vehicles from
various leasing companies. These leases are accounted for as operating leases
for financial statement purposes. Future minimum lease payments on these leases
for the next three years are as follows:
<TABLE>
<S> <C>
1996........................................................ $ 727,810
1997........................................................ 527,251
1998........................................................ 218,518
----------
$1,473,579
==========
</TABLE>
B. The Group leases land for its salt water disposal wells from various
individuals at a monthly total of $5,525.
F-46
<PAGE> 126
TAYLOR ACQUISITION GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
C. A suit is pending in District Court against Taylor Interests, Inc. and
Taylor SWD Operating, Inc. seeking relief based on property rights relating to a
salt water disposal well. The Company prevailed at trial of this suit; however,
the Court has granted Plaintiffs a new trial. An adverse verdict could be for a
material amount.
D. Four suits are pending in various State Courts involving vehicular
accidents against Taylor Interests, Inc. The Company has sufficient insurance to
cover the claims.
NOTE 10 ECONOMIC DEPENDENCY
The Group generated approximately 12% of its revenues from one customer in
1995. Total sales to this company were $1,918,841. In 1994, the Group generated
approximately 24% of its revenue from two customers. Total sales to these two
companies were $4,393,749. No other one customer generated more than 10% of
total revenues.
The Group grants credit to customers in the oil and gas and related
industries in the normal course of business. Consequently, the Group's ability
to collect the amounts due from customers is affected by economic fluctuations
in the oil and gas industry.
NOTE 11 MOTOR CARRIER PERMIT
Taylor Interests, Inc. had previously invested in an intrastate motor
carrier permit for which it had paid $57,200 to another carrier. Intrastate
trucking was deregulated by the federal government as of January 1, 1995,
resulting in a permanent impairment of the value of the permit held by the
Company. This permanent impairment in value has been recognized as an expense in
1994.
NOTE 12 SUBSEQUENT EVENT
On January 1, 1996, Mr. Taylor contributed all the capital stock of Taylor
Water Injections, Inc. and Teague Interests, Inc. to Taylor Companies, Inc. in
exchange for additional shares in Taylor Companies, Inc.
F-47
<PAGE> 127
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Dawson WellTech, L.C.:
We have audited the accompanying balance sheets of Well Solutions, Inc. (a
Delaware Corporation), as of March 31, 1994 and 1993, and the related statements
of income, shareholder's equity and cash flows for each of the three years in
the period ended March 31, 1994. 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 financial position of Well Solutions, Inc., as of
March 31, 1994 and 1993, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1994, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Antonio, Texas
April 10, 1995
F-48
<PAGE> 128
WELL SOLUTIONS, INC.
BALANCE SHEETS -- MARCH 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 53,379 $ 61,312
Unbilled accounts receivable.............................. 581,988 134,827
Receivable due from affiliate, net........................ 1,440,970 1,552,909
Prepaid expenses and other................................ 61,198 58,016
------------ ------------
Total current assets.............................. 2,137,535 1,807,064
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Buildings and land........................................ 1,191,623 1,361,664
Machinery and equipment................................... 22,545,581 22,385,224
------------ ------------
23,737,204 23,746,888
Less accumulated depreciation and amortization............ (12,807,166) (11,237,822)
------------ ------------
10,930,038 12,509,066
------------ ------------
DEFERRED INCOME TAX ASSETS.................................. 335,519 --
------------ ------------
OTHER ASSETS, net........................................... 1,025,903 1,306,309
------------ ------------
Total assets...................................... $ 14,428,995 $ 15,622,439
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 1,249,175 $ 1,197,499
Current deferred income taxes............................. 215,336 49,886
------------ ------------
Total current liabilities......................... 1,464,511 1,247,385
------------ ------------
DEFERRED INCOME TAXES....................................... -- 70,253
------------ ------------
LONG-TERM DEBT, less current maturities..................... 829,677 1,730,579
------------ ------------
NOTE PAYABLE TO AN AFFILIATED COMPANY....................... 8,000,000 8,000,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 4)
SHAREHOLDER'S EQUITY:
Common stock, par value $.01 per share; 10,000 shares
authorized, issued and outstanding at March 31, 1994
and 1993............................................... 100 100
Additional paid-in capital................................ 483,479 483,479
Retained earnings......................................... 3,651,228 4,090,643
------------ ------------
Total shareholder's equity........................ 4,134,807 4,574,222
------------ ------------
Total liabilities and shareholder's equity........ $ 14,428,995 $ 15,622,439
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE> 129
WELL SOLUTIONS, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
OPERATING REVENUES...................................... $24,459,735 $28,460,282 $23,618,211
----------- ----------- -----------
OPERATING EXPENSES:
Cost of services...................................... 20,459,157 22,217,657 17,904,721
General and administrative............................ 1,011,260 801,448 1,407,722
Depreciation and amortization......................... 2,372,040 2,202,732 1,974,938
----------- ----------- -----------
Total operating expenses...................... 23,842,457 25,221,837 21,287,381
----------- ----------- -----------
INCOME FROM OPERATIONS.................................. 617,278 3,238,445 2,330,830
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Loss on sale of assets................................ (326,350) (228,892) (12,093)
Interest and other income............................. 22,451 29,947 140,375
Interest expense...................................... (993,116) (1,009,494) (1,067,544)
----------- ----------- -----------
Total other income (expense).................. (1,297,015) (1,208,439) (939,262)
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES....................... (679,737) 2,030,006 1,391,568
INCOME TAX EXPENSE (BENEFIT)............................ (240,322) 800,375 557,563
----------- ----------- -----------
NET INCOME (LOSS)....................................... $ (439,415) $ 1,229,631 $ 834,005
=========== =========== ===========
EARNINGS (LOSS) PER SHARE OF COMMON
STOCK................................................. $ (43.94) $ 122.96 $ 83.40
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE> 130
WELL SOLUTIONS, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED MARCH 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
--------------- PAID-IN EARNINGS SHAREHOLDER'S
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------ ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, March 31, 1991...................... 10,000 $100 $483,479 $2,027,007 $2,510,586
Net income................................. -- -- -- 834,005 834,005
------ ---- -------- ---------- ----------
BALANCE, March 31, 1992...................... 10,000 100 483,479 2,861,012 3,344,591
Net income................................. -- -- -- 1,229,631 1,229,631
------ ---- -------- ---------- ----------
BALANCE, March 31, 1993...................... 10,000 100 483,479 4,090,643 4,574,222
Net loss................................... -- -- -- (439,415) (439,415)
------ ---- -------- ---------- ----------
BALANCE, March 31, 1994...................... 10,000 $100 $483,479 $3,651,228 $4,134,807
====== ==== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE> 131
WELL SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................. $ (439,415) $ 1,229,631 $ 834,005
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities --
Depreciation and amortization.................. 2,372,040 2,202,732 1,974,938
Loss on sale of assets......................... 326,350 228,892 12,093
Deferred income tax expense (benefit).......... (240,322) 302,998 557,563
Changes in operating accounts
(Increase) decrease in --
Unbilled accounts receivable................... (447,161) (107,130) 36,247
Receivable due from affiliate, net............. (1,576,243) (3,855,940) (3,464,209)
Prepaid expenses and other..................... (3,182) 8,463 (10,535)
Other assets, net.............................. -- -- --
----------- ----------- -----------
Net cash provided by (used in) operating
activities.............................. (7,933) 9,646 (59,898)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH..................... (7,933) 9,646 (59,898)
CASH, beginning of year............................. 61,312 51,666 111,564
----------- ----------- -----------
CASH, end of year................................... $ 53,379 $ 61,312 $ 51,666
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 132
WELL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General
The financial statements include the accounts of Well Solutions, Inc., a
Delaware corporation (the Company). The Company is a wholly owned subsidiary of
New London Inc. (New London) and is engaged in the oilfield service business
operating in Texas and Oklahoma. The Company provides rental tools, frac tank
and vacuum truck services, waste water disposal, production testing and wireline
services.
Cash
The Company's cash balance consists of petty cash funds maintained at the
Company's field offices.
Unbilled Accounts Receivable
Revenues and costs applicable to oilfield services are recognized as the
services are performed.
Receivable Due From Affiliate, Net
Since the Company does not maintain an operating cash account, all
operating and general and administrative expenses, debt payments and any other
cash requirements are paid by the Company's parent, New London. New London also
invoices and collects all trade accounts receivable on behalf of the Company.
The Company is charged by New London for accounts receivable invoiced by New
London on behalf of the Company which are considered to be uncollectible.
Charges to the Company for uncollectible accounts amounted to $240,000, $80,000
and $150,000 for the years ended March 31, 1994, 1993 and 1992, respectively.
All payments made by New London on behalf of the Company are netted against
receivables invoiced by New London on behalf of the Company and included as a
net receivable due from affiliate in the accompanying balance sheet. All
applicable general and administrative expenses incurred by New London on behalf
of the Company are allocated to the Company and are netted against the
receivable due from affiliate. The net receivable balance is payable by the
affiliate on demand and is noninterest bearing.
Concentrations of Credit Risk
The Company's revenues are derived principally from uncollateralized sales
to customers in the oil and gas industry. This industry concentration has the
potential to impact the Company's exposure to credit risk, either positively or
negatively, because the customers may be similarly affected by changes in
economic or other conditions. Management believes that charges to the Company
from New London for amounts deemed uncollectible are adequate to absorb total
estimated losses related to uncollectible accounts.
Property, Plant and Equipment
Property, plant and equipment is carried at cost. Depreciation of assets is
computed primarily using the straight-line method (three-year to thirty-year
lives for buildings and improvements and two-year to twelve-year lives for
machinery and equipment). When assets are retired or otherwise disposed of, the
cost and related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is reflected in income for the period. The cost of
maintenance and repairs is charged to income as incurred; significant renewals
and betterments are capitalized.
Other Assets
Other assets consist primarily of deferred debt and acquisition costs and
other intangible assets and is presented net of accumulated amortization of
$792,185 and $491,779 at March 31, 1994 and 1993,
F-53
<PAGE> 133
WELL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
respectively. Amortization expense amounted to $300,406, $284,094 and $98,237
for 1994, 1993 and 1992, respectively.
Sales to Significant Customers
During the years ended March 31, 1994, 1993 and 1992, sales to the
Company's largest customer accounted for approximately 35 percent, 36 percent
and 27 percent, respectively, of the Company's total operating revenues. No
other single customer accounted for 10 percent or more of the Company's total
operating revenues for any of the years ended March 31, 1994, 1993 and 1992.
Earnings Per Share
Earnings per share of common stock were computed based on the weighted
average number of common shares outstanding during each year. There were no
common stock equivalents outstanding for the three years ended March 31, 1994.
The weighted average numbers of common shares outstanding for the years ended
March 31, 1994, 1993 and 1992, was 10,000.
2. LONG-TERM DEBT:
The prime rate on substantially all of the Company's variable interest debt
was 6.25 percent and 6.00 percent at March 31, 1994 and 1993, respectively. As
of March 31, 1994 and 1993, long-term debt consisted of:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Note payable to an affiliated company, interest at 10
percent, payable in January 2004.......................... $ 8,000,000 $ 8,000,000
Capitalized financing leases payable in monthly installments
of principal and interest, maturing on various dates
ranging from June 1994 through September 1998, at interest
rates ranging from prime plus 2.125 percent to fixed rates
ranging from 7.29 percent to 10.1 percent, collateralized
by equipment.............................................. 1,555,854 1,734,752
Notes payable to individuals, interest at the rate of the
average 90-day certificate of deposit rates (3.23 percent
and 2.69 percent at March 31, 1994 and 1993,
respectively), payable in aggregate annual principal
installments of $278,332 through December 1994............ 278,332 556,666
Notes payable to individuals and a corporation, interest at
4.68 percent, payable in September 1995................... 138,000 414,000
Note payable to an individual, interest at the rate of the
average 90-day certificate of deposit rates (3.23 percent
and 2.69 percent at March 31, 1994 and 1993,
respectively), payable in annual principal installments of
$106,666 through January 1995............................. 106,666 213,333
</TABLE>
F-54
<PAGE> 134
WELL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Mortgage note payable to a bank, interest at 9.25 percent,
payable in monthly installments of principal and interest
aggregating $13,585 per year through December 1993,
secured by land and buildings............................. -- $ 9,327
----------- -----------
$10,078,852 10,928,078
Less --
Current maturities of long-term debt...................... 1,249,175 1,197,499
Note payable to an affiliated company..................... 8,000,000 8,000,000
----------- -----------
Long-term debt, less current maturities..................... $ 829,677 $ 1,730,579
=========== ===========
</TABLE>
The aggregate annual maturities of long-term debt and capital lease
obligations during the five years following March 31, 1994, and thereafter are
as follows:
<TABLE>
<CAPTION>
ANNUAL
FISCAL YEARS MATURITIES
------------ ----------
<S> <C>
1995.......................................... $ 1,249,175
1996.......................................... 417,529
1997.......................................... 261,538
1998.......................................... 127,040
1999.......................................... 23,570
Thereafter.................................... 8,000,000
-----------
Total............................... $10,078,852
===========
</TABLE>
3. LEASES:
Equipment accounts include the following amounts for leases that have been
capitalized:
<TABLE>
<CAPTION>
MARCH 31
------------------------
1994 1993
---- ----
<S> <C> <C>
Equipment........................... $4,102,081 $3,559,517
Less -- Accumulated
depreciation................... 1,809,600 1,294,045
---------- ----------
Net....................... $2,292,481 $2,265,472
========== ==========
</TABLE>
F-55
<PAGE> 135
WELL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The net present value of future minimum lease payments are reflected as a
component of long-term debt. The following table sets forth future minimum lease
payment obligations under capital leases as of March 31, 1994:
<TABLE>
<CAPTION>
EQUIPMENT
---------
<S> <C>
Fiscal years
1995................................................... $ 893,207
1996................................................... 396,712
1997................................................... 283,353
1998................................................... 132,947
1999................................................... 24,020
----------
Minimum lease payments................................... 1,730,239
Less -- Amounts representing interest.................... 174,385
----------
Net present value of future minimum lease payments....... 1,555,854
Less -- Current maturities............................... 795,177
----------
Long-term obligations at March 31, 1994.................. $ 760,677
==========
</TABLE>
The Company also has noncancelable operating leases with remaining terms
ranging from one year to seven years. The related future minimum lease payments
as of March 31, 1994, are as follows:
<TABLE>
<CAPTION>
PROPERTY/FACILITY EQUIPMENT
----------------- ---------
<S> <C> <C>
Fiscal years
1995.................................... $ 52,776 $19,802
1996.................................... 43,950 8,253
1997.................................... 42,000 280
1998.................................... 42,000 --
1999.................................... 34,200 --
Thereafter................................ 44,400 --
-------- -------
$259,326 $28,335
======== =======
</TABLE>
The future minimum lease payments listed above exclude certain operating
lease commitments having a remaining noncancelable term of one year or less.
Rent expense amounted to $140,131, $134,603 and $80,745 for 1994, 1993 and 1992,
respectively, and includes various month-to-month and other short-term rentals
in addition to rents paid and accrued under long-term lease commitments.
4. COMMITMENTS AND CONTINGENCIES:
The Company is exposed to a number of asserted and unasserted potential
claims in the normal course of business. In the opinion of management, the
resolution of the matters will not have a material adverse effect on the
Company's financial position or results of operations.
5. CASH FLOWS:
As discussed in Note 1, all cash requirements of the Company are paid by
New London, therefore, the Company had no cash payments for interest or income
taxes for the years ended March 31, 1994, 1993 and 1992.
F-56
<PAGE> 136
WELL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Supplemental schedule of noncash investing and financing activities is as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Sale of operating assets....................... $ 356,909 $ 205,101 $ 287,275
Reductions in long-term debt................... 1,391,790 1,336,604 2,316,149
Additions to property, plant and equipment..... 633,301 1,798,364 3,001,420
Leases capitalized............................. 542,564 542,345 424,248
Refinance of capital leases.................... -- -- 1,296,089
Additions to other assets...................... 20,000 305,301 1,171,131
</TABLE>
6. INCOME TAXES:
Effective April 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109) which
provides for the recognition of deferred tax assets and liabilities for future
tax consequences of existing differences between the financial reporting and tax
reporting bases of assets and liabilities and operating loss and tax credit
carryforwards for tax purposes. The cumulative impact of adoption of SFAS 109 in
the 1994 statement of income was insignificant.
New London files consolidated tax returns which include the accounts of the
Company. Pursuant to an informal intercompany tax-sharing agreement between the
Company and New London, the Company provides for federal and state income taxes
at rates approximating the statutory tax rates and records the related payable
or receivable as an intercompany payable or receivable with New London.
Income tax expense (benefit) for the years ended March 31, 1994, 1993 and
1992, was as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Current--
Federal................................. $ -- $460,760 $ --
State................................... -- 36,617 --
--------- -------- --------
Total current................... $ -- $497,377 $ --
========= ======== ========
Deferred--
Federal................................. $(220,837) $274,720 $512,355
State................................... (19,485) 28,278 45,208
--------- -------- --------
Total deferred.................. $(240,322) $302,998 $557,563
========= ======== ========
</TABLE>
Total income tax expense (benefit) differs from the amount computed by
applying the statutory federal income tax rate to income (loss) before income
taxes. The reasons for these differences for the tax years ended March 31, 1994,
1993 and 1992, are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Income (loss) before income taxes.............. $(679,737) $2,030,006 $1,391,568
--------- ---------- ----------
Income tax at statutory rate of 34 percent..... $(231,110) $ 690,202 $ 473,133
State taxes, net of federal income tax
benefit...................................... (20,392) 60,900 41,747
Other.......................................... 11,180 49,273 42,683
--------- ---------- ----------
Income tax expense (benefit)......... $(240,322) $ 800,375 $ 557,563
========= ========== ==========
</TABLE>
F-57
<PAGE> 137
WELL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of significant temporary differences representing income tax
assets and liabilities for the years ended March 31, 1994 and 1993, are as
follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Deferred income tax assets --
Deferred income tax assets, long term --
Alternative minimum tax credit carryforward............ $ 45,763 $ 45,763
Property, plant and equipment.......................... 289,756 --
-------- ---------
Total deferred income tax assets, long term....... 335,519 45,763
-------- ---------
Total deferred income tax assets.................. $335,519 $ 45,763
======== =========
Deferred income tax liabilities --
Deferred income tax liabilities, current --
Unbilled accounts receivable........................... $215,336 $ 49,886
-------- ---------
Total deferred income tax liabilities, current.... 215,336 49,886
======== =========
Deferred income tax liabilities, long term --
Property, plant and equipment............................. -- 116,016
-------- ---------
Total deferred income tax liabilities, long
term............................................ -- 116,016
-------- ---------
Total deferred income tax liabilities............. $215,336 $ 165,902
======== =========
Net deferred income tax assets (liabilities)...... $120,183 $(120,139)
======== =========
</TABLE>
The Company has alternative minimum tax credit carryforwards of $45,763
with no expiration date.
7. SUBSEQUENT EVENTS (UNAUDITED):
Effective November 1, 1994, the Company sold the majority of its operating
assets for $17.5 million to Dawson WellTech, L.C., at a gain of approximately
$4.2 million.
F-58
<PAGE> 138
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING
DESCRIBED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
The Company........................... 13
Recent Developments................... 13
Disclosure Regarding Forward-Looking
Statements.......................... 14
Equity Offering....................... 14
Use of Proceeds....................... 14
Capitalization........................ 15
Pro Forma Condensed Consolidated
Financial Statements................ 16
Selected Consolidated Financial
Data................................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 25
Pride Acquisition..................... 33
Management............................ 35
Certain Relationships and Related
Transactions........................ 41
Security Ownership of Management and
Principal and Selling
Shareholders........................ 44
Description of Notes.................. 46
Description of Capital Stock.......... 73
Underwriting.......................... 75
Legal Matters......................... 76
Experts............................... 76
Available Information................. 77
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$130,000,000
[DAWSON INC. LOGO]
DAWSON PRODUCTION
SERVICES, INC.
% SENIOR NOTES
DUE 2007
PROSPECTUS
JEFFERIES & COMPANY, INC.
February , 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 139
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This Prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION, DATED FEBRUARY 13, 1997
[DAWSON INC. LOGO]
PROSPECTUS
4,706,807 SHARES
<TABLE>
<S> <C>
DAWSON PRODUCTION SERVICES, INC.
</TABLE>
COMMON STOCK
------------------------
Dawson Production Services, Inc. ("Dawson" or the "Company") is offering
3,500,000 shares, and certain selling shareholders (the "Selling Shareholders")
are offering 1,206,807 shares, of common stock (the "Common Stock") of the
Company (the "Equity Offering"). Concurrently with the Equity Offering, the
Company is offering $130.0 million of % Senior Notes due February 1, 2007
(the "Notes") pursuant to a separate prospectus (the "Debt Offering" and,
together with the Equity Offering, the "Offerings"). The Company will use
approximately $135.9 million of the aggregate net proceeds from the Offerings to
purchase the U.S. land-based well servicing operations (the "Pride Acquisition")
of Pride Petroleum Services, Inc. ("Pride"), approximately $12.3 million to
prepay certain indebtedness (including accrued interest) of the Company and the
remainder for fees and expenses of the Pride Acquisition, working capital and
general corporate purposes. See "Use of Proceeds" and "Pride Acquisition." The
closing of the Debt Offering and the Equity Offering are each conditioned upon
the simultaneous closing of the other and upon the simultaneous closing of the
Pride Acquisition.
The Common Stock is listed on the Nasdaq National Market under the symbol
"DPSI." On February 12, 1997, the closing price of the Common Stock on the
Nasdaq National Market was $13.25. See "Price Range of Common Stock and Dividend
Policy."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY POTENTIAL 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.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2) SELLING SHAREHOLDERS
-------- ------------ ----------- --------------------
<S> <C> <C> <C> <C>
Per Share...................... $ $ $ $
Total(3)....................... $ $ $ $
</TABLE>
- ---------------
(1) The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $300,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 706,021 shares of Common Stock on the same terms and
conditions as set forth above, solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discount, Proceeds to Company and Proceeds to Selling Shareholders will be
$ , $ , $ and $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by the Underwriters. The
Underwriters reserve the right to reject orders in whole or in part. It is
expected that delivery of the shares of Common Stock will be made against
payment therefor in New York, New York, on or about February , 1997.
------------------------
JEFFERIES & COMPANY, INC.
RAUSCHER PIERCE REFSNES, INC.
SOUTHCOAST CAPITAL
CORPORATION
February , 1997
<PAGE> 140
[GRAPHIC]
IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OR THE
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF
THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER
THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
2
<PAGE> 141
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and the consolidated financial
statements of the Company and notes thereto appearing elsewhere in this
Prospectus. Unless otherwise indicated, the information in this Prospectus
assumes that the Underwriters' over-allotment option in connection with the
Equity Offering will not be exercised. Unless the context otherwise requires,
references in this Prospectus to the "Company" or "Dawson" mean Dawson
Production Services, Inc., its predecessors, and its and their subsidiaries.
Unless the context otherwise requires, pro forma information contained herein
gives effect to the Taylor Acquisition (as defined herein) in July 1996, the
Pride Acquisition and the Offerings.
THE COMPANY
Dawson Production Services, Inc. is a leading provider of a broad range of
workover, liquid and production services used in the production of oil and gas.
The Company's services are utilized by major oil and gas companies as well as
independent producers to optimize performance of oil and gas wells. The Company
recently entered into an agreement to acquire the U.S. land-based well servicing
operations of Pride Petroleum Services, Inc. in a transaction that will position
Dawson as the second largest provider of workover rigs in the United States.
The Company commenced operations in 1951. In 1982, the current management
team joined the Company and initiated a strategy to expand and diversify the
Company's workover rig services. Since 1982, the Company has grown from four
workover rigs in a single yard to 91 workover rigs in 10 yards through a series
of strategic acquisitions of businesses and assets. Upon the closing of the
Pride Acquisition, the Company will own and operate 498 workover rigs. In
addition, in November 1994 the Company broadened the array of services it
provides by acquiring the liquid services and production services businesses of
Well Solutions, Inc. and expanded such businesses in July 1996 with the
acquisition of Taylor Companies, Inc. The Company believes that it generally has
been successful in acquiring businesses and assets and subsequently reducing
overhead, enhancing internal controls, improving marketing and related
operations through management incentives and improving the utilization of its
assets by redeploying equipment.
BUSINESS STRATEGY
The Company's strategy emphasizes diversification and expansion through
acquisitions and internal growth. In recent years, there has been significant
industry consolidation activity in the Company's principal businesses. The
Company has been an active participant in this industry consolidation and plans
to continue to pursue strategic acquisitions of businesses and assets which
enhance or expand its market presence or complement its existing businesses.
Upon the closing of the Pride Acquisition, the Company intends to expand the
range of services offered at its locations and increase its presence, through
redeployment of underutilized assets, within the geographic regions in which the
Company will then operate. The Company believes that its ability to offer a wide
range of services over a large operating base will provide it with a competitive
advantage by allowing its customers to consolidate their procurement of
workover, liquid and production services by utilizing fewer vendors. The Company
believes that this consolidation may allow customers to lower their costs by
streamlining production decisions and increasing operational efficiencies. The
Company also believes that its strategy will allow it to take advantage of
cross-marketing opportunities for its services and to appeal to a broader
customer base by enhancing its position as a one-stop source for workover,
liquid and production services.
PRIDE ACQUISITION
Consistent with its business strategy, on December 23, 1996 the Company
entered into a purchase agreement to acquire substantially all of Pride's U.S.
land-based well servicing operations for approximately $135.9 million in cash.
The Pride Acquisition will significantly increase the size and geographic scope
of the Company's workover rig services business. Pride's U.S. land-based fleet
consists of 407 workover rigs and related operations in 28 locations in the
Texas and Louisiana Gulf Coasts, the Permian Basin areas of West
3
<PAGE> 142
Texas and New Mexico, and California. Upon completion of the Pride Acquisition,
the Company will be the largest provider of workover rigs in Texas and the
second largest provider in the United States. The Company will seek to generate
improved profit margins for the acquired assets through increased operating
efficiencies and cost savings resulting from overhead reductions and the
consolidation of certain overlapping yard locations. In addition, the Company
will seek to expand its liquid and production services businesses into new
markets through certain of the acquired yard locations and to redeploy certain
of the acquired workover rigs to areas with greater rig demand. See "Pride
Acquisition."
For the year ended March 31, 1996, the Company's pro forma revenue and
EBITDA (as defined herein) were approximately $182.2 million and $26.5 million,
respectively, compared to historical revenue and EBITDA of approximately $52.4
million and $9.1 million, respectively. For the six months ended September 30,
1996, the Company's pro forma revenue and EBITDA were approximately $100.2
million and $14.8 million, respectively, compared to historical revenue and
EBITDA of approximately $33.8 million and $6.5 million, respectively.
MOBLEY ACQUISITION
On January 20, 1997, Dawson acquired the liquid services assets of Mobley
Environmental Services, Inc. for approximately $5.0 million in cash and a $0.5
million five year subordinated note (the "Mobley Acquisition"). These assets
generated revenues of approximately $4.4 million and $3.2 million for the 12
months ended December 31, 1995 and the nine months ended September 30, 1996,
respectively.
OPERATIONS
Workover Rig Services. The Company provides workover rig services to oil
and gas exploration and production companies through the use of mobile well
servicing workover rigs together with crews of three to four workers. As of
January 15, 1997, the Company operated 89 land workover rigs, two barge-mounted
workover rigs and ancillary equipment from 10 yards in Texas and Louisiana. Upon
the closing of the Pride Acquisition, the Company will expand its workover rig
fleet to 498 rigs located in Texas, Louisiana, California and New Mexico.
Workover rig services are used throughout the life of a well and are
categorized by the type of job performed: completion, maintenance, workover and
plugging and abandonment. Completion services prepare newly drilled wells for
production. Newly drilled wells are frequently completed by well servicing rigs
to minimize the use of higher cost drilling rigs. Maintenance services are
required on producing oil and gas wells to ensure efficient and continuous
operation. In addition to periodic maintenance, producing oil and gas wells
occasionally require major repairs or modifications called "workovers." Workover
rigs are also used in the plugging and abandonment of oil and gas wells no
longer capable of producing in economic quantities. For the six months ended
September 30, 1996, workover rig services contributed approximately 46% of the
Company's revenues (75% on a pro forma basis).
Liquid Services. The Company uses its vacuum trucks, frac tanks and salt
water injection wells to provide an integrated mix of liquid services to well
site customers. The Company owns and operates 175 vacuum trucks and will acquire
an additional 10 vacuum trucks in connection with the Pride Acquisition. Vacuum
trucks are used to extract fluids from pits, tanks and other storage facilities
and to transport water for frac tanks, produced salt water to injection wells
and brine and other drilling fluids to and from well locations. Vacuum truck
services are generally provided to oilfield operators within a 30-mile radius of
the Company's nearest yard. The Company owns 696 frac tanks, which are used
during all phases of the life of a producing well to store various fluids at the
well site. The Company also owns or leases 22 salt water injection wells. In
Texas and Arkansas, salt water produced from oil and gas wells is generally
required by law to be disposed of in salt water injection wells. For the six
months ended September 30, 1996, liquid services contributed approximately 38%
of the Company's revenues (20% on a pro forma basis).
4
<PAGE> 143
Production Services. The Company's production services consist of
production testing services, slickline wireline services, fishing and rental
tool services and pipe testing. The Company owns 21 gas production testing units
which are used to perform deliverability tests required upon the initial
completion of a well and periodically during the productive life of a gas well.
In addition, the Company offers slickline wireline services which are used to
simplify completion operations and in connection with regular maintenance on
producing wells. The Company also provides a complete line of cased hole fishing
and rental tools to oilfield operators and service companies, and operates nine
pipe testing units along the Texas Gulf Coast. This testing equipment is used
during completion and recompletion operations for leak detection in the internal
pipe systems of oil and gas wells. For the six months ended September 30, 1996,
production services contributed approximately 16% of the Company's revenues (5%
on a pro forma basis).
THE EQUITY OFFERING
Common Stock Offered
by the Company........... 3,500,000 Shares
Common Stock Offered by
the Selling
Shareholders............. 1,206,807 Shares
Common Stock Outstanding:
Before the Equity
Offering(1).............. 6,399,725 Shares
After the Equity
Offering(1)................ 9,899,725 Shares
Use of Proceeds............ The net proceeds to the Company from the sale of
shares of Common Stock are estimated to be
approximately $43.3 million. The Company will use
the net proceeds from the sale of the shares of
Common Stock, together with the estimated net
proceeds to the Company from the Debt Offering of
approximately $125.4 million, to fund the
approximately $135.9 million purchase price of the
Pride Acquisition, to prepay certain existing
indebtedness (including accrued interest) of the
Company, and for fees and expenses of the Pride
Acquisition, working capital and general corporate
purposes. The Company will not receive any proceeds
from the sale of shares of Common Stock by the
Selling Shareholders. See "Use of Proceeds."
Nasdaq National Market
Symbol................... DPSI
Debt Offering.............. Concurrently with the Equity Offering, the Company
is offering $130.0 million of % Senior Notes
due 2007 to the public. The closing of the Equity
Offering and the Debt Offering are each conditioned
upon the simultaneous closing of the other and upon
the simultaneous closing of the Pride Acquisition.
- ---------------
(1) Does not include 548,650 shares issuable upon exercise of outstanding
options as of January 15, 1997, of which 163,479 were exercisable at that
date.
5
<PAGE> 144
SUMMARY OF CONSOLIDATED FINANCIAL DATA
The following table presents for the periods indicated certain historical
consolidated and certain pro forma combined financial data for the Company. The
following information should be read together with "Pro Forma Condensed
Consolidated Financial Statements," "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements, including the notes thereto, included
elsewhere in this Prospectus. The results for the six months ended September 30,
1996 are not necessarily indicative of results for the full year. The pro forma
information is presented for illustrative purposes only and is not necessarily
indicative of the results of operations and financial position that would have
been achieved had the transactions reflected therein been consummated on the
dates indicated.
<TABLE>
<CAPTION>
AT OR FOR SIX MONTHS
AT OR FOR YEARS ENDED MARCH 31, ENDED SEPTEMBER 30,
---------------------------------------------------------- ----------------------------
1996 1996
PRO PRO
1992 1993 1994 1995 1996 FORMA(1) 1995 1996 FORMA(1)
------- ------- ------- ------- ------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............................. $15,784 $20,822 $27,942 $36,005 $52,391 $182,219 $25,888 $33,811 $100,229
Costs and expenses:
Operating.......................... 11,440 14,772 19,937 24,241 34,320 131,052 16,875 21,893 71,994
General and administrative......... 2,443 3,040 3,854 5,574 8,937 24,676 4,238 5,469 13,480
Depreciation and amortization...... 1,062 1,374 1,707 2,608 4,396 19,204 2,016 2,876 9,692
------- ------- ------- ------- ------- -------- ------- ------- --------
Operating income..................... 839 1,636 2,444 3,582 4,738 7,287 2,759 3,573 5,063
Interest expense..................... 352 301 282 789 1,848 12,610 953 296 6,305
Other (income) expense............... (8) 84 (61) (41) (129) (1,490) (27) (252) (201)
Minority interest.................... -- 358 902 1,092 937 937 787 -- --
------- ------- ------- ------- ------- -------- ------- ------- --------
Income (loss) before income taxes and
extraordinary item................. 495 893 1,321 1,742 2,082 (3,833) 1,046 3,529 (1,041)
Provision for income taxes........... 236 320 525 681 709 (1,860) 398 1,354 (406)
------- ------- ------- ------- ------- -------- ------- ------- --------
Income (loss) before extraordinary
item............................... 259 573 796 1,061 1,373 (2,910) 648 2,175 (635)
Extraordinary item(2)................ 38 -- (92) -- (514) (514) -- -- --
------- ------- ------- ------- ------- -------- ------- ------- --------
Net income (loss).................... 297 573 704 1,061 859 (3,424) 648 2,175 (635)
Preferred stock dividends............ 101 101 101 101 88 88 50 -- --
------- ------- ------- ------- ------- -------- ------- ------- --------
Net income (loss) applicable to
common stock....................... $ 196 $ 472 $ 603 $ 960 $ 771 $ (3,512) $ 598 $ 2,175 $ (635)
======= ======= ======= ======= ======= ======== ======= ======= ========
Primary earnings (loss) per share.... $ .11 $ .23 $ .29 $ .45 $ .27 $ (.55) $ .25 $ .33 $ (.06)
Fully diluted earnings (loss) per
share.............................. $ .11 $ .23 $ .29 $ .42 $ .27 $ (.55) $ .23 $ .33 $ (.06)
Average number of shares
outstanding --
primary............................ 1,768,613 2,020,664 2,052,168 2,155,380 2,931,234 6,382,896 2,384,359 6,510,428 9,890,984
Average number of shares
outstanding -- fully diluted....... 1,768,613 2,020,664 2,450,791 2,648,740 3,207,622 6,382,896 3,095,826 6,527,796 9,890,984
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 400 $ 1,139 $ 2,172 $ 2,797 $13,863 $ 9,364 $ 28,393
Net property and equipment........... 6,261 8,625 8,978 25,321 29,115 39,209 145,859
Total assets......................... 11,685 15,828 16,714 40,525 56,368 74,092 235,071
Long-term debt and other obligations,
net of current portion............. 1,938 1,722 1,623 15,989 3,695 4,609 132,750
Total shareholders' equity........... 5,487 6,009 6,720 10,098 45,694 47,933 91,226
OTHER FINANCIAL DATA:
Ratio of earnings to fixed
charges(3)......................... 2.3x 3.6x 5.0x 3.1x 2.1x 0.6x 2.1x 10.9x 0.8x
EBITDA(4)............................ $ 1,901 $ 3,010 $ 4,151 $ 6,190 $ 9,134 $ 26,491 $ 4,775 $ 6,449 $ 14,755
Ratio of EBITDA to interest
expense............................ 5.4x 10.0x 14.7x 7.9x 4.9x 2.1x 5.0x 21.8x 2.3x
</TABLE>
- ---------------
(1) Adjusted, in the case of the income statement data, to reflect the
consummation of the Pride Acquisition, the Taylor Acquisition and the
Offerings, as if each had occurred on April 1, 1995, and in the case of
balance sheet data at September 30, 1996, to reflect the consummation of the
Pride Acquisition and the Offerings as if they had been completed at such
date. See "The Company." Does not give effect to certain estimated
consolidation cost savings and operational efficiencies that the Company
anticipates can be achieved in connection with the Pride Acquisition,
primarily resulting from the consolidation of certain facilities and the
reduction of personnel. Assuming that such consolidation cost savings had
occurred at the beginning of the year ended March 31, 1996 and the beginning
of the six month period ended September 30, 1996, results of operations
(after taking into consideration the tax effect of such consolidation cost
savings) would have been a net loss of $0.5 million and net income of $0.9
million, respectively, and EBITDA would have been $31.3 million and $17.2
million, respectively. There can be no assurance with respect to the amount
or timing of any such consolidation cost savings by the Company or that any
such consolidation cost savings will not be offset in part by additional
operating expenses resulting from the Pride Acquisition.
(2) Includes a $92,000 charge in fiscal 1994 to reflect the cumulative effect of
change in accounting principle.
(3) For purposes of computing the ratio of earnings to fixed charges, earnings
are computed as income before income taxes, extraordinary item and
cumulative effect of a change in accounting principle, plus fixed charges.
Fixed charges consist of interest, whether expensed or capitalized,
amortization of debt issuance costs and an estimated portion of rentals
representing interest costs. On a pro forma basis, earnings were inadequate
to cover fixed charges for the periods ended March 31, 1996 and September
30, 1996 by $4.8 million and $1.0 million, respectively.
(4) EBITDA is defined as earnings before interest expense, taxes, depreciation
and amortization, minority interest and other (income) expense and is
presented because it is a widely accepted financial indication of a
company's ability to incur and service debt. EBITDA should not be considered
as an alternative to earnings as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity.
6
<PAGE> 145
RISK FACTORS
Prospective purchasers of the securities offered hereby should carefully
consider the following factors in addition to the other information in this
Prospectus. See "Disclosure Regarding Forward-Looking Statements."
INCURRENCE OF SUBSTANTIAL INDEBTEDNESS
At September 30, 1996, on a pro forma basis and giving effect to
application of the net proceeds of the Offerings as set forth herein under "Use
of Proceeds," the Company would have had approximately $133.3 million in total
indebtedness, compared with total actual indebtedness of $15.6 million at such
date. The Company historically has operated at substantially lower levels of
debt than will be outstanding after giving effect to the Offerings. The
Company's level of indebtedness will have several important effects on its
future operations, including, without limitation, (i) a substantial portion of
the Company's cash flow from operations must be dedicated to the payment of
interest and principal on its indebtedness, (ii) the Company's leveraged
position will substantially increase its vulnerability to adverse changes in
general economic and industry conditions, as well as to competitive pressure,
and (iii) the Company's ability to obtain additional financing for working
capital, capital expenditures, acquisitions, general corporate and other
purposes may be limited. The Company's ability to meet its debt service
obligations and to reduce its total indebtedness will be dependent upon the
Company's future performance, which will be subject to general economic
conditions, industry cycles and financial, business and other factors affecting
the operations of the Company, many of which are beyond its control. There can
be no assurance that the Company's business will continue to generate cash flow
at or above current levels. If the Company is unable to generate sufficient cash
flow from operations in the future to service its debt, it may be required,
among other things, to seek additional financing in the debt or equity markets,
to refinance or restructure all or a portion of its indebtedness, including the
Notes, or to sell selected assets or reduce or delay planned capital
expenditures or acquisitions. There can be no assurance that any such measures
would be sufficient to enable the Company to service its debt or that any such
financing, refinancing or sale of assets would be available on economically
favorable terms.
DEPENDENCE ON VOLATILE OIL AND GAS INDUSTRY
Demand for the Company's services depends substantially upon the level of
activity in the oil and gas industry, which in turn depends in part on oil and
gas prices, expectations about future prices, the cost of exploring for,
producing and delivering oil and gas, the discovery rate of new oil and gas
reserves in land areas, the level of drilling and workover activity, domestic
and international political, military, regulatory and economic conditions and
the ability of oil and gas companies to raise capital. Prices for oil and gas
historically have been extremely volatile and have reacted to changes in the
supply of and demand for oil and natural gas, domestic and worldwide economic
conditions and political instability in oil producing countries. No assurance
can be given that current levels of oil and gas activities will be maintained or
that demand for the Company's services will reflect the level of such
activities. Prices for oil and natural gas are expected to continue to be
volatile and affect the demand for and pricing of the Company's services. A
material decline in oil or natural gas prices or activities could materially
adversely affect the demand for the Company's services and the Company's results
of operations. Industry conditions will continue to be influenced by numerous
factors over which the Company has no control. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business -- Customers."
The volatility of the oil and gas industry and the consequent impact
thereof on exploration activity could adversely impact certain of the Company's
customers. The Company, therefore, could be subject to special credit risks as
to certain of its customers. While the Company endeavors not to take unjustified
credit risks, it is necessary from time to time to extend trade credit to
long-term customers and others where some risks of nonpayment or late payment
could exist.
7
<PAGE> 146
ACQUISITION RISKS
The Company completed the Taylor Acquisition in July 1996 and the Mobley
Acquisition in January 1997. Most of the net proceeds from the Offerings will be
used to fund the Pride Acquisition. See "Use of Proceeds." Pursuant to the Pride
Acquisition, the Company will acquire 407 workover rigs, which is more than four
times the number of workover rigs Dawson currently operates. As a result of the
Pride Acquisition, the Company will acquire significant operations in
California, a market in which the Company does not currently operate.
Furthermore, Pride has advised the Company that 89 of the 407 workover rigs to
be acquired from Pride were not operated during the 12 months preceding December
23, 1996, the effective date of the Purchase Agreement. The Company believes
that a majority of these 89 rigs will be reactivated only if market demand
justifies the incremental cost, and the Company does not expect the remainder of
such rigs to be restored to operating condition. There can be no assurance that
the Company will be successful in reactivating or redeploying rigs acquired from
Pride. In addition, no assurance can be given that the Company will be
successful in achieving consolidation savings or managing and incorporating the
businesses and assets acquired in the Pride Acquisition, the Mobley Acquisition
or the Taylor Acquisition into the Company's existing operations or that such
activities will not require a disproportionate amount of management's attention.
In connection with the Pride Acquisition, the Company will purchase
substantially all of Pride's U.S. land-based well servicing operations (the
"Pride Assets") "as is, where is." The Company has undertaken a limited amount
of investigation of the condition of the Pride Assets, particularly the workover
rigs, in an effort to determine that their condition appears to be sufficient to
sustain the operations previously conducted by Pride with those assets. The
Company has not, however, thoroughly investigated all material items of
equipment due to limitations of time, cost and geographic disbursement.
The Purchase Agreement provides that Pride and the Company shall treat the
sale as not subject to sales and use taxes in all jurisdictions. However, it
further provides that if, contrary to the foregoing, it shall be finally
determined that the sale, or any other transaction consummated pursuant to the
closing, is subject to such tax, such tax shall be borne equally by Pride and
the Company. Certain ambiguities under existing tax laws of the states in which
assets of Pride are located, and the issue of what transactions are "consummated
pursuant to the closing," could result in substantial liability to the Company.
In connection with the Pride Acquisition, it is expected that the Company
will acquire approximately 14 properties in fee simple and will receive an
assignment or sublease of approximately 14 leased properties. With respect to
all parcels of real estate, Dawson has conducted only limited environmental
studies and investigations. There can be no assurance that Dawson will not
acquire properties that have latent environmental risks and concurrent financial
exposure. Moreover, Pride has not made any warranties and representations
concerning the environmental aspects of any properties that would survive the
closing.
The Company's failure to achieve consolidation savings, to incorporate the
acquired businesses and assets into its existing operations successfully, or to
minimize any unexpected costs or liabilities in the acquired businesses, could
have a material adverse effect on the Company. See "Pride Acquisition."
SUBSTANTIAL COMPETITION
The Company experiences intense competition in its markets. Such markets
are highly competitive and no one competitor is dominant. Some of the Company's
competitors have greater financial and other resources than the Company. See
"Business -- Competition."
OPERATING RISKS AND INSURANCE
The Company's operations are subject to hazards inherent in the oil and gas
industry, such as blowouts, explosions, craterings, fires and oil spills, that
can cause personal injury or loss of life, damage to or destruction of property,
equipment, the environment and marine life and suspension of operations. In
addition, claims for loss of oil and gas production and damage to formations can
occur in the workover business. Litigation arising from a catastrophic
occurrence at a location where the Company's equipment and services are used may
in the future result in the Company being named as a defendant in lawsuits
asserting potentially large claims.
8
<PAGE> 147
The Company maintains insurance coverage that it believes to be customary
in the industry against these hazards. However, there can be no assurance that
the Company will be able to maintain adequate insurance in the future at rates
it considers reasonable or that insurance will continue to be available on terms
as favorable as the Company's existing arrangements. In addition, the insurance
is subject to coverage limits and certain policies exclude coverage for damages
resulting from environmental contamination. The occurrence of a significant
event or adverse claim in excess of the insurance coverage limits maintained by
the Company or which is not covered by insurance could have a materially adverse
effect on the Company's financial condition and results of operations. See
"Business -- Operating Risks and Insurance."
RISKS RELATING TO INJECTION WELLS
The Company's injection operations pose certain risks of environmental
liability to the Company. Although the Company monitors the injection process,
any leakage from the subsurface portions of the wells could cause degradation of
fresh groundwater resources, potentially resulting in cancellation of operation
of the well, fines and penalties from governmental agencies, expenditures for
remediation of the affected resource, and liability to third parties for
property damages and personal injuries. In addition, the sale by the Company of
residual crude oil collected as part of the saltwater injection process could
impose liability on the Company in the event the entity to which the oil was
transferred fails to manage the material in accordance with applicable
environmental health and safety laws.
RISK OF ENVIRONMENTAL COSTS AND LIABILITIES
The Company's operations are subject to governmental laws and regulations
governing the management and disposal of waste materials or otherwise relating
to the protection of the environment or of public health and safety. Many of the
Company's operations take place in or near ecologically sensitive areas, such as
the Texas Gulf Coast and Louisiana inland waters. Numerous local, state and
federal environmental laws impose liability for causing pollution in inland and
coastal waters. Local, state and federal legislation also provides special
protection to water quality and animal and marine life that could be affected by
some of the Company's activities. The regulations applicable to the Company's
operations include certain regulations controlling the discharge of hazardous or
toxic materials into the environment, requiring removal or remediation of
pollutants, requiring permits or licenses issued by regulatory agencies and
imposing civil and criminal penalties for violations. Some of the statutory and
regulatory programs that apply to the Company's operations also authorize
private suits, the recovery of natural resource damages by the government,
injunctive relief and cease and desist orders.
Some environmental statutes impose strict liability, rendering a person or
entity liable for environmental damage without regard to negligence or fault on
the part of such person or entity. As a result, the Company could be liable,
under certain circumstances, for environmental damage caused by others or for
acts of the Company that were in compliance with all applicable laws at the time
such acts were performed.
The clear trend in environmental regulation has been to impose more
restrictions and limitations on activities that may impact the environment,
including the generation and disposal of wastes and the use and handling of
chemical substances. These restrictions and limitations have increased operating
costs for both the Company and its customers. Any regulatory changes that impose
additional environmental restrictions or requirements on the Company and its
customers could adversely affect the Company through increased operating costs,
capital expenditures to meet new regulatory requirements and potential decreased
demand for the Company's services.
In this regard, the Resource Conservation and Recovery Act ("RCRA"), the
principal federal statute governing the disposal of solid and hazardous wastes,
includes a statutory exemption that allows oil and gas exploration and
production wastes to be classified as non-hazardous waste. A similar exemption
is contained in many of the state counterparts to RCRA, including the state
statutes in Texas and Louisiana. If oil and gas exploration and production
wastes were required to be managed and disposed of as hazardous waste, either as
a result of changes in RCRA or the imposition of more stringent state
regulations, the Company could be required to make significant unanticipated
capital and operating expenditures or to cease or curtail certain
9
<PAGE> 148
operations. Further, if such wastes were required to be managed and disposed of
as hazardous waste, domestic oil and gas producers, including many of the
Company's customers, could be required to incur substantial obligations with
respect to such waste. Because of the potential impact on the Company's
customers, any regulatory changes that impose additional restrictions or
requirements on the disposal of oil and gas wastes could adversely affect demand
for the Company's services. See "Business -- Environmental Regulation."
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success will depend to a significant extent
upon the continued services of certain key individuals, particularly Michael E.
Little, Chairman of the Board, President and Chief Executive Officer, and Joseph
B. Eustace, Vice President of Operations and Chief Operating Officer. The loss
of the services of either of these individuals could have a material adverse
effect on the Company. See "Management."
DEPENDENCE ON MAJOR CUSTOMERS
During the six months ended September 30, 1996, the Company derived
approximately 23.0% of its revenues (9.5% on a pro forma basis) from its largest
customer. While the Company believes that its relationship with this customer is
good, the loss of such customer, or a significant reduction in business done
with the Company by this customer, if not offset by sales to new or existing
customers, could have a material adverse effect on the Company's business,
results of operations and prospects.
DIVIDEND POLICY
The Company has never paid cash dividends on the Common Stock and does not
anticipate that cash dividends will be paid in the foreseeable future.
Furthermore, certain provisions of the Credit Facility and the Indenture
relating to the Notes will restrict the Company's ability to pay cash dividends
on the Common Stock. The Company currently intends to retain any future earnings
to finance the expansion and continuing development of the Company's business.
The declaration and payment in the future of any cash dividends will be at the
election of the Company's Board of Directors and will depend upon the earnings,
capital requirements and financial position of the Company, future loan
covenants, general economic conditions and other pertinent factors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of
Notes -- Certain Covenants -- Restricted Payments."
SUBSTANTIAL AMOUNT OF SECURITIES SUBJECT TO REGISTRATION RIGHTS
Pursuant to a registration rights agreement (the "Registration Rights
Agreement"), shareholders (the "Rights Holders") that beneficially own 2,437,887
shares of Common Stock, or approximately 38% of the currently issued and
outstanding shares of Common Stock, are entitled to registration of such shares
under the Securities Act of 1933, as amended (the "Securities Act"), subject to
certain exceptions and limitations. Substantially all of the shares of Common
Stock being offered by the Selling Shareholders in the Equity Offering are being
registered and sold pursuant to the Registration Rights Agreement for the
account of the Rights Holders. Following the Equity Offering, the Rights Holders
will beneficially own 1,235,380 shares of Common Stock (the "Registrable
Securities"), or approximately 12% of the issued and outstanding shares of
Common Stock, subject to the Registration Rights Agreement.
Under the Registration Rights Agreement, the Company is obligated,
beginning July 20, 1997, to file a registration statement (the "Shelf
Registration Statement") for the Registrable Securities. The holders of a
majority of the Registrable Securities can require that the Shelf Registration
Statement be in the form of an underwritten offering. Additionally, if the
Company proposes to register any of its securities under the Securities Act for
its own account or for the account of the other security holders, the Rights
Holders are entitled to notice of such registration and are entitled to include
all or a portion of the Registrable Securities in such registration, subject to
certain exceptions and limitations, including the right of the underwriters (if
any) of any such offering to exclude for marketing reasons some or all of the
Registrable Securities from such
10
<PAGE> 149
registration. The Company generally is required to pay all of the expenses
relating to the registration of the Registrable Securities, except for the
Rights Holders' share of any underwriting discounts and commissions. The
Registration Rights Agreement prohibits the Company from granting any new
registration rights under the Securities Act that would adversely impact the
rights of the Rights Holders. Sales of substantial amounts of the Common Stock
in the public market could adversely affect prevailing market prices and the
ability of the Company to raise equity capital in the future. See "Description
of Capital Stock -- Registration Rights."
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS
The Company's Articles of Incorporation and Bylaws contain certain
provisions that may have the effect of discouraging potential unsolicited offers
or other efforts to obtain control of the Company that are not approved by the
Board. Upon a change of control of the Company, holders of the Notes will have
the right to require the Company to purchase the Notes at a price equal to 101%
of the aggregate principal amount thereof, together with accrued and unpaid
interest to the date of purchase. Such provisions may adversely affect the
market price of the Common Stock and may also deprive the shareholders of
opportunities to sell shares of Common Stock at prices higher than prevailing
market prices. Such provisions include the requirement that all shareholder
action must be taken at a duly called annual or special meeting of shareholders
unless a majority of the entire Board provides its prior approval for
shareholder action to be taken by written consent of shareholders. See
"Description of Capital Stock -- Provisions Having Possible Anti-takeover
Effect." The Board will have the authority, without further action by the
shareholders, to issue up to 560,600 shares of the Company's preferred stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof, and to issue over 9,000,000 additional shares of Common
Stock after the Equity Offering. The issuance of the Company's preferred stock
or additional shares of Common Stock could adversely affect the voting power of
the purchasers of Common Stock in the Equity Offering and could have the effect
of delaying, deferring or preventing a change in control of the Company. See
"Description of Capital Stock -- Provisions Having Possible Anti-takeover
Effect."
11
<PAGE> 150
THE COMPANY
The Company is engaged in the business of providing: (i) workover rig
services, including completion of new wells, maintenance and recompletion of
existing wells (including horizontal recompletions) and plugging and abandonment
of wells at the end of their useful lives; (ii) liquid services, including
vacuum truck services, frac tank rental and salt water injection; and (iii)
production services, including well test analysis, pipe testing, slickline
wireline services and fishing and rental tool services. For the six months ended
September 30 1996, the Company derived approximately 46%, 38% and 16% (75%, 20%
and 5% on a pro forma basis) of its revenues from its workover rig services,
liquid services and production services, respectively. The Company's services
are utilized by major oil and gas companies as well as independent producers to
optimize performance of oil and gas wells.
The Company commenced operations in 1951. In 1982, the current management
team joined the Company and initiated a strategy to expand and diversify the
Company's workover rig services. Since 1982, the Company has grown from four
workover rigs in a single yard to 91 workover rigs in 10 yards through a series
of strategic acquisitions of businesses and assets. The majority of this growth
has occurred since 1992. The Company formed Dawson WellTech, L.C. (the "LLC") in
1992 as a majority owned and operated subsidiary of the Company, which in
November 1994 acquired substantially all of the assets of Well Solutions, Inc.
for approximately $18.1 million (the "Well Solutions Acquisition"). In 1995, the
Company acquired the remaining interest in the LLC. See "Certain Relationships
and Related Transactions."
In July 1996, the Company acquired 70 vacuum trucks, 314 frac tanks and 11
salt water injection wells for approximately $12.8 million pursuant to the
purchase of all of the issued and outstanding stock of Taylor Companies, Inc.
(the "Taylor Acquisition"). During 1996, the Company also acquired 18 additional
vacuum trucks, six workover rigs and one production testing unit.
In March 1996, the Company completed an initial public offering (the "IPO")
of 2,616,250 shares of Common Stock at $10.00 per share, with net proceeds to
the Company of approximately $23.5 million. Simultaneously with the IPO, the
Common Stock began trading on the Nasdaq National Market under the symbol
"DPSI."
On January 20, 1997, the Company acquired the liquid services assets of
Mobley Environmental Services, Inc. for approximately $5.0 million in cash and a
$0.5 million five year subordinated note. On December 23, 1996 the Company
entered into a purchase agreement to acquire Pride's U.S. land-based well
servicing operations, which includes 407 workover rigs, 10 vacuum trucks and
ancillary equipment, for approximately $135.9 million. The closing of the Pride
Acquisition is conditioned upon the simultaneous closing of the Offerings.
The Company's principal executive office is located at 901 N.E. Loop 410,
Suite 700, San Antonio, Texas 78209, and its telephone number is (210) 828-1838.
RECENT DEVELOPMENTS
On February 11, 1997, the Company issued a release announcing earnings for
the third fiscal quarter ended December 31, 1996. The release states that
revenues in the third quarter of fiscal 1997 increased by 72% to $22.5 million,
compared to the $13.0 million in the third quarter of fiscal 1996. Net income of
$1.5 million increased 631% from the third quarter of fiscal 1996. Similarly,
primary earnings per share of $0.24 on 6,548,000 average shares outstanding
increased from $.06 on 2,971,000 average shares outstanding for the prior year.
12
<PAGE> 151
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). All statements other than statements
of historical information provided herein are forward-looking and may contain
information about financial results, economic conditions, trends and known
uncertainties. The Company cautions the reader that actual results could differ
materially from those expected by the Company, depending on the outcome of
certain factors, including, without limitation, (i) factors discussed under
"Risk Factors" such as fluctuations in the prices of oil and natural gas,
competition, operating risks, acquisition risks, liquidity and capital
requirements and the effects of governmental and environmental regulation, (ii)
adverse changes in the operations acquired in the Pride Acquisition or the
failure of the Company to achieve anticipated consolidation cost savings in
connection with the Pride Acquisition and (iii) adverse changes in the market
for the Company's services. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to release publicly the result of any revisions
to these forward-looking statements which may be made to reflect events or
circumstances after the date hereof, including, without limitation, changes in
the Company's business strategy or planned capital expenditures, or to reflect
the occurrence of unanticipated events.
DEBT OFFERING
Concurrently with the Equity Offering, the Company is offering $130.00
million of % Senior Notes due 2007 to the public. The Indenture relating to
the Notes will contain certain covenants, including covenants that limit: (i)
indebtedness; (ii) restricted payments, (iii) issuances and sales of capital
stock of restricted subsidiaries; (iv) sale/leaseback transactions; (v)
transactions with affiliates; (vi) liens; (vii) asset sales; (viii) dividends
and other payment restrictions affecting restricted subsidiaries; (ix) conduct
of business; and (x) mergers, consolidations or sales of assets. The
consummation of the Equity Offering and the Debt Offering are each conditioned
upon the simultaneous closing of the other and upon the simultaneous closing of
the Pride Acquisition. See "Description of Notes."
USE OF PROCEEDS
The net proceeds to the Company from the issuance and sale of the Common
Stock offered hereby, after deducting the underwriting discount and expenses of
the Equity Offering payable by the Company, are estimated to be approximately
$43.3 million ($52.1 million if the Underwriters' over-allotment option is
exercised in full), assuming an offering price of $13.25 per share. The net
proceeds to the Company from the sale of the Notes offered by the Company
pursuant to the Debt Offering, after deducting the underwriting discount and
expenses of the Debt Offering, are estimated to be approximately $125.4 million.
The following table illustrates the sources and uses of the gross proceeds
to the Company, as estimated by the Company's management, in connection with the
Offerings (dollars in millions):
<TABLE>
<S> <C>
SOURCES
- --------------------------------------------
Notes (Debt Offering)............... $130.0
Common Stock (Equity Offering)...... 46.4
------
Total Sources............. $176.4
======
USES
- --------------------------------------------
Pride Acquisition -- Purchase
Price(1).......................... $135.9
Prepayment of Existing Debt(2)...... 12.3
Working Capital..................... 19.1
Fees and Expenses................... 9.1
------
Total Uses................ $176.4
======
</TABLE>
- ---------------
(1) The Pride Acquisition purchase price is subject to certain adjustments.
(2) Consists of a balance as of September 30, 1996 of approximately $7.0 million
on the loan incurred as a result of the Taylor Acquisition, $3.2 million of
capitalized lease obligations and $2.1 million of other indebtedness. The
$7.0 million loan bears interest at a rate of 7.75% and matures on March 31,
1997. The capitalized lease obligations bear interest at rates ranging from
5% to 9% and are due in monthly installments of approximately $136,000. The
other indebtedness consists of approximately $2.0 million of term notes that
were assumed in connection with the Taylor Acquisition, bear interest at
rates ranging from 6% to 10% and have maturity dates ranging from one to
five years after July 29, 1996, the date of assumption.
Pending application of the net proceeds of the Offerings, the Company will
invest such net proceeds in short-term, interest-bearing, investment grade
securities.
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<PAGE> 152
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock commenced trading on the Nasdaq National Market
on March 20, 1996 under the symbol "DPSI." The following table sets forth the
high and low sale prices per share of the Common Stock as reported by the Nasdaq
National Market for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
Fiscal 1996
Fourth Quarter (March 20, 1996 - March 31, 1996).......... $11 7/8 $10
Fiscal 1997
First Quarter (April 1 - June 30, 1996)................... $14 1/2 $10 3/4
Second Quarter (July 1 - September 30, 1996).............. $14 $ 9 3/4
Third Quarter (October 1 - December 31, 1996)............. $16 1/4 $11 1/2
Fourth Quarter (January 1 - February 12, 1997)............ $16 1/2 $12 1/2
</TABLE>
On February 12, 1997, the last reported sale price of the Common Stock on
the Nasdaq National Market was $13.25 per share. At January 15, 1997, the
Company had 140 shareholders of record of the Common Stock. The Company believes
that there are at least 400 beneficial owners of the Common Stock.
The Company has never paid cash dividends on the Common Stock and does not
anticipate that cash dividends will be paid in the foreseeable future.
Furthermore, certain provisions of the Credit Facility and the Indenture will
restrict the Company's ability to pay cash dividends on the Common Stock. The
Company currently intends to retain any future earnings to finance the expansion
and continuing development of the Company's businesses. The declaration and
payment in the future of any cash dividends will be at the election of the
Company's Board of Directors and will depend upon the earnings, capital
requirements and financial position of the Company, future loan covenants,
general economic conditions and other pertinent factors. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of
Notes -- Certain Covenants -- Restricted Payments."
14
<PAGE> 153
CAPITALIZATION
The following table sets forth the cash and cash equivalents, current debt
and capitalization of the Company at September 30, 1996, and as adjusted to give
effect to the Offerings and the application of the net proceeds therefrom as set
forth under "Use of Proceeds." This table should be read in conjunction with the
financial statements and the notes thereto included elsewhere in this Prospectus
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 9,364 $ 28,393
======= ========
Current portion of long-term debt........................... $ 9,247 $ 500
Current portion of obligations under capital leases......... 1,708 --
------- --------
Total current debt................................ $10,955 $ 500
======= ========
Long-term debt, net of current portion:
Notes payable............................................. $ 380 $ --
Senior Notes due 2007..................................... -- 130,000
Subordinated notes........................................ 2,750 2,750
------- --------
Total notes, net of current portion............... 3,130 132,750
Obligations under capital leases, net of current
portion................................................ 1,478 --
------- --------
Total long-term debt, net of current portion...... 4,608 132,750
Shareholders' equity:
Preferred stock, no par value, 560,600 shares authorized,
none issued and outstanding............................ -- --
Common stock, $.01 par value, 20,560,600 shares
authorized, 6,391,126 shares issued and outstanding,
9,891,126 shares issued and outstanding as
adjusted(1)............................................ 64 99
Paid-in capital........................................... 41,522 84,780
Retained earnings......................................... 6,489 6,489
Notes receivable from officers............................ (142) (142)
------- --------
Total shareholders' equity........................ 47,933 91,226
------- --------
Total capitalization.............................. $52,541 $223,976
======= ========
</TABLE>
- ---------------
(1) Excludes 552,950 outstanding stock options, exercisable at various prices
ranging from $4.65 to $11.375 per share (with a weighted average price of
$9.15 per share), of which 167,779 were exercisable.
15
<PAGE> 154
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The table below sets forth the unaudited pro forma condensed consolidated
financial statements of the Company. With respect to statements of income data,
the adjustments give effect to (i) the Pride Acquisition, (ii) the Taylor
Acquisition and (iii) the Offerings, as if each had occurred at the beginning of
the periods presented. With respect to balance sheet data, the adjustments give
effect to (i) the Pride Acquisition and (ii) the Offerings, as if they had been
completed as of the date presented. The unaudited pro forma financial statements
may not be indicative of the results that actually would have occurred if the
transactions described above had been in effect during the periods indicated or
which may be obtained in the future. The unaudited financial statements should
be read in conjunction with the audited financial statements and related notes
of the Company, Taylor and Pride contained elsewhere herein.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PRIDE PRO FORMA
DAWSON TAYLOR ACQUISITION COMBINED
SIX MONTHS ACQUISITION SIX MONTHS SIX MONTHS
ENDED APRIL 1 - ENDED ENDED
SEPTEMBER 30, JULY 29, SEPTEMBER 30, SEPTEMBER 30,
1996 1996 1996 ADJUSTMENTS 1996 (A)
------------- ----------- ------------- ----------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues...................................... $33,811 $6,988 $59,430 $ -- $100,229
Operating costs............................... 21,893 5,272 45,929 (1,100)(B) 71,994
General and administrative expenses........... 5,469 979 7,468 (436)(C) 13,480
Depreciation and amortization................. 2,876 384 2,659 3,773(D) 9,692
------- ------ ------- ------- --------
Operating income.............................. 3,573 353 3,374 (2,237) 5,063
Interest expense.............................. 296 194 986 4,829(E) 6,305
Other (income) expense........................ (252) 218 (167) -- (201)
------- ------ ------- ------- --------
Income (loss) before income taxes............. 3,529 (59) 2,555 (7,066) (1,041)
Provision for income taxes.................... 1,354 65 1,007 (2,832)(F) (406)
------- ------ ------- ------- --------
Net income (loss)............................. $ 2,175 $ (124) $ 1,548 $(4,234) $ (635)
======= ====== ======= ======= ========
Primary earnings (loss) per share............. $ .33 $ (.06)
Fully diluted earnings (loss) per share....... $ .33 $ (.06)
Average shares outstanding -- primary......... 6,510,428 3,380,556(G) 9,890,984
Average shares outstanding -- fully diluted... 6,527,796 3,363,188(G) 9,890,984
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1996
--------------------------------------------------------------------
DAWSON TAYLOR PRIDE PRO FORMA
HISTORICAL ACQUISITION ACQUISITION ADJUSTMENTS COMBINED(A)
---------- ----------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues........................................ $52,391 $16,713 $113,115 $ -- $182,219
Operating costs................................. 34,320 12,755 86,177 (2,200)(B) 131,052
General and administrative expenses............. 8,937 2,290 14,504 (1,055)(C) 24,676
Depreciation and amortization................... 4,396 1,607 5,385 7,816(D) 19,204
------- ------- -------- -------- --------
Operating income................................ 4,738 61 7,049 (4,561) 7,287
Interest expense................................ 1,848 461 821 9,480(E) 12,610
Other (income) expense.......................... (129) (101) (1,260) -- (1,490)
Minority interest............................... 937 -- -- -- 937
------- ------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item............................ 2,082 (299) 7,488 (14,041) (4,770)
Provision for income taxes...................... 709 (158) 2,873 (5,284)(F) (1,860)
------- ------- -------- -------- --------
Income (loss) before extraordinary item......... 1,373 (141) 4,615 (8,757) (2,910)
Extraordinary item.............................. (514) -- -- -- (514)
------- ------- -------- -------- --------
Net income (loss)............................... 859 (141) 4,615 (8,757) (3,424)
Preferred stock dividends....................... (88) -- -- -- (88)
------- ------- -------- -------- --------
Net income (loss) applicable to common stock.... $ 771 $ (141) $ 4,615 $ (8,757) $ (3,512)
======= ======= ======== ======== ========
Primary earnings (loss) per share............... $ .27 $ (.55)
Fully diluted earnings (loss) per share......... $ .27 $ (.55)
Average shares outstanding -- primary........... 2,931,234 3,451,662(G) 6,382,896
Average shares outstanding-- fully diluted...... 3,207,622 3,175,274(G) 6,382,896
</TABLE>
16
<PAGE> 155
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
------------------------------------------------------
PRIDE PRO FORMA PRO
HISTORICAL ACQUISITION ADJUSTMENTS FORMA
---------- ----------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 9,364 $ 1,638 $ 17,391(H) $ 28,393
Trade and other receivables................................. 14,260 19,247 (19,247)(H) 14,260
Prepaid expenses and other.................................. 883 6,368 (6,368)(H) 883
Net property and equipment.................................. 39,209 43,041 63,609(H)(I) 145,859
Goodwill and other assets................................... 10,376 2,006 33,294(H)(I) 45,676
------- ------- -------- --------
Total assets........................................ $74,092 $72,300 $ 88,679 $235,071
======= ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities......................................... $18,306 $18,351 $(28,806)(H)(J) $ 7,851
Long-term debt, net of current portion...................... 3,130 36,885 92,735(H)(J) 132,750
Obligations under capital leases, net of current portion.... 1,479 2,066 (3,545)(H)(J) --
Deferred income taxes....................................... 3,244 11,384 (11,384)(H) 3,244
Shareholders' equity........................................ 47,933 3,614 39,679(G)(H) 91,226
------- ------- -------- --------
Total liabilities and shareholders' equity.......... $74,092 $72,300 $ 88,679 $235,071
======= ======= ======== ========
</TABLE>
- ---------------
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
(A) Does not give effect to certain estimated consolidation cost savings and
operational efficiencies that the Company anticipates can be achieved in
connection with the Pride Acquisition, primarily resulting from the
consolidation of certain facilities and the reduction of personnel. Assuming
that such consolidation cost savings had occurred at the beginning of the
year ended March 31, 1996 and the beginning of the six month period ended
September 30, 1996, results of operations (after taking into consideration
the tax effect of such consolidation cost savings) would have been a net
loss of $0.5 million and net income of $0.9 million, respectively. There can
be no assurance with respect to the amount or timing of any such
consolidation cost savings by the Company or that any such consolidation
cost savings will not be offset in part by additional operating expenses
resulting from the Pride Acquisition.
(B) To record the elimination of approximately $2.2 million of Pride's
operating lease expenses ($1.1 million for the six month period).
(C) To reflect the elimination of certain general corporate cost allocations
that will not be assumed by the Company in connection with the Pride
Acquisition.
(D) To reflect the additional depreciation of property and equipment and
amortization of goodwill (goodwill using a 25-year life) resulting from the
Taylor Acquisition and the Pride Acquisition and a covenant not to compete
(using a five-year life) from the Pride Acquisition, as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
MARCH 31, SEPTEMBER 30,
1996 1996
---------- -------------
<S> <C> <C>
Pride Acquisition.......................... $6,807 $3,437
Taylor Acquisition......................... 1,009 336
------ ------
Total............................ $7,816 $3,773
====== ======
</TABLE>
(E) To adjust interest expense to reflect the issuance of $130.0 million of
Notes at an assumed interest rate of 9.5% per annum, adjusted for the
retirement of existing bank debt and capital leases.
(F) To record the tax effect of pro forma adjustments based on the effective
tax rate of the Company.
(G) To record the issuance of 3,500,000 shares to be issued in the Equity
Offering, adjusted for the elimination of certain antidilutive common stock
equivalents.
(H) To record the Pride Acquisition for $135.9 million, such amount to be
financed using a portion of the proceeds to the Company from the Offerings.
(I) To record Pride's property and equipment at estimated fair market value
($106.7 million), covenant not to compete ($5.0 million) and goodwill and
other assets ($29.7 million) at the date of acquisition.
(J) To reflect the retirement of the Company's existing debt and capital leases
totaling approximately $12.3 million.
17
<PAGE> 156
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company for the periods indicated. The selected consolidated financial data for
all fiscal years presented have been derived from the audited consolidated
financial statements of the Company. The selected consolidated financial data
for the Company for the six months ended September 30, 1995 and 1996 have been
derived from the unaudited consolidated financial statements of the Company for
such periods, which, in the opinion of management, include all adjustments,
consisting of only normal recurring adjustments, necessary to state fairly the
data included therein in accordance with generally accepted accounting
principles for such periods. Interim results are not necessarily indicative of
financial results of the Company for the full fiscal year. The selected
financial data should be read in conjunction with, and is qualified in its
entirety by, the consolidated financial statements of the Company and related
notes and other financial information included elsewhere in this Prospectus and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
AT OR FOR SIX
MONTHS ENDED
AT OR FOR YEARS ENDED MARCH 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............................................... $15,784 $20,822 $27,942 $36,005 $52,391 $25,888 $33,811
Costs and expenses:
Operating............................................ 11,440 14,772 19,937 24,241 34,320 16,875 21,893
General and administrative........................... 2,443 3,040 3,854 5,574 8,937 4,238 5,469
Depreciation and amortization........................ 1,062 1,374 1,707 2,608 4,396 2,016 2,876
------- ------- ------- ------- ------- ------- -------
Operating income....................................... 839 1,636 2,444 3,582 4,738 2,759 3,573
Interest expense....................................... 352 301 282 789 1,848 953 296
Other (income) expense................................. (8) 84 (61) (41) (129) (27) (252)
Minority interest...................................... -- 358 902 1,092 937 787 --
------- ------- ------- ------- ------- ------- -------
Income before income taxes and extraordinary item...... 495 893 1,321 1,742 2,082 1,046 3,529
Provision for income taxes............................. 236 320 525 681 709 398 1,354
------- ------- ------- ------- ------- ------- -------
Income before extraordinary item....................... 259 573 796 1,061 1,373 648 2,175
Extraordinary item(1).................................. 38 -- (92) -- (514) -- --
------- ------- ------- ------- ------- ------- -------
Net income............................................. 297 573 704 1,061 859 648 2,175
Preferred stock dividends.............................. 101 101 101 101 88 50 --
------- ------- ------- ------- ------- ------- -------
Net income applicable to common stock.................. $ 196 $ 472 $ 603 $ 960 $ 771 $ 598 $ 2,175
======= ======= ======= ======= ======= ======= =======
Primary earnings per share............................. $ .11 $ .23 $ .29 $ .45 $ .27 $ .25 $ .33
Fully diluted earnings per share....................... $ .11 $ .23 $ .29 $ .42 $ .27 $ .23 $ .33
Average number of shares outstanding -- primary........ 1,768,613 2,020,664 2,052,168 2,155,380 2,931,234 2,384,359 6,510,428
Average number of shares outstanding -- fully
diluted.............................................. 1,768,613 2,020,664 2,450,791 2,648,740 3,207,622 3,095,826 6,527,796
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 400 $ 1,139 $ 2,172 $ 2,797 $13,863 $ 9,364
Net property and equipment............................. 6,261 8,625 8,978 25,321 29,115 39,209
Total assets........................................... 11,685 15,828 16,714 40,525 56,368 74,092
Long-term debt and other obligations, net of current
portion.............................................. 1,938 1,722 1,623 15,989 3,695 4,609
Total shareholders' equity............................. 5,487 6,009 6,720 10,098 45,694 47,933
OTHER FINANCIAL DATA:
Ratio of earnings to fixed charges(2).................. 2.3x 3.6x 5.0x 3.1x 2.1x 2.1x 10.9x
EBITDA(3).............................................. $ 1,901 $ 3,010 $ 4,151 $ 6,190 $ 9,134 $ 4,775 $ 6,449
Ratio of EBITDA to interest expense.................... 5.4x 10.0x 14.7x 7.9x 4.9x 5.0x 21.8x
</TABLE>
- ---------------
(1) Includes a $92,000 charge in fiscal 1994 to reflect the cumulative effect of
change in accounting principle.
(2) For purposes of computing the ratio of earnings to fixed charges, earnings
are computed as income before income taxes, extraordinary item and
cumulative effect of a change in accounting principle, plus fixed charges.
Fixed charges consist of interest, whether expensed or capitalized,
amortization of debt issuance costs and an estimated portion of rentals
representing interest costs.
(3) EBITDA is defined as earnings before interest expense, taxes, depreciation
and amortization, minority interest and other (income) expense and is
presented because it is a widely accepted financial indication of a
company's ability to incur and service debt. EBITDA should not be considered
as an alternative to earnings as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity.
18
<PAGE> 157
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical information provided herein are
forward-looking and may contain information about financial results, economic
conditions, trends and known uncertainties. The Company cautions the reader that
actual results could differ materially from those expected by the Company,
depending on the outcome of certain factors, including, without limitation, (i)
factors discussed under "Risk Factors" such as fluctuations in the prices of oil
and natural gas, competition, operating risks, acquisition risks, liquidity and
capital requirements and the effects of governmental and environmental
regulation, (ii) adverse changes in the operations acquired in the Pride
Acquisition or the failure of the Company to achieve anticipated consolidation
cost savings in connection with the Pride Acquisition and (iii) adverse changes
in the market for the Company's services. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. The Company undertakes no obligation to release publicly the result
of any revisions to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof, including, without
limitation, changes in the Company's business strategy or planned capital
expenditures, or to reflect the occurrence of unanticipated events.
GENERAL
The Company's operations and future results will be significantly impacted
by the Pride Acquisition. As a result of the Pride Acquisition, the Company will
increase its workover rig fleet to over five times its current size to become
the second largest provider of workover rigs in the United States. In addition,
the Company will acquire significant operations in California, a market in which
it does not currently operate. The Company also will seek to expand its liquid
and production services into Pride's current land-based well servicing areas.
Other than the Pride Acquisition, the Company does not have any current
understanding, arrangement or agreement to acquire other businesses or assets.
There can be no assurance that attractive acquisitions will be available to the
Company at prices it believes to be reasonable or that any acquisition achieved
will ultimately prove to be a successful undertaking by the Company.
The Company will experience substantial revenue growth as a result of the
Pride Acquisition and, to a lesser extent, the Taylor Acquisition. On a pro
forma basis for the year ended March 31, 1996 and for the six months ended
September 30, 1996, the Company would have generated operating revenues of
approximately $182.2 million and $100.2 million, respectively, as compared to
historical operating revenues for the Company of $52.4 million and $33.8
million, respectively.
The Company derives its revenues from workover rig services, liquid
services and production services. Workover rig services are billed at hourly
rates that are generally determined by the type of equipment required, market
conditions in the region in which the rig operates, the ancillary equipment
provided on the rig and the necessary personnel. The Company charges its
customers for liquid services either on an hourly basis or on a per barrel basis
depending on the services offered, while production services are primarily
billed on an hourly basis. The base rates for the Company's services have
generally been stable over the past three years.
The Company's operating costs are comprised primarily of labor and
maintenance costs. Labor costs generally are variable and are incurred only
while a workover rig is operating or liquid services or production services are
being provided; however, the Company employs rig personnel to perform
maintenance and other services who are paid even when rigs are not operating.
The Company's administrative staff at the yard level and in the corporate office
are accounted for as general and administrative expense. Insurance costs
generally are fixed costs and relate to the number of active rigs, trucks and
other equipment in the Company's fleet. The Company's workers' compensation
insurance costs have declined over the past two years due to its favorable
safety record.
19
<PAGE> 158
RESULTS OF OPERATIONS
Six Months Ended September 30, 1996 Compared to Six Months Ended September 30,
1995
Revenues. Revenues were $33.8 million for the six months ended September
30, 1996, a 31% increase compared with revenues of $25.9 million for the six
months ended September 30, 1995. Compared to the same period in 1995, revenues
for the six months ended September 30, 1996 increased by 13%, 81% and 8% in the
workover, liquid and production services lines of business, respectively. The
increase in revenues was attributable primarily to the Taylor Acquisition in
July 1996, the addition of 11 vacuum trucks in March 1996, the acquisition of
six workover rigs in May 1996 and a general increase in demand in the workover,
liquid services and production services lines of business.
Operating Costs. Operating costs for the six months ended September 30,
1996 were $21.9 million, an increase of 30% from $16.9 million for the six
months ended September 30, 1995, which was proportional to the increase in
revenues for the same period and due to the same factors which affected
revenues. Operating costs as a percentage of revenues were 65% for each of the
six month periods ended September 30, 1996 and 1995.
General and Administrative Expenses. General and administrative expenses
for the six months ended September 30, 1996 were $5.5 million, an increase of
29% from $4.2 million for the six months ended September 30, 1995. This increase
was due primarily to the higher general and administrative expenses associated
with the addition of four new yard locations in connection with the Taylor
Acquisition. As a percentage of revenues, general and administrative expenses
remained constant at 16% for each of the six month periods ended September 30,
1996 and 1995.
Depreciation and Amortization. Depreciation and amortization expense for
the six months ended September 30, 1996 was $2.9 million, an increase of 43%
from $2.0 million for the six months ended September 30, 1995. The increase was
due to the additional depreciation on equipment and amortization of goodwill
related to the Taylor Acquisition, the purchase of 11 vacuum trucks in May 1996,
the acquisition of six workover rigs in May 1996, and depreciation related to
normal and ongoing purchases of additional and replacement equipment.
Interest Expense. Interest expense for the six months ended September 30,
1996 was $0.3 million compared with $1.0 million for the corresponding period in
1995. The decrease of $0.7 million was attributable to the retirement of debt
with a portion of the proceeds from the IPO in March 1996.
Minority Interest. The elimination of the minority interest expense in the
six month period ended September 30, 1996 was due to the acquisition of
WellTech, Inc.'s 39% minority interest (the "Minority Interest Acquisition") in
the LLC in November 1995.
Year Ended March 31, 1996 Compared to the Year Ended March 31, 1995
Revenues. Revenues for the year ended March 31, 1996 were $52.4 million, an
increase of 46% from $36.0 million for the year ended March 31, 1995. This
increase was due primarily to the Well Solutions Acquisition in November 1995.
Revenues from workover rig services were slightly higher for the year ended
March 31, 1996 compared to the prior year due to increased demand for horizontal
recompletion services and the introduction of a second barge-mounted workover
rig in August 1995.
Operating Costs. Operating costs for the year ended March 31, 1996 were
$34.3 million, an increase of 42% from $24.2 million for the year ended March
31, 1995. This increase was due primarily to the Well Solutions Acquisition.
Operating costs as a percentage of revenues decreased to 65% for the year ended
March 31, 1996 compared to 67% for the prior year, which reflects the higher
margin characteristics of the liquid services and production services businesses
acquired in the Well Solutions Acquisition compared to the Company's workover
rig services business.
General and Administrative Expenses. General and administrative expenses
for the year ended March 31, 1996 were $8.9 million, an increase of 60% from
$5.6 million for the year ended March 31, 1995. This increase was due primarily
to the higher general and administrative expenses associated with the Well
Solutions
20
<PAGE> 159
Acquisition, which significantly increased the Company's fixed cost base with
the addition of seven new yard locations. As a percentage of revenues, general
and administrative expenses increased to 17% for the year ended March 31, 1996,
compared to 15% for the prior year. In fiscal year 1996, the Company granted
bonuses of $336,000 in connection with exercises of non-statutory stock options
by certain of the Company's current and former officers, directors and employees
with regard to federal tax liability they incurred related to such exercises.
The Company does not anticipate granting bonuses for such purposes in the
future.
Depreciation and Amortization. Depreciation and amortization expense for
the year ended March 31, 1996 was $4.4 million, an increase of 69% from $2.6
million for the year ended March 31, 1995. This increase was due to a
substantial increase in the Company's asset base resulting from the Well
Solutions Acquisition.
Interest Expense. Interest expense for the year ended March 31, 1996 was
$1.8 million compared to $0.8 million for the year ended March 31, 1995, due to
the incurrence, in connection with the Well Solutions Acquisition, of $13.0
million of debt with a 10.81% interest rate. The approximately $11.4 million of
debt remaining in March 1996 relating to the Well Solutions Acquisition was
prepaid with a portion of the proceeds from the IPO.
Minority Interest. Minority interest for the year ended March 31, 1996 was
$0.9 million, a decrease of 12% from $1.1 million for the year ended March 31,
1995. This decrease was a result of the Minority Interest Acquisition in
November 1995.
Extraordinary Item. As a result of the prepayment of approximately $11.4
million of debt related to the Well Solutions Acquisition, the Company recorded
an extraordinary expense for the year ended March 31, 1996 amounting to
approximately $0.5 million (net of taxes). This amount represents prepayment
penalties, reimbursement to the lender for its costs and expenses resulting from
the prepayment and the write-off of fees incurred at loan origination (net of
taxes).
Year Ended March 31, 1995 Compared to the Year Ended March 31, 1994
Revenues. Revenues for the year ended March 31, 1995 were $36.0 million, an
increase of 29% from $27.9 million for the year ended March 31, 1994. This
increase was due primarily to the inclusion following the Well Solutions
Acquisition of the results of operations of Well Solutions, Inc. for four months
of the year ended March 31, 1995. Revenues from workover rig services were
slightly higher for the year ended March 31, 1995 compared to the prior year due
to an increase in billable hours resulting from improved demand for horizontal
recompletion services and the introduction of the Company's first barge-mounted
workover rig.
Operating Costs. Operating costs for the year ended March 31, 1995 were
$24.2 million, an increase of 22% from $19.9 million for the year ended March
31, 1994. This increase was due primarily to the Well Solutions Acquisition.
Operating costs as a percentage of revenues decreased to 67% for the year ended
March 31, 1995 compared to 71% for the prior year, which reflects the higher
margin characteristics of the liquid services and production services businesses
acquired in the Well Solutions Acquisition compared to the Company's workover
rig services business.
General and Administrative Expenses. General and administrative expenses
for the year ended March 31, 1995 were $5.6 million, an increase of 44% from
$3.9 million for the year ended March 31, 1994. This increase was due primarily
to the higher general and administrative expenses associated with the liquid
services and production services businesses acquired in November 1994. As a
percentage of revenues, general and administrative expenses increased to 16% for
the year ended March 31, 1995, compared to 14% for the prior year.
Depreciation and Amortization. Depreciation and amortization expense for
the year ended March 31, 1995 was $2.6 million, an increase of 53% from $1.7
million for the year ended March 31, 1994. This increase was due to a
substantial increase in the Company's asset base resulting from the Well
Solutions Acquisition.
