SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant[x]
Filed by a Party other than the Registrant[ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
DI INDUSTRIES, INC.
(Name of Registrant as Specified In Its Charter)
DI INDUSTRIES, INC.
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[x] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
Common Stock
2) Aggregate number of securities to which transaction applies:
79,274,756
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-111: $0.57
4) Proposed maximum aggregate value of transaction: $45,186,611
5) Total fee paid: $9,037.32
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid: N/A
2) Form, Schedule or Registration Statement No.: N/A
3) Filing Party: N/A
4) Date Filed: N/A
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(1) Estimated pursuant to Rule 0-11(c) and (a)(4), based on the book value of
the securities to be received by the registrant upon consummation of the
Mergers.
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[LOGO GRAPHIC OMITTED]
DI INDUSTRIES, INC.
450 GEARS ROAD, SUITE 625
HOUSTON, TEXAS 77067
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO THE SHAREHOLDERS OF DI INDUSTRIES, INC.:
The Annual Meeting of Shareholders of DI Industries, Inc., a Texas
corporation ( the "Company"), will be held at the Greenspoint Club, 16925
Northchase, Houston, Texas, 77060 on August 27, 1996 at 9:00 a.m., local time,
and any adjournment or postponement thereof, to consider the following matters,
which are described in more detail in the accompanying Proxy Statement:
1. To adopt and approve the Agreement and Plan of Merger, as amended (the
"Rig Merger Agreement"), dated as of May 7, 1996, by and among the
Company, DI Merger Sub, Inc., a newly formed Delaware corporation and
a wholly owned subsidiary of the Company ("Merger Sub"), Roy T.
Oliver, Jr., Mike L. Mullen, R.T. Oliver, Inc., an Oklahoma
corporation ("RTO"), and Land Rig Acquisition Corporation, a Delaware
corporation ("LRAC"), and all of the transactions set forth or
contemplated therein, pursuant to which (1) RTO and Merger Sub will
merge with and into LRAC, which shall be the surviving corporation
(the "Rig Merger"), (2) each outstanding share of common stock of RTO
will be automatically converted into 22,714.770 shares, or an
aggregate of 11,357,385 shares (subject to adjustment), of the common
stock, $0.10 par value per share, of the Company (the "Company Common
Stock"), or, as to up to 20% of the RTO stock, the right to receive
$14,363.50 per share in cash, (3) each outstanding share of common
stock of LRAC will be automatically converted into 28,178.193 shares,
or an aggregate of 28,178,193 shares (subject to adjustment), of the
Company Common Stock or, as to up to 20% of the LRAC stock, the right
to receive $17,818.25 per share in cash, (4) the shareholders of LRAC
and RTO will receive warrants to purchase up to 1,720,000 shares of
Company Common Stock, exercisable only upon the occurrence of certain
events, and (5) LRAC will become a wholly-owned subsidiary of the
Company.
2. To adopt and approve the Agreement and Plan of Merger, as amended (the
"Somerset Merger Agreement"), dated as of May 7, 1996, by and among
the Company and Somerset Investment Corp., a Texas corporation
("Somerset"), and all of the transactions set forth or contemplated
therein, pursuant to which (1) Somerset will merge with and into the
Company, which will be the surviving corporation (the "Somerset
Merger") (the Rig Merger and the Somerset Merger collectively, the
"Mergers"), (2) each outstanding share of common stock of Somerset
will be automatically converted into 39,535.578 shares, or an
aggregate of 39,535,578 shares (subject to adjustment), of the Company
Common Stock, (3) the shareholders of Somerset will receive warrants
to purchase up to 1,720,000 shares of Company Common Stock,
exercisable only upon the occurrence of certain events, and (4) the
Company's Articles of Incorporation shall be amended to incorporate
all of the amendments contemplated by the Charter Amendments (as
defined hereinafter).
3. To elect five (5) members to the Board of Directors of the Company.
4. To adopt and approve the 1996 Employee Stock Option Plan (the "Stock
Option Plan") and the reservation of an aggregate of 7,000,000 shares
of Company Common Stock for issuance thereunder.
5. To adopt and approve an amendment to the Company's Articles of
Incorporation changing the name of the Company to
"_______________________" (the "Name Change Amendment"), which charter
amendment shall be automatically effected upon the approval and
ultimate consummation of the Somerset Merger.
6. To adopt and approve an amendment to the Company's Articles of
Incorporation increasing the number of authorized shares of Company
Common Stock from 75,000,000 shares to 300,000,000 shares (the "Share
Authorization Amendment"), which charter amendment shall be
automatically effected upon the approval and ultimate consummation of
the Somerset Merger.
7. To adopt and approve an amendment to the Company's Articles of
Incorporation providing that any action requiring the consent of more
than a majority of the issued and outstanding stock of the Company
under the Texas Business Corporation Act shall only require the
consent of a majority of the issued and outstanding stock of the
Company (the "Voting Amendment") (the Name Change Amendment, Share
Authorization Amendment and Voting Amendment are sometimes herein
referred to collectively as the "Charter Amendments"), which Charter
Amendments shall be automatically effected upon the approval and
ultimate consummation of the Somerset Merger.
8. To consider and transact such other business as may properly come
before the Annual Meeting or any adjournments or postponements
thereof.
Copies of the Rig Merger Agreement, the Somerset Merger Agreement
(collectively, the "Merger Agreements") and Stock Option Plan are attached to
the Proxy Statement as Appendices A, B and C, respectively.
The Board of Directors of the Company has fixed the close of business on
July 15, 1996, as the record date for determination of shareholders entitled to
notice of and to vote at the Annual Meeting and any adjournments or
postponements thereof. The Bylaws of the Company require that the holders of a
majority of the outstanding shares of the Company Common Stock entitled to vote
be represented in person or by proxy at the meeting to constitute a quorum for
the transaction of business. The affirmative vote of the holders of two-thirds
of the outstanding shares of the Company Common Stock is required to approve
each of the Somerset Merger Agreement and each of the Charter Amendments.
Approval of the Rig Merger Agreement and Stock Option Plan requires the
affirmative vote of a majority, and the election of directors requires the
affirmative vote of a plurality, of shares represented at a meeting at which a
quorum is present.
THE BOARD OF DIRECTORS OF THE COMPANY BELIEVES THAT THE MERGERS, EACH OF
THE CHARTER AMENDMENTS AND THE STOCK OPTION PLAN ARE IN THE BEST INTERESTS OF
THE COMPANY AND ITS SHAREHOLDERS AND RECOMMENDS THAT YOU VOTE FOR APPROVAL OF
THE MERGERS, EACH OF THE CHARTER AMENDMENTS AND THE STOCK OPTION PLAN, AND THE
ELECTION OF THE NOMINEES FOR DIRECTOR NAMED IN THE ACCOMPANYING PROXY STATEMENT.
Your vote is important. Even if you plan to attend the Annual Meeting in
person, we request that you sign and return the enclosed proxy card and thus
ensure that your shares of the Company Common Stock will be represented at the
Annual Meeting if you are unable to attend. When a proxy is returned properly
executed, the shares represented thereby will be voted in accordance with the
indicated instructions. However, if no choice has been specified, the shares
will be voted for the Merger Agreements and the other proposals. If you do
attend the Annual Meeting and wish to vote in person, you may withdraw your
proxy and vote in person.
By Order of the Board of Directors,
Houston, Texas /s/ IVAN SIEM
August __ , 1996 IVAR SIEM, CHAIRMAN OF THE BOARD,
PRESIDENT & CHIEF EXECUTIVE OFFICER
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DI INDUSTRIES, INC.
450 GEARS ROAD, SUITE 625
HOUSTON, TEXAS 77067
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PROXY STATEMENT
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This Proxy Statement (this "Proxy Statement") and the enclosed proxy
card are being furnished to the shareholders of DI Industries, Inc., a Texas
corporation (the "Company"), in connection with the solicitation of proxies by
the Board of Directors of the Company (the "Board of Directors") for use at the
Annual Meeting of Shareholders to be held at 9:00 a.m., local time, on August
27, 1996, at the Greenspoint Club, 16925 Northchase, Houston, Texas 77060, and
at any adjournments or postponements thereof (the "Annual Meeting"). This Proxy
Statement also serves as the Annual Report to Shareholders for the year ended
December 31, 1995.
At the Annual Meeting, the holders (the "Shareholders") of shares of
the common stock, par value $0.10 per share, of the Company (the "Company Common
Stock") will be asked to consider and vote on (1) a proposal to adopt and
approve the Agreement and Plan of Merger, as amended (the "Rig Merger
Agreement"), dated as of May 7, 1996, by and among the Company, DI Merger Sub,
Inc., a newly formed Delaware corporation and a wholly owned subsidiary of the
Company ("Merger Sub"), Roy T. Oliver, Jr. ("Oliver"), Mike L. Mullen
("Mullen"), R.T. Oliver, Inc., an Oklahoma corporation ("RTO"), and Land Rig
Acquisition Corporation, a Delaware corporation ("LRAC"), pursuant to which (a)
RTO and Merger Sub will merge with and into LRAC, which shall be the surviving
corporation (the "Rig Merger"), (b) each outstanding share of common stock of
RTO (the "RTO Shares") will be automatically converted into 22,714.770 shares
(subject to adjustment) of the Company Common Stock or, as to up to 20% of the
RTO Shares, the right to receive $14,363.50 per share in cash, (c) each
outstanding share of common stock of LRAC (the "LRAC Shares") will be
automatically converted into 28,178.193 shares (subject to adjustment) of the
Company Common Stock or, as to up to 20% of the LRAC Shares, the right to
receive $17,818.25 per share in cash, (d) the shareholders of LRAC and RTO (the
"LRAC/RTO Shareholders") will receive warrants to purchase up to 1,720,000
shares of Company Common Stock, exercisable only upon the occurrence of certain
events, and (e) LRAC will become a wholly owned subsidiary of the Company, and
(2) a proposal to adopt and approve the Agreement and Plan of Merger, as amended
(the "Somerset Merger Agreement"), dated as of May 7, 1996, by and between the
Company and Somerset Investment Corp., a Texas corporation ("Somerset"), and all
of the transactions set forth or contemplated therein, pursuant to which (a)
Somerset will merge with and into the Company, which shall be the surviving
corporation (the "Somerset Merger") (the Rig Merger and the Somerset Merger
collectively, the "Mergers"), (b) each outstanding share of common stock of
Somerset (the "Somerset Shares") will be automatically converted into 39,535.578
shares (subject to adjustment) of the Company Common Stock, (c) the shareholders
of Somerset will receive warrants to purchase up to 1,720,000 shares of Company
Common Stock, exercisable only upon the occurrence of certain events, and (d)
the Company's Articles of Incorporation shall be amended to incorporate the
Charter Amendments (as defined hereinafter).
The Shareholders will also be asked: (1) to consider and vote on a
proposal to adopt and approve an amendment to the Company's Articles of
Incorporation changing the name of the Company to "________," (the "Name Change
Amendment") (2) to consider and vote on a proposal to adopt and approve an
amendment to the Company's Articles of Incorporation increasing the number of
authorized shares of the Company Common Stock from 75,000,000 shares to
300,000,000 shares (the "Authorized Share Amendment"), and (3) to consider and
vote on a proposal to adopt and approve an amendment to the Company's Articles
of Incorporation providing
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that any action requiring the consent of more than a majority of the issued and
outstanding stock of the Company under the Texas Business Corporation Act (the
"TBCA") shall only require the consent of majority of the issued and outstanding
stock of the Company, including any amendment to Articles of Incorporation or a
merger, consolidation or sale, lease or disposition of all or substantially all
of the assets of the Company (the "Voting Amendment") (the Name Change
Amendment, Authorized Share Amendment and Voting Amendment are sometimes
referred to collectively as the "Charter Amendments"). Each of the Charter
Amendments will be automatically effected upon the approval and ultimate
consummation of the Somerset Merger.
Additionally, the Shareholders will be asked (1) to elect five
members to the Board of Directors of the Company and (2) to consider and vote on
a proposal to adopt the 1996 Employee Stock Option Plan (the "Stock Option
Plan") and the reservation of an aggregate of 7,000,000 shares of the Company
Common Stock for issuance thereunder.
Copies of the Rig Merger Agreement, the Somerset Merger Agreement
(collectively, the "Merger Agreements") and the Stock Option Plan are attached
to this Proxy Statement as Appendices A, B and C, respectively. This Proxy
Statement and the accompanying form of proxy are first being mailed to the
Shareholders on or about August ___, 1996.
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NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN CONNECTION
WITH THE SOLICITATION OF PROXIES MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY OTHER PERSON.
THE TRANSACTIONS SET FORTH HEREIN 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 FAIRNESS OR MERITS OF THIS TRANSACTION NOR UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DELIVERY OF THIS PROXY STATEMENT SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE
AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
A COPY OF THE COMPANY'S CURRENT ANNUAL REPORT ON FORM 10-KA AS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") MAY BE OBTAINED FROM THE
COMPANY WITHOUT CHARGE BY WRITING TO THE CORPORATE SECRETARY AT THE CORPORATE
OFFICES LOCATED AT 450 GEARS ROAD, SUITE 625, HOUSTON, TEXAS 77067.
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TABLE OF CONTENTS
SUMMARY ................................................................... 7
The Companies and the Transactions .................................. 7
The Annual Meeting .................................................. 8
Stock Ownership of Management and Affiliates ........................ 9
The Rig Merger and the Rig Merger Agreement ......................... 9
The Somerset Merger and the Somerset Merger Agreement ............... 10
The Charter Amendments .............................................. 11
The Stock Option Plan ............................................... 12
Recommendation of the Board of Directors ............................ 12
Accounting Treatment ................................................ 12
No Solicitation ..................................................... 12
No Appraisal Rights ................................................. 13
Dividend Policies ................................................... 13
Listing of Shares; Market and Market Price .......................... 13
Certain Relationships and Related Transactions ...................... 14
Recent Developments ................................................. 15
Selected Historical and Unaudited Pro Forma
Combined Financial Information .................................... 16
THE ANNUAL MEETING ........................................................ 18
General ............................................................. 18
Matters to be Considered at the Annual Meeting ...................... 18
Voting at the Annual Meeting; Record Date ........................... 18
Voting of Proxies ................................................... 19
Revocability of Proxies ............................................. 19
Solicitation of Proxies ............................................. 20
THE MERGERS ............................................................... 20
Effect of the Mergers ............................................... 20
Background of the Mergers ........................................... 22
Valuation of the Mergers ............................................ 24
Dependence on Merger Rigs ........................................... 25
Reasons for the Mergers/Recommendations of the
Board of Directors ................................................ 25
Certain Relationships and Related Transactions ...................... 26
Accounting Treatment ................................................ 27
Restrictions on Resales/Registration Rights ......................... 27
No Solicitation ..................................................... 27
No Appraisal Rights ................................................. 28
THE RIG MERGER AGREEMENT .................................................. 28
Effective Time of the Merger ........................................ 28
Manner and Basis of Converting Shares ............................... 28
Rig Shadow Warrants ................................................. 29
Conditions to the Merger ............................................ 30
Representations and Warranties ...................................... 30
Certain Covenants; Conduct of Business Prior
to the Merger ..................................................... 30
Termination or Amendment of the Merger Agreement .................... 31
Expenses ............................................................ 31
Indemnification ..................................................... 31
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THE SOMERSET MERGER AGREEMENT
Effective Time of the Merger ........................................ 32
Manner and Basis of Converting Shares ............................... 32
Somerset Shadow Warrants ............................................ 33
Conditions to the Merger ............................................ 33
Representations and Warranties ...................................... 34
Certain Covenants; Conduct of Business Prior to the Merger .......... 34
Termination or Amendment of the Merger Agreement .................... 34
Expenses ............................................................ 35
Indemnification ..................................................... 35
Charter Amendments .................................................. 35
SHAREHOLDERS' AGREEMENT ................................................... 35
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES ..................... 36
MARKET PRICES, DIVIDEND AND DISTRIBUTIONS ................................. 37
DI INDUSTRIES, INC. UNAUDITED
PRO FORMA FINANCIAL INFORMATION ....................................... 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ......................... 43
Financial Condition and Liquidity ................................... 43
Results of Operations ............................................... 44
Comparison of the Three Months Ended
March 31, 1996 and 1995 ........................................... 45
Comparison of the Fiscal Year Ended December 31, 1995 to
the Twelve Months Ended December 31, 1994 ......................... 46
Comparison of the Nine Month Period Ended
December 31, 1994 and 1993 ........................................ 49
Income Taxes and Other .............................................. 51
Industry Trends ..................................................... 51
BUSINESS OF THE COMPANY ................................................... 52
Discontinued and Suspended Operations ............................... 53
Industry Segments ................................................... 53
Industry Conditions ................................................. 53
Contract Drilling and Workover ...................................... 54
General ............................................................. 59
Litigation .......................................................... 62
THE RIG COMPANIES ......................................................... 62
SOMERSET .................................................................. 63
ELECTION OF DIRECTORS ..................................................... 63
General Information ................................................. 63
Recommendation of the Board of Directors ............................ 63
Directors and Nominees for Director ................................. 64
Executive Officers .................................................. 65
Compensation of Directors ........................................... 66
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Compensation of Executive Officers .................................. 66
Board Committees .................................................... 67
Report of the Compensation Committee and Stock Option Committee
on Executive Compensation ....................................... 67
Stock Performance Graph ............................................. 69
Section 16(a) Compliance ............................................ 70
APPROVAL OF THE STOCK OPTION PLAN ......................................... 71
Summary of the Stock Option Plan .................................... 71
Federal Income Tax Consequences ..................................... 72
Board Recommendation ................................................ 72
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT ........................................................ 72
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............................ 74
PROPOSAL TO AMEND ARTICLES OF INCORPORATION:
NAME CHANGE AMENDMENT ..................................................... 75
Background .......................................................... 75
Proposed Amendment .................................................. 75
Recommendations and Required Affirmative Vote ....................... 75
PROPOSAL TO AMEND ARTICLES OF INCORPORATION:
SHARE AUTHORIZATION AMENDMENT ............................................. 75
Background .......................................................... 75
Proposed Amendment .................................................. 76
Recommendations and Required Affirmative Vote ....................... 76
PROPOSAL TO AMEND ARTICLES OF INCORPORATION:
VOTING AMENDMENT .......................................................... 76
Background .......................................................... 76
Proposed Amendment .................................................. 77
Recommendations and Required Affirmative Vote ....................... 77
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY ............................... 77
General ............................................................. 77
Company Common Stock ................................................ 78
Company Preferred Stock ............................................. 78
Rights to Purchase Preferred Stock .................................. 78
Stock Option Plans .................................................. 78
Stockholder Vote Required to Approve Certain
Business Combinations ............................................. 78
Transfer Agent and Registrar ........................................ 79
INDEPENDENT AUDITORS ...................................................... 79
FORWARD LOOKING STATEMENTS ................................................ 79
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SHAREHOLDER PROPOSALS ..................................................... 79
AVAILABLE INFORMATION ..................................................... 79
APPENDIX A
Agreement and Plan of Merger Among DI Industries, Inc., DI Merger Sub,
Inc., Roy T. Oliver, Jr., Mike L. Mullen, R.T. Oliver, Inc. and Land Rig
Acquisition Corp., Amendment Dated June 11, 1996 to the Agreement and Plan
of Merger Among DI Industries, Inc., DI Merger Sub, Inc. Roy T. Oliver,
Jr., Mike Mullen, R.T. Oliver, Inc., and Land Rig Acquisition Corp., and
Second Amendment Dated July ___, 1996 to the Agreement and Plan of Merger
Among DI Industries, Inc., DI Merger Sub, Inc., Roy T. Oliver, Jr., Mike
L. Muller, R.T. Oliver, Inc. and Land Rig Acquisition Corp.
APPENDIX B
Agreement and Plan of Merger Between DI Industries, Inc. and Somerset
Investment Corp., Amendment Dated June 11, 1996 to the Agreement and Plan
of Merger between DI Industries, Inc. and Somerset Investment Corp., and
Second Amendment Dated July __, 1996 to the Agreement and Plan of Merger
Among DI Industries, Inc., DI Merger Sub, Inc., Roy T. Oliver, Jr., Mike
L. Mullen, R. T. Oliver, Inc. and Land Rig Acquisition Corp.
APPENDIX C
DI Industries, Inc. 1996 Employee Stock Option Plan.