Interest Expense. Interest expense for the year ended March 31, 1995 was
$0.8 million compared to $0.3 million for the year ended March 31, 1994, due to
the incurrence, in connection with the Well Solutions Acquisition, of $13.0
million of debt with a 10.81% interest rate in the year ended March 31, 1995.
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Minority Interest. Minority interest for the year ended March 31, 1995 was
$1.1 million, an increase of 22% from $0.9 million for the year ended March 31,
1994. This increase was due to higher pretax income of the LLC resulting from
the Well Solutions Acquisition.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of approximately $9.4 million at
September 30, 1996 compared to approximately $13.9 million at March 31, 1996.
Working capital was approximately $6.2 million and approximately $16.8 million
at September 30, 1996 and March 31, 1996, respectively. The Company used a net
amount of approximately $15.1 million for investing activities in the six months
ended September 30, 1996, primarily for the Taylor Acquisition and for other
capital expenditures of approximately $2.2 million. The Company anticipates that
capital expenditures (excluding acquisitions) for the second six months of the
fiscal year ending March 31, 1997 will be approximately $3.0 to $4.0 million for
improvements to its equipment and for capital additions. Acquisitions of
additional assets and businesses are expected to continue to be an important
part of the Company's strategy. Under certain circumstances, the Company would
need to obtain additional financing to fund such acquisitions.
On January 20, 1997, the Company completed the Mobley Acquisition. The
Company paid approximately $5.0 million of the acquisition price from its
existing cash. The remainder of the purchase price consisted of a $0.5 million
five year subordinated note.
The Company has available a $4.0 million revolving line of credit (the
"Revolver"), which matures on March 31, 1997, with the Frost National Bank (the
"Bank") to finance temporary working capital requirements and to support the
issuance of letters of credit. The Revolver is secured by a first lien security
interest on the Company's accounts receivable. Borrowings against the Revolver
bear interest at the Bank's prime lending rate (8.25% as of January 28, 1997).
At January 15, 1997, no amounts were drawn in cash under the Revolver, but $0.4
million was being utilized to support the issuance of letters of credit related
to the Company's workers' compensation coverage.
In July 1996, to finance a portion of the Taylor Acquisition, the Company
obtained a loan from a bank in the amount of $7.0 million. The promissory note
carries an annual interest rate of 7.75% and has a maturity date of March 31,
1997. In September 1996, the Company obtained a take-out commitment for a term
loan in the amount of $7.0 million to replace the promissory note. The Company,
however, intends to prepay the loan with a portion of the proceeds from the
Offerings and thus has decided to not take advantage of the take-out commitment.
Also in connection with the Taylor Acquisition, the Company assumed $0.6
million of bank debt owed by the principal Taylor stockholder, and guaranteed
payment of additional bank indebtedness of approximately $1.5 million owed by
Taylor. The Company intends to prepay both of these obligations with a portion
of the proceeds of the Offerings.
The Company had approximately $3.2 million of capitalized lease obligations
outstanding as of September 30, 1996, bearing interest at rates ranging from 5%
to 9% and due in monthly installments of approximately $136,000. The Company
intends to prepay these capitalized lease obligations in full with a portion of
the proceeds of the Offerings.
In March 1996, the Company sold 2,616,250 shares of Common Stock at $10 per
share in the IPO, which yielded net proceeds of approximately $23.5 million. The
Company used approximately $11.4 million of the net proceeds from the IPO to
prepay indebtedness outstanding from the Well Solutions Acquisition and
approximately $0.5 million (net of taxes) to pay prepayment penalties and
reimburse the lender for its costs and expenses resulting from the prepayment.
The remainder of the proceeds were used for acquisitions and working capital.
In preparation for the IPO, effective February 19, 1996, 60,600 outstanding
shares of the Company's Series A 10% Cumulative Convertible Preferred Stock (the
"Series A Preferred Stock") were converted into 260,580 shares of Common Stock.
Also in February 1996, approximately $2.5 million of convertible debt was
converted into 356,900 shares of Common Stock. The remaining $1.5 million of
convertible debt, represented
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by the debenture held by Well Solutions, bears interest at 8%, matures on
November 30, 1999, is prepayable without penalty at any time, and may be
converted at any time, at the option of the holder, into 37,634 shares of Common
Stock, subject to adjustment to prevent dilution. The Company does not currently
intend to prepay the debenture but may decide to do so in the future if interest
rates decline.
The Company generated cash from operating activities of approximately $6.6
million during the year ended March 31, 1996. The Company's principal uses of
cash during the year ended March 31, 1996 were to prepay the indebtedness from
the Well Solutions Acquisition and to fund approximately $4.5 million of capital
expenditures for upgrading and purchasing equipment.
The Company believes that the combination of internally generated cash
flow, the net proceeds from the Offerings and availability under the Credit
Facility should provide the Company with sufficient financing to fund the
Company's operations for at least the next 12 months. There can be no assurance,
however, that the Company will not need additional financing or that such
financing will be available on economically acceptable terms.
Description of Credit Facility
Prior to the closing of the Offerings, the Company expects to replace the
Revolver with a working capital line of credit (the "Working Line"). The Company
received a commitment on September 13, 1996 from the Bank for the Working Line
and an acquisition line of credit (the "Acquisition Line" and, together with the
Working Line, the "Credit Facility"). The Credit Facility has not yet been
finalized; however, the Company anticipates that certain significant terms of
the Credit Facility will be as follows. The maximum availability under the
Working Line would be the lesser of (i) $10.0 million or (ii) 80% of eligible
accounts receivable that have been outstanding less than 90 days. The Working
Line would be secured by a first lien security interest on all the Company's
accounts receivable and inventory. Borrowings under the Working Line would
mature two years from the date of any such borrowings and would bear interest at
the lesser of (i) the Bank's prime rate of interest or (ii) a varying percentage
rate ranging from 1.75% to 2.75%, based on the total funded debt to cash flow
ratio, over the Company's choice of the 30, 90 or 180-day LIBOR rate of
interest. Under the Acquisition Line, up to $20.0 million would be available
solely to fund up to 100% of the purchase price of acquisitions by the Company
during the first two years of the term of the Acquisition Line. From the third
year until maturity, the Acquisition Line would be secured by assets of the
Company with a loan to collateral value ratio of not less than 70%. Borrowings
under the Acquisition Line would mature seven years from the date of any such
borrowings and would bear interest at the lesser of (i) the Bank's prime rate of
interest or (ii) a varying percentage rate ranging from 2% to 3%, based on the
total funded debt to cash flow ratio, over the 180-day LIBOR rate of interest.
Under the terms of the commitment, the Company must maintain minimum working
capital, tangible net worth, current ratios and debt to capital ratios. The
foregoing description does not purport to be a complete description of all terms
of the Credit Facility, and the negotiation of the definitive agreements may
result in additional terms that are significant to the Company. There can be no
assurance, however, that definitive agreements will be executed.
Due to the pendency of the Pride Acquisition, the Company has requested
from the Bank a modification to its commitment to increase the maximum
availability of funds under the Working Line to the lesser of (i) $50.0 million
or (ii) 80% of eligible accounts receivable that have been outstanding less than
90 days. Based on discussions with the Bank to date, management expects to
receive a commitment from the Bank to such increase and to close the Working
Line prior to and subject to the consummation of the Pride Acquisition. In
addition, management expects that the maximum availability of funds under the
Acquisition Line would be reduced to $10.0 million.
INFLATION AND SEASONALITY
Inflation has not had a significant impact on the Company's operations to
date and the Company's operating revenues have not historically been subject to
significant seasonal changes.
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NEW ACCOUNTING PRONOUNCEMENTS -- ACCOUNTING FOR ASSET IMPAIRMENT; ACCOUNTING FOR
STOCK-BASED COMPENSATION
During March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of "
("FAS 121"). The Company adopted FAS 121 effective April 1, 1996. FAS 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Adoption of this pronouncement had no material effect on the
financial statements.
In October 1995, FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). FAS 123 defines
a fair value based method of accounting for employee stock options or similar
equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. Under the fair
value based method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period of the award, which
is usually the vesting period. However, FAS 123 also allows entities to continue
to measure compensation costs for employee stock compensation plans using the
intrinsic value method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Entities electing to
remain with the accounting prescribed by APB 25 must make pro forma disclosures
of net income and earnings per share as if the fair value based method
recommended by FAS 123 had been applied. The accounting requirements of FAS 123
are effective for transactions entered into in years that begin after December
15, 1995, though they may be adopted on issuance. The disclosure requirements of
FAS 123 are effective for financial statements for years beginning after
December 15, 1995. The Company intends to continue measuring compensation costs
using APB 25 and to provide pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting under FAS 123 had been
applied beginning with its financial statements for the year ending March 31,
1997.
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BUSINESS
GENERAL
Dawson Production Services, Inc. is a leading provider of a broad range of
workover, liquid and production services used in the production of oil and gas.
The Company's services are utilized by major oil and gas companies as well as
independent producers to optimize performance of oil and gas wells. The Company
recently entered into an agreement to acquire the U.S. land-based well servicing
operations of Pride in a transaction that will position Dawson as the second
largest provider of workover rigs in the United States.
The Company commenced operations in 1951. In 1982, the current management
team joined the Company and initiated a strategy to expand and diversify the
Company's workover rig services. Since 1982, the Company has grown from four
workover rigs in a single yard to 91 workover rigs in 10 yards through a series
of strategic acquisitions of businesses and assets. Upon the closing of the
Pride Acquisition, the Company will own and operate 498 workover rigs. In
addition, in November 1994 the Company broadened the array of services it
provides by acquiring the liquid services and production services businesses of
Well Solutions, Inc. and expanded such businesses in July 1996 with the Taylor
Acquisition. The Company believes that it generally has been successful in
acquiring businesses and assets and subsequently reducing overhead, enhancing
internal controls, improving marketing and related operations through management
incentives and improving the utilization of its assets by redeploying equipment.
BUSINESS STRATEGY
The Company's strategy emphasizes diversification and expansion through
acquisitions and internal growth. In recent years, there has been significant
industry consolidation activity in the Company's principal businesses. The
Company has been an active participant in this industry consolidation and plans
to continue to pursue strategic acquisitions of businesses and assets which
enhance or expand its market presence or complement its existing businesses.
Upon the closing of the Pride Acquisition, the Company intends to expand the
range of services offered at its locations and increase its presence, through
redeployment of underutilized assets, within the geographic regions in which the
Company will then operate. The Company believes that its ability to offer a wide
range of services over a large operating base will provide it with a competitive
advantage by allowing its customers to consolidate their procurement of
workover, liquid and production services by utilizing fewer vendors. The Company
believes that this consolidation may allow customers to lower their costs by
streamlining production decisions and increasing operational efficiencies. The
Company also believes that its strategy will allow it to take advantage of
cross-marketing opportunities for its services and to appeal to a broader
customer base by enhancing its position as a one-stop source for workover,
liquid and production services.
Consistent with its business strategy, on December 23, 1996 the Company
entered into a Purchase Agreement to acquire substantially all of Pride's U.S.
land-based well servicing operations for approximately $135.9 million in cash.
The Pride Acquisition will significantly increase the size and geographic scope
of the Company's workover rig service business. Pride's U.S. land-based fleet
consists of 407 workover rigs and related operations in 28 locations in the
Texas and Louisiana Gulf Coasts, the Permian Basin areas of West Texas and New
Mexico, and California. Upon completion of the Pride Acquisition, the Company
will be the largest provider of workover rigs in Texas and the second largest
provider in the United States. The Company will seek to generate improved profit
margins for the acquired assets through increased operating efficiencies and
cost savings resulting from overhead reductions and the consolidation of certain
overlapping yard locations. In addition, the Company will seek to expand its
liquid and production services businesses into new markets through certain of
the acquired yard locations and also to redeploy certain of the acquired
workover rigs to areas with greater rig demand. See "Pride Acquisition."
The Company believes that the high quality of its equipment, employees and
services combined with its favorable safety record enables it to maintain its
position as a leader in its principal markets. In that regard, the Company has
committed substantial capital to an ongoing workover rig refurbishment program
to maintain the Company's equipment in good working condition. The Company has
invested, and plans to continue to
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invest, in quality management and safety programs. The Company believes that
many smaller competitors have not undertaken comparable maintenance or training
programs and do not have the financial resources to enable them to do so. The
Company believes that a number of its customers place significant importance on
their contractors' safety records and quality management systems in their
screening and selection processes, and that such factors will gain further
importance in the future.
OVERVIEW OF SERVICES
Workover Rig Services
The Company provides workover rig services to oil and gas exploration and
production companies through the use of mobile well servicing workover rigs
together with crews of three to four workers. Additional equipment such as
pumps, tanks, blowout preventers and power swivels are provided by the Company
as may be required for a particular job. The Company also provides trucking
services for moving large equipment to and from the job sites of its customers.
The Company charges its customers an hourly rate for its workover rig services,
which varies based on a number of considerations including market conditions in
each region, the type of rig, the amount of ancillary equipment required and the
necessary personnel. The Company gives its yard managers considerable
flexibility to negotiate with customers and, through compensation arrangements,
seeks to provide incentives to its managers to maximize both revenues and
profitability. For the six months ended September 30, 1996, workover rig
services contributed approximately 46% of the Company's revenues (75% on a pro
forma basis).
As of January 15, 1997, the Company operated 89 land workover rigs, two
barge-mounted workover rigs and ancillary equipment from 10 yards in Texas and
Louisiana. Upon the closing of the Pride Acquisition, the Company will operate
496 land workover rigs, two barge-mounted workover rigs and ancillary equipment
from yards in Texas, Louisiana, California and New Mexico. The Company's land
workover rigs are mobile units that generally operate within a radius of
approximately 75 to 100 miles from their respective bases. Swab rigs are used
for swabbing, or cleaning, wells at depths of up to approximately 16,000 feet.
Pole rigs are used for swabbing and rod and tubing workovers and repairs on
wells at depths of up to approximately 4,000 feet. Rigs having between 150 and
250 horsepower are used for services on wells to maximum depths of between 4,000
and 6,000 feet and work primarily on rod and tubing workovers and repairs. Rigs
having between 251 and 350 horsepower are used for services on wells to maximum
depths of between 10,000 and 12,000 feet and also work primarily on rod and
tubing workovers and repairs. Rigs having between 351 and 550 horsepower are
used for deeper workovers and more complicated procedures such as deepening of
existing well bores, recompletions and complicated fishing operations. These
rigs operate at maximum depths of between 16,000 and 18,000 feet. Rigs having
between 551 and 750 horsepower are used in wells with maximum depths of
approximately 20,000 feet. Rigs having between 751 and 900 horsepower are
generally used for horizontal drilling or recompletion jobs and deep workovers
at depths of up to approximately 25,000 feet. These rigs are almost always
operated for continuous 24-hour periods as contrasted to the Company's other
rigs that typically operate during daylight hours only.
The Company operates two barge-mounted workover rigs in the Louisiana
inland waters. These rigs typically are outfitted by moving a land workover rig
onto the barge, with operating crews housed on the barge, and have the
capability to operate for continuous 24-hour periods. In addition to hourly
charges for the workover rigs, when market conditions permit, the Company
charges its customers for auxiliary equipment, travel time, mobilization and
other related items.
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Set forth below is certain information pertaining to the Company's
land-based workover rigs currently owned and to be acquired in the Pride
Acquisition.
<TABLE>
<CAPTION>
PRIDE
DESCRIPTION DAWSON ACQUISITION TOTAL
----------- ------ ----------- -----
<S> <C> <C> <C>
Swab....................................................... 2 17 19
Pole....................................................... -- 1 1
150-250 hp................................................. -- 71 71
251-350 hp................................................. 71 214 285
351-550 hp................................................. 13 95 108
551-750 hp................................................. 1 6 7
751-900 hp................................................. 2 3 5
-- ---- ----
89 407 496
</TABLE>
The Company operated 82 of its 91 workover rigs during 1996. Pride has
advised the Company that 89 of its 407 workover rigs were not operated during
the 12 months preceding December 23, 1996, the effective date of the Purchase
Agreement. The Company believes that a majority of these 89 rigs will be
reactivated only if market demand justifies the incremental cost, and the
Company does not expect the remainder of such rigs to be restored to operating
condition. The Company's stacked rigs will be refurbished, used for spare parts
or liquidated.
Workover rig services are categorized by the type of job performed:
completion, maintenance, workover and plugging and abandonment.
Completion Services. Completion services prepare a newly drilled well for
production. The completion process may involve selectively perforating the well
casing to access producing zones, stimulating and testing these zones and
installing downhole equipment. The Company provides a workover rig to assist in
this completion process. Newly drilled wells are frequently completed by well
servicing rigs to minimize the use of higher cost drilling rigs. The completion
process typically requires a few days to several weeks, depending on the nature
and type of the completion, and generally requires additional auxiliary
equipment.
The demand for well completion services is directly related to drilling
activity levels, which are sensitive to expectations relating to and changes in
oil and gas prices. During periods of weak drilling demand, drilling contractors
frequently price well completion work competitively compared to a workover rig
so that the drilling rig stays on the job. Thus, excess drilling capacity will
serve to reduce the amount of completion work available to the well servicing
industry.
Maintenance Services. Maintenance services are required on producing oil
and gas wells to ensure efficient and continuous operation. These services
consist of routine mechanical repairs necessary to maintain production from the
well, such as repairing parted sucker rods or defective downhole pumps in an oil
well or replacing defective tubing in a gas well. The Company provides the
workover rigs, equipment and crews for these maintenance services. Many of these
workover rigs also have pumps and tanks that can be used for circulating fluids
into and out of the well. Maintenance jobs are often performed on a series of
wells in proximity to each other and typically take less than 48 hours per well.
Maintenance services are generally required throughout the life of a well.
The need for these services does not depend on the level of drilling activity
and is generally independent of short-term fluctuations in oil and gas prices.
Accordingly, maintenance services are generally the most stable type of workover
rig services activity. The general level of maintenance, however, is affected by
changes in the total number of producing oil and gas wells in the Company's
geographic service area.
Workover Services. In addition to periodic maintenance, producing oil and
gas wells occasionally require major repairs or modifications called
"workovers." Workover services include extensions of existing wells to drain new
formations either through deepening well bores or through drilling of horizontal
laterals. In less extensive workovers, the Company's rigs are used to drill out
plugs and packers in existing well bores to access previously bypassed
productive zones. The Company's workover rigs are also used to convert producing
wells
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to injection wells during enhanced recovery operations. Workover services also
include major subsurface repairs such as casing repair or replacement, recovery
of tubing and removal of foreign objects in the well bore. These extensive
workover operations are normally performed by a workover rig with additional
specialized auxiliary equipment, which may include rotary drilling equipment,
mud pumps, mud tanks and blowout preventers, depending upon the particular type
of workover operation. Most of the Company's workover rigs are designed and
equipped to perform complex workover operations. A workover may last from a few
days to several weeks.
The demand for workover services is more sensitive to expectations relating
to and changes in oil and gas prices than the demand for maintenance services,
but not as sensitive as the demand for completion services. When oil and gas
prices are low, there is little incentive to perform workovers on wells to
increase production and well operators tend to defer workover services. As oil
and gas prices increase, the level of workover activity tends to increase as
operators seek to increase production by enhancing the efficiency of their
wells.
Plugging and Abandonment Services. Workover rigs are also used in the
plugging and abandonment of oil and gas wells no longer capable of producing in
economic quantities. The demand for well plugging services is not impacted
significantly by levels of demand for oil and gas.
Liquid Services
The Company provides liquid services, which are comprised of vacuum truck
services, frac tank rentals and salt water injection services. The Company uses
its vacuum trucks, frac tanks and salt water injection wells to provide an
integrated mix of liquid services to well site customers. For the six months
ended September 30, 1996, liquid services contributed approximately 38% of the
Company's revenues (20% on a pro forma basis).
Vacuum Truck Services. The Company owns and operates 175 vacuum trucks and
will acquire an additional 10 vacuum trucks in connection with the Pride
Acquisition. A vacuum truck is a tractor trailer with a fluid hauling capacity
of 130 barrels. A large vacuum pump mounted on each truck extracts fluids from
pits, tanks and other storage facilities. The vacuum trucks also are used for
the following purposes: to transport water to fill frac tanks on well locations,
including frac tanks provided by the Company and by others; to transport
produced salt water to injection wells, including injection wells owned and
operated by the Company; and to transport brine and other drilling fluids to and
from well locations. In conjunction with the rental of its frac tanks, the
Company generally uses its vacuum trucks to transport water for use in
fracturing operations. Following completion of fracturing operations, the
Company's vacuum trucks are used to transport salt water produced as a result of
the fracturing operations from the well site to injection wells. Vacuum truck
services are generally provided to oilfield operators within a 30-mile radius of
the Company's nearest yard.
Frac Tank Rentals. The Company owns 696 frac tanks located primarily at the
Company's yards in Bryan, Giddings and Kilgore, Texas. Each frac tank can store
up to 500 barrels of fluid and is used by oilfield operators to store various
fluids at the well site, including water, drilling mud, acid and brine. The
Company transports frac tanks on its trucks to well locations which are usually
within a 30-mile radius of the Company's nearest yard. Frac tanks are used
during all phases of the life of a producing well. The Company generally rents
frac tanks at daily rates for a minimum of four days. A typical fracturing
operation, absent complications, can be completed within four days using 20 to
100 frac tanks.
Injection Well Services. The Company owns or leases 22 injection wells that
are authorized to dispose of salt water and incidental non-hazardous oil and gas
wastes, each with an injection capacity of 2,000 to 21,000 barrels per day. The
Company's injection wells are strategically located in close proximity to its
customers' producing wells. These wells are utilized primarily to dispose of
salt water produced from oil and gas wells. Most oil and gas wells ultimately
produce varying amounts of salt water and, particularly in vertically fractured
formations such as those common in the Austin Chalk trend, produce salt water at
increasing rates throughout their productive lives. In addition, these wells are
utilized for the disposal of incidental, non-hazardous oil and gas wastes. In
Texas and Arkansas, oil and gas wastes and salt water produced from oil and gas
wells are required by law to be disposed of in authorized facilities, including
permitted injection wells. Injection wells are licensed by state authorities and
are completed in permeable formations below the fresh water table.
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The Company utilizes its injection wells primarily for the disposal of salt
water and incidental, non-hazardous oil and gas waste transported from the well
site by vacuum trucks owned and operated by the Company. Although the Company is
authorized to inject salt water and non-hazardous oil and gas wastes transported
by other licensed vacuum truck operators, the Company does not currently permit
such uses by third parties. The Company also maintains separators at each of its
injection wells permitting it to salvage residual crude oil, which is later sold
for the account of the Company.
The Company's injection operations pose certain risks of environmental
liability to the Company. Although the Company monitors the injection process,
any leakage from the subsurface portions of the wells could cause degradation of
fresh groundwater resources, potentially resulting in cancellation of operation
of the well, fines and penalties from governmental agencies, expenditures for
remediation of the affected resource, and liability to third parties for
property damages and personal injuries. In addition, the sale by the Company of
residual crude oil collected as part of the saltwater injection process could
impose liability on the Company in the event the entity to which the oil was
transferred fails to manage the material in accordance with applicable
environmental health and safety laws.
Production Services
The Company provides production services, which are comprised of production
testing services, slickline wireline services, fishing and rental tool services
and pipe testing. For the six months ended September 30, 1996, production
services contributed approximately 16% of the Company's revenues (5% on a pro
forma basis).
Production Testing Services. The Company owns 21 gas production testing
units that are used to provide services to oil and gas wells located onshore and
in inland waters. The Company performs production testing services for oil and
gas producers primarily along the Texas Gulf Coast. In addition, the Company is
bidding on a multi-year contract for services in northern Mexico.
The Company's equipment includes several trailer-mounted manifolds,
separators, heater treaters, sand separators, light generators and slickline
wireline units. Manifolds are used to reduce the flowing pressure of the well
stream to a rate which will easily flow through the production testing
equipment. After the appropriate well stream rate is achieved, a separator is
used to divide the well stream into its respective components -- oil, gas and
water. For gas wells, a heater is used to prevent the gas from freezing during
flowbacks. Slickline wireline equipment generally is used to lower measurement
equipment into a well for several days to retrieve data to determine the
characteristics of the reservoir.
The Company uses its production testing units to perform deliverability
tests required upon the initial completion of a well and periodically during the
productive life of a gas well to determine the maximum production allowable
under certain rules of the Texas Railroad Commission, the state oil and gas
regulatory agency. In addition, these units are used to clean and test
stimulated wells and to measure the pressure, volume and quality of gas and
liquids produced by the well. These units also are used to determine the most
efficient production flow rate, to run pressure build-up tests that measure the
rate of increase of shut-in gas pressure to determine reservoir characteristics
and to determine whether a producing formation has been damaged.
Slickline Wireline Services. The Company owns seven slickline wireline
units and will acquire three additional units upon the closing of the Pride
Acquisition. The mechanical downhole wireline or "slickline" services are used
to simplify completion operations and in connection with regular maintenance on
producing wells. In some cases, slickline wireline services may be used instead
of workover rigs to provide workover services. By using slickline wireline
services, workover services can be performed under 15,000 psi of pressure
without shutting-in the well. The Company also provides slickline wireline
consulting services where unusual conditions exist.
Fishing and Rental Tools. The Company provides a complete line of cased
hole fishing and rental tools to oilfield operators and well service companies
from two yards in the Texas Panhandle. The Company's rental tool inventory
includes both air compressor equipment, which is used in drilling and workover
activities, and
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fishing tools, which are used to mill or retrieve loose or broken equipment or
other material in the well bore or to free stuck pipe and other tools, such as
slips, elevators and casing cutters. The Company rents the equipment to its
customers at daily rates and, in the case of air compressors and fishing tools,
generally conducts or supervises the operations.
Pipe Testing. The Company operates nine pipe testing units along the Texas
Gulf Coast. The Company's testing equipment is used during completion and
recompletion operations for leak detection in the internal pipe systems of oil
and gas wells.
CUSTOMERS
The Company had approximately 1,050 customers during the 12 months ended
September 30, 1996. For the six months ended September 30, 1996, the Company's
largest customer, Union Pacific Resources Company ("UPRC"), accounted for
approximately 23% of the Company's revenues (approximately 9.5% on a pro forma
basis). The Company has a contract with UPRC to provide liquid and workover rig
services, which expires in February 1999 (with respect to liquid services) and
August 1997 (with respect to workover rig services). The Company is required to
maintain established levels of insurance and to indemnify UPRC against all
losses arising in whole or in part from the Company's negligence, whether or not
UPRC and its agents were contributorily negligent. While the Company believes
that its relationship with UPRC is good, the loss of UPRC, or a significant
reduction in business done with the Company by UPRC, if not offset by sales to
new or existing customers, could have a material adverse effect on the Company's
business, results of operations and prospects. No other customer accounted for
more than 10% of the Company's revenues during the six months ended September
30, 1996.
OPERATING RISKS AND INSURANCE
The Company's operations are subject to hazards inherent in the oil and gas
industry, such as blowouts, explosions, craterings, fires and oil spills, that
can cause personal injury or loss of life, damage to or destruction of property,
equipment, the environment and marine life, and suspension of operations. In
addition, claims for loss of oil and gas production and damage to formations can
occur in the workover business. If a serious accident was to occur at a location
where the Company's equipment and services are used, it could result in the
Company being named as a defendant in lawsuits asserting potentially large
claims.
Because the Company's vacuum truck and frac tank rentals involve the
transportation of heavy equipment and materials, the Company may experience
traffic accidents which may result in spills, property damage and personal
injury. Despite the Company's efforts to maintain high safety standards, the
Company from time to time has suffered losses in the past and anticipates that
it could experience further losses in the future. Moreover, the frequency and
severity of such incidents affect the Company's operating costs and
insurability, and its relationship with customers, employees and regulators. Any
significant increase in the frequency or severity of such incidents, or the
general level of compensation awards with respect thereto, could adversely
affect the cost of, or ability of the Company to obtain, workers' compensation
and other forms of insurance, and could have other material adverse effects on
the Company's financial condition and results of operations.
As a protection against operating hazards, the Company maintains broad
insurance coverage, including physical damage, employer's liability,
comprehensive commercial general liability and workers' compensation insurance.
The Company believes that it is adequately insured for public liability and
property damage to others with respect to its operations, and that its insurance
coverage is comparable to that which is customary in the industry against such
hazards. However, such insurance may not be sufficient to protect the Company
against liability for all consequences of well disasters, extensive fire damage,
damage to personal property, injuries to or deaths of persons or damage to the
environment. In addition, certain insurance policies exclude coverage for
damages resulting from environmental contamination. The Company also carries
insurance to cover physical damage to or loss of its workover rigs. No assurance
can be given that the Company will be able to maintain the type and amount of
coverage that it considers adequate at rates that it considers reasonable or
that insurance will continue to be available on terms as favorable as the
Company's existing arrangements.
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<PAGE> 169
In addition to insurance, the Company conducts training programs designed
to promote the safe operation of all equipment and to minimize accidents
occurring on job sites. The Company gives its managers incentives, through
compensation arrangements, to take all reasonable steps possible to promote
safety. The Company monitors safety closely and has carefully designed safety
programs to reduce costs associated with accidents. However, there can be no
assurance that the Company's insurance or safety programs will be adequate to
protect against liability for accidents occurring on the job site or affecting
the Company's equipment.
COMPETITION
The workover rig and production services industry is highly competitive and
fragmented and includes a number of small companies capable of competing
effectively on a local basis and several large companies which possess
substantially greater financial and other resources than the Company. Pool
Energy Services Co. ("Pool"), Pride and Key Energy Group, Inc. ("Key"), all of
which currently provide workover rig and liquid services, are the largest
companies in the domestic well servicing market. Pool, Pride and Key operate in
multiple geographic regions and currently have significantly more domestic
workover rigs than the Company. Upon the closing of the Pride Acquisition, the
Company will be the second largest provider of workover rigs in the United
States behind Pool. The Company has numerous regional competitors for each of
the services it provides. The Company believes that it is competitive in terms
of pricing, performance, equipment, safety, availability of equipment to meet
customer needs and availability of experienced, skilled personnel in those areas
in which it operates.
Excess capacity in the well servicing industry has resulted in severe price
competition throughout much of the past decade. In the well servicing market, an
important competitive factor in establishing and maintaining long-term customer
relationships is having an experienced and skilled work force. In recent years,
many of the Company's larger customers have placed an emphasis not only on
pricing, but also on safety records and quality management systems of
contractors. The Company believes that such factors will gain further importance
in the future. The Company has directed substantial resources toward employee
safety and quality management training programs as well as its employee review
process. While the Company's efforts in these areas are not unique, many
competitors, particularly small contractors, have not undertaken similar
training programs for their employees. The Company expects competition and
pricing pressures to continue in the foreseeable future.
ENVIRONMENTAL REGULATION
Many of the Company's operations take place in or near ecologically
sensitive areas, such as the Texas Gulf Coast and the Louisiana inland waters.
In addition, the Company's operations routinely involve the handling of
significant amounts of waste materials, some of which are classified as
hazardous substances. The Company's operations and facilities are thus subject
to numerous local, state and federal environmental and public health and safety
laws, rules and regulations, including laws concerning the containment and
disposal of hazardous materials, oilfield waste and other waste materials, the
use of underground storage tanks and the use of underground injection wells. The
regulations applicable to the Company's operations include certain regulations
controlling the discharge of hazardous or toxic materials into the environment,
requiring removal or remediation of pollutants, requiring permits or licenses
issued by regulatory agencies and imposing civil and criminal penalties for
violations. Some of the statutory and regulatory programs that apply to the
Company's operations also authorize private suits, the recovery of natural
resource damages by the government, injunctive relief and cease and desist
orders. Moreover, environmental laws typically expose the Company to "strict
liability" rendering a person or entity liable for environmental damage without
regard to negligence or fault on the part of such person or entity. As a result,
the Company could be liable for cleanup costs, even if the situation resulted
from previous acts by the Company that were lawful at the time or from the
improper conduct of, or conditions caused by, previous property owners, lessees
or other persons not associated with the Company. Environmental laws have become
more stringent in recent years and are expected to become even more so in the
future.
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<PAGE> 170
Cleanup costs associated with environmental claims or capital expenditures
or increased operating costs associated with changes in environmental laws and
regulations could be substantial and could have a material adverse effect on the
Company's financial condition and results of operations. However, the cost of
environmental compliance has not had any material adverse effect on the
Company's operations, financial condition or competitive position in the past,
and management is not currently aware of any situation or condition that it
believes is likely to have any such material adverse effect or require any
material capital expenditure in the foreseeable future. In addition to
management personnel who are responsible for monitoring environmental compliance
and arranging for remedial actions as required from time to time, the Company
also employs outside experts to advise and assist the Company's environmental
compliance efforts.
In addition to having a direct effect on the Company, local, state and
federal environmental regulations also may negatively impact oil and gas
exploration and production companies which in turn could have a material adverse
effect on the Company. To the extent laws are enacted or other governmental
action is taken that prohibits or restricts drilling or imposes environmental
protection requirements that result in increased costs to the oil and gas
industry in general and the drilling industry in particular, the financial
condition and results of operations of the Company could be adversely affected.
In this regard, RCRA, the principal federal statute governing the disposal
of solid and hazardous wastes, includes a statutory exemption that allows oil
and gas exploration and production wastes to be classified as nonhazardous
waste. A similar exemption is contained in many of the state counterparts to
RCRA, including the state statutes in Texas and Louisiana. If oil and gas
exploration and production wastes were required to be managed and disposed of as
hazardous waste, either as a result of changes in RCRA or the imposition of more
stringent state regulations, the Company could be required to make significant
unanticipated capital and operating expenditures or to cease or curtail certain
operations. Further, if such wastes were required to be managed and disposed of
as hazardous waste, domestic oil and gas producers, including many of the
Company's customers, could be required to incur substantial obligations with
respect to such waste. Because of the potential impact on the Company's
customers, any regulatory changes that impose additional restrictions or
requirements on the disposal of oil and gas wastes could adversely affect demand
for the Company's services.
EMPLOYEES
As of January 15, 1997, the Company employed approximately 1,050 people, of
whom approximately 850 were employed on an hourly basis. The Company's future
success will depend partially on its ability to attract, retain and motivate
qualified personnel. The Company is not a party to any collective bargaining
agreements and has not experienced any strikes or work stoppages. The Company
considers its relations with employees to be generally satisfactory.
LEGAL PROCEEDINGS
From time to time, the Company is a party to litigation or other legal
proceedings that the Company considers to be a part of the ordinary course of
its business. The Company currently is not involved in any legal proceedings
that could reasonably be expected to have a material adverse effect on the
Company's financial condition or results of operations. See "-- Operating Risks
and Insurance."
PROPERTIES
The principal office of the Company is located in San Antonio, Texas. The
Company operates 23 yards, 11 of which it owns and 12 of which it leases. Of the
Company's 23 yards, 20 yards are located in Texas and three yards are located in
Louisiana. The Company also operates 21 injection wells in Texas and one in
Arkansas, five of which it owns and 17 of which it leases. The Company believes
that its leased and owned properties, none of which individually is material to
the Company, are adequate for its current needs.
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<PAGE> 171
PRIDE ACQUISITION
On December 23, 1996, the Company entered into a purchase agreement (the
"Purchase Agreement") to acquire substantially all of Pride's U.S. land-based
well servicing operations for approximately $135.9 million in cash. The Pride
Acquisition will significantly increase the size and geographic scope of the
Company's workover rig services business. Pride's U.S. land-based fleet consists
of 407 workover rigs and related operations in 28 locations in the Texas and
Louisiana Gulf Coasts, the Permian Basin areas of West Texas and New Mexico, and
California. Upon completion of the Pride Acquisition, the Company will be the
largest provider of workover rigs in Texas and the second largest provider in
the United States. The Company will seek to generate improved profit margins for
the acquired assets through increased operating efficiencies and cost savings
resulting from overhead reductions and the consolidation of certain overlapping
yard locations. In addition, the Company will also seek to expand its liquid and
production services businesses into new markets through certain of the acquired
yard locations and also to redeploy certain of the acquired workover rigs to
areas with greater rig demand.
Pursuant to the Purchase Agreement, the Company will purchase the Pride
Assets "as is, where is." Dawson has undertaken a limited amount of
investigation of the condition of the Pride Assets, particularly the workover
rigs, in an effort to determine that their condition appears to be sufficient to
sustain the operations previously conducted by Pride with those assets. The
Company has not, however, thoroughly investigated all material items of
equipment due to limitations of time, cost and geographic disbursement.
The Purchase Agreement provides that Pride and the Company shall treat the
sale as not subject to sales and use taxes in all jurisdictions. However, it
further provides that if, contrary to the foregoing, it shall be finally
determined that the sale, or any other transaction consummated pursuant to the
closing, is subject to such tax, such tax shall be borne equally by Pride and
the Company. Certain ambiguities under existing tax laws of the states in which
assets of Pride are located, and the issue of what transactions are "consummated
pursuant to the closing," could result in substantial liability to the Company.
With regard to real property, it is expected that the Company will acquire
approximately 14 properties in fee simple and will receive an assignment or
sublease of approximately 14 leased properties. With respect to all parcels of
real estate, Dawson has conducted only limited environmental studies and
investigations. The Company has obtained Phase I reports on the properties and
has had the opportunity to review the books and records of Pride concerning
environmental compliance aspects of each of those properties. As to each such
property, Dawson has the option of acquiring Pride's interest therein, of
declining to accept the property (resulting in a reduction of the purchase
price) or of leasing the property with an option to buy. There can be no
assurance that Dawson will not acquire properties that have latent environmental
risks and concurrent financial exposure. Moreover, Pride has not made any
warranties and representations concerning the environmental aspects of any
properties that would survive the closing.
The Company expects to employ approximately 1,940 employees of Pride
immediately following consummation of the Pride Acquisition. All such employees
of Pride will continue their employment following the closing as "at will"
employees of the Company. Approximately 146 salaried employees will be entitled
to certain severance benefits if their employment with the Company is
terminated, other than for cause, within 18 months of the closing. To facilitate
certain transitional issues, the Company also has obtained an agreement from
Pride that it will provide reasonable access to its headquarters office in
Houston for the use of the Company and its employees for six months at no cost
to the Company. This is intended to help facilitate and implement a transfer of
bookkeeping and accounting functions with respect to the acquired operations.
Pursuant to the Purchase Agreement, Pride is required to indemnify and hold
harmless the Company with respect to damages, losses or third party warranty
claims accruing or arising prior to the date of closing and for breaches of only
certain limited warranties and representations. With respect to
misrepresentations and breaches of such warranties and representations and
certain covenants, the Company will bear the first $2.0 million of losses or
damages, with Pride being liable for losses in excess thereof. The Purchase
Agreement also provides for a $5.0 million break-up fee, payable by the Company
if it is not able to obtain financing and the Pride Acquisition is not closed on
or before March 17, 1997, and a five year non-compete agreement imposed upon
Pride with respect to U.S. land-based well servicing operations. At the option
of the Company,
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<PAGE> 172
$4.0 million of the break-up fee may be paid in unregistered shares of Common
Stock, provided that Pride would receive registration rights relating to such
shares of Common Stock.
The closing of the Debt Offering and the Equity Offering are each
conditioned upon the simultaneous closing of the other and upon the simultaneous
closing of the Pride Acquisition.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their respective
ages and positions are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael E. Little(1)...................... 42 Chairman of the Board, President and
Chief Executive Officer
Joseph B. Eustace......................... 41 Vice President of Operations and Chief
Operating Officer
P. Mark Stark............................. 41 Chief Financial Officer
Russell Banks(1).......................... 77 Director
J. Michael Bell(2)........................ 57 Director
Wm. Ward Greenwood(1)..................... 43 Director
Douglas D. Lewis(2)....................... 51 Director
Paul E. McCollam(2)....................... 51 Director
Stephen F. Oakes(3)....................... 47 Director
Lawrence C. Petrucci(3)................... 37 Director
</TABLE>
- ---------------
(1) Member of the Nominations Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
Michael E. Little has been President, Chief Executive Officer and a
director of the Company since 1982 and Chairman of the Board since 1983. From
1980 to 1982, he was vice president of Cambern Engineering, Inc., a company that
provided drilling and completion consulting services in the Texas Gulf Coast
area. From 1976 to 1980, he was employed by Chevron USA as a drilling foreman in
Midland, Texas and as a drilling engineer in New Orleans, Louisiana. Mr. Little
received his Bachelor of Science degree in Petroleum Engineering in 1978 from
Texas Tech University.
Joseph B. Eustace has served as the Vice President of Operations and Chief
Operating Officer of the Company since March 1983. From June 1981 to March 1982,
he served as assistant manager of ServRigs, Inc., the Company's largest
competitor at the time. Mr. Eustace received his Bachelor of Arts degree in
Agribusiness in 1978 from Texas Tech University.
P. Mark Stark has served as Chief Financial Officer of the Company since
January 1996. From 1991 through 1995, he was chief financial officer of the Y.O.
Ranch and family holdings of the Schreiner family which has interests in
agribusiness, tourism, lodging and retail and real estate development. From 1979
through 1991, Mr. Stark was employed by Shelton Ranch Corporation and its
successor, Texas Hill Country Orchards, LLP, serving as chief financial officer
from 1984 through 1991. His duties with Shelton Ranch Corporation included
serving as treasurer of Shelton Energy Resources, Ltd., an oil and gas
exploration and production partnership among Shelton Ranch Corporation,
Prudential Insurance Company of America and Shell Oil Company. Mr. Stark
received his Bachelor of Business Administration degree in Finance from the
University of Texas in 1977, and his Master of Business Administration degree in
1978 from Southern Methodist University.
Russell Banks has been a director of the Company since April 1996. From
1962 to 1995, Mr. Banks was president and chief executive officer of Grow Group,
Inc., which was a New York Stock Exchange company that produced coatings, paints
and household products. Since 1995, Mr. Banks has been a principal of Russell
Banks & Co., Ltd., a financial consulting firm. Mr. Banks is also on the board
of directors of GVC Venture Corporation. Mr. Banks is a past president of the
National Paint and Coatings Association and has served on the executive
committee of the board of directors of the American Management Association and
is currently
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<PAGE> 174
on its general management council. Mr. Banks has been named as a defendant in
certain litigation relating to his service as a director of another company. All
other directors of such company were also named as defendants. Counsel to such
company has taken the position that all the claims against that company and Mr.
Banks are without merit and will be vigorously defended. Mr. Banks was
designated to succeed a former director, Kevin P. Collins, to the Board of
Directors pursuant to a letter agreement that provided Mr. Collins the right,
upon his departure from the Board, to designate a successor Board member,
subject to the approval of such successor by the Board.
J. Michael Bell has been a director of the Company since 1982. For more
than the past five years, he has served as the president of Southwest Venture
Management Company, a firm that provides investment management and advisory
services to three venture capital funds. Mr. Bell also serves as the managing
general partner of each of these funds, one of which is HixVen Partners, a
shareholder of the Company.
Wm. Ward Greenwood has been a director of the Company since 1983. Mr.
Greenwood served as Chief Financial Officer of the Company from December 1994
through December 1995. Mr. Greenwood has been since 1990, and is currently, the
president and sole shareholder of Nueces Ventures, Inc. ("Nueces"), a firm that
provides financial consulting services with respect to acquisitions and capital
formation. Since October 1995, he has also served as a principal of First
Capital Group of Texas II, L.P., a private equity fund. Since 1982, Mr.
Greenwood has provided financial consulting services to the Company, most
recently through Nueces. See "Certain Relationships and Related Transactions."
Douglas D. Lewis has been a director of the Company since 1982. Since 1972,
Mr. Lewis has been in the real estate construction, development and management
business, most recently as principal of Vanguard Development, Inc., which he
formed in 1987.
Paul E. McCollam has been a director of the Company since 1991. Since 1985,
he has been a managing director of Resource Investors Management Company Limited
Partnership, a full service investment management company specializing in the
energy industry that serves as the general partner of the RIMCO Parties (as
defined herein). Mr. McCollam serves as a director of the Company pursuant to
the 1991 agreement described below.
Stephen F. Oakes has been a director of the Company since 1994. Since 1996,
Mr. Oakes has served on the board of directors of Universal Seismic Associates,
Inc., a company engaged in the acquisition of seismic data and the exploration
and production of oil and gas. From 1989 to 1992, he served as managing director
of Robert Fleming, Inc., an investment banking company. Since 1992, he has been
associated with Resource Investors Management Company Limited Partnership, a
full service investment management company specializing in the energy industry
that serves as the general partner of the RIMCO Parties, serving as managing
director since 1993. Mr. Oakes serves as a director of the Company pursuant to
the 1994 Voting Agreement (as defined herein).
Lawrence C. Petrucci has been a director of the Company since March 1996.
Since 1991, Mr. Petrucci has served as vice president of First Albany
Corporation, a provider of investment banking, financial advisory and brokerage
services. From April 1990 through June 1991, Mr. Petrucci was a portfolio
manager with Westinghouse Credit Corporation, a financial services company. Mr.
Petrucci is a member of the Audit Committee.
In March 1996, the Company entered into a letter agreement that provided
Mr. Collins, a director of the Company at that time, with the right, upon his
departure from the Board of Directors prior to the Company's next Annual Meeting
of Shareholders, to designate a successor Board member, subject to the approval
of such successor by the Board of Directors. Mr. Banks was designated Mr.
Collins' successor to the Board pursuant to this letter agreement.
A Voting Agreement dated November 28, 1994 (the "1994 Voting Agreement")
among the RIMCO Parties, L.P., RIMCO Partners, L.P. II, RIMCO Partners, L.P.
III, and RIMCO Partners, L.P. IV (the "RIMCO Parties"), Triad Ventures Limited
II and Mr. Little provides that the parties to the 1994 Voting Agreement will
vote the shares of Common Stock held by them in favor of two nominees of the
RIMCO Parties to the Company's Board of Directors. The 1994 Voting Agreement
continues as long as the RIMCO
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<PAGE> 175
Parties own at least 10% of the issued and outstanding shares of Common Stock,
on a fully diluted basis. In addition, pursuant to a 1991 agreement, as long as
the RIMCO Parties own 5% of the issued and outstanding shares of Common Stock or
shares of Common Stock with a value of $500,000, the Company is required to use
its best efforts to elect Mr. McCollam (or a designee of the parent company of
the RIMCO Parties) to the Company's Board. Messrs. McCollam and Oakes were
reelected to the Board pursuant to these agreements. These agreements have been
terminated and superseded by a subsequent agreement. See "Certain Relationships
and Related Transactions."
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established standing Audit, Compensation and
Nominations Committees. The Audit Committee annually recommends to the Board the
appointment of independent certified public accountants as auditors for the
Company, discusses and reviews the scope of and fees for the prospective annual
audit and reviews the results with the auditors, reviews the Company's
compliance with its existing accounting and financial policies, reviews the
adequacy of the financial organization of the Company and considers comments by
the auditors regarding internal controls and accounting procedures and
management's response to those comments. The Audit Committee currently is
comprised of Messrs. Oakes and Petrucci. One vacancy exists on this committee.
The Compensation Committee reviews and make recommendations to the Board
regarding salaries, compensation and benefits of executive officers and
employees of the Company and administers the Company's 1995 Incentive Plan (the
"Incentive Plan"). The Compensation Committee currently is comprised of Messrs.
Bell, Lewis and McCollam.
The Nominations Committee is responsible for recommending to the Board
those persons who will be nominated as management's nominees for positions on
the Board. The Nominations Committee is currently comprised of Messrs. Little,
Greenwood and Banks.
COMPENSATION OF DIRECTORS
For the year ended March 31, 1996, the Company granted each of its
non-employee directors an option under the Incentive Plan to purchase 4,300
shares of Common Stock, at an exercise price per share of $7.44, which was
determined by the Board to be the fair market value of the Common Stock on the
date of grant, for his services as a director. Additionally, all directors were
reimbursed for their reasonable travel expenses incurred in attending meetings
of the Board. Commencing April 1, 1996, each non-employee director received, and
on each April 1 thereafter until and including April 1, 2003 will receive, an
annual grant of an option under the Incentive Plan to purchase 4,300 shares of
Common Stock with an exercise price per share equal to the fair market value of
the Common Stock on the date of grant and reimbursement of reasonable travel
expenses for attending Board or committee meetings. See "Management -- 1995
Incentive Plan."
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<PAGE> 176
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information for the year ended March
31, 1996 with respect to the compensation paid to the President and Chief
Executive Officer, Mr. Little, and the Vice President of Operations and Chief
Operating Officer, Mr. Eustace (collectively, the "Named Executive Officers").
No other executive officers of the Company received annual compensation
(including salary and bonuses earned) which exceeded $100,000 for the year ended
March 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION
------------------------------- ----------------------------
YEAR SECURITIES
ENDED UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION MARCH 31, SALARY BONUS OPTIONS COMPENSATION(2)
--------------------------- --------- -------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Michael E. Little.................. 1996 $150,000 $ 50,000(3) 51,600 --
President and Chief 241,000(4)
Executive Officer 1995 138,125 75,000 64,500 $500
1994 105,000 30,000
Joseph B. Eustace.................. 1996 96,200 20,000(3) 17,200 --
Vice President of Operations 24,000(4)
and Chief Operating Officer 1995 80,000 15,000 21,500 500
1994 80,000 12,000
</TABLE>
- ---------------
(1) The value of perquisites and personal benefits are excluded because the
aggregate amount thereof did not exceed the lesser of $50,000 or 10% of the
total annual salary and bonus reported for each Named Executive Officer.
(2) All other compensation consists entirely of employer contributions to the
Company's 401(k) Plan made by the Company in 1996 as a result of 1995
earnings.
(3) Bonuses are awarded annually in the discretion of the Compensation Committee
with respect to performance in the year indicated; the amount of the bonuses
is determined and paid in the following year.
(4) In the year ended March 31, 1996, in addition to standard bonuses, the Board
of Directors declared special bonuses in the amount of $241,000 for Mr.
Little and $24,000 for Mr. Eustace, each of whom exercised stock options and
incurred federal income tax liability in connection with such exercise.
STOCK OPTION GRANTS IN 1996
The following table shows information concerning individual grants of
options during the year ended March 31, 1996 to the Named Executive Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(1)
OPTIONS EMPLOYEES PRICE EXPIRATION -----------------------
NAME GRANTED IN YEAR ($/SHARE)(2) DATE 5% 10%
---- ---------- ---------- ------------ --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael E. Little(3)... 51,600 52% $7.44 October 6, 2005 $241,435 $611,844
Joseph B. Eustace(3)... 17,200 17% $7.44 October 6, 2005 $ 80,478 $203,948
</TABLE>
- ---------------
(1) The exercise price of the options represents the fair market value of the
Common Stock on the date of grant as determined by the Board of Directors.
Potential realizable values are based on the assumption that the Common
Stock will appreciate in value from the date of grant to the end of the
option terms at the stated annualized rates. Such assumed rates of
appreciation and potential realizable values are not necessarily indicative
of appreciation, if any, that may be realized in future periods.
(2) The exercise price of the option was set equal to the fair market value of
the Common Stock as determined by the Board of Directors on the date of
grant. In establishing the exercise price, the Board
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<PAGE> 177
considered recent sales of the Company's securities, and the terms and
conditions of such sales, the book value of the Company's outstanding shares
of Common Stock and the Company's financial performance at the time of such
grants.
(3) The options granted to Mr. Little and to Mr. Eustace become exercisable
annually and ratably over a three-year period, which began June 30, 1996.
STOCK OPTION EXERCISES AND HOLDINGS
The following table sets forth information concerning the exercise of stock
options during the year ended March 31, 1996, and the number and value of
unexercised stock options held as of the end of the year ended March 31, 1996,
by the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT YEAR OPTIONS AT YEAR
ACQUIRED VALUE END EXERCISABLE/ END EXERCISABLE/
NAME ON EXERCISE REALIZED(1) UNEXERCISABLE UNEXERCISABLE(1)
---- ----------- ----------- ---------------- --------------------
<S> <C> <C> <C> <C>
Michael E. Little.................... 33,681 $286,599 21,500/94,600 $131,150/$433,096
Joseph B. Eustace.................... 1,431 $ 15,054 7,310/31,390 $ 44,591/$143,491
</TABLE>
- ---------------
(1) In calculating the value realized and the value of unexercised in-the-money
options at year end, the Company used the closing price on March 31, 1996 of
$10.75 per share.
OUTSTANDING OPTIONS AND CERTAIN PRIOR EXERCISES
As of January 15, 1997, the Company had outstanding options granted under
the Incentive Plan to purchase 441,150 shares of Common Stock at prices ranging
from $7.44 to $12.25 per share, of which 84,574 were exercisable as of such
date. Of the total options granted pursuant to the Incentive Plan that were
outstanding as of January 15, 1997, Mr. Little held options to acquire 138,980
shares of Common Stock at prices of $7.44 and $11.375 per share, of which 17,200
were exercisable at a price of $7.44 per share, and Mr. Eustace held options to
acquire 80,720 shares of Common Stock at prices of $7.44 and $11.375 per share,
of which 5,736 were exercisable at a price of $7.44 per share.
As of January 15, 1997, the Company also had outstanding nonstatutory
options to purchase 107,500 shares of Common Stock, which were granted prior to
the adoption of the Incentive Plan. The exercise price per share of these
options is $4.65, with options to acquire 78,905 shares being exercisable as of
January 15, 1997. Of the total of such options outstanding as of such date, Mr.
Little held options to acquire 64,500 shares of Common Stock, of which 43,000
were exercisable, and Mr. Eustace held options to acquire 21,500 shares of
Common Stock, of which 14,405 were exercisable. Mr. Little exercised options in
February 1996 to acquire 32,250 shares of Common Stock at $2.33 per share.
Messrs. Little and Eustace each exercised options in March 1996 to acquire 1,431
shares of Common Stock at $0.23 per share.
In February 1996, the Company granted bonuses of an aggregate of
approximately $336,000 to certain current and former officers, directors and
employees who had exercised nonstatutory stock options and incurred federal
income tax liability in connection with such exercises. Of this amount, Mr.
Little received a bonus of approximately $241,000 and Mr. Eustace received a
bonus of approximately $24,000.
1995 INCENTIVE PLAN
The Incentive Plan was adopted by the Board of Directors and approved by
the shareholders in October 1995. A total of 537,500 shares of Common Stock have
been reserved for issuance pursuant to the Incentive Plan. The Incentive Plan
provides for the grant to employees, including officers of the Company, of
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), nonstatutory stock options, stock
appreciation rights and restricted shares of Common Stock (collectively, the
"Awards"). In addition, nonemployee directors (the "Outside Directors") and
consultants are eligible to receive nonstatutory stock options.
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<PAGE> 178
The Incentive Plan provides that Awards may be granted to employees
(including officers), consultants and directors of the Company and its majority
owned subsidiaries. The Incentive Plan is not a qualified deferred compensation
plan under Section 401(a) of the Code and is not subject to the provisions of
the Employee Retirement Income Security Act of 1974, as amended.
The Incentive Plan is required to be administered by the Board or by a
committee of the Board. The Incentive Plan is currently administered by the
Compensation Committee of the Board. Subject to special provisions relating to
Outside Directors, the Board or its designated committee selects the employees
to which Awards may be granted and the type of Award to be granted and
determines, as applicable, the number of shares to be subject to each Award, the
exercise price and the vesting. In making such determination, the Board or its
designated committee takes into account the employee's present and potential
contributions to the success of the Company and other relevant factors.
401(K) PLAN
The Company has adopted a defined contribution retirement plan which
complies with Section 401(k) of the Code (the "401(k) Plan"). Substantially all
employees with at least one year of continuous service are eligible to
participate and may contribute up to the lesser of $9,500 or 15% of their annual
compensation. The Board made no matching contributions for employee
contributions made in the year ended March 31, 1996, and has not made a decision
regarding matching contributions for employee contributions made in the year
ending March 31, 1997. Company contributions vest over a four-year period in
increments of 25% per year.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Little,
Eustace and Stark. Mr. Little's agreement is for a three-year term, which
commenced April 1, 1996, and provides for an annual base salary of $175,000 in
the first year, increasing to $200,000 in the second year and to $225,000 in the
third year. The agreement does not provide for a mandatory bonus, but the Board
of Directors may, in its discretion, award an annual bonus of up to 50% of Mr.
Little's compensation without regard to the special bonus described in the
footnotes to the Summary Compensation Table. If Mr. Little's employment is
terminated without cause in the first, second or third year of the agreement, he
will be entitled to severance compensation in an amount equal to his then
current annual base salary rate for 14, 15 or 16 months, respectively. If Mr.
Little's employment is terminated in connection with a change of control of the
Company (as defined in the employment agreement), he will be entitled to
severance compensation in an amount equal to three times his then current annual
base salary. If Mr. Little's employment is constructively terminated in
connection with a change of control of the Company, he will be entitled to
severance compensation in an amount equal to two times his then current base
salary.
Mr. Eustace's employment agreement is for a three-year term, which
commenced April 1, 1996, and provides for an annual base salary of $125,000 in
the first year, increasing to $132,500 in the second year and to $140,000 in the
third year. The Board of Directors may, in its discretion, award Mr. Eustace an
annual cash bonus without regard to the special bonus described in the footnotes
to the Summary Compensation Table. If Mr. Eustace's employment is terminated
without cause, he will be entitled to severance compensation in an amount equal
to his then current annual base salary rate. If Mr. Eustace's employment is
terminated in connection with a change of control of the Company (as defined in
the employment agreement), he will be entitled to severance compensation in an
amount equal to 1.5 times his then current annual base salary. If Mr. Eustace's
employment is constructively terminated in connection with a change of control
of the Company, he will be entitled to severance compensation in an amount equal
to his then current annual base salary.
Mr. Stark's employment agreement is for a two-year term, which commenced
April 1, 1996, and provides for an annual base salary of $80,000 in the first
year and $90,000 in the second year. The Board of Directors may, in its
discretion, award Mr. Stark an annual cash bonus. If Mr. Stark's employment is
terminated without cause in the first or second year of the agreement, he will
be entitled to severance compensation in an amount equal to one or two months'
salary, respectively, at his then current annual base salary rate. If
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<PAGE> 179
Mr. Stark's employment is terminated in connection with a change of control of
the Company (as defined in the employment agreement), he will be entitled to
severance compensation in an amount equal to his then current annual base
salary. If Mr. Stark's employment is constructively terminated in connection
with a change of control of the Company, he will be entitled to severance
compensation in an amount equal to six months' salary at his then current annual
base salary rate.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1990, the Company issued 80,000 shares of Series A Preferred Stock for
$12.50 per share to Triad Ventures Limited II and NationsBanc Capital
Corporation. In connection with such issuance, Nueces received 800 shares of
Series A Preferred Stock from the Company as a portion of a finder's fee for
services rendered in negotiating the issuance of such stock. H.A. Abshier, a
director of the Company until June 1996, was a general partner of Triad II
Management Company, L.P., which is the general partner of Triad Ventures Limited
II. Mr. Greenwood, a director of the Company, is the sole shareholder of Nueces.
Holders of the Series A Preferred Stock elected, pursuant to their rights under
the Certificate of Designation of Series A Preferred Stock, to convert 20,200
shares of such stock into 86,860 shares of Common Stock, effective October 18,
1995. Pursuant to the Agreement for the Conversion of Securities dated November
1, 1995 (the "Conversion Agreement"), the remaining 60,600 shares of Series A
Preferred Stock converted into 260,580 shares of Common Stock effective February
19, 1996 (the conversion of all shares of Series A Preferred Stock to Common
Stock being referred to herein as the "Series A Preferred Stock Conversion
Transaction"). Purchasers under the Preferred Purchase Agreement were entitled
to appoint one person to the Board as long as they owned an aggregate of at
least 86,860 shares of Common Stock received on conversion of Series A Preferred
Stock. Mr. Abshier, who resigned as a director in June 1996, was elected to the
Board pursuant to this agreement. This agreement has subsequently been
terminated. Purchasers of the Series A Preferred Stock received certain
registration rights in connection with that transaction. See "Description of
Capital Stock -- Registration Rights."
In August 1992, the Company entered into an agreement (the "Nueces
Agreement") with Nueces, pursuant to which Nueces received a commission upon the
consummation by the Company of certain acquisition and financing transactions.
Mr. Greenwood, a director of the Company, is the sole shareholder of Nueces.
Pursuant to the Nueces Agreement, the Company paid Nueces $50,070, $25,416 and
$46,466 in the years ended March 31, 1996, 1995, and 1994, respectively. Of the
amount paid to Nueces in the year ended March 31, 1996, $34,000 was paid upon
the consummation of the IPO. In addition, Jefferies & Company, Inc. paid to
affiliates of Mr. Greenwood in the year ended March 31, 1995, a finder's fee of
$122,500 from the fee it received from the Company in connection with the Well
Solutions Acquisition. Mr. Greenwood has continued to provide consulting
services to the Company during the fiscal year ending March 31, 1997 and may
continue to do so in the future. See "Management -- Executive Officers and
Directors."
In November 1992, the Company and WellTech, Inc. ("WellTech") formed the
LLC by contributing their respective workover rig service businesses in the
Texas Gulf Coast area, for which the Company received a 61% interest and
WellTech received a 39% interest in the LLC. Effective November 1, 1995, the
Company acquired WellTech's 39% minority interest in the LLC in exchange for the
issuance of 1,329,495 shares of the Common Stock to WellTech. In connection with
the Minority Interest Acquisition, the Company granted certain registration
rights to WellTech. See "Description of Capital Stock -- Registration Rights."
The purchase price paid by the Company for WellTech's minority interest in the
LLC was a result of arms-length negotiation and reflected the illiquidity of the
minority interest, the lack of control over the LLC operations by the minority
interest holder and other factors deemed relevant by the parties. The Minority
Interest Acquisition benefitted the Company by removing the Company's need to
get consent of the minority interest holder on a number of issues, such as
borrowing money and making capital expenditures, and relieved the Company from
the obligation under a non-competition provision to conduct all of its well
servicing activities in South Texas only through the LLC. On February 16, 1996,
WellTech distributed its 1,329,495 shares of Common Stock to its shareholders
and directors (the "WellTech Distributees"). As long as the WellTech
Distributees own at least 20% of the issued and outstanding shares of Common
Stock, the WellTech Distributees are entitled to recommend five persons to the
Company's Board, two of whom will be nominated
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<PAGE> 180
by the Company and recommended to the shareholders for election to the Board. As
long as the WellTech Distributees own less than 20% but more than 10% of the
issued and outstanding shares of Common Stock, the Company will nominate and
recommend to the shareholders from a list of persons recommended by the WellTech
Distributees one such person for election to the Board. Mr. Collins, a former
director of WellTech, was elected to the Board pursuant to this provision. This
right, and the right to contractual preemptive rights, terminated upon
consummation of the IPO.
On November 1, 1994, the Company loaned Mr. Little, Chairman of the Board,
President and Chief Executive Officer of the Company, $55,486, which amount
bears interest at 7.5% per annum, provides for annual payments of interest and
for one principal payment at the end of the six-year term of the note. The loan
was made to enable Mr. Little to acquire 33,699 shares of Common Stock and is
secured by those shares. The entire principal balance of such loan was
outstanding as of November 30, 1996. In February 1996, the Company loaned Mr.
Little $75,000, which amount bears interest at 7.5% per annum, provides for
annual payments of interest and for one principal payment at the end of the
six-year term of the note. This loan was made to enable Mr. Little to exercise
options to acquire 32,250 shares of Common Stock and is secured by those shares.
The entire principal balance of such loan was outstanding as of November 30,
1996. In addition, on November 1, 1994, the Company loaned Mr. Eustace, Vice
President of Operations and Chief Operating Officer of the Company, $11,392,
which amount bears interest at 7.5% per annum, provides for annual payments of
interest and for one principal payment at the end of the six-year term of the
note. The loan was made to enable Mr. Eustace to acquire 6,919 shares of Common
Stock and is secured by those shares. The entire principal balance on such loan
was outstanding as of November 30, 1996.
In November 1994, the Company consummated the Well Solutions Acquisition
for approximately $18.1 million. In connection with this transaction, and as
part of the purchase price, the Company issued to Well Solutions, Inc. a $1.5
million convertible debenture, which bears interest at 8% per annum and matures
November 30, 1999. The debenture is convertible at any time, at the option of
Well Solutions, Inc., into 37,634 shares of Common Stock (an effective
conversion price of $39.86 per share). If more or less than $1.5 million of
principal and accrued interest is outstanding under the debenture at the time of
such conversion, Well Solutions is entitled to a proportionately increased or
decreased amount of Common Stock. The Company does not currently intend to
prepay the debenture but may decide to do so in the future if interest rates
decline. In addition to this debenture, to consummate the Well Solutions
Acquisition, the Company utilized a portion of the $2.4 million received from
the issuance of subordinated debt and the $2.4 million received from the
issuance of 344,000 shares of Common Stock to RIMCO Partners, L.P. IV described
below, and a $13.0 million term loan to provide the funding required. The terms
upon which the Company issued the Common Stock and the subordinated debt are
further described below.
Also in November 1994, the Company issued $2.4 million of subordinated debt
to RIMCO Partners, L.P., RIMCO Partners, L.P. II, RIMCO Partners, L.P. III and
Triad Ventures Limited II. The subordinated debt bore interest at 10% per annum,
with a maturity date of December 1, 1999. Pursuant to the Conversion Agreement,
the subordinated debt converted into Common Stock at the rate of one share of
Common Stock for each $6.98 in principal amount of subordinated debt effective
February 19, 1996. In November 1994 and January 1995, RIMCO Partners, L.P. IV
purchased 344,000 shares of Common Stock at $6.98 per share. In addition, Triad
Ventures Limited II held a promissory note issued by the Company with a
principal balance of $75,000 and maturing June 27, 1997, which note converted,
in February 1996, into 12,900 shares of Common Stock (conversion of this debt
and the $2.4 million of subordinated debt being referred to herein as the "Debt
Conversion Transaction" and together with the Series A Preferred Stock
Conversion Transaction, the "Conversion Transactions"). The RIMCO Parties and
Triad Ventures Limited II received certain registration rights in connection
with that transaction. See "Description of Capital Stock -- Registration
Rights."
The Conversion Agreement was entered into, effective November 1, 1995,
among the RIMCO Parties, Triad Ventures Limited II, NationsBanc Capital
Corporation, Nueces and the Company, and provided that the parties to that
agreement would convert all shares of Series A Preferred Stock and the $2.4
million subordinated debt owned by such parties into Common Stock on the
earliest of March 31, 1996, the consummation by the Company of an initial public
offering or notice of the distribution by WellTech of the Common Stock it owned
to the WellTech Distributees, which notice was given on February 19, 1996.
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<PAGE> 181
In 1990, the Company issued a promissory note to an unrelated party in
connection with an asset acquisition. The promissory note, which was acquired by
Triad Ventures Limited II, provided for conversion into Common Stock, at the
rate of one share of Common Stock for each $5.81 of principal due on the note,
at the discretion of Triad Ventures Limited II. In February 1996, Triad Ventures
Limited II converted the promissory note, which had a principal balance of
$75,000, into 12,900 shares of Common Stock.
Effective October 17, 1990, NationsBanc Capital Corporation, Triad Ventures
Limited II and Mr. Greenwood entered into a Voting Agreement (the "1990 Voting
Agreement") pursuant to which the parties agreed to vote the shares of Series A
Preferred Stock held by them, and any Common Stock into which such Series A
Preferred Stock is converted, in the manner directed by Triad Ventures Limited
II and NationsBanc Capital Corporation. Such voting agreement was terminated in
August 1996 by holders of two-thirds of the shares covered by the 1990 Voting
Agreement.
A voting agreement dated November 28, 1994 (the "1994 Voting Agreement")
among the RIMCO Parties, Triad Ventures Limited II and Michael E. Little
provided that the parties to the 1994 Voting Agreement would vote the shares of
Common Stock held by them in favor of two nominees of the RIMCO Parties to the
Board. The 1994 Voting Agreement continues as long as the RIMCO Parties own at
least 10% of the issued and outstanding shares of Common Stock, on a fully
diluted basis. Messrs. McCollam and Oakes were elected to serve on the Board
pursuant to a 1991 agreement and the 1994 Voting Agreement. See
"Management -- Directors and Executive Officers."
On November 21, 1996, the 1994 Voting Agreement and the 1990 Voting
Agreement were terminated concurrent with the execution by the Company of a new
voting agreement. Under the current agreement, the Company agrees to nominate
and seek to elect two nominees of the RIMCO Parties if they own an aggregate of
10% or more of the Company's outstanding Common Stock, one nominee if such
ownership is less than 10% but more than 5% and no nominees if such ownership is
less than 5%.
In March 1996, the Company entered into a letter agreement that provided
Mr. Collins, a director of the Company at that time, with the right, upon his
departure from the Board prior to the Company's next Annual Meeting of
Shareholders, to designate a successor Board member, subject to the approval of
such successor by the Board. Mr. Banks was designated Mr. Collins' successor to
the Board pursuant to this letter agreement.
Gene Little, the father of Michael E. Little, serves as an operations
consultant to the Company and received fees and expense reimbursements of
$63,857, $54,491 and $44,480 in the years ended March 31, 1996, 1995 and 1994,
respectively. Gene Little has continued to serve as an operations consultant for
the Company during the fiscal year ending March 31, 1997.
Jefferies & Company, Inc. has in the past provided investment banking
services to the Company and also acted as an underwriter in the IPO. Jefferies &
Company, Inc. performed investment banking services for the Company in
connection with the Well Solutions Acquisition in November 1994 for which
Jefferies & Company, Inc. received usual and customary fees in the amount of
$295,000. Jefferies & Company, Inc. paid to affiliates of Mr. Greenwood in the
year ended March 31, 1995, a finder's fee of $122,500 from the fee it received
from the Company in connection with the Well Solutions Acquisition. Jefferies &
Company, Inc. also has acted as financial advisor to the Company in connection
with the Pride Acquisition for which it will be paid a fee of approximately $1.2
million, and is being reimbursed for its reasonable out-of-pocket expenses in
connection therewith.
Jefferies & Company, Inc. is serving as the underwriter for purposes of the
Debt Offering and will receive customary compensation for such services
consisting of the underwriting discount.
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<PAGE> 182
SECURITY OWNERSHIP OF MANAGEMENT
AND PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of January 15, 1997, and as adjusted to reflect
the sale of Common Stock in the Equity Offering, by (i) each director of the
Company, (ii) each Named Executive Officer, (iii) each person known or believed
by the Company to own beneficially 5% or more of the Common Stock, (iv) all
directors and executive officers as a group and (v) the Selling Shareholders.
Unless otherwise indicated, each person has sole voting and dispositive power
with respect to such shares.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
BEFORE THE EQUITY OFFERING(1) AFTER THE EQUITY OFFERING(1)
----------------------------- ----------------------------
SHARES OF SHARES TO SHARES OF
NAME OF BENEFICIAL OWNER COMMON STOCK PERCENT BE SOLD COMMON STOCK PERCENT
------------------------ -------------- ---------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Michael E. Little.................. 198,345(2) 3.1% -- 198,345(2) 2.0%
Russell Banks...................... 5,300(3) * -- 5,300(3) *
J. Michael Bell.................... 60,200(4) * -- 60,200(4) *
Joseph B. Eustace.................. 42,138(5) * -- 42,138(5) *
Wm. Ward Greenwood................. 21,804(6) * -- 21,804(6) *
Douglas D. Lewis................... 19,633(7) * -- 19,633(7) *
Paul E. McCollam................... 1,063,033(8) 16.6% -- 1,063,033(8) 10.7%
Stephen F. Oakes................... 1,058,733(9) 16.5% -- 1,058,733(9) 10.7%
Lawrence C. Petrucci............... 4,300(10) * -- 4,300(10) *
All executive officers and
directors
as a group (9 persons)........... 1,423,353(11) 22.3% -- 1,423,353(11) 14.2%
RIMCO Partners, L.P.
RIMCO Partners, L.P. II
RIMCO Partners, L.P. III
RIMCO Partners, L.P. IV.......... 1,050,133(12) 16.4% -- 1,050,133(11) 10.6%
Belmont Capital Partners II,
L.P.............................. 608,321(13) 10.0% 608,231 -- --
Fidelity Summer Street Trust:
Fidelity
Capital & Income Fund............ 117,536(14) 1.8% 117,536 -- --
Triad Ventures Limited II.......... 94,600 1.5% 94,600 -- --
Belmont Fund, L.P.................. 86,903(13) 1.4% 86,903 -- --
Boston Safe Deposit FBO 303
Virginia......................... 57,450(15) * 57,450 -- --
Atwell & Company FBO Detroit
Policeman/Fireman................ 47,713(15) * 47,713 -- --
Trussal & Company FBO MERS of
Michigan......................... 46,150(15) * 46,150 -- --
Ell & Company FBO NCR.............. 43,375(15) * 27,136 16,239 *
Lark & Company FBO Arkansas Teacher
Retirement....................... 39,050(15) * 39,050 -- --
Ell & Company FBO AT&T Corp........ 38,625(15) * 38,625 -- --
How & Company FBO Columbia
Healthcare....................... 12,650(15) * 12,650 -- --
NSCC FBO Pontiac Police/Fire
Department....................... 5,200(15) * 5,200 -- --
Topworks & Company FBO Montgomery
County Growth.................... 5,050(15) * 5,050 -- --
H. A. Abshier, Jr.................. 4,300 * 4,300 -- --
Boston Safe Deposit FBO Fairfax
County Public Schools............ 4,000(15) * 4,000 -- --
Ell & Company FBO Newell Co........ 2,250(15) * 2,250 -- --
</TABLE>
44
<PAGE> 183
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
BEFORE THE EQUITY OFFERING(1) AFTER THE EQUITY OFFERING(1)
----------------------------- ----------------------------
SHARES OF SHARES TO SHARES OF
NAME OF BENEFICIAL OWNER COMMON STOCK PERCENT BE SOLD COMMON STOCK PERCENT
------------------------ -------------- ---------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Bost. & Company FBO Bush
Foundation....................... 1,300(15) * 1,300 -- --
Iowa State University Foundation... 1,200(15) * 1,200 -- --
Salkeld & Company FBO Robinson
Co............................... 1,200(15) * 1,200 -- --
Siglar & Company FBO Marion Bradley
Glass via Part Trust............. 1,100(15) * 1,100 -- --
Siglar & Company FBO Marion Bradley
Glass Trust...................... 1,100(15) * 1,100 -- --
Pitt & Company FBO Tracor, Inc..... 850(15) * 850 -- --
MAC & Company FBO SEIU............. 750(15) * 750 -- --
NSCC FBO City of Pontiac General... 750(15) * 750 -- --
Arik Y. Prawer..................... 623 * 623 -- --
Pitt & Company FBO GCIU Employer... 500(15) * 500 -- --
Siglar & Company FBO Iron Workers.. 500(15) * 500 -- --
---------
1,206,807
=========
</TABLE>
- ---------------
* Less than 1%
(1) Shares of Common Stock that are not outstanding but that can be acquired by
a person within 60 days upon exercise of an option or similar right are
included in the number of shares beneficially owned and in computing the
percentage for such person but are not included in the number of shares
beneficially owned and in computing the percentage for any other person.
(2) Includes immediately exercisable options to purchase 60,200 shares of
Common Stock.
(3) Includes immediately exercisable options to purchase 4,300 shares of Common
Stock.
(4) Includes 43,000 shares owned by HixVen Partners, of which Mr. Bell, a
director of the Company, is the managing general partner, and with respect
to which shares he exercises sole voting and investment power. Also
includes immediately exercisable options for the purchase of 12,900 shares
of Common Stock, and 4,300 shares of Common Stock owned by Mr. Bell's wife
as to which Mr. Bell disclaims any beneficial ownership.
(5) Includes immediately exercisable options to purchase 20,141 shares of
Common Stock.
(6) Includes 4,081 shares held by Nueces, of which Mr. Greenwood is the sole
shareholder, and immediately exercisable options held by Mr. Greenwood to
purchase 12,900 shares of Common Stock.
(7) Includes immediately exercisable options to purchase 12,900 shares of
Common Stock.
(8) Includes 1,050,133 shares of Common Stock beneficially owned by the RIMCO
Parties and immediately exercisable options to purchase 12,900 shares of
Common Stock. Mr. McCollam intends to direct to the RIMCO Parties the
economic benefit of any options he has acquired in his capacity as a
director of the Company. Mr. McCollam's address is c/o RIMCO Associates,
Inc., 600 Travis Street, Suite 6875, Houston, Texas 77002.
(9) Includes 1,050,133 shares of Common Stock beneficially owned by the RIMCO
Parties and immediately exercisable options to purchase 8,600 shares of
Common Stock. Mr. Oakes intends to direct to the RIMCO Parties the economic
benefit of any options he has acquired in his capacity as a director of the
Company. Mr. Oakes' address is c/o RIMCO Associates, Inc., 22 Waterville
Road, Avon, Connecticut 06001.
(10) Represents immediately exercisable options to purchase shares of Common
Stock.
(11) Includes immediately exercisable options to purchase 149,141 shares of
Common Stock.
(12) The RIMCO Parties are limited partnerships; the general partner of each is
Resource Investors Management Company Limited Partnership, and its general
partner is RIMCO Associates, Inc. Their address is 22 Waterville Road,
Avon, Connecticut 06001. Voting and investment power over the shares held
by the RIMCO Parties is exercised by the managing directors of Resource
Investors Management Company Limited Partnership, and by the officers and
directors of RIMCO Associates, Inc. Messrs. McCollam and Oakes, directors
of the Company, are managing directors of Resource Investors Management
Company Limited Partnership. Does not include shares of Common Stock that
may be purchased by one or more affiliates of the RIMCO Parties in the
Equity Offering. See "Underwriting."
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<PAGE> 184
(13) This is a private investment limited partnership which is managed by
Fidelity Management Trust Company ("FMTC"). FMTC is a wholly-owned
subsidiary of FMR Corp. ("FMR") and a bank as defined in Section 3(a)(6) of
the Exchange Act. FMR's address is 82 Devonshire, E20E, Boston,
Massachusetts 02109.
(14) The entity is either an investment company or a portfolio of an investment
company registered under Section 8 of the Investment Company Act of 1940,
as amended, or a private investment account advised by Fidelity Management
& Research Company ("FMR Co."). FMR Co. is an investment advisor registered
under Section 203 of the Investment Advisors Act of 1940, as amended, and
provides investment advisory services to the entity mentioned above, and to
other registered investment companies and to certain other funds which are
generally offered to a limited group of investors. FMR Co. is a
wholly-owned subsidiary of FMR.
(15) Represents shares owned of record by Kennedy Capital Management, held for
the benefit of the named Selling Shareholder. Kennedy Capital Management
will continue to be the record and beneficial owner of 16,239 shares of
Common Stock after the Equity Offering.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,560,600 shares
of Common Stock, $.01 par value, and 560,600 shares of undesignated preferred
stock, no par value per share.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of shareholders voting with the holders of the
Company's preferred stock as a single class, except where class voting is
required by the Texas Business Corporation Act (the "TBCA") or by a Certificate
of Designation adopted by the Board. Cumulative voting in the election of
directors is prohibited. Accordingly, the holders of a majority of the combined
number of outstanding shares of Common Stock and the Company's preferred stock
entitled to vote in any election of directors may elect all of the directors
standing for election except to the extent otherwise provided by various voting
agreements. See "Management -- Directors and Executive Officers" and "Certain
Relationships and Related Transactions."
Holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared by the Board of Directors out of funds legally available
therefor, subject to any preferential dividend rights of outstanding preferred
stock. Upon a liquidation, dissolution or winding up of the Company, the holders
of Common Stock are entitled to receive ratably the net assets of the Company
available after the payment of all debts and other liabilities and subject to
the prior rights of any outstanding preferred stock. The holders of Common Stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of Common Stock are, and the shares issued in the Equity
Offering will be, when issued and paid for, fully paid and nonassessable.
As of January 15, 1997, the outstanding shares of Common Stock were owned
of record by approximately 140 shareholders.
PREFERRED STOCK
There are 560,600 shares of undesignated preferred stock authorized and no
shares of preferred stock issued or outstanding.
REGISTRATION RIGHTS
Pursuant to a Registration Rights Agreement dated as of November 1, 1995 by
and among the Company, WellTech, the RIMCO Parties, Nueces, NationsBanc Capital
Corporation and Triad Ventures Limited II (the "Registration Rights Agreement"),
the Company granted registration rights under the Securities Act with respect to
the shares of Common Stock received by WellTech pursuant to the Minority
Interest Acquisition and with respect to the shares of Common Stock currently
held and to be received by the RIMCO Parties, Nueces, NationsBanc Capital
Corporation and Triad Ventures Limited II (collectively with WellTech, the
"Rights Holders") upon the consummation of the Conversion Transactions. The
Registration Rights Agreement replaced the registration rights previously
granted to certain of the Rights Holders.
46
<PAGE> 185
In February 1996, WellTech distributed all of the Common Stock it then
owned to its approximately 30 shareholders and to certain of its directors
("WellTech Distributees"). The WellTech Distributees, in addition to the RIMCO
Parties, Triad Ventures Limited II and Nueces (and in each case, their
respective transferees), represent the Rights Holders who are entitled to the
benefits of the Registration Rights Agreement.
Under the Registration Rights Agreement, the Company is obligated,
beginning July 20, 1997, to file a registration statement (the "Shelf
Registration Statement") pursuant to Rule 415 of the Securities Act covering all
of the registrable shares held by the Rights Holders (the "Registrable
Securities"). The holders of a majority of the Registrable Securities can
require that the Shelf Registration Statement be in the form of an underwritten
offering. Additionally, if the Company proposes to register any of its
securities under the Securities Act for its own account or for the account of
the other security holders, the Rights Holders are entitled to notice of such
registration and are entitled to include all or a portion of the Registrable
Securities in such registration, subject to certain exceptions and limitations,
including the right of the underwriters (if any) of any such offering to exclude
for marketing reasons some or all of the Registrable Securities from such
registration. The Company generally is required to pay all of the expenses
relating to the registration of the Registrable Securities, except for the
Rights Holders' share of any underwriting discounts and commissions. The
Registration Rights Agreement prohibits the Company from granting any new
registration rights under the Securities Act that would adversely impact the
rights of the Rights Holders. Substantially all of the 1,206,807 shares of
Common Stock being offered by the Selling Shareholders in the Equity Offering
are being registered and sold pursuant to the Registration Rights Agreement for
the account of the Rights Holders. See "Security Ownership of Management and
Principal and Selling Shareholders."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Harris Trust
Company of New York.
PROVISIONS HAVING POSSIBLE ANTI-TAKEOVER EFFECT
The Company's Articles of Incorporation and Bylaws contain certain
provisions that are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors of the Company and in the
policies formulated by the Board and to discourage certain types of transactions
which may involve an actual or threatened change of control of the Company. The
provisions are designed to reduce the vulnerability of the Company to an
unsolicited proposal for a takeover of the Company that does not contemplate the
acquisition of all of its outstanding shares or an unsolicited proposal for the
restructuring or sale of all or part of the Company. The provisions also are
intended to discourage certain tactics that may be used in proxy fights.
The Board will have the authority, without further action by the
shareholders, to issue up to 560,600 shares of the Company's preferred stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof, and to issue over 9,000,000 additional shares of Common
Stock after the Equity Offering. The issuance of the Company's preferred stock
or additional shares of Common Stock could adversely affect the voting power of
the purchasers of Common Stock in the Equity Offering and could have the effect
of delaying, deferring or preventing a change in control of the Company.
The Articles of Incorporation also provide that, subject to the terms of
any outstanding preferred stock, any action required or permitted to be taken by
the shareholders of the Company must be taken at a duly called annual or special
meeting of shareholders and may not be taken by written consent unless
previously approved by a majority of the entire Board. In addition, special
meetings may be called only by the President, the Board or by holders of 20% or
more of the combined voting power of the then outstanding shares of capital
stock entitled to vote at the proposed special meeting.
Upon a change of control of the Company, holders of the Notes will have the
right to require the Company to purchase the Notes at a price equal to 101% of
the aggregate principal amount thereof, together with accrued and unpaid
interest to the date of purchase.
47
<PAGE> 186
INDEMNIFICATION OF OFFICERS AND DIRECTORS; LIMITATION OF DIRECTOR LIABILITY
The Company has entered into indemnification agreements with all of its
directors and executive officers, which, among other things, indemnify directors
of the Company against liability arising from shareholder claims of a breach of
duty by a director if a director votes against a transaction that would result
in a change of control of the Company. The Articles of Incorporation also
provide that its directors shall not be liable for monetary damages caused by an
act or omission occurring in their capacity as directors. This provision does
not eliminate the duty of care, and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available under Texas law. In addition, each director will continue to be
subject to liability for breach of the director's duty of loyalty to the
Company, for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to a director and for acts or omissions for which a director is
made expressly liable by applicable statute, such as the improper payment of
dividends. The limitations on liability provided for in the Articles of
Incorporation do not restrict the availability of non-monetary remedies and do
not affect a director's responsibilities under any other law, such as the
federal securities laws or state or federal environmental laws. The Company
believes that these provisions will assist the Company in attracting and
retaining qualified individuals to serve as executive officers and directors.
DESCRIPTION OF NOTES
Concurrently with the Equity Offering, the Company is offering $130.00
million aggregate principal amount of the Notes pursuant to the Debt Offering.