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SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN
THIS PROXY STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION AND FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS PROXY
STATEMENT. ALL REFERENCES TO THE "COMPANY" IN THE PROXY STATEMENT REFER TO DI
INDUSTRIES, INC. AND ITS SUBSIDIARIES, UNLESS THE CONTEXT OTHERWISE REQUIRES.
THE COMPANIES AND THE TRANSACTIONS
THE COMPANY. DI Industries, Inc., a Texas corporation formed in
1980, is engaged primarily in the business of providing onshore contract
drilling services to the oil and gas industry. The Company conducts domestic
operations in Texas, Louisiana, Oklahoma, Ohio, Pennsylvania, New York,
Michigan, Montana, Utah, North Dakota, and other states; and currently has
international operations in Argentina, Venezuela and Mexico. The Company
believes that it is the second largest operator of United States-based land
drilling rigs in the United States, based on number of rigs owned. The principal
office of the Company is located at 450 Gears Road, Suite 625, Houston, Texas
77067, and its telephone number is (713) 874-0202.
RTO. R.T. Oliver, Inc. is a privately owned Oklahoma corporation
based in Oklahoma City. RTO's assets consist of partial interests in 10 units of
an 18-unit fleet of all electric ("SCR") land drilling rigs (the "Merger Rigs")
which are capable of drilling to depths of 20,000 feet or greater, including
five 3,000 horsepower and nine 2,000 horsepower rigs. The sole shareholder of
RTO is Oliver. Oliver has been an active participant in the used oil field
service equipment market for over 15 years. Oliver is also a nominee for the
Board of Directors. The offices of RTO are located at 6601 S.W. 29th Street,
Oklahoma City, Oklahoma 73179 and its telephone number is (405) 745-4137.
LRAC. Land Rig Acquisition Corporation is a privately owned
Delaware corporation based in Dallas, Texas. LRAC owns whole or partial
interests in all of the Merger Rigs. The interests of RTO and LRAC constitute
all of the ownership interests in all of the Merger Rigs. The principal
shareholders of LRAC are certain corporations and partnerships owned or
controlled by Oliver or Mullen. Mullen has also been an active participant in
the used oil field service equipment market for over 15 years. The offices of
LRAC are located at 8411 Preston Road, Suite 730, Dallas, Texas 75225 and its
telephone number is (214) 692-6690.
MERGER RIGS. The Merger Rigs have been held in stacked mode in
locations in Texas, Oklahoma and Wyoming, in some cases for extended periods of
time. The Company believes that the Merger Rigs are generally in good condition;
however, they will require refurbishment and drill pipe strings and related
equipment before they are in serviceable condition for domestic operations. More
extensive modifications will be required to put the Merger Rigs into condition
for certain types of international operations. The Company estimates that it
would need to spend between $400,000 and $750,000 per rig to place this fleet in
"drill ready" condition for domestic service, and a minimum of $750,000 per rig
for international service. Each rig will also require a 12,000 to 30,000 foot
string of drill pipe (with collars) at a cost of approximately $30 per foot
before it can be placed in service.
The Merger Rigs have been appraised recently by Superior
Auctioneers and Marketing, Inc., an experienced used oil field equipment
appraiser, at $23,700,000 on a "orderly liquidation value" basis. See "The
Mergers - Valuation of the Mergers."
SOMERSET. Somerset Investment Corp. is a Texas corporation which
has been recently formed to receive a $25,000,000 capital contribution from its
sole shareholders, Somerset Drilling Associates, L.L.C., a Delaware limited
liability company ("SDA"), and Somerset Capital Partners, a New York general
partnership ("SCP"), (SDA and SCP collectively, the "Somerset Shareholders") and
to participate in the Somerset Merger. The Somerset Shareholders have secured
the financing for the $25,000,000 capital contribution to Somerset. Messrs.
William R. Ziegler and Steven A. Webster, both affiliates of Somerset, are also
nominees for the Board of Directors. The
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offices of Somerset are located at 69 Delaware Avenue, Buffalo, New York 14202,
and its telephone number is (716) 842-1042.
USE OF PROCEEDS OF SOMERSET MERGER. As a result of the Somerset
Merger, the Company will obtain approximately $25,000,000 in cash. Of such
amount, (1) up to $5,000,000 will be used to make any payments required by
reason of exercise of the Cash Option (as defined below) under the Rig Merger
Agreement, (2) a minimum of $11,000,000 is expected to be utilized for rig
refurbishment and to purchase needed drill pipe strings and other accessory
equipment over an estimated two year period, (3) up to $600,000 will be used to
pay the costs and expenses incurred in connection with the Mergers, including
the reimbursement of certain expenses of LRAC, RTO and Somerset in accordance
with the Merger Agreements, the Investment Monitoring Fee (as defined
hereinafter) and the Company's legal fees and other registration expenses and
(4) the remainder will be used for working capital. Pending application of such
proceeds, the Company intends to invest such proceeds in short-term
interest-bearing securities. The Company may, in its discretion, decide in the
future to use such proceeds for such other purposes as the needs of the Company
dictate.
COMPANY STRATEGY. In early 1996, the Company began implementing a
new strategy which involves making significant changes to the Company's
organization, focusing the Company's activities on higher margin markets and
altering the Company's legal structure to provide a more efficient operating
structure. The proposed Mergers represent a significant step in accomplishing
the Company's new strategy in that the 18 ultra deep drilling rigs and the
capital to refurbish them will enable the Company to focus on higher margin
markets where drilling projects are of a longer duration than the Company's
current markets.
THE ANNUAL MEETING
DATE, TIME AND PLACE. The Annual Meeting will be held at 9:00 a.m.
local time, on August 27, 1996, at the Greenspoint Club, 16925 Northchase,
Houston, Texas 77060.
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM. Holders of record of
the Company Common Stock at the close of business on July 15, 1996 (the "Record
Date") are entitled to notice of and to vote at the Annual Meeting. At such
date, there were 38,836,378 shares of Company Common Stock outstanding. Each
share will be entitled to one vote on each matter to be acted upon or which may
properly come before the Annual Meeting. The presence, in person or by proxy, of
the holders of a majority of the outstanding shares of Company Common Stock
entitled to vote at the Annual Meeting is necessary to constitute a quorum for
the transaction of business at the Annual Meeting. Shares of Company Common
Stock represented by properly executed proxies received at or prior to the
Annual Meeting which have not been revoked will be voted in accordance with the
instructions indicated thereon. If no instructions are indicated on a properly
executed proxy, such proxy will be voted FOR approval and adoption of the Merger
Agreements and all of the other proposals.
PURPOSE OF THE ANNUAL MEETING. The purpose of the Annual Meeting
is to consider and vote upon the following: (1) a proposal to adopt and approve
the Rig Merger Agreement and the transactions set forth or contemplated therein,
(2) a proposal to adopt and approve the Somerset Merger Agreement and the
transactions set forth or contemplated therein, (3) the election of five members
to the Board of Directors of the Company, (4) a proposal to adopt and approve
the Stock Option Plan, and to reserve for issuance 7,000,000 shares of Company
Common Stock thereunder, (5) a proposal to adopt and approve the Name Change
Amendment, (6) a proposal to adopt and approve the Share Authorization
Amendment, and (7) a proposal to adopt and approve the Voting Amendment; and to
transact such other business as may properly come before the Annual Meeting.
Each of the Charter Amendments shall be automatically effected upon the approval
and ultimate consummation of the Somerset Merger.
VOTE REQUIRED. The adoption and approval of the Somerset Merger
Agreement and each of the Charter Amendments will each require the affirmative
vote of the holders of two-thirds of the total number of shares of
-8-
Company Common Stock outstanding and entitled to vote thereon. Adoption and
approval of the Rig Merger Agreement and the Stock Option Plan will require the
affirmative vote of a majority of the shares represented at the meeting,
provided a quorum exists. The election of directors will require a plurality of
votes represented at the meeting.
See "The Annual Meeting."
STOCK OWNERSHIP OF MANAGEMENT AND AFFILIATES
As of the Record Date, the executive officers and directors of the
Company and their affiliates beneficially owned, in the aggregate, 10,432,405
shares of the Company Common Stock, representing approximately 26.9% of the
outstanding shares of the Company Common Stock. The Company has been advised
that executive officers, directors and their affiliates holding 10,430,105
shares, or 26.9% of the outstanding Company Common Stock, intend to vote all of
their shares in favor of approval of the Merger Agreements and the other
proposals. See "Security Ownership of Certain Beneficial Owners and Management."
THE RIG MERGER AND THE RIG MERGER AGREEMENT
EFFECT OF THE RIG MERGER. Upon consummation of the transactions
contemplated by the Rig Merger Agreement, (1) RTO and Merger Sub will be merged
with and into LRAC, which will be the surviving corporation, and (2) subject to
the exercise of the Cash Option, (i) each of the RTO Shares will be converted
into the right to receive 22,714.770 shares of Company Common Stock, or an
aggregate of 11,357,385 shares of Company Common Stock (subject to adjustment),
and (ii) each of the LRAC Shares will be converted into the right to receive
28,178.193 shares of Company Common Stock, or an aggregate of 28,178,193 shares
of Company Common Stock (subject to adjustment). The foregoing exchange ratios
are based on the 38,836,378 shares of Company Common Stock issued and
outstanding on the Record Date, and the 699,200 shares of Company Common Stock
subject to options issued by the Company, excluding the Dillard Option (as
defined hereinafter), and outstanding on the Record Date. In the event the
number of shares of Company Common Stock which are issued or subject to options
as of the Effective Time is greater or less than the amount specified in the
immediately preceding sentence, the number of shares of Company Common Stock
issuable to the LRAC/RTO Shareholders pursuant to the Rig Merger will be
increased or decreased by a number of shares of Company Common Stock equal to
such difference. The LRAC/RTO Shareholders have the option (the "Cash Option")
to receive up to an aggregate of $5,000,000 in cash in lieu of up to 20% of the
aggregate number of shares of Company Common Stock issuable in the Rig Merger.
In addition, the LRAC/RTO Shareholders will receive warrants to purchase up to
1,720,000 shares of Company Common Stock, exercisable only in the event that the
issued and outstanding Series A Convertible Redeemable Preferred Stock of the
Company (the "Series A Preferred Stock") is converted into Company Common Stock
or the Dillard Option is exercised, and, in such event, only with respect to an
equivalent number of shares as are subject to such conversion or exercise. Such
warrants (the "Rig Shadow Warrants") will be exercisable at the conversion price
or option price (as applicable) at which the shares of Series A Preferred Stock
are converted or the Dillard Option is exercised. The Series A Preferred Stock
is convertible at $1.25 per share and the Dillard Option, to the extent
exercisable, is exercisable at $1.00 per share. The maximum number of shares of
Company Common Stock issuable in the Rig Merger represents approximately
one-third of the number of shares of Company Common Stock that the Company
anticipates will be outstanding immediately after the Effective Time. See "The
Mergers - Effect of the Mergers."
CONDITIONS TO THE RIG MERGER. The obligations of each of the
Company, RTO and LRAC to consummate the Rig Merger are subject to the
satisfaction of certain conditions, including, among others (1) obtaining
approval of the Shareholders, (2) the Somerset Merger becoming effective, and
(3) a registration statement on Form S-3 covering the resale of the shares of
Company Common Stock issued pursuant to the Rig Merger shall have been declared
and remain effective. None of the conditions listed in (1) or (2) may be waived
without the consent of the
-9-
other parties to the Rig Merger and, as of the date hereof, the other parties to
the Rig Merger have indicated that they will not waive any of such conditions.
See "The Rig Merger Agreement - Conditions to the Merger."
EFFECTIVE TIME OF THE RIG MERGER. The Rig Merger will become
effective as promptly as practicable after the approval of the Shareholders has
been obtained and all other conditions to consummation of the Rig Merger have
been satisfied or waived (the "Effective Time"). See "The Rig Merger Agreement -
Effective Time of the Merger."
TERMINATION OF THE RIG MERGER AGREEMENT. The Rig Merger Agreement
may be terminated and the Rig Merger abandoned at any time prior to the
Effective Time, before or after the approval of the Rig Merger by the
Shareholders, at the option of either the Company, RTO or LRAC, if the Rig
Merger has not been consummated by October 31, 1996, and prior to such time upon
the occurrence of certain other events. See "The Rig Merger Agreement -
Termination or Amendment of the Merger Agreement."
TERMINATION FEE. In the event of any termination of the Rig Merger
Agreement as a result of the failure to obtain the required approval of the
Shareholders or if there has been a material breach of any of the
representations, warranties, or covenants by the Company which has not been
cured within twenty business days following receipt by the Company of notice of
such breach, the Company has agreed to pay to LRAC and RTO an amount equal to
all of the expenses incurred by LRAC and RTO in connection with the negotiation
and preparation of the Rig Merger Agreement, plus the sum of $500,000 in the
case of a termination as a result of the Company's breach or $250,000 in the
case of the failure to obtain the approval of the Shareholders. If the Rig
Merger is not consummated for any reason other than as a result of the material
breach of LRAC or RTO of any of their representations, covenants, or agreements
and if, prior to December 31, 1996, the Company or the Shareholders publicly
announce, enter into a letter of intent relating to, enter into a definitive
agreement providing for, or consummate, a merger, sale of assets, sale of shares
of capital stock or similar transaction involving the Company (a "Company
Acquisition Transaction"), the Company agrees to pay to LRAC and RTO an amount
equal to 33.3 percent of the difference between the consideration paid in the
Company Acquisition Transaction and $30,000,000, subject to adjustment in the
event that the Company Acquisition Transaction involves less than all of the
outstanding securities or assets of the Company. See "The Rig Merger Agreement -
Termination or Amendment of the Merger Agreement."
APPROVAL BY THE LRAC/RTO SHAREHOLDERS. The LRAC/RTO Shareholders
have unanimously approved the Rig Merger Agreement and the Rig Merger.
THE SOMERSET MERGER AND THE SOMERSET MERGER AGREEMENT
EFFECT OF THE SOMERSET MERGER. Upon consummation of the
transactions contemplated by the Somerset Merger Agreement, (1) Somerset will be
merged with and into the Company, which will be the surviving corporation, (2)
each of the Somerset Shares will be converted into the right to receive
39,535.578 shares of the Company Common Stock, or an aggregate of 39,535,578
shares of Company Common Stock (subject to adjustment), and (3) the Company's
Articles of Incorporation shall be amended to incorporate each of the amendments
contemplated by the Charter Amendments. The foregoing exchange ratio is based on
the 38,836,378 shares of Company Common Stock issued and outstanding on the
Record Date, and the 699,200 shares of Company Common Stock subject to options
issued by the Company, excluding the Dillard Option, and outstanding on the
Record Date. In the event the number of shares of Company Common Stock which are
issued or subject to options as of the Effective Time is greater or less than
the amount specified in the immediately preceding sentence, the number of shares
of Company Common Stock issuable to the Somerset Shareholders pursuant to the
Somerset Merger will be increased or decreased by a number of shares of Company
Common Stock equal to such difference. The Somerset Shareholders will also
receive warrants to purchase up to 1,720,000 shares of the Company Common Stock
exercisable only in the event that the issued and outstanding Series A Preferred
Stock is converted into Company Common Stock or the Dillard Option is exercised,
and, in such event, only with respect to an equivalent
-10-
number of shares as are subject to such conversion or exercise. Such warrants
(the "Somerset Shadow Warrants") will be exercisable at the conversion price or
option price (as applicable) at which the Series A Preferred Stock is converted
or the Dillard Option is exercised. The Series A Preferred Stock is convertible
at $1.25 per share and the Dillard Option, to the extent exercisable, is
exercisable at $1.00 per share. The maximum number of shares of Company Common
Stock issuable in the Somerset Merger to the Somerset Shareholders represents
approximately one-third of the number of shares of Company Common Stock that the
Company anticipates will be outstanding immediately after the Effective Time.
See "The Mergers - Effect of the Mergers."
CONDITIONS TO THE MERGER. The obligations of each of the Company
and Somerset to consummate the Somerset Merger are subject to the satisfaction
of certain conditions, including, among others (1) obtaining approval of the
Shareholders, (2) the Rig Merger becoming effective, and (3) a registration
statement on Form S-3 covering the resale of the shares of Company Common Stock
issued pursuant to the Somerset Merger shall have been declared and remain
effective. None of the conditions listed in (1) or (2) may be waived without the
consent of Somerset and, as of the date hereof, Somerset has indicated that it
will not waive any of such conditions. See "The Somerset Merger Agreement -
Conditions to the Merger."
EFFECTIVE TIME OF THE MERGER. The Somerset Merger will become
effective as promptly as practicable after the approval of the Shareholders has
been obtained and all other conditions to consummation of the Somerset Merger
have been satisfied or waived.
TERMINATION OF THE SOMERSET MERGER AGREEMENT. The Somerset Merger
Agreement may be terminated and the Somerset Merger abandoned at any time prior
to the Effective Time, before or after the approval by the Shareholders, at the
option of either the Company or Somerset, if the Somerset Merger has not been
consummated by October 31, 1996, and prior to such time upon the occurrence of
certain other events. See "The Somerset Merger Agreement - Termination or
Amendment of the Merger Agreement."
TERMINATION FEE. In the event of any termination of the Somerset
Merger Agreement as a result of the failure to obtain the required approval of
the Shareholders or if there has been a material breach of any of the
representations, warranties, or covenants by the Company which has not been
cured within twenty days following receipt by the Company of notice of such
breach, the Company has agreed to pay to Somerset an amount equal to all of the
expenses incurred by Somerset in connection with the negotiation and preparation
of the Somerset Merger Agreement, plus the sum of $500,000 in the case of a
termination as a result of the Company's breach or $250,000 in the case of the
failure to obtain the approval of the Shareholders. If the Somerset Merger is
not consummated for any reason other than as a result of the material breach of
Somerset of any of their representations, covenants, or agreements and if, prior
to December 31, 1996, the Company or the Shareholders publicly announce, enter
into a letter of intent relating to, enter into a definitive agreement providing
for, or consummate, a Company Acquisition Transaction, the Company agrees to pay
to Somerset an amount equal to 33.3 percent of the difference between the
consideration paid in the Company Acquisition Transaction and $30,000,000,
subject to adjustment in the event that the Company Acquisition Transaction
involves less than all of the outstanding securities or assets of the Company.
See "The Somerset Merger Agreement - Termination or Amendment of the Merger
Agreement."
APPROVAL BY THE SOMERSET SHAREHOLDERS. The Somerset Shareholders
have unanimously approved the Somerset Merger Agreement and the Somerset Merger.
CHARTER AMENDMENTS. The adoption of the Somerset Merger Agreement
by the Shareholders and the filing of the Articles of Merger necessary to
consummate the Somerset Merger will cause each of the Charter Amendments to be
adopted without any further action required by the Shareholders.
-11-
THE CHARTER AMENDMENTS
The Shareholders will also be asked to separately consider and
vote on a proposal to adopt and approve (i) the Name Change Amendment, which
will amend the Articles of Incorporation of the Company to change the name of
the Company to "________," (ii) the Share Authorization Amendment which will
amend the Articles of Incorporation of the Company to increase the number of
authorized shares of the Company Common Stock from 75,000,000 shares to
300,000,000 shares, and (iii) the Voting Amendment which will amend the Articles
of Incorporation of the Company to provide that any action requiring the consent
of more than a majority of the issued and outstanding stock of the Company under
the TBCA shall only require the consent of majority of the issued and
outstanding stock of the Company.
Each of the Charter Amendments shall be automatically effected
upon the approval and ultimate consummation of the Somerset Merger.
THE STOCK OPTION PLAN
The Stock Option Plan provides for the issuance of options with
respect to up to 7,000,000 shares of the Company Common Stock to persons
employed by the Company in order to secure for the Company and the Shareholders
the benefits that flow from providing certain employees with the incentive to
further the business of the Company inherent in ownership of the Company Common
Stock. See "Approval of the Stock Option Plan."
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS HAS APPROVED THE MERGER AGREEMENTS AND
RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENTS AND THE
MERGERS BY THE SHAREHOLDERS. The Board of Directors believes that the terms of
the Mergers are fair to and in the best interest of the Company and the
Shareholders. For a discussion of the factors considered by the Board of
Directors in reaching its decision, see "Mergers - Reasons for the Mergers;
Recommendation of the Board of Directors."