The following is a summary of certain terms of the Notes and is qualified in its
entirety by reference to the Indenture (the "Indenture") relating to the Notes.
A copy of the proposed form of Indenture has been filed with the Securities and
Exchange Commission and is available as set forth under "Available Information."
The Notes mature on February 1, 2007, and bear interest at the rate of
% per annum payable semi-annually. The Notes are redeemable at the option
of the Company, in whole or in part, at any time on or after February 1, 2002,
at a premium declining ratably to par on or after February 1, 2005, together
with accrued and unpaid interest to the date of redemption. In the event the
Company consummates a Public Equity Offering (as defined in the Indenture) on or
prior to February 1, 2000, the Company may at its option use all or a portion of
the proceeds from such offering to redeem up to $45.5 million principal amount
of the Notes at a redemption price equal to % of the aggregate principal
thereof, together with accrued and unpaid interest to the date of redemption,
provided that at least $84.5 million in aggregate principal amount of the Notes
remain outstanding immediately after such redemption.
Upon the occurrence of a Change in Control (as defined in the Indenture),
each holder of Notes will have the right to require the Company to purchase all
or a portion of such holder's Notes at a price equal to 101% of the aggregate
principal amount thereof, together with accrued and unpaid interest to the date
of purchase.
The Notes will be unconditionally guaranteed on a senior unsecured basis by
each of the Company's principal operating subsidiaries, and such subsidiary
guarantees will rank pari passu in right of payment with all senior indebtedness
of the subsidiary guarantors. The subsidiary guarantees may be released under
certain circumstances.
The Notes will be senior unsecured obligations of the Company, ranking pari
passu in right of payment will all subordinated indebtedness of the Company. The
Notes and the subsidiary guarantees will be effectively subordinated to secured
indebtedness of the Company and the subsidiary guarantors, including any
indebtedness under the Credit Facility, which is expected to be secured by liens
on the accounts receivable and inventory of the Company. Subject to certain
limitations, the Company, including its subsidiaries, may incur additional
indebtedness in the future.
The Indenture will contain certain covenants, including covenants that
limit: (i) indebtedness, (ii) restricted payments, (iii) issuances and sales of
capital stock of restricted subsidiaries, (iv) sale/leaseback transactions, (v)
transactions with affiliates, (vi) liens, (vii) asset sales, (viii) dividends
and other payment restrictions affecting restricted subsidiaries, (ix) conduct
of business and (x) mergers, consolidations or sales of assets.
48
<PAGE> 187
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company and the Selling Shareholders have agreed to sell to the
Underwriters named below (the "Underwriters"), for whom Jefferies & Company,
Inc., Rauscher Pierce Refsnes, Inc. and Southcoast Capital Corporation are
acting as the representatives (the "Representatives"), and the Underwriters have
severally agreed to purchase, the number of shares of Common Stock set forth
opposite their respective names in the table below at the public offering price
less the underwriting discount set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Jefferies & Company, Inc. ..................................
Rauscher Pierce Refsnes, Inc. ..............................
Southcoast Capital Corporation..............................
---------
Total............................................. 4,706,807
=========
</TABLE>
The Underwriting Agreement provides that the obligation of the Underwriters
to purchase the shares of Common Stock offered hereby is subject to certain
conditions. The Underwriters are committed to purchase all of the shares of
Common Stock offered hereby (other than those covered by the over-allotment
option described below), if any are purchased.
The Underwriters propose to offer the shares of Common Stock to the public
initially at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may
reallow, a discount not in excess of $ per share to certain other
dealers. After the public offering of the shares of Common Stock, the public
offering price, the concession to selected dealers and the reallowance to other
dealers may be changed by the Representatives.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 706,021 additional shares of
Common Stock at the public offering price, less the underwriting discount. To
the extent such option is exercised, each Underwriter will become obligated,
subject to certain conditions, to purchase additional shares of Common Stock
proportionate to such Underwriter's initial commitment as indicated in the
preceding table. The Underwriters may exercise such right of purchase only for
the purpose of covering over-allotments, if any, made in connection with the
shares of Common Stock offered by this Prospectus.
The Company and each executive officer and director of the Company have
agreed not to offer for sale, sell or otherwise dispose of any shares of Common
Stock or any securities convertible into or exchangeable for shares of Common
Stock for a period of 90 days from the date of this Prospectus, without the
prior written consent of Jefferies & Company, Inc.
The Representatives have advised the Company and the Selling Shareholders
that they do not expect the Underwriters to confirm sales of shares of Common
Stock offered by this Prospectus to any accounts over which they exercise
discretionary authority.
49
<PAGE> 188
The closing of the Equity Offering is conditioned upon the simultaneous
closing of the Debt Offering and the Pride Acquisition.
At the request of the Company, the Underwriters have reserved up to 200,000
shares of the Common Stock offered hereby for sale at the initial public
offering price to one or more affiliates of RIMCO Associates, Inc., which has
expressed an interest in purchasing shares of Common Stock. In addition, up to
$5.5 million of the Notes offered in the Debt Offering have been reserved for
sale at the initial public offering price to one or more affiliates of RIMCO
Associates, Inc., which has expressed an interest in purchasing Notes. The
number of shares of Common Stock and the amount of Notes available to the
general public will be reduced to the extent one or more affiliates of RIMCO
Associates, Inc. purchases the reserved shares of Common Stock and Notes.
Certain of the Underwriters and selling group members that currently act as
market makers for the Common Stock may engage in "passive market making" in the
Common Stock on the Nasdaq National Market in accordance with Rule 10b-6A under
the Exchange Act. Rule 10b-6A permits, upon the satisfaction of certain
conditions, underwriters and selling group members participating in a
distribution that are also Nasdaq market makers in the security being
distributed to engage in limited market-making transactions during the period
when Rule 10b-6 under the Exchange Act would otherwise prohibit such activity.
Rule 10b-6A prohibits underwriters and selling group members engaged in passive
market making generally from entering a bid or effecting a purchase at a price
that exceeds the highest bid for those securities reported on the Nasdaq
National Market by a market maker that is not participating in the distribution.
Under Rule 10b-6A, each underwriter or selling group member engaged in passive
market making is subject to a daily net purchase limitation equal to 30% of such
entity's average daily trading volume during the two full consecutive calendar
months immediately preceding the date of the filing of the registration
statement under the Securities Act pertaining to the security to be distributed.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities that may be incurred in connection with
the Equity Offering, including liabilities under the Securities Act, or to
contribute to payments that the Underwriters may be required to make in respect
thereof.
Jefferies & Company, Inc. has in the past provided investment banking
services to the Company and acted as an underwriter in the IPO. Rauscher Pierce
Refsnes, Inc. and Southcoast Capital Corporation also acted as underwriters in
the IPO. Jefferies & Company, Inc. performed investment banking services for the
Company in connection with the Well Solutions Acquisition in November 1994 for
which Jefferies & Company, Inc. received usual and customary fees in the amount
of $295,000. Jefferies & Company, Inc. paid to affiliates of Mr. Greenwood in
the year ended March 31, 1995, a finder's fee of $122,500 from the fee it
received from the Company in connection with the Well Solutions Acquisition.
Jefferies & Company, Inc. also has acted as financial advisor to the Company in
connection with the Pride Acquisition for which it will be paid a fee of
approximately $1.2 million, and is being reimbursed for its reasonable
out-of-pocket expenses in connection therewith.
Jefferies & Company, Inc. is serving as the underwriter for purposes of the
Debt Offering and will receive customary compensation for such services
consisting of the underwriting discount.
LEGAL MATTERS
Certain legal matters with respect to the legality of the Common Stock
offered hereby will be passed upon for the Company by Jenkens & Gilchrist, A
Professional Corporation, Austin, Texas. Fulbright & Jaworski L.L.P., Houston,
Texas, has acted as counsel for the Underwriters in connection with the Equity
Offering and will pass upon certain legal matters relating to the Equity
Offering.
50
<PAGE> 189
EXPERTS
The consolidated financial statements and schedule of the Company as of
March 31, 1995 and 1996 and for each of the years in the three-year period ended
March 31, 1996 included in this Prospectus and elsewhere in the Registration
Statement, of which this Prospectus constitutes a part, have been included
herein and in the Registration Statement in reliance upon the reports of KPMG
Peat Marwick LLP, independent certified public accountants, included elsewhere
herein and in the Registration Statement and upon the authority of said firm as
experts in accounting and auditing. The report of KPMG Peat Marwick LLP covering
the March 31, 1994, financial statements refers to a change in the method of
accounting for income taxes.
The financial statements of the Taylor Acquisition Group as of December 31,
1994 and 1995 and for the years then ended have been audited by Chapman,
Williams & Co., Carthage, Texas, independent certified public accountants. Such
financial statements have been included herein and elsewhere in the Registration
Statement in reliance upon the report of said firm given upon their authority as
experts in accounting and auditing.
The financial statements of the U.S. Land-Based Well Servicing Operations
of Pride as of December 31, 1994 and 1995 and for each of the years in the
three-year period ended December 31, 1995 have been audited by Coopers & Lybrand
L.L.P., independent accountants. Such financial statements have been included in
the Registration Statement in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The financial statements of Well Solutions, Inc., as of March 31, 1994 and
1993 and for each of the three years in the period ended March 31, 1994, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving such reports.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy and information statements,
and other information with the Securities and Exchange Commission (the
"Commission"). These reports, proxy and information statements, and other
information concerning the Company can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549; and at the Commission's regional
offices at Suite 1400, Northwestern Atrium Center, 500 West Madison Avenue,
Chicago, Illinois 60661-2511 and at Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of such material can also be obtained from the
Commission at prescribed rates through its Public Reference Section at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, such
materials filed electronically by the Company with the Commission are available
at the Commission's World Wide Web site at http://www.sec.gov. The Common Stock
is traded on the Nasdaq National Market and such reports, proxy and information
statements, and other information may be inspected at the Nasdaq Stock Market,
1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the securities offered hereby
(including all amendments and supplements thereto, the "Registration
Statement"). This Prospectus, which forms a part of the Registration Statement,
does not contain all the information set forth in the Registration Statement,
certain parts of which have been omitted in accordance with the rules and
regulations of the Commission. Statements contained herein concerning the
provisions of certain documents are not necessarily complete and, in each
instance, reference is made to the copy of such document filed as an exhibit to
the Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference. For further
information with respect to the Company and the securities offered hereby,
reference is made to the Registration Statement, including the exhibits and
schedules thereto. The Registration Statement and the exhibits and schedules
thereto may be inspected, without charge, and copies may be obtained at
prescribed rates, at the public reference facilities and regional offices
referred to above.
51
<PAGE> 190
DAWSON PRODUCTION SERVICES, INC. AND ACQUISITIONS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Dawson Production Services, Inc.
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets at March 31, 1995 and 1996 and
September 30, 1996
(unaudited)............................................ F-3
Consolidated Statements of Income for the years ended
March 31, 1994, 1995 and 1996 and
the six months ended September 30, 1995 and 1996
(unaudited)............................................ F-4
Consolidated Statements of Shareholders' Equity for the
years ended March 31, 1994, 1995
and 1996 and the six months ended September 30, 1996
(unaudited)............................................ F-5
Consolidated Statements of Cash Flows for the years ended
March 31, 1994, 1995 and 1996
and the six months ended September 30, 1995 and 1996
(unaudited)............................................ F-6
Notes to the Consolidated Financial Statements............ F-7
U.S. Land-Based Well Servicing Operations of Pride Petroleum
Services, Inc.
Annual Financial Statements
Report of Independent Accountants...................... F-19
Combined Balance Sheet as of December 31, 1995 and
1994.................................................. F-20
Combined Statement of Operations and Changes in Owner's
Equity for the years ended December 31, 1995, 1994 and
1993.................................................. F-21
Combined Statement of Cash Flows for the years ended
December 31, 1995, 1994 and 1993...................... F-22
Notes to Combined Financial Statements................. F-23
Interim Financial Statements (Unaudited)
Combined Balance Sheet as of September 30, 1996 and
December 31, 1995..................................... F-31
Combined Statement of Operations for the nine months
ended September 30, 1996 and 1995..................... F-32
Combined Statement of Cash Flows for the nine months
ended September 30, 1996 and 1995..................... F-33
Notes to Unaudited Combined Financial Statements....... F-34
Taylor Acquisition Group
Independent Auditor's Report.............................. F-36
Combined Balance Sheet at December 31, 1994 and 1995 and
June 30, 1996 (unaudited).............................. F-37
Combined Statement of Income (Loss) for the years ended
December 31, 1994 and 1995 and the six months ended
June 30, 1995 and 1996 (unaudited)..................... F-38
Combined Statement of Cash Flows for the years ended
December 31, 1994 and 1995 and
the six months ended June 30, 1995 and 1996
(unaudited)............................................ F-39
Combined Statement of Changes in Stockholder's Equity for
the years ended December 31, 1994 and 1995 and the six
months ended June 30, 1996 (unaudited)................. F-40
Notes to the Financial Statements......................... F-41
Well Solutions, Inc.
Report of Independent Public Accountants.................. F-48
Balance Sheets at March 31, 1994 and 1993................. F-49
Statements of Income for the years ended March 31, 1994,
1993 and 1992.......................................... F-50
Statements of Shareholder's Equity for the years ended
March 31, 1994, 1993 and 1992.......................... F-51
Statements of Cash Flows for the years ended March 31,
1994, 1993 and 1992.................................... F-52
Notes to Financial Statements............................. F-53
</TABLE>
F-1
<PAGE> 191
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Dawson Production Services, Inc.:
We have audited the accompanying consolidated balance sheets of Dawson
Production Services, Inc. and subsidiaries as of March 31, 1995 and 1996, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the years in the three-year period ended March 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dawson
Production Services, Inc. and subsidiaries as of March 31, 1995 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended March 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in fiscal 1994.
KPMG Peat Marwick LLP
San Antonio, Texas
June 11, 1996, except as
to note (14) which is as
of December 23, 1996
F-2
<PAGE> 192
DAWSON PRODUCTION SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
-------------------------- SEPTEMBER 30,
1995 1996 1996
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 2,796,540 $13,863,108 $ 9,364,032
Trade receivables (net of allowance for doubtful
accounts of $348,052, $290,839 and $307,236,
respectively).................................. 8,243,705 8,773,156 13,687,635
Other receivables................................. 200,247 95,202 281,536
Income taxes receivable........................... 294,215 740,768 290,768
Prepaid expenses and other........................ 143,985 215,497 882,996
----------- ----------- -----------
Total current assets...................... 11,678,692 23,687,731 24,506,967
Net property and equipment, substantially all
pledged (notes 4 and 5)........................... 25,320,908 29,114,671 39,209,362
Goodwill and other assets........................... 3,525,787 3,565,555 10,375,613
----------- ----------- -----------
Total assets.............................. $40,525,387 $56,367,957 $74,091,942
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 2,929,186 $ 2,909,390 $ 4,114,105
Accrued liabilities............................... 2,315,621 2,825,926 3,237,185
Current portion of long-term debt (note 4)........ 1,611,289 20,055 9,246,947
Current portion of obligations under capital
leases (note 5)................................ 372,308 1,167,384 1,707,665
----------- ----------- -----------
Total current liabilities................. 7,228,404 6,922,755 18,305,902
----------- ----------- -----------
Long-term debt, net of current portion (note 4)..... 15,477,990 1,530,903 3,130,100
Obligations under capital leases, net of current
portion (note 5).................................. 511,254 2,163,610 1,478,405
Deferred income taxes (note 8)...................... 846,072 56,310 3,244,169
Minority interest................................... 5,353,511 -- --
Mandatorily redeemable Series A preferred stock, no
par value, 80,800 shares issued and outstanding in
1995 (note 3)..................................... 1,010,000 -- --
Shareholders' equity (notes 6 and 7):
Preferred stock, no par value 560,600 shares
authorized, none issued and outstanding........ -- -- --
Common stock, $.01 par value, 20,560,600 shares
authorized, 1,682,827, 6,382,526 and 6,391,126
issued, respectively, and 1,681,610, 6,382,526
and 6,391,126 outstanding, respectively........ 16,828 63,826 63,912
Paid-in capital................................... 6,610,595 41,458,254 41,522,152
Retained earnings................................. 3,543,271 4,314,177 6,489,180
Notes receivable from officers.................... (66,878) (141,878) (141,878)
----------- ----------- -----------
10,103,816 45,694,379 47,933,366
Less treasury common stock, at cost............... (5,660) -- --
----------- ----------- -----------
Total shareholders' equity................ 10,098,156 45,694,379 47,933,366
Commitments and contingencies (note 11).............
----------- ----------- -----------
Total liabilities and shareholders'
equity.................................. $40,525,387 $56,367,957 $74,091,942
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 193
DAWSON PRODUCTION SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MARCH 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................. $27,942,484 $36,004,700 $52,391,307 $25,888,387 $33,811,434
----------- ----------- ----------- ----------- -----------
Costs and expenses:
Operating.............................. 19,936,624 24,240,773 34,319,579 16,875,158 21,893,507
General and administrative............. 3,854,336 5,573,978 8,937,502 4,238,011 5,468,804
Depreciation and amortization.......... 1,706,856 2,607,837 4,396,574 2,016,424 2,875,974
----------- ----------- ----------- ----------- -----------
Total costs and expenses....... 25,497,816 32,422,588 47,653,655 23,129,593 30,238,285
----------- ----------- ----------- ----------- -----------
Operating income............... 2,444,668 3,582,112 4,737,652 2,758,794 3,573,149
----------- ----------- ----------- ----------- -----------
Other income and expenses:
Interest expense....................... 281,977 789,276 1,847,678 952,872 296,022
Other income, net...................... (60,530) (40,939) (129,494) (27,207) (251,820)
----------- ----------- ----------- ----------- -----------
Total other income and
expenses..................... 221,447 748,337 1,718,184 925,665 44,202
----------- ----------- ----------- ----------- -----------
Income before minority
interest, income taxes,
extraordinary item and
cumulative effect of change
in accounting principle...... 2,223,221 2,833,775 3,019,468 1,833,129 3,528,947
Minority interest in consolidated
subsidiary............................. 901,707 1,091,717 937,164 787,001 --
----------- ----------- ----------- ----------- -----------
Income before income taxes, extraordinary
item and cumulative effect of change in
accounting principle................... 1,321,514 1,742,058 2,082,304 1,046,128 3,528,947
Provision for income taxes (note 8): 525,281 680,822 709,306 398,000 1,353,944
----------- ----------- ----------- ----------- -----------
Income before extraordinary item and
cumulative effect of change in
accounting principle................... 796,233 1,061,236 1,372,998 648,128 2,175,003
Extraordinary item....................... -- -- (513,819) -- --
Cumulative effect of change in accounting
principle.............................. (92,202) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income............................... 704,031 1,061,236 859,179 648,128 2,175,003
----------- ----------- ----------- ----------- -----------
Preferred stock dividends................ 101,007 101,007 88,273 50,086 --
----------- ----------- ----------- ----------- -----------
Net income applicable to common stock.... $ 603,024 $ 960,229 $ 770,906 $ 598,042 $ 2,175,003
=========== =========== =========== =========== ===========
Earnings per common share:
Primary:
Income before extraordinary item and
cumulative effect of change in
accounting principle................ $ 0.34 $ 0.45 $ 0.44 $ 0.25 $ 0.33
Extraordinary item..................... -- -- (0.17) -- --
Cumulative effect of change in
accounting principle................ (0.05) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income.......................... $ 0.29 $ 0.45 $ 0.27 $ 0.25 $ 0.33
=========== =========== =========== =========== ===========
Average number of shares outstanding... 2,052,168 2,155,380 2,931,234 2,384,359 6,510,428
=========== =========== =========== =========== ===========
Fully diluted:
Income before extraordinary item and
cumulative effect of change in
accounting principle................ $ 0.33 $ 0.42 $ 0.43 $ 0.23 $ 0.33
Extraordinary item..................... -- -- (0.16) -- --
Cumulative effect of change in
accounting principle................ (0.04) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income............................. $ 0.29 $ 0.42 $ 0.27 $ 0.23 $ 0.33
=========== =========== =========== =========== ===========
Average number of shares outstanding... 2,450,791 2,648,740 3,207,622 3,095,826 6,527,796
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 194
DAWSON PRODUCTION SERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK NOTES TOTAL
------------------- TREASURY STOCK RECEIVABLE SHARE-
ISSUED PAID-IN ------------------ RETAINED FROM HOLDERS'
SHARES AMOUNTS CAPITAL SHARES AMOUNTS EARNINGS OFFICERS EQUITY
--------- ------- ----------- ------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT MARCH 31, 1993...... 1,298,548 $12,985 $ 4,093,473 48,732 $(76,994) $1,980,018 $ -- $ 6,009,482
Issuance of common stock in
lieu of interest payments... 2,150 22 7,478 -- -- -- 7,500
Dividends on preferred stock,
paid in common stock........ 7,220 72 25,113 -- -- (25,185) -- --
Dividends on preferred stock,
paid in cash................ -- -- -- -- -- (75,822) -- (75,822)
Conversion of subordinated
convertible note into common
stock....................... 18,430 184 74,816 -- -- -- -- 75,000
Net income.............. -- -- -- -- -- 704,031 -- 704,031
--------- ------- ----------- ------- -------- ---------- --------- -----------
BALANCES AT MARCH 31, 1994...... 1,326,348 13,263 4,200,880 48,732 (76,994) 2,583,042 -- 6,720,191
Purchase of treasury stock.... -- -- -- 16,172 (72,264) -- -- (72,264)
Sale of common stock.......... 282,536 2,826 2,248,576 (63,687) 143,598 -- -- 2,395,000
Dividends on preferred stock,
paid in cash................ -- -- -- -- -- (101,007) -- (101,007)
Exercise of common stock
warrants.................... 57,818 578 86,300 -- -- -- (66,878) 20,000
Conversion of subordinated
convertible note into common
stock....................... 16,125 161 74,839 -- -- -- -- 75,000
Net income.............. -- -- -- -- -- 1,061,236 -- 1,061,236
--------- ------- ----------- ------- -------- ---------- --------- -----------
BALANCES AT MARCH 31, 1995...... 1,682,827 16,828 6,610,595 1,217 (5,660) 3,543,271 (66,878) 10,098,156
Dividends on preferred stock,
paid in cash................ -- -- -- -- -- (88,273) -- (88,273)
Common stock issued --
Initial public offering
(note 6).................. 2,616,202 26,163 23,495,829 -- -- -- -- 23,521,992
Conversion of subordinated
convertible note.......... 371,232 3,712 2,546,288 -- -- -- -- 2,550,000
Issuance of common stock for
minority interest......... 1,329,495 13,295 7,686,705 -- -- -- -- 7,700,000
Conversion of preferred
stock to common stock..... 347,440 3,474 1,006,526 -- -- -- -- 1,010,000
Exercise of stock options..... 36,547 366 75,633 -- -- -- (75,000) 999
Tax benefit realized from
stock options............... -- -- 42,326 -- -- -- -- 42,326
Retirement of treasury
stock....................... (1,217) (12) (5,648) (1,217) 5,660 -- -- --
Net income.............. -- -- -- -- -- 859,179 -- 859,179
--------- ------- ----------- ------- -------- ---------- --------- -----------
BALANCES AT MARCH 31, 1996...... 6,382,526 63,826 41,458,254 -- -- 4,314,177 (141,878) 45,694,379
(the following information is
unaudited)
Exercise of stock options..... 8,600 86 63,898 -- -- -- -- 63,984
Net income.............. -- -- -- -- -- 2,175,003 -- 2,175,003
--------- ------- ----------- ------- -------- ---------- --------- -----------
BALANCES AT SEPTEMBER 30,
1996.......................... 6,391,126 $63,912 $41,522,152 -- -- $6,489,180 $(141,878) $47,933,366
========= ======= =========== ======= ======== ========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 195
DAWSON PRODUCTION SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MARCH 31, SEPTEMBER 30,
----------------------------------------- --------------------------
1994 1995 1996 1995 1996
----------- ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 704,031 $ 1,061,236 $ 859,179 $ 648,128 $ 2,175,003
Adjustments to reconcile net income to net
cash provided by operating activities:
Minority interest in net income of
subsidiary company...................... 901,707 1,091,717 937,164 787,001 --
Depreciation and amortization............. 1,706,856 2,607,837 4,396,574 2,016,424 2,875,974
Allowance for doubtful accounts........... 97,088 157,921 (57,213) (48,088) 53,603
Common stock issued in lieu of interest
payments................................ 7,500 -- -- -- --
Loss (gain) on sale of assets............. (31,762) (22,113) 95,351 (19,176) 81,826
Increase in deferred income taxes......... 256,037 88,740 636,665 26,740 978,192
Decrease (increase) in receivables........ 286,786 (4,338,722) (813,746) (509,666) (721,886)
Decrease (increase) in prepaid expenses
and other............................... 57,571 (11,802) (71,512) (604,779) (463,526)
Decrease (increase) in other assets....... (50,202) (129,336) 170,390 68,092 10,014
Increase (decrease) in accounts payable... 339,887 1,823,552 (19,796) 184,904 378,408
Increase (decrease) in income tax
payable................................. 288,671 (288,671) -- (184,375) (17,980)
Increase in accrued expenses.............. 433,988 1,000,374 510,305 (38,762) (506,176)
----------- ------------ ------------ ----------- ------------
Net cash provided by operating
activities............................ 4,998,158 3,040,733 6,643,361 2,326,443 4,843,452
----------- ------------ ------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions.................................. -- (16,597,550) (125,000) -- (12,958,413)
Additions to property and equipment........... (1,235,963) (2,567,230) (4,522,765) (2,689,532) (2,236,135)
Proceeds from sales of property and
equipment................................... 160,227 65,644 281,841 195,578 65,428
----------- ------------ ------------ ----------- ------------
Net cash used in investing activities... (1,075,736) (19,099,136) (4,365,924) (2,493,954) (15,129,120)
----------- ------------ ------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings.......................... 781,153 16,156,053 1,042,677 170,100 7,261,330
Payments on short-term borrowings............. (965,297) -- -- -- --
Payments on long-term debt.................... (1,058,147) (2,027,649) (14,058,284) (781,757) (462,451)
Capital lease payments........................ (700,673) (593,838) (1,348,564) (320,277) (1,076,271)
Sale of common stock.......................... -- 2,395,000 23,521,992 -- --
Exercise of common stock options and
warrants.................................... -- 20,000 999 -- 63,984
Tax benefit realized from stock options....... -- -- 42,326 -- --
Cost of treasury stock purchased.............. -- (72,264) -- -- --
Cash dividends on preferred stock............. (75,822) (101,007) (88,273) (50,086) --
Investment in subsidiary by minority owner.... -- 1,404,000 -- -- --
Subsidiary distributions to minority owner.... (871,442) (497,026) (323,742) (131,935) --
----------- ------------ ------------ ----------- ------------
Net cash used in financing activities... (2,890,228) 16,683,269 8,789,131 (1,113,955) 5,786,592
----------- ------------ ------------ ----------- ------------
Net increase (decrease) in cash......... 1,032,194 624,866 11,066,568 (1,281,466) (4,499,076)
Cash and cash equivalents at the beginning of
the period.................................. 1,139,480 2,171,674 2,796,540 2,796,540 13,863,108
----------- ------------ ------------ ----------- ------------
Cash and cash equivalents at the end of the
period...................................... $ 2,171,674 $ 2,796,540 $ 13,863,108 $ 1,515,074 $ 9,364,032
=========== ============ ============ =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for:
Interest.................................... $ 275,461 $ 708,234 $ 1,928,993 $ 1,058,823 $ 261,681
Income taxes................................ 100,000 967,208 912,628 640,000 214,000
SUPPLEMENTAL DISCLOSURES OF NON-CASH
TRANSACTIONS:
Assets acquired under capital leases.......... 844,116 645,972 3,823,282 820,292 904,547
Conversion of preferred stock to common
stock....................................... -- -- 1,010,000 75,000 --
Conversion of long-term debt to common
stock....................................... 75,000 75,000 2,550,000 -- --
Issuance of common stock for acquisition of
minority interest........................... -- -- 7,700,000 -- --
Issuance of notes payable for acquisition of
business.................................... -- 1,500,000 -- -- 1,750,000
Issuance of notes receivable for exercise of
stock options............................... -- 66,878 75,000 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 196
DAWSON PRODUCTION SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Dawson Production Services, Inc. (the Company) is engaged in the business
of providing workover rig services, liquid services and production services in
Texas and Louisiana. The Company's primary customers are oil and gas well
operators.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated. (See note 2).
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. While it is believed that such estimates are reasonable,
actual results could differ from those estimates.
CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and short-term
investments with an original maturity of three months or less from the date of
purchase are considered to be cash equivalents.
REVENUE RECOGNITION
The Company generally recognizes revenue when services are rendered.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major renewals and improvements
are capitalized and depreciated over the respective asset's useful life.
Expenditures for repairs and maintenance are charged to expense as incurred.
Property and equipment are depreciated over their estimated useful lives on
the straight-line method as follows:
<TABLE>
<CAPTION>
ESTIMATED
LIFE (YEARS)
------------
<S> <C>
Buildings................................................... 20
Well servicing equipment.................................... 5-12
Vehicles.................................................... 3-5
Office furniture and other equipment........................ 5-12
</TABLE>
INCOME TAXES
Effective April 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
SFAS 109 requires a change from the deferred method of accounting for income
taxes of APB Opinion 11 to the asset and liability method of accounting for
income taxes. Under the asset and liability method of SFAS 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the effect
on deferred
F-7
<PAGE> 197
DAWSON PRODUCTION SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. In connection with the adoption of
SFAS 109, the Company recorded an adjustment to income of $92,202 which
represents the net increase of the deferred tax liability at April 1, 1993. Such
adjustment has been reflected in the 1994 statement of income as the cumulative
effect of change in accounting principle.
INTANGIBLE AND OTHER ASSETS
Goodwill represents the excess purchase price over fair value of net assets
acquired and is amortized on a straight-line basis over twenty years from the
date of acquisition. Other assets consist principally of loan costs and are
amortized on a straight-line basis over the term of the loan.
Intangible assets are reviewed for impairment whenever events or
circumstances provide evidence that suggests that the carrying amount of the
intangible asset may not be recoverable. The Company assesses the recoverability
of the intangible asset by determining whether the carrying amount of the
intangible asset can be recovered through projected undiscounted future cash
flows over the remaining amortization period.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of short-term,
variable rate items or recently issued debt instruments for which management
believes fair value approximates carrying value.
TREASURY STOCK
Treasury stock is recorded under the cost method.
EARNINGS PER SHARE
Primary earnings per share is computed by deducting preferred dividends
from net income in order to determine net income attributable to common
shareholders. This amount is then divided by the weighted average number of
common shares outstanding and common stock equivalents.
Earnings per share assuming full dilution is determined by dividing net
income plus tax effected convertible debt interest by the weighted average
number of common shares outstanding during the year after giving effect for
common stock equivalents arising from stock options and for convertible debt or
preferred stock assumed converted to common stock.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, stock and stock options issued during the twelve months immediately
preceding the Company's initial public offering filing date including those
issued in connection with the minority interest acquisition (see note 2) have
been included in the calculation of common and common equivalent shares using
the treasury stock method and the anticipated public offering price as if they
were outstanding for all periods. Common stock equivalents resulting from the
conversion or exercise of convertible debt or preferred shares and other stock
options are excluded when their result is anti-dilutive.
RECLASSIFICATION
Certain amounts, as previously presented, have been reclassified to conform
with the current year financial statement presentation.
F-8
<PAGE> 198
DAWSON PRODUCTION SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
Accounting for Asset Impairment
During March 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The Company adopted Statement 121
effective April 1, 1996. Statement 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. This new pronouncement had
no material effect on the financial statements upon adoption.
Accounting for Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which sets forth alternative accounting and disclosure
requirements for stock-based compensation arrangements. SFAS 123 does not
rescind the existing accounting for employee stock-based compensation under APB
Opinion No. 25. Companies may continue to follow the current accounting to
measure and recognize employee stock-based compensation; however, SFAS 123
requires disclosure of pro forma net income and earnings per share that would
have been reported under the "fair value" based recognition provisions of SFAS
123. The Company has elected to continue to follow the provisions of APB Opinion
No. 25 for employee stock-based compensation and will disclose the pro forma
information required under SFAS 123 beginning with its consolidated financial
statements for the year ending March 31, 1997.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments
and trade receivables. The Company places its temporary cash investments in U.S.
Government securities and in other high quality financial instruments. By policy
the Company limits the amount of credit exposure to any one financial
institution or issuer. The Company's customer base consists primarily of
independent oil and natural gas producers. During the year ended March 31, 1994
no single customer accounted for 10% or more of the Company's total revenues.
During the years ended March 31, 1995 and 1996, sales to the Company's largest
customer accounted for approximately 16% and 24%, respectively, of the Company's
total operating revenues.
UNAUDITED INFORMATION
The consolidated financial statements as of September 30, 1996 and for the
six months ended September 30, 1996 and 1995, and related footnote disclosures
to the extent they relate to such periods, have been prepared in accordance with
generally accepted accounting principles for interim financial information and
are unaudited. Accordingly, such data does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the six months ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for the year ending March 31, 1997.
(2) ACQUISITIONS
WELL SOLUTIONS, INC.
On November 30, 1994, the Company acquired substantially all of the
property and equipment of Well Solutions, Inc. (Well Solutions), a company
engaged in providing oilfield services, for an aggregate purchase price of
$18,097,550, consisting of $15,895,733 in cash, a convertible note payable of
$1,500,000 and closing costs of $701,817. The acquisition has been accounted for
as a purchase and, accordingly, the operating results
F-9
<PAGE> 199
DAWSON PRODUCTION SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of Well Solutions have been included in the Company's consolidated statements of
income since the date of acquisition. The excess of the aggregate purchase price
over the fair market value of the net assets acquired was recognized as goodwill
and is being amortized over 20 years. The fair value of assets acquired,
including goodwill of $2,451,818, was $18,534,355 and liabilities assumed
totaled $436,805. The funds used to acquire Well Solutions were provided by
long-term borrowings, proceeds of sales of common stock and subordinated debt
and cash from operations.
TAYLOR COMPANIES, INC.
Effective July 29, 1996, the Company acquired all of the issued and
outstanding stock of Taylor Companies, Inc. for an aggregate purchase price of
$12,750,000, consisting of $11,000,000 in cash and a $1,750,000 subordinated
promissory note payable to the selling shareholders. Goodwill recognized on this
transaction amounted to approximately $6,690,000, which is being amortized over
a twenty-year period. The Company reported this acquisition and related pro
forma effects on a current report Form 8-K.
Assuming the purchase of Taylor Companies, Inc. had been consummated as of
the beginning of the fiscal year 1996, unaudited pro forma operating results of
the Company would be as follows:
<TABLE>
<S> <C>
Revenues.................................................... $69,104,000
Net income (loss)........................................... $ (363,000)
Primary earnings (loss) per share........................... $ (0.15)
Fully diluted earnings (loss) per share..................... $ (0.15)
</TABLE>
The pro forma results of operations are not necessarily indicative of the
actual results of operations that would have occurred had the purchase been made
at the beginning of the respective period.
OTHER ACQUISITIONS:
Effective November 1, 1995, the Company acquired the 39% minority interest
in the Company's subsidiary, Dawson WellTech, L.C., from WellTech, Inc. in
exchange for the issuance to WellTech, Inc. of 1,329,495 shares of common stock
for a total purchase price of $7,700,000 based on an independent appraisal of
the common stock. Goodwill recognized on this transaction amounted to $384,847
and is being amortized over 20 years.
Effective March 1, 1996, the Company acquired a portion of the assets of a
small company in Giddings, Texas for an aggregate purchase price of
approximately $1,248,000, consisting of $125,000 in cash and $1,123,000 in
capital leases and a note payable. Goodwill recognized on this transaction
amounted to $97,000 and is being amortized over 20 years.
In April 1996, the Company acquired the assets of two small production
testing companies in Louisiana. The aggregate purchase price was approximately
$673,000. Goodwill and a non-compete agreement were recognized on these
transactions which amounted to approximately $111,000. These items are being
amortized over 20 and five year periods, respectively.
In May 1996, the Company acquired the Texas-based well servicing division
of a non-affiliated company. The aggregate purchase price was $779,000.
In July 1996, the Company acquired the assets of a trucking company in
Louisiana. The aggregate purchase price was approximately $400,000. Goodwill
recognized on the transaction amounted to $50,000, which is being amortized over
a 20-year period.
The acquisitions have been accounted for as purchases and, accordingly, the
operating results have been included in the Company's consolidated statements of
income since the dates of acquisition. Excluding the
F-10
<PAGE> 200
DAWSON PRODUCTION SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Taylor acquisition, the effect on results of operations would not have been
material if such acquisitions had occurred at the beginning of the year.
(3) MANDATORILY REDEEMABLE PREFERRED STOCK
In October 1990, the Company issued 80,800 shares of 10% cumulative
convertible preferred stock for a total price of $1,010,000. Each preferred
shareholder was entitled to receive, in preference to common shareholders,
annual dividends in the amount of $1.25 per share, payable quarterly. At the
discretion of the Company, the dividends could have been declared in either cash
or common stock valued at $3.49 a share. Dividends were cumulative and accrued
from the date of the stock issuance. The Company declared dividends on the
preferred stock in the amount of $101,007 in the years ended March 31, 1994 and
1995 and $88,273 in the year ended March 31, 1996.
Holders of the preferred stock elected to convert 20,200 shares of such
stock into 86,860 shares of common stock, effective October 18, 1995. Pursuant
to a November 1, 1995 Agreement for the Conversion of Securities (the
"Conversion Agreement"), the remaining 60,600 shares of preferred stock
converted into 260,580 shares of common stock effective February 19, 1996.
(4) NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------------ SEPTEMBER 30,
1995 1996 1996
----------- ---------- -------------
<S> <C> <C> <C>
Note payable to a bank with a fixed interest rate of
10.81%. Principal payments of $154,762 plus interest
are due monthly, with a balloon payment at maturity on
November 28, 1999. Collateralized by substantially all
of the Company's property, equipment and
receivables............................................ $13,000,000 $ -- $ --
Promissory note payable to a bank bearing interest at
7.53% per annum. Interest is due monthly; principal is
due February 1997...................................... -- -- 7,000,000
Subordinated convertible notes bearing interest at 10%.
Interest is due quarterly, payable in cash or common
stock at $6.98 per share at the Company's option;
principal is due December 1, 1999. Convertible into
344,000 shares of the Company's common stock........... 2,400,000 -- --
Convertible debenture bearing interest at 8%. Interest is
due quarterly; principal is due November 30, 1999...... 1,500,000 1,500,000 1,500,000
Subordinated promissory note payable to a former Taylor
shareholder bearing interest at 8.0% per annum.
Interest is due quarterly; principal is due in
quarterly installments of $83,333...................... -- -- 1,750,000
Subordinated convertible note bearing interest at 10%.
Interest due quarterly, payable in cash or common stock
at $5.23 per share at the Company's option; principal
is due June 27, 1997................................... 150,000 -- --
Other notes payable to lenders and financing companies
bearing interest at rates ranging from 6% to 10% due in
monthly installments. Secured by various assets of the
Company................................................ 39,279 50,958 2,127,047
----------- ---------- -----------
Total long-term debt..................................... 17,089,279 1,550,958 12,377,047
Less current portion..................................... 1,611,289 20,055 9,246,947
----------- ---------- -----------
Long-term debt, net of current portion................... $15,477,990 $1,530,903 $ 3,130,100
=========== ========== ===========
</TABLE>
F-11
<PAGE> 201
DAWSON PRODUCTION SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In July 1996, to finance a portion of the Taylor acquisition, the Company
obtained a loan from a bank in the amount of $7.0 million. The promissory note
carries an annual interest rate of 7.75% and has a maturity date of March 31,
1997. In September 1996, the Company obtained a take-out commitment for a term
loan in the amount of $7.0 million to replace the promissory note. The Company
subsequently decided to not take advantage of the take-out commitment, and
accordingly, the promissory note has been included as current portion of
long-term debt at September 30, 1996.
In September 1996, the Company signed a commitment letter for an
acquisition line of credit in the amount of up to $20.0 million and a working
capital line of credit with a maximum availability of the lesser of (i) $10.0
million or (ii) 80% of eligible accounts receivable that have been outstanding
less than 90 days. Borrowings under the acquisition line of credit would mature
seven years from the date of any such borrowings and would bear interest at a
per annum rate equal to the lesser of: (i) the prime rate of interest of the
bank as adjusted from time to time or (ii) a varying percentage ranging from 2%
to 3%, based on the total funded debt to cash flow ratio, over the 180-day LIBOR
rate of interest. From the third year until maturity, the acquisition line of
credit would be secured by assets of the Company with a loan to collateral value
ratio of not less than 70%. Borrowings under the working capital line of credit
would mature two years from the date of any such borrowings and would bear
interest at a per annum rate equal to the lesser of: (i) the prime rate of
interest of the bank as adjusted from time to time or (ii) a varying percentage
rate ranging from 1.75% to 2.75%, based on the total funded debt to cash flow
ratio, over the Company's choice of the 30-day, 90-day or 180-day LIBOR rate of
interest. The working capital line of credit would be secured by first lien
security interest on all the Company's accounts receivable and inventory. Under
terms of the commitment, the Company must maintain minimum working capital,
tangible net worth, current ratios and debt to capital ratios.
The Company has requested from its bank a modification to the commitment
letter to increase the maximum availability of funds under the working capital
line of credit to the lesser of (i) $50.0 million or (ii) 80% of eligible
accounts receivable that have been outstanding less than 90 days. The Company
expects to receive a commitment from its bank to such increase.
In March 1996, the Company elected to prepay the $13,000,000 note payable
to a bank. An extraordinary charge of $513,819 (net of income tax benefit of
$264,495) was incurred as a result of the early extinguishment of the note
payable.
Scheduled maturities of principal for long-term debt based on balances
outstanding at March 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDING
MARCH 31, TOTAL
- ------------ ----------
<S> <C> <C>
1997............................................................ $ 20,055
1998............................................................ 21,292
1999............................................................ 9,611
2000............................................................ 1,500,000
----------
$1,550,958
==========
</TABLE>
The Company has a revolving line of credit with a bank in an amount not to
exceed $4,000,000, secured by the Company's receivables, expiring March 31,
1997. The Company has not drawn against the line of credit as of March 31, 1996
but has established a letter of credit in favor of its insurance carrier in the
amounts of $225,000 related to its workers compensation insurance program.
Borrowings against the line bear interest at the prime lending rate and there is
a commitment fee of 0.5% on unfunded amounts. The revolving line of credit
agreement requires the Company to maintain various loan covenants.
F-12
<PAGE> 202
DAWSON PRODUCTION SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the year ended March 31, 1994, 2,150 shares of common stock valued
at $7,500 were issued as payment of the interest on the $150,000 outstanding
under a $300,000 subordinated convertible note payable to a preferred
shareholder. The $150,000 subordinated note is convertible into common stock of
the Company beginning in August 1992 through August 1996 at conversion rates
varying from $4.07 to $5.81 per share. During each of fiscal 1994 and 1995,
$75,000 in principal amount of subordinated notes were converted into 18,430 and
16,125 shares of common stock. During fiscal 1996, $150,000 in principal amount
of subordinated notes were converted into 27,232 shares of common stock.
Also, pursuant to the Conversion Agreement, $2.4 million of the Company's
subordinated debt converted into common stock at the rate of one share of common
stock for each $6.98 in principal amount of subordinated debt effective February
19, 1996.
(5) LEASES AND LEASE COMMITMENTS
The Company leases vehicles and office equipment under capital leases.
Total assets recorded under capital leases at March 31, 1995 and 1996 are
$2,283,951 and $5,197,835, respectively. Amortization expense related to assets
held under capital lease for the years ended March 31, 1994, 1995 and 1996 was
$319,686, $357,363 and $243,558, respectively.
The Company leases certain of its facilities under operating leases. Lease
terms generally range from one to five years. Rent expense for the years ended
March 31, 1994, 1995 and 1996 was approximately $144,830, $174,175 and $251,556,
respectively.
Future minimum lease payments as of March 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
MARCH 31, LEASES LEASES
----------- ---------- ---------
<S> <C> <C>
1997........................................................ $1,406,027 $163,612
1998........................................................ 1,096,233 150,412
1999........................................................ 773,466 95,562
2000........................................................ 429,837 80,262
2001........................................................ 179,986 13,377
---------- --------
Total minimum lease payments................................ $3,885,549 $503,225
========
Less amounts representing interest.......................... (554,555)
----------
Present value of minimum lease payments..................... $3,330,994
==========
</TABLE>
(6) SHAREHOLDERS' EQUITY
(a) Equity Offering
In March 1996, the Company completed an initial public offering (the
"Offering") of 2,616,202 shares (net of 48 fractional shares paid in cash in
connection with the Recapitalization and Stock Split referred to below) of its
common stock for the purpose of raising funds to acquire additional businesses
and to retire debt. Net proceeds to the Company from the Offering, after
deduction of associated expenses, were approximately $23,522,000.
(b) Recapitalization and Stock Split
Effective January 17, 1996, the shareholders approved an amendment to the
Articles of Incorporation which, among other actions, increased the authorized
shares of all classes of capital stock to 20,560,600 and changed the par value
of the common stock to $.01 per share. Share and per share amounts for all
periods presented have been adjusted to reflect these changes. The Board of
Directors approved a 4.3-for-one stock
F-13
<PAGE> 203
DAWSON PRODUCTION SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
split of the common stock which occurred on March 1, 1996. Share and per share
amounts for all periods presented have been adjusted to reflect this stock
split.
(c) Treasury Stock
During fiscal 1996, the Company retired all of the common shares held in
treasury. The cost of acquired shares in excess of par value has been charged to
additional paid-in capital.
(7) STOCK WARRANTS AND OPTIONS
In fiscal 1995, 118,250 common stock warrants were issued by the Company to
several officers and directors of the Company. The warrants have an exercise
price of $4.65 per share. No warrants were exercised or granted during fiscal
1994. During fiscal 1995 and 1996, employees and officers of the Company
exercised their warrants to purchase 40,618 and 36,546 shares, respectively, of
common stock in exchange for notes payable to the Company of $66,878 and
$75,000. The notes are secured by the shares of common stock issued and the
personal guarantees of the officers receiving the stock.
In October 1995, the Company adopted the 1995 Incentive Plan (the "1995
Plan"). Under the 1995 Plan, incentive options, non-statutory options,
restricted stock awards, and/or stock appreciation rights may be granted to key
employees, non-employee directors and consultants to purchase the Company's
common stock at prices not less than the fair market value at the time of grant,
which become exercisable as described in the respective Award Agreement.
Pursuant to the 1995 Plan, an aggregate of 537,500 shares of the Company's
common stock is available for issuance upon the exercise of such options, awards
and rights, which may be granted over a ten-year period. On October 6, 1995,
options to purchase 133,300 shares of common stock at $7.44 per share were
granted under the 1995 Plan.
The following table summarizes the activity of stock options and warrants
granted by the Company:
<TABLE>
<CAPTION>
WARRANT PRICE
SHARES PER SHARE
------ -------------
<S> <C> <C>
OUTSTANDING, MARCH 31, 1994................................ 94,364 $.23 to $2.33
Granted.................................................. 118,250 $4.65
Exercised................................................ (57,818) $1.16 to $1.65
Cancelled................................................ -- --
------- --------------
OUTSTANDING, MARCH 31, 1995................................ 154,796 $.23 to $4.65
Granted.................................................. 133,300 $7.44
Exercised................................................ (36,546) $.23 to $2.33
Cancelled................................................ (10,750) $4.55
-------
OUTSTANDING, MARCH 31, 1996................................ 240,800 $4.65 to $7.44
=======
EXERCISABLE AT END OF YEAR................................. 84,710
=======
</TABLE>
(8) INCOME TAXES
The components of income tax expense applicable to continuing operations
are as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Current............................................ $454,989 $592,082 $ --
Deferred........................................... 70,292 88,740 709,306
-------- -------- --------
$525,281 $680,822 $709,306
======== ======== ========
</TABLE>
F-14
<PAGE> 204
DAWSON PRODUCTION SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As discussed in note 1, the Company adopted SFAS 109 effective April 1,
1993. Income taxes for financial reporting purposes differs from the amount
computed by applying the statutory federal income tax rate of 34% to income
before income taxes as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Expected tax expense at U.S. statutory rate........ $449,315 $592,300 $707,984
Expenses not deductible............................ 15,858 11,220 35,501
State income taxes, net of federal effect.......... 45,663 47,190 (37,116)
Other.............................................. 14,445 30,112 2,937
-------- -------- --------
Provision for income taxes......................... $525,281 $680,822 $709,306
======== ======== ========
</TABLE>
The extraordinary loss of $513,819 in 1996 is net of deferred tax benefits
of $264,495.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at March 31,
1995 and 1996 are presented below:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for uncollectible accounts receivable........... $ 71,020 $ 109,065
State deferred income taxes............................... 55,729 --
Alternative minimum tax credit carryforwards.............. 53,322 435,455
Reserve for worker's compensation......................... -- 347,966
Accrued bonuses........................................... -- 195,110
Net operating loss carryforwards.......................... -- 1,119,522
Other..................................................... 54,309 12,456
---------- ----------
Total gross deferred tax assets................... 234,380 2,219,574
---------- ----------
Deferred tax liabilities:
Property and equipment...................................... 649,181 2,275,884
Investment in Dawson WellTech, L.C. ........................ 431,271 --
---------- ----------
Total gross deferred tax liabilities.............. 1,080,452 2,275,884
---------- ----------
Net deferred tax liability........................ $ 846,072 $ 56,310
========== ==========
</TABLE>
The Company anticipates the reversal of existing taxable temporary
differences will provide sufficient taxable income to realize the benefits of
its deferred tax assets.
For the year ended March 31, 1996, a decrease in deferred income tax
expense resulted primarily from the purchase of the remaining 39% interest in
the Company's majority owned subsidiary, Dawson WellTech, L.C. (note 2), a
reduction in deferred tax liabilities occurred of approximately $1,400,000 as a
result of the differences in basis of assets for financial reporting and income
tax purposes.
At March 31, 1995 and 1996, the Company had $53,322 and $435,455 of
alternative minimum tax credit carryforwards available to reduce regular Federal
income taxes which have no expiration date. The Company also has a tax net
operating loss carryforward of approximately $3,000,000 for federal income tax
purposes which expires in 2010 and 2011. Changes in ownership, as defined by
section 382 of the Internal Revenue Code, will limit the utilization of net
operating loss carryforwards to $2,000,000 per year.
F-15
<PAGE> 205
DAWSON PRODUCTION SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) RELATED PARTY TRANSACTIONS
The Company retains a company owned by a member of the Board of Directors
to provide consulting services and makes payments to that company upon
completion of various financing and acquisition transactions. Payments for fees
and expenses for the years ended March 31, 1994, 1995 and 1996 were $46,466,
$147,916 and $47,475, respectively. The payment for the year ended March 31,
1995 includes $122,500 paid as a finder's fee by an investment banking firm from
the fee it received from the Company in connection with an acquisition.
(10) EMPLOYEE BENEFIT PLANS
The Company has a welfare benefit plan (the "Plan") to provide medical
benefits for eligible employees and their dependents. Contributions to the Plan
are made by the Company and covered employees. The Plan may be terminated at the
discretion of the Company. Contributions to the Plan in the amounts of $571,387
and $686,949 were made in fiscal 1995 and 1996, respectively.
In fiscal 1993, the Company established a 401(k) savings plan. Eligible
employees can make contributions to the plan. The Company may, at its option,
match a portion of the contributions made by the employees. The Company matched
50% of employee contributions up to a limit of $500 per employee in fiscal 1994,
resulting in total payments of $50,140, which amounts were paid in fiscal 1995.
The Company did not match employee contributions made in fiscal 1995 or fiscal
1996.
(11) COMMITMENTS AND CONTINGENCIES
Under the Company's worker's compensation insurance program, the Company
pays the first $300,000 of all claims with no aggregate limit in any one year.
Provision for claims under the program has been made in the financial statements
which represent the expected future payments based on the estimated ultimate
costs for incidents incurred through the end of each period. The insurance
carrier required the Company to make a deposit of $147,663. The deposit has been
included in other assets in the accompanying balance sheet. In addition, the
Company has established a letter of credit in favor of its respective insurance
carriers (note 4) and has entered into an agreement with an insurance carrier
for the guarantee of deductible reimbursement. The amount of the guarantee for
the year ended March 31, 1996 was $500,000.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
F-16
<PAGE> 206
DAWSON PRODUCTION SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) SUPPLEMENTARY BALANCE SHEET DATA
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1995 1996
----------- ------------
<S> <C> <C>
Prepaid expenses and other:
Prepaid expenses.......................................... $ 22,479 $ 108,957
Other current assets...................................... 121,506 106,540
----------- ------------
Total prepaids and other assets................... $ 143,985 $ 215,497
=========== ============
Property and equipment:
Land...................................................... $ 80,000 $ 143,228
Buildings................................................. 814,508 1,087,308
Well servicing equipment.................................. 28,266,102 31,946,106
Automobiles, trucks and other vehicles.................... 5,092,053 8,519,707
Office furniture and other equipment...................... 269,906 354,077
----------- ------------
$34,522,569 $ 42,050,426
Less accumulated depreciation and depletion............... (9,201,661) (12,935,755)
----------- ------------
Net property and equipment........................ $25,320,908 $ 29,114,671
=========== ============
Goodwill and other assets:
Goodwill (net of accumulated amortization of $120,274 and
$216,716).............................................. $ 2,484,280 $ 2,059,696
----------- ------------
Other assets (net of accumulated amortization of $142,065
and
$248,392).............................................. 663,955 1,107,224
Deposits and notes receivable............................. 377,552 398,635
----------- ------------
$ 3,525,787 $ 3,565,555
=========== ============
Accrued liabilities:
Accrued payroll........................................... $ 603,914 $ 839,446
Accrued insurance......................................... 808,941 927,911
Other accrued expenses.................................... 902,766 1,058,569
----------- ------------
$ 2,315,621 $ 2,825,926
=========== ============
</TABLE>
(13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summarized quarterly financial data for 1996 are as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER(a)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues............................ $12,647,883 $13,240,504 $13,058,459 $12,444,461
Operating income.................... 1,338,895 1,419,899 921,093 1,057,765
Net income (loss)................... 326,146 321,982 211,756 (705)(a)
Earnings per share -- primary....... 0.12 0.12 0.06 (0.01)(a)
Earnings per share -- fully
diluted........................... 0.12 0.12 0.06 (0.01)(a)
</TABLE>
- ---------------
(a) See discussion at note 4 regarding extraordinary item.
F-17
<PAGE> 207
DAWSON PRODUCTION SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) RECENT DEVELOPMENTS -- ACQUISITIONS
On November 1, 1996, Dawson signed a letter of intent to acquire the
oilfield service assets of Mobley Environmental Services, Inc. for $5,500,000.
These assets primarily relate to liquid services operations. Pending fulfillment
of certain conditions, the Company expects this acquisition to close during the
quarter ending March 31, 1997.
On December 23, 1996, the Company entered into an Asset Purchase Agreement
pursuant to which the Company will acquire substantially all of Pride's U.S.
land-based well servicing assets for approximately $135,900,000 in cash. The
acquisition is expected to be financed through public offerings of senior
subordinated notes and common stock. The Company also expects the acquisition to
close during the quarter ending March 31, 1997.
F-18
<PAGE> 208
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Pride Petroleum Services, Inc.:
We have audited the combined balance sheet of U.S. Land-Based Well
Servicing Operations of Pride Petroleum Services, Inc. (the "Division") as of
December 31, 1995 and 1994, and the related combined statements of operations
and changes in owner's equity and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Division'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 combined financial position of the U.S. Land-Based
Well Servicing Operations of Pride Petroleum Services, Inc. as of December 31,
1995 and 1994, and the combined results of their operations and their cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
As discussed in Note 6 to the combined financial statements, the Division
changed its method of accounting for income taxes in 1993.
COOPERS & LYBRAND L.L.P.
Houston, Texas
February 26, 1996 (except for the
second paragraph of Note 1 as to which the date
is December 23, 1996)
F-19
<PAGE> 209
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 1,253 $ 1,154
Trade receivables, net of allowance for doubtful accounts
of $426 and $394, respectively......................... 16,055 14,167
Parts and supplies........................................ 2,098 1,586
Deferred income taxes..................................... 2,333 3,858
Other current assets...................................... 2,145 1,548
-------- --------
Total current assets.............................. 23,884 22,313
-------- --------
PROPERTY AND EQUIPMENT, at cost............................. 133,641 126,535
ACCUMULATED DEPRECIATION.................................... (90,717) (91,825)
-------- --------
Net property and equipment........................ 42,924 34,710
-------- --------
OTHER ASSETS................................................ 1,200 642
-------- --------
$ 68,008 $ 57,665
======== ========
LIABILITIES AND OWNER'S EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 5,313 $ 4,460
Accrued expenses.......................................... 7,993 8,884
Current portion of long-term debt......................... 3,132 --
-------- --------
Total current liabilities.............................. 16,438 13,344
-------- --------
OTHER LONG-TERM LIABILITIES................................. 2,804 4,645
LONG-TERM DEBT, net of current portion...................... 8,028 --
DEFERRED INCOME TAXES....................................... 12,289 9,930
COMMITMENTS AND CONTINGENCIES
OWNER'S EQUITY.............................................. 28,449 29,746
-------- --------
$ 68,008 $ 57,665
======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-20
<PAGE> 210
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
COMBINED STATEMENT OF OPERATIONS AND
CHANGES IN OWNER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
-------- ------- --------
<S> <C> <C> <C>
REVENUES.................................................... $113,115 $95,860 $105,865
-------- ------- --------
COSTS AND EXPENSES
Operating costs........................................... 86,177 76,820 85,984
Depreciation and amortization............................. 5,385 4,919 5,092
Selling, general and administrative....................... 14,504 12,772 13,333
-------- ------- --------
Total costs and expenses.......................... 106,066 94,511 104,409
-------- ------- --------
Earnings from operations..................... 7,049 1,349 1,456
OTHER INCOME (EXPENSE)
Other income (expense).................................... 1,260 11 13
Interest expense.......................................... (821) -- --
-------- ------- --------
Total other income, net........................... 439 11 13
-------- ------- --------
EARNINGS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING FOR INCOME TAXES............................ 7,488 1,360 1,469
INCOME TAX PROVISION........................................ 2,873 649 594
-------- ------- --------
NET EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME TAXES............................... 4,615 711 875
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME
TAXES..................................................... -- -- 3,835
-------- ------- --------
NET EARNINGS................................................ 4,615 711 4,710
NET TRANSFERS TO PARENT..................................... (5,912) (4,395) (4,354)
OWNER'S EQUITY, BEGINNING OF YEAR........................... 29,746 33,430 33,074
-------- ------- --------
OWNER'S EQUITY, END OF YEAR................................. $ 28,449 $29,746 $ 33,430
======== ======= ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-21
<PAGE> 211
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings.............................................. $ 4,615 $ 711 $ 4,710
Adjustments to reconcile net earnings to net cash provided
by operating activities --
Depreciation and amortization.......................... 5,385 4,919 5,092
(Gain) loss on sale of assets.......................... (905) (177) 407
Deferred tax provision (benefit)....................... 1,084 296 (548)
Cumulative effect of change in accounting for income
taxes............................................. -- -- (3,835)
Changes in assets and liabilities, net of effects of
acquisitions:
Trade receivables................................. 365 423 1,370
Parts and supplies................................ (302) 23 (74)
Other current and noncurrent assets............... (681) 165 (207)
Accounts payable.................................. 155 (1,161) 1,360
Accrued expenses and other........................ (3,492) (237) (400)
------- ------- -------
Net cash provided by operating activities....... 6,224 4,962 7,875
------- ------- -------
INVESTING ACTIVITIES
Purchase of net assets of acquired entities, including
acquisition costs, less cash acquired.................. (1,990) -- --
Purchases of property and equipment....................... (3,688) (2,272) (549)
Proceeds from sale of property and equipment.............. 1,340 304 231
Other..................................................... (110) -- --
------- ------- -------
Net cash used in investing activities........... (4,448) (1,968) (318)
------- ------- -------
FINANCING ACTIVITIES
Proceeds from debt borrowings............................. 6,600 -- --
Reduction of debt......................................... (2,023) -- --
Net transfers to Parent................................... (6,254) (4,306) (9,330)
------- ------- -------
Net cash used in financing activities........... (1,677) (4,306) (9,330)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 99 (1,312) (1,773)
CASH AND CASH EQUIVALENTS, beginning of period.............. 1,154 2,466 4,239
------- ------- -------
CASH AND CASH EQUIVALENTS, end of period.................... $ 1,253 $ 1,154 $ 2,466
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-22
<PAGE> 212
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The U.S. Land-Based Well Servicing Operations of Pride Petroleum Services,
Inc. (the "Division") consists of the U.S. land-based well servicing operations
of Pride Petroleum Services, Inc. (the "Parent"). In addition, the Division
provides hauling services and downhole tool rentals. The Division's operations
are located in the Texas and Louisiana Gulf Coast, the Permian Basin areas of
West Texas and New Mexico and California, and are principally conducted through
various operating subsidiaries directly or indirectly owned by the Parent.
On December 23, 1996, the Parent and Dawson Production Services, Inc.
entered into a Purchase Agreement whereby Dawson Production Services, Inc. will
acquire the operating subsidiaries comprising the Division for approximately
$135,900,000 in cash. The Parent will retain the Division's working capital
(other than parts and supplies), other long-term liabilities and long-term debt.
The accompanying combined financial statements reflect the financial
position, results of operations and cash flows of these subsidiaries plus
certain allocable corporate activities of the Parent.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
For purposes of the combined balance sheet and combined statement of cash
flows, the Division considers highly liquid debt instruments having maturities
of three months or less at the date of purchase to be cash equivalents.
Parts and Supplies
Parts and supplies consist of spare rig parts and supplies held for use in
operations and are valued at the lower of weighted average cost or estimated
market value.
Property and Equipment
Property and equipment are carried at original cost or adjusted net
realizable value, as applicable. Major renewals and improvements are capitalized
and depreciated over the respective asset's useful life. Maintenance and repair
costs are charged to expense as incurred. During the years ended December 31,
1995, 1994 and 1993, maintenance and repair costs included in operating costs
were $10,640,000, $9,402,000 and $10,710,000, respectively. When assets are sold
or retired, the remaining costs and related accumulated depreciation are removed
from the accounts and any resulting gain or loss is included in income.
For financial reporting purposes, depreciation of property and equipment is
provided using primarily the straight line method based upon expected useful
lives of each class of assets. Estimated useful lives of the assets for
financial reporting purposes are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Rigs and rig equipment...................................... 5-17
Transportation equipment.................................... 3- 7
Buildings and improvements.................................. 10-20
Furniture and fixtures...................................... 5
</TABLE>
F-23
<PAGE> 213
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
The Division recognizes revenue from domestic land well servicing
operations as services are performed based upon actual rig hours worked.
Revenues from related operations are recognized in the period in which such
services are performed.
Income Taxes
The Division joins with the Parent in filing a consolidated federal income
tax return. The Division records income tax expense as though it filed
separately. Effective January 1, 1993, the Division adopted the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the asset is expected to be recovered or the
liability is expected to be settled.
Concentration of Credit Risk
Financial instruments which potentially subject the Division to
concentrations of credit risk consist principally of cash and trade receivables.
By policy, the Company limits the amount of credit exposure to any one financial
institution or issuer. The Division's customer base consists primarily of major
integrated oil companies and smaller independent oil and gas producers.
Management believes the credit quality of its customers is generally high. The
Division provides allowances for potential credit losses when necessary. Bad
debt expense was $174,000 and $116,000 for the years ended December 31, 1995 and
1993, respectively. The Division did not incur any bad debt expense during the
year ended December 31, 1994. During the years ended December 31, 1995, 1994 and
1993, no customer accounted for more than 10% of combined revenue.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. While it is believed that such estimates are reasonable,
actual results could differ from those estimates.
Conditions Affecting Ongoing Operations
Increases and decreases in domestic well servicing activity historically
have had a significant correlation with changes in oil and natural gas prices.
Domestic well servicing contracts are typically entered into for one or multiple
wells, but are typically short term and rig rates may be volatile.
F-24
<PAGE> 214
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and 1994 consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 1,448 $ 1,330
Equipment................................................... 125,358 121,058
Buildings and leasehold improvements........................ 3,690 2,849
Furniture and fixtures...................................... 706 599
Construction-in-progress.................................... 2,439 699
-------- --------
133,641 126,535
Accumulated depreciation.................................... (90,717) (91,825)
-------- --------
$ 42,924 $ 34,710
======== ========
</TABLE>
Depreciation expense was $5,114,000, $4,556,000 and $4,642,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
4. ACQUISITIONS
In March 1995, the Division acquired all of the outstanding capital stock
of X-Pert Enterprises, Inc. ("X-Pert") for aggregate consideration of
approximately $10,000,000, consisting of $3,000,000 cash, a note payable to the
selling shareholders in the amount of $5,964,000, and 200,000 shares of the
Parent's common stock.
The assets acquired and liabilities assumed in the X-Pert acquisition were
as follows:
<TABLE>
<CAPTION>
ASSETS (LIABILITIES)
--------------------
(IN THOUSANDS)
<S> <C>
Cash and cash equivalents................................... $ 1,719
Trade receivables........................................... 2,254
Other current assets........................................ 80
Property and equipment...................................... 10,000
Other assets................................................ 725
Accounts payable............................................ (648)
Accrued expenses............................................ (761)
Long-term debt.............................................. (569)
Deferred income taxes....................................... (2,800)
-------
$10,000
=======
</TABLE>
Unaudited pro forma results of operations assuming the acquisition of
X-Pert had occurred on January 1, 1994, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenues.................................................... $115,109 $110,679
Net Earnings................................................ $ 4,720 $ 2,167
</TABLE>
F-25
<PAGE> 215
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma results of operations presented above do not purport to be
indicative of the results of operations of the Division that might have occurred
nor are they indicative of future results.
Also in March 1995, the Division acquired substantially all of the assets
of a fluids hauling business for total consideration of $400,000, consisting of
$350,000 in cash and a note payable to the sellers in the amount of $50,000.
Each of the acquisitions discussed above was recorded using the purchase
method of accounting. The operating results of each acquisition have been
included in combined results of operations from the date of acquisition.
5. DEBT
Long-Term Debt
Long-term debt at December 31, 1995 consists of the following:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Collateralized term loan.................................... $ 5,696
Notes payable............................................... 394
Note payable to selling shareholders........................ 5,070
-------
11,160
Less current portion........................................ 3,132
-------
$ 8,028
=======
</TABLE>
The collateralized term loan is due in annual installments through 1999,
bears interest at prime plus 1/2%, (9.0% as of December 31, 1995), and is
collateralized by certain equipment of the Division. Notes payable includes two
notes payable to lending institutions totaling an aggregate $344,000 which are
collateralized by certain property and equipment and a note payable in the
amount of $50,000 issued to the sellers of certain assets acquired by the
Company during the first quarter of 1995.
In March 1995, the Company entered into a note payable to two individuals
in the amount of $5,964,000 as partial consideration for the acquisition of
X-Pert. The note bears interest at the rate of 8.5% per annum and is repayable
in quarterly installments through March 2000. The note payable to selling
shareholders is collateralized by certain of the property and equipment of the
acquired business.
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
1996........................................................ $3,132
1997........................................................ 2,749
1998........................................................ 2,742
1999........................................................ 2,239
2000........................................................ 298
</TABLE>
The Division has obtained bank commitments which provide for guidance lines
of credit of $18,000,000. As of December 31, 1995, letters of credit totaling
$10,672,000 were outstanding thereunder. Cash and cash equivalents and a portion
of accounts receivable have been pledged as collateral pursuant to these credit
facilities.
F-26
<PAGE> 216
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Based on rates currently available to the Parent for debt with similar
terms and remaining maturities, the Division believes that the recorded value of
long-term debt approximates fair market value at December 31, 1995.
6. INCOME TAXES
Effective January 1, 1993, the Division adopted SFAS 109 and in connection
therewith recorded a non-cash gain in the amount of $3,835,000, which represents
the reduction of the deferred tax liability as of January 1, 1993. The gain has
been recorded in the combined statement of operations as "cumulative effect of
change in accounting for income taxes".
The components of the provision for income taxes were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
------- ----- -------
(IN THOUSANDS)
<S> <C> <C> <C>
United States Federal:
Current................................................... $1,690 $333 $1,079
Deferred.................................................. 1,024 280 (518)
------ ---- ------
2,714 613 561
------ ---- ------
State:
Current................................................... 99 20 63
Deferred.................................................. 60 16 (30)
------ ---- ------
159 36 33
------ ---- ------
Total income tax provision........................ $2,873 $649 $ 594
====== ==== ======
</TABLE>
The difference between the effective federal income tax rate reflected in
the income tax provision and the amounts which would be determined by applying
the statutory federal tax rate to earnings before income taxes is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
U.S. statutory rate......................................... 34.0% 34.0% 34.0%
State and local taxes....................................... 2.0 2.0 2.0
Other (principally nondeductible expenses).................. 2.4 11.7 4.4
---- ---- ----
Effective tax rate.......................................... 38.4% 47.7% 40.4%
==== ==== ====
</TABLE>
F-27
<PAGE> 217
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities and deferred tax assets as of December
31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Depreciation.............................................. $12,239 $ 9,848
Other..................................................... 50 82
------- -------
Total deferred tax liabilities.................... 12,289 9,930
------- -------
Deferred tax assets:
Insurance accruals........................................ (1,891) (3,345)
Bad debts................................................. (153) (142)
Other..................................................... (289) (371)
------- -------
Total deferred tax assets......................... (2,333) (3,858)
------- -------
Net deferred tax liability.................................. $ 9,956 $ 6,072
======= =======
</TABLE>
7. EMPLOYEE BENEFITS
The Parent has a salary deferral plan covering its employees, including
those of the Division, whereby employees may elect to contribute up to 15% of
their annual compensation. The Parent may at its discretion make matching
contributions with respect to an employee's salary contribution of up to $1,000
or 6% of compensation, whichever is less. Total expense charged to the Division
for the years ended December 31, 1995, 1994 and 1993, were $134,000, $87,000 and
$61,000, respectively.
8. COMMITMENTS AND CONTINGENCIES
The Division is routinely involved in litigation incidental to its
business, which often involves claims for significant monetary amounts, some of
which would not be covered by insurance. In the opinion of management, none of
the existing litigation will have any material adverse effect on the Division's
financial position or results of operations.
The Division is self-insured with respect to physical damage or loss to its
domestic vehicles, land rigs, and equipment (except for thirteen of its largest
land rigs). Thirteen of the Division's largest land rigs are insured, with
deductibles of generally $25,000 per occurrence. Presently, the Division has
insurance deductibles of $250,000 per occurrence for workers' compensation
claims, $100,000 per occurrence for automobile liability claims, and $100,000
for general liability claims. The Division further limits its exposure by
maintaining, together with the Parent, an accident and health insurance policy
with respect to its employees with a deductible of $10,000 per occurrence.
In July 1995, one of the Division's land rigs was destroyed in an explosion
and fire. The damaged rig was covered by insurance and the Division received net
insurance proceeds, after repurchasing the salvage, of $1,094,000. The Division
recognized a gain from the insurance recovery of $1,049,000 which is included in
other income in the accompanying consolidated statement of operations.
As of December 31, 1995 and 1994, the Division had accrued approximately
$5,916,000 and $9,706,000, respectively for estimated claims liabilities, of
which $3,112,000 and $5,217,000, respectively, was included in current
liabilities and $2,804,000 and $4,489,000, respectively, was reflected as other
long-term liabilities in the accompanying balance sheet.
F-28
<PAGE> 218
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1995, the Division had letters of credit outstanding
totaling $10,672,000. These letters of credit guarantee principally the funding
of the Division's share of insured claims. Cash and cash equivalents of the
Parent and a portion of trade receivables have been pledged as security for
these letters of credit. The credit facility provides flexibility to reduce the
pledge of the Parent's cash and cash equivalents by pledging additional trade
receivables.
Due to the nature of the Division's business and the structure of its
insurance program, the occurrence of a significant event against which the
Division is not fully insured or a number of lessor events for which the
Division is insured, but subject to substantial deductibles, could significantly
impact the operating results of the Division for a given period.
Rental expense for equipment, vehicles and various facilities of the
Division for the years ended December 31, 1995, 1994 and 1993 was $4,354,000,
$4,233,000 and $3,877,000, respectively. As of December 31, 1995, the Division
did not have any significant future minimum lease payments for operating leases
having initial or remaining noncancelable lease terms longer than one year. The
Division leases vehicles used in its operations under a revolving master lease.
Although any single lease is cancelable by the Division with 60 days notice, the
Division expects to incur this lease expense in increasing amounts for the
foreseeable future. Vehicle lease expense pursuant to the master lease
agreements included in the above rental expense for the years ended December 31,
1995, 1994 and 1993 was $2,218,000, $2,134,000 and $1,809,000, respectively.
9. RELATED PARTY TRANSACTIONS
Selling, general and administrative expense includes allocation of
corporate costs from the Parent of approximately $4,000,000, $4,500,000 and
$4,600,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Those costs relate principally to financial, marketing, management information,
risk management, legal and human resource services and were allocated based on
estimates of time incurred or the cost of the service provided. Although
management believes such methods of allocation are reasonable, they are not able
to determine whether the allocations are indicative of actual expenses that
would have been incurred if the Division operated as a separate entity.
The Division transfers underutilized equipment to the Parent from time to
time using the equipment's net book value. The amount of such transfers were
approximately $660,000, $489,000 and $529,000 for the years ended December 31,
1995, 1994 and 1993, respectively.
10. SUPPLEMENTAL FINANCIAL INFORMATION
Other Current Assets
Other current assets at December 31, 1995 and 1994 consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1994
------ ------
(IN THOUSANDS)
<S> <C> <C>
Other receivables...................................... $ 821 $ 383
Prepaid expenses....................................... 1,324 1,165
------ ------
$2,145 $1,548
====== ======
</TABLE>
F-29
<PAGE> 219
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Accrued Expenses
Accrued expenses at December 31, 1995 and 1994 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1994
------ ------
(IN THOUSANDS)
<S> <C> <C>
Insurance (excluding the long-term portion of $2,804 and
$4,489,
respectively)............................................. $3,112 $5,217
Payroll................................................... 3,454 2,008
Taxes, other than income.................................. 1,101 1,422
Other..................................................... 326 237
------ ------
$7,993 $8,884
====== ======
</TABLE>
Cash Flow Information
Cash paid for interest and income taxes during the years ended December 31,
1995, 1994 and 1993 was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
----- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the year for:
Interest............................................... $786 $ -- $ --
Income taxes........................................... 500 1,893 2
</TABLE>
F-30
<PAGE> 220
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
COMBINED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 1,638 $ 1,253
Trade receivables, net of allowance for doubtful accounts
of $426 and $426, respectively......................... 17,451 16,055
Parts and supplies........................................ 2,045 2,098
Deferred income taxes..................................... 1,796 2,333
Other current assets...................................... 4,323 2,145
-------- --------
Total current assets.............................. 27,253 23,884
-------- --------
PROPERTY AND EQUIPMENT, at cost............................. 134,133 133,641
ACCUMULATED DEPRECIATION.................................... (91,092) (90,717)
-------- --------
Net property and equipment........................ 43,041 42,924
-------- --------
OTHER ASSETS................................................ 2,006 1,200
-------- --------
$ 72,300 $ 68,008
======== ========
LIABILITIES AND OWNER'S EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 5,337 $ 5,313
Accrued expenses.......................................... 3,988 7,993
Current portion of long-term debt......................... 9,026 3,132
-------- --------
Total current liabilities......................... 18,351 16,438
-------- --------
OTHER LONG-TERM LIABILITIES................................. 2,066 2,804
LONG-TERM DEBT, net of current portion...................... 36,885 8,028
DEFERRED INCOME TAXES....................................... 11,384 12,289
COMMITMENTS AND CONTINGENCIES
OWNER'S EQUITY.............................................. 3,614 28,449
-------- --------
$ 72,300 $ 68,008
======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-31
<PAGE> 221
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1995
-------- -------
<S> <C> <C>
REVENUES.................................................... $ 87,290 $85,990
-------- -------
COSTS AND EXPENSES
Operating costs........................................... 67,756 66,390
Depreciation and amortization............................. 4,070 4,017
Selling, general and administrative....................... 11,012 10,870
-------- -------
Total costs and expenses.......................... 82,838 81,277
-------- -------
Earnings from operations........................ 4,452 4,713
OTHER INCOME (EXPENSE)
Other income.............................................. 230 1,264
Interest expense.......................................... (2,244) (551)
-------- -------
Total other income (expense), net................. (2,014) 713
-------- -------
EARNINGS BEFORE INCOME TAXES................................ 2,438 5,426
INCOME TAX PROVISION........................................ 1,008 2,048
-------- -------
NET EARNINGS................................................ 1,430 3,378
NET TRANSFERS TO PARENT..................................... (26,265) (7,574)
OWNER'S EQUITY, beginning of period......................... 28,449 29,746
-------- -------
OWNER'S EQUITY, end of period............................... $ 3,614 $25,550
======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-32
<PAGE> 222
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1995
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings.............................................. $ 1,430 $ 3,378
Adjustments to reconcile net earnings to net cash provided
by operating activities --
Depreciation and amortization........................ 4,070 4,017
Gain on sale of assets............................... (251) (906)
Deferred tax provision............................... 2,974 1,057
Changes in assets and liabilities, net of effects of
acquisitions --
Trade receivables................................. (1,396) (442)
Parts and supplies................................ 53 (358)
Other current and noncurrent assets............... (3,061) (1,671)
Accounts payable.................................. 24 1,068
Accrued expenses and other........................ (4,743) (1,527)
-------- -------
Net cash provided by operating activities....... (900) 4,616
-------- -------
INVESTING ACTIVITIES
Purchase of net assets of acquired entities, including
acquisition costs, less cash acquired.................. (1,850) (1,990)
Purchases of property and equipment....................... (2,778) (2,573)
Proceeds from sales of property and equipment............. 265 1,280
Other..................................................... (43) (110)
-------- -------
Net cash used in investing activities........... (4,406) (3,393)
-------- -------
FINANCING ACTIVITIES
Proceeds from debt borrowings............................. 45,000 6,600
Reduction of debt......................................... (10,249) (1,000)
Net transfers to Parent................................... (29,060) (7,977)
-------- -------
Net cash provided by financing activities....... 5,691 (2,377)
-------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 385 (1,154)
CASH AND CASH EQUIVALENTS, beginning of period.............. 1,253 1,154
-------- -------
CASH AND CASH EQUIVALENTS, end of period.................... $ 1,638 $ 0
======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-33
<PAGE> 223
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
1. GENERAL
The unaudited combined financial statements included herein have been
prepared without audit pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, pursuant to such rules and
regulations. These unaudited combined financial statements should be read in
conjunction with U.S. Land Based Well Servicing Operations of Pride Petroleum
Services, Inc.'s (the "Division's") audited combined financial statements and
notes thereto for the year ended December 31, 1995.
The unaudited combined financial information included herein reflects all
adjustments, consisting only of normal recurring adjustments, which are
necessary, in the opinion of management, for a fair presentation of the
Division's financial position, results of operations and cash flows for the
interim periods presented. The results of operations for the interim periods
presented herein are not necessarily indicative of the results to be expected
for full years.
2. COMMITMENTS AND CONTINGENCIES
The Division is routinely involved in litigation incidental to its
business, which often involves claims for significant monetary amounts, some of
which would not be covered by insurance. In the opinion of management, none of
the existing litigation will have any material adverse effect on the Division's
financial position or results of operations.
The Division is self-insured with respect to physical damage or loss to its
vehicles, land rigs (except for thirteen of its largest land rigs), and other
equipment. Thirteen of the Division's largest land rigs are insured, with
deductibles of generally $25,000 per occurrence. Presently, the Division has
insurance deductibles of $250,000 per occurrence for workers' compensation
claims, $100,000 per occurrence for automobile liability claims, and $100,000
for general liability claims. The Division further limits its exposure by
maintaining an accident and health insurance policy with respect to its
employees with a deductible of $10,000 per occurrence.
As of September 30, 1996 and December 31, 1995, the Division had accrued
approximately $5,918,000 and $5,916,000, respectively, for estimated claims
liabilities, of which $3,852,000 and $3,112,000, respectively, was included in
current liabilities and $2,066,000 and $2,804,000, respectively, was included in
other long-term liabilities in the accompanying unaudited combined balance
sheet. As of September 30, 1996, the Division had letters of credit outstanding
totaling $8,652,000. These letters of credit principally guarantee the funding
of the Division's share of insured claims.
3. ACQUISITIONS
In February 1996, the Division acquired substantially all of the assets of
another operator in Freer, Texas for aggregate consideration of approximately
$1,879,000, consisting of $1,850,000 cash and 4,200 restricted shares of Pride
Petroleum Services, Inc. common stock. The assets acquired included seven
workover rigs, hauling and anchor trucks and other support assets.
The acquisition was recorded using the purchase method of accounting. The
operating results of each acquisition have been included in the Division's
consolidated results of operations from the date of acquisition.
F-34
<PAGE> 224
U.S. LAND-BASED WELL SERVICING OPERATIONS
OF PRIDE PETROLEUM SERVICES, INC.
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. DEBT
Long-Term Debt
Long-term debt at September 30, 1996 and December 31, 1995 consists of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Collateralized term loans.................................. $41,736 $ 5,696
Notes payable.............................................. -- 394
Acquisition note payable................................... 4,175 5,070
------- -------
45,911 11,160
Less: current portion...................................... 9,026 3,132
------- -------
$36,885 $ 8,028
======= =======
</TABLE>
In April 1996, the Division completed two separate financing arrangements
with lending institutions pursuant to which it borrowed an aggregate amount of
$40,000,000, net of repayment of $5,000,000 of borrowings to one of the lenders.
The collateralized term loans bear interest initially at a floating rate of
prime plus 1/2% and are repayable in monthly installments of principal and
interest over a period of five to six years. The Division may elect to convert
the interest payable to a fixed rate basis at any time during the term of the
loans. The loans are collateralized by substantially all of the land-based rig
fleet and ancillary equipment.
F-35
<PAGE> 225
INDEPENDENT AUDITOR'S REPORT
To the Stockholders, Members, and Owners
Taylor Acquisition Group
Carthage, Texas
We have audited the accompanying combined balance sheets of the Taylor
Acquisition Group (the Group) as of December 31, 1995 and 1994, and the related
statements of income, changes in stockholder equity, and cash flows for the
years then ended. These combined financial statements are the responsibility of
the Group's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
The Taylor Acquisition Group is an unincorporated combination of entities
consisting of Taylor Companies, Inc. (a Texas corporation) and its wholly owned
subsidiaries (excluding Cavern Disposal, Inc.), Taylor Water Injections, Inc. (a
Texas corporation), Teague Interests, Inc. (a Texas corporation), Taylor
Caldwell Properties, LLC (a Texas limited liability company), and the
unincorporated land and buildings owned by John Randall Taylor which constitute
the Carthage yard facilities. The wholly owned subsidiaries of Taylor Companies,
Inc. which are included consist of Taylor Interests, Inc., Taylor SWD Operating,
Inc., Taylor Environmental, Inc., Taylor Disposal, Inc., Production Disposal,
Inc., Taylor Injection Systems, Inc., DeBerry SWD, Inc., Tatum SWD, Inc., and
Newton County SWD, Inc. (all Texas corporations).
We conducted our audit 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 assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Taylor Acquisition
Group as of December 31, 1995 and 1994, and the results of their operations and
their cash flows for the years then ended in conformity with generally accepted
accounting principles.
Chapman, Williams & Co.
Certified Public Accountants
Carthage, Texas
May 21, 1996
F-36
<PAGE> 226
TAYLOR ACQUISITION GROUP
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 563,105 $ 283,054 $ 239,160
Accounts receivable -- trade, (net)................. 3,669,784 2,973,206 3,299,590
Accounts receivable -- affiliates................... 81,399 -- --
Accounts receivable -- officer...................... 445,655 164,135 202,628
Accounts receivable -- other........................ 286,256 122,273 298,003
Prepaid expenses.................................... 141,336 110,496 226,058
----------- ----------- -----------
Total current assets........................ 5,187,535 3,653,164 4,265,439
Property, plant and equipment:
Heavy trucks and trailers........................... 2,415,384 2,331,400 2,371,053
Frac tanks.......................................... 3,961,543 3,980,401 3,992,401
Other equipment..................................... 2,776,437 2,667,291 2,707,025
Disposal wells...................................... 2,348,249 2,816,349 2,810,600
Land................................................ 45,953 55,627 55,627
----------- ----------- -----------
11,547,566 11,851,068 11,936,706
Less: accumulated depreciation...................... 6,790,230 8,073,760 8,749,869
Net property, plant and equipment........... 4,757,336 3,777,308 3,186,837
Other assets:
Equipment not in service............................ 87,964 9,528 --
----------- ----------- -----------
Total assets................................ $10,032,835 $ 7,440,000 $ 7,452,276
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Notes payable -- current portion.................... $ 2,497,684 $ 2,026,198 $ 1,469,604
Obligation under capital leases -- current
portion.......................................... 16,941 18,275 18,275
Accounts payable -- trade........................... 916,657 478,519 628,106
Accounts payable -- affiliates...................... -- 89,241 --
Accrued expenses.................................... 745,452 455,912 631,013
Deferred revenues................................... 17,215 48,800 43,959
----------- ----------- -----------
Total current liabilities................... 4,193,949 3,116,945 2,790,957
Long-term debt:
Notes payable....................................... 1,640,936 852,817 820,173
Obligation under capital leases..................... 36,288 18,013 18,013
Subordinated payable to stockholder................. 3,999,610 2,896,201 2,505,629
----------- ----------- -----------
Total long-term debt........................ 5,676,834 3,767,031 3,343,815
Other non-current liabilities:
Deferred revenue.................................... 242,005 193,205 186,398
Deferred taxes...................................... 380,235 224,827 122,484
----------- ----------- -----------
Total non-current liabilities............... 622,240 418,032 308,882
----------- ----------- -----------
Total liabilities........................... 10,493,023 7,302,008 6,443,654
Stockholder's equity:
Common Stock, $1 par value; 30,000 shares
authorized; 15,000 shares issued and
outstanding...................................... 66,100 67,100 67,100
Paid-in surplus..................................... 5,000 743,011 1,129,083
Retained earnings................................... (531,288) (672,119) (187,561)
----------- ----------- -----------
Total stockholder's equity.................. (460,188) 137,992 1,008,622
----------- ----------- -----------
Total liabilities and stockholder's
equity.................................... $10,032,835 $ 7,440,000 $ 7,452,276
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE> 227
TAYLOR ACQUISITION GROUP
COMBINED STATEMENT OF INCOME (LOSS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, ------------------------
-------------------------- JUNE 30, JUNE 30,
1994 1995 1995 1996
----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES................................ $19,651,930 $16,713,246 $8,369,304 $8,943,005
DIRECT COST OF OPERATIONS............... 16,291,016 14,281,231 7,024,849 7,112,371
----------- ----------- ---------- ----------
Gross profit.......................... 3,360,914 2,432,015 1,344,455 1,830,634
General and administrative expenses... 3,443,168 2,831,866 1,167,660 1,086,408
----------- ----------- ---------- ----------
Net operating income (loss)........... (82,254) (399,851) 176,795 744,226
Other income (expense)................ (140,046) 100,896 78,288 3,330
----------- ----------- ---------- ----------
Net income (loss) before tax.......... (222,300) (298,955) 255,083 747,556
Provision for income taxes (benefit)
Current............................ (7,973) (2,716) 135,335 365,341
Deferred........................... 380,235 (155,408) 236,718 (102,343)
----------- ----------- ---------- ----------
372,262 (158,124) 372,053 262,998
----------- ----------- ---------- ----------
Net income (loss)............. $ (594,562) $ (140,831) $ (116,970) $ 484,558
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-38
<PAGE> 228
TAYLOR ACQUISITION GROUP
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------- ---------------------
1994 1995 1995 1996
----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $ (594,562) $ (140,831) $(116,970) $ 484,558
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization............. 1,645,314 1,607,042 839,977 676,109
Gain on sale of assets.................... (15,058) (86,904) (70,454) (1,789)
Decrease (increase) in accounts
receivable............................. (362,011) 696,578 502,441 (502,114)
Decrease (increase) in prepaid expenses
and other assets....................... (57,645) 119,829 (121,101) (106,034)
Decrease (increase) in due to
affiliates............................. (64,354) 170,640 48,668 (89,241)
Decrease (increase) in accounts payable... 265,419 (438,138) (347,550) 149,587
Decrease (increase) in accrued expenses... 147,618 (289,543) (165,235) 175,101
Decrease (increase) in deferred revenue... 259,220 (17,215) (11,535) (11,648)
Decrease (increase) in income tax
receivable............................. (107,973) 75,000 143,308 --
Decrease (increase) in deferred taxes..... 380,235 (155,408) 236,718 (102,343)
Decrease in officer note receivable for
operations............................. -- 105,509 -- --
Decrease in fixed and other assets used
for operations......................... -- 28,924 -- --
----------- ----------- --------- ---------
Net cash provided by operating
activities...................... 1,496,203 1,675,483 938,267 672,186
----------- ----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets.................... (1,143,548) (1,007,592) (875,809) (85,638)
Proceeds on sale of assets.................. 31,415 343,186 313,503 1,789
Advances on officer note receivable......... -- (321,806) (55,908) (38,493)
Collections on officer note receivable...... 259,320 174,474 -- --
Purchase equipment not in service........... (87,964) -- -- --
----------- ----------- --------- ---------
Net cash used in investing
activities...................... (940,777) (811,738) (618,214) (122,342)
----------- ----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
New loans................................... 1,158,560 250,000 342,066 --
Repayment of capital lease.................. (16,961) (16,941) -- --
Repayment of debt........................... (1,674,845) (1,509,605) (997,739) (589,238)
Repayment of note payable -- shareholder.... (326,339) (100,000) -- (4,500)
Loans from shareholder...................... 2,406,574 231,750 11,250 --
Distribution of Subchapter S earnings....... (2,406,574) -- -- --
Issue capital stock......................... 2,000 1,000 1,000 --
----------- ----------- --------- ---------
Net cash used in financing activities..... (857,585) (1,143,796) (643,423) (593,738)
----------- ----------- --------- ---------
Net decrease in cash and cash
equivalents..................... (302,159) (280,051) (323,370) (43,894)
Cash and cash equivalents at the beginning
of the period............................. 865,264 563,105 563,105 283,054
----------- ----------- --------- ---------
Cash and cash equivalents at the end of the
period.................................... $ 563,105 $ 283,054 $ 239,735 $ 239,160
=========== =========== ========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Additional paid-in surplus.................. $ 738,011 $ -- $ 386,072
Reduction in notes payable -- officer....... (738,011) -- (386,072)
----------- --------- ---------
-- -- --
=========== ========= =========
Acquisition of equipment
Cost of equipment........................... $ 1,617,653
Equipment loans............................. (474,105)
-----------
Cash paid for equipment................... $ 1,143,548
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE> 229
TAYLOR ACQUISITION GROUP
COMBINED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
CAPITAL PAID-IN RETAINED
STOCK SURPLUS EARNINGS
------- ---------- -----------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1993.............................. $64,100 $ -- $ 2,589,538
Issue stock: Taylor Companies, Inc.................... 1,000 -- --
Newton SWD, Inc.................................... 1,000 -- --
Capitalize Taylor Caldwell Properties, LLC............ -- 5,000 --
Distribution of Subchapter-S earnings................. -- -- (2,526,264)
Net loss...................................... -- -- (594,562)
------- ---------- -----------
BALANCE, DECEMBER 31, 1994.............................. 66,100 5,000 (531,288)
Issue stock: Teague Interests, Inc.................... 1,000 -- --
Contribution of officer note payable.................. -- 738,011 --
Net loss...................................... -- -- (140,831)
------- ---------- -----------
BALANCE, DECEMBER 31, 1995.............................. 67,100 743,011 (672,119)
Contribution of officer note payable.................. -- 386,072 --
Net income.................................... -- -- 484,558
------- ---------- -----------
BALANCE, JUNE 30, 1996 (UNAUDITED)...................... $67,100 $1,129,083 $ (187,561)
======= ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-40
<PAGE> 230
TAYLOR ACQUISITION GROUP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. The Group was organized for the purpose of providing oil field services
to major oil companies and drilling companies by providing vacuum trucks, frac
tanks, saltwater disposal and other services necessary for the drilling,
completion and production processes. Operational areas exist primarily in the
east, southeast, and central regions of Texas. The Group maintains facilities in
Carthage, Caldwell, Bryan, Giddings, Pineland, Freestone, and Easton, Texas. The
Group had a facility in Laredo, Texas which was closed in December 1994.
B. The combined financial statements include the accounts of Taylor
Companies, Inc. and its wholly owned subsidiaries Taylor Interests, Inc., Taylor
SWD Operating, Inc., Taylor Environmental, Inc., Taylor Disposal, Inc.,
Production Disposal, Inc., Taylor Injection Systems, Inc., DeBerry SWD, Inc.,
Tatum SWD, Inc. and Newton County SWD, Inc. Cavern Disposal, Inc., which is also
a wholly owned subsidiary of Taylor Companies, Inc. is not included. Also
included are Taylor Water Injections, Inc., Teague Interests, Inc., Taylor
Caldwell Properties, LLC and the real property representing the Carthage yard,
all of which are owned by Mr. John Randall Taylor. Intercompany transactions
have been eliminated.
C. Fixed assets are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Virtually
all assets, excluding buildings, are depreciated over an estimated useful life
of five years.
Depreciation expense on equipment, vehicles and disposal wells is included
in cost of operations. Depreciation expense on these assets totaled $1,526,491
and $1,619,505 in 1995 and 1994, respectively. Depreciation expense on office
furnishing and equipment and leasehold improvements totaled $80,551 and $25,809
for 1995 and 1994, respectively. These amounts are included in general and
administrative expenses.
For federal income tax purposes, depreciation is computed using the
modified accelerated cost recovery system. Expenditures for major renewals and
betterments that extend the useful lives of property and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense as
incurred.
D. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
E. Cash and cash equivalents are comprised of checking accounts, savings
accounts, and short-term cash investment accounts maintained at various
financial institutions.
The Group has had monies invested into a special account with Premier Bank
into which excess operating funds are transferred on a daily basis. The monies
in this account earn a floating interest rate and are collateralized by U.S.
Government obligations.
F. As explained in Note 1B, the Group consists of various companies and
assets which do not exist as a taxable entity. However, the tax provisions
reflected in the financial statements have been computed as if the companies and
assets did exist as a single taxable entity.
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the bases of depreciation and bad debt
reserves for financial and income tax reporting. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred taxes also are recognized for operating losses
that are available to offset future federal income taxes.
F-41
<PAGE> 231
TAYLOR ACQUISITION GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 ACCOUNTS RECEIVABLE -- TRADE
The Group's receivables consist of amounts due from major oil companies and
oilfield drilling companies for frac tank and vacuum truck services and disposal
fees. Receivables are uncollateralized with 30 day terms.
<TABLE>
<CAPTION>
1995 1994
---------------- ----------------
AMOUNT % AMOUNT %
---------- --- ---------- ---
<S> <C> <C> <C> <C>
Current.......................................... $1,992,448 65 $2,477,303 66
30 Days.......................................... 712,236 23 895,283 24
60 Days.......................................... 193,362 6 254,940 7
90 Days and Over................................. 186,482 6 117,729 3
---------- --- ---------- ---
$3,084,528 100 $3,745,255 100
========== === ========== ===
</TABLE>
An allowance for doubtful accounts of $111,322 and $75,471 has been
established as of December 31, 1995 and 1994, respectively.
NOTE 3 NOTES PAYABLE
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Installment notes payable to The Associates, secured by frac
tanks and trailers, payable monthly at 7.6% to 8.5%
interest.................................................. $ 162,271 $ 404,744
Installment note payable to The Associates, secured by
vehicles, payable monthly at 8.15% interest............... 8,741 120,635
Installment notes payable to General Motors Acceptance
Corporation, secured by vehicles, payable monthly at
interest rates of 7.9% to 9.5% interests.................. 26,163 58,831
Installment notes payable to insurance companies for current
policies.................................................. 14,689 64,048
Installment notes payable to MetLife Capital Corporation,
secured by frac tanks, certain vacuum trailers and
vehicles, payable monthly at 6.66% to 7.33% interest...... 629,934 970,214
Installment note payable to Premier Bank, secured by frac
tanks, payable in monthly installments floating at 1.5%
over the Chase Manhattan prime rate....................... 258,750 393,750
Installment note payable to Premier Bank, secured by frac
tanks, payable in monthly installments floating at 1.5%
over the Premier Bank prime rate.......................... 61,655 281,250
Line of credit from Premier Bank, secured by equipment, with
interest at prime plus 1.5%............................... 250,000 --
Line of credit from Premier Bank, secured by accounts
receivable, with interest at prime plus 1.5%.............. 1,000,000 1,000,000
Installment note payable to Case Credit, secured by
equipment, payable monthly at 7.31% interest.............. 9,962 21,144
Installment note payable to Panola National Bank, secured by
portable office buildings, payable in monthly installments
at 9.25% interest......................................... 59,266 72,605
Installment note payable to Premier Bank secured by disposal
wells, payable in monthly installments at 1% over the
Premier Bank prime rate................................... -- 58,334
Installment note payable to Texas Workers Compensation
Insurance Fund, payable in monthly installments........... -- 221,432
</TABLE>
F-42
<PAGE> 232
TAYLOR ACQUISITION GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Installment notes payable to Concord Commercial Corporation,
secured by vacuum trailers and frac tanks, at 12.5%
interest.................................................. $ -- $ 7,510
Installment notes payable to U. S. Leasing (formerly Ford
Leasing), secured by frac tanks, at 11.7% interest........ -- 29,991
Installment notes payable to SafeCo, secured by equipment
and vehicles, at 12.25% interest.......................... -- 15,705
Installment notes payable to Panola National Bank secured by
vehicles, payable in monthly installments at 2% over Texas
Commerce Bank, Houston base rate.......................... -- 18,187
Installment note payable to Premier Bank secured by real
estate, payable in monthly installments of $2,500.00 over
a remaining period of 108 months floating at 1% over the
Chase Manhattan prime rate................................ 269,500 302,500
Installment note payable to Citizens State Bank secured by
real estate, payable in monthly installments of $2,230 at
8% interest............................................... 78,084 97,740
Note payable to an individual secured by two winch trucks,
payable in annual installments of $10,000 over a remaining
period of 5 years at 0% interest.......................... 50,000 --
---------- ----------
Total notes payable......................................... 2,879,015 4,138,620
Less: current portion....................................... 2,026,198 2,497,684
---------- ----------
Long-term debt.............................................. $ 852,817 $1,640,936
========== ==========
</TABLE>
Maturities of the above notes are summarized below:
<TABLE>
<S> <C>
1996........................................................ $2,026,198
1997........................................................ 550,084
1998........................................................ 93,223
1999........................................................ 48,775
2000 and thereafter......................................... 160,735
----------
$2,879,015
==========
</TABLE>
Interest expense was $461,326 and $473,448 for 1995 and 1994, respectively.
Taylor Companies, Inc. also has a line of credit available with Premier
Bank of $800,000 for the purchase of new equipment or salt water disposal wells.
The loan agreement contains a restrictive covenant which requires net worth to
be at least $2,740,000 and the ratio of debt to net worth to be less than 2.25
to 1.00.
The Group had loans from its sole shareholder, Randy Taylor, for $2,896,201
and $3,999,610 at December 31, 1995 and 1994 respectively. These loans are
subordinated to the Premier Bank loans and is considered as equity for
determining the debt to net worth ratio required by the Premier covenant.
F-43
<PAGE> 233
TAYLOR ACQUISITION GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 CAPITAL LEASES
In 1992 Taylor Interests, Inc. entered into a capital lease with The
Associates for three vacuum trailers.
The future minimum lease payments under capital leases together with the
present value of the net minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C> <C>
1996 $20,405
1997 20,405
-------
Total minimum lease payments................................ 40,810
Less: amount representing interest.......................... 4,522
-------
Present value of net minimum lease payments................. $36,288
=======
</TABLE>
NOTE 5 FEDERAL INCOME TAXES
As explained in Note 1B, the Group consists of various companies and assets
which do not exist as a taxable entity. However, the tax provisions reflected in
the financial statements have been computed as if the companies and assets did
exist as a single taxable entity.
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the bases of depreciation and bad debt
reserve for financial and income tax reporting. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred taxes also are recognized for operating losses
that are available to offset future federal income taxes.
The Group utilizes different methods of recognizing depreciation expense
and bad debt expense for financial statement and income tax purposes. The Group
also elected to expense certain costs relating to saltwater disposal wells for
tax purposes that have been capitalized under generally accepted accounting
principles.
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Net loss before taxes....................................... $(298,955) $(222,300)
--------- ---------
Temporary differences
Depreciation.............................................. 329,282 137,641
Basis in assets sold...................................... 110,978 4,601
Bad debts................................................. 35,851 47,371
Capitalization policies................................... (180,110) (353,310)
--------- ---------
Total temporary differences....................... 296,001 (163,397)
Permanent differences....................................... 41,186 (72,475)
--------- ---------
Total differences................................. 337,187 (236,172)
--------- ---------
Taxable income.............................................. $ 38,232 $(458,472)
========= =========
Tax at statutory rates...................................... $ 5,735 $ --
Fuel tax credit............................................. 8,451 7,973
--------- ---------
Net tax........................................... $ (2,716) $ (7,973)
========= =========
</TABLE>
F-44
<PAGE> 234
TAYLOR ACQUISITION GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax liability is computed as follows:
<TABLE>
<S> <C> <C>
Depreciation expense (liability).................... $1,251,644 $1,563,124
Bad debt expense (asset)............................ (111,322) (139,018)
Net operating loss (asset).......................... (479,065) (222,300)
---------- ----------
Net differences................................... 661,257 1,201,806
Rate.............................................. 34% 31%
Deferred tax liability.............................. $ 224,827 $ 380,235
========== ==========
</TABLE>
The deferred tax liability for 1994 was recognized as an expense all in 1994
since the companies had previously been taxed as Subchapter S corporations. No
deferral existed in prior years.
NOTE 6 DEFERRED REVENUES
Taylor Interests, Inc. entered into an agreement with a major oil company
whereby that company would contribute $285,900 toward the cost of drilling and
constructing a salt water disposal well. Taylor Interests, Inc., would bear the
remaining cost of placing the facility in operation. The oil company would
receive a credit of $.05 per barrel for each barrel disposed until such time as
its investment of $285,900 was recovered. Taylor Interests, Inc. had disposed of
877,900 barrels under this agreement as of December 31, 1995. Deferred revenues
recognized were $48,800 and $43,895 in 1995 and 1994, respectively.
NOTE 7 EMPLOYEE BENEFIT PLAN
Taylor Interests, Inc. has established a 401(k) savings plan for its
employees. All persons employed by the Company on April 1, 1990, are eligible to
participate regardless of age or length of service. Persons employed after this
date become eligible upon the attainment of age 18 and the completion of six
months of service. At December 31, 1995, a total of 81 employees were
participants in the plan.
This plan is a defined contribution plan in which the Company has the
option to match 50% of each employee's contributions which do not exceed 6% of
the employee's annual compensation. All contributions are paid into a trust fund
which has been established solely for the participants in the plan. Total plan
expense to the Company in 1995 was $101,663 and $53,602 in 1995 and 1994,
respectively.
A valuation of plan assets is prepared by an independent actuary. At
December 31, 1995, plan assets totaled $661,156. The Company has a liability to
the plan in the amount of $30,482 which is reflected in accrued expenses.
F-45
<PAGE> 235
TAYLOR ACQUISITION GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 RELATED PARTY TRANSACTIONS
John Randall Taylor owns 100 percent of the stock of Taylor Companies,
Inc., Taylor Water Injections, Inc., Teague Interests, Inc., and Taylor Caldwell
Properties, LLC. On January 1, 1995, Mr. Taylor exchanged 100% of the stocks of
Newton County SWD, Inc. and Cavern Disposal, Inc. for additional stock in Taylor
Companies, Inc.
Various members of the Group had outstanding notes payable to Mr. Taylor.
The note from Taylor Companies, Inc. is subordinated to the notes payable to
Premier Bank and bears an interest rate of 5% per annum.
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Taylor Companies, Inc....................................... $2,505,629 $2,505,629
Taylor SWD Operating, Inc................................... 5,500 5,000
Teague Interests, Inc....................................... 231,500 --
Taylor Caldwell Properties, LLC............................. 17,000 17,000
Taylor Water Injectors, Inc................................. 137,072 137,072
Taylor Disposal, Inc........................................ -- 243,493
Production Disposal, Inc.................................... -- 109,920
Taylor Injection Systems, Inc............................... -- 65,049
DeBerry SWD, Inc............................................ -- 42,215
Tatum SWD, Inc.............................................. -- 244,371
Newton SWD, Inc............................................. -- 629,861
---------- ----------
$2,896,201 $3,999,610
========== ==========
</TABLE>
Mr. Taylor contributed to paid-in surplus $738,011 of the notes payable
from Taylor Disposal, Inc., Production Disposal, Inc., Taylor Injection Systems,
Inc., DeBerry SWD, Inc., Tatum SWD, Inc., and Newton SWD, Inc. in 1995. The
balance of the notes were distributed to Mr. Taylor.
Taylor Interests, Inc. leases its office and shop facilities in Carthage
from Mr. Taylor. The lease is renewable annually with lease payments of $72,000
per annum. The Company also leases its Caldwell facilities from Taylor Caldwell
Properties, LLC, which is a member of the Group. The Company also leases the
administrative office in Carthage from Tay-Rob Interests, Inc., a company in
which Mr. Taylor is president and sole stockholder. The lease is renewable
annually with lease payments of $12,000 per annum. Taylor SWD Operating, Inc.
also leases its facilities from Mr. Taylor for $12,000 per annum.
NOTE 9 COMMITMENTS AND CONTINGENT LIABILITIES
A. Taylor Interests, Inc. leases certain heavy trucks and vehicles from
various leasing companies. These leases are accounted for as operating leases
for financial statement purposes. Future minimum lease payments on these leases
for the next three years are as follows:
<TABLE>
<S> <C>
1996........................................................ $ 727,810
1997........................................................ 527,251
1998........................................................ 218,518
----------
$1,473,579
==========
</TABLE>
B. The Group leases land for its salt water disposal wells from various
individuals at a monthly total of $5,525.
F-46
<PAGE> 236
TAYLOR ACQUISITION GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
C. A suit is pending in District Court against Taylor Interests, Inc. and
Taylor SWD Operating, Inc. seeking relief based on property rights relating to a
salt water disposal well. The Company prevailed at trial of this suit; however,
the Court has granted Plaintiffs a new trial. An adverse verdict could be for a
material amount.
D. Four suits are pending in various State Courts involving vehicular
accidents against Taylor Interests, Inc. The Company has sufficient insurance to
cover the claims.
NOTE 10 ECONOMIC DEPENDENCY
The Group generated approximately 12% of its revenues from one customer in
1995. Total sales to this company were $1,918,841. In 1994, the Group generated
approximately 24% of its revenue from two customers. Total sales to these two
companies were $4,393,749. No other one customer generated more than 10% of
total revenues.
The Group grants credit to customers in the oil and gas and related
industries in the normal course of business. Consequently, the Group's ability
to collect the amounts due from customers is affected by economic fluctuations
in the oil and gas industry.
NOTE 11 MOTOR CARRIER PERMIT
Taylor Interests, Inc. had previously invested in an intrastate motor
carrier permit for which it had paid $57,200 to another carrier. Intrastate
trucking was deregulated by the federal government as of January 1, 1995,
resulting in a permanent impairment of the value of the permit held by the
Company. This permanent impairment in value has been recognized as an expense in
1994.
NOTE 12 SUBSEQUENT EVENT
On January 1, 1996, Mr. Taylor contributed all the capital stock of Taylor
Water Injections, Inc. and Teague Interests, Inc. to Taylor Companies, Inc. in
exchange for additional shares in Taylor Companies, Inc.
F-47
<PAGE> 237
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Dawson WellTech, L.C.:
We have audited the accompanying balance sheets of Well Solutions, Inc. (a
Delaware Corporation), as of March 31, 1994 and 1993, and the related statements
of income, shareholder's equity and cash flows for each of the three years in
the period ended March 31, 1994. 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 financial position of Well Solutions, Inc., as of
March 31, 1994 and 1993, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1994, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Antonio, Texas
April 10, 1995
F-48
<PAGE> 238
WELL SOLUTIONS, INC.
BALANCE SHEETS -- MARCH 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 53,379 $ 61,312
Unbilled accounts receivable.............................. 581,988 134,827
Receivable due from affiliate, net........................ 1,440,970 1,552,909
Prepaid expenses and other................................ 61,198 58,016
------------ ------------
Total current assets.............................. 2,137,535 1,807,064
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Buildings and land........................................ 1,191,623 1,361,664
Machinery and equipment................................... 22,545,581 22,385,224
------------ ------------
23,737,204 23,746,888
Less accumulated depreciation and amortization............ (12,807,166) (11,237,822)
------------ ------------
10,930,038 12,509,066
------------ ------------
DEFERRED INCOME TAX ASSETS.................................. 335,519 --
------------ ------------
OTHER ASSETS, net........................................... 1,025,903 1,306,309
------------ ------------
Total assets...................................... $ 14,428,995 $ 15,622,439
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 1,249,175 $ 1,197,499
Current deferred income taxes............................. 215,336 49,886
------------ ------------
Total current liabilities......................... 1,464,511 1,247,385
------------ ------------
DEFERRED INCOME TAXES....................................... -- 70,253
------------ ------------
LONG-TERM DEBT, less current maturities..................... 829,677 1,730,579
------------ ------------
NOTE PAYABLE TO AN AFFILIATED COMPANY....................... 8,000,000 8,000,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 4)
SHAREHOLDER'S EQUITY:
Common stock, par value $.01 per share; 10,000 shares
authorized, issued and outstanding at March 31, 1994
and 1993............................................... 100 100
Additional paid-in capital................................ 483,479 483,479
Retained earnings......................................... 3,651,228 4,090,643
------------ ------------
Total shareholder's equity........................ 4,134,807 4,574,222
------------ ------------
Total liabilities and shareholder's equity........ $ 14,428,995 $ 15,622,439
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE> 239
WELL SOLUTIONS, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
OPERATING REVENUES...................................... $24,459,735 $28,460,282 $23,618,211
----------- ----------- -----------
OPERATING EXPENSES:
Cost of services...................................... 20,459,157 22,217,657 17,904,721
General and administrative............................ 1,011,260 801,448 1,407,722
Depreciation and amortization......................... 2,372,040 2,202,732 1,974,938
----------- ----------- -----------
Total operating expenses...................... 23,842,457 25,221,837 21,287,381
----------- ----------- -----------
INCOME FROM OPERATIONS.................................. 617,278 3,238,445 2,330,830
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Loss on sale of assets................................ (326,350) (228,892) (12,093)
Interest and other income............................. 22,451 29,947 140,375
Interest expense...................................... (993,116) (1,009,494) (1,067,544)
----------- ----------- -----------
Total other income (expense).................. (1,297,015) (1,208,439) (939,262)
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES....................... (679,737) 2,030,006 1,391,568
INCOME TAX EXPENSE (BENEFIT)............................ (240,322) 800,375 557,563
----------- ----------- -----------
NET INCOME (LOSS)....................................... $ (439,415) $ 1,229,631 $ 834,005
=========== =========== ===========
EARNINGS (LOSS) PER SHARE OF COMMON
STOCK................................................. $ (43.94) $ 122.96 $ 83.40
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE> 240
WELL SOLUTIONS, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED MARCH 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
--------------- PAID-IN EARNINGS SHAREHOLDER'S
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------ ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, March 31, 1991...................... 10,000 $100 $483,479 $2,027,007 $2,510,586
Net income................................. -- -- -- 834,005 834,005
------ ---- -------- ---------- ----------
BALANCE, March 31, 1992...................... 10,000 100 483,479 2,861,012 3,344,591
Net income................................. -- -- -- 1,229,631 1,229,631
------ ---- -------- ---------- ----------
BALANCE, March 31, 1993...................... 10,000 100 483,479 4,090,643 4,574,222
Net loss................................... -- -- -- (439,415) (439,415)
------ ---- -------- ---------- ----------
BALANCE, March 31, 1994...................... 10,000 $100 $483,479 $3,651,228 $4,134,807
====== ==== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE> 241
WELL SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................. $ (439,415) $ 1,229,631 $ 834,005
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities --
Depreciation and amortization.................. 2,372,040 2,202,732 1,974,938
Loss on sale of assets......................... 326,350 228,892 12,093
Deferred income tax expense (benefit).......... (240,322) 302,998 557,563
Changes in operating accounts
(Increase) decrease in --
Unbilled accounts receivable................... (447,161) (107,130) 36,247
Receivable due from affiliate, net............. (1,576,243) (3,855,940) (3,464,209)
Prepaid expenses and other..................... (3,182) 8,463 (10,535)
Other assets, net.............................. -- -- --
----------- ----------- -----------
Net cash provided by (used in) operating
activities.............................. (7,933) 9,646 (59,898)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH..................... (7,933) 9,646 (59,898)
CASH, beginning of year............................. 61,312 51,666 111,564
----------- ----------- -----------
CASH, end of year................................... $ 53,379 $ 61,312 $ 51,666
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 242
WELL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General
The financial statements include the accounts of Well Solutions, Inc., a
Delaware corporation (the Company). The Company is a wholly owned subsidiary of
New London Inc. (New London) and is engaged in the oilfield service business
operating in Texas and Oklahoma. The Company provides rental tools, frac tank
and vacuum truck services, waste water disposal, production testing and wireline
services.
Cash
The Company's cash balance consists of petty cash funds maintained at the
Company's field offices.
Unbilled Accounts Receivable
Revenues and costs applicable to oilfield services are recognized as the
services are performed.
Receivable Due From Affiliate, Net
Since the Company does not maintain an operating cash account, all
operating and general and administrative expenses, debt payments and any other
cash requirements are paid by the Company's parent, New London. New London also
invoices and collects all trade accounts receivable on behalf of the Company.
The Company is charged by New London for accounts receivable invoiced by New
London on behalf of the Company which are considered to be uncollectible.
Charges to the Company for uncollectible accounts amounted to $240,000, $80,000
and $150,000 for the years ended March 31, 1994, 1993 and 1992, respectively.
All payments made by New London on behalf of the Company are netted against
receivables invoiced by New London on behalf of the Company and included as a
net receivable due from affiliate in the accompanying balance sheet. All
applicable general and administrative expenses incurred by New London on behalf
of the Company are allocated to the Company and are netted against the
receivable due from affiliate. The net receivable balance is payable by the
affiliate on demand and is noninterest bearing.
Concentrations of Credit Risk
The Company's revenues are derived principally from uncollateralized sales
to customers in the oil and gas industry. This industry concentration has the
potential to impact the Company's exposure to credit risk, either positively or
negatively, because the customers may be similarly affected by changes in
economic or other conditions. Management believes that charges to the Company
from New London for amounts deemed uncollectible are adequate to absorb total
estimated losses related to uncollectible accounts.
Property, Plant and Equipment
Property, plant and equipment is carried at cost. Depreciation of assets is
computed primarily using the straight-line method (three-year to thirty-year
lives for buildings and improvements and two-year to twelve-year lives for
machinery and equipment). When assets are retired or otherwise disposed of, the
cost and related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is reflected in income for the period. The cost of
maintenance and repairs is charged to income as incurred; significant renewals
and betterments are capitalized.
Other Assets
Other assets consist primarily of deferred debt and acquisition costs and
other intangible assets and is presented net of accumulated amortization of
$792,185 and $491,779 at March 31, 1994 and 1993,
F-53
<PAGE> 243
WELL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
respectively. Amortization expense amounted to $300,406, $284,094 and $98,237
for 1994, 1993 and 1992, respectively.
Sales to Significant Customers
During the years ended March 31, 1994, 1993 and 1992, sales to the
Company's largest customer accounted for approximately 35 percent, 36 percent
and 27 percent, respectively, of the Company's total operating revenues. No
other single customer accounted for 10 percent or more of the Company's total
operating revenues for any of the years ended March 31, 1994, 1993 and 1992.
Earnings Per Share
Earnings per share of common stock were computed based on the weighted
average number of common shares outstanding during each year. There were no
common stock equivalents outstanding for the three years ended March 31, 1994.
The weighted average numbers of common shares outstanding for the years ended
March 31, 1994, 1993 and 1992, was 10,000.
2. LONG-TERM DEBT:
The prime rate on substantially all of the Company's variable interest debt
was 6.25 percent and 6.00 percent at March 31, 1994 and 1993, respectively. As
of March 31, 1994 and 1993, long-term debt consisted of:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Note payable to an affiliated company, interest at 10
percent, payable in January 2004.......................... $ 8,000,000 $ 8,000,000
Capitalized financing leases payable in monthly installments
of principal and interest, maturing on various dates
ranging from June 1994 through September 1998, at interest
rates ranging from prime plus 2.125 percent to fixed rates
ranging from 7.29 percent to 10.1 percent, collateralized
by equipment.............................................. 1,555,854 1,734,752
Notes payable to individuals, interest at the rate of the
average 90-day certificate of deposit rates (3.23 percent
and 2.69 percent at March 31, 1994 and 1993,
respectively), payable in aggregate annual principal
installments of $278,332 through December 1994............ 278,332 556,666
Notes payable to individuals and a corporation, interest at
4.68 percent, payable in September 1995................... 138,000 414,000
Note payable to an individual, interest at the rate of the
average 90-day certificate of deposit rates (3.23 percent
and 2.69 percent at March 31, 1994 and 1993,
respectively), payable in annual principal installments of
$106,666 through January 1995............................. 106,666 213,333
</TABLE>
F-54
<PAGE> 244
WELL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Mortgage note payable to a bank, interest at 9.25 percent,
payable in monthly installments of principal and interest
aggregating $13,585 per year through December 1993,
secured by land and buildings............................. -- $ 9,327
----------- -----------
$10,078,852 10,928,078
Less --
Current maturities of long-term debt...................... 1,249,175 1,197,499
Note payable to an affiliated company..................... 8,000,000 8,000,000
----------- -----------
Long-term debt, less current maturities..................... $ 829,677 $ 1,730,579
=========== ===========
</TABLE>
The aggregate annual maturities of long-term debt and capital lease
obligations during the five years following March 31, 1994, and thereafter are
as follows:
<TABLE>
<CAPTION>
ANNUAL
FISCAL YEARS MATURITIES
------------ ----------
<S> <C>
1995.......................................... $ 1,249,175
1996.......................................... 417,529
1997.......................................... 261,538
1998.......................................... 127,040
1999.......................................... 23,570
Thereafter.................................... 8,000,000
-----------
Total............................... $10,078,852
===========
</TABLE>
3. LEASES:
Equipment accounts include the following amounts for leases that have been
capitalized:
<TABLE>
<CAPTION>
MARCH 31
------------------------
1994 1993
---- ----
<S> <C> <C>
Equipment........................... $4,102,081 $3,559,517
Less -- Accumulated
depreciation................... 1,809,600 1,294,045
---------- ----------
Net....................... $2,292,481 $2,265,472
========== ==========
</TABLE>
F-55
<PAGE> 245
WELL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The net present value of future minimum lease payments are reflected as a
component of long-term debt. The following table sets forth future minimum lease
payment obligations under capital leases as of March 31, 1994:
<TABLE>
<CAPTION>
EQUIPMENT
---------
<S> <C>
Fiscal years
1995................................................... $ 893,207
1996................................................... 396,712
1997................................................... 283,353
1998................................................... 132,947
1999................................................... 24,020
----------
Minimum lease payments................................... 1,730,239
Less -- Amounts representing interest.................... 174,385
----------
Net present value of future minimum lease payments....... 1,555,854
Less -- Current maturities............................... 795,177
----------
Long-term obligations at March 31, 1994.................. $ 760,677
==========
</TABLE>
The Company also has noncancelable operating leases with remaining terms
ranging from one year to seven years. The related future minimum lease payments
as of March 31, 1994, are as follows:
<TABLE>
<CAPTION>
PROPERTY/FACILITY EQUIPMENT
----------------- ---------
<S> <C> <C>
Fiscal years
1995.................................... $ 52,776 $19,802
1996.................................... 43,950 8,253
1997.................................... 42,000 280
1998.................................... 42,000 --
1999.................................... 34,200 --
Thereafter................................ 44,400 --
-------- -------
$259,326 $28,335
======== =======
</TABLE>
The future minimum lease payments listed above exclude certain operating
lease commitments having a remaining noncancelable term of one year or less.
Rent expense amounted to $140,131, $134,603 and $80,745 for 1994, 1993 and 1992,
respectively, and includes various month-to-month and other short-term rentals
in addition to rents paid and accrued under long-term lease commitments.
4. COMMITMENTS AND CONTINGENCIES:
The Company is exposed to a number of asserted and unasserted potential
claims in the normal course of business. In the opinion of management, the
resolution of the matters will not have a material adverse effect on the
Company's financial position or results of operations.
5. CASH FLOWS:
As discussed in Note 1, all cash requirements of the Company are paid by
New London, therefore, the Company had no cash payments for interest or income
taxes for the years ended March 31, 1994, 1993 and 1992.
F-56
<PAGE> 246
WELL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Supplemental schedule of noncash investing and financing activities is as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Sale of operating assets....................... $ 356,909 $ 205,101 $ 287,275
Reductions in long-term debt................... 1,391,790 1,336,604 2,316,149
Additions to property, plant and equipment..... 633,301 1,798,364 3,001,420
Leases capitalized............................. 542,564 542,345 424,248
Refinance of capital leases.................... -- -- 1,296,089
Additions to other assets...................... 20,000 305,301 1,171,131
</TABLE>
6. INCOME TAXES:
Effective April 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109) which
provides for the recognition of deferred tax assets and liabilities for future
tax consequences of existing differences between the financial reporting and tax
reporting bases of assets and liabilities and operating loss and tax credit
carryforwards for tax purposes. The cumulative impact of adoption of SFAS 109 in
the 1994 statement of income was insignificant.
New London files consolidated tax returns which include the accounts of the
Company. Pursuant to an informal intercompany tax-sharing agreement between the
Company and New London, the Company provides for federal and state income taxes
at rates approximating the statutory tax rates and records the related payable
or receivable as an intercompany payable or receivable with New London.
Income tax expense (benefit) for the years ended March 31, 1994, 1993 and
1992, was as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Current--
Federal................................. $ -- $460,760 $ --
State................................... -- 36,617 --
--------- -------- --------
Total current................... $ -- $497,377 $ --
========= ======== ========
Deferred--
Federal................................. $(220,837) $274,720 $512,355
State................................... (19,485) 28,278 45,208
--------- -------- --------
Total deferred.................. $(240,322) $302,998 $557,563
========= ======== ========
</TABLE>
Total income tax expense (benefit) differs from the amount computed by
applying the statutory federal income tax rate to income (loss) before income
taxes. The reasons for these differences for the tax years ended March 31, 1994,
1993 and 1992, are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Income (loss) before income taxes.............. $(679,737) $2,030,006 $1,391,568
--------- ---------- ----------
Income tax at statutory rate of 34 percent..... $(231,110) $ 690,202 $ 473,133
State taxes, net of federal income tax
benefit...................................... (20,392) 60,900 41,747
Other.......................................... 11,180 49,273 42,683
--------- ---------- ----------
Income tax expense (benefit)......... $(240,322) $ 800,375 $ 557,563
========= ========== ==========
</TABLE>
F-57
<PAGE> 247
WELL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of significant temporary differences representing income tax
assets and liabilities for the years ended March 31, 1994 and 1993, are as
follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Deferred income tax assets --
Deferred income tax assets, long term --
Alternative minimum tax credit carryforward............ $ 45,763 $ 45,763
Property, plant and equipment.......................... 289,756 --
-------- ---------
Total deferred income tax assets, long term....... 335,519 45,763
-------- ---------
Total deferred income tax assets.................. $335,519 $ 45,763
======== =========
Deferred income tax liabilities --
Deferred income tax liabilities, current --
Unbilled accounts receivable........................... $215,336 $ 49,886
-------- ---------
Total deferred income tax liabilities, current.... 215,336 49,886
======== =========
Deferred income tax liabilities, long term --
Property, plant and equipment............................. -- 116,016
-------- ---------
Total deferred income tax liabilities, long
term............................................ -- 116,016
-------- ---------
Total deferred income tax liabilities............. $215,336 $ 165,902
======== =========
Net deferred income tax assets (liabilities)...... $120,183 $(120,139)
======== =========
</TABLE>
The Company has alternative minimum tax credit carryforwards of $45,763
with no expiration date.
7. SUBSEQUENT EVENTS (UNAUDITED):
Effective November 1, 1994, the Company sold the majority of its operating
assets for $17.5 million to Dawson WellTech, L.C., at a gain of approximately
$4.2 million.
F-58
<PAGE> 248
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING
DESCRIBED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
The Company........................... 12
Recent Developments................... 12
Disclosure Regarding Forward-Looking
Statements.......................... 13
Debt Offering......................... 13
Use of Proceeds....................... 13
Price Range of Common Stock and
Dividend Policy..................... 14
Capitalization........................ 15
Pro Forma Condensed Consolidated
Financial Statements................ 16
Selected Consolidated Financial
Data................................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 25
Pride Acquisition..................... 33
Management............................ 35
Certain Relationships and Related
Transactions........................ 41
Security Ownership of Management and
Principal and Selling
Shareholders........................ 44
Description of Capital Stock.......... 46
Description of Notes.................. 48
Underwriting.......................... 49
Legal Matters......................... 50
Experts............................... 51
Available Information................. 51
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
4,706,807 SHARES
[DAWSON INC. LOGO]
DAWSON PRODUCTION
SERVICES, INC.
COMMON STOCK
PROSPECTUS
JEFFERIES & COMPANY, INC.
RAUSCHER PIERCE REFSNES, INC.
SOUTHCOAST CAPITAL
CORPORATION
February , 1997
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 249
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following sets forth estimated expenses (other than the Commission
registration fee and the NASD filing fee) to be incurred in connection with the
issuance and distribution of the securities offered hereby:
<TABLE>
<S> <C>
Commission registration fee................................. $ 63,612
NASD filing fee............................................. 20,992
Nasdaq National Market listing fee.......................... 17,500
Accounting fees and expenses................................ 250,000
Legal fees and expenses..................................... 225,000
Printing and engraving fees and expenses.................... 200,000
Trustee fees................................................ 10,000
Rating agency fee........................................... 50,000
Fees of transfer agent and registrar........................ 60,000
Miscellaneous............................................... 102,896
----------
Total............................................. $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant has authority under Articles 2.02A. (16) and 2.02-1 of the
Texas Business Corporation Act (the "TBCA") to indemnify its directors and
officers to the extent provided for in such statute. The Registrant's Articles
of Incorporation and Bylaws allow indemnification of directors and officers to
the full extent permitted by said provisions of the TBCA.
The TBCA provides in part that a corporation may indemnify a director or
officer or other person who was, is, or is threatened to be made a named
defendant or respondent in a proceeding because the person is or was a director,
officer, employee or agent of the corporation, if it is determined that (i) such
person conducted himself in good faith; (ii) reasonably believed, in the case of
conduct in his official capacity as a director or officer of the corporation,
that his conduct was in the corporation's best interest, and, in all other
cases, that his conduct was not opposed to the corporation's best interests; and
(iii) in the case of any criminal proceeding, had no reasonable cause to believe
that his conduct was unlawful.
A corporation may indemnify a person under the TBCA against judgments,
penalties (including excise and similar taxes), fines, settlements, and
reasonable expenses actually incurred by the person in connection with the
proceeding. If the person is found liable to the corporation or is found liable
on the basis that personal benefit was improperly received by the person, the
indemnification is limited to reasonable expenses actually incurred by the
person in connection with the proceeding, and shall not be made in respect of
any proceeding in which the person shall have been found liable for willful or
intentional misconduct in the performance of his duty to the corporation.
A corporation may also pay or reimburse expenses incurred by a person in
connection with his appearance as a witness or other participation in a
proceeding at a time when he is not a named defendant or respondent in the
proceeding.
Reference is also made to the Articles of Incorporation, which limit or
eliminate a director's liability for monetary damages to the Registrant or its
shareholders for acts or omissions in the director's capacity as a director,
except that the Articles of Incorporation do not eliminate the liability of a
director for (i) a breach of the director's duty of loyalty to the Registrant or
its shareholders, (ii) an act or omission not in good faith that constitutes a
breach of duty of the director to the Registrant or an act or omission that
involves intentional misconduct or a knowing violation of the law, (iii) a
transaction from which a director received in an improper benefit, whether or
not the benefit resulted from an action taken within the scope of the director's
office, or
II-1
<PAGE> 250
(iv) an act or omission for which the liability of a director is expressly
provided by an applicable statute. The Registrant's Bylaws further provide that
the Registrant shall indemnify its officers and directors to the fullest extent
permitted by law.
The Company will seek to obtain director's and officers' liability
insurance that covers certain liabilities and expenses of the Company's
directors and officers. In addition, the Company has entered into
indemnification against certain liabilities, including those arising under the
Securities Act, in connection with the Offering.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
All references to numbers of shares and per share prices give effect to the
4.3-for-one stock split ("Stock Split") which occurred on March 1, 1996.
Within the past three years, the Registrant has sold the following
securities which were not registered under the Securities Act:
1. On March 1, 1996, the Registrant effected a 4.3-for-one stock split
of the issued and outstanding shares of Common Stock. The transaction was
exempt from the registration requirements as not involving any "sale,"
"offer," or "offer to sell" within the meaning of Section 2(3) of the
Securities Act.
2. On October 18, 1995 and February 19, 1996, the Company issued an
aggregate of 347,440 shares of Common Stock upon conversion of its Series A
10% Cumulative Convertible Preferred Stock, and on February 19, 1996, the
Company issued 344,000 shares of Common Stock upon conversion of $2.4
million of convertible debt. Also in February 1996, the Company issued
12,900 shares of Common Stock to Triad Ventures Limited II upon conversion
of $75,000 due under a subordinated convertible debenture. These
transactions were exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereunder.
3. On November 1, 1995, the Registrant issued 1,329,495 shares of
Common Stock to WellTech, Inc. in connection with the Minority Interest
Acquisition. The terms of the transaction required that WellTech, Inc.
distribute its shares to its shareholders and directors, a total of 29
persons or entities which was completed on February 16, 1996. This
transaction was exempt from the registration requirements of the Securities
Act pursuant to Section 4(2) thereunder.
4. On October 1, 1994, the Registrant granted options to purchase an
aggregate of 21,500 shares of Common Stock to five of the Outside
Directors, and options to purchase an aggregate of 96,750 shares to three
senior executives. On October 6, 1995, the Registrant granted options to
purchase an aggregate of 34,400 shares of Common Stock to seven of the
Outside Directors and Mr. Greenwood, and options to purchase an aggregate
of 98,900 shares to nine employees. On April 1, 1996, the Registrant
granted options to purchase 34,400 shares of Common Stock to its eight
non-employee directors, and on July 3, 1996 granted options to purchase
290,750 shares of Common Stock to 34 employees. The Registrant has issued
107,505 shares of Common Stock in connection with exercises of options
granted to employees and directors or their assigns, as follows:
<TABLE>
<CAPTION>
PER SHARE
DATE NUMBER OF SHARES EXERCISE PRICE
---- ---------------- --------------
<S> <C> <C>
October 27, 1994....................................... 7,405 $ 1.16
October 27, 1994....................................... 40,618 $ 1.65
November 1, 1994....................................... 4,300 $ 1.16
November 4, 1994....................................... 4,300 $ 1.16
February 1, 1996....................................... 32,250 $ 2.33
February 27, 1996...................................... 1,432 $ 2.33
April 5, 1996.......................................... 4,300 $ 7.44
May 30, 1996........................................... 4,300 $ 7.44
January 14, 1997....................................... 4,300 $ 7.44
January 14, 1997....................................... 4,300 $10.75
</TABLE>
These transactions were exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) and, for transactions occurring prior to
March 20, 1996, also pursuant to Rule 701 thereunder.
II-2
<PAGE> 251
5. On April 28, 1993 and July 22, 1993, the Registrant issued 2,197 and
2,176 shares of Common Stock, respectively, to Triad Ventures Limited II as
payment of interest on a promissory note. On September 3, 1993, the Registrant
issued 18,430 shares of Common Stock to Triad Ventures Limited II upon
conversion of $75,000 of principal outstanding under a promissory note and on
July 1, 1994, the Registrant issued 16,125 shares of Common Stock to Triad
Ventures Limited II upon conversion of $75,000 of principal outstanding under a
promissory note held by Triad Ventures Limited II. Each of these transactions is
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) thereunder.
6. On November 28, 1994 and January 1, 1995, the Registrant sold an
aggregate of 201,240 and 132,760 shares of Common Stock, respectively to RIMCO
Partners, L.P. IV. On November 30, 1994, the Registrant sold an aggregate of
$2.4 million in convertible subordinated notes to RIMCO Partners L.P., RIMCO
Partners, L.P. II, RIMCO Partners, L.P. III and Triad Ventures Limited II. Each
of these transactions is exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereunder.
7. From time to time over the past three years, the Registrant has issued
shares of Common Stock pursuant to provisions of the Certificate of Designation
of Series A Preferred Stock in payment of dividends on the Series A Preferred
Stock. Since January 1, 1993, a total of 14,357 shares have been issued for this
purpose to Triad Ventures Limited II, NationsBanc Capital Corporation and Nueces
Ventures, Inc. In addition, on October 18, 1995, 20,200 shares of the Series A
Preferred Stock were converted into 86,860 shares of Common Stock in accordance
with the terms of the Registrant's Certificate of Designation of Series A
Preferred Stock. Each of these dividend transactions was exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereunder, and each of these conversions was so exempt pursuant to Section
3(a)(9) thereunder.
8. On October 27, 1994, the Registrant issued 40,618 shares of Common Stock
to two executive officers in exchange for a promissory note from each officer.
This issuance was exempt from registration under Section 4(2) of the Securities
Act.
The securities referred to above as having been issued in reliance on the
exemption from registration under Section 4(2) of the Securities Act were
subject to restrictions on transfer and appropriate restrictive legends were
affixed to the certificates or instruments issued in each transaction. All
recipients were furnished with, or had adequate access to, information regarding
the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
+1.1 -- Form of Underwriting Agreement relating to Equity
Offering.
+1.2 -- Form of Underwriting Agreement relating to Debt Offering.
3.1 -- Amended and Restated Articles of Incorporation of the
Company, as amended by Articles of Amendment to the
Amended and Restated Articles of Incorporation
(incorporated by reference as Exhibit 3.1 of the
Registrant's Registration Statement on Form S-1 (No.
333-00452 dated March 14, 1996)).
3.2 -- Bylaws of the Company, as amended (incorporated by
reference as Exhibit 3.2 of the Registrant's Registration
Statement on Form S-1 (No. 333-00452 dated March 14,
1996)).
4.1 -- Specimen stock certificate evidencing the Common Stock
(incorporated by reference as Exhibit 4.1 of the
Registrant's Registration Statement on Forms S-1 (No.
333-00452 dated March 14, 1996)).
4.2 -- See Exhibits 3.1 and 3.2 for provisions of the Articles
of Incorporation and Bylaws of the Company defining the
rights of the holders of Common Stock.
+4.3 -- Form of Indenture between the Company and U.S. Trust
Company of Texas, N.A. related to the Debt Offering.
+5.1 -- Opinion of Jenkens & Gilchrist, a Professional
Corporation.
</TABLE>
II-3
<PAGE> 252
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.1 -- Dawson Production Services, Inc. 1995 Incentive Plan
(incorporated by reference as Exhibit 10.1 of the
Registrant's Registration Statement on Forms S-1 (No.
333-00452 dated March 14, 1996)).
10.2 -- Employment Agreement between the Company and Michael E.
Little dated as of April 1, 1996 (incorporated by
reference as Exhibit 10.2 of the Registrant's
Registration Statement on Forms S-1 (No. 333-00452 dated
March 14, 1996)).
10.3 -- Service contract between the Company and Union Pacific
Resources Company dated December 8, 1992 and Purchase
Order dated April 27, 1995 (incorporated by reference as
Exhibit 10.4 of the Registrant's Registration Statement
on Forms S-1 (No. 333-00452 dated March 14, 1996)).
10.4 -- First Amendment to Loan Agreement between the Company,
Dawson WellTech, L.C. and the Frost National Bank dated
October 12, 1995 and the Modification, Renewal and
Extension Agreement among The Frost National Bank, the
Company and Dawson WellTech, L.C. dated November 28, 1995
(incorporated by reference as Exhibit 10.5 of the
Registrant's Registration Statement on Forms S-1 (No.
333-00452 dated March 14, 1996)).
++10.5 -- Agreement Regarding Election of Directors dated as of
November 21, 1996, by and between Dawson Production
Services, Inc., and RIMCO Partners, L.P., RIMCO Partners,
L.P. II, RIMCO Partners, L.P. III, and RIMCO Partners,
L.P. IV.
10.6 -- Non-Negotiable Convertible Debenture dated December 1,
1994 executed by Dawson WellTech, L.C., as maker, and
payable to Well Solutions, Inc., and Amendment and
Modification of Non-Negotiable Convertible Debenture
(incorporated by reference as Exhibit 10.11 of the
Registrant's Registration Statement on Forms S-1 (No.
333-00452 dated March 14, 1996)).
10.7 -- Agreement for the Acquisition of Minority Interest in
Dawson WellTech, L.C. between the Company and WellTech,
Inc. dated as of November 1, 1995 (incorporated by
reference as Exhibit 10.12 of the Registrant's
Registration Statement on Forms S-1 (No. 333-00452 dated
March 14, 1996)).
10.8 -- Agreement for the Conversion of Securities of Dawson Well
Servicing, Inc. among the Company, RIMCO Partners, L.P.,
RIMCO Partners, L.P. II, RIMCO Partners, L.P. III, Triad
Ventures Limited II and Nueces Ventures, Inc., dated as
of November 1, 1995, and Joinder Agreement executed by
NationsBanc Capital Corporation (incorporated by
reference as Exhibit 10.13 of the Registrant's
Registration Statement on Forms S-1 (No. 333-00452 dated
March 14, 1996)).
10.9 -- Registration Rights Agreement among the Company,
WellTech, Inc., RIMCO Partners, L.P., RIMCO Partners,
L.P. II, RIMCO Partners, L.P. III, RIMCO Partners, L.P.
IV, Triad Ventures Limited II, NationsBanc Capital
Corporation and Nueces Ventures, Inc., dated as of
November 1, 1995 (incorporated by reference as Exhibit
10.14 of the Registrant's Registration Statement on Forms
S-1 (No. 333-00452 dated March 14, 1996)).
10.10 -- Letter agreements between the Company and Nueces
Ventures, Inc. Relating to consulting services dated
August 14, 1992, with amendment dated January 10, 1995
and termination dated October 13, 1995 (incorporated by
reference as Exhibit 10.15 of the Registrant's
Registration Statement on Forms S-1 (No. 333-00452 dated
March 14, 1996)).
10.11 -- Form of Indemnification Agreement between the Company and
each of its directors and executive officers
(incorporated by reference as Exhibit 10.16 of the
Registrant's Registration Statement on Forms S-1 (No.
333-00452 dated March 14, 1996)).
10.12 -- Employment Agreement between the Company and P. Mark
Stark dated as of April 1, 1996 (incorporated by
reference as Exhibit 10.17 of the Registrant's
Registration Statement on Forms S-1 (No. 333-00452 dated
March 14, 1996)).
10.13 -- Employment Agreement between the Company and Joseph
Eustace dated as of April 1, 1996 (incorporated by
reference as Exhibit 10.18 of the Registrant's
Registration Statement on Forms S-1 (No. 333-00452 dated
March 14, 1996)).
</TABLE>
II-4
<PAGE> 253
<TABLE>
<C> <S>
10.14 -- Promissory Notes dated November 1, 1994 and February 1, 1996 payable to the Company by
Michael E. Little (incorporated by reference as Exhibit 10.19 of the Registrant's
Registration Statement on Forms S-1 (No. 333-00452 dated March 14, 1996)).
10.15 -- First [sic] Amendment to Loan Agreement by and among the Company, Dawson WellTech, L.C., and
The Frost National Bank dated November 25, 1995 (incorporated by reference as Exhibit 10.21
of the Registrant's Registration Statement on Forms S-1 (No. 333-00452 dated March 14,
1996)).
++10.16 -- Purchase Agreement between the Company and Pride Petroleum Services, Inc. dated as of
December 23, 1996.
10.17 -- Stock Purchase Agreement dated July 8, 1996 among Dawson Production Services, Inc., a Texas
corporation (the "Buyer"), PSD Investments, Ltd., a Texas limited partnership (the "Seller"),
John Randall Taylor, an individual residing in Panola County, Texas, in his individual
capacity, and as general partner and sole managing partner of the Seller and his spouse,
Kathy Dianne Taylor, who is also an individual residing in Panola County, Texas, in her
individual capacity and as a general partner of the Seller (incorporated by reference as
Exhibit 10.23 of the Registrant's Current Report on Form 8-K (No. 0-27732 dated July 29,
1996)).
10.18 -- First Amendment dated July 29, 1996 to Stock Purchase Agreement dated July 8, 1996 by and
among Dawson Production Services, Inc., a Texas corporation (the "Buyer"), PSD Investments,
Ltd., a Texas limited partnership (the "Seller"), John Randall Taylor, an individual residing
in Panola County, Texas, in his individual capacity, and as general partner and sole managing
partner of the Seller and his spouse, Kathy Diane Taylor, who is also an individual residing
in Panola County, Texas, in her individual capacity and as a general partner of the Seller
(incorporated by reference as Exhibit 10.24 of the Registrant's Current Report on Form 8-K
(No. 0-27732 dated July 29, 1996)).
++10.19 -- Second Amendment to Loan Agreement dated as of December 4, 1996 between Dawson Production
Services, Inc. and The Frost National Bank relating to the renewal of a $4.0 million
Revolving Credit Facility, and related Promissory Note dated November 28, 1996.
++10.20 -- Third Amendment to Loan Agreement dated as of January 28, 1997 between Dawson Production
Services, Inc. and The Frost National Bank relating to the renewal of a $4.0 million
Revolving Credit Facility, and related Promissory Note dated January 28, 1997.
++10.21 -- Promissory Note of Dawson Production Services, Inc. to The Frost National Bank dated January
25, 1997 relating to the renewal of a $7.0 million term loan.
++11.1 -- Statement Regarding Computation of Per Share Earnings.
+12.1 -- Statement of Ratio of Earnings to Fixed Charges for each of the last five fiscal years.
+21.1 -- Subsidiaries of the Registrant.
+23.1 -- Consent of Jenkens & Gilchrist, A Professional Corporation (included in Exhibit 5.1).
+23.2 -- Consent of KPMG Peat Marwick LLP (included at Page S-1).
+23.3 -- Consent of Chapman, Williams & Co.
+23.4 -- Consent of Coopers & Lybrand L.L.P.
+23.5 -- Consent of Arthur Andersen LLP.
++24.1 -- Power of Attorney for Dawson Production Services, Inc. (contained on the signature page of
this Registration Statement).
++24.2 -- Power of Attorney for Taylor Companies, Inc. (contained on the signature page of this
Registration Statement).
+25.1 -- Statement of Eligibility of U.S. Trust Company of Texas, N.A., as trustee.
</TABLE>
- ---------------
+ Filed herewith.
++ Previously filed.
II-5
<PAGE> 254
As permitted by Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant
has not filed with this Registration Statement certain instruments defining the
rights of holders of long-term debt of the Registrant and its subsidiaries
because the total amount of securities authorized under any such instruments
does not exceed 10% of the total assets of the Registrant and its subsidiaries
on a consolidated basis. The Registrant agrees to furnish a copy of any such
agreement to the Commission upon request.
(b) Financial Statement Schedules
The following financial statement schedules are included in Part II of this
Registration Statement, can be found on the pages indicated and should be read
in conjunction with the financial statements and notes thereto:
<TABLE>
<CAPTION>
ITEM
----
<S> <C>
Independent Auditors' Consent and Report on Consolidated
Financial Statement Schedule.............................. S-1
Schedule II -- Valuation and Qualifying Accounts............ S-2
</TABLE>
All other financial statement schedules for which provision is made in the
applicable accounting regulations of the Commission are omitted because they are
not required under the related instructions, are inapplicable or the required
information is included elsewhere in the financial statements.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Securities Act or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. If a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
the Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 255
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Antonio, State of
Texas, on February 13, 1997.
DAWSON PRODUCTION SERVICES, INC.
By: /s/ MICHAEL E. LITTLE
--------------------------------------
Michael E. Little
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ MICHAEL E. LITTLE Chairman of the Board, February 13, 1997
- ----------------------------------------------------- President, Chief Executive
Michael E. Little Officer and Director
(Principal Executive
Officer)
/s/ P. MARK STARK Chief Financial Officer February 13, 1997
- ----------------------------------------------------- (Principal Accounting and
P. Mark Stark Financial Officer)
* Director February 13, 1997
- -----------------------------------------------------
Wm. Ward Greenwood
* Director February 13, 1997
- -----------------------------------------------------
J. Michael Bell
* Director February 13, 1997
- -----------------------------------------------------
Douglas D. Lewis
* Director February 13, 1997
- -----------------------------------------------------
Paul E. McCollam
* Director February 13, 1997
- -----------------------------------------------------
Russell Banks
* Director February 13, 1997
- -----------------------------------------------------
Stephen F. Oakes
* Director February 13, 1997
- -----------------------------------------------------
Lawrence C. Petrucci
By: /s/ P. MARK STARK
- -----------------------------------------------------
*P. Mark Stark
Attorney-in-Fact pursuant to
power of attorney contained in
original filing of this Registration Statement.
</TABLE>
II-7
<PAGE> 256
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Antonio, State of
Texas, on February 13, 1997.
TAYLOR COMPANIES, INC.
By: /s/ MICHAEL E. LITTLE
--------------------------------------
Michael E. Little
President and Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ MICHAEL E. LITTLE President and Director February 13,
- ----------------------------------------------------- (Principal Executive 1997
Michael E. Little Officer)
/s/ P. MARK STARK Vice-President and Secretary February 13,
- ----------------------------------------------------- (Principal Accounting and 1997
P. Mark Stark Financial Officer)
</TABLE>
II-8
<PAGE> 257
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Antonio, State of
Texas, on February 13, 1997.
DAWSON PRODUCTION SERVICES
de MEXICO, S.A.
By: /s/ JACK P. LOMAX
--------------------------------------
Jack P. Lomax
Sole Administrator
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ JACK P. LOMAX Sole Administrator (Principal February 13, 1997
- ----------------------------------------------------- Executive Officer,
Jack P. Lomax Principal Accounting and
Financial Officer)
</TABLE>
II-9
<PAGE> 258
INDEPENDENT AUDITORS' CONSENT AND REPORT ON
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
The Board of Directors
Dawson Production Services, Inc.
The audits referred to in our report dated June 11, 1996, included the
related financial statement schedule as of and for the years ended March 31,
1994, 1995 and 1996, included in the Registration Statement. This consolidated
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this consolidated financial
statement schedule based on our audits. In our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Our report refers to a change in method of accounting for income taxes in
1994.
We consent to the use of our reports included herein and to the references
to our firm under the heading "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
San Antonio, Texas
February 13, 1997
S-1
<PAGE> 259
SCHEDULE II
DAWSON PRODUCTION SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE OF ADDITIONS DEDUCTIONS BALANCE
BEGINNING CHARGED TO FROM AT END
DESCRIPTION OF PERIOD EXPENSE ACCOUNTS OF PERIOD
----------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended March 31, 1994........................ $ 93,043 $450,590 $353,502 $190,131
Year ended March 31, 1995........................ 190,131 223,475 65,554 348,052
Year ended March 31, 1996........................ 348,052 21,714 78,927 290,839
</TABLE>
S-2
<PAGE> 260
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
+1.1 -- Form of Underwriting Agreement relating to Equity
Offering.
+1.2 -- Form of Underwriting Agreement relating to Debt Offering.
3.1 -- Amended and Restated Articles of Incorporation of the
Company, as amended by Articles of Amendment to the
Amended and Restated Articles of Incorporation
(incorporated by reference as Exhibit 3.1 of the
Registrant's Registration Statement on Form S-1 (No.
333-00452 dated March 14, 1996)).
3.2 -- Bylaws of the Company, as amended (incorporated by
reference as Exhibit 3.2 of the Registrant's Registration
Statement on Form S-1 (No. 333-00452 dated March 14,
1996)).
4.1 -- Specimen stock certificate evidencing the Common Stock
(incorporated by reference as Exhibit 4.1 of the
Registrant's Registration Statement on Forms S-1 (No.
333-00452 dated March 14, 1996)).
4.2 -- See Exhibits 3.1 and 3.2 for provisions of the Articles
of Incorporation and Bylaws of the Company defining the
rights of the holders of Common Stock.
+4.3 -- Form of Indenture between the Company and U.S. Trust
Company of Texas, N.A. related to the Debt Offering.
+5.1 -- Opinion of Jenkens & Gilchrist, a Professional
Corporation.
10.1 -- Dawson Production Services, Inc. 1995 Incentive Plan
(incorporated by reference as Exhibit 10.1 of the
Registrant's Registration Statement on Forms S-1 (No.
333-00452 dated March 14, 1996)).
10.2 -- Employment Agreement between the Company and Michael E.
Little dated as of April 1, 1996 (incorporated by
reference as Exhibit 10.2 of the Registrant's
Registration Statement on Forms S-1 (No. 333-00452 dated
March 14, 1996)).
10.3 -- Service contract between the Company and Union Pacific
Resources Company dated December 8, 1992 and Purchase
Order dated April 27, 1995 (incorporated by reference as
Exhibit 10.4 of the Registrant's Registration Statement
on Forms S-1 (No. 333-00452 dated March 14, 1996)).
10.4 -- First Amendment to Loan Agreement between the Company,
Dawson WellTech, L.C. and the Frost National Bank dated
October 12, 1995 and the Modification, Renewal and
Extension Agreement among The Frost National Bank, the
Company and Dawson WellTech, L.C. dated November 28, 1995
(incorporated by reference as Exhibit 10.5 of the
Registrant's Registration Statement on Forms S-1 (No.
333-00452 dated March 14, 1996)).
++10.5 -- Agreement Regarding Election of Directors dated as of
November 21, 1996, by and between Dawson Production
Services, Inc., and RIMCO Partners, L.P., RIMCO Partners,
L.P. II, RIMCO Partners, L.P. III, and RIMCO Partners,
L.P. IV.
10.6 -- Non-Negotiable Convertible Debenture dated December 1,
1994 executed by Dawson WellTech, L.C., as maker, and
payable to Well Solutions, Inc., and Amendment and
Modification of Non-Negotiable Convertible Debenture
(incorporated by reference as Exhibit 10.11 of the
Registrant's Registration Statement on Forms S-1 (No.
333-00452 dated March 14, 1996)).
10.7 -- Agreement for the Acquisition of Minority Interest in
Dawson WellTech, L.C. between the Company and WellTech,
Inc. dated as of November 1, 1995 (incorporated by
reference as Exhibit 10.12 of the Registrant's
Registration Statement on Forms S-1 (No. 333-00452 dated
March 14, 1996)).
10.8 -- Agreement for the Conversion of Securities of Dawson Well
Servicing, Inc. among the Company, RIMCO Partners, L.P.,
RIMCO Partners, L.P. II, RIMCO Partners, L.P. III, Triad
Ventures Limited II and Nueces Ventures, Inc., dated as
of November 1, 1995, and Joinder Agreement executed by
NationsBanc Capital Corporation (incorporated by
reference as Exhibit 10.13 of the Registrant's
Registration Statement on Forms S-1 (No. 333-00452 dated
March 14, 1996)).
</TABLE>
<PAGE> 261
<TABLE>
<C> <S>
10.9 -- Registration Rights Agreement among the Company, WellTech, Inc., RIMCO Partners, L.P., RIMCO
Partners, L.P. II, RIMCO Partners, L.P. III, RIMCO Partners, L.P. IV, Triad Ventures Limited
II, NationsBanc Capital Corporation and Nueces Ventures, Inc., dated as of November 1, 1995
(incorporated by reference as Exhibit 10.14 of the Registrant's Registration Statement on
Forms S-1 (No. 333-00452 dated March 14, 1996)).
10.10 -- Letter agreements between the Company and Nueces Ventures, Inc. Relating to consulting
services dated August 14, 1992, with amendment dated January 10, 1995 and termination dated
October 13, 1995 (incorporated by reference as Exhibit 10.15 of the Registrant's Registration
Statement on Forms S-1 (No. 333-00452 dated March 14, 1996)).
10.11 -- Form of Indemnification Agreement between the Company and each of its directors and executive
officers (incorporated by reference as Exhibit 10.16 of the Registrant's Registration
Statement on Forms S-1 (No. 333-00452 dated March 14, 1996)).
10.12 -- Employment Agreement between the Company and P. Mark Stark dated as of April 1, 1996
(incorporated by reference as Exhibit 10.17 of the Registrant's Registration Statement on
Forms S-1 (No. 333-00452 dated March 14, 1996)).
10.13 -- Employment Agreement between the Company and Joseph Eustace dated as of April 1, 1996
(incorporated by reference as Exhibit 10.18 of the Registrant's Registration Statement on
Forms S-1 (No. 333-00452 dated March 14, 1996)).
10.14 -- Promissory Notes dated November 1, 1994 and February 1, 1996 payable to the Company by
Michael E. Little (incorporated by reference as Exhibit 10.19 of the Registrant's
Registration Statement on Forms S-1 (No. 333-00452 dated March 14, 1996)).
10.15 -- First [sic] Amendment to Loan Agreement by and among the Company, Dawson WellTech, L.C., and
The Frost National Bank dated November 25, 1995 (incorporated by reference as Exhibit 10.21
of the Registrant's Registration Statement on Forms S-1 (No. 333-00452 dated March 14,
1996)).
++10.16 -- Purchase Agreement between the Company and Pride Petroleum Services, Inc. dated as of
December 23, 1996.
10.17 -- Stock Purchase Agreement dated July 8, 1996 among Dawson Production Services, Inc., a Texas
corporation (the "Buyer"), PSD Investments, Ltd., a Texas limited partnership (the "Seller"),
John Randall Taylor, an individual residing in Panola County, Texas, in his individual
capacity, and as general partner and sole managing partner of the Seller and his spouse,
Kathy Dianne Taylor, who is also an individual residing in Panola County, Texas, in her
individual capacity and as a general partner of the Seller (incorporated by reference as
Exhibit 10.23 of the Registrant's Current Report on Form 8-K (No. 0-27732 dated July 29,
1996)).
10.18 -- First Amendment dated July 29, 1996 to Stock Purchase Agreement dated July 8, 1996 by and
among Dawson Production Services, Inc., a Texas corporation (the "Buyer"), PSD Investments,
Ltd., a Texas limited partnership (the "Seller"), John Randall Taylor, an individual residing
in Panola County, Texas, in his individual capacity, and as general partner and sole managing
partner of the Seller and his spouse, Kathy Diane Taylor, who is also an individual residing
in Panola County, Texas, in her individual capacity and as a general partner of the Seller
(incorporated by reference as Exhibit 10.24 of the Registrant's Current Report on Form 8-K
(No. 0-27732 dated July 29, 1996)).
++10.19 -- Second Amendment to Loan Agreement dated as of December 4, 1996 between Dawson Production
Services, Inc. and The Frost National Bank relating to the renewal of a $4.0 million
Revolving Credit Facility, and related Promissory Note dated November 28, 1996.
++10.20 -- Third Amendment to Loan Agreement dated as of January 28, 1997 between Dawson Production
Services, Inc. and The Frost National Bank relating to the renewal of a $4.0 million
Revolving Credit Facility, and related Promissory Note dated January 28, 1997.
++10.21 -- Promissory Note of Dawson Production Services, Inc. to The Frost National Bank dated January
25, 1997 relating to the renewal of a $7.0 million term loan.
</TABLE>
<PAGE> 262
<TABLE>
<C> <S>
++11.1 -- Statement Regarding Computation of Per Share Earnings.
+12.1 -- Statement of Ratio of Earnings to Fixed Charges for each of the last five fiscal years.
+21.1 -- Subsidiaries of the Registrant.
+23.1 -- Consent of Jenkens & Gilchrist, A Professional Corporation (included in Exhibit 5.1).
+23.2 -- Consent of KPMG Peat Marwick LLP (included at Page S-1).
+23.3 -- Consent of Chapman, Williams & Co.
+23.4 -- Consent of Coopers & Lybrand L.L.P.
+23.5 -- Consent of Arthur Andersen LLP.
++24.1 -- Power of Attorney for Dawson Production Services, Inc. (contained on the signature page of
this Registration Statement).
++24.2 -- Power of Attorney for Taylor Companies, Inc. (contained on the signature page of this
Registration Statement).
+25.1 -- Statement of Eligibility of U.S. Trust Company of Texas, N.A., as trustee.
</TABLE>
- ---------------
+ Filed herewith.
++ Previously filed.
<PAGE> 1
DAWSON PRODUCTION SERVICES, INC.
(A TEXAS CORPORATION)
5,206,807 SHARES OF COMMON STOCK
UNDERWRITING AGREEMENT
February __, 1997
Jefferies & Company, Inc.
Rauscher Pierce Refsnes, Inc.
Southcoast Capital Corporation
As Representatives of
the Several Underwriters
c/o Jefferies & Company, Inc.
Attn: Syndicate Department
650 Fifth Avenue, 4th Floor
New York, New York 10019
Dear Sirs:
Dawson Production Services, Inc., a Texas corporation (the "Company"),
and the persons listed on Schedule 1 hereto (the "Selling Shareholders") hereby
confirm their agreement with you, as representatives (the "Representatives") of
the underwriters named in Schedule 2 hereto (the "Underwriters"), with respect
to the issuance and sale by the Company of an aggregate of 3,500,000 shares and
the sale by the Selling Shareholders of an aggregate of 1,206,807 shares
(collectively, the "Firm Shares"), of the Company's Common Stock, $.01 par
value (the "Common Stock"), and the purchase of the Firm Shares by the
Underwriters, acting severally and not jointly. The Company also has agreed to
sell up to 706,021 shares (the "Additional Shares") of Common Stock to cover
over-allotments, if any. The Firm Shares and the Additional Shares are
hereinafter collectively referred to as the "Shares".
You have advised us that you desire to purchase the Shares and that you
propose to make a public offering of the Shares as soon as you deem advisable
after the Registration Statement referred to below becomes effective upon the
terms set forth in the Prospectus referred to below.
The terms that follow, when used in this Agreement, shall have the
meanings indicated. "Preliminary Prospectus" shall mean any preliminary
prospectus referred to in Section 1(a)(i) below and any preliminary prospectus
related to the Shares included in the Registration Statement on the date that
the Registration Statement becomes effective (the "Effective Date") that omits
Rule 430A Information (as defined below). "Registration Statement" shall mean
the registration statement referred to in Section 1(a)(i) below, including
exhibits, as amended at the Representation Date (as defined below) (or, if not
effective at the Representation Date, in the form in which it shall become
effective) and, in the event any post-effective amendment thereto becomes
effective prior to the Closing Date (as defined in Section 2 hereof), shall
also mean such registration statement as so amended. Such term shall include
Rule 430A Information deemed to be included therein at the Effective Date as
provided by Rule 430A (as defined below). The prospectus related to the Shares
and constituting a part of the Registration Statement (including the Rule 430A
Information), as from time to time amended
<PAGE> 2
or supplemented, is hereinafter referred to as the "Prospectus", except that if
any revised prospectus shall be provided to the Underwriters by the Company
that differs from the prospectus on file at the Securities and Exchange
Commission (the "Commission") at the Effective Date (whether or not such
revised prospectus is required to be filed by the Company pursuant to Rule 424
of the Act Regulations), the term "Prospectus" shall refer to each such revised
prospectus from and after the time it is first provided to the Underwriters for
such use. "Rule 158", "Rule 424" and "Rule 430A" refer to such rules under the
Securities Act of 1933, as amended (the "Act"; and the rules and regulations
under the Act, the "Act Regulations"). "Rule 430A Information" means
information with respect to the Shares and the offering thereof permitted to be
omitted from the Registration Statement when it becomes effective pursuant to
Rule 430A.
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) The Company represents and warrants to the Underwriters as of the
date hereof (such date being referred to as the "Representation Date") and as
of the Closing Date, as follows:
(i) The Company has filed with the Commission a registration
statement on Form S-1 (Registration No. 333-19413), including a
preliminary prospectus related to the Shares, and one or more amendments
thereto, including the related preliminary prospectus, each of which has
previously been furnished to the Underwriters, for the registration
under the Act of the offering and sale of the Shares. The Company will
file with the Commission either (A) prior to effectiveness of such
registration statement, a further amendment to such registration
statement (including the form of final prospectus) or (B) after
effectiveness of such registration statement, a final prospectus in
accordance with Rules 430A and 424(b) or Rule 434 of the Act
Regulations. The Company has included in such registration statement,
as amended at the Effective Date, all information (other than Rule 430A
Information in the case of clause (B)) required by the Act and the Act
Regulations to be included in the prospectus with respect to the Shares
and the offering thereof. As filed, such amendment and form of final
prospectus, or such final prospectus, shall contain all Rule 430A
Information, together with all other such required information, with
respect to the Shares and the offering thereof and, except to the extent
the Underwriters shall agree in writing to a modification, shall be in
all substantive respects in the form furnished to the Underwriters prior
to the date hereof.
(ii) On the Effective Date, the Representation Date and the
Closing Date, the Registration Statement did and will, and when the
Prospectus is first filed (if required) in accordance with Rule 424(b)
the Prospectus will, comply in all material respects with the applicable
requirements of the Act and the Act Regulations; on the Effective Date,
the Representation Date and the Closing Date, the Registration Statement
did not and will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and,
on the Effective Date, the Representation Date and the Closing Date, and
on the date of any filing pursuant to Rule 424(b), the Prospectus did
not and will not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances
under which they were made, not misleading; provided, that the Company
makes no representation or warranty as to the information provided in
writing to the Company by or on behalf of the Underwriters, expressly
for use in the Registration Statement or the Prospectus, and the Company
agrees that the only information provided in writing by or on behalf of
the Underwriters to the Company, expressly for use in the Registration
Statement or the Prospectus, is that information contained in the table
and the second, fifth, eighth and
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<PAGE> 3
tenth paragraphs following the table in the section of the Prospectus
entitled "Underwriting" and the last paragraph on the cover page of the
Prospectus.
(iii) The Company is a corporation duly organized and validly
existing in good standing under the laws of the State of Texas, with
full corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Registration
Statement and the Prospectus, and is duly registered and qualified to
conduct its business and is in good standing in each jurisdiction where
the nature or location of its properties (owned or leased) or the
conduct of its business requires such registration or qualification,
except where the failure so to register or qualify would not have a
Material Adverse Effect. As used herein, the term "Material Adverse
Effect" shall mean an adverse effect on the condition (financial or
other), business, properties, net worth or results of operations of the
Company or any of the Subsidiaries (as hereinafter defined) that would
be, singly or in the aggregate, material to the Company and the
Subsidiaries, taken as a whole, whether or not occurring in the ordinary
course of business.
(iv) The only subsidiaries (as defined in the Act Regulations)
of the Company are the subsidiaries listed on Schedule 3 hereto
(collectively, the "Subsidiaries"). Each of the Subsidiaries is a
corporation duly organized and validly existing in good standing under
the laws of its jurisdiction of its incorporation with full corporate
power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and in
the Prospectus, and is duly registered and qualified to conduct its
business and is in good standing in each jurisdiction where the nature
or location of its properties (owned or leased) or the conduct of its
business requires such registration or qualification, except where the
failure so to register or qualify would not have a Material Adverse
Effect.
(v) Each of the Company and the Subsidiaries has all necessary
authorizations, approvals, orders, licenses, rights-of-way, operating
rights, easements, certificates and permits of and from, and has made
all declarations and filings with, all regulatory or governmental
officials and bodies, all self-regulatory organizations and all courts
and other tribunals ("Permits"), to own or lease its respective
properties and to conduct its respective businesses described in the
Prospectus and the Registration Statement, except where failure to have
obtained or made the same would not have a Material Adverse Effect, and
neither the Company nor any of the Subsidiaries has received any notice
of proceedings relating to the revocation or modification of any such
Permits, if the failure to be so licensed or approved or if the subject
of an unfavorable decision, ruling or finding, would have a Material
Adverse Effect; the Company and each of the Subsidiaries has fulfilled
and performed all its current material obligations with respect to such
Permits and no event has occurred that allows, or after notice or lapse
of time, or both, would allow, revocation or termination thereof or
result in any other material impairment of the rights of the holder of
any such Permit; and such Permits contain no restrictions that are
materially burdensome to the Company and the Subsidiaries; and the
Company and each of the Subsidiaries is in compliance with all
applicable laws, rules, regulations, orders and consents, the violation
of which could have a Material Adverse Effect. The property and
business of the Company and the Subsidiaries conform in all material
respects to the descriptions thereof contained in the Prospectus and the
Registration Statement.
(vi) All of the Company's authorized and outstanding capital
stock has been duly authorized, validly issued and is fully paid and
nonassessable and the capitalization of the Company conforms to the
descriptions thereof and the statements made with respect thereto in the
Registration Statement and the Prospectus as of the date set forth
therein. There are no outstanding securities convertible into or
-3-
<PAGE> 4
exchangeable for, and no outstanding options, warrants or other rights
to purchase, any shares of the capital stock of the Company, nor any
agreements or commitments to issue any of the same, except as described
in the Registration Statement and the Prospectus, and there are no
preemptive or other rights to subscribe for or to purchase, and no
restrictions upon the voting or transfer of, any capital stock of the
Company pursuant to the Company's articles of incorporation or by-laws
or any agreement or other instrument to which the Company is a party,
except as described in the Registration Statement and the Prospectus.
(vii) All the outstanding shares of capital stock of each
Subsidiary have been duly authorized and are validly issued, fully paid
and nonassessable and were not issued in violation of or subject to any
preemptive or similar rights. Except as otherwise set forth in the
Registration Statement and the Prospectus, all outstanding shares of
capital stock of the Subsidiaries are owned by the Company, directly or
indirectly through another Subsidiary, free and clear of any security
interests, liens, encumbrances, equities or other claims.
(viii) Each of the Company and the Subsidiaries has good and
indefeasible title to all real property and good and marketable title to
all personal property owned by it, including those properties described
in the Registration Statement and Prospectus, in each case free and
clear of all liens, charges, encumbrances and restrictions, except such
as are described in the Registration Statement and Prospectus or such as
would not have a Material Adverse Effect. Each of the Company and the
Subsidiaries has valid, subsisting and enforceable leases for the
properties described in the Registration Statement and the Prospectus as
leased by it, with such exceptions as are described in the Registration
Statement and the Prospectus or that in the aggregate would not have a
Material Adverse Effect.
(ix) The Company has all requisite power, authority,
authorizations, approvals, orders, licenses, certificates and permits to
enter into this Agreement and to carry out the provisions and conditions
hereof, and to issue and deliver to the Underwriters the Shares that are
being sold by the Company as provided herein. This Agreement has been
duly authorized, executed and delivered by the Company and constitutes a
legal, valid and binding agreement of the Company, enforceable against
it in accordance with the terms hereof, except to the extent rights to
indemnity hereunder may be limited by federal or state securities laws
or public policy underlying such laws and except to the extent the
enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by equitable principles.
(x) Each of the Company and the Subsidiaries owns, or
possesses adequate rights to use, all trademarks, service marks and
other rights necessary for the conduct of its business as described in
the Registration Statement and the Prospectus, and neither the Company
nor any of the Subsidiaries has received a notice, or knows of any
basis, of any conflict with the asserted rights of others in any such
respect that could have a Material Adverse Effect.
(xi) The Shares that are being issued and sold by the Company
have been duly and validly authorized for issuance by the Company, and
the Company has full corporate power and authority to issue, sell and
deliver such Shares; and, when such Shares are issued and delivered
against payment therefor as provided by this Agreement, such Shares will
have been validly issued, fully paid and nonassessable, and the issuance
of such Shares will not be subject to any statutory preemptive rights or
similar statutory rights or any other preemptive or similar rights. All
corporate action
-4-
<PAGE> 5
required to be taken by the Company for the authorization, issuance and
sale of the Shares that are being issued and sold by the Company has
been duly and validly taken.
(xii) KPMG Peat Marwick LLP, Chapman, Williams & Co., Coopers &
Lybrand L.L.P. and Arthur Andersen LLP are independent public
accountants with respect to the Company and the Subsidiaries as required
by the Act.
(xiii) The consolidated financial statements and related notes
and schedules included in the Registration Statement or in the
Prospectus present fairly the financial position of the Company and the
Subsidiaries, on the basis stated in the Registration Statement, as of
the respective dates thereof and the consolidated statements of income,
shareholders' equity and cash flows of the Company and the Subsidiaries,
for the respective periods covered thereby; and such financial
statements and the related schedules and notes have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis throughout the entire period involved, except as
otherwise disclosed in the Registration Statement and the Prospectus.
The selected financial information included in the Registration
Statement or the Prospectus presents fairly the information shown
therein and has been compiled on a basis consistent with that of the
audited financial statements of the Company included therein. The pro
forma financial information in the Registration Statement or in the
Prospectus complies in all material respects with the applicable
accounting requirements of Article 11 of Regulation S-X promulgated by
the Commission and presents fairly the information shown therein; the
assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the
transactions or circumstances referred to therein. No other financial
statements or schedules of the Company and the Subsidiaries are required
by the Securities Exchange Act of 1934, as amended, and the rules and
regulations of the Commission promulgated thereunder (collectively, the
"Exchange Act"), the Act or the Act Regulations to be included in the
Registration Statement or Prospectus.