THE BOARD OF DIRECTORS HAS DECLARED THE NAME CHANGE AMENDMENT
ADVISABLE AND BELIEVES THAT IT IS IN THE BEST INTERESTS OF THE COMPANY AND THE
SHAREHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
THE SHAREHOLDERS VOTE FOR THE NAME CHANGE AMENDMENT. For a discussion of the
factors considered by the Board of Directors in reaching its decision with
respect to the Name Change Amendment, see "Proposal to Amend Articles of
Incorporation: Name Change Amendment."
THE BOARD OF DIRECTORS HAS DECLARED THE SHARE AUTHORIZATION
AMENDMENT ADVISABLE AND BELIEVES THAT IT IS IN THE BEST INTERESTS OF THE COMPANY
AND THE SHAREHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT THE SHAREHOLDERS VOTE FOR THE SHARE AUTHORIZATION AMENDMENT. For a
discussion of the factors considered by the Board of Directors in reaching its
decision with respect to the Share Authorization Amendment, see "Proposal to
Amend Articles of Incorporation: Share Authorization Amendment."
THE BOARD OF DIRECTORS HAS DECLARED THE VOTING AMENDMENT ADVISABLE
AND BELIEVES THAT IT IS IN THE BEST INTERESTS OF THE COMPANY AND THE
SHAREHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
THE SHAREHOLDERS VOTE FOR THE VOTING AMENDMENT. For a discussion of the factors
considered by the Board of Directors in reaching its decision with respect to
the Voting Amendment, see "Proposal to Amend Articles of Incorporation: Voting
Amendment."
THE BOARD OF DIRECTORS HAS DECLARED THE STOCK OPTION PLAN
ADVISABLE AND BELIEVES IT IS IN THE BEST INTERESTS OF THE COMPANY AND THE
SHAREHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
THE SHAREHOLDERS VOTE FOR THE STOCK OPTION PLAN. For a discussion of the factors
considered
-12-
by the Board of Directors in reaching its decision, see "Approval of the Stock
Option Plan - Board Recommendation."
ACCOUNTING TREATMENT
The Rig Merger is expected to be accounted for as a "purchase" and
the Somerset Merger is expected to be accounted for as a "stock issuance" for
financial accounting purposes. See "The Mergers - Accounting Treatment."
NO SOLICITATION
The Merger Agreements provide that the Company may, directly or
indirectly, furnish information and access to any corporation, partnership,
person, or other entity or group pursuant to confidentiality agreements, only in
response to unsolicited requests therefor, and may participate in discussions
and negotiate with such entity or group concerning any Company Acquisition
Transaction, only if such entity or group has submitted a written proposal to
the Board of Directors relating to any such transaction and the Board of
Directors by a majority vote determines in its good faith judgment, based as to
legal matters on the written opinion of legal counsel, that failing to take such
action would constitute a breach of the Board of Directors' fiduciary duty. The
Board of Directors is required to provide a copy of any such written proposal
and legal opinion to Somerset, LRAC and RTO immediately after receipt thereof
and to thereafter keep each of them promptly advised of any development with
respect thereto. The Merger Agreements further provide that neither the Company
or any of its affiliates, nor any of its or their respective officers,
directors, employees, representatives or agents, shall, directly or indirectly,
encourage, solicit, participate in or initiate discussions or negotiations with,
or provide any information to, any corporation, partnership, person or other
entity or group (other than Somerset, LRAC or RTO, or any affiliate, associate
or designee of Somerset, LRAC or RTO, or as contemplated by the Merger
Agreements) concerning a Company Acquisition Transaction; provided, however,
that nothing in the Merger Agreements prevents the Board of Directors from
taking, and disclosing to the Shareholders, a position contemplated by Rules
14d-9 and 14e-2 promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") with regard to any tender offer; provided, further,
that the Board of Directors is not permitted to recommend that the Shareholders
tender their shares of Company Common Stock in connection with any such tender
offer unless the Board of Directors by a majority vote determines in its good
faith judgment, based as to legal matters on the written opinion of legal
counsel, that failing to take such action would constitute a breach of the
fiduciary duties of the directors.
See "The Mergers - No Solicitation."
NO APPRAISAL RIGHTS
Under Texas law, the Shareholders will not be entitled to any
appraisal or dissenter's rights in connection with the Mergers. Additionally,
under the applicable laws of the respective states of incorporation of RTO, LRAC
and Somerset, none of the shareholders of RTO, LRAC and Somerset will be
entitled to any appraisal or dissenter's rights in connection with the Mergers.
See "The Mergers - No Appraisal Rights."
DIVIDEND POLICIES
The Company has never paid dividends on the Company Common Stock
and has no plans to pay dividends on the Company Common Stock in the foreseeable
future. Additionally, certain debt covenants prohibit the payment of dividends
by the Company on the Company Common Stock without the consent of the lender.
-13-
LISTING OF SHARES; MARKET AND MARKET PRICE
The Company Common Stock is listed on the American Stock Exchange
("AMEX") under the symbol "DRL." At July 15, 1996, there were approximately 584
holders of record of the Company Common Stock, not including those beneficial
holders who hold shares of Company Common Stock in street name.
The following table sets forth the high and low sale prices of the
Company Common Stock reported by the AMEX for the periods indicated:
HIGH LOW
Year Ended December 31, 1996 --------- ---------
First Quarter ................................ $ 0.7500 $ 0.3750
Second Quarter ............................... 2.0000 0.6875
Third Quarter (through July ___, 1996) ....... -- --
Year Ended December 31, 1995:
First Quarter ................................ 1.0000 0.6250
Second Quarter ............................... 1.0625 0.6875
Third Quarter ................................ 0.8750 0.6250
Fourth Quarter ............................... 0.8750 0.6250
Year Ended December 31, 1994:
First Quarter ................................ 1.1875 0.8125
Second Quarter ............................... 1.1875 0.8125
Third Quarter ................................ 1.3125 0.8750
Fourth Quarter ............................... 1.0625 0.7500
On July 26, 1996, the last reported sale price of the Company Common
Stock on the AMEX was $1.3750 per share.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Somerset Shareholders, Norex Drilling, Ltd., a Bermuda
corporation which is an affiliate of the Company ("Norex"), Pronor Holdings
Ltd., a British Virgin Islands corporation which is an affiliate of the Company
("Pronor") (Norex and Pronor, collectively the "Company Parties"), Oliver,
Mullen, U.S. Rig and Equipment, Inc., an Oklahoma corporation ("USRE"), Mike
Mullen Energy Equipment Resource, Inc., a Texas corporation ("EER"), and GCT
Investments, Inc., a Texas corporation ("GCT") (Oliver, Mullen, USRE, EER and
GCT collectively, the "Mullen/Oliver Group") have entered into a Shareholders'
Agreement dated as of May 7, 1996, as amended (the "Shareholders' Agreement"),
covering various agreements among such parties (collectively, the "Shareholders'
Agreement Parties") with respect to the Company Common Stock owned by them. For
four years following the effective time of the Mergers (the "Effective Time"),
the Shareholders' Agreement Parties will be required to vote the shares of
Company Common Stock subject to the Shareholders' Agreement so as to maintain
the size of the Board of Directors at five directors, consisting of two
directors who are not officers (or relatives of officers) of the Company and who
do not represent concentrated or family holdings of the stock of the Company
(including the Shareholders' Agreement Parties) (the "Non-Party Directors"), and
one director designated by each of (1) the Somerset Shareholders, (2) the
Company Parties, and (3) the Mullen/Oliver Group. See "Shareholders' Agreement"
and "Security Ownership of Certain Beneficial Owners and Management."
During the fourth quarter of 1995, Norex subscribed to and paid
$4,000,000 for 4,000 shares of the Company's Series B 15% Cumulative Redeemable
Preferred Stock, par value $1.00 per share (the "Series B Preferred Stock"), to
be issued subsequent to December 31, 1995 (the "Subscription"). As of the date
hereof, the Series B Preferred Stock has not been issued. During May of 1996,
the Company and Norex agreed that, upon
-14-
consummation of the Mergers, the Company would rescind the Subscription and
refund the $4,000,000 payment made by Norex for the Subscription out of the
proceeds of a $4,000,000 loan to be provided by Norex. If the Mergers are not
consummated, the Subscription will not be rescinded and the 4,000 shares of
Series B Preferred Stock will be issued. See "Management's Discussion and
Analysis of the Company's Financial Condition and Results of Operations -
Financial Condition and Liquidity," "Certain Relationships and Related
Transactions" and "Security Ownership of Certain Beneficial Owners and
Management."
At the Effective Time, the Company will enter into an investment
monitoring agreement providing for a one time payment by the Company of $75,000
(the "Investment Monitoring Fee") to SCP to monitor on behalf of SDA the
investment in the Company by SDA resulting from the Somerset Merger. See
"Certain Relationships and Related Transactions" and "Security Ownership of
Certain Beneficial Owners and Management."
The Company, the Company Parties, Oliver, USRE, EER, GCT and the
Somerset Shareholders (collectively the "Registration Rights Agreement Parties")
have executed a Registration Rights Agreement dated May 7, 1996, as amended (the
"Registration Rights Agreement"), that requires the Company (i) to file and
obtain and maintain the effectiveness of the Registration Statement and (ii) to
provide certain other registration rights. See "The Mergers - Restrictions on
Resales by Affiliates/Registration Rights."
The Merger Agreements provide for indemnification of LRAC, RTO,
Mullen and Oliver, SDA and various affiliates for claims relating to omissions
or misstatements in this Proxy Statement, the Registration Statement being filed
in connection herewith and certain other matters. See "The Rig Merger Agreement
- - - - Indemnification" and "The Somerset Merger Agreement - Indemnification."
RECENT DEVELOPMENTS
On June 24, 1996, Western Oil Well Service Co., a wholly owned
subsidiary of the Company ("Western"), sold its operational assets, which
included 23 carrier-mounted workover rigs, to Pool Company ("Pool"), a
subsidiary of Pool Energy Services Co., for $3,950,000 in cash. At the time,
Western provided well workover services principally in Montana, Utah and North
Dakota. Pursuant to the purchase agreement, Pool agreed to assume all of
Western's capital leases associated primarily with transportation equipment and
certain real estate leases.
Mr. Max Dillard's employment as President and Chief Executive Officer
of the Company terminated on April 9, 1996. The Company is currently seeking a
replacement for Mr. Dillard. Mr. Dillard also resigned as a member of the Board
of Directors on June 10, 1996.
Mr. Dillard was granted an option under the 1982 Stock Option and
Long-Term Incentive Plan for Key Employees to purchase up to 1,000,000 shares of
the Company Common Stock (the "Dillard Option"). The Company believes that the
Dillard Option expired upon the termination of Mr. Dillard's employment on April
9, 1996. Mr. Dillard contends that the Dillard Option has not expired and
remains in effect. The resolution of this dispute regarding the validity of the
Dillard Option is uncertain.
-15-
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following historical consolidated financial data of the Company
has been derived from its historical consolidated financial statements and
should be read in conjunction with such consolidated financial statements and
notes thereto, which are included elsewhere in this Proxy Statement. The
unaudited pro forma financial data of the Company, LRAC, RTO and Somerset
combined have been derived from the unaudited pro forma financial statements and
should be read in conjunction with such unaudited pro forma financial statements
and notes thereto, which are included elsewhere in this Proxy Statement. For a
description of the various information regarding the pro forma data, see "DI
Industries, Inc. Unaudited Pro Forma Financial Information."
<PAGE>
DI INDUSTRIES, INC.
SELECTED SUMMARY HISTORICAL
FINANCIAL INFORMATION
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Year Ended Nine Months Ended
March 31, December 31, December 31, Year Ended March 31,
------------------- ------------------- ------------------- ------------------------------
1996 1995 1995 1994 1994 1993 1994 1993 1992
-------- -------- -------- -------- -------- -------- -------- -------- --------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONTINUING OPERATIONS:
Revenues ................... $ 20,102 $ 22,344 $ 94,709 $ 65,393 $ 50,987 $ 53,449 $ 67,855 $ 62,242 $ 63,186
Loss from continuing
operations ............. (1,491) (2,219) (12,675) (3,557) (2,260) (67) (1,384) (3,555) (3,066)
DISCONTINUED OPERATIONS:
Income (loss) from oil and
gas operations ......... (11) (4) 55 51 (1,298) (1,274) 60 104
Loss from sale of oil
and gas properties ..... (768)
Net loss ........................ (1,491) (2,230) (13,447) (3,502) (2,209) (1,365) (2,658) (3,495) (2,962)
Net loss available to
Common Stock ............... (1,641) (2,230) (13,447) (3,502) (2,209) (1,365) (2,658) (3,495) (2,962)
Loss per common share:
From continuing operations .. $ (0.04) $ (0.06) $ (0.33) $ (0.09) $ (0.06) $ -- (0.04) (0.09) (0.08)
From discontinued operations (0.02) (0.04) (0.03)
Net loss per share of common
stock ........................... (0.04) (0.06) (0.35) (0.09) (0.06) (0.04) (0.07) (0.09) (0.08)
Total assets(1) ................. $ 54,769 $ 63,072 $ 57,783 $ 62,860 $ 62,860 $ 43,717 $ 40,325 $ 41,937 $ 47,317
Long-term debt(1) ............... 10,379 9,932 11,146 10,224 10,224 204 198 223 151
Series A Preferred Stock ........ 900 1,900 900 1,900 1,900
</TABLE>
- - - ------------
(1) Total assets and long-term debt have been restated to account for certain
operations of the Company discontinued effective April 1, 1995.
-16-
<PAGE>
DI INDUSTRIES, INC.
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Year Ended December 31, 1995
-------------------------------------------------------------------------
Western (1) Merger (1)
Pro Forma Pro Foma
Historical Adjustments Pro Forma Adjustments Pro Forma
-------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT:
Revenues ...................................... $ 94,709 $ (7,164) $ 87,545 $ 87,545
Operating Loss ................................ (12,793) (469) (13,262) (113) (13,375)
Gain (Loss) on Sale of Assets ................. 466 (17) 449 449
Loss from Continuing Operations ............... (12,675) (478) (13,153) (113) (13,266)
Net Loss ...................................... (13,447) (478) (13,925) (113) (14,038)
Earnings (loss) per common and
common equivalent share from
continuing operations ......................... $ (0.33) $ (0.34) $ (0.12)
Earnings (loss) per common and
common equivalent share ....................... $ (0.35) $ (0.36) $ (0.13)
Weighted average number of common
and common equivalent shares .................. 38,669 38,669 110,017
As of or For The
Three Months Ended March 31, 1996
--------------------------------------------------------------------------
Income Statement:
Revenues ..................................... $ 20,102 $ (1,659) $ 18,443 $ 18,443
Operating Loss ............................... (1,253) (26) (1,279) (28) (1,307)
Gain (Loss) on Sale of Assets ................ 15 (12) 3 3
Net Loss ..................................... (1,491) (36) (1,527) (148) (1,675)
Net Loss Applicable to
Common Stock ............................. (1,641) (36) (1,677) 2 (1,675)
Earnings (loss) per common and
common equivalent share from
continuing operations ........................ $ (0.04) $ (0.04) $ (0.02)
Earnings (loss) per common and
common equivalent share ...................... $ (0.04) $ (0.04) $ (0.02)
Weighted average number of common
and common equivalent shares ................. 38,669 38,669 110,017
Unaudited Balance Sheet Date:
Working Capital .............................. 6,249 3,930 10,179 15,250 25,429
Total Assets ................................. 54,769 2,460 57,229 50,091 107,320
Long-Term Debt ............................... 10,379 (127) 10,252 10,252
Shareholders' Equity ......................... 18,203 2,677 20,880 40,427 61,307
Book value per common
and common equivalent share ................ $ (0.47) $ (0.54) $ (0.56)
</TABLE>
- - - ------------
(1) For explanation of pro forma adjustments, see "Notes to Unaudited Pro
Forma Consolidated Financial Statements."
-17-
THE ANNUAL MEETING
GENERAL
This Proxy Statement is being furnished to Shareholders in connection with
the solicitation of proxies by the Board of Directors for use at the Annual
Meeting of Shareholders to be held on August 27, 1996, at 9:00 a.m., local time,
at the Greenspoint Club, 16925 Northchase, Houston, Texas 77060, and at any
adjournments or postponements thereof.
MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING
At the Annual Meeting, the Shareholders will be asked to consider and vote
upon each of the following: (1) a proposal to adopt and approve the Rig Merger
Agreement and the transactions set forth or contemplated therein, (2) a proposal
to adopt and approve the Somerset Merger Agreement and the transactions set
forth or contemplated therein, (3) the election of five members to the Board of
Directors, (4) a proposal to adopt and approve the Stock Option Plan, and to
reserve for issuance 7,000,000 shares of the Company Common Stock thereunder,
(5) a proposal to adopt and approve the Name Change Amendment, (6) a proposal to
adopt and approve the Share Authorization Amendment, and (7) a proposal to adopt
and approve the Voting Amendment. The Shareholders will also consider and vote
upon such other business as may properly come before the Annual Meeting. Each of
the Charter Amendments shall automatically be effected upon the consummation of
the Somerset Merger.
THE BOARD OF DIRECTORS HAS APPROVED THE RIG MERGER AGREEMENT AND THE
SOMERSET MERGER AGREEMENT, HAVING CONCLUDED THAT THE MERGERS ARE ADVISABLE AND
IN THE BEST INTERESTS OF THE COMPANY AND THE SHAREHOLDERS, AND RECOMMENDS A VOTE
FOR THE ADOPTION AND APPROVAL OF THE SOMERSET MERGER AGREEMENT, THE RIG MERGER
AGREEMENT AND THE MERGERS. ADDITIONALLY, THE BOARD OF DIRECTORS HAS APPROVED
EACH OF THE NAME CHANGE AMENDMENT, THE SHARE AUTHORIZATION AMENDMENT, THE VOTING
AMENDMENT, THE STOCK OPTION PLAN AND THE SLATE OF NOMINEES FOR ELECTION AS
DIRECTORS, HAVING CONCLUDED THAT THEY ARE ALL ADVISABLE AND IN THE BEST
INTERESTS OF THE COMPANY AND THE SHAREHOLDERS, AND RECOMMENDS A VOTE FOR THE
ADOPTION AND APPROVAL OF THE NAME CHANGE AMENDMENT, THE SHARE AUTHORIZATION
AMENDMENT, THE VOTING AMENDMENT, THE STOCK OPTION PLAN AND THE FIVE NOMINEES FOR
THE BOARD OF DIRECTORS.
VOTING AT THE ANNUAL MEETING; RECORD DATE
The Board of Directors has fixed July 15, 1996 as the Record Date for the
determination of the Shareholders entitled to notice of and to vote at the
Annual Meeting. Accordingly, only holders of record of shares of the Company
Common Stock on the Record Date will be entitled to notice of, and to vote at,
the Annual Meeting. As of the Record Date, there were 38,836,378 shares of
Company Common Stock outstanding and entitled to vote, which were held by
approximately 584 holders of record (excluding beneficial holders of shares in
street name). Each holder of record of shares of Company Common Stock on the
Record Date is entitled to cast one vote per share, exercisable in person or by
properly executed proxy, on each matter properly submitted for the vote of the
Shareholders at the Annual Meeting. The presence, in person or by properly
executed proxy, of the holders of a majority of the outstanding shares of
Company Common Stock entitled to vote at the Annual Meeting is necessary to
constitute a quorum at the Annual Meeting.
If a quorum is not obtained, or if fewer shares are voted in favor of
approval of any of the proposals than the number required for approval, the
Annual Meeting may be adjourned for the purpose of obtaining
-18-
additional proxies or votes or for any other purpose, and, at any subsequent
reconvening of the Annual Meeting, all proxies will be voted in the same manner
as such proxies would have been voted at the original convening of the meeting
(except for any proxies which have theretofore effectively been revoked,
notwithstanding that they may have been effectively voted on the same or any
other matter at a previous meeting).