(xiv) The Shares conform in all material respects to the
descriptions thereof in the Registration Statement and Prospectus.
(xv) Since the respective dates as of which information is
provided in the Registration Statement and Prospectus, except as
otherwise specifically stated therein, there has been no change or
development with respect to the condition (financial or otherwise) or
business of the Company and the Subsidiaries, taken as a whole, whether
or not arising in the ordinary course of business, that would have a
Material Adverse Effect.
(xvi) Neither the Company nor any Subsidiary is in violation of
its articles of incorporation or bylaws or other organizational
documents. Neither the Company nor any Subsidiary is, nor with the
passage of time or the giving of notice or both would be, in violation
of any law, ordinance, administrative or governmental rule or regulation
applicable to the Company or any of the Subsidiaries, or of any
judgment, order or decree of any court or governmental agency or body or
of any arbitrator having jurisdiction over the Company or any of the
Subsidiaries, or in default in the performance or observance of any
obligation, agreement, covenant or condition contained in any mortgage,
loan agreement, note, bond, debenture, credit agreement or any other
evidence of indebtedness or in any agreement, contract, indenture, lease
or other instrument to which the Company or any of the Subsidiaries is a
party or by which it may be bound, or to which any of the property or
assets of the Company or any of the Subsidiaries is subject, the effect
of which violation or default in performance or observance would have a
Material Adverse Effect.
-5-
<PAGE> 6
(xvii) There is no action, suit or proceeding pending before or
by any court, arbitrator or governmental agency or body or, to the
Company's knowledge, threatened against the Company or any of the
Subsidiaries or to which any of their respective property is subject (A)
that is required to be described in the Registration Statement or the
Prospectus but is not described as required or (B) that, if adversely
determined, could reasonably be expected to have a Material Adverse
Effect. There is no agreement, contract, indenture, lease or other
document or instrument that is required to be described in the
Registration Statement or Prospectus or to be filed as an exhibit to the
Registration Statement that is not described or filed as required.
(xviii) No person has any right to the registration of any
security of the Company by reason of the filing of the Registration
Statement with the Commission or the consummation of the transactions
contemplated hereby, which right has not been waived or lapsed, except
as described in the Registration Statement or Prospectus.
(xix) The Company is not an "investment company" within the
meaning of the Investment Company Act of 1940, as amended, and is not
subject to registration under such Act.
(xx) As of the date of the Prospectus, and except as described
in the Registration Statement and the Prospectus, neither the Company
nor any of the Subsidiaries is currently planning any probable
acquisitions for which disclosure of pro forma financial information
would be required by the Act.
(xxi) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus (or any amendment
or supplement thereto), except as otherwise stated therein, (A) neither
the Company nor any of the Subsidiaries (1) has issued any securities
other than in connection with the exercise of any outstanding options,
(2) incurred any material liability or obligations, direct or
contingent, for borrowed money, (3) entered into any transaction, not in
the ordinary course of business, that is material to the Company and the
Subsidiaries, taken as a whole, (4) entered into any transaction with an
affiliate of the Company (as the term "affiliate" is defined in Rule 405
of the Act Regulations) that would otherwise be required to be disclosed
in the Prospectus or the Registration Statement, or (5) declared or paid
any dividend on its capital stock, or made any other distribution to its
equity holders, (B) there has not been any material change in the
capital stock or other equity, or material increase in the short-term or
long-term debt, of the Company or any of the Subsidiaries and (C) there
has been no change or development with respect to the condition
(financial or otherwise) or business of the Company and the
Subsidiaries, taken as a whole, whether or not arising in the ordinary
course of business, that would have a Material Adverse Effect.
(xxii) The Company has not distributed and, prior to the later
to occur of (A) the Closing Date and (B) completion of the distribution
of the Shares, will not distribute without your prior written consent any
offering material in connection with the offering and sale of the Shares
other than the Registration Statement, the Prospectus or other
materials, if any, permitted by the Act.
(xxiii) Prior to the Closing Date, the Shares will be duly
authorized for listing on the Nasdaq National Market upon official
notice of issuance.
(xxiv) Neither the Company nor any Subsidiary is involved in any
labor dispute and, to the knowledge of the Company, no such dispute is
threatened.
-6-
<PAGE> 7
(xxv) Neither the Company nor any Subsidiary nor, to the best
of its knowledge, any employee or agent of the Company or any Subsidiary
has made any payment of funds of the Company or any Subsidiary or
received or retained any funds of a character required to be disclosed
in the Prospectus.
(xxvi) The Company and each of the Subsidiaries have filed (or
have obtained extensions thereto) all federal, state and local tax
returns that are required to be filed, which returns are complete and
correct in all material respects, and have paid all taxes shown on such
returns and all assessments with respect thereto to the extent that the
same have become due.
(xxvii) Except for the shares of capital stock of each of
the Subsidiaries, neither the Company nor any of the Subsidiaries owns
any shares of stock or any other securities of any corporation or has
any equity interest in any firm, partnership, association or other
entity other than as reflected in the consolidated financial statements
included in the Registration Statement and the Prospectus.
(xxviii) Neither the execution, delivery or performance of
this Agreement, the offer, issuance, sale or delivery of the Shares that
are being issued and sold by the Company nor the consummation by the
Company of the terms of this Agreement (A) requires the consent,
approval, authorization or order of any court or governmental agency or
body, except such as have been obtained under the Act and such as may be
required under the blue sky laws of any jurisdiction in connection with
the purchase and distribution of the Shares by the Underwriters or such
as may be required by the National Association of Securities Dealers,
Inc. (the "NASD") and such other approvals as have been obtained, (B)
will conflict with, result in a breach of, or constitute a default under
the terms of any indenture, agreement, lease or other instrument to
which the Company or any of the Subsidiaries is a party or by which any
of them or any of their respective properties may be bound, or will
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any of the Subsidiaries
pursuant to the terms of any agreement or instrument to which any of
them is a party or by which any of them may be bound or to which any of
the property or assets of any of them is subject, (C) will conflict with
or violate any law, order, statute, regulation, consent or memorandum of
understanding applicable to the Company or any Subsidiary of any court,
regulatory body, administrative agency, governmental body or arbitrator
having jurisdiction over the Company or any of the Subsidiaries (in the
case of (B) or (C) above, where such conflict, breach, default or
violation, individually or in the aggregate, would have a Material
Adverse Effect), or (D) will conflict with or violate the articles of
incorporation or by-laws of the Company or any Subsidiary.
(xxix) The Company has not taken, directly or indirectly, any
action designed to cause or result in or that has constituted or that
might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate
the sale or resale of the Shares.
(xxx) The Company is not required to comply with Section
517.075 of the Florida statutes.
(xxxi) The Company and each of the Subsidiaries (A) are in
compliance with any and all applicable federal, state, local and foreign
laws and regulations relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("Environmental Laws"), (B) have received all
permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their business and (C) are in compliance
with all terms
-7-
<PAGE> 8
and conditions of any such permit, license or approval, except where
such noncompliance with Environmental Laws, failure to receive required
permits, licenses or approvals or failure to comply with the terms and
conditions of such permits, licenses or approvals would not have a
Material Adverse Effect.
(xxxii) There are no costs or liabilities, to the Company's
knowledge after due inquiry, associated with the effect of Environmental
Laws on the business, operations and properties of the Company and its
Subsidiaries that would have a Material Adverse Effect.
(b) Except for Belmont Fund, L.P. ("Belmont Fund"), Belmont Capital
Partners II, L.P. ("Belmont Capital") and Fidelity Summer Street Trust:
Fidelity Capital & Income Fund ("Fidelity Fund"), who make the separate
representations and warranties set forth in Section 1(c) below, each Selling
Shareholder, severally and not jointly, represents and warrants to the
Underwriters as of the Representation Date and as of the Closing Date, as
follows:
(i) Such Selling Shareholder now has, and on the Closing Date
will have, valid and marketable title to the Shares to be sold by such
Selling Shareholder pursuant to this Agreement, free and clear of any
security interests, liens, encumbrances, equities or other claims,
including, without limitation, any restriction on transfer (except for
restrictions imposed by applicable federal or state securities laws)
other than as specified on the certificate(s) representing such Shares.
(ii) Such Selling Shareholder now has, and on the Closing Date
will have, full legal right, power and authorization, and any approval
required by law (except such as may be required under the Act or such as
may be required by the NASD or under state securities or blue sky laws
governing the purchase and distribution of the Shares), to sell, assign,
transfer and deliver the Shares to be sold by such Selling Shareholder
pursuant to this Agreement in the manner provided in this Agreement, and
upon delivery of and payment for such Shares hereunder, the several
Underwriters will acquire valid and marketable title to such Shares free
and clear of any adverse claims, assuming that the Underwriters have
acquired such Shares for value, in good faith and without notice of any
adverse claim.
(iii) This Agreement and the Custody Agreement (as such term is
defined herein) have been duly authorized, executed and delivered by or
on behalf of such Selling Shareholder and are the valid and binding
agreements of such Selling Shareholder enforceable against such Selling
Shareholder in accordance with their terms except (i) as limited by any
applicable bankruptcy, insolvency, reorganization or other law relating
to or affecting creditors' rights generally, (ii) general principles of
equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law) and (iii) as such enforceability of
rights to indemnity and contribution hereunder may be limited under
applicable securities laws.
(iv) The execution and delivery of this Agreement or the
Custody Agreement by or on behalf of such Selling Shareholder does not
and the consummation of the transactions herein or therein contemplated
by or on behalf of such Selling Shareholder will not, require any
consent, approval, authorization or order of, or filing or registration
with, any court, regulatory body, administrative agency or other
governmental body, agency or official (except such as may be required
under the Act or such as may be required by the NASD or under state
securities or blue sky laws governing the purchase and distribution of
the Shares) or conflict with or constitute a breach of, or default
under, or violate, any agreement, indenture or other instrument to which
such Selling Shareholder is a party or by which such Selling Shareholder
is or may be bound or to which any of such Selling Shareholder's
property or assets is
-8-
<PAGE> 9
subject, or any statute, law, rule, regulation, ruling, judgment,
injunction, order or decree applicable to such Selling Shareholder or to
any property or assets of such Selling Shareholder, which breach,
default or violation would impair such Selling Shareholder's ability to
perform under this Agreement or the Custody Agreement and would have any
adverse impact on the Company or the Underwriters under this Agreement
or the Custody Agreement.
(v) The information with respect to such Selling Shareholder
contained in the section entitled "Security Ownership of Management and
Principal and Selling Shareholders" in the Prospectus does not and will
not on the Closing Date contain an untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
(vi) The representations and warranties of such Selling
Shareholder in the Custody Agreement are, and on the Closing Date will
be, true and correct.
(vii) Such Selling Shareholder has not taken, directly or
indirectly, any action designed to or that might reasonably be expected
to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Shares, except for
such actions as would not be unlawful.
(c) Each of Belmont Fund, Belmont Capital and Fidelity Fund,
severally and not jointly, represents and warrants to the Underwriters as of
the Representation Date and as of the Closing Date, as follows:
(i) Such Selling Shareholder now has, and on the Closing Date
will have, valid and marketable title to the Shares to be sold by such
Selling Shareholder pursuant to this Agreement, free and clear of any
security interests, liens, encumbrances, equities or other claims,
including, without limitation, any restriction on transfer (except for
restrictions imposed by applicable federal or state securities laws)
other than as specified on the certificate(s) representing such Shares.
(ii) Such Selling Shareholder now has, and on the Closing Date
will have, full legal right, power and authorization, and any approval
required by law (except such as may be required under the Act or such as
may be required by the NASD or under state securities or blue sky laws
governing the purchase and distribution of the Shares), to sell, assign,
transfer and deliver the Shares to be sold by such Selling Shareholder
pursuant to this Agreement in the manner provided in this Agreement, and
upon delivery of and payment for such Shares hereunder, the several
Underwriters will acquire valid and marketable title to such Shares free
and clear of any adverse claims, assuming that the Underwriters have
acquired such Shares for value, in good faith and without notice of any
adverse claim.
(iii) This Agreement has been duly authorized, executed and
delivered by or on behalf of such Selling Shareholder and is the valid
and binding agreement of such Selling Shareholder enforceable against
such Selling Shareholder in accordance with its terms except (i) as
limited by any applicable bankruptcy, insolvency, reorganization or
other law relating to or affecting creditors' rights generally, (ii)
general principles of equity (regardless of whether such enforceability
is considered in a proceeding in equity or at law) and (iii) as such
enforceability of rights to indemnity and contribution hereunder may be
limited under applicable securities laws.
(iv) The execution and delivery of this Agreement by or on
behalf of such Selling Shareholder does not and the consummation of the
transactions herein contemplated by or on behalf of such Selling
Shareholder will not, require any consent,
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<PAGE> 10
approval, authorization or order of, or filing or registration with, any
court, regulatory body, administrative agency or other governmental
body, agency or official (except such as may be required under the Act
or such as may be required by the NASD or under state securities or blue
sky laws governing the purchase and distribution of the Shares) or
conflict with or constitute a breach of, or default under, or violate,
any agreement, indenture or other instrument to which such Selling
Shareholder is a party or by which such Selling Shareholder is or may be
bound or to which any of such Selling Shareholder's property or assets
is subject, or any statute, law, rule, regulation, ruling, judgment,
injunction, order or decree applicable to such Selling Shareholder or to
any property or assets of such Selling Shareholder, which breach,
default or violation would impair such Selling Shareholder's ability to
perform under this Agreement and would have any adverse impact on the
Company or the Underwriters under this Agreement.
(v) The information with respect to such Selling Shareholder
contained in the section entitled "Security Ownership of Management and
Principal and Selling Shareholders" in the Prospectus does not and will
not on the Closing Date contain an untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
(vi) Such Selling Shareholder has not taken, directly or
indirectly, any action designed to or that might reasonably be expected
to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Shares, except for
such actions as would not be unlawful.
(d) Any certificate signed by any officer of the Company or any
Selling Shareholder delivered to the Underwriters or to counsel for the
Underwriters pursuant to the terms of this Agreement shall be deemed a
representation and warranty by the Company or such Selling Shareholder, as the
case may be, to each Underwriter as to the matters covered thereby.
SECTION 2. SALE AND DELIVERY TO THE UNDERWRITERS; CLOSING
(a) Subject to the terms and conditions set forth herein, and subject
to such adjustments as you may determine to avoid fractional shares:
(i) the Company agrees to sell to each Underwriter, severally
and not jointly, and, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set
forth, each Underwriter, severally and not jointly, agrees to purchase
from the Company, at a purchase price of $________ per share (the
"Initial Price"), the aggregate number of Firm Shares that bears the
same proportion to the aggregate number of Firm Shares to be issued and
sold by the Company as the number of Firm Shares set forth opposite the
name of such Underwriter in Schedule 2 hereto (or such number of Firm
Shares increased as provided in Section 10 hereof) bears to the
aggregate number of Firm Shares to be sold by the Company and the
Selling Shareholders, and the Company will have no obligation to sell
the Underwriters any of the Firm Shares that are being issued and sold
by the Company hereunder unless the Underwriters purchase all of such
Firm Shares hereunder; and
(ii) each Selling Shareholder agrees, severally and not
jointly, to sell to each Underwriter, severally and not jointly, and, on
the basis of the representations and warranties herein contained and
subject to the terms and conditions herein set forth, each Underwriter,
severally and not jointly, agrees to purchase from each Selling
Shareholder at the Initial Price, the aggregate number of Firm Shares
that bears the same proportion to the aggregate number of Firm Shares
set forth opposite the name
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<PAGE> 11
of such Selling Shareholder on Schedule 1 hereto as the number of Firm
Shares set forth opposite the name of such Underwriter in Schedule 2
hereto (or such number of Firm Shares increased as provided in Section
10 hereof) bears to the aggregate number of Firm Shares to be sold by
the Company and the Selling Shareholders, and each Selling Shareholder
will have no obligation to sell the Underwriters any of the Firm Shares
to be sold by such Selling Shareholder hereunder unless the Underwriters
purchase all of such Firm Shares hereunder.
(b) The Company grants to the Underwriters an option to purchase all
or any part of the Additional Shares at the Initial Price. Additional Shares
shall be purchased from the Company, severally and not jointly, for the
accounts of the Underwriters in proportion to the number of Firm Shares set
forth in Schedule 2 hereto opposite the name of such Underwriter. Such option
may be exercised only to cover over-allotments in the sale of the Firm Shares
by the Underwriters and may be exercised in whole or in part at any time on or
before 12:00 noon, New York City time, on the business day before the Firm
Shares Closing Date (as hereinafter defined), and only once thereafter within
30 days after the date of the Prospectus, in each case upon written or
telegraphic notice, or oral or telephonic notice confirmed by written or
facsimile notice, by the Underwriters to the Company no later than 12:00 noon,
New York City time, on the business day before the Firm Shares Closing Date or
at least two business days before the Additional Shares Closing Date (as
hereinafter defined), as the case may be, setting forth the number of
Additional Shares to be purchased and the time and date (if other than the Firm
Shares Closing Date) of such purchase.
(c) Certificates in transferable form for the Shares that certain of
the Selling Shareholders agrees to sell pursuant to this Agreement have been
placed in custody with _______ (the "Custodian") for delivery under this
Agreement pursuant to a Custody Agreement and Power of Attorney (the "Custody
Agreement") executed by certain of the Selling Shareholders appointing _______
and _______ as agents and attorneys-in-fact (the "Attorneys-in-Fact"). Each
Selling Shareholder that is a party to the Custody Agreement agrees that (i)
the Shares represented by the certificates held in custody pursuant to the
Custody Agreement are subject to the interests of the Underwriters, the Company
and each other Selling Shareholder that is a party to the Custody Agreement,
(ii) the arrangements made by the Selling Shareholders that are parties to the
Custody Agreement for such custody are, except as specifically provided in the
Custody Agreement, irrevocable, (iii) the appointments of the Custodian and of
the Attorneys-in-Fact are coupled with the interest of the Underwriters and
irrevocable, (iv) the obligations of the Selling Shareholders hereunder and
under the Custody Agreement shall not be terminated by any act of such Selling
Shareholder or by operation of law, whether by the death or incapacity of any
Selling Shareholder or the occurrence of any other event. If any Selling
Shareholder that is a party to the Custody Agreement shall die or be
incapacitated or if any other event shall occur before the delivery of the
Shares hereunder, certificates for the Shares of such Selling Shareholder shall
be delivered to the Underwriters by the Attorneys-in-Fact in accordance with
the terms and conditions of this Agreement and the Custody Agreement as if such
death or incapacity or other event had not occurred, regardless of whether or
not the Attorneys-in-Fact or any Underwriter shall have received notice of such
death, incapacity or other event. Each Attorney-in-Fact is authorized, on
behalf of each of the Selling Shareholders that are parties to the Custody
Agreement, to execute this Agreement and any other necessary documents in
connection with the sale of the Shares to be sold hereunder by such Selling
Shareholder, to make delivery of the certificates for such Shares, to receive
the proceeds of the sale of such Shares, to give receipts for such proceeds, to
pay therefrom any expenses to be borne by such Selling Shareholder in
connection with the sale and public offering of such Shares, to distribute the
balance thereof to such Selling Shareholder, and to take such other action as
may be necessary or desirable in connection with the transactions contemplated
by this Agreement. Each Attorney-in-Fact agrees to perform his duties under
the Custody Agreement.
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<PAGE> 12
(d) Payment of the purchase prices for, and delivery of, the Firm
Shares to be purchased by the Underwriters shall be made at the offices of
Jefferies & Company, Inc., 39 Broadway, New York, New York 10006, or at such
other place as shall be agreed upon by the Underwriters, the Company and the
Attorneys-in-Fact, at 10:00 A.M., New York City time, on the third (or, if
pricing occurs after 4:30 p.m., New York City time, on any given day, on the
fourth) business day following the date hereof, or such other time not later
than ten business days after such date as shall be agreed upon by the
Underwriters, the Company and the Attorneys-in-Fact (such time and date of
payment and delivery being herein called the "Firm Shares Closing Date").
Payment shall be made to the Company and the Selling Shareholders or Attorneys-
in-Fact, as the case may be, by certified or official bank check or checks
drawn in New York Clearing House funds (or similar next day funds) payable to
the order of the Company and each of the Selling Shareholders or Attorneys-in-
Fact, as the case may be, respectively, against delivery to the Underwriters of
the Firm Shares.
(e) Payment of the purchase price for, and delivery of, the
Additional Shares to be purchased by the Underwriters shall be made at the
office as set forth above or at such other place as shall be agreed upon by the
Underwriters and the Company at the time and on the date (which may be the same
as, but in no event shall be earlier than, the Firm Shares Closing Date)
specified in the notice referred to in Section 2(b) (such time and date of
delivery and payment being herein called the "Additional Shares Closing Date").
The Firm Shares Closing Date and the Additional Shares Closing Date are called,
individually, the "Closing Date" and together, the "Closing Dates". Payment
shall be made to the Company by certified or official bank check or checks
drawn in New York Clearing House funds (or similar next day funds) payable to
the order of the Company against delivery to the Underwriters of the Additional
Shares.
(f) Certificates representing the Shares shall be in such
denominations and registered in such names as the Underwriters may request in
writing at least two business days before the Firm Shares Closing Date or, in
the case of Additional Shares, on the day of notice of exercise of the option
as described in Section 2(b). The certificates representing the Shares will be
made available for examination and packaging by the Underwriters not later than
1:00 P.M., New York City time, on the last business day prior to the Firm
Shares Closing Date (or the Additional Shares Closing Date in the case of the
Additional Shares) at such place as is designated by the Underwriters.
SECTION 3. COVENANTS OF THE COMPANY.
The Company covenants with each of the Underwriters as follows:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the Representation Date, and any amendment
thereof, to become effective, as promptly as possible after the filing thereof.
The Company will not file any amendment to the Registration Statement or any
amendment or supplement to the Prospectus to which the Underwriters shall
reasonably object in writing after a reasonable opportunity to review such
amendment or supplement. Subject to the foregoing sentences in this clause
(a), if the Registration Statement has become or becomes effective pursuant to
Rule 430A, or filing of the Prospectus or supplement to the Prospectus is
otherwise required under Rule 424(b), the Company will cause the Prospectus,
properly completed, or such supplement thereto to be filed with the Commission
pursuant to the applicable paragraph of Rule 424(b) within the time period
prescribed and will provide evidence satisfactory to the Underwriters of such
timely filing. The Company will promptly advise the Underwriters (i) when the
Registration Statement, if not effective at the Representation Date, and any
amendment thereto, shall have become effective, (ii) when the Prospectus, and
any supplement thereto, shall have been filed (if required) with the Commission
pursuant to Rule 424(b), (iii) when any amendment to the Registration Statement
shall have been filed or become effective, (iv) of any request by the
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<PAGE> 13
Commission for any amendment of the Registration Statement or supplement to any
Prospectus or for any additional information, (v) of the receipt by the Company
of any notification of, or if the Company otherwise has knowledge of, the
issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or the institution or threatening of any proceeding
for that purpose and (vi) of the receipt by the Company of any notification
with respect to the suspension of the qualification of the Shares for sale in
any jurisdiction or the initiation or threatening of any proceeding for such
purpose. The Company will use its best efforts to prevent the issuance of any
such stop order and, if issued, to obtain as soon as possible the lifting
thereof.
(b) If, at any time when a prospectus relating to the Shares is
required to be delivered under the Act or the Act Regulations, any event occurs
as a result of which the Prospectus as then amended or supplemented would
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading,
or if it shall be necessary to amend the Registration Statement or amend or
supplement the Prospectus to comply with the Act or the Act Regulations, the
Company promptly will prepare and file with the Commission, subject to the
second sentence of paragraph (a) of this Section 3, an amendment or supplement
that will correct such statement or omission or effect such compliance.
Neither your consent to, nor your delivery of, any such amendment or supplement
shall constitute a waiver of any of the conditions set forth in Section 6.
(c) The Company consents to the use of the Prospectus in accordance
with the provisions of the Act and with the securities or blue sky laws of the
jurisdictions in which the Shares are offered by the Underwriters and by all
dealers to whom Shares may be sold, both in connection with the offering and
sale of the Shares and for such period of time thereafter as the Prospectus is
required by the Act to be delivered in connection with the sales by any
Underwriter or dealer. The Company will comply with all requirements imposed
upon it by the Act, as now and hereafter amended, so far as necessary to permit
the continuance of sales of or dealing in the Shares in accordance with the
provisions hereof and the Prospectus.
(d) As soon as practicable, the Company will make generally available
to its securityholders and to the Underwriters a consolidated earnings
statement or statements of the Company and the Subsidiaries covering a twelve-
month period beginning after the Effective Date that will satisfy the
provisions of Section 11(a) of the Act and Rule 158 under the Act Regulations.
(e) The Company will furnish to the Representatives, without charge,
three signed copies of the Registration Statement (including exhibits thereto
and all documents incorporated by reference therein) and, so long as delivery
of a prospectus by an Underwriter or dealer may be required by the Act or the
Act Regulations, as many copies of the Prospectus and all amendments and
supplements thereto as the Underwriters may reasonably request.
(f) During the period of five years hereafter, the Company will
furnish to you, as soon as practicable after the end of each fiscal year, a
copy of its annual report to shareholders for such year; and the Company will
furnish to you (i) as soon as available, a copy of each report or definitive
proxy statement of the Company filed with the Commission under Exchange Act or
mailed to shareholders, and (ii) from time to time, such other information
concerning the Company as you may reasonably request, provided that prior to
the Company's furnishing any such other information that is nonpublic you shall
enter into such agreement respecting the confidentiality thereof as the Company
may reasonably request.
(g) The Company will not, and will cause each of its executive
officers and directors to enter into agreements with the Underwriters in the
form set forth in Exhibit A to the effect
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<PAGE> 14
that they will not, for a period of 90 days following the date of the
Prospectus, without prior written consent of Jefferies & Company, Inc., offer,
sell or contract to sell, or otherwise dispose of, directly or indirectly, or
announce the offering of, any shares of Common Stock or any securities
convertible into, or exchangeable for, shares of Common Stock.
(h) The Company will comply with all the provisions of any
undertakings contained in the Registration Statement.
(i) The Company will not at any time, directly or indirectly, take
any action intended, or that might reasonably be expected, to cause or result
in, or that will cause, stabilization of the price of the shares of Common
Stock to facilitate the sale or resale of any of the Shares.
(j) The Company will apply the net proceeds from the offering and
sale of the Shares to be sold by the Company in accordance with the description
set forth in the "Use of Proceeds" section of the Prospectus.
(k) The Company will cooperate with the Underwriters and their
counsel in connection with endeavoring to obtain and maintain the qualification
or registration, or exemption from qualification, of the Shares for offer and
sale under the applicable securities laws of such states and other
jurisdictions of the United States as the Underwriters may designate; provided,
that in no event shall the Company be obligated to qualify to do business in
any jurisdiction where it is not now so qualified or to take any action that
would subject it to taxation or general service of process in any jurisdiction
where it is not now so subject.
(l) The Company will cause the Shares to be duly listed on the Nasdaq
National Market.
SECTION 4. COVENANTS OF THE SELLING SHAREHOLDERS.
Each of the Selling Shareholders, severally and not jointly, covenants
with each of the Underwriters as follows:
(a) Such Selling Shareholder shall cooperate to the extent reasonably
necessary to cause the Registration Statement, if not effective at the
Representation Date, and any amendment thereof, to become effective, as
promptly as possible after the filing thereof.
(b) Without prejudice to any rights such Selling Shareholder may have
against the Company, such Selling Shareholder shall pay all Federal and other
taxes, if any, on the transfer or sale of the Shares being sold by such Selling
Shareholder to the Underwriters.
(c) Such Selling Shareholder shall do or perform all things required
to be done or performed by the Selling Shareholder prior to the Firm Shares
Closing Date or any Additional Shares Closing Date, as the case may be, to
satisfy all conditions precedent to the delivery of and the payment for the
Shares pursuant to this Agreement.
(d) Except as would not be unlawful, such Selling Shareholder will
not at any time, directly or indirectly, take any action intended, or that
might reasonably be expected, to cause or result in, or that will cause,
stabilization of the price of the shares of Common Stock to facilitate the sale
or resale of any of the Shares.
(e) Such Selling Shareholder will advise the Representatives
promptly, and if requested by the Representatives will confirm such advice in
writing, of any change in the information relating to such Selling Shareholder
contained in the Registration Statement
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<PAGE> 15
under the caption "Security Ownership of Management and Principal and Selling
Shareholders".
SECTION 5. PAYMENT OF EXPENSES.
The Company will pay, or reimburse if paid by the Underwriters, all
actual and reasonable costs and expenses incident to the performance of the
obligations of the Company under this Agreement, including (i) the fees,
disbursements and expenses of counsel and accountants for the Company and the
Selling Shareholders and all other expenses in connection with the preparation,
printing and filing of the Registration Statement, any Preliminary Prospectus,
the Prospectus, and any amendments or supplements thereto, and the mailing and
delivery of copies thereof to the Underwriters and dealers; (ii) the cost of
printing the Agreement Among Underwriters, this Agreement, the Selling
Agreement, any Dealer Agreements, the Underwriters' Questionnaire and the Blue
Sky Memorandum (in both preliminary and final form); (iii) all expenses in
connection with qualification of the Shares for offering and sale under state
securities laws, including filing and registration fees and the fees,
disbursements and expenses of counsel for the Underwriters in connection with
such qualification and in connection with blue sky surveys; (iv) the filing
fees incident to securing any required review by the NASD; (v) the cost of
preparing stock certificates; (vi) all fees of the Company's transfer agent and
registrar; (vii) any fees for including the Shares on the Nasdaq National
Market; and (viii) all other costs and expenses incident to the performance of
its obligations hereunder that are not otherwise specifically provided for in
this Section.
If this Agreement is terminated by the Underwriters because of any
failure or refusal on the part of the Company or the Selling Shareholders to
comply with the terms or fulfill any of the conditions of this Agreement, the
Company shall reimburse the Underwriters for all of their reasonable out-of-
pocket expenses, including the reasonable fees and disbursements of counsel for
the Underwriters. The Company shall not in any event be liable to any of the
Underwriters for consequential damages including loss of anticipated profits
from the transactions covered by this Agreement.
SECTION 6. CONDITIONS OF THE UNDERWRITERS' OBLIGATION.
The obligation of the Underwriters to purchase the Shares hereunder is
subject to the continued accuracy of the representations and warranties of the
Company and the Selling Shareholders herein contained, to the accuracy of the
statements of the Company and the Selling Shareholders made in any certificates
pursuant to the provisions hereof, to the performance by the Company and the
Selling Shareholders of their respective obligations hereunder and to the
following further conditions:
(a) The Registration Statement shall have become effective, and you
shall have received notice thereof, not later than 5:30 p.m., Washington D.C.
time, on the date hereof, or such later time and date as shall be approved by
the Representatives and the Company and shall remain effective at the Closing
Date. No stop order suspending the effectiveness of the Registration Statement
shall have been issued under the Act or proceedings therefor initiated or
threatened by the Commission. No order suspending the effectiveness of the
Registration Statement or the qualification or registration of the Shares under
the securities or blue sky laws of any jurisdiction shall be in effect or
proceedings therefor initiated or threatened by the Commission or the
authorities of any such jurisdiction. If the Company has elected to rely upon
Rule 430A, the price of the Shares and any price-related or other information
previously omitted from the effective Registration Statement pursuant to Rule
430A shall have been transmitted to the Commission for filing pursuant to Rule
424(b) within the prescribed time period, and, prior to the Closing Date, the
Company shall have provided evidence satisfactory to the Underwriters of such
timely filing, or a post-effective amendment providing such
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<PAGE> 16
information shall have been promptly filed and declared effective in accordance
with the requirements of Rule 430A.
(b) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred (i) any change, or any development involving a
prospective change, in or affecting particularly the business, properties,
condition (financial or other) or results of operations of the Company and the
Subsidiaries, taken as a whole, which, in the reasonable judgment of the
Underwriters, materially impairs the investment quality of the Shares and
constitutes a Material Adverse Effect; (ii) any material loss or interference
with the business or properties of the Company or any of the Subsidiaries from
fire, explosion, flood or other casualty, whether or not covered by insurance,
or from any labor dispute or any court or legislative or other governmental
action, order or decree, that is not set forth in the Registration Statement
and the Prospectus, if in the reasonable judgment of the Underwriters any such
development makes it impracticable or inadvisable to proceed with completion of
the sale of and payment for the Shares; (iii) any suspension or limitation of
trading in securities generally on the New York Stock Exchange or the Nasdaq
National Market System, or any setting of minimum prices for trading on such
exchange or system, or any suspension of trading of any securities of the
Company on any exchange or system or in the over-the-counter market; (iv) any
banking moratorium declared by federal or New York authorities; or (v) any
outbreak or escalation of major hostilities in which the United States is
involved, any declaration of war by Congress or any other substantial national
or international calamity or emergency if, in the reasonable judgment of the
Underwriters, the effect of any such outbreak, escalation, declaration,
calamity or emergency makes it impractical or inadvisable to proceed with
completion of the sale of and payment for the Shares.
(c) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there shall have been no
litigation or other proceeding instituted against the Company or any of the
Subsidiaries or any of their respective officers or directors in their
capacities as such, before or by any federal, state or local court, commission,
regulatory body, administrative agency or other governmental body, domestic or
foreign, or arbitrator, in which litigation or proceeding an unfavorable
ruling, decision or finding would have a Material Adverse Effect.
(d) Each of the representations and warranties of the Company
contained herein shall be true and correct in all material respects at the
Closing Date, as if made at the Closing Date, and all covenants and agreements
contained herein to be performed on the part of the Company, and all conditions
contained herein to be fulfilled or complied with by the Company at or prior to
the Closing Date, shall have been duly performed, fulfilled or complied with.
(e) Each of the representations and warranties of each of the Selling
Shareholders contained herein shall be true and correct in all material
respects at the Closing Date, as if made at the Closing Date, and all covenants
and agreements contained herein to be performed on the part of each of the
Selling Shareholders, and all conditions contained herein to be fulfilled or
complied with by each of the Selling Shareholders at or prior to the Closing
Date, shall have been duly performed, fulfilled or complied with, and the
Representatives shall have received a certificate to such effect, dated the
Closing Date and signed by or on behalf of each Selling Shareholder.
(f) The Underwriters shall have received an opinion from Jenkens &
Gilchrist, A Professional Corporation, counsel for the Company, satisfactory in
form and substance to counsel for the Underwriters, dated as of each Closing
Date, to the effect set forth in Exhibit B.
(g) The Underwriters shall have received a favorable opinion, dated
as of each Closing Date, of Fulbright & Jaworski L.L.P., counsel for the
Underwriters, with respect to
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<PAGE> 17
such matters as may be reasonably requested by the Underwriters, and you shall
have provided such counsel with such papers and information as they may
reasonably request to enable them to provide such opinion.
(h) On the Firm Shares Closing Date, the Underwriters shall have
received (i) a certificate from an individual authorized to deliver such a
certificate on behalf of Belmont Fund, Belmont Capital and Fidelity Fund,
satisfactory in form and substance to counsel for the Underwriters, dated as of
the Firm Shares Closing Date, and (ii) an opinion from legal counsel to each of
the other Selling Shareholders, satisfactory in form and substance to counsel
for the Underwriters, dated as of the Firm Shares Closing Date, to the effect
set forth in Exhibit C.
(i) The following conditions contained in clauses (i), (ii) and (iii)
of this Section 6(i) shall have been satisfied on and as of each Closing Date
and the Company shall have furnished to the Underwriters a certificate of the
Company, signed by the President and the principal financial or accounting
officer of the Company, dated such Closing Date to the effect that the signers
of such certificate have carefully examined the Registration Statement, the
Prospectus, any supplement or amendment to the Prospectus, and this Agreement
and that:
(i) the representations and warranties of the Company in this
Agreement are true and correct in all material respects on and as of the
Closing Date with the same effect as if made on the Closing Date and the
Company has complied with all the agreements and satisfied all the
conditions under this Agreement on its part to be performed or satisfied
at or prior to the Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or, to the Company's knowledge, threatened;
and
(iii) since the date of the most recent financial statements
included in the Prospectus, there has been no change that would have a
Material Adverse Effect.
(j) At the Representation Date and at each Closing Date, KPMG Peat
Marwick LLP, Chapman, Williams & Co. and Coopers & Lybrand L.L.P. shall have
furnished to the Underwriters a letter or letters, dated respectively as of the
date of this Agreement and each Closing Date, in form and substance
satisfactory to the Underwriters, containing statements and information of the
type customarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial and statistical
information pertaining to the Company and the Subsidiaries contained in the
Registration Statement and the Prospectus.
(k) At the Representation Date, the Company shall have furnished to
the Underwriters a letter substantially in the form of Exhibit A hereto from
each executive officer and director of the Company, addressed to the
Underwriters, in which each such person or entity agrees not to offer, sell or
contract to sell, or otherwise dispose of, directly or indirectly, or announce
an offering of, any shares of Common Stock beneficially owned by such person or
entity or any securities convertible into, or exchangeable for, shares of
Common Stock for a period of 90 days following the date of the Prospectus
without the prior written consent of Jefferies & Company, Inc.
(l) At the Closing Date, counsel for the Underwriters shall have been
furnished with such information, certificates and documents as they may
reasonably require for the purpose of enabling them to pass upon the issuance
and sale of the Shares as contemplated herein and related proceedings, or to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained, or otherwise in
connection with the offering contemplated hereby; and all opinions and
certificates mentioned above or
-17-
<PAGE> 18
elsewhere in this Agreement shall be reasonably satisfactory in form and
substance to the Underwriters and counsel for the Underwriters.
(m) At the time of the closing of the offering of the Firm Shares,
simultaneous closings occur with respect to (i) the offering by the Company of
$130,000,000 of its % Senior Notes due February 1, 2007 (the "Notes"), and
(ii) the acquisition by the Company of substantially all of the U.S. land-based
well servicing operations of Pride Petroleum Services, Inc. ("Pride") pursuant
to a purchase agreement, dated as of December 23, 1996, between the Company and
Pride (the "Pride Acquisition").
If any condition specified in this Section 6 shall not have been
fulfilled in all material respects when and as required to be fulfilled, this
Agreement may be terminated by the Underwriters by notice to the Company and
the Selling Shareholders and such termination shall be without liability of any
party to any other party except as provided in Section 5.
SECTION 7. CONDITIONS OF THE COMPANY'S AND THE SELLING SHAREHOLDERS'
OBLIGATIONS.
The obligations of the Company and the Selling Shareholders to issue and
sell the Firm Shares hereunder is subject to the conditions that, at the time
of the closing of the offering of the Firm Shares, simultaneous closings occur
with respect to (i) the offering by the Company of the Notes and (ii) the Pride
Acquisition.
SECTION 8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify, defend and hold harmless each
Underwriter and its respective officers, shareholders, employees and directors
and any person who controls any Underwriter within the meaning of Section 15 of
the Act from and against any loss, expense, liability or claim (including the
reasonable cost of investigating such claim) that, jointly or severally, any
such Underwriter or any such officer, shareholder, employee, director or
controlling person may incur under the Act, the Exchange Act or otherwise, as
such expenses are incurred, insofar as such loss, expense, liability or claim
arises out of or is based upon any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement (or in the
Registration Statement as amended by any post-effective amendment thereof) or
any omission or alleged omission to state a material fact required to be stated
in such Registration Statement or necessary to make the statements made therein
not misleading or any untrue statement or alleged untrue statement of a
material fact contained in a Prospectus (the term Prospectus for the purpose of
this Section 8 being deemed to include any Preliminary Prospectus, the
Prospectus, the Prospectus as amended or supplemented and any document filed
under the Exchange Act and incorporated by reference into the Prospectus) or
any omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
the Company will not be liable in any such case to the extent any such loss,
expense, liability or claim arises out of or is based upon any untrue statement
or omission or alleged untrue statement or omission that has been made therein
or omitted therefrom in reliance upon and in conformity with the information
provided in writing to the Company by or on behalf of any Underwriter,
expressly for use in the Registration Statement or the Prospectus; and
provided, further that with respect to any untrue statement or omission or
alleged untrue statement or omission made in any Preliminary Prospectus, the
indemnity agreement contained in this Section 8(a) shall not inure to the
benefit of any such indemnified Underwriter or its respective officers,
shareholders, employees and directors, and the Company shall not be liable to
any such indemnified Underwriter or its respective officers, shareholders,
employees and directors, from whom the person asserting any such losses,
claims, damage, or liabilities purchased the Shares concerned, to the extent
that any such loss, claim, damage or liability of such indemnified Underwriter
or its respective officers, shareholders, employees and directors results from
the
-18-
<PAGE> 19
fact that there was not sent or given to such person at or prior to the written
confirmation of the sale of such shares to such person, a copy of the
Prospectus, as the same may be amended or supplemented, and the untrue
statement or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact in such Preliminary Prospectus was corrected
in such Prospectus and the Company had previously furnished copies thereof to
such indemnified Underwriter on a timely basis to permit the Prospectus (as the
same may be amended or supplemented) to be sent or given. The Company agrees
that the only such information provided in writing by or on behalf of any
Underwriter to the Company, expressly for use in the Registration Statement or
the Prospectus, is that information contained in the table and the second,
fifth, eighth and tenth paragraphs following the table in the section of the
Prospectus entitled "Underwriting" and the last paragraph on the cover page of
the Prospectus. The foregoing indemnity agreement shall be in addition to any
liability that the Company may otherwise have.
(b) Each Selling Shareholder agrees severally and not jointly to
indemnify, defend and hold harmless each Underwriter and its respective
officers, shareholders, employees and directors and any person who controls any
Underwriter within the meaning of Section 15 of the Act from and against any
loss, expense, liability or claim (including the reasonable cost of
investigating such claim) that, jointly or severally, any such Underwriter or
any such officer, shareholder, employee, director or controlling person may
incur under the Act, the Exchange Act or otherwise, as such expenses are
incurred, insofar as such loss, expense, liability or claim arises out of or is
based upon any untrue statement or alleged untrue statement of a material fact
or any omission or alleged omission to state a material fact required to be
stated in such Registration Statement or necessary to make the statements made
therein not misleading or any untrue statement or alleged untrue statement of a
material fact contained in a Prospectus (the term Prospectus for the purpose of
this Section 8 being deemed to include any Preliminary Prospectus, the
Prospectus, the Prospectus as amended or supplemented and any document filed
under the Exchange Act and incorporated by reference into the Prospectus) or
any omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, to the extent that
any untrue statement or omission was made in reliance upon and in conformity
with any information furnished to the Company by or on behalf of such Selling
Shareholder expressly for use in the Registration statement (or in the
Registration Statement as amended by any post-effective amendment thereof);
provided, however, that with respect to any untrue statement or omission or
alleged untrue statement or omission made in any Preliminary Prospectus, the
indemnity agreement contained in this Section 8(b) shall not inure to the
benefit of any such indemnified Underwriter or its respective officers,
shareholders, employees and directors, and the Selling Shareholders shall not
be liable to any such indemnified Underwriter or its respective officers,
shareholders, employees and directors, from whom the person asserting any such
losses, claims, damage, or liabilities purchased the Shares concerned, to the
extent that any such loss, claim, damage or liability of such indemnified
Underwriter or its respective officers, shareholders, employees and directors
results from the fact that there was not sent or given to such person at or
prior to the written confirmation of the sale of such shares to such person, a
copy of the Prospectus, as the same may be amended or supplemented, and the
untrue statement or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact in such Preliminary Prospectus was
corrected in such Prospectus and the Company had previously furnished copies
thereof to such indemnified Underwriter on a timely basis to permit the
Prospectus (as the same may be amended or supplemented) to be sent or given,
and provided further, that the liability of each Selling Shareholder pursuant
hereto shall not exceed an amount equal to the net proceeds received by such
Selling Shareholder from the sale of its Shares hereunder to the Underwriters.
(c) Each Underwriter agrees to indemnify, defend and hold harmless
(i) each Selling Shareholder and its officers, partners, shareholders,
employees and directors and any person
-19-
<PAGE> 20
who controls such Selling Shareholder within the meaning of Section 15 of the
Act, and (ii) the Company and its officers, shareholders, employees and
directors and any person who controls the Company within the meaning of Section
15 of the Act, from and against any loss, expense, liability or claim
(including the reasonable cost of investigating such claim) that (i) the
Selling Shareholders or any such officers, partners, shareholders, employees
and directors and any such controlling person, or (ii) the Company or any such
officer, shareholder, employee, director or controlling person may incur under
the Act, the Exchange Act or otherwise to the same extent as the provisions of
Section 8(a) above, but only insofar as such loss, expense, liability or claim
arises out of or is based upon any untrue statement or omission or alleged
untrue statement or omission made in reliance or in conformity with information
relating to such Underwriter furnished in writing to the Company by or on
behalf of such Underwriter, expressly for use in the Registration Statement or
the Prospectus. The Company agrees that the only information provided in
writing by or on behalf of the Underwriters to the Company, expressly for use
in the Registration Statement or the Prospectus, is that information contained
in the table and the second, fifth, eighth and tenth paragraphs following the
table in the section of the Prospectus entitled "Underwriting" and the last
paragraph on the cover page of the Prospectus.
(d) If any action is brought against an indemnified party under this
Section 8, the indemnified party or parties shall promptly notify the
indemnifying party in writing of the institution of such action (provided that
the failure to give such notice shall not relieve the indemnifying party of any
liability that it may have pursuant to this Agreement, unless and to the extent
the indemnifying party did not otherwise learn of such action and such failure
has resulted in the forfeiture of substantive rights or defenses by the
indemnifying party) and the indemnifying party shall assume the defense of such
action, including the employment of counsel and payment of reasonable expenses.
The indemnified party or parties shall have the right to employ its or their
own counsel in any such case, but the fees and expenses of such counsel shall
be at the expense of the indemnified party or parties unless (i) the employment
of such counsel shall have been authorized in writing by the indemnifying party
in connection with the defense of such action, (ii) the indemnifying party
shall not have employed counsel reasonably satisfactory to the indemnified
party to take charge of the defense of such action within a reasonable time
after notice of the institution of such action, (iii) such indemnified party or
parties shall have reasonably concluded that there may be defenses available to
it or them that are different from or additional to those available to the
indemnifying party or (iv) the use of counsel chosen by the indemnifying party
to represent the indemnified party would present such counsel with a conflict
of interest (in which case the indemnifying party shall not have the right to
direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses shall be borne by the
indemnifying party and paid as incurred; provided that the indemnifying party
shall only be responsible for the fees and expenses of one counsel for the
indemnified party or parties hereunder. Anything in this paragraph to the
contrary notwithstanding, the indemnifying party shall not be liable for any
settlement of any such claim or action effected without its written consent,
which consent shall not be unreasonably withheld.
(e) If the indemnification provided for in this Section 8 is
unavailable to an indemnified party under subsection (a), (b) or (c) of this
Section 8 in respect of any losses, damages, expenses, liabilities or claims
referred to therein, then each applicable indemnifying party shall contribute
to the amount paid or payable by such indemnified party as a result of such
losses, expenses, liabilities or claims (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company, the
Selling Shareholders and the Underwriters from the offering of the Shares or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault
of the indemnifying parties and the indemnified party in connection with the
statements or omissions that resulted in such losses, expenses, liabilities or
claims, as well as any other relevant equitable considerations. The
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<PAGE> 21
relative benefits received by the Company, the Selling Shareholders and the
Underwriters shall be deemed to be in the same proportion as the total proceeds
from the offering of the Shares (net of underwriting discounts and commissions
but before deducting expenses) received by the Company or the Selling
Shareholders, as the case may be, bear to the total underwriting discounts and
commissions received by the Underwriters. The relative fault of the Company,
the Selling Shareholders and of the Underwriters shall be determined by
reference to, among other things, whether the untrue statement or alleged
untrue statement of a material fact or omission or alleged omission relates to
information supplied by the Company, the Selling Shareholders or by the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The amount
paid or payable by a party as a result of the losses, expenses, liabilities and
claims referred to above shall be deemed to include any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any claim or action.
(f) The Company, the Selling Shareholders and the Underwriters agree
that it would not be just and equitable if contribution pursuant to this
Section 8 were determined by pro rata allocation or by any other method of
allocation that does not take account of the equitable considerations referred
to in Section 8(e) above. Notwithstanding the provisions of this Section 8, no
Underwriter shall be required to contribute any amount in excess of the total
underwriting discount applicable to the Shares purchased by such Underwriter
and no Selling Shareholder shall be required to contribute any amount in excess
of the net proceeds received by such Selling Shareholder from the sale of its
Shares to the Underwriters hereunder. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
SECTION 9. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY.
The respective indemnity and contribution agreements contained in
Section 8, and the covenants, representations and warranties of the Company and
the Selling Shareholders contained in this Agreement or contained in
certificates of officers of the Company or the Selling Shareholders submitted
pursuant hereto, shall remain in full force and effect, regardless of any
investigation, or statement as to the results thereof, made by or on behalf of
any Underwriter or any of its respective officers, employees, directors,
shareholders or any person who controls any Underwriter, or by or on behalf of
the Company or the Selling Shareholders or any of the officers or directors or
any controlling person of the Company or the Selling Shareholders, as the case
may be, and will survive delivery of and payment for the Shares.
SECTION 10. DEFAULT OF UNDERWRITERS.
If any Underwriter or Underwriters default in their obligations to
purchase Shares hereunder on either the Firm Shares Closing Date or the
Additional Shares Closing Date and the aggregate number of Shares that such
defaulting Underwriter or Underwriters agreed but failed to purchase does not
exceed 10% of the total number of Shares that the Underwriters are obligated to
purchase on such Closing Date, the Representatives may make arrangements
satisfactory to the Company and the Selling Shareholders for the purchase of
such Shares by other persons, including any of the Underwriters, but if no such
arrangements are made by such Closing Date the non-defaulting Underwriters
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Shares that such defaulting Underwriters agreed but
failed to purchase on such Closing Date. If any Underwriter or Underwriters so
default and the aggregate number of Shares with respect to which such default
or defaults occur exceeds 10% of the total number of Shares that the
Underwriters are obligated to purchase on such Closing Date and arrangements
satisfactory to the Representatives, the Company and the Selling Shareholders
for the purchase of such Shares by other persons are not made within 36 hours
after such default, this Agreement will
-21-
<PAGE> 22
terminate without liability on the part of any non-defaulting Underwriter or
the Company or the Selling Shareholders, except as provided in this Section 10
(provided that if such default occurs with respect to the Additional Shares
after the Firm Shares Closing Date, this Agreement will not terminate as to the
Firm Shares). As used in this Agreement, the term "Underwriter" includes any
person substituted for an Underwriter under this Section. Nothing herein will
relieve a defaulting Underwriter from liability for its default.
SECTION 11. NOTICES.
All notices and other communications hereunder will be in writing and
shall be deemed to have been duly given if mailed or transmitted by standard
form of telecommunication. Notices to the Underwriters shall be directed to
the Underwriters in care of Jefferies & Company, Inc. at 11100 Santa Monica
Boulevard, Los Angeles, California 90071, attn: Jerry Gluck, Esq., with a copy
to Charles L. Strauss, Fulbright & Jaworski L.L.P., 1301 McKinney, Suite 5100,
Houston, Texas 77010-3095; if sent to the Company, directed to Dawson
Production Services, Inc., 901 N.E. Loop 410, Suite 700, San Antonio, Texas
78209, attn: Michael E. Little, with a copy to J. Rowland Cook, Jenkens &
Gilchrist, A Professional Corporation, 600 Congress Avenue, Suite 2200, Austin,
Texas 78701; and if to the Selling Shareholders, directed to the Attorneys-in-
Fact, c/o Dawson Production Services, Inc., 901 N.E. Loop 410, Suite 700, San
Antonio, Texas 78209, with a copy to J. Rowland Cook, Jenkens & Gilchrist, A
Professional Corporation, 600 Congress Avenue, Suite 2200, Austin, Texas 78701,
and to each of Fidelity Capital & Income Fund, Belmont Capital Partners II,
L.P., and Belmont Fund, L.P., Fidelity Investments, 82 Devonshire Street -
E20F, Boston, Massachusetts 02109, Attention: Portfolio Manager, with a copy to
Sharon Shelfer-Casey, Esq., Fidelity Investments, 82 Devonshire Street - E20E,
Boston, Massachusetts 02109.
SECTION 12. PARTIES.
This Agreement shall inure to the benefit of and be binding upon the
Underwriters, the Company and the Selling Shareholders and their respective
successors and legal representatives. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to provide any person, firm or
corporation, other than the Underwriters, the Company and the Selling
Shareholders and their respective successors and legal representatives and the
controlling persons, officers, employees, directors and shareholders referred
to in Sections 8 and 9 and their respective heirs and legal representatives,
any legal or equitable right, remedy or claim under or in respect of this
Agreement or any provision herein or therein contained. This Agreement and all
conditions and provisions hereof are intended to be for the sole and exclusive
benefit of the Underwriters, the Company and the Selling Shareholders and their
respective successors and legal representatives, and such controlling persons,
shareholders, officers and directors and their respective heirs and legal
representatives, and for the benefit of no other person, firm or corporation.
No purchaser of Shares from any Underwriter shall be deemed to be a successor
by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York applicable to agreements made and to be performed
in such State. Specified times of day refer to New York time, unless otherwise
specified.
SECTION 14. COUNTERPARTS.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
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<PAGE> 23
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement among the Company, the Underwriters and the Selling Shareholders in
accordance with its terms.
Very truly yours,
DAWSON PRODUCTION SERVICES, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Belmont Capital Partners II, L.P.
By: Fidelity Capital Partners II Corp.,
as General Partner
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Belmont Fund, L.P.
By: Fidelity Management Trust Company,
pursuant to a Power of Attorney for
Fidelity International Services
Limited, Managing General Partner
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
-23-
<PAGE> 24
Fidelity Summer Street Trust: Fidelity
Capital & Income Fund
By: , Trustee
-----------------
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
Each of the Selling Shareholders named
in Schedule 1 hereto (excluding
Belmont Fund, L.P., Belmont Capital
Partners II, L.P. and Fidelity
Summer Street Trust: Fidelity Capital
& Income Fund):
By:
-----------------------------------
Attorney-in-Fact
By:
-----------------------------------
Attorney-in-Fact
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
JEFFERIES & COMPANY, INC.
RAUSCHER PIERCE REFSNES, INC.
SOUTHCOAST CAPITAL CORPORATION
As Representatives of
the Several Underwriters
By: Jefferies & Company, Inc.
By:
-----------------------------
Name:
----------------------------
Title:
---------------------------
-24-
<PAGE> 25
SCHEDULE 1
SELLING SHAREHOLDERS
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
SELLING SHAREHOLDER TO BE SOLD
------------------- -------------
<S> <C>
Belmont Capital Partners II, L.P. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 608,321
Belmont Fund, L.P. 86,903
Fidelity Summer Street Trust: Fidelity Capital & Income Fund . . . . . . . . . . . . . . . 117,536
Triad Ventures Limited II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,600
Boston Safe Deposit FBO 303 Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,450
Atwell & Company FBO Detroit Policeman/Fireman . . . . . . . . . . . . . . . . . . . . . . 47,713
Trussal & Company FBO MERS of Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . 46,150
Ell & Company FBO NCR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,136
Lark & Company FBO Arkansas Teacher Retirement . . . . . . . . . . . . . . . . . . . . . . 39,050
Ell & Company FBO AT&T Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,625
How & Company FBO Columbia Healthcare . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,650
NSCC FBO Pontiac Police/Fire Department . . . . . . . . . . . . . . . . . . . . . . . . . . 5,200
Topworks & Company FBO Montgomery County Growth . . . . . . . . . . . . . . . . . . . . . . 5,050
H.A. Abshier, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,300
Boston Safe Deposit FBO Fairfax County Public Schools . . . . . . . . . . . . . . . . . . . 4,000
Ell & Company FBO Newell Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,250
Bost. & Company FBO Bush Foundation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,300
Iowa State University Foundation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200
Salkeld & Company FBO Robinson Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200
Siglar & Company FBO Marion Bradley Glass via Part Trust . . . . . . . . . . . . . . . . . 1,100
Siglar & Company FBO Marion Bradley Glass Trust . . . . . . . . . . . . . . . . . . . . . . 1,100
Pitt & Company FBO Tracor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 850
MAC & Company FBO SEIU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750
NSCC FBO City of Pontiac General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750
Arik Y. Prawer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 623
Pitt & Company FBO GCIU Employer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500
Siglar & Company FBO Iron Workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500
---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,206,807
=========
</TABLE>
-25-
<PAGE> 26
SCHEDULE 2
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
NAME OF UNDERWRITER TO BE PURCHASED
------------------- -----------------
<S> <C>
Jefferies & Company, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rauscher Pierce Refsnes, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Southcoast Capital Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . .
---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,706,807
=========
</TABLE>
-26-
<PAGE> 27
SCHEDULE 3
SUBSIDIARIES
<TABLE>
<CAPTION>
Name Jurisdiction Ownership (%)
----------------------------------------- ------------------------------ -------------------
<S> <C> <C>
Taylor Companies, Inc. Texas 100%
Dawson Production Services de Mexico, S.A. Mexico 100%
</TABLE>
-27-
<PAGE> 28
EXHIBIT A
February __, 1997
Jefferies & Company, Inc.
Rauscher Pierce Refsnes, Inc.
Southcoast Capital Corporation
As Representatives of the Several Underwriters
c/o Jefferies & Company, Inc.
11100 Santa Monica Boulevard
Los Angeles, California 90025
Dear Sirs:
The undersigned has been informed that you, as representatives of the
underwriters (the "Underwriters"), are planning to enter into an Underwriting
Agreement (the "Underwriting Agreement") with Dawson Production Services, Inc.,
a Texas corporation (the "Company"), and the Selling Shareholders (as such term
is defined therein) providing for the purchase by the Underwriters of an
aggregate of 4,706,807 shares of the Company's common stock, $.01 par value
(the "Common Stock"), with the right to purchase up to 706,021 additional
shares of Common Stock to cover over-allotments.
To induce you to enter into this Underwriting Agreement and in
consideration of the purchase and public offering by you of such shares of
Common Stock (which the undersigned considers to be in the best interests of
the Company and its shareholders and to the undersigned's benefit), the
undersigned agrees with the Underwriters that for a period of 90 days from the
date of the final Prospectus relating to such sale of Common Stock covered by
the Underwriting Agreement, the undersigned will not without Jefferies &
Company, Inc.'s prior written consent, or unless pursuant to bona fide gifts to
persons or entities who agree to be bound by the provisions of this letter,
offer, sell or contract to sell, or otherwise dispose of, directly or
indirectly, or announce an offering of, any shares of Common Stock beneficially
owned by the undersigned or any securities convertible into, or exchangeable
for, shares of Common Stock.
Very truly yours,
A-1
<PAGE> 29
EXHIBIT B
(i) the Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Texas, with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus;
(ii) each Subsidiary has been duly organized and is validly existing
as a corporation in good standing under the laws of its jurisdiction of
incorporation and has full corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Registration Statement and the Prospectus;
(iii) each of the Company and the Subsidiaries is duly registered and
qualified to conduct its business and is in good standing in each jurisdiction
where the nature or location of its properties (owned or leased) or the conduct
of its business requires such registration or qualification, except where the
failure so to register or qualify would not have a Material Adverse Effect;
(iv) all the outstanding shares of capital stock of each Subsidiary
have been duly authorized and validly issued and are fully paid and
nonassessable, and, except as otherwise set forth in the Prospectus, all
outstanding shares of capital stock of each such Subsidiary are owned of record
and, to such counsel's knowledge, beneficially by the Company, either directly
or through a wholly-owned subsidiary of the Company, free and clear of any
perfected security interests and, to such counsel's knowledge, any other
security interests, liens, encumbrances, equities, other rights to purchase or
other claims;
(v) except as described in the Registration Statement and the
Prospectus, there are no preemptive or other rights to subscribe for or to
purchase shares of capital stock of the Company pursuant to any statute, the
articles of incorporation or bylaws of the Company or, to such counsel's
knowledge, any agreement or other instrument to which the Company is a party as
to which any person can successfully maintain an action, suit or proceeding
against the Company for violation of his or her preemptive rights with respect
to the issuance of any shares of capital stock of the Company;
(vi) to such counsel's knowledge, there is no pending or threatened
action, suit or proceeding before any court or governmental agency, authority
or body or any arbitrator involving the Company or any of the Subsidiaries
required to be disclosed in the Prospectus that is not adequately disclosed in
the Prospectus;
(vii) to such counsel's knowledge, there is no contract or other
document required to be described in the Registration Statement or Prospectus,
or to be filed as an exhibit, that is not described or filed as required;
(viii) all of the Company's issued and outstanding capital stock has
been duly authorized and validly issued and is fully paid and non-assessable as
of the date hereof and the authorized capital stock of the Company conforms in
all material respects to the descriptions thereof under the caption
"Description of Capital Stock" in the Prospectus;
B-1
<PAGE> 30
(ix) the Registration Statement has become effective under the Act;
any required filing of the Prospectus, and any supplements thereto, pursuant to
Rule 424(b) has been made in the manner and within the time period required by
Rule 424(b); to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued, no proceedings for
that purpose have been instituted or threatened, and the Registration Statement
and the Prospectus (other than the financial statements and supporting
schedules contained therein as to which such counsel need express no opinion)
comply as to form in all material respects with the requirements of the Act and
the applicable Act Regulations; and such counsel has no reason to believe that
at the Effective Date the Registration Statement contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus includes any untrue statement of a material fact or omits to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(x) the statements in the Registration Statement and Prospectus,
insofar as they are descriptions of contracts, agreements or other legal
documents, are accurate in all material respects and present fairly the
information required to be shown;
(xi) this Agreement has been duly authorized, executed and delivered
by the Company and the Company has full corporate power and authority to enter
into this Agreement;
(xii) no consent, approval, authorization or order of any court or
governmental agency or body is required in connection with the consummation of
the transactions contemplated hereby, except such as have been obtained under
the Act and such as may be required under the blue sky laws of any jurisdiction
in connection with the purchase and distribution of the Shares by the
Underwriters and such other approvals (specified in such opinion) as have been
obtained;
(xiii) neither the execution and delivery of this Agreement, nor the
consummation of any other of the transactions herein contemplated, nor the
fulfillment of the terms hereof, will result in a breach of, or constitute a
default under, (a) the terms of any indenture or other agreement or instrument
(i) to which the Company or any of the Subsidiaries is a party or by which it
is bound and (ii) that is either filed as an exhibit to the Registration
Statement or is identified to such counsel as being material to the Company and
the Subsidiaries, taken as a whole, and listed on a schedule to such counsel's
opinion, (b) any law, statute, rule, order, regulation or decree of any court,
regulatory body, administrative agency, governmental body or arbitrator having
jurisdiction over the Company or any of the Subsidiaries of which such counsel
is aware and that is known by such counsel to be applicable to the Company or
any of the Subsidiaries (where such conflict, breach or default would have a
Material Adverse Effect) or (c) the articles of incorporation or by-laws of the
Company;
(xiv) the Purchase Agreement, dated as of December 23, 1996 (the
"Purchase Agreement"), between the Company and Pride Petroleum Services, Inc.
has been duly authorized, executed and delivered by the Company;
B-2
<PAGE> 31
(xv) the execution, delivery and performance of the Purchase Agreement
and the consummation of the transactions contemplated thereby have not and will
not result in a breach or violation of any of the terms and provisions of, or
constitute a default under, any statute, any rule, regulation or order of any
governmental agency or body or any court having jurisdiction over the Company
or any Subsidiary or any of their properties, or any agreement or instrument
known to such counsel to which the Company or any Subsidiary is a party or by
which the Company or any Subsidiary is bound or to which any of the properties
of the Company or any Subsidiary is subject, or the charter or bylaws of the
Company or any Subsidiary, which breach, violation or default would have a
Material Adverse Effect;
(xvi) the Shares have been duly and validly authorized by the Company
for issuance, and the Company has full corporate power and authority to issue,
sell and deliver the Shares; and, when the Shares are issued and delivered
against payment therefor as provided by this Agreement, the Shares will have
been validly issued and will be fully paid and nonassessable, and the issuance
of such Shares will not be subject to any statutory preemptive rights or
similar statutory rights or, to such counsel's knowledge, any other preemptive
or similar rights;
(xvii) the certificates for the Shares are in due and proper form under
Texas law and the by-laws of the Company and conform with the form of
certificates duly authorized by the Board of Directors of the Company;
(xviii) the Shares, when issued, will conform in all material
respects to the description thereof contained in the Prospectus and the
Registration Statement under the caption "Description of Capital Stock";
(xix) to such counsel's knowledge, no holder of any securities of the
Company or any other person has the right, contractual or otherwise, to cause
the Company to sell or otherwise issue to such person, or to permit such person
to underwrite the sale of, any of the Shares or the right to have any Common
Stock or other securities of the Company included in the Registration Statement
or the right, as a result of the filing of the Registration Statement, to
require registration under the Act of any shares of Common Stock or other
securities of the Company that has not been waived or lapsed; and
(xx) the Company is not an "investment company" as defined under the
Investment Company Act or 1940 or subject to registration under the Investment
Company Act of 1940.
In addition, such counsel shall also state that such counsel has
participated in conferences with representatives of the Underwriters, officers
and other representatives of the Company and representatives of the independent
certified public accountants of the Company and the Subsidiaries at which
conferences the contents of the Registration Statement and the Prospectus and
related matters were discussed and that, although such counsel is not passing
upon and does not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement and the
Prospectus (except as set forth in clauses (viii), (x) and (xvi) of this
Exhibit B), on the basis of the foregoing (relying as to materiality upon
officers and other representatives of the Company), no facts have come to the
attention of such counsel that lead such counsel to believe that the
Registration Statement at the time it became effective or at the Representation
Date and the
B-3
<PAGE> 32
Closing Date contained or contains an untrue statement of a material fact or
omitted or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein not misleading or that the
Prospectus, at the Representation Date (unless the term "Prospectus" refers to
a prospectus that has been provided to the Underwriters by the Company for use
in connection with the offering of the Shares that differs from the Prospectus
on file at the Commission at the Representation Date, in which case at the time
it is first provided to the Underwriters for such use) or at the Closing Date,
contained or contains an untrue statement of a material fact or omitted or
omits to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, that such counsel need not
express any comment with respect to the financial statements and schedules
contained therein, including the notes thereto, the auditors' report thereon
and the related summary of accounting policies.
The opinions of such counsel relate solely to, are based solely upon and
are limited exclusively to the laws of the State of Texas and the federal laws
of the United States of America, to the extent applicable.
B-4
<PAGE> 33
EXHIBIT C
(i) the Agreement and the Custody Agreement have each been duly
executed and delivered by or on behalf of the Selling Shareholder;
(ii) the Custody Agreement is a valid and binding agreement of such
Selling Shareholder enforceable against such Selling Shareholder in accordance
with its terms except (a) as limited by any applicable bankruptcy, insolvency,
reorganization or other law relating to or affecting creditors' rights
generally, (b) general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law) and (c) as
such enforceability of rights to indemnity and contribution hereunder may be
limited under applicable securities laws;
(iii) to such counsel's knowledge, such Selling Shareholder has full
legal right, power and authorization, and any approval required by law (except
such as may be required under the Act or such as may be required by the NASD or
under state securities or blue sky laws governing the purchase and distribution
of the Shares), to sell, assign, transfer and deliver valid and marketable
title to the Shares;
(iv) to such counsel's knowledge the execution and delivery of the
Agreement and the Custody Agreement by or on behalf of such Selling Shareholder
and the consummation of the transactions contemplated thereby will not conflict
with or violate, result in a breach of or constitute a default under the terms
or provisions of any agreement, indenture, mortgage or other instrument known
to such counsel to which such Selling Shareholder is a party or by which it or
any of its assets or property is bound, or any court order or decree or any
laws, rule, or regulation (except such as may be required under the Act or such
as may be required by the NASD or under state securities or blue sky laws
governing the purchase and distribution of the Shares) applicable to such
Selling Shareholder or to any of the property or assets of such Selling
Shareholder, which breach, default or violation would impair such Selling
Shareholder's ability to perform under the Agreement or the Custody Agreement
and would have any material adverse impact on the Company or the Underwriters
under the Agreement or the Custody Agreement; and
(v) upon delivery of the Shares that such Selling Shareholder has
agreed to sell pursuant to the Agreement and payment therefor as contemplated
therein and assuming the Underwriters are acquiring the Shares in good faith
without notice of any adverse claims, the Underwriters will acquire valid and
marketable title to such Shares free and clear of any adverse claims.
C-1
<PAGE> 1
DAWSON PRODUCTION SERVICES, INC.
(A TEXAS CORPORATION)
% SENIOR NOTES DUE 2007
UNDERWRITING AGREEMENT
February ____, 1997
Jefferies & Company, Inc.
650 Fifth Avenue, 4th Floor
New York, New York 10019
Dear Sirs:
Dawson Production Services, Inc., a Texas corporation (the "Company"),
and the Subsidiaries (as hereinafter defined) listed below (the "Guarantors")
hereby confirms their agreement with you (the "Underwriter") with respect to
the issuance and sale by the Company and the Guarantors and the purchase by the
Underwriter of $130,000,000 aggregate principal amount of the Company's _____%
Senior Notes due February 1, 2007 (the "Notes") and the related Guaranties (as
hereinafter defined). The Notes are being issued pursuant to an indenture (the
"Indenture") among the Company, the Guarantors and U.S. Trust Company of Texas,
N.A., as Trustee (the "Trustee"). The guaranties provided by the Guarantors
pursuant to the Indenture are herein referred to as the "Guaranties". The
Notes and the Guaranties are herein collectively referred to as the
"Securities".
You have advised us that you desire to purchase the Securities and that
you propose to make a public offering of the Securities as soon as you deem
advisable after the Registration Statement referred to below becomes effective
upon the terms set forth in the Prospectus referred to below.
The terms that follow, when used in this Agreement, shall have the
meanings indicated. "Preliminary Prospectus" shall mean any preliminary
prospectus referred to in Section 1(a)(i) below and any preliminary prospectus
related to the Securities included in the Registration Statement on the date
that the Registration Statement becomes effective (the "Effective Date") that
omits Rule 430A Information (as defined below). "Registration Statement" shall
mean the registration statement referred to in Section 1(a)(i) below, including
exhibits, as amended at the Representation Date (as defined below) (or, if not
effective at the Representation Date, in the form in which it shall become
effective) and, in the event any post-effective amendment thereto becomes
effective prior to the Closing Date (as defined in Section 2 hereof), shall
also mean such registration statement as so amended. Such term shall include
Rule 430A Information deemed to be included therein at the Effective Date as
provided by Rule 430A (as defined below). The prospectus related to the
Securities constituting a part of the Registration Statement (including the
Rule 430A Information), as from time to time amended or supplemented, is
hereinafter referred to as the "Prospectus", except that if any revised
prospectus shall be provided to the Underwriter by the Company that differs
from the prospectus on file at the Securities and Exchange Commission (the
"Commission") at the Effective Date (whether or not such revised prospectus is
required to be filed by the Company pursuant to Rule 424 of the Act
Regulations), the term "Prospectus" shall refer to each such revised prospectus
from and after the time it is first provided to the Underwriter for such use.
"Rule 158", "Rule 424" and "Rule 430A" refer to such rules under the Securities
Act of 1933, as
<PAGE> 2
amended (the "Act"; and the rules and regulations under the Act, the "Act
Regulations"). "Rule 430A Information" means information with respect to the
Securities and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A. The
"Trust Indenture Act" shall mean the Trust Indenture Act of 1939, as amended,
and the "Trust Indenture Act Regulations" shall mean the rules and regulations
under the Trust Indenture Act.
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) The Company and the Guarantors represent and warrant to the
Underwriter as of the date hereof (such date being referred to as the
"Representation Date") and as of the Closing Date, as follows:
(i) The Company and the Guarantors have filed with the
Commission a registration statement on Form S-1 (Registration No.
333-19413), including a preliminary prospectus related to the
Securities, and one or more amendments thereto, including the related
preliminary prospectus, each of which has previously been furnished to
the Underwriter, for the registration under the Act of the offering and
sale of the Securities. The Company and the Guarantors will file with
the Commission either (A) prior to effectiveness of such registration
statement, a further amendment to such registration statement (including
the form of final prospectus) or (B) after effectiveness of such
registration statement, a final prospectus in accordance with Rules 430A
and 424(b) or Rule 434 of the Act Regulations. The Company and the
Guarantors have included in such registration statement, as amended at
the Effective Date, all information (other than Rule 430A Information in
the case of clause (B)) required by the Act, the Act Regulations, the
Trust Indenture Act and the Trust Indenture Act Regulations to be
included in the prospectus with respect to the Securities and the
offering thereof. As filed, such amendment and form of final
prospectus, or such final prospectus, shall contain all Rule 430A
Information, together with all other such required information, with
respect to the Securities and the offering thereof and, except to the
extent the Underwriter shall agree in writing to a modification, shall
be in all substantive respects in the form furnished to the Underwriter
prior to the date hereof.
(ii) On the Effective Date, the Representation Date and the
Closing Date, the Registration Statement did and will, and when the
Prospectus is first filed (if required) in accordance with Rule 424(b)
the Prospectus will, comply in all material respects with the applicable
requirements of the Act, the Act Regulations, the Trust Indenture Act
and the Trust Indenture Act Regulations; on the Effective Date, the
Representation Date and the Closing Date, the Registration Statement did
not and will not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading; and, on the
Effective Date, the Representation Date and the Closing Date, and on the
date of any filing pursuant to Rule 424(b), the Prospectus did not and
will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances
under which they were made, not misleading; provided, that the Company
and the Guarantors make no representation or warranty as to the
information provided in writing to the Company and the Guarantors by or
on behalf of the Underwriter, expressly for use in the Registration
Statement or the Prospectus, and the Company and the Guarantors agree
that the only information provided in writing by or on behalf of the
Underwriter to the Company, expressly for use in the Registration
Statement or the Prospectus, is that information contained in the third,
sixth and eighth paragraphs in the section of the Prospectus entitled
"Underwriting" and the last paragraph on the cover page of the
Prospectus.
-2-
<PAGE> 3
(iii) The Company is a corporation duly organized and validly
existing in good standing under the laws of the State of Texas, with
full corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Registration
Statement and the Prospectus, and is duly registered and qualified to
conduct its business and is in good standing in each jurisdiction where
the nature or location of its properties (owned or leased) or the
conduct of its business requires such registration or qualification,
except where the failure so to register or qualify would not have a
Material Adverse Effect. As used herein, the term "Material Adverse
Effect" shall mean an adverse effect on the condition (financial or
other), business, properties, net worth or results of operations of the
Company or any of the Subsidiaries (as hereinafter defined) that would
be, singly or in the aggregate, material to the Company and the
Subsidiaries, taken as a whole, whether or not occurring in the ordinary
course of business.
(iv) The only subsidiaries (as defined in the Act Regulations)
of the Company are the subsidiaries listed on Schedule 1 hereto
(collectively, the "Subsidiaries"). Each of the Subsidiaries is a
corporation duly organized and validly existing in good standing under
the laws of its jurisdiction of its incorporation with full corporate
power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and in
the Prospectus, and is duly registered and qualified to conduct its
business and is in good standing in each jurisdiction where the nature
or location of its properties (owned or leased) or the conduct of its
business requires such registration or qualification, except where the
failure so to register or qualify would not have a Material Adverse
Effect.
(v) Each of the Company and the Subsidiaries has all necessary
authorizations, approvals, orders, licenses, rights-of-way, operating
rights, easements, certificates and permits of and from, and has made
all declarations and filings with, all regulatory or governmental
officials and bodies, all self-regulatory organizations and all courts
and other tribunals ("Permits"), to own or lease its respective
properties and to conduct its respective businesses described in the
Prospectus and the Registration Statement, except where failure to have
obtained or made the same would not have a Material Adverse Effect, and
neither the Company nor any of the Subsidiaries has received any notice
of proceedings relating to the revocation or modification of any such
Permits, if the failure to be so licensed or approved or if the subject
of an unfavorable decision, ruling or finding, would have a Material
Adverse Effect; the Company and each of the Subsidiaries has fulfilled
and performed all its current material obligations with respect to such
Permits and no event has occurred that allows, or after notice or lapse
of time, or both, would allow, revocation or termination thereof or
result in any other material impairment of the rights of the holder of
any such Permit; and such Permits contain no restrictions that are
materially burdensome to the Company and the Subsidiaries; and the
Company and each of the Subsidiaries is in compliance with all
applicable laws, rules, regulations, orders and consents, the violation
of which could have a Material Adverse Effect. The property and
business of the Company and the Subsidiaries conform in all material
respects to the descriptions thereof contained in the Prospectus and the
Registration Statement.
(vi) All of the Company's authorized and outstanding capital
stock has been duly authorized, validly issued and is fully paid and
nonassessable and the capitalization of the Company conforms to the
descriptions thereof and the statements made with respect thereto in the
Registration Statement and the Prospectus as of the date set forth
therein. There are no outstanding securities convertible into or
exchangeable for, and no outstanding options, warrants or other rights
to purchase, any shares of the capital stock of the Company, nor any
agreements or commitments to issue any of the same, except as described
in the Registration Statement and the
-3-
<PAGE> 4
Prospectus, and there are no preemptive or other rights to subscribe for
or to purchase, and no restrictions upon the voting or transfer of, any
capital stock of the Company pursuant to the Company's articles of
incorporation or by-laws or any agreement or other instrument to which
the Company is a party, except as described in the Registration
Statement and the Prospectus.
(vii) All the outstanding shares of capital stock of each
Subsidiary have been duly authorized and are validly issued, fully paid
and nonassessable and were not issued in violation of or subject to any
preemptive or similar rights. Except as otherwise set forth in the
Registration Statement and the Prospectus, all outstanding shares of
capital stock of the Subsidiaries are owned by the Company, directly or
indirectly through another Subsidiary, free and clear of any security
interests, liens, encumbrances, equities or other claims.
(viii) Each of the Company and the Subsidiaries has good and
indefeasible title to all real property and good and marketable title to
all personal property owned by it, including those properties described
in the Registration Statement and Prospectus, in each case free and
clear of all liens, charges, encumbrances and restrictions, except such
as are described in the Registration Statement and Prospectus or such as
would not have a Material Adverse Effect. Each of the Company and the
Subsidiaries has valid, subsisting and enforceable leases for the
properties described in the Registration Statement and the Prospectus as
leased by it, with such exceptions as are described in the Registration
Statement and the Prospectus or that in the aggregate would not have a
Material Adverse Effect.
(ix) The Company and the Guarantors have all requisite power,
authority, authorizations, approvals, orders, licenses, certificates and
permits to enter into this Agreement and the Indenture and to carry out
the provisions and conditions hereof and thereof, and to issue and
deliver to the Underwriter the Securities that are being sold by the
Company and the Guarantors as provided herein. This Agreement has been
duly authorized, executed and delivered by the Company and the
Guarantors and constitutes a legal, valid and binding agreement of the
Company and the Guarantors, enforceable against them in accordance with
its terms, except to the extent rights to indemnity hereunder may be
limited by federal or state securities laws or public policy underlying
such laws and except to the extent that such enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by
equitable principles. The Indenture has been duly authorized and, when
executed and delivered by the Company, the Guarantors and the Trustee
and qualified under the Trust Indenture Act, will constitute a legal,
valid and binding agreement of the Company and the Guarantors,
enforceable against them in accordance with its terms, except to the
extent rights to indemnity thereunder may be limited by federal or state
securities laws or public policy underlying such laws and except to the
extent that such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to
or affecting creditors' rights generally or by equitable principles.
(x) Each of the Company and the Subsidiaries owns, or
possesses adequate rights to use, all trademarks, service marks and
other rights necessary for the conduct of its business as described in
the Registration Statement and the Prospectus, and neither the Company
nor any of the Subsidiaries has received a notice, or knows of any
basis, of any conflict with the asserted rights of others in any such
respect that could have a Material Adverse Effect.
(xi) The Securities have been duly and validly authorized and,
when issued, delivered and sold, and in the case of the Notes
authenticated by the Trustee, in
-4-
<PAGE> 5
accordance with this Agreement and the Indenture, will have been duly
and validly executed, issued and delivered, and in the case of the Notes
authenticated, and will constitute legal, valid and binding obligations
of the Company and the Guarantors, enforceable against the Company and
the Guarantors in accordance with their respective terms and entitled to
the benefits of the Indenture, except to the extent that such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors'
rights generally or by equitable principles. All corporate action
required to be taken by the Company and the Guarantors for the
authorization, issuance and sale of the Securities has been duly and
validly taken.
(xii) KPMG Peat Marwick LLP, Chapman, Williams & Co., Coopers &
Lybrand L.L.P. and Arthur Andersen LLP are independent public
accountants with respect to the Company and the Subsidiaries as required
by the Act.
(xiii) The consolidated financial statements and related notes
and schedules included in the Registration Statement or in the
Prospectus present fairly the financial position of the Company and the
Subsidiaries, on the basis stated in the Registration Statement, as of
the respective dates thereof and the consolidated statements of income,
shareholders' equity and cash flows of the Company and the Subsidiaries,
for the respective periods covered thereby; and such financial
statements and the related schedules and notes have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis throughout the entire period involved, except as
otherwise disclosed in the Registration Statement and the Prospectus.
The selected financial information included in the Registration
Statement or the Prospectus presents fairly the information shown
therein and has been compiled on a basis consistent with that of the
audited financial statements of the Company included therein. The pro
forma financial information in the Registration Statement or in the
Prospectus complies in all material respects with the applicable
accounting requirements of Article 11 of Regulation S-X promulgated by
the Commission and presents fairly the information shown therein; the
assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the
transactions or circumstances referred to therein. No other financial
statements or schedules of the Company and the Subsidiaries are required
by the Securities Exchange Act of 1934, as amended, and the rules and
regulations of the Commission promulgated thereunder (collectively, the
"Exchange Act"), the Act, the Act Regulations, the Trust Indenture Act
or the Trust Indenture Act Regulations to be included in the
Registration Statement or Prospectus.
(xiv) The Securities and the Indenture conform in all material
respects to the descriptions thereof in the Registration Statement and
Prospectus.
(xv) Since the respective dates as of which information is
provided in the Registration Statement and Prospectus, except as
otherwise specifically stated therein, there has been no change or
development with respect to the condition (financial or otherwise) or
business of the Company and the Subsidiaries, taken as a whole, whether
or not arising in the ordinary course of business, that would have a
Material Adverse Effect.
(xvi) Neither the Company nor any Subsidiary is in violation of
its articles of incorporation or bylaws or other organizational
documents. Neither the Company nor any Subsidiary is, nor with the
passage of time or the giving of notice or both would be, in violation
of any law, ordinance, administrative or governmental rule or regulation
applicable to the Company or any of the Subsidiaries, or of any
judgment, order or decree of any court or governmental agency or body or
of any arbitrator having
-5-
<PAGE> 6
jurisdiction over the Company or any of the Subsidiaries, or in default
in the performance or observance of any obligation, agreement, covenant
or condition contained in any mortgage, loan agreement, note, bond,
debenture, credit agreement or any other evidence of indebtedness or in
any agreement, contract, indenture, lease or other instrument to which
the Company or any of the Subsidiaries is a party or by which it may be
bound, or to which any of the property or assets of the Company or any
of the Subsidiaries is subject, the effect of which violation or default
in performance or observance would have a Material Adverse Effect.
(xvii) There is no action, suit or proceeding pending before or
by any court, arbitrator or governmental agency or body or, to the
Company's knowledge, threatened against the Company or any of the
Subsidiaries or to which any of their respective property is subject (A)
that is required to be described in the Registration Statement or the
Prospectus but is not described as required or (B) that, if adversely
determined, could reasonably be expected to have a Material Adverse
Effect. There is no agreement, contract, indenture, lease or other
document or instrument that is required to be described in the
Registration Statement or Prospectus or to be filed as an exhibit to the
Registration Statement that is not described or filed as required.
(xviii) No person has any right to the registration of any
security of the Company by reason of the filing of the Registration
Statement with the Commission or the consummation of the transactions
contemplated hereby, which right has not been waived or lapsed, except
as described in the Registration Statement or Prospectus.
(xix) The Company is not an "investment company" within the
meaning of the Investment Company Act of 1940, as amended, and is not
subject to registration under the Investment Company Act of 1940.
(xx) As of the date of the Prospectus, and except as described
in the Registration Statement and the Prospectus, neither the Company
nor any of the Subsidiaries is currently planning any probable
acquisitions for which disclosure of pro forma financial information
would be required by the Act.
(xxi) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus (or any amendment
or supplement thereto), except as otherwise stated therein, (A) neither
the Company nor any of the Subsidiaries (1) has issued any securities
other than in connection with the exercise of any outstanding options,
(2) incurred any material liability or obligations, direct or
contingent, for borrowed money, (3) entered into any transaction, not in
the ordinary course of business, that is material to the Company and the
Subsidiaries, taken as a whole, (4) entered into any transaction with an
affiliate of the Company (as the term "affiliate" is defined in Rule 405
of the Act Regulations) that would otherwise be required to be disclosed
in the Prospectus or the Registration Statement, or (5) declared or paid
any dividend on its capital stock, or made any other distribution to its
equity holders, (B) there has not been any material change in the
capital stock or other equity, or material increase in the short-term or
long-term debt, of the Company or any of the Subsidiaries and (C) there
has been no change or development with respect to the condition
(financial or otherwise) or business of the Company and the
Subsidiaries, taken as a whole, whether or not arising in the ordinary
course of business, that would have a Material Adverse Effect.