Under the TBCA, the adoption and approval of the each of the Somerset
Merger Agreement and each of the Charter Amendments will require the affirmative
vote of the holders of two-thirds of the total number of shares of Company
Common Stock outstanding and entitled to vote thereon. Adoption of the Rig
Merger Agreement and Stock Option Plan requires the affirmative vote of a
majority of the shares, and election of each director requires the affirmative
vote of a plurality of the shares represented at a meeting at which a quorum is
present.
As of the Record Date, directors and executive officers of the Company and
their respective affiliates may be deemed to be beneficial owners of an
aggregate of 10,432,405 shares of Company Common Stock, representing
approximately 26.9% of the outstanding shares of Company Common Stock. See
"Security Ownership of Certain Beneficial Owners and Management." Directors and
executive officers and affiliates holding 10,430,105 shares of Company Common
Stock, or 26.9% of the outstanding Company Common Stock, have indicated that
they intend to vote in favor of the Mergers and the other proposals.
Consequently, approval of the Somerset Merger Agreement and each of the Charter
Amendments will require the favorable vote of the holders of an additional
15,460,814 shares of Company Common Stock, representing approximately 39.8% of
the issued and outstanding shares of Company Common Stock on the Record Date and
approval of the Rig Merger Agreement and the Stock Option Plan will require the
favorable vote of the holders of an additional 8,988,085 shares of Company
Common Stock, representing approximately 23.1% of the issued and outstanding
shares of Company Common Stock on the Record Date.
VOTING OF PROXIES
All shares of Company Common Stock represented at the Annual Meeting by
properly executed proxies received prior to or at the Annual Meeting and not
subsequently revoked will be voted at the Annual Meeting in accordance with the
instructions indicated on such proxies. A properly executed proxy marked
"ABSTAIN" will be counted for purposes of determining whether there is a quorum
for the Annual Meeting but will not be voted. An abstention or a broker non-vote
has the same effect as a vote against the proposal for which a Shareholder has
abstained. If no instructions are indicated, such proxy will be voted FOR all of
the proposals.
If any other matters are properly presented at the Annual Meeting for
consideration, the person named in the enclosed proxy card and acting thereunder
will have discretion to vote such matters in accordance with his best judgment,
unless the proxy card indicates otherwise. As of the date of this Proxy
Statement, the Board of Directors does not know of any other matters that are to
come before the Annual Meeting.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (1) filing
with the Secretary of the Company, at or before the taking of the vote at the
Annual Meeting, a written notice of revocation bearing a later date than the
proxy, (2) duly executing a later dated proxy relating to the same shares of
Company Common Stock and delivering it to the Secretary of the Company before
the taking of the vote at the Annual Meeting or (3) attending the
-19-
Annual Meeting and voting in person (although attendance at the Annual Meeting
will not in and of itself constitute the revocation of a proxy). Any written
notice of revocation or subsequent proxy should be delivered to DI Industries,
Inc., 450 Gears Road, Suite 625, Houston, Texas 77067, Attention: Corporate
Secretary, on or before the date which precedes the date of the Annual Meeting,
or delivered to the Secretary of the Company at the Annual Meeting.
SOLICITATION OF PROXIES
In addition to solicitation by use of the mails, proxies may be solicited
by directors, officers and employees of the Company in person or by telephone,
telegram or other means of communication. Such directors, officers and employees
will not be additionally compensated, but may be reimbursed for out-of-pocket
expenses incurred in connection with such solicitation. Arrangements will also
be made with custodians, nominees and fiduciaries for forwarding of proxy
solicitation materials to beneficial owners of shares held of record by such
custodians, nominees and fiduciaries, and the Company will reimburse such
custodians, nominees and fiduciaries for reasonable expenses incurred in
connection therewith.
THE MERGERS
EFFECT OF THE MERGERS
EFFECT OF THE RIG MERGER. Upon consummation of the transactions
contemplated by the Rig Merger Agreement, and assuming the Cash Option is not
exercised, (1) RTO and Merger Sub will be merged with and into LRAC, which will
be the surviving corporation, (2) each of the RTO Shares will be converted into
the right to receive 22,714.770 shares of Company Common Stock, or an aggregate
of 11,357,385 shares of Company Common Stock (subject to adjustment), and (3)
each of the LRAC Shares will be converted into the right to receive 28,178.193
shares of Company Common Stock, or an aggregate of 28,178,193 shares of Company
Common Stock (subject to adjustment). The foregoing exchange ratios are based on
the 38,836,378 shares of Company Common Stock issued and outstanding as of the
Record Date, and the 699,200 shares of Company Common Stock subject to options
issued by the Company (excluding the Dillard Option) and outstanding as of the
Record Date. Accordingly, based upon the capitalization of the Company as of the
Record Date, approximately 39,535,578 shares of Company Common Stock will be
issued in the Rig Merger, assuming the Cash Option is not exercised. In the
event the number of shares of Company Common Stock which are issued or subject
to options as of the Effective Time is greater or less than the amount specified
in the immediately preceding sentence, the number of shares of Company Common
Stock issuable to the LRAC/RTO Shareholders pursuant to the Rig Merger will be
increased or decreased by a number of shares of Company Common Stock equal to
such difference. The LRAC/RTO Shareholders have the option to receive up to
$5,000,000 in cash in lieu of up to 20% of the aggregate number of shares of
Company Common Stock issuable in the Rig Merger. In addition, the LRAC/RTO
Shareholders will receive the Rig Shadow Warrants, which provide the right to
purchase up to 1,720,000 shares of Company Common Stock, exercisable only in the
event that the issued and outstanding Series A Preferred Stock is converted into
Company Common Stock or the Dillard Option is exercised, and, in such event,
only with respect to an equivalent number of shares as are subject to such
conversion or exercise. The Rig Shadow Warrants will be exercisable at the
conversion price or option price (as applicable) at which the shares of Series A
Preferred Stock are converted or the Dillard Option is exercised. The Series A
Preferred Stock is convertible at $1.25 per share and the Dillard Option is
exercisable, if at all, at $1.00 per share. The maximum number of shares of
Company Common Stock issuable in the Rig Merger to the LRAC/RTO Shareholders
represents approximately one-third of the shares of Company Common Stock that
would be outstanding immediately after the Mergers.
-20-
EFFECT OF THE SOMERSET MERGER. Upon consummation of the transactions
contemplated by the Somerset Merger Agreement, (1) Somerset will be merged with
and into the Company, which shall be the surviving corporation, (2) each of the
Somerset Shares will be converted into the right to receive 39,535.578 shares of
Company Common Stock, or an aggregate of 39,535,578 shares of Company Common
Stock (subject to adjustment), and (3) the Company's Articles of Incorporation
shall be amended to incorporate all of the amendments contemplated by the
Charter Amendment. The foregoing exchange ratio is based on the 38,836,378
shares of Company Common Stock issued and outstanding as of the Record Date of
the Somerset Merger, and the 699,200 shares of Company Common Stock subject to
options issued by the Company (excluding the Dillard Option) and outstanding as
of the Record Date. In the event the number of shares of Company Common Stock
which are issued or subject to options as of the Effective Time is greater or
less than the amount specified in the immediately preceding sentence, the number
of shares of Company Common Stock issuable to the Somerset Shareholders pursuant
to the Somerset Merger will be increased or decreased by a number of shares of
Company Common Stock equal to such difference. In addition, the Somerset
Shareholders will receive the Somerset Shadow Warrants, which provide the right
to purchase up to 1,720,000 shares of Company Common Stock, exercisable only in
the event that the issued and outstanding Series A Preferred Stock of the
Company is converted into Company Common Stock or the Dillard Option is
exercised, and in such event, only with respect to an equivalent number of
shares as are subject to such conversion or exercise. The Somerset Shadow
Warrants will be exercisable at the conversion price or option price (as
applicable) at which the shares of Series A Preferred Stock are converted or the
Dillard Option is exercised. The Series A Preferred Stock is convertible at
$1.25 per share and the Dillard Option is exercisable, if at all, at $1.00 per
share. The maximum number of shares of Company Common Stock issuable in the
Somerset Merger to the Somerset Shareholders represents approximately one-third
of the shares of Company Common Stock that would be outstanding immediately
after the Mergers.
USE OF PROCEEDS OF SOMERSET MERGER. As a result of the Somerset Merger,
the Company will obtain approximately $25,000,000 in cash. Of such amount, (1)
up to $5,000,000 will be used to make any payments required by reason of
exercise of the Cash Option (as defined below) under the Rig Merger Agreement,
(2) a minimum of $11,000,000 is expected to be utilized for rig refurbishment
and to purchase needed drill pipe strings and other accessory equipment over an
estimated two year period, (3) up to $600,000 will be used to pay the costs and
expenses incurred in connection with the Mergers, including the reimbursement of
certain expenses of LRAC, RTO and Somerset in accordance with the Merger
Agreements, the Investment Monitoring Fee (as defined hereinafter) and the
Company's legal fees and other registration expenses and (4) the remainder will
be used for working capital. Pending application of such proceeds, the Company
intends to invest such proceeds in short-term interest-bearing securities. The
Company may, in its discretion, decide in the future to use such proceeds for
such other purposes as the needs of the Company dictate.
CONTROL CONSIDERATIONS. Upon consummation of the Mergers, the Company
Parties, the LRAC/RTO Shareholders and the Somerset Shareholders will own 15.9%,
33.5% and 33.5%, respectively, or 82.9% in the aggregate, of the outstanding
Company Common Stock following consummation of the Mergers, assuming that the
Cash Option, the Dillard Option, and any other options to purchase shares of
Company Common Stock are not exercised and that the Series A Preferred Stock is
not converted. In addition, certain of such persons are parties to the
Shareholders' Agreement, which provides that all of the parties thereto will be
required to vote their shares of Company Common Stock so as to maintain the size
of the Board of Directors at five, one of which will be designated by each of
the Company Parties, the Mullen/Oliver Group and Somerset Shareholders,
respectively, and the remaining two of which will be Non-Party Directors. By
reason of such shareholdings and the Shareholders' Agreement, the Company
Parties, the Mullen/Oliver Group and Somerset Shareholders will each exercise
considerable influence over the Company and will be able to collectively control
all of its business and affairs for the foreseeable future.
-21-
BACKGROUND OF THE MERGERS
The Company's oil and gas contract drilling operations have historically
focused on the domestic market. Since the early 1980s, the United States market
has been characterized by severe overcapacity, numerous competitors and
aggressive price cutting. These conditions, combined with extended periods of
low oil and gas prices over the last decade, have resulted in the near collapse
of this segment of the industry. Technological advances such as horizontal
drilling and the use of 3-D seismic technology, while causing temporary spurts
in drilling activity over the last ten years, have actually resulted in overall
declines in drilling activity in the long-term. This is because the higher
success levels typically associated with such technologies have usually
ultimately resulted in the drilling of fewer well bores to achieve levels of
success comparable with previous technology.
At one point in 1981, there were over 3,700 land rigs operating
domestically out of over 5,000 estimated rigs available for service. At May 31,
1996, the Baker Hughes Inc. domestic land rig count was 633. The Rig Census
published by Reed Tool Company indicated that at December 31, 1995, there were
1,500 land rigs available domestically, the lowest number in the history of the
survey. The Company believes that many of the available rigs are in a poor state
of repair or maintenance, and that in recent years many drillers have conducted
drilling operations for revenues that have covered only direct operating costs
and have been insufficient to provide for amortization or upgrading of
equipment. As a result, the Company believes that the Reed Tool Company Census
may overestimate the number of rigs reasonably available to meet market demand.
The extended industry downturn has resulted in a steady consolidation of
drilling contractors. There are now fewer than ten companies with rig fleets of
more than 20 rigs operating in the lower 48 states. In the past three years,
Nabors Industries, Inc., the largest United States land driller, has acquired
three companies owning an aggregate of 95 rigs. In 1995, an estimated 45
companies owning land rigs ceased doing business. The Company believes that, as
the industry consolidates, the level and stability of day and contract rates
will improve and the sector as a whole will eventually experience a shift away
from the intensely competitive environment which has prevailed over the last
decade. The Company also believes that recent increases in oil and gas prices,
if maintained, will also result in additional drilling activity. The Company
believes that the larger industry participants, particularly those that are
adequately capitalized and sufficiently positioned in terms of rig fleet quality
and geographic mix of business, are the most likely to benefit from this
scenario of improved industry fundamentals.
The Company believes that the onshore sector consolidation, continued rig
fleet attrition and modest increases in domestic drilling levels will begin to
correct the oversupply of rigs. The Company believes that, in particular, the
demand and supply may approach balance for domestic-based large capacity SCR
rigs (i.e., those SCR rigs capable of drilling wells 20,000 feet or deeper) if
recent improvements in natural gas prices are sustained. These larger rigs were
among the first to be idled in the downturn of the market in the early 1980s,
but, due to a steady demand in international markets, the excess capacity of the
domestic fleet of this type of equipment has now been largely exported, leaving
a relatively small United States-based fleet. While precise industry statistics
are hard to establish, the Company believes that, as of February 1996, there may
less than 50 serviceable 2,000 and 3,000 horsepower SCR land rigs based in the
United States that can be put into service. The 18 Merger Rigs may, thus,
constitute a substantial portion of the available rigs of that type. With the
Merger Rigs in service, the Company believes that it would have the largest
domestic onshore-based fleet of deep drilling SCR rigs.
By improving the Company's cash position and acquiring the Merger Rigs, as
well as by refocusing its competitive position in the industry, the Company
hopes to exploit an anticipated improvement in natural
-22-
gas markets and increase in the demand for land drilling services. These
conditions, in the Company's opinion, would have a positive effect on the larger
operators, particularly those with deep drilling capacity equipment. The
developing consolidation of domestic land rig operators is expected to
eventually produce economies of scale and more rational price and service
competition. The capital infusion from the Somerset Merger will also put the
Company in a potentially stronger position to participate in anticipated
on-going industry consolidation. Due to the high replacement cost of rigs
relative to their current earning capacity, day rates would have to rise very
significantly before new construction or large outlays for rig rebuilding became
economical. This should provide ample upside potential for industry participants
with larger fleets of serviceable rigs.
CERTAIN OF THE MATTERS DISCUSSED ABOVE REPRESENT FORWARD-LOOKING
STATEMENTS WHICH CONSTITUTE THE COMPANY'S EXPECTATIONS OF THE FUTURE PERFORMANCE
OF THE DOMESTIC DRILLING INDUSTRY, BASED ON REASONABLE ASSUMPTIONS. CERTAIN
FACTORS COULD CAUSE THE ACTUAL FUTURE PERFORMANCE OF THE DOMESTIC DRILLING
INDUSTRY TO DIFFER MATERIALLY FROM THAT PROJECTED BY THE COMPANY. OIL AND GAS
PRICES ARE VOLATILE, AND ANY DECREASE COULD ADVERSELY IMPACT THE FUTURE LEVEL OF
DRILLING ACTIVITY, RESULTING IN A DECREASE IN THE DEMAND FOR THE COMPANY'S
DRILLING SERVICES. CONVERSELY, THE NUMBER OF SCR LAND RIGS AVAILABLE IN THE
UNITED STATES COULD INCREASE IN RESPONSE TO ANY INCREASE IN THE DEMAND FOR
DRILLING SERVICES AS A RESULT OF THE REINTRODUCTION OF PREVIOUSLY EXPORTED RIGS
TO THE DOMESTIC DRILLING MARKET. ANY SUCH INCREASE IN THE NUMBER OF AVAILABLE
RIGS WOULD LIKELY SUPPRESS ANY ANTICIPATED INCREASE IN THE RATES CHARGED BY
DRILLERS.
The Company, with its existing fleet of 75 drilling rigs, is now operating
in United States and foreign markets that will be among the first to realize
benefits from consolidation and increased demand. The Company intends to
refurbish and place the Merger Rigs in service domestically or market them for
international contracts, as demand warrants. The Merger Rigs will augment these
benefits in areas where deep drilling or horizontal drilling equipment is at a
premium, as well as in foreign markets where the demand for large capacity
international caliber equipment has been steadily growing.
As a result of the adverse industry factors discussed above, the Company's
financial position has continued to deteriorate in recent years, culminating in
losses of $13,447,000 for the calendar year ended December 31, 1995 and
$1,641,000 for the quarter ended March 31, 1996. Because of the magnitude of the
losses the Company was experiencing in 1995, the Board of Directors began to
explore various options to preserve shareholder value. The Company conducted
preliminary discussions with various parties to explore the possibility of a
merger or similar transaction involving the Company, none of which resulted in
serious negotiations. The Board of Directors also considered liquidating the
Company's rig fleet on an orderly basis. It determined however, that by reason
of the large number of rigs available due to rig company failures and
consolidations, it was doubtful that such liquidation would realize any
significant value for the Shareholders.
In May of 1995, the Company was approached by William R. Ziegler, a
partner of SCP, regarding a possible investment in the Company in connection
with the acquisition of the Merger Rigs and a capital infusion. However, given
the level of demand for drilling services at that time, it appeared unlikely to
the Company that it could profitably acquire, refurbish and operate the rigs.
Mr. Ziegler and the Company decided to study the situation further and contact
each other at a later date.
-23-
In October, 1995, Mr. Ziegler contacted Mr. Dillard and Mr. Ivar Siem, who
had been elected Chairman of the Board in August 1995, regarding the proposed
Mergers. Messrs. Ziegler, Siem, Oliver and Mullen conducted regular negotiations
thereafter. On March 13, 1996, Mr. Ziegler suggested the current pricing of the
Somerset Merger, effectively $.63 per share of the Company Common Stock. The
Company Common Stock had traded at an average daily closing price of $.68 per
share over the preceding six month period beginning September 13, 1995 through
March 12, 1996, thus, such proposed effective price approximated the market
price.
LRAC, RTO, and Somerset indicated to the Company that the simultaneous
closing of both of the Mergers would be a condition precedent to their agreement
to participate in the Mergers. Based on (1) the pricing of the Company Common
Stock at the time of the negotiations, (2) the appraised value of the Merger
Rigs and the Company's estimates of refitting costs, (3) the lack of
availability of any other capital infusion sources to the Company, and (4) the
beneficial effect to the Company of repositioning itself in the marketplace
through the acquisition and eventual refurbishment of the Merger Rigs, the Board
of Directors agreed to consummate the Mergers on the terms set forth in the
Merger Agreements.
On April 15, 1996, Mullen, Oliver, LRAC, RTO, Somerset and the Company
executed a letter of intent outlining the proposed transaction. Thereafter, on
May 7, 1996, the same parties executed the Merger Agreements.
VALUATION OF THE MERGERS
In anticipation of a transaction such as the Rig Merger, the Merger Rigs
were appraised by Superior Auctioneers and Marketing, Inc., an experienced used
oil field equipment appraiser retained by USRE (the "Rig Appraiser"). The
purpose of the appraisal was to determine the orderly liquidation value of the
Merger Rigs as of April, 1996 for the function of updating the equipment's
collateral value. To the best knowledge of the Company, no limitations were
imposed on the scope and nature of the appraisal of the Merger Rigs conducted by
the Rig Appraiser and no material relationships have existed between the Rig
Appraiser and the Company and the LRAC/RTO Shareholders, or any affiliates of
either, within the last two years. The Merger Rigs were inspected on March
19-22, 1996. The total orderly liquidation value of the Merger Rigs was
appraised at $23,700,000.
The total orderly liquidation value of the Merger Rigs represents the
approximated gross sale proceeds that might be realized in a moderate or
reasonably short time frame on the sale of such Rigs (within approximately 120
days). This valuation method takes into account various intervening variables
such as psychological attractiveness, removal time and expense, physical
deterioration quantity, etc. The orderly liquidation value concept assumes that
the responsibility (risk) and cost of removal of remains with the buyer, and
that there is no actual or implied warranty or guarantee on the equipment and/or
inventory sold. Additionally, it is assumed that all equipment and/or inventory
would eventually be sold in total, with clear title, and without consideration
allotted to a willing buyer/willing seller situation.
The orderly liquidation concept mutually shares some of the elemental
criteria present in two other valuation concepts, liquidation value and fair
market value. One factor that distinguishes the three factors is the time frame
in which the equipment is to be sold. Theoretically, the more time one has to
sell equipment, the more the likelihood the equipment will sell at a higher
market range. Hence, fair market value denotes a reasonable amount of time
(usually with no specified constraints) to sell equipment, thereby causing the
gross purchase price before expenses to be at the upper range of the spectrum in
many cases. Likewise, orderly liquidation also typifies a gross recovery (before
expenses) slightly in the upper spectrum, but usually not quite as high as fair
market value due to various time constraints. Lastly, liquidation
-24-
exemplifies a forced time constraint where the values could fall to the lower
end of the spectrum. However, no differently than liquidation value, the orderly
liquidation concept considers the difficulty of removal.
The Board of Directors believes that the Company, the second largest
United States based operator of domestic land drilling rigs, has substantial
in-house expertise in valuing drilling rigs. The Company's in-house experts and
outside consultants conducted extensive inspections of all of the Merger Rigs
and corroborated the valuations of the Rig Appraiser. Based upon such expertise,
the Company's management believed that the valuation of the Rig Appraiser was
fair and that the Company did not need to obtain an additional appraisal.
Although the Board of Directors believes that the Mergers are fair to the
Company and the Shareholders, there is no independent third party opinion by an
investment banking or other firm to provide Shareholders with independent
assurances of the fairness of the transactions. The Board of Directors
considered retaining an investment banker to provide an opinion as to the
fairness of the financial terms of the Mergers, the cost of which would have
been substantial. The Board of Directors decided to proceed with the
transactions without obtaining such an opinion based upon its belief that the
Mergers were fair, in that (1) the effective price of the shares to be issued in
the Mergers approximated the market price of the Company Common Stock during the
time period immediately preceding the time that the terms of the Mergers were
negotiated, and (2) the Company had no viable alternative for recapitalizing the
Company on a sound basis, and absent such recapitalization, the Company would
have difficulty remaining in business.
DEPENDENCE ON MERGER RIGS
Each of the Merger Rigs is stacked and is not currently in service and
will require substantial refurbishment and the purchase of significant accessory
equipment before it may be placed in service. A portion of the Company's
existing rig fleet is also stacked. The Company intends to refurbish, equip and
place in service the Merger Rigs as market opportunities arise for such rigs.
The Company believes there will eventually be significant opportunities to
profitably employ the Merger Rigs because they have significantly better
performance features (particularly electric drives) and have deeper drilling
capacity than most of the Company's existing rigs. By reason of such features,
the Company believes that there will be opportunities to utilize the Merger Rigs
in domestic and international operations for which most of the rigs in the
Company's current fleet would not be suitable. It is anticipated that the future
success of the Company will be heavily dependent upon the ability of the Company
to successfully place the Merger Rigs in service on a timely basis at profitable
rates.
REASONS FOR THE MERGERS/RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
The Board of Directors has concluded that the consummation of the Mergers
is in the best interests of the Company and the Shareholders, primarily for the
following reasons:
-- The cash provided in the Somerset Merger will significantly
enhance the Company's balance sheet, providing working capital, and
the capital necessary to refurbish the Merger Rigs and thereby
position the Company to pursue additional growth opportunities in
its industry.
-- The Merger Rigs represent a strategically important asset and
provide the Company with significant additional SCR deep-drilling
capacity. Although the Company has significant capacity because many
of its rigs are idle, most of such rigs do not have deep-drilling
capacity and are typically not electrically powered.
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In the Company's view, SCR deep-drilling rigs are currently in
higher demand for deep well natural gas projects and in
international markets, and, to the extent that industry conditions
continue to improve, the demand for SCR deep-drilling rigs will
increase.
-- Recent firming of natural gas prices has caused a significant
increase in the demand for SCR deep-drilling rigs both domestically
and internationally. SCR deep-drilling projects tend to have higher
margins than other drilling projects because SCR deep- drilling
projects tend to be of longer duration, thus providing a more steady
cash flow.
-- Absent a substantial capital infusion, the Company would be
forced to consider liquidation of certain of its assets or seek
other financing alternatives to satisfy working capital needs.
Therefore, the Board of Directors views the Mergers as the Company's
best opportunity to preserve and augment shareholder value.
-- The Board of Directors views the long-term outlook for the
onshore drilling industry as improving and potentially favorable
because of improving oil and gas prices and ongoing industry
consolidation.
-- The Board of Directors believes that the consideration to be
received in the Somerset Merger is fair, in that it approximates the
trading price of the Company's stock over the trading period
immediately preceding the agreement in principle on the terms
thereof.
-- The Board of Directors believes that the consideration to be
received in the Rig Merger is fair based upon the familiarity of the
Company and the Rig Appraiser with the value of drilling rigs such
as the Merger Rigs.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For four years following the Effective Time, by reason of the
Shareholders' Agreement, the Shareholders' Agreement Parties will be required to
vote the shares of Company Common Stock so as to maintain the size of the Board
of Directors at five directors, consisting of one director designated by each of
the Somerset Shareholders, the Company Parties and the Mullen/Oliver Group, and
two Non-Party Directors. See "Shareholders' Agreement."
As a condition to the Closing, the Company is required to rescind the
Subscription of Norex for 4,000 shares of Series B Preferred Stock. The
$4,000,000 payment by Norex for the Subscription will be simultaneously refunded
out of the proceeds of a $4,000,000 loan to be provided by Norex. See "Certain
Relationships and Related Transactions."
The Merger Agreements provide for Norex to advance to the Company
$1,000,000, which was done on June 10, 1996. The term loan was repaid with
interest on July 1, 1996.
At the Effective Time, the Company will enter into an investment
monitoring agreement providing for a single payment by the Company of $75,000 to
SCP to monitor on behalf of SDA the investment in the Company by SDA resulting
from the Somerset Merger. See "Certain Relationships and Related Transactions."
-26-
The Registration Rights Agreement Parties have entered into a Registration
Rights Agreement that requires the Company to register for sale under the
Securities Act of 1933, as amended (the "Securities Act") the shares received by
any of such parties and certain of their assignees pursuant to the Mergers. See
"Restrictions on Resales/Registration Rights."
The Merger Agreements provide for limited indemnification of LRAC, RTO,
Mullen, Oliver, Somerset and various affiliates of each. See "The Rig Merger
Agreement - Indemnification" and "The Somerset Merger Agreement -
Indemnification."
ACCOUNTING TREATMENT
The Rig Merger is expected to be accounted for as a "purchase" and the
Somerset Merger is expected to be accounted for as a "stock issuance" for
financial accounting purposes.
RESTRICTIONS ON RESALES/REGISTRATION RIGHTS
RESTRICTIONS ON RESALE. The shares of Company Common Stock to be issued
pursuant to the Merger Agreements are not being registered under Section 4(2) of
the Securities Act. Accordingly, the parties to the Mergers will not be able to
resell the Company Common Stock received by them in connection with the Merger
unless and until such shares are (1) registered for resale under the Securities
Act, (2) sold in compliance with an exemption from the registration requirements
of the Securities Act, such as Rule 144 under the Securities Act. The Company is
obligated under the Merger Agreements to file and obtain and maintain the
effectiveness of the Registration Statement.
To the extent that the Company does not maintain the effectiveness of the
Registration Statement, the sale of the Company Common Stock received by the
parties to the Merger pursuant to the Merger Agreements will be subject to
certain restrictions. Such persons could, absent registration, sell Company
Common Stock under Rule 144, but only if (1) the Company has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months, (2) the holder of the Company Common Stock has satisfied
certain holding period requirements (generally two years), (3) the Company
Common Stock is sold in "brokers' transactions" or in transactions directly with
a "market maker," within the meanings thereof in Rule 144 under the Securities
Act, and (4) such sale and all other sales made by such person within the
preceding three months do not collectively exceed the greater of (i) one percent
of the then outstanding shares of Company Common Stock and (ii) the average
weekly trading volume of Company Common Stock on the AMEX during the four-week
period preceding the sale.
REGISTRATION RIGHTS. Under the Registration Rights Agreement, the Company
is obligated to file as soon as practicable the Registration Statement and to
cause such Registration Statement to become effective no later than the
Effective Time. Additionally, the Registration Rights Agreement Parties are
entitled to require up to three demand registrations with respect to all of the
Company Common Stock held by such persons as of the Effective Time and an
unlimited number of incidental registrations (the right to register shares when
the Company files a registration statement with respect to other shares). All of
such registrations are required to be at the expense of the Company and are
subject to numerous terms and conditions set forth in the Registration Rights
Agreement.
NO SOLICITATION
Each of the Merger Agreements provides that the Company may, directly or
indirectly, furnish information and access only in response to unsolicited
requests therefor, to any corporation, partnership,
-27-
person, or other entity or group pursuant to confidentiality agreements, and may
participate in discussion and negotiate with such entity or group concerning any
Company Acquisition Transaction, if such entity or group has submitted a written
proposal to the Board of Directors relating to any such transaction and the
Board of Directors by a majority vote determines in its good faith judgment,
based as to legal matters on the written opinion of legal counsel, that failing
to take such action would constitute a breach of the Board of Directors'
fiduciary duty. The Board of Directors is required to provide a copy of any such
written proposal to Somerset, LRAC and RTO immediately after receipt thereof and
thereafter keep each of them promptly advised of any development with respect
thereto. The Merger Agreements further provide that neither the Company or any
of its affiliates, nor any of its or their respective officers, directors,
employees, representatives or agents, shall, directly or indirectly, encourage,
solicit, participate in or initiate discussions or negotiations with, or provide
any information to, any corporation, partnership, person or other entity or
group (other than Somerset, LRAC or RTO, or any affiliate, associate or designee
of Somerset, LRAC or RTO, or as contemplated by the Merger Agreements)
concerning any Company Acquisition Transaction provided, however, that nothing
in the Merger Agreements prevents the Board of Directors from taking, and
disclosing to the Company's shareholders a position contemplated by Rules 14d-9
and 14e-2 promulgated under the Exchange Act with regard to any tender offer;
provided, further, that the Board of Directors is not permitted to recommend
that the shareholders of the Company tender their shares of the Company Common
Stock in connection with any such tender offer unless the Board of Directors by
a majority vote determines in it good faith judgment, based as to legal matters
on the written opinion of legal counsel, that failing to take such action would
constitute a breach of such Board of Directors' fiduciary duty.
NO APPRAISAL RIGHTS
Under Texas law, none of the Shareholders will be entitled to any
appraisal or dissenter's rights in connection with the Mergers. Additionally,
under the applicable laws of the respective states of incorporation of RTO, LRAC
and Somerset, none of the shareholders of RTO, LRAC and Somerset will be
entitled to any appraisal or dissenter's rights in connection with the Mergers.
THE RIG MERGER AGREEMENT
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN TERMS AND CONDITIONS OF THE
RIG MERGER AGREEMENT, A COPY OF WHICH IS ATTACHED HERETO AS APPENDIX A. THE
STATEMENTS CONTAINED IN THIS SUMMARY ARE, IN MOST INSTANCES, ONLY ABBREVIATED
SUMMARIES AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE RIG MERGER
AGREEMENT. RECIPIENTS OF THIS PROXY STATEMENT SHOULD CAREFULLY READ AND REVIEW
THE ENTIRE RIG MERGER AGREEMENT AND SHOULD NOT RELY EXCLUSIVELY UPON THE
FOLLOWING SUMMARY.
EFFECTIVE TIME OF THE MERGER
The Rig Merger Agreement provides that the Rig Merger will become
effective at such time as certificates of merger are duly filed with the
Secretaries of State of Delaware and Oklahoma, or at such later time, not to
exceed ninety days after the closing date (the "Closing Date") specified in the
Rig Merger Agreement, as is specified in the certificates of merger pursuant to
the mutual agreement of the parties thereto. It is anticipated that the
Effective Time of the Rig Merger will occur on the first business day following
the Closing Date.
-28-
MANNER AND BASIS OF CONVERTING SHARES
The Rig Merger Agreement provides that (i) each of the LRAC Shares issued
and outstanding immediately prior to the Effective Time shall, unless the holder
thereof shall have duly elected to receive cash therefor as described below, be
converted into the right to receive 28,250.748 shares (subject to adjustment) of
Company Common Stock and (ii) each of the RTO Shares issued and outstanding
immediately prior to the Effective Time shall, unless the holder thereof shall
have duly elected to receive cash therefor as described below, be converted into
the right to receive 22,773.26 shares (subject to adjustment) of Company Common
Stock.
The foregoing exchange ratios are based on 38,669,378 shares of Company
Common Stock being issued and outstanding as of the Effective Time of the Rig
Merger, and 968,000 shares of Company Common Stock being subject to options
issued by the Company (excluding the Dillard Option) as of the Effective Time.
The Rig Merger Agreement provides that in the event the number of shares of
Company Common Stock which are issued or subject to options as of the Effective
Time is greater or less than the amount specified in the immediately preceding
sentence, the number of shares issuable pursuant to the Rig Merger will be
increased or decreased by a number of shares equal to such difference.
As of the Record Date, there were 38,836,378 shares of Company Common
Stock issued and outstanding and 699,200 shares of Company Common Stock subject
to outstanding options issued by the Company, excluding the Dillard Option.
Accordingly, pursuant to the Rig Merger Agreement, as of the Record Date, (i)
each of the RTO Shares will be converted into the right to receive 22,714.770
shares of Company Common Stock, or an aggregate of 11,357,385 shares of Company
Common Stock, and (ii) each of the LRAC Shares will be converted into the right
to receive 28,178.193 shares of Company Common Stock, or an aggregate of
28,178,193 shares of Company Common Stock.
No fractional shares of the Company Common Stock will be issued in the Rig
Merger. Each holder of RTO Shares or LRAC Shares otherwise entitled to a
fractional share will receive an amount in cash equal to the value of such
fractional share based upon the closing sales price of the Company Common Stock,
as reported on the AMEX, on the first day in which there is a reported trade in
the Company Common Stock after the Effective Time. No interest shall be paid on
such amount, and all RTO Shares or LRAC Shares held by the record holder will be
aggregated for purposes of computing the number of shares of Company Common
Stock to be issued pursuant to the Rig Merger.
Notwithstanding the foregoing, holders of LRAC Shares may elect to receive
$17,818.25 per share in cash for some or all of such holder's LRAC Shares, in
lieu of receiving the Company Common Stock as discussed above. If such cash
option is elected with respect to more than 200 of the LRAC Shares, (1)
$3,563,650 in cash and (2) that number of shares of Company Common Stock into
which the LRAC Shares in excess of 200 would otherwise have been converted, as
discussed above, will be distributed on a pro rata basis to the holders of the
LRAC Shares exercising the Cash Option.
Holders of RTO Shares may elect to receive $14,363.50 per share in cash
for some or all of such holder's RTO Shares, in lieu of receiving the Company
Common Stock as discussed above. If such cash option is elected with respect to
more than 100 of the RTO Shares, (1) $1,436,350 in cash and (2) that number of
the shares of Company Common Stock into which the RTO Shares in excess of 100
would otherwise have been converted, as discussed above, will be distributed on
a pro rata basis to the holders of the RTO Shares exercising the Cash Option.
-29-
As soon as practical after the Effective Time, the Company is required to
make any cash payment required pursuant to the exercise of the Cash Option
described above and deliver to the shareholders of LRAC and RTO certificates
representing the Company Common Stock issuable to them as discussed above.
No exchange of the LRAC and RTO certificates will be required.
RIG SHADOW WARRANTS
In addition, the LRAC/RTO Shareholders will receive warrants to purchase
up to 1,720,000 shares of Company Common Stock, exercisable only in the event
that the issued and outstanding Series A Preferred Stock of the Company is
converted into Company Common Stock or the Dillard Option is exercised, and, in
such event, only with respect to an equivalent number of shares as are subject
to such conversion or exercise. The Rig Shadow Warrants will be exercisable at
the conversion price or option price at which the Series A Preferred Stock is
converted or the Dillard Option is exercised. The Series A Preferred Stock is
convertible at $1.25 per share and the Dillard Option is exercisable, if at all,
at $1.00 per share.
CONDITIONS TO THE MERGER
The obligations of the respective parties to consummate the Rig Merger are
subject to the satisfaction of various conditions, including, without
limitation, that (1) the Rig Merger Agreement and the Rig Merger shall have been
approved and adopted by the requisite vote of the Shareholders; (2) the Company
Common Stock issuable upon the consummation of the Rig Merger shall have been
approved for listing on the AMEX, subject to official notice of issuance; (3)
the Somerset Merger shall have become effective in accordance with and as
provided in the Somerset Merger Agreement; (4) the Subscription of Norex for
4,000 shares of the Series B Preferred Stock shall have been canceled and the
$4,000,000 payment made by Norex for the Subscription shall have been repaid out
of the proceeds of a term loan pursuant to a Term Loan Agreement between the
Company and Norex in the form attached to the Rig Merger Agreement (the "Term
Loan Agreement"), and such Term Loan Agreement shall be in full force and
effect; (5) the Cash Option shall be in compliance in all material respects
with, or the Company shall have obtained appropriate exemptions with respect to
the Cash Option from, all federal and state laws, including, without limitation,
Section 14 of the Exchange Act and Rules 10b-6 and 10b-13 promulgated under the
Exchange Act; and (6) the Registration Rights Agreement shall be in full force
and effect.
The obligation of the Company to consummate the Rig Merger is further
subject to the satisfaction of certain other conditions, including, without
limitation, the conditions that: (1) a Noncompetition Agreement shall have been
executed and delivered by Mullen, Oliver, USRE, and EER pursuant to which such
parties agree not to sell, lease or otherwise dispose of drilling rigs in
Venezuela or Columbia for a period of five years; and (2) the RTO Liabilities
(as defined in the Rig Merger Agreement) shall have been satisfied or otherwise
eliminated to the satisfaction of the Company.
The obligations of LRAC and RTO to consummate the Merger are further
subject to the satisfaction of certain other conditions, including, without
limitation, the conditions that: (1) the Company shall have executed and issued
to the LRAC/RTO Shareholders the Rig Shadow Warrants; (2) Norex shall have
released the Norex Lien (as defined in the Rig Merger Agreement); (3) the
Shareholders' Agreement shall have been executed and delivered by SDA, Norex
Drilling, and Pronor; and (4) the Registration Statement shall be effective on
the Closing Date, and all post-effective amendments shall have been declared
effective or shall have been withdrawn, and no stop orders suspending the
effectiveness thereof shall have been issued and no proceedings for that purpose
shall have been initiated or, to the knowledge of the parties, threatened by the
Commission.
-30-
REPRESENTATIONS AND WARRANTIES
Each of the parties has made various representations and warranties in the
Rig Merger Agreement relating to, among other things, their respective
businesses and financial conditions, the accuracy of their various filings with
the Commission, satisfaction of certain legal requirements for the Rig Merger,
and the existence of certain litigation matters. The representations and
warranties of each of the parties to the Rig Merger Agreement will expire upon
the consummation of the Merger, except for the representations of LRAC and RTO
regarding title to the Merger Rigs, absence of tax or other liabilities, and
absence of known latent defects in the Merger Rigs.
CERTAIN COVENANTS; CONDUCT OF BUSINESS PRIOR TO THE MERGER
Both LRAC and RTO have agreed that, from the date of the Rig Merger
Agreement until the Effective Time, unless the Company shall otherwise agree in
writing or as otherwise expressly contemplated by the Rig Merger Agreement, they
will undertake, or refrain from undertaking, as the case may be, certain
specified actions.
The Company has also agreed that, from the date of the Rig Merger
Agreement until the Effective Time, unless both LRAC and RTO shall otherwise
agree in writing or as otherwise expressly contemplated by the Rig Merger
Agreement, it will undertake, or refrain from undertaking, as the case may be,
certain specified actions.
TERMINATION OR AMENDMENT OF THE MERGER AGREEMENT
The Rig Merger Agreement provides that the same may not be amended or
supplemented at any time, except by an instrument in writing signed on behalf of
each party thereto and further provided that the same may be amended only as may
be permitted by the applicable provisions of the General Corporation Law of the
State of Delaware (the "DGCL") and the Oklahoma General Corporation Act (the
"OGCA").
The Rig Merger Agreement provides that it may be terminated and the Rig
Merger and other transactions contemplated therein may be abandoned at any time
prior to the Effective Time, whether before or after the approval by the
Shareholders, for certain specified reasons.