(xxii) The Company has not distributed and, prior to the later
to occur of (A) the Closing Date and (B) completion of the distribution
of the Securities, will not distribute without your prior written consent
any offering material in connection with
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<PAGE> 7
the offering and sale of the Securities other than the Registration
Statement, the Prospectus or other materials, if any, permitted by the
Act.
(xxiii) The Indenture has been duly qualified under the Trust
Indenture Act and complies with all applicable provisions of the Trust
Indenture Act and the Trust Indenture Act Regulations.
(xxiv) Neither the Company nor any Subsidiary is involved in any
labor dispute and, to the knowledge of the Company, no such dispute is
threatened.
(xxv) Neither the Company nor any Subsidiary nor, to the best
of its knowledge, any employee or agent of the Company or any Subsidiary
has made any payment of funds of the Company or any Subsidiary or
received or retained any funds of a character required to be disclosed
in the Prospectus.
(xxvi) The Company and each of the Subsidiaries have filed (or
have obtained extensions thereto) all federal, state and local tax
returns that are required to be filed, which returns are complete and
correct in all material respects, and have paid all taxes shown on such
returns and all assessments with respect thereto to the extent that the
same have become due.
(xxvii) Except for the shares of capital stock of each of
the Subsidiaries, neither the Company nor any of the Subsidiaries owns
any shares of stock or any other securities of any corporation or has
any equity interest in any firm, partnership, association or other
entity other than as reflected in the consolidated financial statements
included in the Registration Statement and the Prospectus.
(xxviii) Neither the execution, delivery or performance of this
Agreement or the Indenture, the offer, issuance, sale or delivery of the
Securities that are being issued and sold by the Company and the
Guarantors nor the consummation by the Company and the Guarantors of the
terms of this Agreement and the Indenture (A) requires the consent,
approval, authorization or order of any court or governmental agency or
body, except such as have been obtained under the Act, the Trust
Indenture Act and the Trust Indenture Act Regulations and such as may be
required under the blue sky laws of any jurisdiction in connection with
the purchase and distribution of the Securities by the Underwriter or
such as may be required by the National Association of Securities
Dealers, Inc. (the "NASD") and such other approvals as have been
obtained, (B) will conflict with, result in a breach of, or constitute a
default under the terms of any indenture, agreement, lease or other
instrument to which the Company or any of the Subsidiaries is a party or
by which any of them or any of their respective properties may be bound,
or will result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any of the
Subsidiaries pursuant to the terms of any agreement or instrument to
which any of them is a party or by which any of them may be bound or to
which any of the property or assets of any of them is subject, (C) will
conflict with or violate any law, order, statute, regulation, consent or
memorandum of understanding applicable to the Company or any Subsidiary
of any court, regulatory body, administrative agency, governmental body
or arbitrator having jurisdiction over the Company or any of the
Subsidiaries (in the case of (B) or (C) above, where such conflict,
breach, default or violation, individually or in the aggregate, would
have a Material Adverse Effect), or (D) will conflict with or violate
the articles of incorporation or by-laws of the Company or any
Subsidiary.
(xxix) The Company nor the Guarantors has taken, directly or
indirectly, any action designed to cause or result in or that has
constituted or that might be expected
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<PAGE> 8
to constitute, the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Securities.
(xxx) The Company nor the Guarantors is required to comply with
Section 517.075 of the Florida statutes.
(xxxi) The Company and each of the Subsidiaries (A) are in
compliance with any and all applicable federal, state, local and foreign
laws and regulations relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("Environmental Laws"), (B) have received all
permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their business and (C) are in compliance
with all terms and conditions of any such permit, license or approval,
except where such noncompliance with Environmental Laws, failure to
receive required permits, licenses or approvals or failure to comply
with the terms and conditions of such permits, licenses or approvals
would not have a Material Adverse Effect.
(xxxii) There are no costs or liabilities, to the Company's
knowledge after due inquiry, associated with the effect of Environmental
Laws on the business, operations and properties of the Company and its
Subsidiaries that would have a Material Adverse Effect.
(b) Any certificate signed by any officer of the Company or the
Guarantors delivered to the Underwriter or to counsel for the Underwriter
pursuant to the terms of this Agreement shall be deemed a representation and
warranty by the Company and the Guarantors to the Underwriter as to the matters
covered thereby.
SECTION 2. SALE AND DELIVERY TO THE UNDERWRITER; CLOSING
(a) Subject to the terms and conditions set forth herein, the Company
agrees to sell to the Underwriter on the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Underwriter agrees to purchase from the Company, at a purchase price
of %____ of the $130,000,000 principal amount of the Securities. The Company
will have no obligation to sell the Underwriter any of the Securities that are
being issued and sold by the Company hereunder unless the Underwriter purchases
all of such Securities hereunder.
(b) Payment of the purchase prices for, and delivery of, the
Securities to be purchased by the Underwriter shall be made at the offices of
Jefferies & Company, Inc., 39 Broadway, New York, New York 10006, or at such
other place as shall be agreed upon by the Underwriter and the Company, at
10:00 A.M., New York City time, on the third (or, if pricing occurs after 4:30
p.m., New York City time, on any given day, on the fourth) business day
following the date hereof, or such other time not later than ten business days
after such date as shall be agreed upon by the Underwriter and the Company
(such time and date of payment and delivery being herein called the "Closing
Date"). Payment shall be made to the Company by certified or official bank
check or checks drawn in New York Clearing House funds (or similar next day
funds) payable to the order of the Company against delivery to the Underwriter
of the Securities.
(c) Certificates representing the Securities shall be in such
denominations and registered in such names as the Underwriter may request in
writing at least two business days before the Closing Date. The certificates
representing the Securities will be made available for examination and
packaging by the Underwriter not later than 1:00 P.M., New York City time, on
the last business day prior to the Closing Date at such place as is designated
by the Underwriter.
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<PAGE> 9
SECTION 3. COVENANTS OF THE COMPANY AND THE GUARANTORS.
The Company and the Guarantors covenant with the Underwriter as follows:
(a) The Company and the Guarantors will use their best efforts to
cause the Registration Statement, if not effective at the Representation Date,
and any amendment thereof, to become effective, as promptly as possible after
the filing thereof. The Company and the Guarantors will not file any amendment
to the Registration Statement or any amendment or supplement to the Prospectus
to which the Underwriter shall reasonably object in writing after a reasonable
opportunity to review such amendment or supplement. Subject to the foregoing
sentences in this clause (a), if the Registration Statement has become or
becomes effective pursuant to Rule 430A, or filing of the Prospectus or
supplement to the Prospectus is otherwise required under Rule 424(b), the
Company will cause the Prospectus, properly completed, or such supplement
thereto to be filed with the Commission pursuant to the applicable paragraph of
Rule 424(b) within the time period prescribed and will provide evidence
satisfactory to the Underwriter of such timely filing. The Company and the
Guarantors will promptly advise the Underwriter (i) when the Registration
Statement, if not effective at the Representation Date, and any amendment
thereto, shall have become effective, (ii) when the Prospectus, and any
supplement thereto, shall have been filed (if required) with the Commission
pursuant to Rule 424(b), (iii) when any amendment to the Registration Statement
shall have been filed or become effective, (iv) of any request by the
Commission for any amendment of the Registration Statement or supplement to any
Prospectus or for any additional information, (v) of the receipt by the Company
or any Guarantor of any notification of, or if the Company or any Guarantor
otherwise has knowledge of, the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the institution
or threatening of any proceeding for that purpose and (vi) of the receipt by
the Company or any Guarantor of any notification with respect to the suspension
of the qualification of the Securities for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose. The Company and
the Guarantors will use their best efforts to prevent the issuance of any such
stop order and, if issued, to obtain as soon as possible the lifting thereof.
(b) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act or the Act Regulations, any event occurs
as a result of which the Prospectus as then amended or supplemented would
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading,
or if it shall be necessary to amend the Registration Statement or amend or
supplement the Prospectus to comply with the Act or the Act Regulations, the
Company and the Guarantors promptly will prepare and file with the Commission,
subject to the second sentence of paragraph (a) of this Section 3, an amendment
or supplement that will correct such statement or omission or effect such
compliance. Neither your consent to, nor your delivery of, any such amendment
or supplement shall constitute a waiver of any of the conditions set forth in
Section 5.
(c) The Company and the Guarantors consent to the use of the
Prospectus in accordance with the provisions of the Act and with the securities
or blue sky laws of the jurisdictions in which the Securities are offered by
the Underwriter and by all dealers to whom Securities may be sold, both in
connection with the offering and sale of the Securities and for such period of
time thereafter as the Prospectus is required by the Act to be delivered in
connection with the sales by the Underwriter or any dealer. The Company and
the Guarantors will comply with all requirements imposed upon them by the Act,
as now and hereafter amended, so far as necessary to permit the continuance of
sales of or dealing in the Securities in accordance with the provisions hereof
and the Prospectus.
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<PAGE> 10
(d) As soon as practicable, the Company will make generally available
to its securityholders and to the Underwriter a consolidated earnings statement
or statements of the Company and the Subsidiaries covering a twelve-month
period beginning after the Effective Date that will satisfy the provisions of
Section 11(a) of the Act and Rule 158 under the Act Regulations.
(e) The Company will furnish to the Underwriter, without charge, two
signed copies of the Registration Statement (including exhibits thereto and all
documents incorporated by reference therein) and, so long as delivery of a
prospectus by the Underwriter or a dealer may be required by the Act or the Act
Regulations, as many copies of the Prospectus and all amendments and
supplements thereto as the Underwriter may reasonably request.
(f) During the period of five years hereafter, the Company will
furnish to you, as soon as practicable after the end of each fiscal year, a
copy of its annual report to shareholders for such year; and the Company will
furnish to you (i) as soon as available, a copy of each report or definitive
proxy statement of the Company filed with the Commission under Exchange Act or
mailed to shareholders, and (ii) from time to time, such other information
concerning the Company as you may reasonably request, provided that prior to
the Company's furnishing any such other information that is nonpublic you shall
enter into such agreement respecting the confidentiality thereof as the Company
may reasonably request.
(g) The Company and the Guarantors will comply with all the
provisions of any undertakings contained in the Registration Statement.
(h) The Company and the Guarantors will not at any time, directly or
indirectly, take any action intended, or that might reasonably be expected, to
cause or result in, or that will cause, stabilization of the price of any
security of the Company to facilitate the sale or resale of any of the
Securities.
(i) The Company will apply the net proceeds from the offering and
sale of the Securities to be sold in accordance with the description set forth
in the "Use of Proceeds" section of the Prospectus.
(j) The Company and the Guarantors will cooperate with the
Underwriter and its counsel in connection with endeavoring to obtain and
maintain the qualification or registration, or exemption from qualification, of
the Securities for offer and sale under the applicable securities laws of such
states and other jurisdictions of the United States as the Underwriter may
designate; provided, that in no event shall the Company or the Guarantors be
obligated to qualify to do business in any jurisdiction where they are not now
so qualified or to take any action that would subject them to taxation or
general service of process in any jurisdiction where they are not now so
subject.
SECTION 4. PAYMENT OF EXPENSES.
The Company will pay, or reimburse if paid by the Underwriter, all
actual and reasonable costs and expenses incident to the performance of the
obligations of the Company and the Guarantors under this Agreement, including
(i) the fees, disbursements and expenses of counsel and accountants for the
Company and all other expenses in connection with the preparation, printing and
filing of the Registration Statement, any Preliminary Prospectus, the
Prospectus, the Statement of Eligibility and Qualification under the Trust
Indenture Act of the Trustee (the "Form T-1"), and any amendments or
supplements thereto, and the mailing and delivery of copies thereof to the
Underwriter and dealers, (ii) the fees and disbursements of the Trustee and its
counsel; (ii) the cost of printing the Agreement Among Underwriters, this
Agreement, the Indenture, the Form T-1, the Selling Agreement, any Dealer
Agreements, the Underwriter Questionnaire and the Blue Sky Memorandum (in both
preliminary and final
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<PAGE> 11
form); (iii) all expenses in connection with qualification of the Securities
for offering and sale under state securities laws, including filing and
registration fees and the fees, disbursements and expenses of counsel for the
Underwriter in connection with such qualification and in connection with blue
sky surveys; (iv) the filing fees incident to securing any required review by
the NASD; (v) the cost of preparing certificates representing the Securities;
(vi) all fees of the Company's transfer agent and registrar; (vii) all fees and
expenses of nationally recognized statistical rating organizations (as defined
for purposes of Rule 436(g) under the Act); and (viii) all other costs and
expenses incident to the performance of the Company's and the Guarantors'
obligations hereunder that are not otherwise specifically provided for in this
Section.
If this Agreement is terminated by the Underwriter because of any
failure or refusal on the part of the Company or the Guarantors to comply with
the terms or fulfill any of the conditions of this Agreement, the Company shall
reimburse the Underwriter for all of its reasonable out-of-pocket expenses,
including the reasonable fees and disbursements of counsel for the Underwriter.
The Company shall not in any event be liable to the Underwriter for
consequential damages including loss of anticipated profits from the
transactions covered by this Agreement.
SECTION 5. CONDITIONS OF THE UNDERWRITER'S OBLIGATION.
The obligation of the Underwriter to purchase the Securities hereunder
is subject to the continued accuracy of the representations and warranties of
the Company and the Guarantors herein contained, to the accuracy of the
statements of the Company and the Guarantors made in any certificates pursuant
to the provisions hereof, to the performance by the Company and the Guarantors
of their obligations hereunder and to the following further conditions:
(a) The Registration Statement shall have become effective, and you
shall have received notice thereof, not later than 5:30 p.m., Washington D.C.
time, on the date hereof, or such later time and date as shall be approved by
the Underwriter and the Company and shall remain effective at the Closing Date.
No stop order suspending the effectiveness of the Registration Statement shall
have been issued under the Act or proceedings therefor initiated or threatened
by the Commission. No order suspending the effectiveness of the Registration
Statement or the qualification or registration of the Securities under the
securities or blue sky laws of any jurisdiction shall be in effect or
proceedings therefor initiated or threatened by the Commission or the
authorities of any such jurisdiction. If the Company and the Guarantors have
elected to rely upon Rule 430A, the price of the Securities and any price-
related or other information previously omitted from the effective Registration
Statement pursuant to Rule 430A shall have been transmitted to the Commission
for filing pursuant to Rule 424(b) within the prescribed time period, and,
prior to the Closing Date, the Company and the Guarantors shall have provided
evidence satisfactory to the Underwriter of such timely filing, or a post-
effective amendment providing such information shall have been promptly filed
and declared effective in accordance with the requirements of Rule 430A.
(b) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred (i) any change, or any development involving a
prospective change, in or affecting particularly the business, properties,
condition (financial or other) or results of operations of the Company and the
Subsidiaries, taken as a whole, which, in the reasonable judgment of the
Underwriter, materially impairs the investment quality of the Securities and
constitutes a Material Adverse Effect; (ii) any material loss or interference
with the business or properties of the Company or any of the Subsidiaries from
fire, explosion, flood or other casualty, whether or not covered by insurance,
or from any labor dispute or any court or legislative or other governmental
action, order or decree, that is not set forth in the Registration Statement
and the Prospectus, if in the reasonable judgment of the Underwriter any such
development makes it impracticable or inadvisable to proceed with completion of
the sale of and payment for the
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<PAGE> 12
Securities; (iii) any suspension or limitation of trading in securities
generally on the New York Stock Exchange or the Nasdaq National Market System,
or any setting of minimum prices for trading on such exchange or system, or any
suspension of trading of any securities of the Company on any exchange or
system or in the over-the-counter market; (iv) any banking moratorium declared
by federal or New York authorities; or (v) any outbreak or escalation of major
hostilities in which the United States is involved, any declaration of war by
Congress or any other substantial national or international calamity or
emergency if, in the reasonable judgment of the Underwriter, the effect of any
such outbreak, escalation, declaration, calamity or emergency makes it
impractical or inadvisable to proceed with completion of the sale of and
payment for the Securities.
(c) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there shall have been no
litigation or other proceeding instituted against the Company or any of the
Subsidiaries or any of their respective officers or directors in their
capacities as such, before or by any federal, state or local court, commission,
regulatory body, administrative agency or other governmental body, domestic or
foreign, or arbitrator, in which litigation or proceeding an unfavorable
ruling, decision or finding would have a Material Adverse Effect.
(d) Each of the representations and warranties of the Company and the
Guarantors contained herein shall be true and correct in all material respects
at the Closing Date, as if made at the Closing Date, and all covenants and
agreements contained herein to be performed on the part of the Company and the
Guarantors, and all conditions contained herein to be fulfilled or complied
with by the Company and the Guarantors at or prior to the Closing Date, shall
have been duly performed, fulfilled or complied with.
(e) The Underwriter shall have received an opinion from Jenkens &
Gilchrist, A Professional Corporation, counsel for the Company and the
Guarantors, satisfactory in form and substance to counsel for the Underwriter,
dated as of the Closing Date, to the effect set forth in Exhibit A.
(f) The Underwriter shall have received a favorable opinion, dated as
of the Closing Date, of Fulbright & Jaworski L.L.P., counsel for the
Underwriter, with respect to such matters as may be reasonably requested by the
Underwriter, and you shall have provided such counsel with such papers and
information as they may reasonably request to enable them to provide such
opinion.
(g) The following conditions contained in clauses (i), (ii) and (iii)
of this Section 5(g) shall have been satisfied on and as of the Closing Date
and the Company shall have furnished to the Underwriter a certificate of the
Company, signed by the President and the principal financial or accounting
officer of the Company, and each of the Guarantors shall have furnished to the
Underwriter a certificate of such Guarantor, signed by the President and the
principal financial or accounting officer of such Guarantor, each dated the
Closing Date to the effect that the signers of such certificates have carefully
examined the Registration Statement, the Prospectus, any supplement or
amendment to the Prospectus, and this Agreement and that:
(i) the representations and warranties of the Company and the
Guarantors, respectively, in this Agreement are true and correct in all
material respects on and as of the Closing Date with the same effect as
if made on the Closing Date and the Company and the Guarantors,
respectively, have complied with all the agreements and satisfied all
the conditions under this Agreement on their part to be performed or
satisfied at or prior to the Closing Date;
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<PAGE> 13
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or, to the Company's and the Guarantors'
knowledge, threatened; and
(iii) since the date of the most recent financial statements
included in the Prospectus, there has been no change that would have a
Material Adverse Effect.
(h) At the Representation Date and at the Closing Date, KPMG Peat
Marwick LLP, Chapman, Williams & Co. and Coopers & Lybrand L.L.P. shall have
furnished to the Underwriter a letter or letters, dated respectively as of the
date of this Agreement and the Closing Date, in form and substance satisfactory
to the Underwriter, containing statements and information of the type
customarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and certain financial and statistical
information pertaining to the Company and the Subsidiaries contained in the
Registration Statement and the Prospectus.
(i) As of the Closing Date, the Securities shall have been rated
"B+" by Standard & Poor's and "B1" by Moody's Investors Service, Inc.,
and such ratings shall not have been rescinded. The Company shall have
delivered to the Underwriter letters from such rating organizations, or other
evidence satisfactory to the Underwriter, confirming that the Securities have
such ratings.
(j) The Indenture shall have been duly executed and delivered by the
parties thereto.
(k) At the Closing Date, counsel for the Underwriter shall have been
furnished with such information, certificates and documents as they may
reasonably require for the purpose of enabling them to pass upon the issuance
and sale of the Securities as contemplated herein and related proceedings, or
to evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained, or otherwise in
connection with the offering contemplated hereby; and all opinions and
certificates mentioned above or elsewhere in this Agreement shall be reasonably
satisfactory in form and substance to the Underwriter and counsel for the
Underwriter.
(l) At the time of the closing of the offering of the Securities,
simultaneous closings occur with respect to (i) the offering by the Company of
3,500,000 shares of its common stock, $.01 par value, (the "Common Stock
Offering") and (ii) the acquisition by the Company of substantially all of the
U.S. land-based well servicing operations of Pride Petroleum Services, Inc.
("Pride") pursuant to a purchase agreement, dated as of December 23, 1996,
between the Company and Pride (the "Pride Acquisition").
If any condition specified in this Section 5 shall not have been
fulfilled in all material respects when and as required to be fulfilled, this
Agreement may be terminated by the Underwriter by notice to the Company and
such termination shall be without liability of any party to any other party
except as provided in Section 4.
SECTION 6. CONDITIONS OF THE COMPANY'S OBLIGATION.
The obligation of the Company to issue and sell the Securities hereunder
is subject to the conditions that, at the time of the closing of the offering
of the Securities, simultaneous closings occur with respect to (i) the Common
Stock Offering and (ii) the Pride Acquisition.
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<PAGE> 14
SECTION 7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company and the Guarantors agree to indemnify, defend and
hold harmless the Underwriter and its officers, shareholders, employees and
directors and any person who controls the Underwriter within the meaning of
Section 15 of the Act from and against any loss, expense, liability or claim
(including the reasonable cost of investigating such claim) that the
Underwriter or any such officer, shareholder, employee, director or controlling
person may incur under the Act, the Exchange Act or otherwise, as such expenses
are incurred, insofar as such loss, expense, liability or claim arises out of
or is based upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (or in the Registration Statement
as amended by any post-effective amendment thereof) or any omission or alleged
omission to state a material fact required to be stated in such Registration
Statement or necessary to make the statements made therein not misleading or
any untrue statement or alleged untrue statement of a material fact contained
in a Prospectus (the term Prospectus for the purpose of this Section 7 being
deemed to include any Preliminary Prospectus, the Prospectus, the Prospectus as
amended or supplemented and any document filed under the Exchange Act and
incorporated by reference into the Prospectus) or any omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; provided, however, the Company and the
Guarantors will not be liable in any such case to the extent any such loss,
expense, liability or claim arises out of or is based upon any untrue statement
or omission or alleged untrue statement or omission that has been made therein
or omitted therefrom in reliance upon and in conformity with the information
provided in writing to the Company by or on behalf of the Underwriter,
expressly for use in the Registration Statement or the Prospectus; and
provided, further that with respect to any untrue statement or omission or
alleged untrue statement or omission made in any Preliminary Prospectus, the
indemnity agreement contained in this Section 7(a) shall not inure to the
benefit of the Underwriter or its officers, shareholders, employees and
directors, and the Company and the Guarantors shall not be liable to the
Underwriter or its officers, shareholders, employees and directors, from whom
the person asserting any such losses, claims, damage, or liabilities purchased
the Securities concerned, to the extent that any such loss, claim, damage or
liability of the Underwriter or its officers, shareholders, employees and
directors results from the fact that there was not sent or given to such person
at or prior to the written confirmation of the sale of such shares to such
person, a copy of the Prospectus, as the same may be amended or supplemented,
and the untrue statement or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact in such Preliminary
Prospectus was corrected in such Prospectus and the Company had previously
furnished copies thereof to the Underwriter on a timely basis to permit the
Prospectus (as the same may be amended or supplemented) to be sent or given.
The Company and the Guarantors agree that the only such information provided in
writing by or on behalf of the Underwriter to the Company, expressly for use in
the Registration Statement or the Prospectus, is that information contained in
the third, sixth and eighth paragraphs in the section of the Prospectus
entitled "Underwriting" and the last paragraph on the cover page of the
Prospectus. The foregoing indemnity agreement shall be in addition to any
liability that the Company and the Guarantors may otherwise have.
(b) The Underwriter agrees to indemnify, defend and hold harmless the
Company, the Guarantors and their respective officers, shareholders, employees
and directors and any person who controls the Company or the Guarantors within
the meaning of Section 15 of the Act from and against any loss, expense,
liability or claim (including the reasonable cost of investigating such claim)
that the Company, the Guarantors or any such officer, shareholder, employee,
director or controlling person may incur under the Act, the Exchange Act or
otherwise to the same extent as the provisions of Section 7(a) above, but only
insofar as such loss, expense, liability or claim arises out of or is based
upon any untrue statement or omission or alleged untrue statement or omission
made in reliance or in conformity with information
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relating to the Underwriter furnished in writing to the Company by or on behalf
of the Underwriter, expressly for use in the Registration Statement or the
Prospectus. The Company and the Guarantors agree that the only information
provided in writing by or on behalf of the Underwriter to the Company,
expressly for use in the Registration Statement or the Prospectus, is that
information contained in the third, sixth and eighth paragraphs in the section
of the Prospectus entitled "Underwriting" and the last paragraph on the cover
page of the Prospectus.
(c) If any action is brought against an indemnified party under this
Section 7, the indemnified party or parties shall promptly notify the
indemnifying party in writing of the institution of such action (provided that
the failure to give such notice shall not relieve the indemnifying party of any
liability that it may have pursuant to this Agreement, unless and to the extent
the indemnifying party did not otherwise learn of such action and such failure
has resulted in the forfeiture of substantive rights or defenses by the
indemnifying party) and the indemnifying party shall assume the defense of such
action, including the employment of counsel and payment of reasonable expenses.
The indemnified party or parties shall have the right to employ its or their
own counsel in any such case, but the fees and expenses of such counsel shall
be at the expense of the indemnified party or parties unless (i) the employment
of such counsel shall have been authorized in writing by the indemnifying party
in connection with the defense of such action, (ii) the indemnifying party
shall not have employed counsel reasonably satisfactory to the indemnified
party to take charge of the defense of such action within a reasonable time
after notice of the institution of such action, (iii) such indemnified party or
parties shall have reasonably concluded that there may be defenses available to
it or them that are different from or additional to those available to the
indemnifying party or (iv) the use of counsel chosen by the indemnifying party
to represent the indemnified party would present such counsel with a conflict
of interest (in which case the indemnifying party shall not have the right to
direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses shall be borne by the
indemnifying party and paid as incurred; provided that the indemnifying party
shall only be responsible for the fees and expenses of one counsel for the
indemnified party or parties hereunder. Anything in this paragraph to the
contrary notwithstanding, the indemnifying party shall not be liable for any
settlement of any such claim or action effected without its written consent,
which consent shall not be unreasonably withheld.
(d) If the indemnification provided for in this Section 7 is
unavailable to an indemnified party under subsection (a) or (b) of this Section
7 in respect of any losses, damages, expenses, liabilities or claims referred
to therein, then each applicable indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
expenses, liabilities or claims (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Guarantors on the
one hand and the Underwriter on the other hand from the offering of the
Securities or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company and the Guarantors on the one hand and the
Underwriter on the other hand in connection with the statements or omissions
that resulted in such losses, expenses, liabilities or claims, as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Guarantors on the one hand and the Underwriter on the other
hand shall be deemed to be in the same proportion as the total proceeds from
the offering of the Securities (net of underwriting discounts and commissions
but before deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Underwriter. The
relative fault of the Company and the Guarantors on the one hand and of the
Underwriter on the other hand shall be determined by reference to, among other
things, whether the untrue statement or alleged untrue statement of a material
fact or omission or alleged omission relates to information supplied by the
Company, the Guarantors or by the Underwriter and the parties' relative
-15-
<PAGE> 16
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The amount paid or payable by a party as a result
of the losses, expenses, liabilities and claims referred to above shall be
deemed to include any legal or other fees or expenses reasonably incurred by
such party in connection with investigating or defending any claim or action.
(e) The Company, the Guarantors and the Underwriter agree that it
would not be just and equitable if contribution pursuant to this Section 7 were
determined by pro rata allocation or by any other method of allocation that
does not take account of the equitable considerations referred to in Section
7(d) above. Notwithstanding the provisions of this Section 7, the Underwriter
shall not be required to contribute any amount in excess of the underwriting
discount received by it by reason of such untrue statement or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY.
The respective indemnity and contribution agreements contained in
Section 7, and the covenants, representations and warranties of the Company and
the Guarantors contained in this Agreement or contained in certificates of
officers of the Company or the Guarantors submitted pursuant hereto, shall
remain in full force and effect, regardless of any investigation, or statement
as to the results thereof, made by or on behalf of the Underwriter or any of
its officers, employees, directors, shareholders or any person who controls the
Underwriter, or by or on behalf of the Company or the Guarantors or any of
their respective officers or directors or any controlling person of the Company
or the Guarantors, and will survive delivery of and payment for the Securities.
SECTION 9. NOTICES.
All notices and other communications hereunder will be in writing and
shall be deemed to have been duly given if mailed or transmitted by standard
form of telecommunication. Notices to the Underwriter shall be directed to
Jefferies & Company, Inc. at 11100 Santa Monica Boulevard, Los Angeles,
California 90071, attn: Jerry Gluck, Esq., with a copy to Charles L. Strauss,
Fulbright & Jaworski L.L.P., 1301 McKinney, Suite 5100, Houston, Texas 77010-
3095; and if sent to the Company or the Guarantors, directed to Dawson
Production Services, Inc., 901 N.E. Loop 410, Suite 700, San Antonio, Texas
78209, attn: Michael E. Little, with a copy to J. Rowland Cook, Jenkens &
Gilchrist, A Professional Corporation, 600 Congress Avenue, Suite 2200, Austin,
Texas 78701.
-16-
<PAGE> 17
SECTION 10. PARTIES.
This Agreement shall inure to the benefit of and be binding upon the
Underwriter, the Company and the Guarantors and their respective successors and
legal representatives. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to provide any person, firm or corporation,
other than the Underwriter, the Company and the Guarantors and their respective
successors and legal representatives and the controlling persons, officers,
employees, directors and shareholders referred to in Sections 7 and 8 and their
respective heirs and legal representatives, any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision herein
or therein contained. This Agreement and all conditions and provisions hereof
are intended to be for the sole and exclusive benefit of the Underwriter, the
Company and the Guarantors and their respective successors and legal
representatives, and such controlling persons, shareholders, officers and
directors and their respective heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities
from the Underwriter shall be deemed to be a successor by reason merely of such
purchase.
SECTION 11. GOVERNING LAW AND TIME.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York applicable to agreements made and to be performed
in such State. Specified times of day refer to New York time, unless otherwise
specified.
SECTION 12. COUNTERPARTS.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement among the Company, the Guarantors and the Underwriter in accordance
with its terms.
Very truly yours,
DAWSON PRODUCTION SERVICES, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
TAYLOR COMPANIES, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
-17-
<PAGE> 18
DAWSON PRODUCTION SERVICE DE MEXICO, S.A.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
JEFFERIES & COMPANY, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
-18-
<PAGE> 19
SCHEDULE 1
SUBSIDIARIES
<TABLE>
<CAPTION>
Name Jurisdiction Ownership (%)
---- ------------ -------------
<S> <C> <C>
Taylor Companies, Inc. Texas 100%
Dawson Production Service
de Mexico, S.A. Mexico 100%
</TABLE>
-19-
<PAGE> 20
EXHIBIT A
(i) the Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State
of Texas, with full corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Registration Statement and the Prospectus;
(ii) each Subsidiary has been duly organized and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and has full corporate power and authority
to own, lease and operate its properties and to conduct its business as
described in the Registration Statement and the Prospectus;
(iii) each of the Company and the Subsidiaries is duly
registered and qualified to conduct its business and is in good standing
in each jurisdiction where the nature or location of its properties
(owned or leased) or the conduct of its business requires such
registration or qualification, except where the failure so to register
or qualify would not have a Material Adverse Effect;
(iv) all the outstanding shares of capital stock of each
Subsidiary have been duly authorized and validly issued and are fully
paid and nonassessable, and, except as otherwise set forth in the
Prospectus, all outstanding shares of capital stock of each such
Subsidiary are owned of record and, to such counsel's knowledge,
beneficially by the Company, either directly or through a wholly-owned
subsidiary of the Company, free and clear of any perfected security
interests and, to such counsel's knowledge, any other security
interests, liens, encumbrances, equities, other rights to purchase or
other claims;
(v) except as described in the Registration Statement and the
Prospectus, there are no preemptive or other rights to subscribe for or
to purchase shares of capital stock of the Company pursuant to any
statute, the articles of incorporation or bylaws of the Company or, to
such counsel's knowledge, any agreement or other instrument to which the
Company is a party as to which any person can successfully maintain an
action, suit or proceeding against the Company for violation of his or
her preemptive rights with respect to the issuance of any shares of
capital stock of the Company;
(vi) to such counsel's knowledge, there is no pending or
threatened action, suit or proceeding before any court or governmental
agency, authority or body or any arbitrator involving the Company or any
of the Subsidiaries required to be disclosed in the Prospectus that is
not adequately disclosed in the Prospectus;
(vii) to such counsel's knowledge, there is no contract or other
document required to be described in the Registration Statement or
Prospectus, or to be filed as an exhibit, that is not described or filed
as required;
(viii) all of the Company's issued and outstanding capital stock
has been duly authorized and validly issued and is fully paid and non-
assessable as of the date hereof and the authorized capital stock of the
Company conforms in all material respects to the descriptions thereof
under the caption "Description of Capital Stock" in the Prospectus;
A-1
<PAGE> 21
(ix) the Registration Statement has become effective under the
Act; any required filing of the Prospectus, and any supplements thereto,
pursuant to Rule 424(b) has been made in the manner and within the time
period required by Rule 424(b); to such counsel's knowledge, no stop
order suspending the effectiveness of the Registration Statement has
been issued, no proceedings for that purpose have been instituted or
threatened, and the Registration Statement and the Prospectus (other
than the financial statements and supporting schedules contained therein
as to which such counsel need express no opinion) comply as to form in
all material respects with the requirements of the Act and the
applicable Act Regulations; and such counsel has no reason to believe
that at the Effective Date the Registration Statement contained any
untrue statement of a material fact or omitted to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus includes any untrue
statement of a material fact or omits to state a material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading;
(x) the statements in the Registration Statement and
Prospectus, insofar as they are descriptions of contracts, agreements or
other legal documents, are accurate in all material respects and present
fairly the information required to be shown;
(xi) this Agreement has been duly authorized, executed and
delivered by the Company and the Guarantors and the Company and the
Guarantors have full corporate power and authority to enter into this
Agreement;
(xii) no consent, approval, authorization or order of any court
or governmental agency or body is required in connection with the
consummation of the transactions contemplated hereby, except such as
have been obtained under the Act and the Trust Indenture Act and such as
may be required under the blue sky laws of any jurisdiction in
connection with the purchase and distribution of the Securities by the
Underwriter and such other approvals (specified in such opinion) as have
been obtained;
(xiii) neither the execution and delivery of this Agreement or
the Indenture, nor the consummation of any other of the transactions
herein or therein contemplated, nor the fulfillment of the terms hereof
or thereof, will result in a breach of, or constitute a default under,
(a) the terms of any indenture or other agreement or instrument (i) to
which the Company or any of the Subsidiaries is a party or by which it
is bound and (ii) that is either filed as an exhibit to the Registration
Statement or is identified to such counsel as being material to the
Company and the Subsidiaries, taken as a whole, and listed on a schedule
to such counsel's opinion, (b) any law, statute, rule, order, regulation
or decree of any court, regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over the Company or
any of the Subsidiaries of which such counsel is aware and that is known
by such counsel to be applicable to the Company or any of the
Subsidiaries (where such conflict, breach or default would have a
Material Adverse Effect) or (c) the articles of incorporation or by-laws
of the Company or any Guarantor;
(xiv) the Securities have been duly and validly authorized by
the Company and, when executed and authenticated in accordance with the
provisions of the Indenture and delivered to and paid for by the
Underwriter
A-2
<PAGE> 22
pursuant to this Agreement, will constitute legal, valid and binding
obligations of the Company, entitled to the benefits of the Indenture;
(xv) the Indenture has been duly authorized, executed and
delivered by the Company, has been duly qualified under the Trust
Indenture Act and constitutes a legal, valid and binding obligation of
the Company, enforceable against the Company in accordance with its
terms, except to the extent that such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by equitable
principles;
(xvi) the Indenture has been duly authorized, executed and
delivered by the Guarantors, and each Subsidiary Guarantee constitutes a
legal, valid and binding obligation of the respective Guarantors,
enforceable against the respective Guarantors in accordance with its
terms, except to the extent that such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by equitable
principles;
(xvii) each of the Guarantors has the corporate or partnership
power and authority to execute and deliver and issue its Subsidiary
Guarantee;
(xviii) the certificates for the Securities are in due and
proper form under Texas law and the by-laws of the Company and conform
with the form of certificates duly authorized by the Board of Directors
of the Company;
(xix) the Securities, when issued, and the Indenture conform in
all material respects to the description thereof contained in the
Prospectus and the Registration Statement under the caption "Description
of Notes";
(xx) the Purchase Agreement, dated as of December 23, 1996 (the
"Purchase Agreement"), between the Company and Pride Petroleum Services,
Inc. has been duly authorized, executed and delivered by the Company;
(xxi) the execution, delivery and performance of the Purchase
Agreement and the consummation of the transactions contemplated thereby
have not and will not result in a breach or violation of any of the
terms and provisions of, or constitute a default under, any statute, any
rule, regulation or order of any governmental agency or body or any
court having jurisdiction over the Company or any Subsidiary or any of
their properties, or any agreement or instrument known to such counsel
to which the Company or any Subsidiary is a party or by which the
Company or any Subsidiary is bound or to which any of the properties of
the Company or any Subsidiary is subject, or the charter or bylaws of
the Company or any Subsidiary, which breach, violation or default would
have a Material Adverse Effect;
(xxii) to such counsel's knowledge, no holder of any securities
of the Company or any other person has the right, contractual or
otherwise, to cause the Company to sell or otherwise issue to such
person, or to permit such person to underwrite the sale of, any of the
Securities or the right to have any securities of the Company included
in the Registration Statement or the right, as a result of the filing of
the Registration Statement, to require registration under the Act of any
securities of the Company that has not been waived or lapsed, except as
described in the Registration Statement or Prospectus; and
A-3
<PAGE> 23
(xxiii) the Company is not an "investment company" as
defined under the Investment Company Act of 1940 or subject to
registration under the Investment Company Act of 1940.
In addition, such counsel shall also state that such counsel has
participated in conferences with representatives of the Underwriter, officers
and other representatives of the Company and representatives of the independent
certified public accountants of the Company and the Subsidiaries at which
conferences the contents of the Registration Statement and the Prospectus and
related matters were discussed and that, although such counsel is not passing
upon and does not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement and the
Prospectus (except as set forth in clauses (viii), (x) and (xix) of this
Exhibit A), on the basis of the foregoing (relying as to materiality upon
officers and other representatives of the Company), no facts have come to the
attention of such counsel that lead such counsel to believe that the
Registration Statement at the time it became effective or at the Representation
Date and the Closing Date contained or contains an untrue statement of a
material fact or omitted or omits to state a material fact required to be
stated therein or necessary in order to make the statements therein not
misleading or that the Prospectus, at the Representation Date (unless the term
"Prospectus" refers to a prospectus that has been provided to the Underwriter
by the Company for use in connection with the offering of the Securities that
differs from the Prospectus on file at the Commission at the Representation
Date, in which case at the time it is first provided to the Underwriter for
such use) or at the Closing Date, contained or contains an untrue statement of
a material fact or omitted or omits to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided, that such counsel need not express any comment with respect to the
financial statements and schedules contained therein, including the notes
thereto, the auditors' report thereon and the related summary of accounting
policies.
The opinions of such counsel relate solely to, are based solely upon and
are limited exclusively to the laws of the State of Texas and the federal laws
of the United States of America, to the extent applicable.
A-4
<PAGE> 1
DAWSON PRODUCTION SERVICES, INC.
AND
SUBSIDIARY GUARANTORS
% SENIOR NOTES DUE 2007
INDENTURE
Dated as of February , 1997
U.S. Trust Company of Texas, N.A.
Trustee
$130,000,000
<PAGE> 2
CROSS REFERENCE TABLE*
<TABLE>
<CAPTION>
TRUST INDENTURE ACT SECTION INDENTURE SECTION
<S> <C>
310(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10
(a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(a)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
311(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
312(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3
313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6
(b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6
(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6;7.7
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6;11.2
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6
314(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3;11.2
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.12
(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.4
(c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.4
(c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3;11.4;11.5
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.5
(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
315(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5;11.2
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.11
316 (a)(last sentence) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9
(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5
(a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.12
317(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.8
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4
318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1
</TABLE>
N.A. means not applicable.
*This Cross Reference Table is not part of the Indenture.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE . . . . . . . . . 1
SECTION 1.1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.2 OTHER DEFINITIONS . . . . . . . . . . . . . . . . . . 15
SECTION 1.3 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. . 16
SECTION 1.4 RULES OF CONSTRUCTION . . . . . . . . . . . . . . . . 16
ARTICLE 2 THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 2.1 FORM AND DATING . . . . . . . . . . . . . . . . . . . 17
SECTION 2.2 EXECUTION AND AUTHENTICATION . . . . . . . . . . . . 17
SECTION 2.3 REGISTRAR AND PAYING AGENT . . . . . . . . . . . . . 18
SECTION 2.4 PAYING AGENT TO HOLD MONEY IN TRUST . . . . . . . . . 18
SECTION 2.5 HOLDER LISTS . . . . . . . . . . . . . . . . . . . . 19
SECTION 2.6 TRANSFER AND EXCHANGE . . . . . . . . . . . . . . . . 19
SECTION 2.7 REPLACEMENT NOTES . . . . . . . . . . . . . . . . . . 21
SECTION 2.8 OUTSTANDING NOTES . . . . . . . . . . . . . . . . . . 22
SECTION 2.9 TREASURY NOTES . . . . . . . . . . . . . . . . . . . 22
SECTION 2.10 TEMPORARY NOTES . . . . . . . . . . . . . . . . . . . 22
SECTION 2.11 CANCELLATION . . . . . . . . . . . . . . . . . . . . 22
SECTION 2.12 DEFAULTED INTEREST . . . . . . . . . . . . . . . . . 23
SECTION 2.13 CUSIP NUMBERS . . . . . . . . . . . . . . . . . . . . 23
ARTICLE 3 REDEMPTION AND PREPAYMENT . . . . . . . . . . . . . . . . . 23
SECTION 3.1 NOTICES TO TRUSTEE . . . . . . . . . . . . . . . . . 23
SECTION 3.2 SELECTION OF NOTES TO BE REDEEMED . . . . . . . . . . 23
SECTION 3.3 NOTICE OF REDEMPTION . . . . . . . . . . . . . . . . 24
SECTION 3.4 EFFECT OF NOTICE OF REDEMPTION . . . . . . . . . . . 25
SECTION 3.5 DEPOSIT OF REDEMPTION PRICE . . . . . . . . . . . . . 25
SECTION 3.6 NOTES REDEEMED IN PART . . . . . . . . . . . . . . . 25
SECTION 3.7 OPTIONAL REDEMPTION . . . . . . . . . . . . . . . . . 25
SECTION 3.8 MANDATORY REDEMPTION . . . . . . . . . . . . . . . . 26
SECTION 3.9 OFFER TO PURCHASE BY APPLICATION OF EXCESS PROCEEDS . 26
ARTICLE 4 COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 4.1 PAYMENT OF NOTES . . . . . . . . . . . . . . . . . . 28
SECTION 4.2 MAINTENANCE OF OFFICE OR AGENCY . . . . . . . . . . . 29
SECTION 4.3 REPORTS . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 4.4 COMPLIANCE CERTIFICATE . . . . . . . . . . . . . . . 29
SECTION 4.5 TAXES . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 4.6 STAY, EXTENSION AND USURY LAWS . . . . . . . . . . . 30
SECTION 4.7 RESTRICTED PAYMENTS . . . . . . . . . . . . . . . . . 31
SECTION 4.8 DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . 32
SECTION 4.9 INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED
EQUITY . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 4.10 ASSET SALES . . . . . . . . . . . . . . . . . . . . . 35
SECTION 4.11 TRANSACTIONS WITH AFFILIATES . . . . . . . . . . . . 37
SECTION 4.12 LIENS . . . . . . . . . . . . . . . . . . . . . . . . 37
</TABLE>
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<TABLE>
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SECTION 4.13 ISSUANCES AND SALES OF CAPITAL STOCK OF WHOLLY OWNED
SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . 38
SECTION 4.14 SALE-AND-LEASEBACK TRANSACTIONS . . . . . . . . . . . 38
SECTION 4.15 OFFER TO REPURCHASE UPON CHANGE OF CONTROL . . . . . 38
SECTION 4.16 BUSINESS ACTIVITIES . . . . . . . . . . . . . . . . . 39
ARTICLE 5 SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 5.1 MERGER, CONSOLIDATION OR SALE OF ASSETS . . . . . . . 39
SECTION 5.2 SUCCESSOR CORPORATION SUBSTITUTED . . . . . . . . . . 40
ARTICLE 6 DEFAULTS AND REMEDIES . . . . . . . . . . . . . . . . . . . 40
SECTION 6.1 EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . 40
SECTION 6.2 ACCELERATION . . . . . . . . . . . . . . . . . . . . 42
SECTION 6.3 OTHER REMEDIES . . . . . . . . . . . . . . . . . . . 43
SECTION 6.4 WAIVER OF PAST DEFAULTS . . . . . . . . . . . . . . . 43
SECTION 6.5 CONTROL BY MAJORITY . . . . . . . . . . . . . . . . . 43
SECTION 6.6 LIMITATION ON SUITS . . . . . . . . . . . . . . . . . 43
SECTION 6.7 RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT . . . . 44
SECTION 6.8 COLLECTION SUIT BY TRUSTEE . . . . . . . . . . . . . 44
SECTION 6.9 TRUSTEE MAY FILE PROOFS OF CLAIM . . . . . . . . . . 44
SECTION 6.10 PRIORITIES . . . . . . . . . . . . . . . . . . . . . 45
SECTION 6.11 UNDERTAKING FOR COSTS . . . . . . . . . . . . . . . . 45
ARTICLE 7 TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 7.1 DUTIES OF TRUSTEE . . . . . . . . . . . . . . . . . . 45
SECTION 7.2 RIGHTS OF TRUSTEE . . . . . . . . . . . . . . . . . . 46
SECTION 7.3 INDIVIDUAL RIGHTS OF TRUSTEE . . . . . . . . . . . . 47
SECTION 7.4 TRUSTEE'S DISCLAIMER . . . . . . . . . . . . . . . . 47
SECTION 7.5 NOTICE OF DEFAULTS . . . . . . . . . . . . . . . . . 47
SECTION 7.6 REPORT BY TRUSTEE TO HOLDERS OF THE NOTES . . . . . . 47
SECTION 7.7 COMPENSATION AND INDEMNITY . . . . . . . . . . . . . 48
SECTION 7.8 REPLACEMENT OF TRUSTEE . . . . . . . . . . . . . . . 49
SECTION 7.9 SUCCESSOR TRUSTEE BY MERGER, ETC . . . . . . . . . . 49
SECTION 7.10 ELIGIBILITY; DISQUALIFICATION . . . . . . . . . . . . 50
SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST THE COMPANY 50
ARTICLE 8 LEGAL DEFEASANCE AND COVENANT DEFEASANCE . . . . . . . . . . 50
SECTION 8.1 OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE 50
SECTION 8.2 LEGAL DEFEASANCE AND DISCHARGE . . . . . . . . . . . 50
SECTION 8.3 COVENANT DEFEASANCE . . . . . . . . . . . . . . . . . 51
SECTION 8.4 CONDITIONS TO LEGAL OR COVENANT DEFEASANCE . . . . . 51
SECTION 8.5 DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN
TRUST; OTHER MISCELLANEOUS PROVISIONS . . . . . . . . 52
SECTION 8.6 REPAYMENT TO THE COMPANY . . . . . . . . . . . . . . 53
SECTION 8.7 REINSTATEMENT . . . . . . . . . . . . . . . . . . . . 53
</TABLE>
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<TABLE>
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ARTICLE 9 AMENDMENT, SUPPLEMENT AND WAIVER . . . . . . . . . . . . . . 54
SECTION 9.1 WITHOUT CONSENT OF HOLDERS OF NOTES . . . . . . . . . 54
SECTION 9.2 WITH CONSENT OF HOLDERS OF NOTES . . . . . . . . . . 55
SECTION 9.3 COMPLIANCE WITH TRUST INDENTURE ACT . . . . . . . . . 56
SECTION 9.4 REVOCATION AND EFFECT OF CONSENTS . . . . . . . . . . 56
SECTION 9.5 NOTATION ON OR EXCHANGE OF NOTES . . . . . . . . . . 56
SECTION 9.6 TRUSTEE TO SIGN AMENDMENT ETC . . . . . . . . . . . . 57
ARTICLE 10 SUBSIDIARY GUARANTEES . . . . . . . . . . . . . . . . . . . 57
SECTION 10.1 SUBSIDIARY GUARANTEES . . . . . . . . . . . . . . . . 57
SECTION 10.2 ADDITIONAL SUBSIDIARY GUARANTEES . . . . . . . . . . 58
SECTION 10.3 LIMITATION OF SUBSIDIARY GUARANTORS' LIABILITY . . . 59
SECTION 10.4 SUBSIDIARY GUARANTORS MAY CONSOLIDATE ETC., ON CERTAIN
TERMS . . . . . . . . . . . . . . . . . . . . . . . . 60
SECTION 10.5 RELEASES OF SUBSIDIARY GUARANTORS . . . . . . . . . . 60
SECTION 10.6 "TRUSTEE" TO INCLUDE PAYING AGENT . . . . . . . . . . 61
SECTION 10.7 CONTRIBUTION . . . . . . . . . . . . . . . . . . . . 61
SECTION 10.8 EXECUTION OF SUBSIDIARY GUARANTEES . . . . . . . . . 61
ARTICLE 11 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 11.1 TRUST INDENTURE ACT CONTROLS . . . . . . . . . . . . 62
SECTION 11.2 NOTICES . . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 11.3 COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF
NOTES . . . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 11.4 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT . 64
SECTION 11.5 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION . . . . 64
SECTION 11.6 RULES BY TRUSTEE AND AGENTS . . . . . . . . . . . . . 65
SECTION 11.7 NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES
AND SHAREHOLDERS . . . . . . . . . . . . . . . . . . 65
SECTION 11.8 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . 65
SECTION 11.9 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS . . . . 65
SECTION 11.10 SUCCESSORS . . . . . . . . . . . . . . . . . . . . . 65
SECTION 11.11 SEVERABILITY . . . . . . . . . . . . . . . . . . . . 65
SECTION 11.12 COUNTERPART ORIGINALS . . . . . . . . . . . . . . . . 65
SECTION 11.13 TABLE OF CONTENTS, HEADINGS, ETC . . . . . . . . . . 65
</TABLE>
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INDENTURE dated as of February , 1997, by and among Dawson Production
Services, Inc., a Texas corporation (the "Company"), the Subsidiary Guarantors
(as defined herein) and U.S. Trust Company of Texas, N.A., as trustee (the
"Trustee").
The Company, the Subsidiary Guarantors and the Trustee agree as follows
for the benefit of one another and for the equal and ratable benefit of the
Holders of the % Senior Notes due 2007 of the Company (the "Notes"):
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1 DEFINITIONS.
"Agent" means any Registrar, Paying Agent or co-registrar.
"Acquired Indebtedness" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary to such specified Person and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Acquisition Line" means the loan facility under the credit agreement,
dated February , 1997, between the Company and the Frost National Bank for the
purpose of acquisitions of assets or businesses, as amended, modified,
supplemented, extended, restated or renewed from time to time.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall
mean the possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Attributable Indebtedness" in respect of a sale-and-leaseback
transaction means, at the time of determination, the present value (discounted
at the rate of interest implicit in such transaction, determined in accordance
with GAAP) of the obligation of the lessee for net rental payments during the
remaining term of the lease included in such sale-and-leaseback transaction
(including any period for which such lease has been extended or may, at the
option of the lessor, be extended). As used in the preceding sentence, the
"net rental payments" under any lease for any such period shall mean the sum of
rental and other payments required to be paid with respect to such period by
the lessee thereunder, excluding any amounts required to be paid by such
lessee on account of maintenance and repairs, insurance, taxes, assessments,
water rates or similar charges. In the case of any lease that is terminable by
the lessee upon payment of penalty, such net rental payment shall also include
the amount of such penalty, but no rent
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shall be considered as required to be paid under such lease subsequent to the
first date upon which it may be so terminated.
"Bankruptcy Custodian" similar officer under any Bankruptcy Law.
"Bankruptcy Law" means Title 11, U.S. Code or any similar federal or
state law for the relief of debtors.
"Board of Directors" means the Board of Directors of the Company, or any
authorized committee of the Board of Directors.
"Business Day" means any day other than a Legal Holiday.
"Capital Lease Obligation" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited), (iv) in the case of a limited liability
corporation or similar entity, any membership or other similar interests
therein and (v) any other interest or participation that confers on a Person
the right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means (i) any evidence of Indebtedness with a
maturity of 365 days or less issued or directly and fully guaranteed or insured
by the United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America is
pledged in support thereof); (ii) demand and time deposits and certificates of
deposit or acceptances with a maturity of 365 days or less of any financial
institution that is a member of the Federal Reserve System having combined
capital and surplus and undivided profits of not less than $500 million; (iii)
commercial paper with a maturity of 270 days or less issued by a corporation
that is not an Affiliate of the Company and is organized under the laws of any
state of the United States or the District of Columbia and rated at least A-2
by Standard and Poor's or at least P-2 by Moody's; (iv) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clause (i) above entered into with any commercial bank meeting the
specifications of clause (ii) above; (v) overnight bank deposits and bankers'
acceptances at any commercial bank meeting the qualifications specified in
clause (ii) above; (vi) deposits available for withdrawal on demand with any
commercial bank not meeting the qualifications specified in clause (ii) above,
provided all such deposits do not exceed $5.0 million in the aggregate at any
one time; (vii) demand and time deposits and certificates of deposit with any
commercial bank organized in the United States not meeting the qualifications
specified in clause (ii) above, provided that such deposits and certificates
support bond, letter of credit and other similar types of obligations incurred
in the ordinary course of business and (viii) investments in money market or
other mutual funds substantially all of whose assets comprise securities of the
types described in clauses (i) through (v) above.
"Change of Control" means the occurrence of any of the following: (i)
the sale, lease, transfer, conveyance or other disposition (other than by way
of merger or consolidation), in one or a series of related transactions, of all
or substantially all of the assets of the Company and its Restricted
Subsidiaries
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<PAGE> 8
taken as a whole to any "person" (as such term is used in Section 13(d)(3) of
the Exchange Act); (ii) the Company consolidates with or merges into another
Person or any Person consolidates with, or merges into, the Company, in any
such event pursuant to a transaction in which the outstanding Voting Stock of
the Company is changed into or exchanged for cash, securities or other
property, other than any such transaction where (a) the outstanding Voting
Stock of the Company is changed into or exchanged for Voting Stock of the
surviving or resulting Person that is Qualified Capital Stock and (b) the
holders of the Voting Stock of the Company immediately prior to such
transaction own, directly or indirectly, not less than a majority of the Voting
Stock of the surviving or resulting Person immediately after such transaction;
(iii) the adoption of a plan relating to the liquidation or dissolution of the
Company; (iv) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above) becomes the "beneficial owner" (as such term is
defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or
indirectly, of more than 50% of the Voting Stock of the Company or (v) the
first day on which a majority of the members of the Board of Directors are not
Continuing Directors. For purposes of this definition, any transfer of an
equity interest of an entity that was formed for the purpose of acquiring
Voting Stock of the Company will be deemed to be a transfer of such portion of
such Voting Stock as corresponds to the portion of the equity of such entity
that has been so transferred.
"Commission" means the Securities and Exchange Commission.
"Consolidated Cash Flow" means, with respect to any Person for any
period, the Consolidated Net Income of such Person for such period plus (i) an
amount equal to any extraordinary loss plus any net loss realized in connection
with an Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period, to the
extent that such provision for taxes was included in computing such
Consolidated Net Income, plus (iii) consolidated net interest expense of such
Person and its Restricted Subsidiaries for such period, whether paid or accrued
and whether or not capitalized (including, without limitation, amortization of
original issue discount, non-cash interest payments, the interest component of
any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, imputed interest with respect to
Attributable Indebtedness, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Interest Rate Protection Obligations), to the
extent that any such expense was deducted in computing such Consolidated Net
Income, plus (iv) depreciation, amortization (including amortization of
goodwill, debt issuance costs and other intangibles but excluding amortization
of prepaid cash expenses that were paid in a prior period) and other non-cash
charges (including any provision for the reduction in the carrying value of
assets recorded in accordance with GAAP but excluding any such non-cash charge
to the extent that it represents an accrual of or reserve for cash charges in
any future period or amortization of a prepaid cash expense that was paid in a
prior period) of such Person and its Restricted Subsidiaries for such period to
the extent that such depreciation, amortization and other non-cash charges were
deducted in computing such Consolidated Net Income, minus (v) any non-cash
items increasing the Consolidated Net Income of such Person and its Restricted
Subsidiaries during such period (excluding any such items that represent the
reversal of any accrual of, or cash reserve for, anticipated cash charges in
any prior period commencing subsequent to the Issue Date), in each case, on a
consolidated basis and determined in accordance with GAAP. Notwithstanding the
foregoing, the provision for taxes on the income or profits of, and the
depreciation and amortization and other non-cash charges of a Restricted
Subsidiary of the referent Person shall be added to Consolidated Net Income to
compute Consolidated Cash Flow only to the extent (and in same proportion) that
the Net Income of such Restricted Subsidiary was included in calculating the
Consolidated Net
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<PAGE> 9
Income of such Person and only if a corresponding amount would be permitted at
the date of determination to be dividended to the Company by such Restricted
Subsidiary without prior governmental approval (that has not been obtained),
and without direct or indirect restriction pursuant to the terms of its charter
and all agreements, instruments, judgments, decrees, orders, statutes, rules
and governmental regulations applicable to that Restricted Subsidiary or its
shareholders.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that (i) the Net Income (but not loss) of any Person that
is not a Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted Subsidiary
thereof that is a Subsidiary Guarantor; (ii) the Net Income of any Restricted
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Restricted Subsidiary of that Net
Income is not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable to
that Restricted Subsidiary or its shareholders; (iii) the Net Income of any
Person acquired in a pooling of interests transaction for any period prior to
the date of such acquisition shall be excluded and (iv) the cumulative effect
of a change in accounting principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any
date, the sum of (i) the consolidated equity of the common shareholders of such
Person and its consolidated Restricted Subsidiaries as of such date plus (ii)
the respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of cash dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred stock, less (x) all
write-ups (other than write-ups resulting from foreign currency translations
and write-ups of tangible assets of a going concern business made within 12
months after the acquisition of such business) subsequent to the Issue Date in
the book value of any asset owned by such Person or a consolidated Restricted
Subsidiary of such Person, (y) all investments as of such date in
unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except,
in each case, Permitted Investments) and (z) all unamortized debt discount and
expense and unamortized deferred charges as of such date, all of the foregoing
determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any
member of the Board of Directors who (i) was a member of such Board of
Directors on the Issue Date or (ii) was nominated for election or elected to
such Board of Directors with the approval of a majority of the Continuing
Directors who were members of such Board at the time of such nomination or
election.
"Corporate Trust Office of the Trustee" shall be at the address of the
Trustee specified in Section 11.2 hereof or such other address as to which the
Trustee may give notice to the Company.
"Credit Facility" means, collectively, the Acquisition Line and the
Working Line.
"Currency Hedge Obligations" means, at any time as to any Person, the
obligations of such Person at such time that were incurred in the ordinary
course of business pursuant to any foreign currency exchange agreement, option
or futures contract or other similar agreement or arrangement designed to
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protect against or manage such Person's or any of its Subsidiaries' exposure to
fluctuations in foreign currency exchange rates.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Definitive Notes" means Notes that are in the form of the Notes
attached hereto as Exhibit A, that do not include the information called for by
footnotes 1 and 2 thereto.
"Depository" means, with respect to the Notes issuable or issued in
whole or in part in global form, the Person specified in Section 2.3 hereof as
the Depository with respect to the Notes, until a successor shall have been
appointed and become such pursuant to the applicable provision of this
Indenture, and, thereafter, "Depository" shall mean or include such successor.
"Disinterested Director" means, with respect to any transaction or
series of transactions in respect of which the Board of Directors is required
to deliver a resolution of the Board of Directors under this Indenture, a
member of the Board of Directors who does not have any material direct or
indirect financial interest (other than an interest arising solely from the
beneficial ownership of Capital Stock of the Company) in or with respect to
such transaction or series of transactions.
"Disqualified Stock" means any Capital Stock that, by its terms (or by
the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the Holder thereof, in whole or in part, on or prior to the
date on which the Notes mature.
"Employee Stock Repurchases" means purchases by the Company of any of
its Capital Stock from employees, provided that the aggregate amount of all
such purchases shall not exceed $500,000 during any fiscal year of the Company.
"Equity Interests" means Capital Stock and all warrants, options or
other rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Event of Loss" means, with respect to any workover rig or similar or
related property or asset of the Company or any Restricted Subsidiary, (i) any
damage to such workover rig or similar or related property or asset that
results in an insurance settlement with respect thereto on the basis of a total
loss or a constructive or compromised total loss or (ii) the confiscation,
condemnation or requisition of title to such workover rig or similar or related
property or asset by any government or instrumentality or agency thereof. An
Event of Loss shall be deemed to occur as of the date of the insurance
settlement, confiscation, condemnation or requisition of title, as applicable.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
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<PAGE> 11
"Existing Indebtedness" means up to $3.75 million in aggregate principal
amount of Indebtedness of the Company and its Subsidiaries (other than
Indebtedness under the Credit Facility) in existence on the Issue Date, until
such amounts are repaid.
"Fair Market Value" means, with respect to any asset or Investment, the
fair market value of such asset or Investment at the time of the event
requiring such determination, and, with respect to any assets or Investment in
excess of $5.0 million (other than cash or Cash Equivalents) as determined by
an Independent Appraiser that is, in the reasonable judgment of the Board of
Directors, qualified to perform the task for which such Independent Appraiser
has been engaged and independent with respect to the Company.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person for
such period. In the event that the Company or any of its Restricted
Subsidiaries incurs, assumes, guarantees or redeems any Indebtedness (other
than revolving credit borrowings) or issues preferred stock subsequent to the
commencement of the period for which the Fixed Charge Coverage Ratio is being
calculated but prior to the date on which the event for which the calculation
of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the
Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such
incurrence, assumption, guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i) acquisitions of
businesses that have been made by the referent Person or any of its Restricted
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and prior to the Calculation Date shall be
deemed to have occurred on the first day of the four-quarter reference period;
(ii) the Consolidated Cash Flow attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded; and (iii) the Fixed Charges
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall
be excluded, but only to the extent that the obligations giving rise to such
Fixed Charges will not be obligations of the referent Person or any of its
Restricted Subsidiaries following the Calculation Date.
"Fixed Charges" means, with respect to any Person for any period, the
sum of (i) the consolidated interest expense (net of any interest income) of
such Person and its Restricted Subsidiaries for such period, whether paid or
accrued (excluding amortization of debt issuance costs and including, without
limitation, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
imputed interest with respect to Attributable Indebtedness, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Interest
Rate Protection Obligations); (ii) the consolidated interest expense of such
Person and its Restricted Subsidiaries that was capitalized during such period;
(iii) any interest expense on Indebtedness of another Person that is guaranteed
by such Person or one of its Restricted Subsidiaries or secured by a Lien on
assets of such Person or one of its Restricted Subsidiaries (whether or not
such guarantee or Lien is called upon) and (iv) the product of (A) all cash
dividend payments (and non-cash dividend payments in the case of a Person that
is a Restricted Subsidiary) on any series of preferred stock of such Person, to
the extent such preferred stock is owned by Persons other than such Person or
its Restricted Subsidiaries, times (B) a fraction, the numerator of which is
one and the denominator of which is one minus the then current
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combined federal, state and local statutory tax rate of such Person, expressed
as a decimal, in each case, on a consolidated basis and in accordance with
GAAP.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession of the United States, which are in effect as of the date of
preparation of a financial statement or the date that a particular action is
taken or event occurs, as applicable.
"Global Note" means a Note that contains the paragraph referred to in
footnote 1 and the additional schedule referred to in footnote 2 to the form of
Note attached hereto as Exhibit A.
"Government Securities" means securities that are (a) direct obligations
of the United States of America for the timely payment of which its full faith
and credit is pledged or (b) obligations of a Person controlled or supervised
by and acting as an agency or instrumentality of the United States of America
the timely payment of which is unconditionally guaranteed as a full faith and
credit obligation of the United States of America, which, in either case, are
not callable or redeemable as the option of the issuer thereof, and shall also
include a depository receipt issued by a bank (as defined in Section 2.13(a)(2)
of the Securities Act), as custodian with respect to any such Government
Security or a specific payment of principal of or interest on any such
Government Security held by such custodian for the account of the holder of
such depository receipt; provided, that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to
the holder of such depository receipt from any amount received by the custodian
in respect of the Government Security or the specific payment of principal of
or interest on the Government Security evidenced by such depository receipt.
The term "guarantee" means, as applied to any obligation, (i) a
guarantee (other than by endorsement of negotiable instruments for collection
in the ordinary course of business), direct or indirect, in any manner, of any
part or all of such obligation and (ii) an agreement, direct or indirect,
contingent or otherwise, the practical effect of which is to assure in any way
the payment or performance (or payment of damages in the event of
nonperformance) of all or any part of such obligation, including, without
limiting the foregoing, the payment of amounts drawn down under letters of
credit. When used as a verb, "guarantee" has a corresponding meaning.
"Holder" means a Person in whose name a Note is registered.
"Indebtedness" means, with respect to any Person, any indebtedness of
such Person, whether or not contingent, in respect of borrowed money or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof) or banker's acceptances
or representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any obligations in respect
of Currency Hedge Obligations or Interest Rate Protection Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and
to the extent any of the foregoing indebtedness (other than letters of credit,
Currency Hedge
7
<PAGE> 13
Obligations and Interest Rate Protection Obligations) would appear as a
liability upon a balance sheet of such Person prepared in accordance with GAAP,
as well as all indebtedness of others secured by a Lien on any asset of such
Person (whether or not such indebtedness is assumed by such Person) and, to the
extent not otherwise included, the guarantee by such Person of any Indebtedness
of any other Person.
"Indenture" means this indenture, as amended or supplemented from time
to time.
"Independent Appraiser" means an investment banking firm of national
standing with noninvestment grade debt underwriting experience or any third
party appraiser of national standing; provided, however, that such firm or
appraiser is not an Affiliate of the Company.
"Interest Rate Protection Obligations" means the obligations of any
Person pursuant to any arrangement with any other Person whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest
on a stated notional amount in exchange for periodic payments made by such
Person calculated by applying a fixed or a floating rate of interest on the
same notional amount and shall include, without limitation, interest rate
swaps, caps, floors, collars and similar agreements or arrangements designed to
protect against or manage such Person's or any of its Subsidiaries' exposure to
fluctuations in interest rates.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that the following shall not constitute Investments: (i) an
acquisition of assets, Equity Interests or other securities by the Company for
consideration consisting of common equity securities of the Company, (ii)
extensions of trade credit or other advances to customers on commercially
reasonable terms in accordance with normal trade practices or otherwise in the
ordinary course of business, (iii) Interest Rate Protection Obligations and
Currency Hedge Obligations, but only to the extent that the same constitute
Permitted Indebtedness and (iv) endorsements of negotiable instruments and
documents in the ordinary course of business. If the Company or any Subsidiary
of the Company sells or otherwise disposes of any Equity Interests of any
direct or indirect Subsidiary of the Company such that, after giving effect to
any such sale or disposition, such Person is no longer a Subsidiary of the
Company, the Company shall be deemed to have made an Investment on the date of
any such sale or disposition equal to the fair market value of the Equity
Interests of such Subsidiary not sold or disposed of.
"Issue Date" means the date on which the Notes were first issued under
this Indenture.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in the City of San Antonio, Texas or the City of New York or at a
place of payment are authorized by law, regulation or executive order to remain
closed. If a payment date is a Legal Holiday, payment may be made on the next
succeeding day that is not a Legal Holiday, and no interest shall accrue for
the intervening period.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease
in the
8
<PAGE> 14
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction
other than a precautionary financing statement respecting a lease not intended
as a security agreement).
"Moody's" means Moody's Investors Service, Inc. and any successor to the
rating agency business thereof.
"Net Equity Proceeds" means (i) in the case of any sale by the Company
of Qualified Capital Stock of the Company, the aggregate net proceeds received
by the Company, after payment of expenses, commissions and the like incurred in
connection therewith, whether such proceeds are in cash or in other property
(valued as determined reasonably and in good faith by the Board of Directors,
as evidenced by a written resolution of said Board of Directors, at the fair
market value thereof at the time of receipt) and (ii) in the case of any
exchange, exercise, conversion or surrender of any outstanding Indebtedness of
the Company or any Restricted Subsidiary for or into shares of Qualified
Capital Stock of the Company, the amount of such Indebtedness (or, if such
Indebtedness was issued at an amount less than the stated principal amount
thereof, the accrued amount thereof as determined in accordance with GAAP) as
reflected in the consolidated financial statements of the Company prepared in
accordance with GAAP as of the most recent date next preceding the date of such
exchange, exercise, conversion or surrender (plus any additional amount
required to be paid by the holders of such Indebtedness to the Company or to
any Wholly Owned Restricted Subsidiary of the Company upon such exchange,
exercise, conversion or surrender and less any and all payments made to the
holders of such Indebtedness, and all other expenses incurred by the Company in
connection therewith), in the case of each of clauses (i) and (ii) to the
extent consummated after the Issue Date.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale-and-leaseback transactions) or other
sale of assets or (b) the disposition of any securities by such Person or any
of its Restricted Subsidiaries or the extinguishment of any Indebtedness of
such Person or any of its Restricted Subsidiaries; (ii) any extraordinary or
nonrecurring item (but not loss), together with any related provision for taxes
on such extraordinary or nonrecurring gain (but not loss) and (iii) any
interest income, together with any related provision for taxes on such interest
income.
"Net Proceeds" means the aggregate cash proceeds received by the Company
or any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of (i) the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), (ii) amounts required to be applied to the repayment of
Indebtedness (other than Indebtedness under the Credit Facility) secured by a
Lien on the asset or assets that were the subject of such Asset Sale, (iii)
amounts required to be paid to any Person (other than the Company or any
Restricted Subsidiary) owning a beneficial interest in the asset or assets that
were the subject of such Asset Sale, (iv) any reserve for adjustment in respect
of the sale price of such asset or assets established in accordance with GAAP
and (v) any adjustment for expenses of discontinuing any operations or line
9
<PAGE> 15
of business or severance costs, in both cases associated with an Asset Sale;
provided that such adjustment does not exceed 15% of the aggregate cash
proceeds.
"Non-Recourse Indebtedness" means Indebtedness (i) as to which neither
the Company nor any of its Restricted Subsidiaries (A) provides credit support
of any kind (including any undertaking, agreement or instrument that would
constitute Indebtedness), (B) is directly or indirectly liable (as a Subsidiary
Guarantor or otherwise) or (C) constitutes the lender; (ii) no default with
respect to which (including any rights that the holders thereof may have to
take enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default on such
other Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity and (iii) as to which the lenders have been
notified in writing that they will not have any recourse to the stock or assets
of the Company or any of its Restricted Subsidiaries.
"Non-Recourse Purchase Money Indebtedness" means Indebtedness or that
portion of Indebtedness of the Company or any Restricted Subsidiary incurred in
connection with the acquisition by the Company or such Restricted Subsidiary,
subsequent to the Issue Date, of any property or assets and as to which (i) the
holders of such Indebtedness agree that they will look solely to the property
or assets so acquired (or, in the case of the acquisition of all of the
outstanding Capital Stock of a Person, the underlying properties and assets of
such Person at the time of such acquisition, including proceeds thereof) and
securing such Indebtedness for payment on or in respect of such Indebtedness,
and neither the Company nor any Restricted Subsidiary (A) provides credit
support, including any undertaking, agreement or instrument that would
constitute Indebtedness or (B) is directly or indirectly liable for such
Indebtedness and (ii) no default with respect to such Indebtedness would permit
(after notice or passage of time or both), according to the terms thereof, any
holder of any Indebtedness of the Company or a Restricted Subsidiary to declare
a default on such Indebtedness or cause the payment thereof to be accelerated
or payable prior to its stated maturity; and, provided however, that any
portion of the purchase price of such property or assets that is not financed
through the incurrence of such Indebtedness, shall be deemed to be a
"Restricted Investment" under this Indenture and shall only be permitted to be
expended by the Company or any Restricted Subsidiary to the extent that the
Company would be permitted to make a Restricted Payment in such amount under
the terms of Section 4.7 hereof.
"Note Custodian" means the Trustee, as custodian with respect to the
Notes in global form, or any successor entity thereto.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Officer" means, with respect to any Person, the Chief Executive
Officer, President, Chief Financial Officer, Treasurer, Secretary or any Vice
President of such Person.
"Officers' Certificate" means a certificate signed by two Officers, at
least one of whom shall be the principal executive officer, principal
accounting officer or principal financial officer of the Company, that meets
the requirements of Section 11.5 hereof.
"Oil Service Business" means any businesses related to providing
services for the drilling for, or exploration and production of, oil, gas or
other hydrocarbons, including, but not limited to, (i) the well servicing
business, (ii) liquid services and (iii) production services.
10
<PAGE> 16
"Opinion of Counsel" means an Opinion from legal counsel who is
reasonably acceptable to the Trustee, that meets the requirements of Section
11.5 hereof. The counsel may be an employee of or counsel to the Company.
"Permitted Investments" means any of the following: (i) Investments in
Cash Equivalents; (ii) Investments in the Company or any of its Wholly Owned
Restricted Subsidiaries (including repurchases of any of the Notes on the open
market or as otherwise permitted by this Indenture); (iii) Investments by the
Company or any of its Restricted Subsidiaries in another Person, if as a result
of such Investment (A) such other Person becomes a Wholly Owned Restricted
Subsidiary or (B) such other Person is merged or consolidated with or into, or
transfers or conveys all or substantially all of its properties and assets to,
the Company or a Wholly Owned Restricted Subsidiary; (iv) Investments permitted
under Section 4.10 hereto; (v) Investments made in the ordinary course of
business in prepaid expenses, lease, utility, workers' compensation,
performance and other similar deposits; (vi) Investments in stock, obligations
or securities received in, settlement of debts owing to the Company or any
Restricted Subsidiary as a result of bankruptcy or insolvency proceedings or
upon the foreclosure, perfection or enforcement of any Lien in favor of the
Company or any Restricted Subsidiary, in each case as to debt owing to the
Company or any Restricted Subsidiary that arose in the ordinary course of
business of the Company or any such Restricted Subsidiary, provided that any
stocks, obligations or securities received in settlement of debts that arose in
the ordinary course of business (and received other than as a result of
bankruptcy or insolvency proceedings or upon foreclosure, perfection or
enforcement of any Lien) that are, within 30 days of receipt, converted into
cash or Cash Equivalents shall be treated as having been cash or Cash
Equivalents at the time received and (vii) other Investments in joint ventures,
corporations, limited liability companies or partnerships formed with or
organized by third Persons, which joint ventures, corporations, limited
liability companies or partnerships, engage in the Oil Service Business and are
not Unrestricted Subsidiaries at the time of such Investment, provided all such
Investments do not, in the aggregate, exceed $10.0 million.
"Permitted Liens" means the following types of Liens:
(i) Liens existing as of the Issue Date;
(ii) Liens securing the Notes or the Subsidiary
Guarantees;
(iii) Liens in favor of the Company;
(iv) Liens securing Indebtedness that constitutes
Permitted Indebtedness pursuant to clause (i), (ii) or (iv) of the
definition of "Permitted Indebtedness" included in Section 4.9 hereof;
(v) Liens for taxes, assessments and governmental
charges or claims either (A) not delinquent or (B) contested in good
faith by appropriate proceedings and as to which the Company or its
Restricted Subsidiaries shall have set aside on its books such reserves
as may be required pursuant to GAAP;
(vi) statutory Liens of landlords and Liens of carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen and other
Liens imposed by law incurred in the ordinary course of business for
sums not delinquent or being contested in good faith, if such
11
<PAGE> 17
reserve or other appropriate provision, if any, as shall be required by
GAAP shall have been made in respect thereof;
(vii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation,
unemployment insurance and other types of social security, or to secure
the payment or performance of tenders, statutory or regulatory
obligations, surety and appeal bonds, bids, government contracts and
leases, performance and return of money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed
money);
(viii) judgment Liens not giving rise to an Event of
Default so long as any appropriate legal proceedings which may have been
duly initiated for the review of such judgment shall not have been
finally terminated or the period within which such proceeding may be
initiated shall not have expired;
(ix) any interest or title of a lessor under any Capital
Lease Obligation or operating lease;
(x) Liens securing Non-Recourse Purchase Money
Indebtedness and other purchase money Liens; provided, however, that (i)
the related Non-Recourse Purchase Money Indebtedness or other purchase
money Indebtedness shall not be secured by any property or assets of the
Company or any Restricted Subsidiary other than the property or assets
so acquired and any proceeds therefrom and (ii) the Lien securing any
such Indebtedness shall be created within 90 days of such acquisition;
(xi) Liens securing obligations under or in respect of
either Currency Hedge Obligations or Interest Rate Protection
Obligations;
(xii) Liens upon specific items of inventory or other
goods of any Person securing such Person's obligations in respect of
bankers' acceptances issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory or other
goods;
(xiii) Liens securing reimbursement obligations with
respect to commercial letters of credit that encumber documents and
other property or assets relating to such letters of credit and products
and proceeds thereof; and
(xiv) Liens encumbering deposits made to secure
obligations arising from statutory, regulatory, contractual or warranty
requirements of the Company or any of its Restricted Subsidiaries,
including rights of offset and set-off.
"Permitted Refinancing Indebtedness" means any Indebtedness of the
Company or any of its Restricted Subsidiaries issued in exchange for, or the
net proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
provided that: (i) the principal amount (or accreted value, if applicable) of
such Permitted Refinancing Indebtedness does not exceed the principal amount
(or accreted value, if applicable) of the Indebtedness so extended, refinanced,
renewed, replaced, defeased or refunded (plus the amount of reasonable expenses
incurred in connection therewith); (ii) such Permitted Refinancing Indebtedness
has
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<PAGE> 18
a final maturity date later than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; (iii) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is subordinated in right of payment to
the Notes, such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and is subordinated in right of payment
to, the Notes on terms at least as favorable to the Holders of Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded and (iv) with respect to
any such Indebtedness of the Company being extended, refinanced, renewed,
replaced, defeased or refunded, such Permitted Refinancing Indebtedness shall
not be incurred by any Restricted Subsidiary.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Public Equity Offering" means an underwritten offer and sale of common
stock of the Company pursuant to a registration statement that has been
declared effective by the Commission pursuant to the Securities Act (other than
a registration statement on Form S-8 or otherwise relating to equity securities
issuable under any employee benefit plan of the Company) or a private sale in
which the Company is obligated to publicly register such common stock for
resale within 120 days of such sale.
"Qualified Capital Stock" of any Person means any and all Capital Stock
of such Person other than Disqualified Stock.
"Rating Agencies" means Standard and Poor's and Moody's, or any
successor to the respective rating agency businesses thereof.
"Responsible Officer", when used with respect to the Trustee, means any
officer within the corporate trust department of the Trustee (or any successor
group of the Trustee) or any other officer of the Trustee customarily
performing functions similar to those performed by any of the above designated
officers and also means, with respect to a particular corporate trust matter,
any other officer to whom such matter is referred because of his knowledge of
and familiarity with the particular subject.
"Restricted Investment" means (without duplication) (i) the designation
of a Subsidiary as an Unrestricted Subsidiary in the manner described in the
definition of "Unrestricted Subsidiary", (ii) any Investment other than a
Permitted Investment and (iii) any amount constituting a "Restricted
Investment" as contemplated in the definition of "Non-Recourse Purchase Money
Indebtedness".
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Securities Act" means the Securities Act of 1933, as amended.
"Significant Subsidiary" means any (i) Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the date hereof, and (ii) any other Subsidiary that contributed more than 5% of
the Company's Consolidated Cash Flow for the most recent four fiscal quarters
for which financial statements are available.
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<PAGE> 19
"Standard and Poor's" means Standard and Poor's Ratings Group, a
division of The McGraw-Hill Companies, Inc., and any successor to the rating
agency business thereof.
"Subordinated Indebtedness" means any Indebtedness of the Company or a
Subsidiary Guarantor that is expressly subordinated in right of payment to the
Notes or the Subsidiary Guarantees, as the case maybe.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Voting Stock is at the time owned or controlled, directly or
indirectly, by such Person of one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (A) the sole general
partner or the managing general partner of which is such Person or a Subsidiary
of such Person or (B) the only general partners of which are such Person or of
one or more Subsidiaries of such Person (or any combination thereof).
"Subsidiary Guarantors" means each of (i) the Company's Significant
Subsidiaries on the Issue Date or any other Restricted Subsidiary that provides
a guarantee under the Credit Facility, (ii) any other Subsidiary that executes
a Subsidiary Guarantee in accordance with Article 10 hereof and (iii) their
respective successors and assigns, as required under Article 10 hereof.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-
77bbbb)as in effect on the date on which this Indenture is qualified under the
TIA, except as provided in Section 9.3 hereof.
"Trustee" means the party named as such above until a successor replaces
it in accordance with the applicable provisions of this Indenture and
thereafter means the successor serving hereunder.
"Unrestricted Subsidiary" means any Subsidiary (or any successor to any
of them) that is designated by the Board of Directors as an Unrestricted
Subsidiary pursuant to a resolution of the Board of Directors; but only to the
extent that such Subsidiary (i) has no Indebtedness other than Non-Recourse
Indebtedness; (ii) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or understanding
are no less favorable to the Company or such Restricted Subsidiary than those
that might be obtained at the time from Persons who are not Affiliates of the
Company; (iii) is a Person with respect to which neither the Company nor any of
its Restricted Subsidiaries has any direct or indirect obligation (A) to
subscribe for additional Equity Interests or (B) to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results and (iv) has not guaranteed or otherwise directly
or indirectly provided credit support for any Indebtedness of the Company or
any of its Restricted Subsidiaries. Any such designation by the Board of
Directors shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the resolution of the Board of Directors giving effect to
such designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions and was permitted by Section 4.7 hereof.
If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of this Indenture and any Indebtedness of
such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of
the Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under Section 4.9 hereof, the Company shall be in
default of such Section). The Board of Directors may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted
14
<PAGE> 20
if (i) such Indebtedness is permitted under Section 4.9 hereof and (ii) no
Default or Event of Default would be in existence following such designation.
"Voting Stock" means, with respect to any specified Person, Capital
Stock with voting power, under ordinary circumstances and without regard to the
occurrence of any contingency, to elect the directors or other managers or
trustees of such Person.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the sum
of the products obtained by multiplying (A) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (B) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary to
the extent (i) all of the Capital Stock or other ownership interests in such
Restricted Subsidiary, other than any directors' qualifying shares mandated by
applicable law, is owned directly or indirectly by the Company or (ii) such
Restricted Subsidiary is organized in a foreign jurisdiction and is required by
the applicable laws and regulations of such foreign jurisdiction to be
partially owned by the government of such foreign jurisdiction or individual or
corporate citizens of such foreign jurisdiction in order for such Restricted
Subsidiary to transact business in such foreign jurisdiction, provided that the
Company, directly or indirectly, owns the remaining Capital Stock or ownership
interests in such Restricted Subsidiary and, by contract or otherwise, controls
the management and business of such Restricted Subsidiary and derives the
economic benefits of ownership of such Restricted Subsidiary to substantially
the same extent as if such Restricted Subsidiary were a wholly owned
Subsidiary.
"Wholly Owned Subsidiary" means any Subsidiary to the extent (i) all of
the Capital Stock or other ownership interests in such Subsidiary, other than
any directors' qualifying shares mandated by applicable law, is owned directly
or indirectly by the Company or (ii) such Subsidiary is organized in a foreign
jurisdiction and is required by the applicable laws and regulations of such
foreign jurisdiction to be partially owned by the government of such foreign
jurisdiction or individual or corporate citizens of such foreign jurisdiction
in order for such Subsidiary to transact business in such foreign jurisdiction,
provided that the Company, directly or indirectly, owns the remaining Capital
Stock or ownership interests in such Subsidiary and, by contract or otherwise,
controls the management and business of such Subsidiary and derives the
economic benefits of ownership of such Subsidiary to substantially the same
extent as if such Subsidiary were a wholly owned Subsidiary.
"Working Line" means the loan facility under the credit agreement, dated
February o, 1997, between the Company and the Frost National Bank for the
purposes of supporting accounts receivable, funding letters of credit and
providing for working capital needs, as amended, modified, supplemented,
extended, restated or renewed from time to time.
15
<PAGE> 21
SECTION 1.2 OTHER DEFINITIONS.
<TABLE>
<CAPTION>
Defined in
Term Section
---- -------
<S> <C>
"Adjusted Net Assets" . . . . . . . . . . . . . . . . . . . . . . . 10.7
"Asset Sale" . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.10
"Asset Sale Offer" . . . . . . . . . . . . . . . . . . . . . . . . 4.10
"Asset Sale Offer Payment" . . . . . . . . . . . . . . . . . . . . 3.9
"Asset Sale Offer Purchase Date" . . . . . . . . . . . . . . . . . . 3.9
"Asset Sale Offer Trigger Date" . . . . . . . . . . . . . . . . . . 4.10
"Benefitted Party" . . . . . . . . . . . . . . . . . . . . . . . . 10.1
"Change of Control Offer" . . . . . . . . . . . . . . . . . . . . . 4.15
"Change of Control Payment" . . . . . . . . . . . . . . . . . . . . 4.15
"Change of Control Payment Date" . . . . . . . . . . . . . . . . . 4.15
"Covenant Defeasance" . . . . . . . . . . . . . . . . . . . . . . . 8.3
"DTC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3
"Event of Default" . . . . . . . . . . . . . . . . . . . . . . . . 6.1
"Excess Proceeds" . . . . . . . . . . . . . . . . . . . . . . . . . 4.10
"Funding Guarantor" . . . . . . . . . . . . . . . . . . . . . . . . 10.7
"incur" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9
"Interest Payment Date" . . . . . . . . . . . . . . . . . . . Exhibit A
"Legal Defeasance" . . . . . . . . . . . . . . . . . . . . . . . . 8.2
"Maximum Bank Facility Amount" . . . . . . . . . . . . . . . . . . 4.9
"Offer Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . 3.9
"Offer Period" . . . . . . . . . . . . . . . . . . . . . . . . . . 3.9
"Paying Agent" . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3
"Payment Default" . . . . . . . . . . . . . . . . . . . . . . . . . 6.1
"Permitted Indebtedness" . . . . . . . . . . . . . . . . . . . . . 4.9
"refinancing" . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9
"Registrar" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3
"Restricted Payments" . . . . . . . . . . . . . . . . . . . . . . . 4.7
"Subsidiary Guarantees" . . . . . . . . . . . . . . . . . . . . . . 10.1
"transfer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.10
</TABLE>
SECTION 1.3 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
Whenever this Indenture refers to a provision of the TIA, the provision
is incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the following
meanings:
"indenture securities" means the Notes and the Subsidiary Guarantees;
"indenture security Holder" means a Holder of a Note;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the Trustee;
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<PAGE> 22
"obligor" on the Notes means the Company, any Subsidiary Guarantor and
any successor obligor upon the Notes.
All other terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by Commission rule under
the TIA have the meanings so assigned to them.
SECTION 1.4 RULES OF CONSTRUCTION.
Unless the context otherwise requires:
(i) a term has the meaning assigned to it;
(ii) an accounting term not otherwise defined has the
meaning assigned to it in accordance with GAAP;
(iii) "or" is not exclusive;
(iv) words in the singular include the plural, and in
the plural include the singular;
(v) provisions apply to successive events and
transactions; and
(vi) references to sections of or rules under the
Securities Act or the Exchange Act shall be deemed to include
substitute, replacement of successor sections or rules adopted by the
Commission from time to time.
ARTICLE 2
THE NOTES
SECTION 2.1 FORM AND DATING.
The Notes, the notation thereon relating to the Subsidiary Guarantees
and the Trustee's certificate of authentication shall be substantially in the
form of Exhibit A hereto. The Notes may have notations, legends or
endorsements required by law, stock exchange rule or usage. Each Note shall be
dated the date of its authentication. The Notes shall be issued in minimum
denominations of $1,000 and integral multiples thereof.
The terms and provisions contained in the form of the Notes and the
notation thereon relating to the Subsidiary Guarantees annexed hereto as
Exhibit A and the Subsidiary Guarantees shall constitute, and are hereby
expressly made, a part of this Indenture and the Company and the Trustee, by
their execution and delivery of this Indenture, expressly agree to such terms
and provisions and to be bound thereby.
Notes issued in global form shall be substantially in the form of
Exhibit A attached hereto (including the text referred to in footnotes 1 and 2
thereto). Notes issued in definitive form shall be substantially in the form
of Exhibit A attached hereto (but without including the text referred to in
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<PAGE> 23
footnotes 1 and 2 thereto). Each Global Note shall represent such of the
outstanding Notes as shall be specified therein and each shall provide that it
shall represent the aggregate amount of outstanding Notes from time to time
endorsed thereon and that the aggregate amount of outstanding Notes represented
thereby may from time to time be reduced or increased, as appropriate, to
reflect exchanges and redemptions. Any endorsement of a Global Note to reflect
the amount of any increase or decrease in the amount of outstanding Notes
represented thereby shall be made by the Trustee or the Note Custodian, at the
direction of the Trustee, in accordance with instructions given by the Holder
thereof as required by Section 2.6 hereof.
SECTION 2.2 EXECUTION AND AUTHENTICATION.
One Officer shall sign the Notes for the Company by manual or facsimile
signature. If an Officer whose signature is on a Note no longer holds that
office at the time a Note is authenticated, the Note shall nevertheless be
valid. Each Subsidiary Guarantor shall execute its Subsidiary Guarantee in the
manner set forth in Section 10.8.
A Note shall not be valid until authenticated by the manual signature of
the Trustee. The signature shall be conclusive evidence that the Note has been
authenticated under this Indenture.
The Trustee shall authenticate the Notes for original issue up to the
aggregate principal amount of $130,000,000. The aggregate principal amount of
Notes outstanding at any time may not exceed $130,000,000 except as provided in
Section 2.7 hereof.
The Trustee may appoint an authenticating agent acceptable to the
Company to authenticate Notes. An authenticating agent may authenticate Notes
whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with the Company
or an Affiliate of the Company.
SECTION 2.3 REGISTRAR AND PAYING AGENT.
The Company shall maintain an office or agency where Notes may be
presented for registration of transfer or for exchange ("Registrar") and an
office or agency where Notes may be presented for payment ("Paying Agent").
The Registrar shall keep a register of the Notes and of their transfer and
exchange. The Company may appoint one or more co-registrars and one or more
additional paying agents. The term "Registrar" includes any co-registrar and
the term "Paying Agent" includes any additional paying agent. The Company may
change any Paying Agent or Registrar without notice to any Holder. The Company
shall notify the Trustee in writing of the name and address of any Agent not a
party to this Indenture. If the Company fails to appoint or maintain another
entity as Registrar or Paying Agent, the Trustee shall act as such. The
Company or any of its Subsidiaries may act as Paying Agent or Registrar.
The Company initially appoints The Depository Trust Company ("DTC") to
act as Depository with respect to the Global Notes.
The Company initially appoints the Trustee to act as the Registrar and
Paying Agent and to act as Note Custodian with respect to the Global Notes.
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<PAGE> 24
SECTION 2.4 PAYING AGENT TO HOLD MONEY IN TRUST.
The Company shall require each Paying Agent other than the Trustee to
agree in writing that the Paying Agent will hold in trust for the benefit of
Holders or the Trustee all money held by the Paying Agent for the payment of
principal, premium, if any, or interest on the Notes, and will notify the
Trustee of any default by the Company in making any such payment. While any
such default continues, the Trustee may require a Paying Agent to pay all money
held by it to the Trustee. The Company at any time may require a Paying Agent
to pay all money held by it to the Trustee. Upon payment over to the Trustee,
the Paying Agent (if other than the Company or a Subsidiary thereof) shall have
no further liability for the money. If the Company or a Subsidiary thereof
acts as Paying Agent, it shall segregate and hold in a separate trust fund for
the benefit of the Holders all money held by it as Paying Agent. Upon any
bankruptcy or reorganization proceedings relating to the Company, the Trustee
shall serve as Paying Agent for the Notes.
SECTION 2.5 HOLDER LISTS.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
all Holders and shall otherwise comply with TIA Section 312(a). If the
Trustee is not the Registrar, the Company shall furnish to the Trustee at least
seven Business Days before each interest payment date and at such other times
as the Trustee may request in writing, a list in such form and as of such date
as the Trustee may reasonably require of the names and addresses of the Holders
of Notes and the Company shall otherwise comply with TIA Section 312(a).
SECTION 2.6 TRANSFER AND EXCHANGE.
(a) Transfer and Exchange of Definitive Notes. When
Definitive Notes are presented by a Holder to the Registrar with a request:
(x) to register the transfer of the Definitive Notes;
or
(y) to exchange such Definitive Notes for an equal
principal amount of Definitive Notes of other authorized denominations,
the Registrar shall register the transfer or make the exchange as requested if
its requirements for such transactions are met; provided, however, that the
Definitive Notes presented or surrendered for register of transfer or exchange
shall be duly endorsed or accompanied by a written instruction of transfer in
form satisfactory to the Registrar duly executed by such Holder or by his
attorney, duly authorized in writing.
(b) Transfer of a Definitive Note for a Beneficial Interest in
a Global Note. A Definitive Note may not be exchanged for a beneficial
interest in a Global Note except upon satisfaction of the requirements set
forth below. Upon receipt by the Trustee of a Definitive Note, duly endorsed
or accompanied by appropriate instruments of transfer, in form satisfactory to
the Trustee, together with written instructions from the Holder thereof
directing the Trustee to make, or to direct the Note Custodian to make, an
endorsement on the Global Note to reflect an increase in the aggregate
principal amount of the Notes represented by the Global Note, in which case the
Trustee shall cancel such Definitive Note in accordance with Section 2.11
hereof and cause, or direct the Note Custodian to cause, in accordance with the
standing instructions and procedures existing between the Depository and the
Note Custodian, the aggregate principal amount of Notes represented by the
Global Note to be increased accordingly. If
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<PAGE> 25
no Global Notes are then outstanding, the Company shall issue and, upon receipt
of an authentication order in accordance with Section 2.2 hereof, the Trustee
shall authenticate,a new Global Note in the appropriate principal amount.
(c) Transfer and Exchange of Global Notes. The transfer and
exchange of Global Notes or beneficial interests therein shall be effected
through the Depository, in accordance with this Indenture and the procedures of
the Depository therefor, which shall include restrictions on transfer
comparable to those set forth herein to the extent required by the Securities
Act.
(d) Transfer of a Beneficial Interest in a Global Note for a
Definitive Note.
(i) Any Person having a beneficial interest in a Global
Note may upon request exchange such beneficial interest for a Definitive
Note. Upon receipt by the Trustee of written instructions or such other
form of instructions as is customary for the Depository, from the
Depository or its nominee on behalf of any Person having a beneficial
interest in a Global Note, the Trustee or the Note Custodian, at the
direction of the Trustee, shall, in accordance with the standing
instructions and procedures existing between the Depository and the Note
Custodian, cause the aggregate principal amount of Global Notes to be-
reduced accordingly and, following such reduction, the Company shall
execute and the Trustee shall authenticate and deliver to the transferee
a Definitive Note in the appropriate principal amount.
(ii) Definitive Notes issued in exchange for a
beneficial interest in a Global Note pursuant to this Section 2.6(d)
shall be registered in such names and in such authorized denominations
as the Depository, pursuant to instructions from its direct or indirect
participants or otherwise, shall instruct the Trustee. The Trustee
shall deliver such Definitive Notes to the Persons in whose names such
Notes are so registered.
(e) Restrictions on Transfer and Exchange of Global Notes.
Notwithstanding any other provision of this Indenture (other than the
provisions set forth in subsection (f) of this Section 2.6), a Global Note may
not be transferred as a whole except by the Depository to a nominee of the
Depository or by a nominee of the Depository to the Depository or another
nominee of the Depository or by the Depository or any such nominee to a
successor Depository or a nominee of such successor Depository.
(f) Authentication of Definitive Notes in Absence of
Depository. If at any time:
(i) the Depository for the Notes notifies the Company
that the Depository is unwilling or unable to continue as Depository for
the Global Notes and a successor Depository for the Global Notes is not
appointed by the Company within 90 days after delivery of such notice;
or
(ii) the Company, at its discretion, notifies the
Trustee in writing that it elects to cause the issuance of Definitive
Notes under this Indenture,
then the Company shall execute, and the Trustee shall authenticate and deliver,
Definitive Notes in an aggregate principal amount equal to the principal amount
of the Global Notes in exchange for such Global Notes.
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<PAGE> 26
(g) Cancellation and/or Adjustment of Global Notes. At such
time as all beneficial interests in Global Notes have been exchanged for
Definitive Notes, redeemed, repurchased or canceled, all Global Notes shall be
returned to or retained and canceled by the Trustee in accordance with Section
2.11 hereof. At any time prior to such cancellation, if any beneficial
interest in a Global Note is exchanged for Definitive Notes, redeemed,
repurchased or canceled, the principal amount of Notes represented by such
Global Note shall be reduced accordingly and an endorsement shall be made on
such Global Note, by the Trustee or the Note Custodian, at the direction of the
Trustee, to reflect such reduction.
(h) General Provisions Relating to Transfers and Exchanges.
(i) To permit registrations of transfers and exchanges,
the Company shall execute and the Trustee shall authenticate Definitive
Notes and Global Notes at the Registrar's request.
(ii) No service charge shall be made to a Holder for any
registration of transfer or exchange, but the Company may require
payment of a sum sufficient to cover any transfer tax or similar
governmental charge payable in connection therewith (other than any such
transfer taxes or similar governmental charge payable upon exchange or
transfer pursuant to Sections 3.7, 3.9, 4.10, 4.15 and 9.5 hereto).
(iii) The Registrar shall not be required to register the
transfer of or exchange any Note selected for redemption in whole or in
part, except the unredeemed portion of any Note being redeemed in part.
(iv) All Definitive Notes and Global Notes issued upon
any registration of transfer or exchange of Definitive Notes or Global
Notes shall be the valid obligations of the Company, evidencing the same
debt, and entitled to the same benefits under this Indenture, as the
Definitive Notes or Global Notes surrendered upon such registration of
transfer or exchange.
(v) The Company shall not be required:
(A) to issue, to register the transfer of or to
exchange Notes during a period beginning at the opening of
business 15 days before the day of any selection of Notes for
redemption under Section 3.2 hereof and ending at the close of
business on the day of selection;
(B) to register the transfer of or to exchange
any Note so selected for redemption in whole or in part, except
the unredeemed portion of any Note being redeemed in part; or
(C) to register the transfer of or to exchange a
Note between a record date and the next succeeding interest
payment date.
(i) Prior to due presentment for the registration of a
transfer of any Note, the Trustee, any Agent and the Company may deem and treat
the Person in whose name any Note is registered as the absolute owner of such
Note for the purpose of receiving payment of principal of and
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<PAGE> 27
interest on such Notes, and neither the Trustee, any Agent nor the Company
shall be affected by notice to the contrary.
SECTION 2.7 REPLACEMENT NOTES.
If any mutilated Note is surrendered to the Trustee or the Company, and
the Trustee receives evidence to its satisfaction of the destruction, loss or
theft of any Note, the Company shall issue and the Trustee shall authenticate a
replacement Note if the Trustee's requirements are met. If required by the
Trustee or the Company, an indemnity bond must be supplied by the Holder that
is sufficient in the judgment of the Trustee and the Company to protect the
Company, the Trustee, any Agent and any authenticating agent from any loss that
any of them may suffer if a Note is replaced. The Company may charge for its
expenses in replacing a Note.
Every replacement Note is an additional obligation of the Company and
shall be entitled to all of the benefits of this Indenture equally and
proportionately with all other Notes duly issued hereunder.
SECTION 2.8 OUTSTANDING NOTES.
The Notes outstanding at any time are all the Notes authenticated by the
Trustee except for those canceled by it, those delivered to it for
cancellation, those reductions in the interest in a Global Note effected by the
Trustee in accordance with the provisions hereof, and those described in this
Section as not outstanding. Except as set forth in Section 2.9 hereof, a Note
does not cease to be outstanding because the Company, any of the Subsidiary
Guarantors or any Affiliate of the Company or any of the Subsidiary Guarantors
holds the Note.
If a Note is replaced pursuant to Section 2.7 hereof, it ceases to be
outstanding unless the Trustee receives proof satisfactory to it that the
replaced Note is held by a bona fide purchaser.
If the principal amount of any Note is considered paid under Section 4.1
hereof, it ceases to be outstanding and interest on it ceases to accrue.
If the Paying Agent (other than the Company, a Subsidiary or an
Affiliate of any thereof) holds, on a redemption date or maturity date, money
sufficient to pay Notes payable on that date, then on and after that date such
Notes shall be deemed to be no longer outstanding and shall cease to accrue
interest.
SECTION 2.9 TREASURY NOTES.
In determining whether the Holders of the required principal amount of
Notes have concurred in any direction, waiver or consent, Notes owned by the
Company, any of the Subsidiary Guarantors or any Affiliate of the Company or
any of the Subsidiary Guarantors, shall be considered as though not
outstanding, except that for the purposes of determining whether the Trustee
shall be protected in relying on any such direction, waiver or consent, only
Notes that the Trustee actually knows are so owned shall be so disregarded.
SECTION 2.10 TEMPORARY NOTES.
Until definitive Notes are ready for delivery, the Company may prepare
and the Trustee shall authenticate temporary Notes upon a written order of the
Company signed by two Officers thereof.
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<PAGE> 28
Temporary Notes shall be substantially in the form of definitive Notes but may
have variations that the Company considers appropriate for temporary Notes and
as shall be reasonably acceptable to the Trustee. Without unreasonable delay,
the Company shall prepare and the Trustee shall authenticate Definitive Notes
or the Global Note in exchange for temporary Notes.
Holders of temporary Notes shall be entitled to all of the benefits of
this Indenture.
SECTION 2.11 CANCELLATION.
The Company at any time may deliver Notes to the Trustee for
cancellation. The Registrar and Paying Agent shall forward to the Trustee any
Notes surrendered to them for registration of transfer, exchange or payment.
The Trustee and no one else shall cancel all Notes surrendered for registration
of transfer, exchange, payment, replacement or cancellation and shall destroy
such canceled Notes. The Trustee shall provide a certificate of destruction to
the Company from time to time, at the written request of the Company. The
Company may not issue new Notes to replace Notes that it has paid or that have
been delivered to the Trustee for cancellation. If the Company or any
Subsidiary Guarantor shall acquire any of the Notes, such acquisition shall not
operate as a redemption or satisfaction of the Indebtedness represented by such
Securities unless and until the same are surrendered to the Trustee for
cancellation pursuant to this Section 2.11.
SECTION 2.12 DEFAULTED INTEREST.
If the Company defaults in a payment of interest on the Notes, it shall
pay the defaulted interest in any lawful manner plus, to the extent lawful,
interest payable on the defaulted interest, to the Persons who are Holders on a
subsequent special record date, in each case at the rate provided in the Notes
and in Section 4.1 hereof. The Company shall notify the Trustee in writing of
the amount of defaulted interest proposed to be paid on each Note and the date
of the proposed payment. The Company shall fix or cause to be fixed each such
special record date and payment date, provided that no such special record date
shall be less than 10 days prior to the related payment date for such defaulted
interest. At least 15 days before the special record date, the Company (or,
upon the written request of the Company, the Trustee in the name and at the
expense of the Company) shall mail or cause to be mailed to Holders a notice
that states the special record date, the related payment date and the amount of
such interest to be paid.
SECTION 2.13 CUSIP NUMBERS.
The Company in issuing the Notes may use "CUSIP" numbers (if then
generally in use), and, if so, the Trustee shall use CUSIP numbers in notices
of redemption as a convenience to Holders; provided that any such notice may
state that no representation is made as to the correctness of such numbers
either as printed on the Notes or as contained in any notice of a redemption
and that reliance may be placed only on the other identification numbers
printed on the Notes, and any such redemption shall not be affected by any
defect in or omission of such numbers. The Company shall promptly notify the
Trustee of any change in the CUSIP numbers.
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<PAGE> 29
ARTICLE 3
REDEMPTION AND PREPAYMENT
SECTION 3.1 NOTICES TO TRUSTEE.
If the Company elects to redeem Notes pursuant to the optional
redemption provisions of Section 3.7 hereof, it shall furnish to the Trustee,
at least 30 days but not more than 60 days before a redemption date, an
Officers' Certificate setting forth (i) the clause of this Indenture pursuant
to which the redemption shall occur, (ii) the redemption date, (iii) the
principal amount of Notes to be redeemed and (iv) the redemption price.
SECTION 3.2 SELECTION OF NOTES TO BE REDEEMED.
If less than all of the Notes are to be redeemed at any time, the
Trustee shall select the Notes to be redeemed among the Holders of the Notes in
compliance with the requirements of the principal national securities exchange,
if any, on which the Notes are listed or, if the Notes are not so listed, on a
pro rata basis, by lot or in accordance with any other method the Trustee
considers fair and appropriate; provided that no Notes of $1,000 or less will
be redeemed in part. In the event that less than all of the Notes are to be
redeemed by lot, the particular Notes to be redeemed shall be selected, unless
otherwise provided herein, not less than 30 nor more than 60 days prior to the
redemption date by the Trustee from the outstanding Notes not previously called
for redemption.
The Trustee shall promptly notify the Company in writing of the Notes
selected for redemption and, in the case of any Note selected for partial
redemption, the principal amount thereof to be redeemed. Notes and portions of
Notes selected shall be in amounts of $1,000 or whole multiples of $1,000;
except that if all of the Notes of a Holder are to be redeemed, the entire
outstanding amount of Notes held by such Holder, even if not a multiple of
$1,000, shall be redeemed. Except as provided in the preceding sentence,
provisions of this Indenture that apply to Notes called for redemption also
apply to portions of Notes called for redemption.
The provisions of the two preceding paragraphs of this Section 3.2 shall
not apply with respect to any redemption affecting only a Global Note, whether
such Global Note is to be redeemed in whole or in part. In case of any such
redemption in part, the unredeemed portion of the principal amount of the
Global Note shall be in an authorized denomination.
SECTION 3.3 NOTICE OF REDEMPTION.
Subject to the provisions of Section 3.9 hereof, at least 30 days but
not more than 60 days before a redemption date, the Company shall mail or cause
to be mailed, by first class mail, a notice of redemption to each Holder whose
Notes are to be redeemed at its registered address. Failure to receive such
notice or any defect in the notice to any such Holder shall not affect the
validity of the proceedings for the redemption of any other Notes or portion
thereof.
The notice shall identify the Notes to be redeemed (including CUSIP
number) and shall state:
(i) the redemption date;
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<PAGE> 30
(ii) the redemption price;
(iii) if any Note is being redeemed in part, the portion
of the principal amount of such Note to be redeemed and that, after the
redemption date upon surrender of such Note, a new Note or Notes in
principal amount equal to the unredeemed portion shall be issued upon
cancellation of the original Note;
(iv) the name and address of the Paying Agent;
(v) that Notes called for redemption must be
surrendered to the Paying Agent to collect the redemption price;
(vi) that, unless the Company's defaults in making such
redemption payment, interest on Notes called for redemption ceases to
accrue on and after the redemption date;
(vii) the paragraph of the Notes and/or Section of this
Indenture pursuant to which the Notes called for redemption are being
redeemed; and
(viii) that no representation is made as to the
correctness or accuracy of the CUSIP number, if any, listed in such
notice or printed on the Notes.
If any of the Notes to be redeemed is in the form of a Global Note, then
the Company shall modify such notice to the extent necessary to accord with the
procedures of the Depository applicable to redemption.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at its expense; provided, however, that
the Company shall have delivered to the Trustee, at least 45 days (unless the
Trustee and the Company agree to a shorter period) prior to the redemption
date, an Officers' Certificate requesting that the Trustee give such notice and
setting forth the information to be stated in such notice as provided in the
preceding paragraph.
SECTION 3.4 EFFECT OF NOTICE OF REDEMPTION.
Once notice of redemption is mailed in accordance with Section 3.3
hereof, Notes called for redemption become irrevocably due and payable on the
redemption date at the redemption price. A notice of redemption may not be
conditional.
SECTION 3.5 DEPOSIT OF REDEMPTION PRICE.
One Business Day prior to the redemption date, the Company shall deposit
with the Trustee or with the Paying Agent (or, if the Company is acting as its
own Paying Agent, segregate and hold in trust as provided in Section 2.4
hereof) money sufficient to pay the redemption price of and accrued interest on
all Notes to be redeemed on that date. The Trustee or the Paying Agent shall
promptly return to the Company any money deposited with the Trustee or the
Paying Agent by the Company in excess of the amounts necessary to pay the
redemption price of, and accrued interest on, all Notes to be redeemed.
If the Company complies with the provisions of the preceding paragraph,
on and after the redemption date, interest shall cease to accrue on the Notes
or the portions of Notes called for
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<PAGE> 31
redemption. If a Note is redeemed on or after an interest record date but on
or prior to the related interest payment date, then any accrued and unpaid
interest shall be paid to the Person in whose name such Note was registered at
the close of business on such record date. If any Note called for redemption
shall not be so paid upon surrender for redemption because of the failure of
the Company to comply with the preceding paragraph, interest shall be paid on
the unpaid principal, from the redemption date until such principal is paid,
and to the extent lawful on any interest not paid on such unpaid principal, in
each case at the rate provided in the Note and in Section 4.1 hereof.
SECTION 3.6 NOTES REDEEMED IN PART.
Upon surrender of a Note that is redeemed in part, the Company shall
issue and the Trustee shall authenticate for the Holder at the expense of the
Company a new Note equal in principal amount to the unredeemed portion of the
Note surrendered.
SECTION 3.7 OPTIONAL REDEMPTION.
(a) The Notes will not be redeemable at the Company's option
prior to February 1, 2002. Thereafter, the Notes will be subject to redemption
at the option of the Company, in whole or in part, upon not less than 30 nor
more than 60 days' notice, at the redemption prices (expressed as percentages
of principal amount) set forth below plus accrued and unpaid interest thereon
to the applicable redemption date, if redeemed during the 12-month period
beginning on February 1, of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002.......................... o%
2003.......................... o%
2004.......................... o%
2005 and thereafter........... 100.000%
</TABLE>
(b) Notwithstanding the foregoing, at any time on or prior to
February 1, 2000, the Company may redeem up to an aggregate of $45.5 million
principal amount of Notes at a redemption price of o% of the principal amount
thereof, plus accrued and unpaid interest thereon to the redemption date, with
the net proceeds of a Public Equity Offering; provided that at least $84.5
million in aggregate principal amount of Notes remain outstanding immediately
after the occurrence of such redemption; and, provided, further; that such
redemption shall occur within 60 days of the date of the closing of such Public
Equity Offering.
(c) Any redemption pursuant to this Section 3.7 shall be made
pursuant to the provisions of Sections 3.1 through 3.6 hereof.
SECTION 3.8 MANDATORY REDEMPTION.
Except as set forth under Sections 4.10 and 4.15 hereof, the Company
shall not be required to make mandatory redemption payments or sinking fund
payments with respect to the Notes.
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<PAGE> 32
SECTION 3.9 OFFER TO PURCHASE BY APPLICATION OF EXCESS PROCEEDS.
(a) In the event that, pursuant to Section 4.10 hereof, the
Company shall be required to commence an Asset Sale Offer, it shall follow the
procedures specified below.
(i) The Asset Sale Offer shall be made to all Holders
and shall remain open for a period of 20 Business Days following its
commencement and no longer, except to the extent that a longer period is
required by applicable law (the "Offer Period").
(ii) If the Asset Sale Offer Purchase Date is on or
after an interest record date and on or before the related interest
payment date, any accrued and unpaid interest thereon, if any, shall be
paid to the Person in whose name a Note is registered at the close of
business on such record date, and no additional interest shall be
payable to Holders who tender Notes pursuant to the Asset Sale Offer.
(iii) Within 10 days following any Asset Sale Offer
Trigger Date, the Company shall send, by first class mail, a notice to
each of the Holders at such Holder's registered address, with a copy to
the Trustee. The notice, which shall govern the terms of the Asset Sale
Offer, shall contain all instructions and materials necessary to enable
such Holders to tender Notes pursuant to the Asset Sale Offer, and shall
state:
(A) that the Asset Sale Offer Trigger Date has
occurred pursuant to Section 4.10 hereof and that the Company is
offering to purchase the maximum principal of Notes that may be
purchased out of the Excess Proceeds (the "Offer Amount") at an
offer price in cash in an amount equal to 100.0% of the principal
amount thereof, plus accrued and unpaid interest thereon, if any,
to date of purchase, which shall be a Business Day (the "Asset
Sale Offer Purchase Date") that is not earlier than 30 days nor
later than 60 days from the date such notice is mailed;
(B) the amount of accrued and unpaid interest,
if any, as of the Asset Sale Offer Purchase Date;
(C) that any Note subject to the Asset Sale
Offer not tendered shall continue to accrue interest;
(D) that, unless the Company defaults in the
payment of the purchase price for the Notes payable pursuant to
the Asset Sale Offer, any such Notes accepted for payment
pursuant to the Asset Sale Offer shall cease to accrue interest,
after the Asset Sale Offer Purchase Date;
(E) that Holders electing to have a Note
purchased pursuant to an Asset Sale Offer may only elect to have
all of such Note purchased and may not elect to have only a
portion of such Note purchased;
(F) that Holders electing to have a Note
purchased pursuant to any Asset Sale Offer shall be required to
surrender the Note, with the form entitled "Option of Holder to
Elect Purchase" on the reverse of the Note completed to the
Company;
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a Paying Agent at the address specified in the notice at least
three Business Days before the Purchase Date;
(G) that Holders shall be entitled to withdraw
their election if the Company or the Paying Agent, as the case
may be, receives, not later than the expiration of the Offer
Period, a facsimile transmission or letter setting forth the name
of the Holder, the principal amount of the Note the Holder
delivered for purchase and a statement that such Holder is
withdrawing his election to have such Note purchased;
(H) that, if the aggregate principal amount of
Notes surrendered by Holders exceeds the Offer Amount or less
than all of the Notes tendered pursuant to the Asset Sale Offer
are accepted for payment by the Company for any reason consistent
with this Indenture, the Trustee shall select the Notes to be
purchased in compliance with the requirements of the principal
national securities exchange, if any, on which the Notes are
listed or, if the Notes are not so listed, on a pro rata basis,
by lot or by such method as the Trustee deems fair and
appropriate; provided that Notes accepted for payment in part
will only be purchased in integral multiples of $1,000; and
(I) that Holders whose Notes were purchased only
in part shall be issued new Notes equal in principal amount to
the unpurchased portion of the Notes surrendered.
If any of the Notes subject to an Asset Sale Offer is in the form of a
Global Note, then the Company shall modify such notice to the extent necessary
to accord with the procedures of the Depository applicable to repurchases.
(b) On the Asset Sale Offer Purchase Date, the Company shall:
(i) accept for payment the maximum principal amount of Notes or portions
thereof tendered pursuant to the Asset Sale Offer that can be purchased out of
the Excess Proceeds, (ii) deposit with the Paying Agent the aggregate purchase
price of all Notes or portions thereof accepted for payment and (iii) deliver
or cause to be delivered to the Trustee all Notes tendered pursuant to the
Asset Sale Offer. The Company or the Paying Agent, as the case may be, shall
promptly mail to each Holder of Notes or portions thereof accepted for payment
an amount equal to the purchase price for such Notes and the Trustee shall
promptly authenticate and mail to any such Holder of Notes accepted for payment
in part a new Note equal in principal amount to any unpurchased portion of the
Notes, and any Note not accepted for payment in whole or in part shall be
promptly returned to the Holder of such Note. The Company shall announce the
results of the Asset Sale Offer to Holders of the Notes on or as soon as
practicable after the Asset Sale Offer Purchase Date. The Company shall comply
with the requirements of Rule 14e-1 under the Exchange Act, and any other
securities laws or regulations, if applicable, in connection with any Asset
Sale Offer.
(c) Other than as specifically provided in this Section 3.9,
any purchase pursuant to this Section 3.9 shall be made pursuant to the
provisions of Sections 3.1 through 3.6 hereof.
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ARTICLE 4
COVENANTS
SECTION 4.1 PAYMENT OF NOTES.
The Company shall pay or cause to be paid the principal of, premium, if
any, and interest on the Notes on the dates and in the manner provided in the
Notes. Principal, premium, if any, and interest shall be considered paid on
the date due if the Paying Agent, if other than the Company or a Subsidiary
thereof, holds as of 2:00 p.m. Eastern Time one Business Day prior to the due
date money deposited by the Company in immediately available funds and
designated for and sufficient to pay all principal, premium, if any, and
interest then due.
The Company shall pay interest (including post-petition interest in any
proceeding under any Bankruptcy Law) on overdue principal at the rate equal to
1.0% per annum in excess of the then applicable interest rate on the Notes to
the extent lawful; it shall pay interest (including post-petition interest in
any proceeding under any Bankruptcy Law) on overdue installments of interest
(without regard to any applicable grace period) at the same rate to the extent
lawful.
SECTION 4.2 MAINTENANCE OF OFFICE OR AGENCY.
The Company shall maintain in the Borough of Manhattan, the City of New
York, an office or agency (which may be an office of the Trustee or an
affiliate of the Trustee, Registrar or co-registrar) where Notes may be
presented for payment, surrendered for registration of transfer or for exchange
and where notices and demands to or upon the Company in respect of the Notes
and this Indenture may be served. The Company shall give prompt written notice
to the Trustee of the location, and any change in the location, of such office
or agency. If at any time the Company shall fail to maintain any such required
office or agency or shall fail to furnish the Trustee with the address thereof,
such presentations, surrenders, notices and demands may be made or served at
the Corporate Trust Office of the Trustee.
The Company may also from time to time designate one or more other
offices or agencies where the Notes may be presented or surrendered for any or
all such purposes and may from time to time rescind such designations;
provided, however, that no such designation or rescission shall in any manner
relieve the Company of its obligation to maintain an office or agency in the
Borough of Manhattan, the City of New York for such purposes. The Company
shall give prompt written notice to the Trustee of any such designation or
rescission and of any change in the location of any such other office or
agency.
The Company hereby designates the Corporate Trust Office of the Trustee
as one such office or agency of the Company in accordance with Section 2.3
hereof.
SECTION 4.3 REPORTS.
(a) Whether or not required by the rules and regulations of
the Commission, so long as any Notes are outstanding, the Company shall furnish
to the Holders of Notes (i) either the actual Forms 10-Q and 10-K filed with
the Commission, or all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and 10-K
if the Company were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" that
describes the consolidated financial condition and
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results of operations of the Company and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants and (ii) either any actual Form 8-K filed with the Commission, or
all information that would be required to be contained in a filing with the
Commission on Form 8-K if the Company were required to file such Form. In
addition, whether or not required by the rules and regulations of the
Commission, the Company shall file a copy of all such information and reports
with the Commission for public availability (unless the Commission will not
accept such a filing) and make such information available to securities
analysts and prospective investors upon request. The Company shall at all
times comply with TIA Section 314(a).
(b) Delivery of such reports, information and documents to the
Trustee is for informational purposes only and the Trustee's receipt of such
shall not constitute constructive notice of any information contained therein
or determinable from information contained therein, including the Company'
compliance with any of the covenants hereunder (as to which the Trustee is
entitled to rely exclusively on Officers' Certificates).
SECTION 4.4 COMPLIANCE CERTIFICATE.
(a) The Company shall deliver to the Trustee, within 90 days
after the end of each fiscal year, an Officers' Certificate stating that a
review of the activities of the Company and its Subsidiaries during the
preceding fiscal year has been made under the supervision of the signing
Officers with a view to determining whether the Company has kept, observed,
performed and fulfilled its obligations under this Indenture, and further
stating, as to each such Officer signing such certificate, that to the best of
his or her knowledge the Company has kept, observed, performed and fulfilled
each and every covenant contained in this Indenture and is not in default in
the performance or observance of any of the terms, provisions and conditions of
this Indenture (or, if a Default or Event of Default shall have occurred and is
continuing, describing all such Defaults or Events of Default of which he or
she may have knowledge and what action the Company is taking or proposes to
take with respect thereto) and that to the best of his or her knowledge no
event has occurred and remains in existence by reason of which payments on
account of the principal of or interest, if any, on the Notes is prohibited or
if such event has occurred, a description of the event and what action the
Company is taking or proposes to take with respect thereto.
(b) So long as not contrary to the then current
recommendations of the American Institute of Certified Public Accountants, the
year-end financial statements delivered pursuant to Section 4.3(a) above shall
be accompanied by a written statement of the Company's independent public
accountants (who shall be a firm of established national reputation) that in
making the examination necessary for certification of such financial
statements, nothing has come to their attention that would lead them to believe
that the Company has violated any provisions of Article 4 or Article 5 hereof
or, if any such violation has occurred, specifying the nature and period of
existence thereof, it being understood that such accountants shall not be
liable directly or indirectly to any Person for any failure to obtain knowledge
of any such violation.
(c) The Company shall, so long as any of the Notes are
outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware
of any Default or Event of Default, an Officers' Certificate specifying such
Default or Event of Default and what action the Company is taking or proposes
to take with respect thereto.
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SECTION 4.5 TAXES.
The Company shall pay, and shall cause each of its Subsidiaries to pay,
prior to delinquency, all material taxes, assessments, and governmental levies
except such as are contested in good faith and by appropriate proceedings or
where the failure to effect such payment is not adverse in any material respect
to the Holders of the Notes.
SECTION 4.6 STAY, EXTENSION AND USURY LAWS.
The Company covenants (to the extent that it may lawfully do so) that it
shall not at any time insist upon, plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay, extension or usury law wherever
enacted, now or at any time hereafter in force, that may affect the covenants
or the performance of this Indenture; and the Company (to the extent that it
may lawfully do so) hereby expressly waives all benefit or advantage of any
such law, and covenants that it shall not, by resort to any such law, hinder,
delay or impede the execution of any power herein granted to the Trustee, but
shall suffer and permit the execution of every such power as though no such law
has been enacted.
SECTION 4.7 RESTRICTED PAYMENTS.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or
make any other payment or distribution on account of the Company's or any of
its Restricted Subsidiaries' Equity Interests (including, without limitation,
any payment in connection with any merger or consolidation involving the
Company) or to the direct or indirect holders of the Company's Equity Interests
in their capacity as such (other than dividends or distributions payable in
Equity Interests (other than Disqualified Stock) of the Company or dividends or
distributions payable to the Company or any Wholly Owned Restricted Subsidiary
of the Company); (ii) purchase, redeem or otherwise acquire or retire for value
any Equity Interests of the Company or any Affiliate of the Company (other than
(A) any such Equity Interests owned by the Company or any Wholly Owned
Restricted Subsidiary of the Company that is a Subsidiary Guarantor and (B)
Employee Stock Repurchases); (iii) make any principal payment on, or purchase,
redeem, defease or otherwise acquire or retire for value any Subordinated
Indebtedness (other than $3.75 million of Subordinated Indebtedness which is
Existing Indebtedness, provided that such Subordinated Indebtedness is redeemed
or repaid at or below par), except in accordance with the mandatory redemption
or repayment provisions set forth in the documentation governing such
Indebtedness or (iv) make any Restricted Investment (all such payments and
other actions set forth in clauses (i) through (iv) above being collectively
referred to as "Restricted Payments"), unless, at the time of and after giving
effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment
and after giving pro forma effect thereto as if such Restricted Payment
had been made at the beginning of the applicable four-quarter period,
have been permitted to incur at least $1.00 of additional Indebtedness
(in addition to Permitted Indebtedness) pursuant to the Fixed Charge
Coverage Ratio test set forth in Section 4.9(a) hereof; and
(c) such Restricted Payment, together with the aggregate of
all other Restricted Payments made by the Company and its Restricted
Subsidiaries after the Issue Date (excluding
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Restricted Payments permitted by clauses (x) and (y) of the next
succeeding paragraph, but including the Restricted Payment permitted by
clause (z) of the next succeeding paragraph), is less than the sum of
(i) 50% of the Consolidated Net Income of the Company for the period
(taken as one accounting period) from the beginning of the first fiscal
quarter commencing after the Issue Date to the end of the Company's most
recently ended fiscal quarter for which internal financial statements
are available at the time of such Restricted Payment (or, if such
Consolidated Net Income for such period is a deficit, less 100% of such
deficit), plus (ii) 100% of the aggregate Net Equity Proceeds (A)
received by the Company from the issue or sale, subsequent to the Issue
Date, of Qualified Capital Stock of the Company or (B) of any other
Equity Interests or debt securities of the Company that have been issued
subsequent to the Issue Date and that have been converted into such
Qualified Capital Stock (other than any Qualified Capital Stock sold to
a Restricted Subsidiary of the Company) plus (iii) to the extent not
otherwise included in Consolidated Net Income, the net reduction in
Investments in Unrestricted Subsidiaries resulting from dividends,
repayments of loans or advances, or other transfers of assets, in each
case to the Company or a Restricted Subsidiary after the Issue Date from
any Unrestricted Subsidiary or from the redesignation of an Unrestricted
Subsidiary as a Restricted Subsidiary (valued as provided below), plus
(iv) $10.0 million.
The foregoing provisions shall not prohibit any of the following: (w)
the payment of any dividend within 60 days after the date of declaration
thereof, if at said date of declaration such payment would have complied with
the provisions of this Indenture; (x) the redemption, repurchase, retirement or
other acquisition of any Equity Interests of the Company in exchange for, or
out of the Net Equity Proceeds of, the substantially concurrent sale (other
than to a Restricted Subsidiary of the Company) of Qualified Capital Stock of
the Company (other than any Disqualified Stock); provided that the amount of
any such Net Equity Proceeds that are utilized for any such redemption,
repurchase, retirement or other acquisition shall be excluded from clause
(c)(ii) of the preceding paragraph and (y) the defeasance, redemption or
repurchase of Subordinated Indebtedness with the net cash proceeds from an
incurrence of Permitted Refinancing Indebtedness or the substantially
concurrent sale (other than to a Restricted Subsidiary of the Company) of
Qualified Capital Stock of the Company; provided that the amount of any such
net cash proceeds that are utilized for any such redemption, repurchase,
retirement or other acquisition shall be excluded from clause (c)(ii) of the
preceding paragraph.
For purposes of the foregoing provisions, the amount of any Restricted
Payment (other than cash) shall be the fair market value (evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) on the date of the Restricted Payment of the asset(s)
proposed to be transferred by the Company or such Restricted Subsidiary, as the
case may be, pursuant to the Restricted Payment. Not later than five days
following the date of making any Restricted Payment, the Company shall deliver
to the Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
this Section 4.7 were computed, which calculations may be based upon the
Company's latest available financial statements.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would be permitted by the
provisions of this Section 4.7 and if such Restricted Subsidiary otherwise
meets the definition of an Unrestricted Subsidiary. For purposes of making
such determination, all outstanding Investments by the Company and its
Restricted Subsidiaries (except to the extent repaid in cash prior to such
designation) in the Restricted Subsidiary so designated will be deemed to be
Restricted Payments at the time of such designation and will reduce the amount
available for Restricted Payments under paragraph (c) of this Section 4.7. All
such outstanding Investments will be
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deemed to constitute Investments in an amount equal to the Fair Market Value of
such Investments at the time of such designation.
SECTION 4.8 DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to (i)(a) pay dividends or make any other distributions
to the Company or any of its Restricted Subsidiaries (1) on its Capital Stock
or (2) with respect to any other interest or participation in, or measured by,
its profits or (b) pay any indebtedness owed to the Company or any of its
Restricted Subsidiaries, (ii) make loans or advances to the Company or any of
its Restricted Subsidiaries or (iii) transfer any of its properties or assets
to the Company or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (r) Existing
Indebtedness as in effect on the Issue Date, (s) the Credit Facility as in
effect as of the Issue Date, and any amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or refinancings
thereof, provided that such amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacement or refinancings are no more
restrictive with respect to such dividend and other payment restrictions than
those contained in the Credit Facility as in effect on the Issue Date, (t) this
Indenture and the Notes, (u) applicable law, (v) any instrument governing
Indebtedness or Capital Stock of a Person acquired by the Company or any of its
Restricted Subsidiaries as in effect at the time of such acquisition (except to
the extent such Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so acquired, provided
that, in the case of Indebtedness, such Indebtedness was permitted by the terms
of Section 4.9 hereof to be incurred, (w) by reason of customary non-assignment
provisions in leases entered into in the ordinary course of business and
customary provisions in other agreements that restrict assignment of such
agreements or rights thereunder, (x) customary restrictions contained in asset
sale agreements limiting the transfer of such assets pending the closing of
such sale, (y) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in clause
(iii) above on the property so acquired, or (z) Permitted Refinancing
Indebtedness with respect to any indebtedness referred to in clauses (r), (t)
and (v) above, provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive than
those contained in the agreements governing the Indebtedness being refinanced.
SECTION 4.9 INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED EQUITY.
(a) The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Indebtedness but excluding any Permitted
Indebtedness) and that the Company will not issue any Disqualified Stock and
will not permit any of its Restricted Subsidiaries to issue any shares of
preferred stock; provided, however, that the Company may incur Indebtedness
(including Acquired Indebtedness) or issue shares of Disqualified Stock, and
any Restricted Subsidiary may incur Indebtedness (including Acquired
Indebtedness), if the Fixed Charge Coverage Ratio for the Company's most
recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date on which such
additional Indebtedness is incurred or such Disqualified Stock is issued would
have been at least (i) 2.0 to 1.0 if such date occurs on or after the Issue
Date and on or prior to March 31, 1998, or (ii) 2.25 to 1.0 if such date occurs
after March 31, 1998, determined on a pro forma
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basis (including a pro forma application of the net proceeds therefrom), as if
the additional Indebtedness had been incurred, or the Disqualified Stock had
been issued, as the case may be, at the beginning of such four-quarter period.
(b) The Company shall not, and shall not permit any Subsidiary
Guarantor to, directly or indirectly, in any event incur any Indebtedness that
by its terms (or by the terms of any agreement governing such Indebtedness) is
subordinated to any other Indebtedness of that Company or such Subsidiary
Guarantor, as the case may be, unless such Indebtedness is also by its terms
(or by the terms of any agreement governing such Indebtedness) made expressly
subordinate to the Notes or the Subsidiary Guarantee of such Subsidiary
Guarantor, as the case may be, to the same extent and in the same manner as
such Indebtedness is subordinated pursuant to subordination provisions that are
most favorable to the holders of any other Indebtedness of the Company or such
Subsidiary Guarantor, as the case may be.
The foregoing provisions shall not apply to the incurrence of any of the
following Indebtedness (collectively, "Permitted Indebtedness"):
(i) Indebtedness (and any guarantee thereof) under the
Working Line in an aggregate principal amount at any one time
outstanding not to exceed the greater of (A) $35.0 million, less any
amounts derived from Asset Sales and applied to the permanent reduction
of the Indebtedness thereunder as contemplated by Section 4.10 hereof or
(B) the sum of (1) 80% of the Company's Eligible Accounts Receivable (as
defined in the Working Line) and (2) 50% of the inventory of the Company
and its Restricted Subsidiaries determined in accordance with GAAP (the
"Maximum Bank Facility Amount"), and any renewals, amendments,
extensions, supplements, modifications, deferrals, refinancing or
replacements (each, for purposes of this clause (i), a "refinancing")
thereof, including any successive refinancing thereof, so long as the
aggregate principal amount of any such new Indebtedness, together with
the aggregate principal amount of all other Indebtedness outstanding
pursuant to this clause (i), shall not at any one time exceed the
Maximum Bank Facility Amount;
(ii) Indebtedness under the Acquisition Line in an
aggregate principal amount at any one time outstanding not to exceed
$10.0 million, and any renewals, amendments, extensions, supplements,
modifications, deferrals, refinancing or replacements (each, for
purposes of this clause (ii), a "refinancing") thereof, including any
successive refinancing thereof, so long as the aggregate principal
amount of any such new Indebtedness hereunder, together with the
aggregate principal amount of all other Indebtedness outstanding
pursuant to this clause (ii), shall not at any one time exceed $10.0
million;
(iii) Indebtedness under the Notes;
(iv) Indebtedness under any Existing Indebtedness and
any Indebtedness under Letters of Credit existing on the Issue Date;
(v) Indebtedness under Interest Rate Protection
Obligations, provided that (A) such Interest Rate Protection Obligations
are related to payment obligations on Permitted Indebtedness or
Indebtedness otherwise permitted by Section 4.9(a) hereof and (B) the
notional principal amount of such Interest Rate Protection Obligations
does not exceed
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the principal amount of such Indebtedness to which such Interest Rate
Protection Obligations relate;
(vi) Indebtedness under Currency Hedge Obligations,
provided that (A) such Currency Hedge Obligations are related to payment
obligations on Permitted Indebtedness or Indebtedness otherwise
permitted by Section 4.9(a) hereof or to the foreign currency cash flows
reasonably expected to be generated by the Company and its Restricted
Subsidiaries and (B) the notional principal amount of such Currency Hedge
Obligations does not exceed the principal amount of such Indebtedness and
the amount of such foreign currency cash flows to which such Currency
Hedge Obligations relate;
(vii) the Subsidiary Guarantees of the Notes (and any
assumption of the obligations guaranteed thereby);
(viii) Indebtedness of the Company to a Wholly Owned
Restricted Subsidiary and Indebtedness of any Restricted Subsidiary of
the Company to the Company or a Wholly Owned Restricted Subsidiary;
provided, however, that upon any subsequent issuance or transfer of any
Capital Stock or any other event that results in any such Wholly Owned
Restricted Subsidiary ceasing to be a Wholly Owned Restricted Subsidiary
or any other subsequent transfer of any such Indebtedness (except to the
Company or a Wholly Owned Restricted Subsidiary), such Indebtedness
shall be deemed, in each case, to be incurred and shall be treated as an
incurrence for purposes of Section 4.9(a) hereof at the time the Wholly
Owned Restricted Subsidiary in question ceased to be a Wholly Owned
Restricted Subsidiary or the time such subsequent transfer occurred;
(ix) Indebtedness in respect of bid, performance or
surety bonds issued for the account of the Company or any Restricted
Subsidiary thereof in the ordinary course of business, including
guarantees or obligations of the Company or any Restricted Subsidiary
thereof with respect to letters of credit supporting such bid,
performance or surety obligations (in each case other than for an
obligation for money borrowed);
(x) the incurrence by the Company or its Restricted
Subsidiaries of Non-Recourse Purchase Money Indebtedness;
(xi) any Permitted Refinancing Indebtedness incurred by
the Company or a Restricted Subsidiary of any Indebtedness incurred
pursuant to clause (iii) or (iv) of this definition, including any
successive refinancing by the Company or such Restricted Subsidiary;
(xii) Capital Lease Obligations in an aggregate amount
not in excess of $8.0 million at any one time outstanding; and
(xiii) any additional Indebtedness issued pursuant to one
or more credit agreements in an aggregate principal amount for all such
credit agreements not in excess of $5.0 million at any one time
outstanding and any guarantee thereof.
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SECTION 4.10 ASSET SALES.
The Company shall not, and shall not permit any Restricted Subsidiary
to, sell, issue, convey, transfer, lease or otherwise dispose of, to any Person
other than the Company or any of its Restricted Subsidiaries (including,
without limitation, by means of a sale-and-leaseback transaction or a merger or
consolidation) (collectively, for purposes of this Section 4.10, a "transfer"),
directly or indirectly, in one or a series of related transactions, (a) any
Capital Stock of any Restricted Subsidiary held by the Company or any other
Restricted Subsidiary, (b) all or substantially all of the properties and
assets of any division or line of business of the Company or any of its
Restricted Subsidiaries, (c) any Event of Loss or (d) any other properties or
assets of the Company or any of its Restricted Subsidiaries other than
transfers of cash, Cash Equivalents, accounts receivable, or properties or
assets in the ordinary course of business; provided that the sale, lease,
conveyance or other disposition of all or substantially all of the properties
or assets of the Company and its Restricted Subsidiaries, taken as a whole,
shall be governed by Sections 4.15 and/or 5.1 hereof and not by the provisions
of this Section 4.10 (each of the foregoing, an "Asset Sale"), unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of cash or Cash Equivalents; provided that the amount of (x) any
liabilities (as shown on the Company's or such Restricted Subsidiary's most
recent balance sheet) of the Company or any Restricted Subsidiary (other than
contingent liabilities and liabilities that are Subordinated Indebtedness or
otherwise by their terms subordinated to the Notes or the Subsidiary Guarantees)
that are assumed by the transferee of any such assets pursuant to a novation
agreement that releases the Company or such Restricted Subsidiary from further
liability and (y) any notes or other obligations received by the Company or any
such Restricted Subsidiary from such transferee that are converted by the
Company or such Restricted Subsidiary into cash within 180 days of closing such
Asset Sale (to the extent of the cash received), shall be deemed to be cash for
purposes of this clause (ii).
Notwithstanding the foregoing, any of the following shall, not be deemed
an "Asset Sale": (i) any transfer of properties or assets to an Unrestricted
Subsidiary, if such transfer is permitted under Section 4.7 hereof; (ii) sales
of damaged, worn-out or obsolete equipment or assets that, in the Company's
reasonable judgment, are either (A) no longer used or (B) no longer useful in
the business of the Company or its Restricted Subsidiaries; (iii) any lease of
any property entered into in the ordinary course of business and with respect
to which the Company or any Restricted Subsidiary is the lessor, except any
such lease that provides for the acquisition of such property by the lessee
during or at the end of the term thereof for an amount that is less than the
fair market value thereof at the time the right to acquire such property
occurs; (iv) any trade or exchange by the Company or any Restricted Subsidiary
of one or more workover rigs for one or more workover rigs owned or held by
another Person, provided that (A) the Fair Market Value of the workover rig or
rigs traded or exchanged by the Company or such Restricted Subsidiary
(including any cash or Cash Equivalents, not to exceed 15% of such Fair Market
Value, to be delivered by the Company or such Restricted Subsidiary) is
reasonably equivalent to the Fair Market Value of the workover rig or rigs
(together with any cash or Cash Equivalents, not to exceed 15% of such Fair
Market Value) to be received by the Company or such Restricted Subsidiary and
(B) such exchange is approved by a majority of the Disinterested Directors of
the Company; (v) sales of inventory in the ordinary course of business of the
Company and any Subsidiary consistent with past practices; (vi) the issuance by
the Company of its Capital Stock; (vii) a Restricted Payment permitted under
the terms of Section 4.7 hereof and (viii) any transfers that, but for this
clause (viii), would be Asset Sales,
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if (A) the Company elects to designate such transfers as not constituting Asset
Sales and (B) after giving effect to such transfers, the aggregate Fair Market
Value of the properties or assets transferred in such transaction or any such
series of related transactions so designated by the Company does not exceed
$500,000.
Within 365 days after the receipt of any Net Proceeds from any Asset
Sale, the Company may (i) apply all or any of the Net Proceeds therefrom to
repay Indebtedness (other than Subordinated Indebtedness) of the Company or any
Restricted Subsidiary, provided, in each case, that the related loan commitment
of any revolving credit facility or other borrowing (if any) is thereby
permanently reduced by the amount of such Indebtedness so repaid or (ii) invest
all or any part of the Net Proceeds thereof in properties and other capital
assets that replace the properties or other capital assets that were the
subject of such Asset Sale or in other properties or other capital assets that
will be used in the business of the Company and its Restricted Subsidiaries or
in entities engaged in such business, provided that in such latter instance
such entities become a Subsidiary Guarantor or Restricted Subsidiary, as
applicable. Pending the final application of any such Net Proceeds, the
Company may temporarily reduce borrowings under any revolving credit facility
or otherwise invest such Net Proceeds in any manner that is not prohibited by
this Indenture. Any Net Proceeds from Asset Sales that are not applied or
invested as provided in the first sentence of this paragraph shall be deemed to
constitute "Excess Proceeds". When the aggregate amount of Excess Proceeds
equals or exceeds $15.0 million (the date of such occurrence being called the
"Asset Sale Offer Trigger Date"), the Company shall make an offer to all
Holders of Notes (an "Asset Sale Offer") to purchase the maximum principal
amount of Notes that may be purchased out of the Excess Proceeds at an offer
price in cash in an amount equal to 100% of the principal amount thereof plus
accrued and unpaid interest thereon to the date of purchase in accordance with
the procedures set forth in Section 3.9 hereof. To the extent that the
aggregate amount of Notes tendered pursuant to an Asset Sale Offer is less than
the Excess Proceeds, the Company may use any remaining Excess Proceeds for
general corporate purposes. Upon completion of such Asset Sale Offer, the
amount of Excess Proceeds shall be reset at zero.
The Company shall not permit any Restricted Subsidiary to enter into or
suffer to exist any agreement that would place any restriction of any kind
(other than pursuant to law or regulation) on the ability of the Company to
make an Asset Sale Offer following any Asset Sale. The Company shall comply
with Rule 14e-1 under the Exchange Act, and any other securities laws and
regulations thereunder, if applicable, in the event that an Asset Sale occurs
and the Company is required to purchase Notes pursuant to this Section 4.10.
SECTION 4.11 TRANSACTIONS WITH AFFILIATES.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, (a) sell, lease, transfer or otherwise dispose of any of its
properties, assets or securities to, (b) purchase or lease any property, assets
or securities from, (c) make any Investment in or (d) enter into or suffer to
exist any other transaction or series of related transactions with, or for the
benefit of, any Affiliate of the Company unless (i) such transaction or series
of transactions is on terms that are no less favorable to the Company or such
Restricted Subsidiary, as the case may be, than those that would be available
in a comparable arm's length transaction with an unrelated third party, (ii)
with respect to any one transaction or series of related transactions involving
aggregate payments in excess of $1.0 million, the Company delivers an
Officers' Certificate to the Trustee certifying that such transaction or series
of related transactions complies with clause (i) above and (iii) with respect
to a transaction or series of related transactions involving payments in excess
of $10.0 million, the Company delivers an Officers' Certificate to the Trustee
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certifying that (A) such transaction or series of related transactions complies
with clause (i) above and (B) such transaction or series of related
transactions has been approved by a majority of the Disinterested Directors of
the Company; provided, however, that the foregoing restriction shall not apply
to (u) any arrangements in effect on the Issue Date, (v) transactions between
or among the Company and its Wholly Owned Restricted Subsidiaries, (w) loans or
advances to officers, directors and employees of the Company or any Restricted
Subsidiary made in the ordinary course of business and consistent with past
practices of the Company and its Restricted Subsidiaries in an aggregate amount
not to exceed $1.0 million outstanding at any one time, (x) indemnities of
officers, directors and employees of the Company or any Restricted Subsidiary
permitted by bylaw or statutory provisions, (y) the payment of reasonable and
customary regular fees to directors of the Company or any of its Restricted
Subsidiaries who are not employees of the Company or any Affiliate and (z) the
Company's employee compensation and other benefit arrangements.
SECTION 4.12 LIENS.
The Company shall not, and shall not permit any Restricted Subsidiary
to, directly or indirectly, create, incur, assume, affirm or suffer to exist or
become effective any Lien of any kind, except for Permitted Liens, upon any of
their respective property or assets, whether now owned or acquired after the
Issue Date, or any income, profits or proceeds therefrom, to secure (i) any
Indebtedness of the Company or such Restricted Subsidiary (if it is not also a
Subsidiary Guarantor), unless prior to, or contemporaneously therewith, the
Notes are equally and ratably secured or (ii) any Indebtedness of any
Subsidiary Guarantor, unless prior to, or contemporaneously therewith, the
Subsidiary Guarantees are equally and ratably secured; provided, however, that
if such Indebtedness is expressly subordinated to the Notes or the Subsidiary
Guarantees, the Lien securing such Indebtedness will be subordinated and junior
to the Lien securing the Notes or the Subsidiary Guarantees, as the case may
be, with the same relative priority as such Indebtedness has with respect to
the Notes or the Subsidiary Guarantees. The foregoing covenant shall not apply
to any Lien securing Acquired Indebtedness, provided that any such Lien extends
only to the property or assets that were subject to such Lien prior to the
related acquisition by the Company or such Restricted Subsidiary and was not
created, incurred or assumed in contemplation of such transaction.
SECTION 4.13 ISSUANCES AND SALES OF CAPITAL STOCK OF WHOLLY OWNED
SUBSIDIARIES.
The Company (i) shall not, and shall not permit any Wholly Owned
Restricted Subsidiary of the Company to, transfer, convey, sell, or otherwise
dispose of any Capital Stock of any Wholly Owned Restricted Subsidiary of the
Company to any Person (other than the Company or a Wholly Owned Restricted
Subsidiary of the Company), unless (A) such transfer, conveyance, sale or other
disposition is of all the Capital Stock of such Wholly Owned Restricted
Subsidiary and (B) the cash Net Proceeds from such transfer, conveyance, sale
or other disposition are applied in accordance with Section 4.10 hereof and
(ii) will not permit any Wholly Owned Restricted Subsidiary of the Company to
issue any of its Equity Interests to any Person other than to the Company or a
Wholly Owned Restricted Subsidiary of the Company; except, in the case of both
clauses (i) and (ii) above, with respect to dispositions or issuances by a
Wholly Owned Restricted Subsidiary of the Company as contemplated in clauses
(i) and (ii) of the definition of "Wholly Owned Restricted Subsidiary" included
in Section 1.1 hereof.
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SECTION 4.14 SALE-AND-LEASEBACK TRANSACTIONS.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, enter into any sale-and-leaseback transaction; provided that
the Company or any Restricted Subsidiary, as applicable, may enter into a sale-
and-leaseback transaction if (i) the Company could have (A) incurred
Indebtedness in an amount equal to the Attributable Indebtedness relating to
such sale-and-leaseback transaction pursuant to the Fixed Charge Coverage Ratio
test set forth in Section 4.9(a) hereof and (B) incurred a Lien to secure such
Indebtedness pursuant to Section 4.12 hereof; (ii) the gross cash proceeds of
such sale-and-leaseback transaction are at least equal to the fair market value
(as determined in good faith by the Board of Directors and set forth in an
Officers' Certificate delivered to the Trustee) of the property that is the
subject of such sale-and-leaseback transaction and (iii) the transfer of assets
in such sale-and-leaseback transaction is permitted by, and the Company applies
the proceeds of such transaction in compliance with, Section 4.10 hereof.
SECTION 4.15 OFFER TO REPURCHASE UPON CHANGE OF CONTROL.
(a) Upon the occurrence of a Change of Control, each Holder of
Notes shall have the right to require the Company to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of such Holder's Notes on a
Business Day (the "Change of Control Payment Date") not more than 70 nor less
than 30 days following such Change of Control, pursuant to the offer described
below (the "Change of Control Offer") at an offer price in cash equal to 101%
of the aggregate principal amount thereof plus accrued and unpaid interest
thereon to the date of purchase (the "Change of Control Payment"). Within 30
days following any Change of Control, the Company shall mail a notice to each
Holder describing the transaction or transactions that constitute the Change of
Control and offering to repurchase Notes pursuant to the procedures required by
this Section 4.15 and described in such notice. The Company shall comply with
the requirements of Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control. The Change of Control Offer shall be required to remain
open for at least 20 Business Days and until the close of business on the fifth
Business Day prior to the Change of Control Payment Date.
(b) On the Change of Control Payment Date, the Company shall,
to the extent lawful, (i) accept for payment all Notes or portions thereof
properly tendered pursuant to the Change of Control Offer, (ii) deposit with
the Paying Agent an amount equal to the Change of Control Payment in respect of
all Notes or portions thereof so tendered and (iii) deliver or cause to be
delivered to the Trustee the Notes so accepted, together with an Officers'
Certificate stating the aggregate principal amount of Notes or portions thereof
being purchased by the Company. The Paying Agent shall promptly mail or
otherwise deliver to each Holder of Notes so tendered the Change of Control
Payment for such Notes, and the Trustee shall promptly authenticate and mail
(or cause to be transferred by book entry) to each Holder a new Note equal in
principal amount to any unpurchased portion of the Notes surrendered, if any;
provided that each such new Note shall be in a principal amount of $1,000 or an
integral multiple thereof. The Company shall publicly announce the results of
the Change of Control Offer on or as soon as practicable after the Change of
Control Payment Date.
(c) The Change of Control provisions described above shall be
applicable whether or not any other provisions of this Indenture are
applicable.
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(d) The Company shall not be required to make a Change of
Control Offer upon a Change of Control if a third party makes the Change of
Control Offer in the manner, at the times and otherwise in compliance with the
requirements set forth in this Indenture applicable to a Change of Control
Offer made by the Company and purchases all Notes validly tendered and not
withdrawn under such Change of Control Offer.
SECTION 4.16 BUSINESS ACTIVITIES.
The Company shall not, and will not permit any Restricted Subsidiary to,
engage in any business other than (i) the Oil Service Business, (ii) such other
businesses as the Company or its Restricted Subsidiaries are engaged in on the
Issue Date and (iii) such other business activities as are reasonably related
or incidental thereto.
ARTICLE 5
SUCCESSORS
SECTION 5.1 MERGER, CONSOLIDATION OR SALE OF ASSETS.
The Company shall not consolidate or merge with or into (whether or not
the Company is the surviving corporation), or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its properties or
assets in one or more related transactions, to another Person unless (i) the
Company is the surviving corporation or the Person formed by or surviving any
such consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia, (ii) the Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the Person to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made assumes all the obligations of the Company
under the Notes and this Indenture pursuant to a supplemental Indenture in a
form reasonably satisfactory to the Trustee, (iii) except in the case of a
merger of the Company with or into a Wholly Owned Subsidiary of the Company,
immediately after such transaction no Default or Event of Default exists and
(iv) except in the case of a merger of the Company with or into a Wholly Owned
Subsidiary of the Company, the Company or the Person formed by or surviving any
such consolidation or merger (if other than the Company), or to which such
sale, assignment, transfer, lease, conveyance or other disposition shall have
been made (A) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of the Company
immediately preceding the transaction and (B) will, at the time of such
transaction and after giving pro forma effect thereto as if such transaction
had occurred at the beginning of the applicable four-quarter period, be
permitted to incur at least $1.00 of additional Indebtedness (in addition to
Permitted Indebtedness) pursuant to the Fixed Charge Coverage Ratio test set
forth in Section 4.9(a) hereof.
In connection with any consolidation, merger or transfer contemplated by
this provision, the Company shall deliver, or cause to be delivered, to the
Trustee, in form and substance reasonably satisfactory to the Trustee, an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and the supplemental indenture in respect
thereto comply with this provision and that all conditions precedent in this
Indenture provided for relating to such transaction or transactions have been
complied with.
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SECTION 5.2 SUCCESSOR CORPORATION SUBSTITUTED.
Upon any consolidation or merger, or any sale, assignment, transfer,
lease, conveyance or other disposition of all or substantially all of the
properties or assets of the Company in accordance with Section 5.1 hereof, the
Person formed by such consolidation or into or with which the Company is merged
or to which such sale, assignment, transfer, lease, conveyance or other
disposition is made shall succeed to, and be substituted for (so that from and
after the date of such consolidation, merger, sale, lease, conveyance or other
disposition, the provisions of this Indenture referring to "the Company" shall
refer instead to such Person and not to the Company), and may exercise every
right and power of the Company under this Indenture with the same effect as if
such Person had been named as the Company herein; provided, however, that the
Company shall not be relieved from the obligation to pay the principal of,
premium, if any, and interest on the Notes except in the case of a sale of all
or substantially all of the Company's properties or assets that meets the
requirements of Section 5.1 hereof.
ARTICLE 6
DEFAULTS AND REMEDIES
SECTION 6.1 EVENTS OF DEFAULT.
An "Event of Default" occurs if:
(i) the Company defaults for 30 days in the payment
when due of interest on the Notes;
(ii) the Company defaults in payment when due of the
principal of or premium, if any, on the Notes;
(iii) the Company fails to comply with the provisions of
Section 4.10, 4.15 or 5.1 hereof.
(iv) the Company fails for 45 days after notice to
comply with any of its other agreements in this Indenture or the Notes;
(v) the Company or any of its Restricted Subsidiaries
defaults under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or
any of its Restricted Subsidiaries) whether such Indebtedness or
guarantee now exists, or is created after the Issue Date, which default
(A) is caused by a failure to pay principal of or premium, if any, or
interest on such Indebtedness prior to the expiration of the grace
period provided in such Indebtedness on the date of such default (a
"Payment Default") or (B) results in the acceleration of such
Indebtedness prior to its express maturity and, in each case, the
principal amount of any such Indebtedness, together with the principal
amount of any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so accelerated,
aggregates $5.0 million or more for any single Indebtedness or a total
of $10.0 million or more for all such Indebtedness and provided,
further, that if any such default is cured or waived or any
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such acceleration rescinded, or such Indebtedness is repaid, within a
period of 10 days from the continuation of such default beyond the
applicable grace period or the occurrence of such acceleration, as the
case may be, such Event of Default under this Section 6.1(v) and any
consequential acceleration of the Notes shall be automatically
rescinded, so long as such recision does not conflict with any judgment
or decree;
(vi) a final judgment or final judgments for the payment
of money are entered by a court or courts of competent jurisdiction
against the Company or any of its Subsidiaries and such judgment or
judgments remain unpaid and undischarged for a period (during which
execution shall not be effectively stayed) of 60 consecutive days,
provided that the aggregate of all such unpaid and undischarged
judgments exceeds $5.0 million;
(vii) any Subsidiary Guarantee shall for any reason cease
to be, or be asserted by the Company or any Subsidiary Guarantor, as
applicable, not to be, in full force and effect (except pursuant to the
release of any Subsidiary Guarantee in accordance with this Indenture);
(viii) the Company or any of its Restricted Subsidiaries
that constitutes a Significant Subsidiary or any group of Restricted
Subsidiaries that, taken together, would constitute a Significant
Subsidiary, pursuant to or within the meaning of Bankruptcy Law:
(A) commences a voluntary case,
(B) consents to the entry of an order for relief
against it in an involuntary case,
(C) consents to the appointment of a Bankruptcy
Custodian of it or for all or substantially all of its property,
(D) makes a general assignment for the benefit
of its creditors, or
(E) generally is not paying its debts as they
become due; or
(ix) a court of competent jurisdiction enters an order
or decree under any Bankruptcy Law that:
(A) is for relief, in an involuntary case,
against the Company or any of its Restricted Subsidiaries that
constitutes a Significant Subsidiary or any group of Restricted
Subsidiaries that, taken together, would constitute a Significant
Subsidiary;
(B) appoints a Bankruptcy Custodian of the
Company or any of its Restricted Subsidiaries that constitutes a
Significant Subsidiary or any group of Restricted Subsidiaries
that, taken together, would constitute a Significant Subsidiary,
for all or substantially all of the property of the Company or
any of such Restricted Subsidiaries; or
(C) orders the liquidation of the Company or any
of its Restricted Subsidiaries that constitutes a Significant
Subsidiary or any group of Restricted
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Subsidiaries that, taken together, would constitute a Significant
Subsidiary, for all of substantially all of the property of the
Company or any of such Restricted Subsidiaries;
and the order or decree remains unstayed and in effect for 60
consecutive days.
SECTION 6.2 ACCELERATION.
If any Event of Default (other than an Event of Default specified in
clause (viii) or (ix) of Section 6.1 hereof with respect to the Company or any
of its Restricted Subsidiaries that constitutes a Significant Subsidiary or any
group of Restricted Subsidiaries that, taken together, would constitute a
Significant Subsidiary) occurs and is continuing, the Trustee or the Holders of
at least 25% in aggregate principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately. Upon any such
declaration, the Notes shall become due and payable immediately.
Notwithstanding the foregoing, if an Event of Default specified in clause
(viii) or (ix) of Section 6.1 hereof occurs with respect to the Company or any
of its Restricted Subsidiaries that constitutes a Significant Subsidiary or any
group of Restricted Subsidiaries that, taken together, would constitute a
Significant Subsidiary, all outstanding Notes shall be due and payable
immediately without further action or notice.
The Holders of a majority in aggregate principal amount of the then
outstanding Notes by written notice to the Trustee may on behalf of all of the
Holders waive any existing Default or Event of Default acceleration and its
consequences if the rescission would not conflict with any judgment or decree
and if all existing Events of Default (except nonpayment of principal, interest
or premium) have been cured or waived.
SECTION 6.3 OTHER REMEDIES.
If an Event of Default occurs and is continuing, the Trustee may pursue
any available remedy to collect the payment of principal, premium, if any, and
interest on the Notes or to enforce the performance of any provision of the
Notes or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any of
the Notes or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Holder of a Note in exercising any right or
remedy accruing upon an Event of Default shall not impair the right or remedy
or constitute a waiver of or acquiescence in the Event of Default. All
remedies are cumulative to the extent permitted by law.
SECTION 6.4 WAIVER OF PAST DEFAULTS.
Holders of not less than a majority in aggregate principal amount of the
then outstanding Notes by notice to the Trustee may on behalf of the Holders of
all of the Notes waive an existing Default or Event of Default and its
consequences hereunder, except a continuing Default or Event of Default in the
payment of interest on, or the principal of, the Notes (including in connection
with an offer to purchase pursuant to Sections 3.7, 3.9, 4.10 or 4.15 hereof).
Upon any such waiver, such Default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been cured for every purpose
of this Indenture; but no such waiver shall extend to any subsequent or other
Default or impair any right consequent thereon.
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SECTION 6.5 CONTROL BY MAJORITY.
Holders of a majority in aggregate principal amount of the then
outstanding Notes may direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee or exercising any
trust or power conferred on it. However, the Trustee may refuse to follow any
direction that conflicts with law or this Indenture that the Trustee determines
may be unduly prejudicial to the rights of other Holders of Notes or that may
involve the Trustee in personal liability.
SECTION 6.6 LIMITATION ON SUITS.
A Holder of a Note may pursue a remedy with respect to this Indenture or
the Note only if:
(i) the Holder of a Note gives to the Trustee written
notice of a continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal
amount of the then outstanding Notes make a written request to the
Trustee to pursue the remedy;
(iii) such Holder of a Notes or Holders of Notes offer
and, if requested, provide to the Trustee indemnity satisfactory to the
Trustee against any loss, liability or expense;
(iv) the Trustee does not comply with the request within
60 days after receipt of the request and the offer and, if requested,
the provision of indemnity; and
(v) during such 60-day period the Holders of a majority
in aggregate principal amount of the then outstanding Notes do not give
the Trustee a direction inconsistent with the request.
A Holder of a Note may not use this Indenture to prejudice the rights of
another Holder of a Note or to obtain a preference or priority over another
Holder of a Note.
SECTION 6.7 RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT.
Notwithstanding any other provision of this Indenture, the right of any
Holder of a Note to receive payment of principal, premium, if any, and interest
on the Note, on or after the respective due dates expressed in the Note
(including in connection with an offer to purchase pursuant to Sections 3.7,
3.9, 4.10 or 4.15 hereof), or to bring suit for the enforcement of any such
payment on or after such respective dates, shall not be impaired or affected
without the consent of such Holder.
SECTION 6.8 COLLECTION SUIT BY TRUSTEE.
If an Event of Default specified in Section 6.1(i) or (ii) occurs and is
continuing, the Trustee is authorized to recover judgment in its own name and
as trustee of an express trust against the Company for the whole amount of
principal of, premium, if any, and interest remaining unpaid on the Notes and
interest on overdue principal and, to the extent lawful, interest and such
further amount as shall be sufficient to cover the costs and expenses of
collection, including the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel.
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SECTION 6.9 TRUSTEE MAY FILE PROOFS OF CLAIM.
The Trustee is authorized to file such proofs of claim and other papers
or documents as may be necessary or advisable in order to have the claims of
the Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and the
Holders of the Notes allowed in any judicial proceedings relative to the
Company (or any other obligor upon the Notes), its creditors or its property
and shall be entitled and empowered to collect, receive and distribute any
money or other property payable or deliverable on any such claims and any
custodian in any such judicial proceeding is hereby authorized by each Holder
to make such payments to the Trustee, and in the event that the Trustee shall
consent to the making of such payments directly to the Holders, to pay to the
Trustee any amount due to it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any
other amounts due the Trustee under Section 7.7 hereof. To the extent that the
payment of any such compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 7.7 hereof out of the estate in any such proceeding, shall be denied
for any reason, payment of the same shall be secured by a Lien on, and shall be
paid out of, any and all distributions, dividends, money, securities and other
properties that the Holders may be entitled to receive in such proceeding
whether in liquidation or under any plan of reorganization or arrangement or
otherwise. Nothing herein contained shall be deemed to authorize the Trustee
to authorize or consent to or accept or adopt on behalf of any Holder any plan
of reorganization, arrangement, adjustment or composition affecting the Notes
or the rights of any Holder, or to authorize the Trustee to vote in respect of
the claim of any Holder in any such proceeding.
SECTION 6.10 PRIORITIES.
If the Trustee collects any money pursuant to this Article 6, it shall
pay out the money in the following order:
First: to the Trustee, its agents and attorneys for amounts due
under Section 7.7 hereof, including payment of all compensation, expense
and liabilities incurred, and all advances made, by the Trustee and the
costs and expenses of collection;
Second: to Holders of Notes for amounts due and unpaid on the
Notes for principal, premium, if any, and interest, ratably, without
preference or priority of any kind, according to the amounts due and
payable on the Notes for principal, premium, if any, and interest,
respectively; and
Third: to the Company or to such party as a court of competent
jurisdiction shall direct.
The Trustee may fix a record date and payment date for any payment to
Holders of Notes pursuant to this Section 6.10.
SECTION 6.11 UNDERTAKING FOR COSTS.
In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as a Trustee, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees and expenses, against any party litigant in the suit, having
due regard to the merits and good faith of the claims or defenses made
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by the party litigant. This Section 6.11 does not apply to a suit by the
Trustee, a suit by a Holder of a Note pursuant to Section 6.6 hereof, or a suit
by Holders of more than 10% in aggregate principal amount of the then
outstanding Notes.
ARTICLE 7
TRUSTEE
SECTION 7.1 DUTIES OF TRUSTEE.
(a) If an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in its exercise, as a
prudent person would exercise or use under the circumstances in the conduct of
his or her own affairs.
(b) Except during the continuance of an Event of Default:
(i) the duties of the Trustee shall be determined
solely by the express provisions of this Indenture and the
Trustee need perform only those duties that are specifically set
forth in this Indenture and no others, and no implied covenants
or obligations shall be read into this Indenture against the
Trustee; and
(ii) in the absence of bad faith on its part, the
Trustee may conclusively rely, as to the truth of the statements
and the correctness of the opinions expressed therein, upon
certificates or opinions furnished to the Trustee and conforming
to the requirements of this Indenture. However, in the case of
any such certificates or opinions that by any provision hereof
are specifically required to be furnished to the Trustee, the
Trustee shall examine the certificates and opinions to determine
whether or not they conform to the requirements of this
Indenture.
(c) The Trustee may not be relieved from liabilities for its
own negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(i) this paragraph does not limit the effect of
paragraph (b) of this Section 7.1;
(ii) the Trustee shall not be liable for any error of
judgment made in good faith by a Responsible Officer, unless it
is proved that the Trustee was negligent in ascertaining the
pertinent facts; and
(iii) the Trustee shall not be liable with respect to any
action it takes or omits to take in good faith in accordance with
a direction received by it pursuant to Section 6.5 hereof.
(d) Whether or not therein expressly so provided, every
provision of this Indenture that in any way relates to the Trustee is subject
to paragraphs (a), (b) and (c) of this Section 7.1.
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(e) No provision of this Indenture shall require the Trustee
to expend or risk its own funds or incur any liability. The Trustee shall be
under no obligation to exercise any of its rights and powers under this
Indenture at the request of any Holders, unless such Holder shall have offered
to the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
(f) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Company.
Money held in trust by the Trustee need not be segregated from other funds
except to the extent required by law.
SECTION 7.2 RIGHTS OF TRUSTEE.
(a) The Trustee may conclusively rely upon any document
believed by it to be genuine and to have been signed or presented by the proper
Person. The Trustee need not investigate any fact or matter stated in the
document.
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel or both. The Trustee
shall not be liable for any action it takes or omits to take in good faith in
reliance on such Officers' Certificate or Opinion of Counsel. The Trustee may
consult with counsel of its selection and the advice of such counsel or any
Opinion of Counsel shall be full and complete authorization and protection from
liability in respect of any action taken, suffered or omitted by it hereunder
in good faith and in reliance thereon.
(c) The Trustee may act through its attorneys and agents and
shall not be responsible for the misconduct or negligence of any agent
appointed with due care.
(d) The Trustee shall not be liable for any action it takes or
omits to take in good faith that it believes to be authorized or within the
rights or powers conferred upon it by this Indenture.
(e) Unless otherwise specifically provided in this Indenture,
any demand, request, direction or notice from the Company shall be sufficient
if signed by an Officer of the Company.
(f) The Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request or
direction of any of the Holders unless such Holders shall have offered to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities that might be incurred by it in compliance with such request or
direction.
SECTION 7.3 INDIVIDUAL RIGHTS OF TRUSTEE.
The Trustee in its individual or any other capacity may become the owner
or pledgee of Notes and may otherwise deal with the Company or any Affiliate of
the Compete with the same rights it would have if it were not Trustee.
However, in the event that the Trustee acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue as trustee or resign. Any Agent may do the same with
like rights and duties. The Trustee is also subject to Sections 7.10 and 7.11
hereof.
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SECTION 7.4 TRUSTEE'S DISCLAIMER.
The Trustee shall not be responsible for and makes no representation as
to the validity or adequacy of this Indenture or the Notes, it shall not be
accountable for the Company's use of the proceeds from the Notes or any money
paid to the Company or upon the Company's direction under any provision of this
Indenture, it shall not be responsible for the use or application of any money
received by any Paying Agent other than the Trustee, and it shall not be
responsible for any statement or recital herein or any statement in the Notes
or any other document in connection with the sale of the Notes or pursuant to
this Indenture other than its certificate of authentication.
SECTION 7.5 NOTICE OF DEFAULTS.
If a Default or Event of Default occurs and is continuing and if it is
known to the Trustee, the Trustee shall mail to Holders of Notes a notice of
the Default or Event of Default within 90 days after it occurs. Except in the
case of a Default or Event of Default in payment of principal of, premium, if
any, or interest on any Notes, the Trustee may withhold the notice if and so
long as a committee of its Responsible Officers in good faith determines that
withholding the notice is in the interests of the Holders of the Notes.
SECTION 7.6 REPORT BY TRUSTEE TO HOLDERS OF THE NOTES.
Within 60 days after each May 15 beginning with the May 15 following the
date of this Indenture, and for so long as Notes remain outstanding, the
Trustee shall mail to the Holders of the Notes a brief report dated as of such
reporting date that complies with TIA Section 313(a) (but if no event
described in TIA Section 313(a) has occurred within the 12 months preceding
the reporting date, no report need be transmitted). The Trustee also shall
comply with TIA Section 313(b)(2) and Section 313(b)(1). The Trustee shall
also transmit by mail all reports as required by TIA Section 313(c).
A copy of each report at the time of its mailing to the Holders of Notes
shall be mailed to the Company and filed with the Commission and each stock
exchange on which the Notes are listed in accordance with TIA Section 313(d).
The Company shall promptly notify the Trustee when the Notes are listed on any
stock exchange.
SECTION 7.7 COMPENSATION AND INDEMNITY.
The Company shall pay to the Trustee from time to time such compensation
as shall be agreed between the Company and the Trustee for its acceptance of
this Indenture and services hereunder. The Trustee's compensation shall not be
limited by any law on compensation of a trustee of an express trust. The
Company shall reimburse the Trustee promptly upon request for all reasonable
disbursements, advances and expenses incurred or made by it in addition to the
compensation for its services. Such expenses shall include the reasonable
compensation, disbursements and expenses of the Trustee's agents and counsel.
The Company shall indemnify each of the Trustee and any predecessor
Trustee against any and all losses, liabilities, damages, claims or expenses,
including taxes (other than taxes based on the income of the Trustee), incurred
by it arising out of or in connection with the acceptance or administration of
its duties under this Indenture, including the costs and expenses of enforcing
this Indenture against the Company (including this Section 7.7) and defending
itself against any claim (whether asserted by the
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Company or any Holder or any other person) or liability in connection with the
exercise or performance of any of its powers or duties hereunder, except to the
extent any such loss, liability or expense may be attributable to its
negligence or bad faith. The Trustee shall notify the Company promptly of any
claim for which it may seek indemnity. Failure by the Trustee to so notify the
Company shall not relieve the Company of its obligations hereunder. The
Company shall defend the claim and the Trustee shall cooperate in the defense.
The Trustee may have separate counsel and the Company shall pay the reasonable
fees and expenses of much counsel. The Company need not pay for any settlement
made without its consent, which consent shall not be unreasonably withheld.
The obligations of the Company under this Section 7.7 shall survive the
satisfaction and discharge of this Indenture.
To secure the Company's payment obligations in this Section 7.7, the
Trustee shall have a Lien prior to the Notes on all money or property held or
collected by the Trustee, except that held in trust to pay principal, premium,
if any, and interest on particular Notes. Such Lien shall survive the
satisfaction and discharge of this Indenture.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.1(viii) or (ix) hereof occurs, the expenses and
the compensation for the services (including the fees and expenses of its agents
and counsel) are intended to constitute expenses of administration under any
Bankruptcy Law. The Trustee shall also be entitled to receive compensation for
extraordinary services in default administration.
The Trustee shall comply with the provisions of TIA Section 313 (b)(2)
to the extent applicable.
SECTION 7.8 REPLACEMENT OF TRUSTEE.