In the event of any termination of the Rig Merger Agreement as a result of
the failure to obtain the required approval of the Shareholders or if there has
been a material breach of any of the representations, warranties, or covenants
by the Company which has not been cured within twenty business days following
receipt by the Company of notice of such breach, the Company has agreed to pay
to LRAC and RTO an amount equal to all of the expenses incurred by LRAC and RTO
in connection with the Rig Merger Agreement, the negotiations leading to its
execution, the examination and investigation of the Company, the preparation and
negotiation of the Rig Merger Agreement and the related agreements, and in all
other ways relating to the Rig Merger, including, but not limited to, all fees
and expenses incurred by LRAC and RTO to investment bankers, accountants,
attorneys, and other agents, plus the sum of $500,000 in the case of a
termination as a result of the Company's breach or $250,000 in the case of the
failure to obtain the approval of the Shareholders. If the Rig Merger is not
consummated for any reason other than as a result of the material breach of LRAC
or RTO of any of their representations, covenants, or agreements and if, prior
to December 31, 1996, the Company or the Shareholders publicly announce, enter
into a letter of intent relating to, enter into a definitive agreement providing
for, or consummate, a Company Acquisition Transaction, the Company agrees to pay
to LRAC and RTO an amount equal to 33-1/3 percent of the difference between the
consideration paid in the Company Acquisition Transaction and $30,000,000,
subject to adjustment in the
-31-
event that the Company Acquisition Transaction involves less than all of the
outstanding securities or assets of the Company.
EXPENSES
The Company has agreed to pay the reasonable legal fees and disbursements
of LRAC and RTO in connection with the organization of LRAC and the negotiation,
preparation, and performance of the Rig Merger Agreement and the agreements and
transactions contemplated thereby, up to a maximum of $60,000. Except for the
foregoing, whether or not the Rig Merger Agreement is consummated, all costs and
expenses incurred in connection with the Rig Merger Agreement and the
transactions contemplated thereby are required to be paid by the party incurring
such expense, except as otherwise may be payable as a result of a termination of
the Rig Merger Agreement.
INDEMNIFICATION
The Rig Merger Agreement provides that the Company and LRAC, as the
surviving corporation, will indemnify, defend, and hold harmless Mullen, Oliver,
and each other person who is an officer or director of LRAC or RTO against all
losses, claims, damages, costs, expenses, liabilities, or judgments or amounts
that are paid in settlement with the approval of the indemnifying party of or in
connection with any claim, action, suit, proceeding, or investigation, whether
asserted or claimed prior to, or at or after, the Effective Time to the extent,
and only to the extent, that such claim arises from any untrue statement of
material fact in the Registration Statement and Proxy Statement or any omission
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading, except to the extent that such claim is
subject to indemnification by Mullen and Oliver as discussed below.
Mullen and Oliver have agreed to indemnify, defend, and hold harmless the
Company and LRAC, as the surviving corporation, and any officer or director of
the foregoing against all losses, claims, damages, costs, expenses, liabilities,
or judgments or amounts that are paid in settlement with the approval of the
indemnifying party, of or in connection with any claim, action, suit,
proceeding, or investigation, whether asserted or claimed prior to, or at or
after, the Effective Time, to the extent, and only to the extent, such claim
arises from (1) any untrue statement of material fact in the Registration
Statement or Proxy Statement or any omission to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
which is made or omitted in reliance on and in conformity with the written
information provided by Mullen or Oliver or any of their representatives or
affiliates specifically for use therein, or (2) any breach of any representation
or warranty by Mullen, Oliver, LRAC, or RTO that survives the Effective Time. In
addition, Oliver has agreed to indemnify, defend, and hold harmless the Company
and the surviving corporation, and any officer or director of the foregoing
against all liabilities of RTO arising prior to the Effective Time to which any
of them may be subject by reason of the Rig Merger.
THE SOMERSET MERGER AGREEMENT
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN TERMS AND CONDITIONS OF THE
SOMERSET MERGER AGREEMENT, A COPY OF WHICH IS ATTACHED HERETO AS APPENDIX B. THE
STATEMENTS CONTAINED IN THIS SUMMARY ARE, IN MOST INSTANCES, ONLY ABBREVIATED
SUMMARIES AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE SOMERSET
MERGER AGREEMENT. RECIPIENTS OF THIS PROXY STATEMENT SHOULD CAREFULLY READ AND
REVIEW THE ENTIRE SOMERSET MERGER AGREEMENT AND SHOULD NOT RELY EXCLUSIVELY UPON
THE FOLLOWING SUMMARY.
-32-
EFFECTIVE TIME OF THE MERGER
The Somerset Merger Agreement provides that the Somerset Merger will
become effective at such time as articles of merger are duly filed with the
Secretary of State of Texas and the Secretary of State of Texas has issued a
Certificate of Merger, or at such later time, not to exceed ninety days after
the Closing Date specified in the Somerset Merger Agreement, as is specified in
the Articles of Merger pursuant to the mutual agreement of the parties thereto.
It is anticipated that the Effective Time of the Somerset Merger will occur on
the first business day following the Closing Date.
MANNER AND BASIS OF CONVERTING SHARES
By virtue of the Somerset Merger, each of the Somerset Shares issued and
outstanding immediately prior to the Effective Time shall be converted into the
right to receive 39,637.378 (subject to adjustment) shares of Company Common
Stock. The foregoing exchange ratio is based on 38,669,378 shares of Company
Common Stock being issued and outstanding as of the Effective Time of the
Somerset Merger, and 968,000 shares of Company Common Stock being subject to
options issued by the Company (excluding the Dillard Option) as of the Effective
Time. In the event the number of shares of Company Common Stock which are issued
or subject to options as of the Effective Time is greater or less than the
amount specified in the immediately preceding sentence, the number of shares
issuable pursuant to the Somerset Merger will be increased or decreased by a
number of shares equal to such difference.
As of the date of the Record Date, there were 38,836,378 shares of Company
Common Stock issued and outstanding and 699,200 shares of Company Common Stock
subject to outstanding options issued by the Company, excluding the Dillard
Option. Accordingly, pursuant to the Somerset Merger Agreement, as of the Record
Date, each of the Somerset Shares will be converted into the right to receive
39,535.578 shares of the Company Common Stock, or an aggregate of 39,535,578
shares of Company Common Stock.
No fractional shares of the Company Common Stock will be issued in the
Somerset Merger. Each holder of the Somerset Shares otherwise entitled to a
fractional share will receive an amount in cash equal to the value of such
fractional share based upon the closing sales price of the Company Common Stock,
as reported on the AMEX, on the first day in which there is a reported trade in
the Company Common Stock after the Effective Time. No interest shall be paid on
such amount, and all of the Somerset Shares held by the record holder shall be
aggregated for purposes of computing the number of share of Company Common Stock
to be issued pursuant to the Somerset Merger.
SOMERSET SHADOW WARRANTS
In addition, the shareholders of Somerset will receive warrants to
purchase up to 1,720,000 shares of Company Common Stock, exercisable only in the
event that the issued and outstanding Series A Preferred Stock of the Company is
converted into Company Common Stock or the Dillard Option is exercised, and, in
such event, only with respect to an equivalent number of shares as are subject
to such conversion or exercise. The Somerset Shadow Warrants will be exercisable
at the conversion price or option price at which the Series A Preferred Stock is
converted or the Dillard Option is exercised. The Series A Preferred Stock is
convertible at $1.25 per share and the Dillard Option is exercisable, if at all,
at $1.00 per share.
CONDITIONS TO THE MERGER
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The respective obligations of the parties to consummate the Somerset
Merger are subject to the satisfaction of various conditions, including, without
limitation, that (1) the Somerset Merger Agreement and the Somerset Merger shall
have been approved and adopted by the requisite vote of the Shareholders; (2)
the shares of Company Common Stock issuable upon the consummation of the
Somerset Merger shall have been approved for listing on the AMEX, subject to
official notice of issuance; (3) the Registration Rights Agreement shall be in
full force and effect; (4) the Rig Merger shall become effective in accordance
with and as provided in the Rig Merger Agreement; and (5) the Subscription of
Norex for 4,000 shares of the Company Series B Preferred Stock shall have been
canceled and the $4,000,000 payment made by Norex for the Subscription shall
have been repaid out of the proceeds of a term loan pursuant to a Term Loan
Agreement between the Company and Norex in the form attached to the Somerset
Merger Agreement, and such Term Loan Agreement shall be in full force and
effect.
The obligation of the Company to consummate the Somerset Merger is further
subject to the satisfaction of certain other conditions, including, without
limitation, the condition that the Somerset Shareholders shall have contributed
to the capital of Somerset at least $25,000,000 in cash.
The obligation of Somerset to consummate the Merger is further subject to
the satisfaction of certain other conditions, including, without limitation, the
conditions that: (1) the Company shall have executed and issued to the Somerset
Shareholders the Somerset Shadow Warrants; (2) Norex shall have released the
Norex Lien; (3) the Shareholders' Agreement shall have been executed and
delivered by the Mullen/Oliver Group, Norex Drilling, and Pronor; and (4) the
Registration Statement shall be effective on the Closing Date, and all
post-effective amendments shall have been declared effective or shall have been
withdrawn, and no stop orders suspending the effectiveness thereof shall have
been issued and no proceedings for that purpose shall have been initiated or, to
the knowledge of the parties, threatened by the Commission.
REPRESENTATIONS AND WARRANTIES
Each of the parties has made various representations and warranties in the
Somerset Merger Agreement relating to, among other things, their respective
businesses and financial conditions, the accuracy of their various filings with
the Commission, satisfaction of certain legal requirements for the Somerset
Merger, and the existence of certain litigation matters. The representations and
warranties of each of the parties to the Somerset Merger Agreement will expire
upon the consummation of the Merger.
CERTAIN COVENANTS; CONDUCT OF BUSINESS PRIOR TO THE MERGER
Somerset has agreed that, from the date of the Somerset Merger Agreement
until the Effective Time, unless the Company shall otherwise agree in writing or
as otherwise expressly contemplated by the Somerset Merger Agreement, it will
undertake, or refrain from undertaking, as the case may be, certain specified
actions.
The Company has also agreed that, from the date of the Somerset Merger
Agreement until the Effective Time, unless Somerset shall otherwise agree in
writing or as otherwise expressly contemplated by the Somerset Merger Agreement,
it will undertake, or refrain from undertaking, certain specified actions.
TERMINATION OR AMENDMENT OF THE MERGER AGREEMENT
The Somerset Merger Agreement provides that the same may not be amended or
supplemented at any time, except by an instrument in writing signed on behalf of
each party thereto and further provided that the same may be amended only as may
be permitted by the applicable provisions of the TBCA.
-34-
The Somerset Merger Agreement provides that it may be terminated and the
Somerset Merger and other transactions contemplated therein may be abandoned at
any time prior to the Effective Time, whether before or after the approval by
the Shareholders, for certain specified reasons.
In the event of any termination of the Somerset Merger Agreement as a
result of the failure to obtain the required approval of the Shareholders or if
there has been a material breach of any of the representations, warranties, or
covenants by the Company which has not been cured within twenty days following
receipt by the Company of notice of such breach, the Company has agreed to pay
to Somerset an amount equal to all of the expenses incurred by Somerset in
connection with the Somerset Merger Agreement, the negotiations leading to its
execution, the examination and investigation of the Company, the preparation and
negotiation of the Somerset Merger Agreement and the related agreements, and in
all other ways relating to the Somerset Merger, including, but not limited to,
all fees and expenses incurred by Somerset to investment bankers, accountants,
attorneys, and other agents, plus the sum of $500,000 in the case of a
termination as a result of the Company's breach or $250,000 in the case of the
failure to obtain the approval of the Shareholders. If the Somerset Merger is
not consummated for any reason other than as a result of the material breach of
Somerset of any of their representations, covenants, or agreements and if, prior
to December 31, 1996, the Company or the Shareholders publicly announce, enter
into a letter of intent relating to, enter into a definitive agreement providing
for, or consummate, a Company Acquisition Transaction, the Company agrees to pay
to Somerset an amount equal to 33 1/3 percent of the difference between the
consideration paid in the Company Acquisition Transaction and $30,000,000,
subject to adjustment in the event that the Company Acquisition Transaction
involves less than all of the outstanding securities or assets of the Company.
EXPENSES
The Company has agreed to pay the reasonable legal fees and disbursements
of the Somerset Shareholders and Somerset in connection with the organization of
Somerset and the negotiation, preparation, and performance of the Somerset
Merger Agreement and the agreements and transactions contemplated thereby, up to
a maximum of $200,000. In addition, the Company has agreed to pay, up to a
maximum of $30,000, one-half of the fee of Robert Greer for his services as a
consultant to SDA in connection with the Somerset Merger. Except for the
foregoing, whether or not the Somerset Merger Agreement is consummated, all
costs and expenses incurred in connection with the Somerset Merger Agreement and
the transactions contemplated thereby are required to be paid by the party
incurring such expense, except as otherwise may be payable as a result of a
termination of the Somerset Merger Agreement.
INDEMNIFICATION
The Somerset Merger Agreement provides that the Company will indemnify,
defend, and hold harmless Somerset and each other person who is an officer or
director of Somerset against all losses, claims, damages, costs, expenses,
liabilities, or judgments or amounts that are paid in settlement with the
approval of the indemnifying party of or in connection with any claim, action,
suit, proceeding, or investigation, whether asserted or claimed prior to, or at
or after, the Effective Time to the extent, and only to the extent, that such
claim arises from any untrue statement of material fact in the Registration
Statement or Proxy Statement or any omission to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
except to the extent that such claim is subject to indemnification by Somerset
as discussed below.
Somerset has agreed to indemnify, defend, and hold harmless the Company
and any officer or director of the Company against all losses, claims, damages,
costs, expenses, liabilities, or judgments or amounts that are paid in
settlement with the approval of the indemnifying party, of or in connection with
any
-35-
claim, action, suit, proceeding, or investigation, whether asserted or claimed
prior to, or at or after, the Effective Time, to the extent, and only to the
extent, such claim arises from any untrue statement of material fact in the
Registration Statement or Proxy Statement or any omission to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading which is made or omitted in reliance on and in conformity with
the written information provided by the Somerset Shareholders or Somerset or any
of their representatives or affiliates specifically for use therein.
CHARTER AMENDMENTS
The adoption of the Somerset Merger Agreement by the Shareholders and the
filing of the Articles of Merger necessary to consummate the Somerset Merger
will cause each of the Charter Amendments to be adopted without any further
action required by the Shareholders.
SHAREHOLDERS' AGREEMENT
The Somerset Shareholders, the Mullen/Oliver Group and the Company Parties
have entered into a Shareholders' Agreement dated as of May 7, 1996, covering
various agreements among such parties with respect to the Company Common Stock
owned or to be acquired by them, as further described below. The Shareholders'
Agreement is effective as of the Effective Time of the Mergers and terminates
four years thereafter, unless sooner terminated under the terms of the
Shareholders' Agreement. Upon consummation of the Mergers, the Shareholders'
Agreement Parties will beneficially own up to an aggregate of 91,560,073 shares,
or up to 77.7% of the Company Common Stock expected to be issued and outstanding
as of the Effective Time, assuming the Cash Option is not exercised.
The Shareholders' Agreement requires that the Shareholders' Agreement
Parties vote their Company Common Stock so as to ensure that the Board of
Directors and the board of directors of any material subsidiary (as defined)
consists of five directors, of which the Company Parties, the Mullen/Oliver
Group and the Somerset Shareholders will each be entitled to designate and
maintain one director and the remaining two of which shall be Non-Party
Directors. The initial nominees under the agreement are William R. Ziegler on
behalf of the Somerset Shareholders, Ivar Siem on behalf of the Company Parties,
Roy T. Oliver, Jr. on behalf of the Mullen/Oliver Group and Steven A. Webster
and Peter M. Holt as the Non-Party Directors. Each of the Shareholders'
Agreement Parties has granted the other parties a four year irrevocable proxy to
enforce the foregoing provisions. The Shareholders' Agreement also contains (i)
certain standstill provisions that effectively deprive the Shareholders'
Agreement Parties voting rights with respect to any additional stock of the
Company so as to limit their relative voting power to their voting power as of
the Effective Time, and (ii) certain provisions that provide rights of first
refusal and co-sale among the Shareholders' Agreement Parties as to certain
sales or dispositions to third parties.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The Company has been advised by Cokinos, Bosien & Young, its tax counsel,
that regardless of whether the Mergers qualify as reorganizations within the
meaning of Section 368(a) of the Code (a "Reorganization"), the Mergers will not
require the Shareholders or the Company to recognize taxable income or loss.
If the merger of RTO into LRAC (the "RTO Merger") qualifies as a
Reorganization, LRAC will hold the assets acquired pursuant to the RTO Merger at
the same basis as RTO held such assets prior to the
-36-
consummation of the Mergers. If the RTO Merger is not a Reorganization, LRAC
will hold such assets at a basis equal to the fair market value of the Company
Common Stock issued in the RTO Merger plus the amount of cash paid pursuant to
the Cash Option in connection with the RTO Merger.
Whether or not the merger of Merger Sub into LRAC ("the Sub Merger")
qualifies as a Reorganization, the basis of the assets held by LRAC prior to the
consummation of the Sub Merger will not be changed as a result of the
consummation of the Sub Merger.
If the Sub Merger is a Reorganization, the basis at which the Company
holds the stock of LRAC will equal the bases of the assets held by LRAC and RTO
prior to the consummation of the Mergers.
If the Sub Merger is not a Reorganization, the basis at which the Company
holds the stock of LRAC will equal the fair market value of the Company Common
Stock issued pursuant to the Sub Merger plus the amount of cash paid to the LRAC
Shareholders in connection with the Cash Option.
As a result of the consummation of the Mergers, the Company will undergo
an "ownership change" within the meaning of Section 382 of the Internal Revenue
Code of 1986, as amended (the "Code"). As a result, the right of the Company to
use its existing net operating loss carryforwards ("NOLs") (and certain other
tax attributes) for both regular tax and alternative minimum tax purposes during
each future year is limited to a percentage (currently approximately six
percent) of the fair market value of the Company's stock immediately before the
ownership change (the "Section 382 Limitation"). To the extent that taxable
income exceeds the Section 382 Limitation in any year subsequent to the
ownership change, such excess income may not be offset by NOLs from years prior
to the ownership change. To the extent the amount of taxable income in any
subsequent year is less than the Section 382 Limitation for such year, the
Section 382 Limitation for future years is correspondingly increased. There is
generally no restriction on the use of NOLs arising after the ownership change,
although Section 382 applies anew each time there is an ownership change. The
actual effect, if any, of such utilization of NOLs will depend on the Company's
profitability in future years. As of December 31, 1995, the Company had
approximately $64 million of NOLs, a significant portion of which are already
subject to a Section 382 Limitation resulting from ownership changes in years
prior to the year of the Mergers.
-37-
MARKET PRICES, DIVIDEND AND DISTRIBUTIONS
The Company Common Stock is listed on the American Stock Exchange under
the symbol "DRL." At July 15, 1996, there were approximately 584 shareholders of
record of the Company Common Stock, not including beneficial holders who hold
shares of Company Common Stock in street-name.
The following table sets forth the high and low sale prices of the common
stock reported by the AMEX for the periods indicated:
HIGH LOW
------- -------
Year Ended December 31, 1996
First Quarter .................................... $ 0.7500 $ 0.3750
Second Quarter ................................... 2.0000 0.6875
Third Quarter (through July ___, 1996) ........... -- --
Year Ended December 31, 1995:
First Quarter .................................... 1.0000 0.6250
Second Quarter ................................... 1.0625 0.6875
Third Quarter .................................... 0.8750 0.6250
Fourth Quarter ................................... 0.8750 0.6250
Year Ended December 31, 1994:
First Quarter .................................... 1.1875 0.8125
Second Quarter ................................... 1.1875 0.8125
Third Quarter .................................... 1.3125 0.8750
Fourth Quarter ................................... 1.0625 0.7500
On July 26, 1996, the last reported sale price of the Company's common
stock on the AMEX was $1.3750 per share.
The Company has never paid dividends on its common stock and has no plans
to pay dividends on its common stock in the foreseeable future.
-38-
DI INDUSTRIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited pro forma consolidated financial statements of
the Company are based upon the historical consolidated financial statements of
the Company as of March 31, 1996 and for the year ended December 31, 1995 and
the three months ended March 31, 1996, as adjusted for certain items discussed
in the notes to these unaudited pro forma consolidated financial statements. The
historical financial statement of RTO, LRAC and Somerset are not included herein
because the historical operations of RTO are inconsistent and not comparable
with the future anticipated operations of the Company and because LRAC and
Somerset were created during early 1996 for the sole purpose of the Mergers and
as such, there were no historical operations.
For purposes of the accompanying statements, the sale of Western's
operational assets has been accounted for as an asset sale. Accordingly, the
$3.95 million sale proceeds has been recorded against the book value of the
assets sold resulting in a gain on the sale of the assets. The accounts of
Western have also been adjusted to reflect the purchaser's assumption of
Western's operational leases, pursuant to the terms of the definitive agreement.
The $2.7 million gain on the sale of Western's assets is not reflected in the
attached pro forma financial statements as the gain was non-recurring in nature.
In addition, for purposes of the accompanying statements, the Somerset
Merger has been accounted for as a stock issuance and the Rig Mergers have been
accounted for as an asset purchase. Accordingly, the stock issuance is recorded
based on estimated proceeds received for the stock issued and the asset purchase
is recorded at purchase cost based on the price per share received for the
Company Common Stock issued in the Somerset Merger. The purchase price of the
assets acquired in the Rig Mergers was grossed up for the deferred tax estimate
based on the difference in book versus tax bases.
The unaudited pro forma balance sheet assumes the Mergers and the sale of
Western's assets occurred on March 31, 1996 while the unaudited pro forma
statement of operations assume the Mergers and sale of Western's assets occurred
on January 1, 1995 for the year ended December 31, 1995 and January 1, 1996 for
the three months ended March 31, 1996.
These unaudited pro forma consolidated financial statements should be read
in conjunction with the consolidated financial statements and the related notes
thereto included elsewhere in this Prospectus/Proxy Statement. Pro forma
financial data is not necessarily indicative of future operations of the Company
as a result of numerous factors, including changes in utilization rates for
drilling rigs, changes in rates received for contract drilling services and
future equipment sales and acquisitions. In addition, the results of operations
for the three-month period ending March 31, 1996, if annualized, are not
necessarily indicative of annual results.
-38-
<PAGE>
DI INDUSTRIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
March 31, 1996
(In Thousands)
<TABLE>
<CAPTION>
Western Merger
Pro forma Pro forma
Historical Adjustments Pro forma Adjustments Pro forma
-------- ------------ --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ..................... $ 996 $ 3,950 (1) $ 4,946 $ 20,000 (a,b) $ 24,196
(150)(c)
(600)(d)
Restricted cash ............................... 1,862 1,862 1,862
Accounts receivable, net of allowance of $1,935 17,789 17,789 17,789
Rig inventory and supplies .................... 2,902 2,902 2,902
Assets held for sale .......................... 2,398 2,398 2,398
Prepaids and other current assets ............. 2,815 (110)(1) 2,705 2,705
-------- -------- -------- --------- ---------
Total current assets ..................... 28,762 3,840 32,602 19,250 51,852
-------- -------- -------- --------- ---------
Property and Equipment:
Land, buildings and improvements .............. 3,523 (227)(1) 3,296 3,296
Drilling and well service equipment ........... 39,910 (2,110)(1) 37,800 25,000 (b) 68,641
5,664 (b)
177 (d)
Furniture and fixtures ........................ 1,094 (29)(1) 1,065 1,065
Less accumulated depreciation and amortization (18,797) 986 (1) (17,811) (17,811)
-------- -------- -------- --------- ---------
Net property and equipment ............... 25,730 (1,380) 24,350 30,841 55,191
-------- -------- -------- --------- ---------
Other Noncurrent Assets ........................... 277 277 277
-------- -------- -------- --------- ---------
$ 54,769 $ 2,460 $ 57,229 $ 50,091 $ 107,320
======== ======== ======== ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt .......... $ 1,644 $ (90)(1) $ 1,554 $ 4,000 (c) $ 5,554
Accounts payable - trade ...................... 10,246 10,246 10,246
Accrued workers' compensation ................. 2,672 2,672 2,672
Payroll and related employee costs ............ 4,029 4,029 4,029
Customer advances ............................. 60 60 60
Other accrued liabilities ..................... 3,862 3,862 3,862
-------- -------- -------- --------- ---------
Total current liabilities ................ 22,513 (90) 22,423 4,000 26,423
-------- -------- -------- --------- ---------
Long-term debt less current maturities ............ 10,379 (127)(1) 10,252 10,252
-------- -------- -------- --------- ---------
Other long-term liabilities and minority interest . 2,774 2,774 2,774
-------- -------- -------- --------- ---------
Deferred income taxes ............................. -- -- 5,664 (b) 5,664
-------- -------- -------- --------- ---------
Series A Preferred stock - mandatory redeemable ... 900 900 900
-------- -------- -------- --------- ---------
Commitments and contingent liabilities
Shareholders' equity:
Series B Preferred stock, $1 par value;
10 shares authorized, 4 shares subscribed 4,150 4,150 (4,150)(c) --
Common stock, $.10 par value; 75,000 shares
authorized; 38,669 issued and outstanding 3,867 3,867 7,135 (a,b) 11,002
Additional paid-in capital .................... 46,458 46,458 37,865 (a,b) 83,900
(423)(d)
Deficit ....................................... (36,272) 2,677 (1) (33,595) (33,595)
-------- -------- -------- --------- ---------
Total shareholders' equity ............... 18,203 2,677 20,880 40,427 61,307
-------- -------- -------- --------- ---------
$ 54,769 $ 2,460 $ 57,229 $ 50,091 $ 107,320
======== ======== ======== ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS.
39
<PAGE>
DI INDUSTRIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1995
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Western Merger
Pro forma Pro forma
Historical Adjustments Pro forma Adjustments Pro forma
--------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Contract drilling ................................ $ 94,709 $(7,164)(2) $ 87,545 $ $ 87,545
Costs and Expenses:
Drilling operations .............................. 93,825 (6,056)(2) 87,769 113 (e) 87,882
Depreciation, depletion and amortization ......... 4,832 (339)(2) 4,493 4,493
Provision for SFAS #121 asset impairment ......... 5,290 5,290 5,290
General and administrative ....................... 3,264 (300)(2) 2,964 2,964
Bad debt expense ................................. 291 291 291
--------- ------- --------- -------- ---------
Total costs and expenses .................... 107,502 (6,695) 100,807 113 100,920
Operating Income (Loss) .............................. (12,793) (469) (13,262) (113) (13,375)
Other Income (expense):
Interest income .................................. 292 292 292
Gain on sale of assets ........................... 466 (17)(2) 449 449
Interest expense ................................. (1,472) 8(2) (1,464) (1,464)
Gain on currency exchange ........................ 888 888 888
Minority Interest ................................ (56) (56) (56)
--------- ------- --------- -------- ---------
Other income (expense), net ................. 118 (9) 109 -- 109
Income (Loss) from Continuing Operations ............. (12,675) (478) (13,153) (113) (13,266)
Discontinued Operations:
Income (loss) from oil and gas operations ........ (4) (4) (4)
Loss from sale of oil and gas properties ......... (768) (768) (768)
--------- ------- --------- -------- ---------
Loss from Discontinued Operations .................... (772) (772) -- (772)
Income Tax Provision
Current .......................................... -- -- --
Deferred ......................................... -- -- --
--------- ------- --------- -------- ---------
Net Income (Loss) .................................... $ (13,447) $ (478) $ (13,925) $ (113) $ (14,038)
========= ======= ========= ======== =========
Primary Earning (loss) per share:
From continuing operations ....................... $ (.33) $ (.34) $ (.12)
From discontinued operations ..................... (.02) (.02) (.01)
--------- --------- ---------
Net income per common share ...................... $ (.35) $ (.36) $ (.13)
========= ========= =========
Fully Diluted Earning (loss) per share:
From continuing operations ....................... $ (.33) $ (.34) $ (.12)
From discontinued operations ..................... (.02) (.02) (.01)
--------- --------- ---------
Net loss per common share ........................ $ (.35) $ (.36) $ (.13)
========= ========= =========
Weighted average common shares outstanding:
Primary .......................................... 38,669 38,669 71,347 110,017
========= ========= ======== =========
Fully Diluted .................................... 38,669 38,669 71,347 110,017
========= ========= ======== =========
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS.
40
<PAGE>
DI INDUSTRIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1996
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Western Merger
Pro forma Pro forma
Historical Adjustments Pro forma Adjustments Pro forma
--------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Contract drilling .................................. $20,102 $(1,659)(2) $18,443 $ -- $18,443
Costs and Expenses:
Drilling operations ................................ 18,936 (1,449)(2) 17,487 28 (e) 17,515
Depreciation, depletion and amortization ........... 1,097 (61)(2) 1,036 1,036
General and administrative ......................... 720 (123)(2) 597 597
Employment severance ............................... 602 602 602
-------- ------- -------- -------- ---------
Total costs and expenses ...................... 21,355 (1,633) 19,722 (28) 19,750
Operating Income (Loss) ................................ (1,253) (26) (1,279) (28) (1,307)
Other Income (expense):
Interest income .................................... 11 11 11
Gain on sale of assets ............................. 15 (12)(2) 3 3
Interest expense ................................... (262) 2 (2) (260) (120)(f) (380)
Minority Interest .................................. (2) (2) -- (2)
-------- ------- -------- -------- ---------
Other income (expense), net ................... (238) (10) (248) (120) (368)
Income (Loss) Before Income Taxes ...................... (1,491) (36) (1,527) (148) (1,675)
Income Tax Provision
Current ............................................ -- -- -- -- --
Deferred ........................................... -- -- -- -- --
-------- ------- -------- -------- ---------
Net income tax provision ...................... -- -- -- -- --
Net Income (Loss) ...................................... (1,491) (36) (1,527) (148) (1,675)
Series B preferred stock subscription dividend ......... (150) (150) 150 (f) --
Net Income (Loss) Applicable to Common Stock ........... $(1,641) $ (36) $ (1,677) $ 2 $ (1,675)
======== ======= ======== ======== =========
Primary Earning (loss) per share:
From continuing operations ......................... $ (.04) $ (.04) $ (.02)
From discontinued operations ....................... -- -- --
-------- -------- ---------
Net income (loss) per common share ................. $ (.04) $ (.04) $ (.02)
======== ======== =========
Fully Diluted Earning (loss) per share:
From continuing operations ......................... $ (.04) $ (.04) $ (.02)
From discontinued operations ....................... -- -- --
------- -------- ---------
Net income (loss) per common share ................. $ (.04) $ (.04) $ (.02)
======= ======== =========
Weighted average common shares outstanding:
Primary ............................................ 38,669 38,669 71,347 110,017
======= ======== =========
Fully Diluted ...................................... 38,669 38,669 71,347 110,017
======= ======== =========
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS.
41
<PAGE>
DI INDUSTRIES, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma financial statements reflect the adjustments described
below:
WESTERN SALE
BALANCE SHEET -
(1) To record the sale of Western pursuant to the June 3, 1996
definitive agreement for $3.95 million cash plus the lease
obligation assumption of $217,000.
STATEMENTS OF OPERATIONS -
(2) To record the effect of the Western sale on the operating accounts.
MERGERS
BALANCE SHEET -
(a) To record the issuance of 39,535,578 shares of Company Common Stock
and 1,720,000 warrants to acquire Company Common Stock in exchange
for all of the outstanding capital stock of Somerset whose only
asset consisted of $25,000,000 in cash, net of certain transaction
expenses.
(b) To record the issuance of 31,627,939 shares of Company Common Stock,
1,720,000 warrants to acquire Company Common Stock and $5 million in
exchange for all outstanding capital stock of R.T. Oliver, Inc. and
Land Rig Acquisition Corporation whose assets consist of the Merger
Rigs. The Merger Rigs were valued at $30.664 million consisting of
i) $20 million for the shares (based on $0.63 per share, the value
received for the shares issued in the Somerset Merger), ii) $5
million in cash and iii) $5.664 million in deferred taxes based on
DI's effective tax rate times the difference between the $25 million
acquisition cost and the $8.3 million of carryover tax bases in the
assets. Depreciation associated with the capitalized cost of the
Merger Rigs has not been provided as these rigs are not considered
to be in service for the periods shown. Depreciation will be
provided when these rigs are refurbished and placed in service. If
the Cash Option is not exercised, the "Working Capital", "Total
Assets" and " Shareholders' Equity" accounts would be as follows:
Merger
Pro Forma
Pro Forma Adjustment Pro Forma
--------- ---------- ---------
Working Capital $ 10,179 $ 20,250 $ 30,429
Total Assets 57,229 55,091 112,320
Shareholders' Equity 20,880 45,427 66,307
(c) To record the rescission of the subscription by Norex Drilling, Ltd
("Norex") for DI Series B Preferred Stock and the establishment of a
$4,000,000 term loan with Norex.
(d) To record the cost of consummating the Mergers which includes the
Company's direct expenses, the expenses of Somerset, LRAC, RTO to be
reimbursed by the Company and the Investment Monitoring Fee. DI's
direct expenses consist of legal fees, accounting costs, printing
and mailing costs and registration expenses. The amount of these
expenses was allocated between the two transactions so that $177,000
was capitalized with the property acquired and $423,000 served to
reduce paid in capital.
STATEMENTS OF OPERATIONS -
(e) To adjust operating expense to reflect the estimated cost to store
the Merger Rigs.
(f) To provide for interest expense associated with the $4 million term
loan funded by Norex Drilling, Ltd. with interest at 12% and to
eliminate the preferred dividend.
-42-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
The Company had working capital of $6.2 million and $7.5 million at
March 31, 1996 and December 31, 1995, respectively. The Company's current ratio
(current assets to current liabilities) at March 31, 1996 and December 31, 1995,
was 1.28 to 1.00 and 1.31 to 1.00, respectively. Cash and cash equivalents
decreased from $1.9 million at December 31, 1995 to $1.0 million at March 31,
1996, exclusive of $1.9 million and $1.6 million of restricted cash deposits
securing insurance deposits at March 31, 1996 and December 31, 1995,
respectively. Long-term debt was 57.0% and 56.6% of total capital at March 31,
1996 and December 31, 1995, respectively.
Following the completion of the Mergers, the Company will have
approximately $15.8 million of debt obligations, most of which are attributable
to the Company's $10,000,000 loan agreement with NorlandsBanken AS (the
"NorlandsBanken Loan Agreement"). The NorlandsBanken Loan Agreement was amended
October 1, 1995 to provide for deferral of monthly principal payments of
$277,777 until January 12, 1997, after which the balance of $9,444,000 will be
amortized in 36 equal monthly installments commencing January 12, 1997.
During the fourth quarter of 1995, Norex subscribed to and paid
$4,000,000 for 4,000 shares of the Series B Preferred Stock, to be issued
subsequent to December 31, 1995. As of the date hereof, the Series B Preferred
Stock has not been issued. During May of 1996, the Company and Norex agreed
that, upon consummation of the Mergers, the Company would rescind the
Subscription and refund the $4,000,000 payment made by Norex for the
Subscription out of the proceeds of a $4,000,000 loan to be provided by Norex.
If the Mergers are not consummated, the Subscription will not be rescinded and
the 4,000 shares of Series B Preferred Stock will be issued.
The Company has an overdraft facility with a bank in Argentina, which is
payable on demand, bearing interest at the current market rate in Argentina and
secured by two drilling rigs. The overdraft facility had outstanding balances of
approximately $188,000 and $149,000 at March 31, 1996 and December 31, 1995,
respectively.
The NorlandsBanken Loan Agreement and an ancillary guaranty by Norex
restrict, among other things, the Company's ability to incur additional
indebtedness, mortgage or otherwise encumber certain of its properties and make
certain asset dispositions. Furthermore, the NorlandsBanken Loan Agreement
prohibits the payment of dividends by the Company and requires the Company to
maintain a minimum working capital balance of $7,000,000 and a minimum adjusted
net worth of $50,000,000. These restrictions could limit the Company's
flexibility in responding to changing market conditions.
As of March 31, 1996, the Company was not in compliance with a certain
financial covenant contained in the NorlandsBanken Loan Agreement and,
subsequent to such date, received a waiver of such failure to comply from
NorlandsBanken AS.
The Company will require substantial cash flow to meet its debt service
requirements. Payment of principal and interest on these obligations will depend
on the Company's future performance, which is subject to general economic and
business factors beyond the Company's control.
On June 24, 1996, the Company sold the operational assets of Western Oil
Well Service Co., a wholly owned subsidiary of the Company, to Pool Company for
$3.95 million in cash. Pursuant to the terms of the purchase agreement, the
buyer assumed all existing leases of Western, which primarily include leases for
vehicles. The Company recorded a gain of approximately $2.7 million in
connection with the transaction.
-43-
On July 25, 1996, the Company agreed to repurchase 13,500 shares of its
Series A Preferred Stock for $148,500. The Company issued three interest free
promissory notes for the purchase price which matures on September 10, 1996. The
13,500 shares of the Series A Preferred Stock were pledged as collateral for the
promissory note.
Capital expenditures were approximately $900,000 for the three months
ended March 31, 1996, compared to approximately $1,200,000 for the three months
ended March 31, 1995. Capital expenditures for the three months ended March 31,
1995 primarily related to the Company's foreign operations expansion.
Cash provided by operating activities was approximately $500,000 for the
three months ended March 31, 1996, as compared to cash provided by operating
activities of $2,300,000 for the three months ended March 31, 1995. The 1995 and
1996 quarters included changes in the accounts receivable, accounts payable,
accrued liabilities, inventory and prepaids generated from international
activity.
As of the current date, management believes the Company may require
additional capital to supplement cash resources available from working capital,
cash flow from operations, proceeds from non-strategic asset sales, and existing
credit facilities to execute its near term business plan.
The Company has no derivative contracts related to its foreign currency
exposure in the countries in which it operates. However, the Company generally
structures its foreign operations and related drilling contracts in such a
manner as to minimize any potential foreign currency exchange restrictions and
any exposure to foreign currency fluctuations. The Company believes that its
foreign currency exposure, if any, is not significant. See further discussion in
"Business of the Company - General - International Operations and Risks."
The Company has not paid any cash dividends on the Company Common Stock
and does not anticipate paying dividends on the Company Common Stock at any time
in the foreseeable future. Furthermore, the NorlandsBanken Loan Agreement
prohibits the payment of dividends without their consent.
RESULTS OF OPERATIONS
A comparison of revenues and operating expenses from continuing
operations (also expressed as a percentage of respective domestic and
international operations revenues) for the Company's domestic and international
operations are described below.
-44-
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
For the Three Months
Ended March 31,
(in thousands, except percentages)
------------------------------------------------
1996 Percent of 1995 Percent of
(Unaudited) Revenues (Unaudited) Revenues
----------- --------- ----------- ----------
REVENUES
Contract Drilling:
US .......................... $10,429 $ 9,832
International
Mexico and Central America 1,261 2,904
South America ............. 8,412 7,004
Export Sales and other .... -- 2,604
------- -------
Consolidated Totals ....... $20,102 $22,344
======= =======
OPERATING EXPENSE(1)
Contract Drilling:
US .......................... $ 9,770 93.7% $ 9,521 96.8%
International
Mexico and Central America 1,144 90.7% 2,963 102.0%
South America ............. 8,022 95.4% 7,285 104.0%
Export Sales and Other .... -- -- 2,755 105.8%
------- -------
Consolidated Totals ....... $18,936 $22,524
======= =======
GROSS PROFIT $ 1,166 $ (180)
======= =======
- - - ------------
(1) Operating Expense excludes expenses for depreciation and amortization,
general and administrative, bad debt and legal.
CONTINUING OPERATIONS. Consolidated revenues decreased 10% to $20.1
million for the three months ended March 31, 1996, compared to $22.3 million for
the three months ended March 31, 1995. This decrease was principally due to the
absence of export sales of equipment to Costa Rica in 1996. Revenues from United
States domestic drilling activities increased by approximately $600,000 from the
1995 to 1996 quarter due to increased rig utilization in the Eastern Division.