A resignation or removal of the Trustee and appointment of a successor
Trustee shall become effective only upon the successor Trustee's acceptance of
appointment as provided in this Section 7.8.
The Trustee may resign in writing at any time and be discharged from the
trust hereby created by so notifying the Company. The Holders of Notes of a
majority in aggregate principal amount of the then outstanding Notes may remove
the Trustee by so notifying the Trustee and the Company in writing. The
Company may remove the Trustee if:
(a) the Trustee fails to comply with Section 7.10 hereof;
(b) the Trustee is adjudged a bankrupt or an insolvent or an
order for relief is entered with respect to the Trustee under any Bankruptcy
Law;
(c) a Bankruptcy Custodian or public officer takes charge of
the Trustee or its property; or
(d) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a
successor Trustee. Within one year after the successor Trustee
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takes office, the Holders of a majority in aggregate principal amount of the
then outstanding Notes may appoint a successor Trustee to replace the successor
Trustee appointed by the Company.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or
the Holders of Notes of at least 10% in aggregate principal amount of the then
outstanding Notes may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
If the Trustee, after written request by any Holder of a Note who has
been a Holder of a Note for at least six months, fails to comply with Section
7.10 hereof, such Holder of a Note may petition any court of competent
jurisdiction for the removal of the Trustee and the appointment of a successor
Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon, the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Holders of the Notes. The retiring Trustee shall promptly
transfer all property held by it as Trustee to the successor Trustee, provided
all sums owing to the Trustee hereunder have been paid and subject to the Lien
provided for in Section 7.7 hereof. Notwithstanding replacement of the Trustee
pursuant to this Section 7.8, the Company's obligations under Section 7.7
hereof shall continue for the benefit of the retiring Trustee.
SECTION 7.9 SUCCESSOR TRUSTEE BY MERGER, ETC.
If the Trustee consolidates, merges or converts into, or transfers all
or substantially all of its corporate trust business to another corporation,
the successor corporation without any further act shall be the successor
Trustee. As soon as practicable, the successor Trustee shall mail a notice of
its succession to the Company and the Holders of the Notes.
SECTION 7.10 ELIGIBILITY; DISQUALIFICATION.
There shall at all times be a Trustee hereunder that is a corporation
organized and doing business under the laws of the United States of America or
of any state thereof that is authorized under such laws to exercise corporate
trustee power, that is subject to supervision or examination by federal or
state authorities and that has a combined capital and surplus of at least $50
million as set forth in its most recent published annual report of condition.
This Indenture shall always have a Trustee who satisfies the
requirements of TIA Section 310(a)(1), (2) and (5). The Trustee is subject to
TIA Section 310(b).
SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST THE COMPANY.
The Trustee is subject to TIA Section 311(a), excluding any creditor
relationship listed in TIA Section 311(b). A Trustee who has resigned or been
removed shall be subject to TIA Section 311(a) to the extent indicated
therein.
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ARTICLE 8
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
SECTION 8.1 OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE.
The Company may, at the option of its Board of Directors evidenced by a
resolution set forth in an Officers' Certificate, at any time, elect to have
either Section 8.2 or 8.3 hereof be applied to all outstanding Notes upon
compliance with the conditions set forth below in this Article 8.
SECTION 8.2 LEGAL DEFEASANCE AND DISCHARGE.
Upon the Company's exercise under Section 8.1 hereof of the option
applicable to this Section 8.2, the Company and each Subsidiary Guarantor
shall, subject to the satisfaction of the conditions set forth in Section 8.4
hereof, be deemed to have been discharged from its obligations with respect to
all outstanding Notes on the date the conditions set forth below are satisfied
(hereinafter, "Legal Defeasance"). For this purpose, Legal Defeasance means
that the Company shall be deemed to have paid and discharged the entire
Indebtedness represented by the outstanding Notes, which shall thereafter be
deemed to be "outstanding" only for the purposes of Section 8.5 hereof and the
other Sections of this Indenture referred to in clauses (i) and (ii) below, and
the Company and each Subsidiary Guarantor shall be deemed to have satisfied all
of its other obligations under such Notes or Subsidiary Guarantee and this
Indenture (and the Trustee, on demand of and at the expense of the Company,
shall execute proper instruments acknowledging the same), except for the
following provisions, which shall survive until otherwise terminated or
discharged hereunder: (i) the rights of Holders of outstanding Notes to receive
solely from the trust fund described in Section 8.4 hereof, and as more fully
set forth in such Section, payments in respect of the principal of, premium, if
any, and interest on such Notes when such payments are due; (ii) the Company's
obligations with respect to such Notes under Article 2 and Section 4.2 hereof;
(iii) the rights, powers, trusts, duties and immunities of the Trustee
hereunder and the Company's obligations in connection therewith and (iv) this
Article 8. Subject to compliance with this Article 8, the Company may exercise
its option under this Section 8.2 notwithstanding the prior exercise of its
option under Section 8.3 hereof.
SECTION 8.3 COVENANT DEFEASANCE.
Upon the Company's exercise under Section 8.1 hereof of the option
applicable to this Section 8.3, the Company shall, subject to the satisfaction
of the conditions set forth in Section 8.4 hereof, be released from its
obligations under the covenants contained in Sections 4.5, 4.7, 4.8, 4.9, 4.10,
4.11, 4.12, 4.13, 4.14, 4.15 and 4.16 hereof and Article 10 hereof with respect
to the outstanding Notes on and after the date the conditions set forth below
are satisfied (hereinafter, "Covenant Defeasance"), and the Notes shall
thereafter be deemed not "outstanding" for the purposes of any direction,
waiver, consent or declaration or act of Holders (and the consequences of any
thereof) in connection with such covenants, but shall continue to be deemed
"outstanding" for all other purposes hereunder (it being understood that such
Notes shall not be deemed outstanding for accounting purposes). For this
purpose, Covenant Defeasance means that, with respect to the outstanding Notes,
the Company and any Subsidiary Guarantor may omit to comply with and shall have
no liability in respect of any term, condition or limitation set forth in any
such covenant, whether directly or indirectly, by reason of any reference
elsewhere herein to any such covenant or by reason of any reference in any such
covenant to any other provision herein or in any other document and such
omission to comply shall not constitute a
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Default or an Event of Default under Section 6.1 hereof, but, except as
specified above, the remainder of this Indenture and such Notes shall be
unaffected thereby. In addition, upon the Company's exercise under Section 8.1
hereof of the option applicable to this Section 8.3 hereof, subject to the
satisfaction of the conditions set forth in Section 8.4 hereof, Sections 6.1(v)
and 6.1(vii) hereof shall not constitute Events of Default.
SECTION 8.4 CONDITIONS TO LEGAL OR COVENANT DEFEASANCE.
The following shall be the conditions to the application of either
Sections 8.2 or 8.3 hereof to the outstanding Notes:
In order to exercise either Legal Defeasance or Covenant Defeasance:
(a) the Company must irrevocably deposit with the Trustee, in
trust, for the benefit of the Holders, cash in United States dollars, non-
callable Government Securities, or a combination thereof, in such amounts as
will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any, and
interest on the outstanding Notes on the stated date for payment thereof or on
the applicable redemption date, as the case may be, and the Company must
specify whether the Notes are being defeased to maturity or to a particular
redemption date;
(b) in the case of an election under Section 8.2 hereof, the
Company shall have delivered to the Trustee an Opinion of Counsel in the United
States reasonably acceptable to the Trustee confirming that (i) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (ii) since the date of this Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such Opinion of Counsel shall confirm that, the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income
tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Legal Defeasance had not occurred;
(c) in the case of an election under Section 8.3 hereof, the
Company shall have delivered to the Trustee an Opinion of Counsel in the United
States reasonably acceptable to the Trustee confirming that the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income
tax purposes as a result of such Covenant Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(d) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of
Default resulting from the incurrence of Indebtedness all or a portion of the
proceeds of which will be used to defease the Notes pursuant to this Article 8
concurrently with such incurrence) or insofar as Section 6.1(viii) or 6.1(ix)
hereof is concerned, at any time in the period ending on the 91st day after the
date of deposit;
(e) such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under, any material
agreement or instrument (other than this Indenture) to which the Company or any
of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound;
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(f) the Company shall have delivered to the Trustee an Opinion
of Counsel to the effect that, as of the date such opinion, (i) the trust funds
will not be subject to rights of holders of Indebtedness other than the Notes
and (ii) assuming no intervening bankruptcy of the Company between the date of
deposit and the 91st day following the deposit (assuming no Holder of Notes is
an insider of the Company) or the day following the end of such other
preference period in effect at the time of such opinion (assuming a Holder of
Notes is an insider of the Company), as applicable, following the deposit, the
trust funds will not be subject to the effects of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally under any applicable United States or state law;
(g) the Company shall have delivered to the Trustee an
Officers' Certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders of Notes over any other creditors of the
Company or any Subsidiary Guarantor with the intent of defeating, hindering,
delaying or defrauding creditors of the Company, or any Subsidiary Guarantor or
others; and
(h) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, which, taken together, state
that all conditions precedent provided for or relating to the Legal Defeasance
or the Covenant Defeasance have been complied with.
SECTION 8.5 DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST;
OTHER MISCELLANEOUS PROVISIONS.
Subject to Section 8.6 hereof, all money and non-callable Government
Securities (including the proceeds thereof) deposited with the Trustee (or
other qualifying trustee, collectively for purposes of this Section 8.5, the
"Trustee") pursuant to Section 8.4 hereof in respect of the outstanding Notes
shall be held in trust and applied by the Trustee, in accordance with the
provisions of such Notes and this Indenture, to the payment, either directly or
through any Paying Agent (including the Company acting as Paying Agent) as the
Trustee may determine, to the Holders of such Notes of all sums due and to
become due thereon in respect of principal, premium, if any, and interest, but
such money need not be segregated from other funds except to the extent
required by law.
The Company shall pay and indemnify the Trustee against any tax, fee or
other charge imposed on or assessed against the cash or non-callable Government
Securities deposited pursuant to Section 8.4 hereof or the principal and
interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the Holders of the outstanding Notes.
Anything in this Article 8 to the contrary notwithstanding, the Trustee
shall deliver or pay to the Company from time to time upon the request of the
Company any money or non-callable Government Securities held by it as provided
in Section 8.4 hereof that, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee (which may be the opinion delivered under Section
8.4(a) hereof), are in excess of the amount thereof that would then be required
to be deposited to effect an equivalent Legal Defeasance or Covenant
Defeasance.
SECTION 8.6 REPAYMENT TO THE COMPANY.
Subject to the applicable escheat and abandoned property laws, any money
deposited with the Trustee or any Paying Agent, or then held by the Company, in
trust for the payment of the principal of, premium, if any, or interest on any
Note and remaining unclaimed for two years after such principal, and
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premium, if any, or interest has become due and payable shall be paid to the
Company on its request or (if then held by the Company) shall be discharged
from such trust; and the Holder of such Notes shall thereafter, as a secured
creditor, look only to the Company for payment thereof, and all liability of
the Trustee or such Paying Agent with respect to such trust money, and all
liability of the Company as trustee thereof, shall thereupon cease; provided,
however, that the Trustee or such Paying Agent, before being required to make
any such repayment, may at the expense of the Company cause to be published
once, in The New York Times and The Wall Street Journal (national edition),
notice that such money remains unclaimed and that, after a date specified
therein, which shall not be less than 30 days from the date of such
notification or publication, any unclaimed balance of such money then remaining
will be repaid to the Company.
SECTION 8.7 REINSTATEMENT.
If the Trustee or Paying Agent is unable to apply any United States
dollars or non-callable Government Securities in accordance with Section 8.5
hereof by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application,
then the Company's obligations under this Indenture and the Notes shall be
revived and reinstated as though no deposit had occurred pursuant to Sections
8.2 or 8.3 hereof until such time as the Trustee or Paying Agent is permitted
to apply all such money in accordance with Section 8.5 hereof; provided,
however, that, if the Company makes any payment of principal of, premium, if
any, or interest on any Note following the reinstatement of its obligations,
the Company shall be subrogated to the rights of the Holders of such Notes to
receive such payment from the money held by the Trustee or Paying Agent.
ARTICLE 9
AMENDMENT, SUPPLEMENT AND WAIVER
SECTION 9.1 WITHOUT CONSENT OF HOLDERS OF NOTES.
(a) Notwithstanding Section 9.2 of this Indenture, the
Company, the Subsidiary Guarantors and the Trustee may amend or supplement this
Indenture or the Notes without the consent of any Holder of a Note:
(i) to cure any ambiguity, defect or inconsistency;
(ii) to provide for uncertificated Notes in addition to
or in place of certificated Notes;
(iii) to provide for the assumption of the Company's
obligations to the Holders of the Notes pursuant to
Article 5 or Section 10.4(b) hereof;
(iv) to secure the Notes pursuant to the requirements of
Section 4.12 or otherwise;
(v) to make any change that would provide any
additional rights or benefits to the Holders of the
Notes or that does not adversely affect the legal
rights under this Indenture of any such Holder;
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(vi) to add any Restricted Subsidiary as an additional
Subsidiary Guarantor as provided in Section 10.2
hereof or to evidence the succession of another
Person to any Subsidiary Guarantor pursuant to
Section 10.4 hereof and the assumption by any such
successor of the covenants and agreements of such
Subsidiary Guarantor contained herein and in the
Subsidiary Guarantee of such Subsidiary Guarantor;
(vii) to release a Subsidiary Guarantor from its
obligations under this Indenture and its Subsidiary
Guarantee pursuant to Section 10.5 hereof, or
(viii) to comply with requirements of the Commission in
order to effect or maintain the qualification of
this Indenture under the TIA.
(b) Upon the request of the Company accompanied by a
resolution of its Board of Directors authorizing the execution of any such
amended or supplemental Indenture, and upon receipt by the Trustee of the
documents described in Section 9.6 hereof, the Trustee shall join with the
Company and the Subsidiary Guarantors in the execution of any amended or
supplemental Indenture authorized or permitted by the terms of this Indenture
and to make any further appropriate agreements and stipulations that may be
therein contained, but the Trustee shall not be obligated to enter into such
amended or supplemental Indenture that affects its own rights, duties or
immunities under this Indenture or otherwise.
SECTION 9.2 WITH CONSENT OF HOLDERS OF NOTES.
Except as provided below in this Section 9.2, the Company and the
Trustee may amend or supplement this Indenture, the Subsidiary Guarantors or
the Notes with the consent of the Holders of at least a majority in aggregate
principal amount of the Notes then outstanding (including, without limitation,
consents obtained in connection with a purchase of, or tender offer or exchange
offer for, Notes) and, subject to Sections 6.4 and 6.7 hereof, any existing
Default or Event of Default (other than a Default or Event of Default in the
payment of the principal of, premium, if any, or interest on the Notes, except
a payment default resulting from an acceleration that has been rescinded) or
compliance with any provision of this Indenture or the Notes may be waived with
the consent of the Holders of a majority in aggregate principal amount of the
then outstanding Notes (including consents obtained in connection with a
purchase of, tender offer or exchange offer for Notes).
Upon the request of the Company accompanied by a resolution of its Board
of Directors authorizing the execution of any such amended or supplemental
Indenture, and upon the filing with the Trustee of evidence satisfactory to the
Trustee of the consent of the Holders of Notes as aforesaid, and upon receipt
by the Trustee of the documents described in Section 9.6 hereof, the Trustee
shall join with the Company and the Subsidiary Guarantors in the execution of
such amended or supplemental Indenture unless such amended or supplemental
Indenture affects the Trustee's own rights, duties or immunities under this
Indenture or otherwise, in which case the Trustee may in its discretion, but
shall not be obligated to, enter into such amended or supplemental Indenture.
Subject to Sections 6.4 and 6.7 hereof, the Holders of a majority in
aggregate principal amount of the Notes then outstanding may waive compliance
in a particular instance by the Company and the Subsidiary Guarantors with any
provision of this Indenture or the Notes. However, without the consent
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of each Holder affected, an amendment or waiver may not (with respect to any
Notes held by a non-consenting Holder):
(i) reduce the principal amount of Notes whose Holders
must consent to an amendment, supplement or waiver;
(ii) reduce the principal of or change the fixed
maturity of any Note or alter or waive any of the
provisions with respect to the redemption of the
Notes (except as provided below with respect to
Sections 3.9, 4.10 and 4.15 hereof);
(iii) reduce the rate of or change the time for payment
of interest, including default interest, on any
Note;
(iv) waive a Default or Event of Default in the payment
of principal of or premium, if any, or interest on
the Notes (except a rescission of acceleration of
the Notes by the Holders of at least a majority in
aggregate principal amount of the then outstanding
Notes and a waiver of the payment default that
resulted from such acceleration);
(v) make any Note payable in money other than that
stated in the Notes;
(vi) make any change in the provisions of this Indenture
relating to waivers of past Defaults or the rights
of Holders of Notes to receive payments of
principal of or premium, if any, or interest on the
Notes;
(vii) waive a redemption payment with respect to any Note
(other than a payment required by Sections 4.10 or
4.15 hereof);
(viii) alter the ranking of the Notes relative to other
Indebtedness of the Company; or
(ix) make any change in the foregoing amendment and
waiver provisions.
In addition, without the consent of Holders of not less than 66-2/3% in
aggregate principal amount of the Notes then outstanding, no such amendment,
supplement or waiver may amend, change or modify the obligation of the Company
to make and consummate a Change of Control Offer in the event of a Change of
Control or make and consummate an Asset Sale Offer with respect to any Asset
Sale or modify any of the provisions or definitions with respect thereto.
It shall not be necessary for the consent of the Holders of Notes under
this Section 9.2 to approve the particular form of any proposed amendment or
waiver, but it shall be sufficient if such consent approves the substance
thereof.
After an amendment, supplement or waiver under this Section 9.2 becomes
effective, the Company shall mail to the Holders of Notes affected thereby a
notice briefly describing the amendment, supplement or waiver. Any failure of
the Company to mail such notice, or any defect therein, shall not,
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however, in any way impair or affect the validity of any such amended or
supplemental Indenture or waiver.
SECTION 9.3 COMPLIANCE WITH TRUST INDENTURE ACT.
Every amendment or supplement to this Indenture or the Notes shall be
set forth in a amended or supplemental Indenture that complies with the TIA as
then in effect.
SECTION 9.4 REVOCATION AND EFFECT OF CONSENTS.
Until an amendment, supplement or waiver becomes effective, a consent to
it by a Holder of a Note is a continuing consent by the Holder of a Note and
every subsequent Holder of a Note or portion of a Note that evidences the same
debt as the consenting Holder's Note, even if notation of the consent is not
made on any Note. However, any such Holder of a Note or subsequent Holder of a
Note may revoke the consent as to its Note if the Trustee receives written
notice of revocation before the date the waiver, supplement or amendment
becomes effective. An amendment, supplement or waiver becomes effective in
accordance with its terms and thereafter binds every Holder.
SECTION 9.5 NOTATION ON OR EXCHANGE OF NOTES.
The Trustee may place an appropriate notation about an amendment,
supplement or waiver on any Note thereafter authenticated. The Company in
exchange for all Notes may issue and the Trustee shall authenticate new Notes
that reflect the amendment, supplement or waiver.
Failure to make the appropriate notation or issue a new Note shall not
affect the validity and effect of such amendment, supplement or waiver.
SECTION 9.6 TRUSTEE TO SIGN AMENDMENT ETC.
The Trustee shall sign any amended or supplemental Indenture authorized
pursuant to this Article 9 if the amendment or supplement does not adversely
affect the rights, duties, liabilities or immunities of the Trustee. The
Company may not sign an amendment or supplemental Indenture until its Board of
Directors approves it. In executing any amended or supplemental Indenture, the
Trustee shall be entitled to receive, and (subject to Section 7.1 hereof) shall
be fully protected in relying upon, Officers' Certificates and Opinions of
Counsel stating that the execution of such amended or supplemental Indenture is
authorized or permitted by this Indenture.
ARTICLE 10
SUBSIDIARY GUARANTEES
SECTION 10.1 SUBSIDIARY GUARANTEES.
(a) The Subsidiary Guarantors and each Subsidiary of the
Company that in accordance with Section 10.2 hereof is required to guarantee
the obligations of the Company under the Notes and this Indenture hereby
jointly and severally and unconditionally guarantees, on a senior basis (each
such guarantee being a "Subsidiary Guarantee"), to each Holder of a Note
authenticated and
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delivered by the Trustee irrespective of the validity or enforceability of this
Indenture, the Notes or the obligations of the Company under this Indenture or
the Notes, that: (i) the principal of, premium, if any, and interest on the
Notes shall be paid in full when due, whether at the maturity or interest
payment or mandatory redemption date, by acceleration, call for redemption or
otherwise, and interest on the overdue principal and interest, if any, of the
Notes and all other obligations of the Company to the Holders or the Trustee
under this Indenture or the Notes shall be promptly paid in full or performed,
all in accordance with the terms of this Indenture and the Notes and (ii) in
case of any extension of time of payment or renewal of any Notes or any of such
other obligations, they shall be paid in full when due or performed in
accordance with the terms of the extension or renewal, whether at maturity, by
acceleration or otherwise. Failing payment when due of any amount so
guaranteed for whatever reason, each Subsidiary Guarantor shall be obligated to
pay the same whether or not such failure to pay has become an Event of Default
that could cause acceleration pursuant to Section 6.2 hereof. Each Subsidiary
Guarantor agrees that this is a guarantee of payment not a guarantee of
collection.
(b) Each Subsidiary Guarantor hereby agrees that its
obligations with regard to its Subsidiary Guarantee shall be unconditional,
irrespective of the validity or enforceability of the Notes or the obligations
of the Company under this Indenture, the absence of any action to enforce the
same, the recovery of any judgment against the Company or any other obligor
with respect to this Indenture, the Notes or the obligations of the Company
under this Indenture or the Notes, any action to enforce the same or any other
circumstances (other than complete performance) that might otherwise constitute
a legal or equitable discharge or defense of a Subsidiary Guarantor. Each
Subsidiary Guarantor further, to the extent permitted by law, waives and
relinquishes all claims, rights and remedies accorded by applicable law to
guarantors and agrees not to assert or take advantage of any such claims,
rights or remedies, including but not limited to: (i) any right to require the
Trustee, the Holders or the Company (each, a "Benefitted Party") to proceed
against the Company or any other Person or to proceed against or exhaust any
security held by a Benefitted Party at any time or to pursue any other remedy
in any Benefitted Party's power before proceeding against such Subsidiary
Guarantor; (ii) the defense of the statute of limitations in any action
hereunder or in any action for the collection of any Indebtedness or the
performance of any obligation hereby guaranteed; (iii) any defense that may
arise by reason of the incapacity, lack of authority, death or disability of
any other Person or the failure of a Benefitted Party to file or enforce a
claim against the estate (in administration, bankruptcy or any other
proceeding) of any other Person; (iv) demand, protest and notice of any kind
including but not limited to notice of the existence, creation or incurring of
any new or additional Indebtedness or obligation or of any action or non-action
on the part of such Subsidiary Guarantor, the Company, any Benefitted Party,
any creditor of such Subsidiary Guarantor, the Company or on the part of any
other Person whomsoever in connection with any Indebtedness or Obligations
hereby guaranteed; (v) any defense based upon an election of remedies by a
Benefitted Party, including but not limited to an election to proceed against
such Subsidiary Guarantor for reimbursement; (vi) any defense based upon any
statute or rule of law that provides that the obligation of a surety must be
neither larger in amount nor in other respects more burdensome than that of the
principal; (vii) any defense arising because of a Benefitted Party's election,
in any proceeding instituted under any Bankruptcy Law, of the application of
Section 1111(b)(2) under the Bankruptcy Law; (viii) any defense based on any
borrowing or grant of a security interest under Section 364 under the
Bankruptcy Law or (ix) any right to require a proceeding first against the
Company, protest, notice and all demands whatsoever. Each Subsidiary Guarantor
hereby covenants that its Subsidiary Guarantee will not be discharged except by
complete performance of all of the obligations contained in its Subsidiary
Guarantee, the Notes and this Indenture.
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(c) If any Holder or the Trustee is required by any court or
otherwise to return to either the Company or any Subsidiary Guarantor, or any
custodian, trustee, or similar official acting in relation to either the
Company or such Subsidiary Guarantor, any amount paid by the Company or such
Subsidiary Guarantor to the Trustee or such Holder, the applicable Subsidiary
Guarantee, to the extent theretofore discharged, shall be reinstated in full
force and effect. Each Subsidiary Guarantor agrees that it will not be
entitled to any right of subrogation in relation to the Holders in respect of
any obligations guaranteed hereby until payment in full of all obligations
guaranteed hereby.
(d) Each Subsidiary Guarantor further agrees that, as between
such Subsidiary Guarantor, on the one hand, and the Holders and the Trustee, on
the other hand, (i) the maturity of the obligations guaranteed hereby may be
accelerated as provided in Section 6.2 hereof for the purposes of this
Subsidiary Guarantee, notwithstanding any stay, injunction or other prohibition
preventing such acceleration as to the Company or any other obligor on the
Notes of the obligations guaranteed hereby and (ii) in the event of any
declaration of acceleration of those obligations as provided in Section 6.2
hereof, those obligations (whether or not due and payable) will forthwith
become due and payable by such Subsidiary Guarantor for the purpose of this
Subsidiary Guarantee.
SECTION 10.2 ADDITIONAL SUBSIDIARY GUARANTEES.
(a) If, after the Issue Date, (i) the Company or any of its
Restricted Subsidiaries shall (A) transfer or cause to be transferred, any
assets, businesses, divisions, real property or equipment having a fair market
or book value in excess of $1.0 million to any Restricted Subsidiary that is
not a Subsidiary Guarantor or (B) make any Investment having an aggregate fair
market or book value in excess of $1.0 million in any Restricted Subsidiary
that is not a Subsidiary Guarantor or (ii) any Restricted Subsidiary that is
not a Subsidiary Guarantor (A) shall provide a guarantee under the Credit
Facility or (B) shall own any assets or properties having an aggregate fair
market or book value in excess of $1.0 million, then the Company shall cause
such Restricted Subsidiary to execute and deliver a supplemental indenture to
this Indenture agreeing to be bound by its terms applicable to a Subsidiary
Guarantor and providing for a Subsidiary Guarantee of the Notes by such
Restricted Subsidiary, in accordance with the terms of this Indenture.
(b) The Company shall not permit any of its Restricted
Subsidiaries, other than a Subsidiary Guarantor, directly or indirectly, to (i)
incur, guarantee or secure through the granting of Liens the payment of any
Indebtedness of the Company or (ii) pledge any intercompany notes representing
obligations of any of its Restricted Subsidiaries to secure the payment of any
Indebtedness of the Company, in each case, unless the Company shall cause such
Restricted Subsidiary to execute a Subsidiary Guarantee and deliver an Opinion
of Counsel in advance in accordance with the terms of this Indenture.
SECTION 10.3 LIMITATION OF SUBSIDIARY GUARANTORS' LIABILITY.
(a) Each Subsidiary Guarantor and by its acceptance hereof,
each beneficiary hereof, hereby confirm that it is its intention that the
Subsidiary Guarantee by such Subsidiary Guarantor not constitute a fraudulent
transfer or conveyance for purposes of the Bankruptcy Law, the Uniform
Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar
federal or state law to the extent applicable to any of the Subsidiary
Guarantees. To effectuate the foregoing intention, each such person hereby
irrevocably agrees that the obligations of such Subsidiary Guarantor under its
Subsidiary Guarantee under this Article 10 shall be limited to the maximum
amount as will, after giving
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effect to all other contingent and fixed liabilities of such Subsidiary
Guarantor and after giving effect to any collections from or payments made by
or on behalf of any other Subsidiary Guarantor in respect of the obligations of
such other Subsidiary Guarantor under its Subsidiary Guarantee or pursuant to
its contribution obligations under this Indenture, result in the obligations of
such Subsidiary Guarantor under the Subsidiary Guarantee not constituting a
fraudulent conveyance or fraudulent transfer under federal or state law.
(b) For purposes of such limitations and the applicable
fraudulent conveyance laws, any indebtedness of a Subsidiary Guarantor incurred
from time to time pursuant to the Credit Facility and secured by a perfected
Lien on the assets of such Subsidiary Guarantor (assuming, for purposes of such
determination, that the incurrence of any such indebtedness and the granting of
any such security interest did not violate any such fraudulent conveyance laws)
shall be deemed, to the extent of the value of the assets subject to such Lien,
to have been incurred prior to the incurrence by such Subsidiary Guarantor of
liability under its Subsidiary Guarantee.
(c) Each beneficiary under the Subsidiary Guarantees, by
accepting the benefits hereof, confirms its intention that, in the event of a
bankruptcy, reorganization or other similar proceeding of the Company or any
Subsidiary Guarantor in which concurrent claims are made upon such Subsidiary
Guarantor hereunder, to the extent such claims will not be fully satisfied,
each such claimant with a valid claim against the Company shall be entitled to
a ratable share of all payments by such Subsidiary Guarantor in respect of such
concurrent claims.
SECTION 10.4 SUBSIDIARY GUARANTORS MAY CONSOLIDATE ETC., ON CERTAIN TERMS.
(a) No Subsidiary Guarantor may consolidate with or merge with
or into (whether or not such Subsidiary Guarantor is the surviving Person)
another Person (other than the Company or another Subsidiary Guarantor),
whether or not affiliated with such Subsidiary Guarantor, unless (i) subject to
the provisions of the following paragraph, the Person formed by or surviving
any such consolidation or merger (if other than such Subsidiary Guarantor)
shall execute and deliver a supplemental indenture to this Indenture agreeing
to be bound by its terms applicable to a Subsidiary Guarantor and providing for
a Subsidiary Guarantee of the Notes by such Person, in accordance with the
terms of this Indenture; (ii) immediately after giving effect to such
transaction, no Default or Event of Default exists; (iii) such Subsidiary
Guarantor, or any Person formed by or surviving any such consolidation or
merger, would have Consolidated Net Worth (immediately after giving effect to
such transaction), equal to or greater than the Consolidated Net Worth of such
Subsidiary Guarantor immediately preceding the transaction; (iv) the Company
would be permitted by virtue of the Company's pro forma Fixed Charge Coverage
Ratio, immediately after giving effect to such transaction, to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in Section 4.9 hereof and (v) such transaction does not violate
any of the covenants contained in Articles 4 and 5 hereof. In connection with
any consolidation or merger contemplated by this provision, the Subsidiary
Guarantor shall deliver, or cause to be delivered, to the Trustee, in form and
substance reasonably satisfactory to the Trustee, an Officers' Certificate and
an Opinion of Counsel, each stating that such consolidation or merger and the
supplemental indenture in respect thereto comply with this provision and that
all conditions precedent in this Indenture provided for relating to such
transaction or transactions have been complied with.
(b) Notwithstanding the foregoing, (i) a Subsidiary Guarantor
may consolidate with or merge with or into the Company, provided that the
surviving corporation (if other than the Company)
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shall expressly assume by supplemental indenture complying with the
requirements of this Indenture, the due and punctual payment of the principal
of, premium, if any, and interest on all of the Notes, and the due and punctual
performance and observance of all the covenants and conditions of this
Indenture to be performed by the Company and (ii) a Subsidiary Guarantor may
consolidate with or merge with or into any other Subsidiary Guarantor.
SECTION 10.5 RELEASES OF SUBSIDIARY GUARANTORS.
In the event of (i) the designation of any Subsidiary Guarantor as an
Unrestricted Subsidiary or (ii) a sale or other disposition of all or
substantially all of the properties or assets of any Subsidiary Guarantor to a
third party or an Unrestricted Subsidiary, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Subsidiary Guarantor, in either case, in a transaction or manner that does not
violate any of the covenants or other provision of this Indenture, then such
Subsidiary Guarantor (in the event of such a designation or a sale or other
disposition, by way of such a merger, consolidation or otherwise, of all of the
capital stock of such Subsidiary Guarantor) or the Person acquiring the
property (in the event of a sale or other disposition of all or substantially
all of the assets of such Subsidiary Guarantor) will be released from and
relieved of any obligations under this Indenture and its Subsidiary Guarantee,
provided that any Net Proceeds of such sale or other disposition are applied in
accordance with Section 4.10 hereof and provided, further, however, that any
such termination shall occur only to the extent that all obligations of such
Subsidiary Guarantor under all of its guarantees of, and under all of its
pledges of assets or other security interests that secure, any other
Indebtedness of the Company or its Restricted Subsidiaries shall also terminate
upon such release, sale or disposition.
SECTION 10.6 "TRUSTEE" TO INCLUDE PAYING AGENT.
In case at any time any Paying Agent other than the Trustee shall have
been appointed by the Company and be then acting hereunder, the term "Trustee"
as used in this Article 10 shall in such case (unless the context shall
otherwise require) be construed as extending to and including such Paying Agent
within its meaning as fully and for all intents and purposes as if such Paying
Agent were named in this Article 10 in place of the Trustee.
SECTION 10.7 CONTRIBUTION.
In order to provide for just and equitable contribution among the
Subsidiary Guarantors, the Subsidiary Guarantors agree, inter se, that in the
event any payment or distribution is made by any Subsidiary Guarantor (a
"Funding Guarantor") under a Subsidiary Guarantee, such Funding Guarantor shall
be entitled to a contribution from all other Subsidiary Guarantors in a pro
rata amount based on the Adjusted Net Assets (as defined below) of each
Subsidiary Guarantor (including the Funding Guarantor) for all payments,
damages and expenses incurred by that Funding Guarantor in discharging the
Company's obligations with respect to the Notes or any other Subsidiary
Guarantor's obligations with respect to such Subsidiary Guarantee. "Adjusted
Net Assets" of such Subsidiary Guarantor at any date shall mean the lesser of
the amount by which (x) the fair value of the property of such Subsidiary
Guarantor exceeds the total amount of liabilities, including, without
limitation, contingent liabilities, but excluding liabilities under the
Subsidiary Guarantee of such Subsidiary Guarantor at such date and (y) the
present fair salable value of the assets of such Subsidiary Guarantor at such
date exceeds the amount that will be required to pay the probable liability of
such Subsidiary Guarantor on its debts (after giving effect to all other fixed
and contingent liabilities incurred or assumed on such date and after giving
effect to any
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collection from any subsidiary of such Subsidiary Guarantor in respect of the
obligations of such subsidiary under the Subsidiary Guarantees), excluding debt
in respect of the Subsidiary Guarantees, as they become absolute and matured.
SECTION 10.8 EXECUTION OF SUBSIDIARY GUARANTEES.
To evidence its guarantee to each Holder of Notes, each of the
Subsidiary Guarantors hereby agree to execute its Subsidiary Guarantee in
substantially the form of Exhibit A recited to be endorsed on each Note ordered
to be authenticated and delivered by the Trustee. Each Subsidiary Guarantor
hereby agrees that its Subsidiary Guarantee set forth in Section 10.1 hereof
shall remain in full force and effect notwithstanding any failure to endorse on
each Note a notation of such Subsidiary Guarantee. Each such Subsidiary
Guarantee shall be signed on behalf of each Subsidiary Guarantor by one Officer
of such Subsidiary Guarantor who shall have been duly authorized by all
requisite corporate actions, and the delivery of such Note by the Trustee,
after the authentication thereof hereunder, shall constitute due delivery of
such Subsidiary Guarantee on behalf of such Subsidiary Guarantor. Such
signatures upon the Subsidiary Guarantee may be by manual or facsimile
signature of such Officer and may be imprinted or otherwise reproduced on the
Subsidiary Guarantee, and in case any such Officer who shall have signed the
Subsidiary Guarantee shall cease to be such Officer before the Note on which
such Subsidiary Guarantee is endorsed shall have been authenticated and
delivered by the Trustee or disposed of by the Company, such Note nevertheless
may be authenticated and delivered or disposed of as though the person who
signed the Subsidiary Guarantee had not ceased to be such officer of the
Subsidiary Guarantor.
ARTICLE 11
MISCELLANEOUS
SECTION 11.1 TRUST INDENTURE ACT CONTROLS.
If any provision of this Indenture limits, qualifies or conflicts with
the duties imposed by TIA Section 318(c), the imposed duties shall control.
SECTION 11.2 NOTICES.
Any notice or communication by the Company, any of the Subsidiary
Guarantors or the Trustee to any of the others is duly given if in writing and
delivered in person or mailed by first class mail (registered or certified,
return receipt requested), facsimile or overnight air courier guaranteeing
next-day delivery, to such other's address:
If to the Company:
Dawson Production Services, Inc.
901 N.E. Loop 410
Suite 700
San Antonio, Texas 78209
Facsimile No.: (210) 930-3345
Attention:
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With a copy to:
J. Rowland Cook
Jenkens & Gilchrist
2200 One American Center
600 Congress Avenue
Austin, Texas 78701
Facsimile No.: (512) 404-3520
If to any Subsidiary Guarantor:
c/o Dawson Production Services, Inc.
901 N.E. Loop 410
Suite 700
San Antonio, Texas 78209
Facsimile No.: (210) 930-3345
Attention:
With a copy to:
J. Rowland Cook
Jenkens & Gilchrist
2200 One American Center
600 Congress Avenue
Austin, Texas 78701
Facsimile No.: (512) 404-3520
If to the Trustee:
For payment, registration, transfer, exchange and tender of
Notes:
By hand:
U.S. Trust Company of Texas, N.A.
111 Broadway, L.L.
New York, New York 10006
Telephone: (212) 374-4056
Attention: Corporate Trust
By mail:
U.S. Trust Company of Texas, N.A.
P.O. Box 841
Cooper Station
New York, New York 10276
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For all other communications relating to the Notes:
U.S. Trust Company of Texas, N.A.
2001 Ross Avenue
Suite 2700
Dallas, Texas 75201
Telephone: (214) 754-1254
Facsimile No.: (214) 754-1303
Attention: Corporate Trust
The Company, any of the Subsidiary Guarantors or the Trustee, by notice
to the others, may designate additional or different addresses for subsequent
notices or communications.
All notices and communications (other than those sent to Holders) shall
be deemed to have been duly given: at the time delivered by hand, if personally
delivered; five Business Days after being deposited in the United States mail,
postage prepaid, if mailed; when receipt acknowledged, if sent by facsimile;
the next Business Day after timely delivery to the courier, if sent for
overnight delivery by a courier guaranteeing next-day delivery; and the second
Business Day after timely delivery to the courier, if sent for second-day
delivery by a courier guaranteeing second-day delivery.
Any notice or communication to a Holder shall be mailed by first class
U.S. mail to its address shown on the register kept by the Registrar. Any
notice or communication shall also be so mailed to any Person described in TIA
Section 313(c), to the extent required by the TIA. Failure to mail a notice
or communication to a Holder or any defect in it shall not affect its
sufficiency with respect to other Holders.
If a notice or communication is mailed in the manner provided above
within the time prescribed, it is duly given, whether or not the addressee
receives it.
If the Company mails a notice or communication to Holders, it shall mail
a copy to the Trustee and each Agent at the same time.
SECTION 11.3 COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF NOTES.
Holders may communicate pursuant to TIA Section 312(b) with other
Holders with respect to their rights under this Indenture or the Notes. The
Company, the Subsidiary Guarantors, the Trustee, the Registrar and anyone else
shall have the protection of TIA Section 312(c).
SECTION 11.4 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
Upon any request or application by the Company to the Trustee to take
any action under this Indenture, such requesting entity shall furnish to the
Trustee:
(i) an Officers' Certificate in form and substance
reasonably satisfactory to the Trustee (which shall include the
statements set forth in Section 11.5 hereof) stating that, in the
opinion of the signers, all conditions precedent and covenants, if any,
provided for in this Indenture relating to the proposed action have been
satisfied; and
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(ii) an Opinion of Counsel in form and substance
reasonably satisfactory to the Trustee (which shall include the
statements set forth in Section 11.5 hereof) stating that, in the
opinion of such counsel, all such conditions precedent and covenants
have been satisfied.
SECTION 11.5 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION.
Each certificate or opinion with respect to compliance with a condition
or covenant provided for in this Indenture (other than a certificate provided
pursuant to TIA Section 314(a)(4)) shall comply with the provisions of TIA
Section 314(e) and shall include:
(i) a statement that the Person making such certificate
or opinion has read such covenant or condition;
(ii) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(iii) a statement that, in the opinion of such Person, he
or she has made such examination or investigation as is necessary to
enable him or her to express an informed opinion as to whether or not
such covenant or condition has been satisfied; and
(iv) a statement as to whether or not, in the opinion of
such Person, such condition or covenant has been satisfied.
SECTION 11.6 RULES BY TRUSTEE AND AGENTS.
The Trustee may make reasonable rules for action by or at a meeting of
Holders. The Registrar or Paying Agent may make reasonable rules and set
reasonable requirements for its functions.
SECTION 11.7 NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND
SHAREHOLDERS.
No past, present or future director, officer, employee, incorporator or
shareholder of the Company or any Subsidiary Guarantor, as such, shall have any
liability for any obligations of the Company or such Subsidiary Guarantor under
the Notes, this Indenture or the Subsidiary Guarantees, as the case may be, or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance
of the Notes and the Subsidiary Guarantees.
SECTION 11.8 GOVERNING LAW.
THE INTERNAL LAWS OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO
CONSTRUE THIS INDENTURE, THE NOTES AND THE SUBSIDIARY GUARANTEES.
SECTION 11.9 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.
This Indenture may not be used to interpret any other indenture, loan or
debt agreement of the Company or its Subsidiaries or of any other Person. Any
such indenture, loan or debt agreement may not be used to interpret this
Indenture.
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SECTION 11.10 SUCCESSORS.
All agreements of the Company or any Subsidiary Guarantor in this
Indenture and the Notes shall bind its successors. All agreements of the
Trustee in this Indenture shall bind its successors.
SECTION 11.11 SEVERABILITY.
In case any provision in this Indenture or in the Notes shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 11.12 COUNTERPART ORIGINALS.
The parties hereto may sign any number of copies of this Indenture.
Each signed copy shall be an original, but all of them together represent the
same agreement.
SECTION 11.13 TABLE OF CONTENTS, HEADINGS, ETC.
The Table of Contents, Cross Reference Table and headings of the
Articles and Sections of this Indenture have been inserted for convenience of
reference only, are not to be considered a part of this Indenture and shall in
no way modify or restrict any of the terms or provisions hereof.
[signature page follows]
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IN WITNESS WHEREOF, the parties hereto have executed this Indenture as
of the date first written above.
DAWSON PRODUCTION SERVICES, INC.,
a Texas corporation
By:
------------------------------
Name:
Title:
[intentionally left blank]
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SUBSIDIARY GUARANTORS:
TAYLOR COMPANIES, INC.
DAWSON PRODUCTION SERVICES DE MEXICO,
S.A.
By:
------------------------------
Name:
(for each of the above-listed
Subsidiary Guarantors)
[intentionally left blank]
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U.S. TRUST COMPANY OF TEXAS, N.A., as Trustee
By:
---------------------------------------
Authorized Signatory
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EXHIBIT A
[FORM OF NOTE]
% SENIOR NOTES DUE 2007
CUSIP: 239423 AA 4
No. $
DAWSON PRODUCTION SERVICES, INC., a Texas corporation, promises to pay
to ,
or registered assigns, the principal sum of Dollars on
February 1, 2007.
Interest Payment Dates: February 1 and August 1
Record Dates: January 15 and July 15
DAWSON PRODUCTION SERVICES, INC.
By:
--------------------------------
Name:
------------------------------
Title:
------------------------------
Dated:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION:
This is one of the
Notes referred to in the
within-mentioned Indenture:
U.S. TRUST COMPANY OF TEXAS, N.A.,
as Trustee
By:
-------------------------------
Authorized Signatory
A-1
<PAGE> 76
(DAWSON PRODUCTION SERVICES, INC.)
% SENIOR NOTES DUE 2007
Unless and until it is exchanged in whole or in part for Notes in
definitive form, this Note may not be transferred except as a whole by the
Depository to a nominee of the Depository or by a nominee of the Depository to
the Depository or another nominee of the Depository or by the Depository or any
such nominee to a successor Depository or a nominee of such successor
Depository. Unless this certificate is presented by an authorized
representative of The Depository Trust Company (55 Water Street, New York, New
York) ("DTC"), to the Company or its agent for registration of transfer,
exchange or payment, and any certificate issued is registered in the name of
Cede & Co. or such other name as may be requested by an authorized
representative of DTC (and any payment is made to Cede & Co. or such other
entity as may be requested by an authorized representative of DTC), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co, has an interest
herein.(1)
Capitalized terms used herein shall have the meanings assigned to them
in the Indenture referred to below unless otherwise indicated.
1. Interest. Dawson Production Services, Inc., a Texas corporation
(the "Company"), promises to pay interest on the principal amount of this Note
at % per annum from February , 1997, until maturity. The Company shall pay
interest semi-annually on February 1 and August 1 of each year, or if any such
day is not a Business Day, on the next succeeding Business Day (each, an
"Interest Payment Date"). Interest on the Notes shall accrue from the most
recent date to which interest has been paid or, if no interest has been paid,
from the date of issuance; provided that the first Interest Payment Date shall
be August 1, 1997. The Company shall pay interest (including post-petition
interest in any proceeding under any Bankruptcy Law) on overdue principal and
premium, if any, from time to time on demand at a rate that is 1% per annum in
excess of the rate then in effect; it shall pay interest (including post-
petition interest in any proceeding under any Bankruptcy Law) on overdue
installments of interest (without regard to any applicable grace periods) from
time to time on demand at the same rate to the extent lawful. Interest will be
computed on the basis of a 360-day year of twelve 30-day months.
2. Method of Payment. The Company shall pay interest on the Notes
(except defaulted interest) to the Persons who are registered Holders of Notes
at the close of business on the January 15 or July 15 next preceding the
Interest Payment Date, even if such Notes are canceled after such record date
and on or before such Interest Payment Date, except as provided in Section 2.12
of the Indenture with respect to defaulted interest. The Notes will be payable
as to principal, premium and interest at the office or agency of the Company
maintained for such purpose within or without the City and State of New York,
or, at the option of the Company, payment of interest may be made by check
mailed to the Holders at their addresses set forth in the register of Holders,
and provided that payment by wire transfer of immediately available funds will
be required with respect to principal of, and interest and premium on, all
Global Notes and all other Notes the Holders of which shall have provided
written wire transfer instructions to the Company or the Paying Agent at least
10 Business Days prior to the applicable
- ---------------
(1) This paragraph should be included only in the Note if issued in global
form.
A-2
<PAGE> 77
payment date. Such payment shall be in such coin or currency of the United
States of America as at the time of payment is legal tender for payment of
public and private debts.
3. Paying Agent and Registrar. Initially, U.S. Trust Company of
Texas, N.A., the Trustee under the Indenture, will act as Paying Agent and
Registrar. The Company may change any Paying Agent or Registrar without notice
to any Holder. The Company or any of its Subsidiaries may act in any such
capacity.
4. Indenture and Subsidiary Guarantees. The Company issued the
Notes under an Indenture dated as of February , 1997 (the "Indenture"), among
the Company, the Subsidiary Guarantors and the Trustee. The terms of the Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code Sections
77aaa-77bbbb). The Notes are subject to all such terms, and Holders are
referred to the Indenture and such Act for a statement of such terms. The
Notes are obligations of the Company limited to $130 million in aggregate
principal amount. Payment on each Note is guaranteed on a senior basis,
jointly and severally, by the Subsidiary Guarantors pursuant to Article 10 of
the Indenture.
5. Optional Redemption.
(a) Except as set forth in subparagraph (b) of this Paragraph
5, the Company shall not have the option to redeem the Notes prior to February
1, 2002. Thereafter, the Company shall have the option to redeem the Notes, in
whole or in part, upon not less than 30 nor more than 60 days' written notice,
at the redemption prices (expressed as percentages of principal amount) set
forth below, plus accrued and unpaid interest thereon, if any, to the
applicable redemption date, if redeemed during the 12-month period beginning on
February 1 of each of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002.................................. %
2003.................................. %
2004.................................. %
2005 and thereafter................... 100.000%
</TABLE>
(b) Notwithstanding the provisions of subparagraph (a) of this
Paragraph 5, at any time on or prior to February 1, 2000, the Company may
redeem up to an aggregate of $45.5 million principal amount of Notes at a
redemption price of % of the principal amount thereof, plus accrued and unpaid
interest thereon to the redemption date, with the net proceeds of a Public
Equity Offering; provided that at least $84.5 million in aggregate principal
amount of Notes remain outstanding immediately after the occurrence of such
redemption; and, provided, further, that such redemption shall occur within 60
days of the date of the closing of such Public Equity Offering.
6. Mandatory Redemption. The Company shall not be required to make
mandatory redemption payments or sinking fund payments with respect to the
Notes.
A-3
<PAGE> 78
7. Repurchase at Option of Holder.
(a) If there is a Change of Control, the Company shall be
required to make an offer (a "Change of Control Offer") to repurchase all or
any part (equal to $1,000 or an integral multiple thereof) of each Holder's
Notes at a purchase price equal to 101% of the aggregate principal amount
thereof plus accrued and any unpaid interest thereon, if any, to the Change of
Control Payment Date (as hereinafter defined) (the "Change of Control
Payment"). Within 30 days of the occurrence of a Change of Control, the
Company shall notify the Trustee in writing of such proposed occurrence and
shall make a Change of Control Offer. Within 30 days following the occurrence
of a Change of Control, the Company shall mail a notice to each Holder setting
forth the procedures governing the Change of Control Offer as required by the
Indenture.
(b) If the Company or a Restricted Subsidiary consummates any
Asset Sales, within 10 days following each Asset Sale Trigger Date, the Company
shall commence an offer to all Holders of Notes (an "Asset Sale Offer")
pursuant to Section 3.9 of the Indenture to purchase the maximum principal
amount of Notes that may be purchased out of the Excess Proceeds at an offer
price in cash in an amount equal to 100% of the principal amount thereof plus
accrued and unpaid interest thereon, if any, to the Asset Sale Offer Purchase
Date in accordance with the procedures set forth in the Indenture. To the
extent that the aggregate amount of Notes tendered pursuant to an Asset Sale
Offer is less than the Excess Proceeds, the Company (or such Subsidiary) may
use such excess for general corporate purposes. Holders of Notes that are the
subject of an offer to purchase will receive an Asset Sale Offer from the
Company prior to any related purchase date and may elect to have such Notes
purchased by completing the form entitled "Option of Holder to Elect Purchase"
on the reverse of the Notes.
8. Notice of Redemption. Notice of redemption shall be mailed at
least 30 days but not more than 60 days before a redemption date to each Holder
whose Notes are to be redeemed at its registered address. Notes in
denominations larger than $1,000 may be redeemed in part but only in whole
multiples of $1,000, unless all of the Notes held by a Holder are to be
redeemed. On and after the redemption date interest ceases to accrue on Notes
or portions thereof called for redemption.
9. Denominations, Transfer, Exchange. The Notes are in registered
form without coupons in denominations of $1,000 and integral multiples of
$1,000. The transfer of Notes may be registered and Notes may be exchanged as
provided in the Indenture. The Registrar and the Trustee may require a Holder,
among other things, to furnish appropriate endorsements and transfer documents
and the Company may require a Holder to pay any taxes and fees required by law
or permitted by the Indenture. The Company need not exchange or register the
transfer of any Note or portion of a Note selected for redemption, except for
the unredeemed portion of any Note being redeemed in part. Also, it need not
exchange or register the transfer of any Notes for a period of 15 days before a
selection of Notes to be redeemed or during the period between a record date
and the corresponding Interest Payment Date.
10. Persons Deemed Owners. The registered Holder of a Note may be
treated as its owner for all purposes.
11. Amendment, Supplement and Waiver. Subject to certain exceptions,
the Indenture or the Notes may be amended or supplemented with the consent of
the Holders of at least a majority in aggregate principal amount of the then
outstanding Notes, and any existing default or compliance with any provision of
the Indenture or the Notes may be waived with the consent of the Holders of a
majority in aggregate principal amount of the then outstanding Notes. Without
the consent of any Holder of a
A-4
<PAGE> 79
Note, the Indenture or the Notes may be amended or supplemented to cure any
ambiguity, defect or inconsistency, to provide for uncertificated Notes in
addition to or in place of certificated Notes, to provide for the assumption of
the Company's obligations to Holders of the Notes in case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to the Holders of the Notes or that does not adversely affect the
legal rights under the Indenture of any such Holder, to secure the Notes, to
add or release any Subsidiary Guarantor pursuant to the terms of the Indenture
or to comply with the requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the TIA.
12. Defaults and Remedies. Events of Default include: (i) default
for 30 days in the payment when due of interest on the Notes; (ii) default in
payment when due of principal of or premium, if any, on the Notes when the same
becomes due and payable at maturity, upon redemption (including in connection
with an offer to purchase) or otherwise, (iii) failure by the Company to comply
with Section 4.10, 4.15 or 5.1 of the Indenture; (iv) failure by the Company
for 45 days after notice to the Company by the Trustee or the Holders of at
least 25% in aggregate principal amount of the Notes then outstanding to comply
with certain other agreements in the Indenture or the Notes; (v) default under
certain other agreements relating to Indebtedness of the Company, which default
(A) is caused by a failure to pay principal of or premium, if any, or interest
on such Indebtedness prior to the expiration of the grace period provided in
such Indebtedness on the date of such default (a "Payment Default") or (B)
results in the acceleration of such Indebtedness prior to its express maturity
and, in each case, the principal amount of any such Indebtedness, together with
the principal amount of any other such Indebtedness under which there has been
a Payment Default or the maturity of which has been so accelerated, aggregates
$5.0 million or more for any single Indebtedness or a total of $10.0 million or
more for all such Indebtedness and provided, further, that if any such default
is cured or waived or any such acceleration rescinded, or such Indebtedness is
repaid, within a period of 10 days from the continuation of such default beyond
the applicable grace period or the occurrence of such acceleration, as the case
may be, such Event of Default under the Indenture and any consequential
acceleration of the Notes shall be automatically rescinded, so long as such
recision does not conflict with any judgment or decree; (vi) certain final
judgments for the payment of money that remain undischarged for a period of 60
days; (vii) any Subsidiary Guarantee shall for any reason cease to be, or be
asserted by the Company or any Restricted Subsidiary that is a Guarantor, as
applicable, not to be, in full force and effect (except pursuant to the release
of any Subsidiary Guarantee in accordance with the Indenture) and (viii)
certain events of bankruptcy or insolvency with respect to the Company or any
of its Restricted Subsidiaries that constitutes a Significant Subsidiary or any
group of Restricted Subsidiaries that, taken together, would constitute a
Significant Subsidiary. If any Event of Default occurs and is continuing, the
Trustee or the Holders of at least 25% in aggregate principal amount of the
then outstanding Notes may declare all the Notes to be due and payable
immediately. Notwithstanding the foregoing, in the case of an Event of Default
arising from certain events of bankruptcy or insolvency with respect to the
Company, any Restricted Subsidiary that constitutes a Significant Subsidiary or
any group of Restricted Subsidiaries that, taken together, would constitute a
Significant Subsidiary, all outstanding Notes will become due and payable
without further action or notice. Holders may not enforce the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders of the Notes notice of any continuing Default or Event of
Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest. The Holders of a majority in aggregate principal amount of the Notes
then outstanding by notice to the Trustee may on behalf of the Holders of all
of the Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing
A-5
<PAGE> 80
Default or Event of Default in the payment of interest on, or the principal of,
the Notes. The Company is required to deliver to the Trustee annually a
statement regarding compliance with the Indenture, and the Company is required
upon becoming aware of any Default or Event of Default, to deliver to the
Trustee a statement specifying such Default or Event of Default.
13. Trustee Dealings with the Company. The Trustee, in its
individual or any other capacity, may make loans to, accept deposits from, and
perform services for the Company or its Affiliates, and may otherwise deal with
the Company or its Affiliates, as if it were not the Trustee.
14. No Recourse Against Others. No past, present or future director,
officer, employee, incorporator or shareholder of the Company or any Subsidiary
Guarantor, as such, shall have any liability for any obligations of the Company
or such Subsidiary Guarantor under the Notes, the Indenture or the Subsidiary
Guarantees, as the case may be, or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for the issuance of the Notes and the Subsidiary Guarantees.
15. Authentication. This Note shall not be valid until authenticated
by the manual signature of the Trustee.
16. Abbreviations. Customary abbreviations may be used in the name
of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts
to Minors Act).
17. CUSIP Numbers. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers
in notices of redemption as a convenience to Holders. No representation is
made as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
The Company shall furnish to any Holder upon written request and without
charge a copy of the Indenture. Requests may be made to:
Dawson Production Services, Inc.
901 N.E. Loop 410
Suite 700
San Antonio, Texas 78209
Facsimile No.: (210) 930-3345
Attention:
[intentionally left blank]
A-6
<PAGE> 81
[FORM OF NOTATION ON NOTE RELATING TO SUBSIDIARY GUARANTEES]
Each of the Subsidiary Guarantors under the Indenture (the "Indenture")
referred to in the Note upon which this notation is endorsed, has
unconditionally guaranteed the obligations of the Company under the Notes and
the Indenture, jointly and severally (each such guarantee being a "Subsidiary
Guarantee"), to each Holder of a Note authenticated and delivered by the
Trustee irrespective of the validity or enforceability of the Indenture, the
Notes or the obligations of the Company under the Indenture or the Notes, that:
(i) the principal of, premium, if any, and interest on the Notes shall be paid
in full when due, whether at the maturity or interest payment or mandatory
redemption date, by acceleration, call for redemption or otherwise, and
interest on the overdue principal and interest, if any, of the Notes and all
other obligations of the Company to the Holders or the Trustee under the
Indenture or the Notes shall be promptly paid in full or performed, all in
accordance with the terms of the Indenture and the Notes and (ii) in case of
any extension of time of payment or renewal of any Notes or any of such other
obligations, they shall be paid in full when due or performed in accordance
with the terms of the extension or renewal, whether at maturity, by
acceleration or otherwise. Failing payment when due of any amount so
guaranteed for whatever reason, each Subsidiary Guarantor shall be obligated to
pay the same whether or not such failure to pay has become an Event of Default
that could cause acceleration pursuant to Section 6.2 of the Indenture. Each
Subsidiary Guarantor agrees that this is a guarantee of payment, not a
guarantee of collection. Capitalized terms used herein have the meanings
assigned to them in the Indenture unless otherwise indicated, and the
obligations of the Subsidiary Guarantors pursuant to the Subsidiary Guarantees
are subject to the terms of the Indenture, to which reference is hereby made
for the precise terms thereof. The obligations of each Subsidiary Guarantor to
the Holders of Notes and to the Trustee pursuant to the Subsidiary Guarantee
and the Indenture are expressly set forth, and are senior unsecured obligations
of each such Subsidiary Guarantor to the extent and in the manner provided, in
Article 10 of the Indenture, and may be released or limited under certain
circumstances. Reference is hereby made to such Indenture for the precise
terms of the Subsidiary Guarantee therein made.
The Subsidiary Guarantees shall not be valid or obligatory for any
purpose until the certificate of authentication on the Note on which the
Subsidiary Guarantees are noted shall have been executed by the Trustee under
the Indenture by the manual signature of one of its authorized officers.
By each of the following, and any other Subsidiary Guarantor as may be
added or substituted from time to time, as Subsidiary Guarantors:
SUBSIDIARY GUARANTORS:
TAYLOR COMPANIES, INC.
DAWSON PRODUCTION SERVICE DE MEXICO,
S.A.
By:
----------------------------------
Name:
(for each of the above-listed
Subsidiary Guarantors)
A-7
<PAGE> 82
ASSIGNMENT FORM
To assign this Note, fill in the form below: (I) or (we) assign and transfer
this Note to
- --------------------------------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. no.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint
--------------------------------------------------------
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.
Date:
-----------------
Your Signature:
------------------------------
(Sign exactly as your name appears on the
face of this Note)
Signature Guarantee.
A-8
<PAGE> 83
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company pursuant
to Section 4.10 or 4.15 of the Indenture, check the box below:
[ ] Section 4.10 [ ] Section 4.15
If you want to elect to have only part of the Note purchased by the
Company pursuant to Section 4.10 or Section 4.15 of the Indenture, state the
amount you elect to have purchased:
$
------------
Date:
----------------
Your Signature:
------------------------------
(Sign exactly as your name appears on the
face of this Note)
Signature Guarantee.
A-9
<PAGE> 84
SCHEDULE OF EXCHANGES FOR DEFINITIVE NOTES (2)
The following exchanges of a part of this Global Note for Definitive
Notes have been made:
<TABLE>
<CAPTION>
Amount of Signature of
decrease in Principal Amount of authorized
Principal Amount of increase this Global Note signatory of
Date of Amount of this in Principal Amount following such Trustee or Note
Exchange Global Note of this Global Note decrease (or increase) Custodian
--------------- ---------------------- -------------------------- -------------------------- ----------------------
<S> <C> <C> <C> <C>
</TABLE>
- ---------------
(2) This should be included only if the Note is issued in global form.
A-10
<PAGE> 1
[JENKENS & GILCHRIST LETTERHEAD]
February 11, 1997
Dawson Production Services, Inc.
Suite 700
901 Northeast Loop 410
San Antonio, Texas 78209
Re: Opinion as to Legality of Organization and Certain Securities
of Dawson Production Services, Inc.
Gentlemen:
We have acted as counsel to Dawson Production Services, Inc., a Texas
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended ("Securities Act") of (i)_____% Senior Notes
due 2007 (the "Notes") in the principal amount of $110,000,000 to be offered by
the Company in an underwritten public offering, (ii) 4,600,000 shares of the
Company's Common Stock, $.01 par value, (including 600,000 shares subject to
the Underwriters' over-allotment option) to be offered by the Company in an
underwritten public offering (the "Company Shares") and (iii) 1,387,828 shares
of the Company's Common Stock, $.01 par value, to be offered by certain selling
shareholders of the Company in an underwritten public offering (the "Selling
Shareholder Shares, and collectively with the "Company Shares" to be referred
to herein as the "Shares"). The terms and conditions of the offering of the
Notes are described in a prospectus (the "Debt Prospectus") and the terms and
conditions of the offering of the Shares are contained in a separate prospectus
(the "Equity Prospectus"), both contained in a registration statement (File No.
333-19413), as amended (the "Registration Statement") on Form S-1 filed on
February 13, 1997 with the Securities and Exchange Commission (the
"Commission").
We have examined (i) the Debt Prospectus, the Equity Prospectus and the
Registration Statement, (ii) a form of Indenture proposed to be entered into
between the Company and U.S. Trust Co. of Texas, N.A., as Trustee, pertaining
to the Notes, (iii) the Articles of Incorporation of the Company, as amended,
and the Bylaws and corporate proceedings of the Company, and (iv) such other
records, documents, opinions and instruments as in our judgment are necessary
or appropriate to enable us to render this opinion. We have made such legal and
factual determination as we have deemed relevant.
<PAGE> 2
Dawson Production Services, Inc.
February 11, 1997
Page 2
Based upon the foregoing, and having regard for such legal considerations
as we deem relevant, we are of the opinion that:
1. the Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Texas;
2. when the Indenture has been duly executed and delivered by the
officers authorized by the Board of Directors of the Company or a duly
authorized committee thereof to execute and deliver the same, it will
constitute a legal, valid and binding instrument of the Company, enforceable
against the Company in accordance with its terms;
3. the Notes are duly authorized, and when executed and
authenticated in the manner set forth in the Indenture and when sold, issued to
and paid for by the Underwriters, will be legal, valid and binding obligations
of the Company, entitled to the benefits provided by the Indenture, and
enforceable in accordance with their terms, except as enforcement may be limited
by bankruptcy, insolvency, fraudulent conveyance, reorganization, general
equitable principles and other laws relating to or affecting the enforcement of
creditors' rights; and
4. the Shares are duly authorized, and when issued to and paid for
by the Underwriters will be validly issued, fully paid and non-assessable
securities of the Company.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to reference being made to our firm under the
caption "Legal Matters" in the Debt Prospectus and the Equity Prospectus. We
also consent to the filing of this opinion with state securities officials in
connection with the registration of the Notes and the Shares under applicable
state securities laws. In giving this consent, this firm does not thereby admit
that it comes into the category of persons whose consent is required under
Section 7 of the Securities Act or the rules and regulations of the Commission
promulgated thereunder.
Sincerely yours,
JENKINS & GILCHRIST,
A Professional Corporation
By:
---------------------------------
J. Rowland Cook
Authorized Signatory on
Behalf of the Corporation
<PAGE> 1
EXHIBIT 12.1
DAWSON PRODUCTION SERVICES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MARCH 31, SEPTEMBER 30,
-------------------------------------------------- -------------------------
1996 1996
PRO PRO
1992 1993 1994 1995 1996 FORMA 1995 1996 FORMA
---- ------ ------ ------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income (loss) before income
taxes......................... $495 $ 893 $1,321 $1,742 $2,082 $(4,770) $1,046 $3,529 $(1,041)
Add back:
Interest expense................. 352 301 282 789 1,848 12,610 953 296 6,305
Amortization of debt issuance
cost.......................... -- -- -- -- -- 460 -- -- 230
Portion of rent expense
representative of interest
factor........................ 36 41 48 58 84 84 39 62 62
---- ------ ------ ------ ------ ------- ------ ------ -------
Earnings as adjusted............... $883 $1,235 $1,651 $2,589 $4,014 $ 8,384 $2,038 $3,887 $ 5,556
==== ====== ====== ====== ====== ======= ====== ====== =======
Fixed charges:
Interest expense................. $352 $ 301 $ 282 $ 789 $1,848 $12,610 $ 953 $ 296 $ 6,305
Amortization of debt issuance
cost.......................... -- -- -- -- -- 460 -- -- 230
Portion of rent expense
representative of interest
factor........................ 36 41 48 58 84 84 39 62 62
---- ------ ------ ------ ------ ------- ------ ------ -------
$388 $ 342 $ 330 $ 847 $1,932 $13,154 $ 992 $ 358 $ 6,597
==== ====== ====== ====== ====== ======= ====== ====== =======
Ratio of earnings to fixed
charges.......................... 2.3x 3.6x 5.0x 3.1x 2.1x 0.6x 2.1x 10.9x 0.8x
==== ====== ====== ====== ====== ======= ====== ====== =======
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION OF
NAME INCORPORATION
---- ---------------
<S> <C>
Taylor Companies, Inc....................................... Texas
Dawson Production Services de Mexico, S.A. ................. Mexico
</TABLE>
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
To the Stockholders, Members, and Owners
Taylor Acquisition Group
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ CHAPMAN, WILLIAMS & CO.
CHAPMAN, WILLIAMS & CO.
Carthage, Texas
February 12, 1997
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report dated February 26, 1996 (except for the second paragraph of Note 1 as
to which the date is December 23, 1996), and which includes an explanatory
paragraph regarding a change in the accounting for income taxes in 1993, on our
audits of the financial statements of the U.S. Land-Based Well Servicing
Operations of Pride Petroleum Services, Inc. as of December 31, 1995 and 1994
and for each of the three years in the period ended December 31, 1995. We also
consent to the reference to our firm under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Houston, Texas
February 12, 1997
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our firm) included in or made a part of this
Registration Statement.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
San Antonio, Texas
February 12, 1997
<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM T-1
STATEMENT OF ELIGIBILITY AND QUALIFICATION UNDER THE TRUST
INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A
TRUSTEE PURSUANT TO SECTION 305(b)(2) ______
------------------
U.S. TRUST COMPANY OF TEXAS, N.A.
(Exact name of trustee as specified in its charter)
75-2353745
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)
2001 Ross Avenue, Suite 2700 75201-2936
Dallas, Texas (Zip Code)
(Address of trustee's
principal executive offices)
Compliance Officer
U.S. Trust Company of Texas, N.A.
2001 Ross Avenue, Suite 2700
Dallas, Texas 75201-2936
(214) 754-1200
(Name, address and telephone number of agent for service)
------------------
Dawson Production Services, Inc.
(Exact name of obligor as specified in its charter)
Texas 74-2231546
(State of other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
901 N.E. Loop 410, Suite 700
San Antonio, Texas 78209
(Address of principal executive office) (Zip Code)
<PAGE> 2
Taylor Companies, Inc.
(Exact name of guarantor as specified in its charter)
Texas 75-2445316
(State of other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
901 N.E. Loop 410, Suite 700
San Antonio, Texas 78209
(Address of principal executive offices) (Zip Code)
Dawson Production Services de Mexico, S.A. de C.V.
(Exact name of guarantor as specified in its charter)
Mexico
(State of other jurisdiction of
incorporation or organization)
Poza Rica #830
Col. Resendez Fierro
Reynosa, Tamaulipas, Mexico 88600
(Address of principal executive offices) (Zip Code)
--------------------
_____% Senior Notes due 2007
(Title of the indenture securities)
================================================================================
<PAGE> 3
GENERAL
1. General Information.
Furnish the following information as to the Trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Federal Reserve Bank of Dallas (11th District), Dallas, Texas
(Board of Governors of the Federal Reserve System)
Federal Deposit Insurance Corporation, Dallas, Texas
The Office of the Comptroller of the Currency, Dallas, Texas
(b) Whether it is authorized to exercise corporate trust powers.
The Trustee is authorized to exercise corporate trust powers.
2. Affiliations with Obligor and Underwriters.
If the obligor or any underwriter for the obligor is an affiliate of
the Trustee, describe each such affiliation.
None.
3. Voting Securities of the Trustee.
Furnish the following information as to each class of voting
securities of the Trustee:
As of December 31, 1997
- --------------------------------------------------------------------------------
Col A. Col B.
- --------------------------------------------------------------------------------
Title of Class Amount Outstanding
- --------------------------------------------------------------------------------
Capital Stock - par value $100 per share 5,000 shares
4. Trusteeships under Other Indentures.
Not Applicable
5. Interlocking Directorates and Similar Relationships with the Obligor
or Underwriters.
Not Applicable
<PAGE> 4
6. Voting Securities of the Trustee Owned by the Obligor or its
Officials.
Not Applicable
7. Voting Securities of the Trustee Owned by Underwriters or their
Officials.
Not Applicable
8. Securities of the Obligor Owned or Held by the Trustee.
Not Applicable
9. Securities of Underwriters Owned or Held by the Trustee.
Not Applicable
10. Ownership or Holdings by the Trustee of Voting Securities of Certain
Affiliates or Security Holders of the Obligor.
Not Applicable
11. Ownership or Holdings by the Trustee of any Securities of a Person
Owning 50 Percent or More of the Voting Securities of the Obligor.
Not Applicable
12. Indebtedness of the Obligor to the Trustee.
Not Applicable
13. Defaults by the Obligor.
Not Applicable
14. Affiliations with the Underwriters.
Not Applicable
15. Foreign Trustee.
Not Applicable
16. List of Exhibits.
T-1.1 - A copy of the Articles of Association of U.S. Trust
Company of Texas, N.A.; incorporated herein by
reference to Exhibit T-1.1 filed with Form T-1
Statement, Registration No. 22-21897.
<PAGE> 5
16. (con't.)
T-1.2 - A copy of the certificate of authority of the Trustee
to commence business; incorporated herein by
reference to Exhibit T-1.2 filed with Form T-1
Statement, Registration No. 22-21897.
T-1.3 - A copy of the authorization of the Trustee to
exercise corporate trust powers; incorporated herein
by reference to Exhibit T-1.3 filed with Form T-1
Statement, Registration No. 22-21897.
T-1.4 - A copy of the By-laws of the U.S. Trust Company of
Texas, N.A., as amended to date; incorporated herein
by reference to Exhibit T-1.4 filed with Form T-1
Statement, Registration No. 22-21897.
T-1.6 - The consent of the Trustee required by Section 321(b)
of the Trust Indenture Act of 1939.
T-1.7 - A copy of the latest report of condition of the
Trustee published pursuant to law or the requirements
of its supervising or examining authority.
NOTE
As of December 31, 1996 the Trustee had 5,000 shares of Capital Stock
outstanding, all of which are owned by U.S. T.L.P.O. Corp. As of December 31,
1996 U.S. T.L.P.O. Corp. had 35 shares of Capital Stock outstanding, all of
which are owned by U.S. Trust Corporation. U.S. Trust Corporation had
outstanding 9,752,781 shares of $5 par value Common Stock as of December 31,
1996.
The term "Trustee" in Items 2, 5, 6, 7, 8, 9, 10 and 11 refers to each of U.S.
Trust Company of Texas, N.A., U.S. T.L.P.O. Corp. and U.S. Trust Corporation.
Inasmuch as this Form T-1 is filed prior to the ascertainment by the Trustee of
all the facts on which to base responsive answers to Items 2, 5, 6, 7, 9, 10
and 11, the answers to said Items are based upon incomplete information. Items
2, 5, 6, 7, 9, 10 and 11 may, however, be considered correct unless amended by
an amendment to this Form T-1.
In answering any items in this Statement of Eligibility and Qualification which
relates to matters peculiarly within the knowledge of the obligors or their
directors or officers, or an underwriter for the obligors, the Trustee has
relied upon information furnished to it by the obligors and will rely on
information to be furnished by obligors or such underwriter, and the Trustee
disclaims responsibility for the accuracy or completeness of such information.
<PAGE> 6
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the Trustee,
U.S. Trust Company of Texas, N.A., a national banking association organized
under the laws of the United States of America, has duly caused this statement
of eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of Dallas, and State of Texas on the
11th day of February, 1997.
U.S. Trust Company of Texas, N.A.,
Trustee
By: /s/ JOHN C. STOHLMANN
----------------------------------
John C. Stohlmann
Vice President
<PAGE> 7
EXHIBIT T-1-6
CONSENT OF TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of
1939 as amended in connection with the proposed issue of Dawson Production
Services, Inc. % Senior Notes due 2007, we hereby consent that reports of
examination by Federal, State, Territorial or District authorities may be
furnished by such authorities to the Securities and Exchange Commission upon
request therefore.
U.S. Trust Company of Texas, N.A.
By: /s/ JOHN C. STOHLMANN
----------------------------------
John C. Stohlmann
Vice President
<PAGE> 8
<TABLE>
<S> <C>
Board of Governors of the Federal Reserve System
OMB Number: 7100-0036
Federal Deposit Insurance Corporation
OMB Number: 3064-0052
Office of the Comptroller of the Currency
OMB Number: 1557-0081
Federal Financial Institutions Examination Council Expires March 31, 1999
- -------------------------------------------------------------------------------------------------------------------------
1
[LOGO] Please Refer to Page i,
Table of Contents, for
the required disclosure
of estimated burden
- -------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED REPORTS OF CONDITION AND INCOME FOR
A BANK WITH DOMESTIC OFFICES ONLY AND
TOTAL ASSETS OF LESS THAN $100 MILLION - FFIEC 034
REPORT AT THE CLOSE OF BUSINESS DECEMBER 31, 1996 (961231)
-----------
(RCRI 9999)
This report is required by law: 12 U.S.C. Section 324 (State This report form is to be filed by banks with
member banks); 12 U.S.C. Section 1817 (State nonmember domestic offices only. Banks with branches and
banks); and 12 U.S.C. Section 161 (National banks). consolidated subsidiaries in U.S. territories and
possessions, Edge or Agreement subsidiaries, foreign
branches, consolidated foreign subsidiaries, or
International Banking Facilities must file FFIEC 031.
- -------------------------------------------------------------------------------------------------------------------------
NOTE: The Reports of Condition and Income must be signed by The Reports of Condition and Income are to be
an authorized officer and the Report of Condition must be prepared in accordance with Federal Regulatory
attested to by not less than two directors (trustees) for authority instructions. NOTE: These instructions may
State nonmember banks and three directors for State member in some cases differ from generally accepted
and National banks. accounting principles.
I, Alfred B. Childs, SVP & Cashier We, the undersigned directors (trustees), attest to
-------------------------------------------------------- the correctness of this Report of Condition
Name and Title of Officer Authorized to Sign Report (including the supporting schedules) and declare that
it has been examined by us and to the best of our
of the named bank do hereby declare that these Reports of knowledge and belief has been prepared in conformance
Condition and Income (including the supporting schedules) with the instructions issued by the appropriate
have been prepared in conformance with the instructions Federal regulatory authority and is true and correct.
issued by the appropriate Federal regulatory authority and
are true to the best of my knowledge and belief. /s/ ILLEGIBLE
-----------------------------------------------------
Director (Trustee)
/s/ ALFRED B. CHILDS
- ------------------------------------------------------------- /s/ ILLEGIBLE
Signature of Officer Authorized to Sign Report -----------------------------------------------------
Director (Trustee)
1/15/97 /s/ ILLEGIBLE
- ------------------------------------------------------------- -----------------------------------------------------
Date of Signature Director (Trustee)
- -------------------------------------------------------------------------------------------------------------------------
FOR BANKS SUBMITTING HARD COPY REPORT FORMS:
STATE MEMBER BANKS: Return the original and one copy to the NATIONAL BANKS: Return the original only in the
appropriate Federal Reserve District Bank. special return address envelope provided. If express
mail is used in lieu of the special return address
STATE NONMEMBER BANKS: Return the original only in the envelope, return the original only to the FDIC, c/o
special return address envelope provided. If express mail is Quality Data Systems, 2127 Espey Court, Suite 204,
used in lieu of the special return address envelope, return Crofton, MD 21114.
the original only to the FDIC, c/o Quality Data Systems,
2127 Espey Court, Suite 204, Crofton, MD 21114.
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FDIC Certificate Number 12-31-96
----------- Banks should affix the address label in this space.
(RCRI 9050)
U. S. TRUST COMPANY OF TEXAS, NATIONAL
-----------------------------------------------------
Legal Title of Bank (TEXT 9010)
2001 ROSS AVENUE , SUITE 2700
-----------------------------------------------------
City (TEXT 9130)
DALLAS, TX 75201
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State Abbrev. (TEXT 9200) ZIP Code (TEXT 9220)
Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency
</TABLE>
<PAGE> 9
<TABLE>
<S> <C> <C> <C>
U.S. TRUST COMPANY OF TEXAS, N.A. Call Date: 12/31/96 ST-BK: 6797 FFIEC 034
2100 ROSS AVENUE, SUITE 2700 Page RC-1
DALLAS, TX 75201 Vendor ID: D CERT: 33217
9
Transit Number: 11101765
</TABLE>
Consolidated Report of Condition for Insured
Commercial and State-Chartered Savings Banks for December 31, 1996
Schedules are to be reported in thousands of dollars. Unless otherwise
indicated, report the amount outstanding as of the last business day of the
quarter.
Schedule RC - Balance Sheet
<TABLE>
<CAPTION>
C100 <-
Dollar Amounts in Thousands
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
RCON
----
1. Cash and balances due from depository institutions:
a. Noninterest-bearing balances and currency and coin(1, 2).............................. 0081 326 1.a
b. Interest bearing balances(3).......................................................... 0071 173 1.b
2. Securities:
a. Held-to-maturity securities (from Schedule RC-B, column A)............................ 1754 0 2.a
b. Available-for-sale securities (from Schedule RC-B, column D).......................... 1773 101,385 2.b
3. Federal funds sold and securities purchased under agreements to resell:
a. Federal funds sold(4)................................................................. 0276 0 3.a
b. Securities purchased under agreements to resell(5).................................... 0277 0 3.b
RCON
-----
4. Loans and lease financing receivables:
a. Loans and leases, net of unearned income (from Schedule RC-C)... 2122 42,103 4.a
b. LESS: Allowance for loan and lease losses....................... 3123 481 4.b
c. LESS: Allocated transfer risk reserve........................... 3128 0 4.c
d. Loans and leases, net of unearned income, allowance, and reserve (item 4.a minus 4.b
and 4.c).............................................................................. 2125 41,622 4.d
5. Trading assets ............................................................................ 3545 0 5.
6. Premises and fixed assets (including capitalized leases)................................... 2145 753 6.
7. Other real estate owned (from Schedule RC-M)............................................... 2150 0 7.
8. Investments in unconsolidated subsidiaries and associated companies (from Schedule
RC-M)...................................................................................... 2130 0 8.
9. Customers' liability to this bank on acceptances outstanding............................... 2155 0 9.
10. Intangible assets (from Schedule RC-M)..................................................... 2143 0 10.
11. Other assets (from Schedule RC-F).......................................................... 2160 1,511 11.
12. Total assets (sum of items 1 through 11)................................................... 2170 145,789 12.a
b. Losses deferred pursuant to 12 U.S.C. 1823(i)........................................... 0306 0 12.b
c. Total assets and losses deferred pursuant to 12 U.S.C. 1823(i)
(sum of items 12.a and 12.b)......................................................... 0307 145,789 12.c
</TABLE>
- ---------------
(1) Includes cash items in process of collection and unposted debits.
(2) The amount reported in this item must be greater than or equal to the sum
of Schedule RC-M, items 3.a and 3.b
(3) Includes time certificates of deposit not held for trading.
(4) Report 'term federal funds sold' in Schedule RC, Item 4.a, 'Loans and
leases, net of unearned income', and in Schedule RC-C part I.
(5) Report securities purchased under agreements to resell that involve the
receipt of immediately available funds and mature in one business day or
roll over under a continuing contract in Schedule RC, Item 3.a, 'Federal
funds sold.'
<PAGE> 10
<TABLE>
<S> <C> <C> <C>
U.S. TRUST COMPANY OF TEXAS, N.A. Call Date: 12/31/96 ST-BK: 6797 FFIEC 034
2100 ROSS AVENUE, SUITE 2700 Page RC-2
DALLAS, TX 75201 Vendor ID: D CERT: 33217
10
Transit Number: 11101765
</TABLE>
Schedule RC -- Continued
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
- ---------------------------------------------------------------------------------------------------------------------
RCON
----
<S> <C> <C> <C>
LIABILITIES
13. Deposits:
a. In domestic offices (sum of totals of columns A and C from Schedule RC-E..... 2200 118,129 13.a
RCON
----
(1) Noninterest-bearing(1)............................. 6631 12,689 13.a.1
(2) Interest-bearing................................... 6636 105,440 13.a.2
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs................
(1) Noninterest-bearing.......................................................
(2) Interest-bearing..........................................................
14. Federal funds purchased and securities sold under agreements to repurchase:
a. Federal funds purchased(2)................................................... 0278 0 14.a
b. Securities sold under agreements to repurchase(3)............................ 0279 0 14.b
15. a. Demand notes issued to the U.S. Treasury..................................... 2840 0 15.a
b. Trading liabilities.......................................................... 3548 0 15.b
16. Other borrowed money:
a. With a remaining maturity of one year or less................................ 2332 0 16.a
b. With a remaining maturity of more than one year.............................. 2333 6,000 16.b
17. Mortgage indebtedness and obligations under capitalized leases................. 2910 0 17.
18. Bank's liability on acceptances executed and outstanding....................... 2920 0 18.
19. Subordinated notes and debentures.............................................. 3200 0 19.
20. Other liabilities (from Schedule RC-G)......................................... 2930 1,575 20.
21. Total liabilities (sum of items 13 through 20)................................. 2948 125,704 21.
22. Limited-life preferred stock and related surplus............................... 3282 0 22.
EQUITY CAPITAL
23. Perpetual preferred stock and related surplus.................................. 3838 7,000 23.
24. Common stock................................................................... 3230 500 24.
25. Surplus (exclude all surplus related to preferred stock)....................... 3839 8,384 25.
26. a. Undivided profits and capital reserves...................................... 3632 4,045 26.a
b. Net unrealized holding gains (losses) on available-for-sale securities...... 8434 136 26.b
27. Cumulative foreign currency translation adjustments............................ 3210
28. a. Total equity capital (sum of items 23 through 27)........................... 3210 20,065 28.a
b. Losses deferred pursuant to 12 U.S.C. 1823(i)............................... 0306 0 28.b
c. Total equity capital and losses deferred pursuant to 12 U.S.C. 1823(i)
(sum of items 28.a and 28.b)................................................ 3558 20,065 28.c
29. Total liabilities, limited-life preferred stock, and equity capital, and losses
deferred pursuant to 12 U.S.C. 1823(i) (sum of items 21, 22 and 28.c).......... 2257 145,769 29.
MEMORANDUM
To be reported only with the March Report of Condition.
1. Indicate in the box at the right the number of the statement below that best
describes the most comprehensive level of auditing work performed for the bank
by independent external auditors as of any date during 1995.................... 6724 N/A M.1
1 = Independent audit of the bank conducted in accordance with generally accepted auditing standards by a certified
public accounting firm which submits a report on the bank
2 = Independent audit of the bank's parent holding company conducted in accordance with generally accepted auditing
standards by a certified public accounting firm which submits a report on the consolidated holding company (but
not on the bank separately)
3 = Directors' examination of the bank conducted in accordance with generally accepted auditing standards by a
certified public accounting firm (may be required by state chartering authority)
4 = Directors' examination of the bank performed by other external auditors (may be required by state chartering
authority)
5 = Review of the bank's financial statements by external auditors
6 = Compilation of the bank's financial statements by external auditors
7 = Other audit procedures (excluding tax preparation work)
8 = No external audit work
</TABLE>
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(1) Includes total demand deposits and noninterest-bearing time and savings
deposits.
(2) Report 'term federal funds purchased' in Schedule RC, item 16, 'Other
borrowed money.'
(3) Report securities sold under agreements to repurchase that involve the
receipt of immediately available funds and mature in one business day or
roll over under a continuing contract in Schedule RC, item 14.a, 'Federal
funds purchased.'