Drilling days for the first quarter of 1996 for the Eastern Division totaled 328
compared to 208 drilling days for the comparable quarter of 1995. Average daily
drilling rates were relatively unchanged between the two periods. Revenues from
the Company's South American operations increased by $1.4 million from the 1995
to 1996 quarter due to higher levels of reimbursable costs associated with the
Venezuelan operation. For the first quarter of 1996, the South American drilling
generated 1,234 drilling days compared with 1,200 drilling days for the first
quarter of 1995. During both quarters the majority of the Company's South
American work was under existing long-term contracts; thus the average daily
rates were virtually the same. Revenues from the Company's Mexico and Central
American operations decreased by $1.6 million from the 1995 to 1996 quarter due
to a reduction in rig operating levels from four rigs to one rig. This drop in
rigs relates to a corresponding drop in drilling days to 91 for the first
quarter of 1996 from 351 for the first quarter of 1995. The Company plans to
continue operating one rig in Mexico for the remainder of 1996. As discussed in
Note 13 to the accompanying Consolidated Financial Statements, the operating
assets of Western were sold in June 1996. Western had revenues of approximately
$7.2 million in both the 1996 and 1995 periods.
Consolidated operating expenses decreased 15.9% to $18.9 million for the
three months ended March 31, 1996, compared to $22.5 million for the three
months ended March 31, 1995 due primarily to the absence of export sales of
equipment to Costa Rica in 1996. Operating expenses for domestic drilling
increased approximately $200,000 from the 1995 to 1996 quarter, principally due
to increased rig activity in the Eastern Division. Operating expenses for the
Company's South American operations increased $.7 million from the 1995 to 1996
quarter due primarily to higher labor costs for the Venezuela operations, which
are reimbursable under the terms of the applicable drilling contracts. Mexico
and Central American operating expenses decreased $1.8 million from the 1995 to
1996 quarter due to a reduction in rig operating levels from four rigs to one
rig. Western had allocable operating costs of approximately $1.4 million in the
respective 1996 and 1995 periods.
-45-
Depreciation and amortization decreased to $1.1 million for the 1996
quarter compared to $1,113,000 for the 1995 quarter. This slight decrease was
primarily due to the reduction in the depreciable asset base in 1996 resulting
from the $5,290,000 impairment provision made in the fourth quarter, 1995 to
reduce the carrying value of certain drilling rigs and equipment as provided for
in Statement of Financial Accounting Standard No. 121.
General and administrative expense increased by $67,000 from the 1995 to
1996 quarter due to increased staff requirements for the Company's expanded
South American operations.
Employment severance expense of $602,000 for the March 31, 1996 quarter
represents an accrual of contractual severance costs to be paid over a two-year
period to the Company's former President and Chief Executive Officer.
Interest expense decreased by $84,000 for the three months ended March
31, 1996, compared to the three months ended March 31, 1995. The decrease was
due to reduced levels of outstanding debt, principally the retirement of $2.1
million of bank debt related to the Company's oil and gas properties sold in
August 1995.
The loss from discontinued operations of $11,000 for the three months
ended March 31, 1995 was the result of the sale of the Company's oil and gas
properties in August 1995.
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1995 TO TWELVE MONTHS ENDED
DECEMBER 31, 1994
For the Year Ended
December 31,
(in thousands, except percentages)
------------------------------------------
Percent of 1994 Percent of
1995 Revenues (Unaudited) Revenues
---------- --------- ---------- ----------
REVENUES
Contract Drilling:
US ............................. $44,797 $49,530
International
Mexico and Central America ... 12,617 1,706
South America ................ 33,081 12,277
Export Sales and other ....... 4,214 1,880
------- -------
Consolidated Totals .......... $94,709 $65,393
======= =======
OPERATING EXPENSE(1)
Contract Drilling:
US ............................. $40,867 91.2% $47,722 96.3%
International
Mexico and Central America ... 11,890 94.2% 1,727 101.2%
South America ................ 36,387 110.0% 11,477 93.5%
Export Sales and Other ....... 4,681 111.1% 2,147 114.2%
------- -------
Consolidated Totals .......... $93,825 $63,073
======= =======
GROSS PROFIT ..................... $ 884 $ 2,320
======= =======
- - - ------------
(1) Operating Expenses excludes expenses for depreciation and amortization,
general and administrative, bad debt and legal.
CONTINUING OPERATIONS. Consolidated revenues increased 44.8% to $94.7
million for the fiscal year ended December 31, 1995, compared to $65.4 million
for the twelve months ended December 31, 1994. This increase was primarily due
to the expansion in South America, Mexico and Central America. Revenues from the
Company's South American operations increased by $6.7 million during the year
ended December 31, 1995, due to the addition of four drilling rigs to supplement
the three rigs already operating in Argentina. The additional increase of $14.1
million in 1995 revenues from South American operations resulted from the
acquisition of a Venezuelan operating company effective September 1, 1994. South
America drilling days increased to 5,301 days for 1995 compared with 1,460 days
for 1994. During 1995, 16 rigs were operating in South America due
-46-
to the expansion noted above in Venezuela and Argentina. Between the
corresponding years, the average daily drilling rates increased approximately 9%
under the various contracts that the Company was working under during the years.
Revenues from the Company's Mexico and Central American operation increased by
$10.9 million for the year ended December 31, 1995, as compared to the twelve
months ended December 31, 1994. This increase resulted from the expansion of
Mexico from a one rig operation to a four rig operation for the first three
quarters of fiscal 1995. Drilling days in Mexico for 1995 totaled 993 compared
with 153 drilling days for 1994. Average daily drilling rates were virtually the
same between the corresponding periods. International export revenues for the
year ended December 31, 1995 were $4.2 million and resulted from materials sold
for export to Costa Rica. US Operations revenue decreased by $4.7 million for
the year ended December 31, 1995 compared to the twelve months ended December
31, 1994. The decrease was the result of a $3.9 million decrease in the
Company's Gulf Coast district and $1.4 million in the Eastern Division due to
decreased rig utilization in 1995. The Gulf Coast District drilling days
decreased by 24% from 2,247 days in 1994 to 1,711 days in 1995. The average
daily drilling rates declined only a slight 2% from 1994 to 1995. The Eastern
Division decrease in revenues can also be seen in the drop in drilling days from
1,313 in 1994 to 1,031 in 1995. Average daily drilling rates were virtually
unchanged between the periods. The Foundation Division had a revenue decrease of
$1.1 million due to the phase out of this division. The decreases were offset by
revenues from the Western Division increasing $1.3 million due to the
utilization of a horizontal re-entry rig which was inactive during the twelve
months ended December 31, 1994. Also, revenues from the Company's East Texas and
Louisiana operations increased $3 million due to increased rig utilization and a
certain large turnkey contract in 1995. The Company's operations in East Texas
and Louisiana had an increase in drilling days of 30% to 2,280 days in 1995 from
1,751 days in 1994. Due to a large turnkey contract average daily drilling rates
were approximately 4% higher in 1995 when compared with 1994. Western had
operating revenue of approximately $7.2 million and $5.9 million in the
respective 1995 and 1994 periods.
Consolidated operating expenses increased 48.8% to $93.8 million for the
year ended December 31, 1995, compared to $63.1 million for the twelve months
ended December 31, 1994. Operating expenses for the Company's South American
operations increased $24.9 million for the year ended December 31, 1995,
compared to the 1994 twelve month period as a result of the expansion of the
Argentina drilling rig fleet and acquisition of the Venezuela operating company
discussed above. The increase in percentage of South American operating expenses
relative to revenues for the year ended December 31, 1995 is due to start-up
costs on the four rigs added to Argentina and higher than expected repairs,
maintenance and rig move costs experienced on all Argentina rigs during 1995.
Operating expenses for the Mexico and Central American operations were $11.9
million for the year ended December 31, 1995, compared to $1.7 million during
the twelve months ended December 31, 1994. This increase is due to the expansion
of the drilling fleet discussed above. International export operating and other
expenses for the year ended December 31, 1995 were $4.7 million, primarily
representing costs of materials sold for export to Costa Rica. Domestic
operating expenses decreased by $6.9 million for the year ended December 31,
1995 as compared to the twelve months ended December 31, 1994. Operating
expenses from the Company's East Texas and Louisiana operations increased by
$2.6 million from 1994 to 1995 due to increased rig utilization and large
turnkey contract. A decrease of $4.1 million in the Company's Gulf Coast
District operations and $1 million in the Eastern Division was due to decreased
rig utilization in 1995. The Foundation Division's operating expenses decreased
$2.5 million due to the phase out of that division. Western had operating costs
of approximately $6.1 million and $5.1 million in the respective 1995 and 1994
periods.
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for LongLived Assets to Be Disposed Of,"
effective for years beginning after December 15, 1995. As the FASB encourages
earlier application, the Company adopted the provisions of SFAS No. 121 during
the fourth quarter, 1995. This new accounting standard requires certain assets
to be reviewed for impairment whenever events or circumstances indicate the
carrying amount may not be recoverable. The Company has provided a non-cash
impairment provision of $5,290,000 for certain drilling rigs and equipment due
to market indications that the carrying amounts were not fully recoverable. Net
realizable value was determined based upon appraisal, comparable sale data and
management estimates.
-47-
Depreciation and amortization increased 54.8% to $4.8 million for the
year ended December 31, 1995, compared to $3.1 million for the twelve months
ended December 31, 1994. This increase was due to the acquisition of drilling
equipment for the International Division.
General and administrative expenses (including legal and bad debt
expenses) increased to $3.5 million for the year ended December 31, 1995
compared to $3.0 million for the twelve months ended December 31, 1994,
primarily due to the expanded scope of International Operations.
Gain from foreign currency of $888,000 for the year ended December 31,
1995 is the result of currency exchange transactions derived from the Venezuelan
operations.
Interest expense increased to $1.4 million for the year ended December
31, 1995, compared to $425,000 for the twelve months ended December 31, 1994.
The increase was due to an increase in borrowings for expansion of the
International Operations.
DISCONTINUED OPERATIONS. The net loss from discontinued operations was
$772,000 for the year ended December 31, 1995, as compared to net income of
$55,000 for the twelve months ended December 31, 1994. The net loss in 1995
includes a $768,000 non-cash provision resulting from the disposal of the
Company's oil and gas properties in August 1995.
CONSOLIDATED NET LOSS. The net loss for the year ended December 31, 1995
was $13.4 million, compared to a net loss of $3.5 million for the twelve months
ended December 31, 1994. Of this $9.9 million loss increase: $5.3 million was
due to the 1995 non-cash provision for SFAS No. 121 asset impairment of certain
long-lived assets; $1.4 million was due to reduced consolidated operating
margins resulting primarily from start-up and higher operating costs incurred in
Argentina, aggregating $3.7 million; $1.7 million was due to increased non-cash
charges in 1995 for depreciation and amortization resulting from increased
capital investments in drilling rigs and equipment; $.8 million was due to
losses from discontinued operations of producing oil and gas properties in 1995;
and $.7 million was due to other miscellaneous increased costs and expenses.
-48-
COMPARISON OF NINE MONTH PERIODS ENDED DECEMBER 31, 1994 TO 1993
For the Nine Months
Ended December 31,
(in thousands, except percentages)
---------------------------------------------
Percent of 1993 Percent of
1994 Revenues (Unaudited) Revenues
---------- --------- ---------- ----------
REVENUES
Contract Drilling:
US ........................... $38,635 $45,398
International
Mexico and Central America . 1,706 3,159
South America .............. 8,766 4,892
Export Sales and other ..... 1,880 --
------- -------
Consolidated Totals ........ $50,987 $53,449
======= =======
OPERATING EXPENSE(1)
Contract Drilling:
US ........................... $36,921 95.6% $41,374 91.1%
International
Mexico and Central America . 1,681 98.5% 1,819 57.6%
South America .............. 8,346 95.2% 5,255 107.4%
Export Sales and Other ..... 2,040 108.5% 185
------- -------
Consolidated Totals ........ $48,988 $48,633
======= =======
GROSS PROFIT $ 1,999 $ 4,816
======= =======
- - - ------------
(1) Operating Expense excludes expenses for depreciation and amortization,
general and administrative, bad debt and legal.
BASIS FOR COMPARISON. In comparing the results of operations for the
nine months ended December 31, 1994 to the year ended March 31, 1994, other than
what is discussed in the comparison of the results of operations for the nine
months ended December 31, 1994 and 1993; nothing significant occurred that would
require further discussion.
CONTINUING OPERATIONS. Consolidated revenues decreased by 5% to $50.9
million for the nine months ended December 31, 1994, compared to $53.4 million
for the nine months ended December 31, 1993. The International Division's
revenues increased $4.3 million and the Northern Division's revenue increased
$263,000. The revenue increases were offset by revenue decreases of $3.2 million
in the Commercial Division; $2.8 million in the Mid-Continent division and
$474,000 in the Eastern Division; and $515,000 in the Western Division. The
revenue increase for the International Division was due to an increase in rig
utilization for the three rigs operating in Argentina, the purchase of the
operating drilling rigs in Venezuela in September, 1994, and the sale of certain
drilling equipment in Costa Rica. International drilling days increased to 1,386
days for the nine months ended December 31, 1994 compared to 662 days for the
nine months ended December 31, 1993. The revenue increase for the Northern
Division is due to increased drilling activity in Michigan. The Northern
Division drilling days increased by 8% between the corresponding periods while
the average drilling rates remained virtually unchanged. The revenue decrease
for the Commercial Division is due to the Company's phasing out of auger
drilling activities. The revenue decrease for the Mid-Continent Division and the
Eastern Division is primarily due to lower drilling activity due to lower than
anticipated oil and gas prices. The Mid-Continent Division and the Northern
Division decreased by 10% between the 1994 period (4,419 days) and the 1993
period (4,911 days). Again, average daily rates were relatively unchanged
between the two periods. The revenue decrease for the Western division is
primarily due to lower oil prices reducing workover requirements by operators.
Western had revenues of approximately $4.3 million and $4.8 million in the
respective 1994 and 1993 periods.
Operating expenses increased 1% to $48.9 million for the nine months
ended December 31, 1994, compared to $48.6 million for the nine months ended
December 31, 1993. The International Division increased $4.8 million and the
Northern Division increased $256,000. The operating expense increases were
offset by
-49-
operating expense decreases in the Commercial Division of $2 million; the
Mid-Continent Division decreased $2 million; the Eastern Division decreased
$443,000; and the Western Division decreased $59,000. The increases in the
International Divisions are due to increased rig utilization in Argentina; the
purchase of the operating rigs in Venezuela and the sale of certain drilling
equipment in Costa Rica. The operating increase in the Northern Division is due
to increased rig utilization in Michigan. The operating expense decrease in the
Commercial Division is due to the phasing out of the auger drilling activities.
The operating decrease in the MidContinent and Eastern Divisions is primarily
due to lower drilling activity due to lower oil and gas sales prices. The
operating expense decrease in the Western Division is primarily due to less
workover activity resulting from customers who received lower oil prices. The
operating expense decrease for DI Energy is the result of the sale of certain
oil and gas properties. Western had operating costs of approximately $3.8
million and $3.9 million in the respective 1994 and 1993 periods.
Depreciation and amortization decreased 14% to $2.4 million for the nine
months ended December 31, 1994, compared to $2.8 million for the nine months
ended December 31, 1993. The decrease is primarily due to the Company's change
in depreciation policy for drilling rigs, effective January 1, 1994, which
includes a salvage value in the calculation of depreciation expenses.
General and administrative expenses (including legal and bad debt
expenses) increased to $2.1 million for the nine months ended December 31, 1994
compared to $2.0 million for the nine months ended December 31, 1993. The slight
increase was due to the increase in International Operations.
Interest income increased to $353,000 for the nine months ended December
31, 1994, compared to $86,000 for the nine months ended December 31, 1993. The
increase is primarily due to interest received as a result of the settlement of
a lawsuit.
Gain on sale of assets increased to $277,000 for the nine months ended
December 31, 1994, compared to $52,000 for the nine months ended December 31,
1993. The increase is primarily due to the disposition of unused oil field
equipment.
Interest expense increased to $322,000 for the nine months ended
December 31, 1994, compared to $164,000 for the nine months ended December 31,
1993. The increase is due to the increasing in borrowing for the International
Operations.
Minority interest was a credit of $17,000 for the nine months ended
December 31, 1994, compared to an expense of $209,000 for the nine months ended
December 31, 1993 primarily due to less drilling activity and the start-up of a
project in Mexico for the majority owned subsidiary, DI/Perfensa Inc.
Other expense, net decreased to $123,000 for the nine months ended
December 31, 1994, compared to $177,000 for the nine months ended December 31,
1993.
DISCONTINUED OPERATIONS. Discontinued operations of producing oil and
gas properties resulted in income of $51,000 for the nine months ended December
31, 1994, compared to a loss of $1,278,000 for the nine months ended December
31, 1993. The 1993 period loss resulted from cost to the Company from the
unsuccessful conclusion of a lawsuit.
CONSOLIDATED NET LOSS. The net loss for the nine months ended December
31, 1994 was $2.2 million compared to a net loss of $1.4 million for the nine
months ended December 31, 1993. The increased net loss in 1994 is primarily due
to less drilling activity in the Mid-Continent Division; less drilling activity
and less profitable drilling activity in the Company's majority owned
subsidiary, DI/Perfensa Inc., offset by the phase out of the auger drilling
activities.
-50-
INCOME TAXES AND OTHER
The operations of the Company generated net operating loss ("NOL") and
investment tax credit ("ITC") carryforwards which expire at various times
through 2010 and 2000, respectively.
Under provisions of the federal income tax code, such carryforwards
generally can be utilized only to reduce future taxable income or income taxes
payable, if any, of the individual subsidiary that produced the tax NOL or ITC
carryforward. In addition, tax NOL and ITC carryforwards are subject to annual
limitations on the amount that the Company can utilize because of the change in
the ownership of the Company's principal stockholder in 1991 and the change in
the Company's principal stockholder on June 2, 1994. The Company estimates that
at December 31, 1995 its tax NOL and ITC carryforwards, before consideration of
the limitations, aggregated approximately $64 million and $2.4 million,
respectively. However, the ultimate utilization of the tax NOL and ITC
carryforwards, if any, is substantially limited as a result of limitations
imposed as a result of previous changes in the ownership of the Company and will
be further limited as a result of ownership changes resulting of the Mergers.
See "Risk Factors - Limitations on the Availability of the Company's Net
Operating Loss Carry Forwards."
The Company accounts for income taxes based upon Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which
requires recognition of deferred income tax liabilities and assets for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. Based on an analysis of the
Company's gross deferred tax asset (taking into consideration applicable
statutory carryforward periods and other limitations), the Company has
determined that the recognition criteria set forth in SFAS No. 109, have not
been met and, accordingly, the gross deferred tax asset is reduced fully by a
valuation allowance.
Prior to the purchase of the Company Common Stock by Norex on June 2,
1994, certain of the Company's insurance coverage was arranged by American
Premier Underwriters, Inc. ("American Premier") as part of a program provided to
its subsidiaries. Subsequent to the common shares purchase by Norex, the Company
has obtained workers' compensation, excess liability coverage and certain other
insurance from other sources. This change has not materially increased the cost
of insurance coverage to the Company, although liquidity has been adversely
impaired by requirements to post restricted cash deposits to secure potential
claims.
The Company believes inflation has not had a material effect on its
operations or on its financial condition, but there can be no assurance that
future increases in the inflation rate would not have an adverse effect.
INDUSTRY TRENDS
The stabilization of working rig count that began in 1995 has continued
into 1996. The weekly national count of working rigs in the United States as
reported by Baker Hughes Incorporated on May 31, 1996 was 765, compared to 677
on May 26, 1995. The 765 working rigs included 218 working land rigs which are
in the Company's area of competition.
The significant decline in oil and gas prices in the mid-1980's severely
depressed oil and gas exploration activities and reduced demand for the
Company's oil and gas drilling services. Although industry conditions have
improved during 1995 and 1996, a reversal of this trend and further
deterioration could have an ongoing negative effect on the Company's future
operating results. The decline in drilling activity resulted in an oversupply of
drilling equipment and created intense competition, particularly in the price
received for contract drilling services by drilling contractors. Demand for oil
and gas drilling services will continue to be dependent upon the present and
anticipated sales price of oil and gas, which is subject to conditions such as
consumer demand, events in the Middle East, weather and other factors that are
not controlled by the Company.
-51-
There has been an increase in the demand for oil and gas drilling
services in South America. In response to this, during 1992, the Company
commenced drilling activities in Argentina and expanded into Venezuela during
1994. The Company also formed a majority-owned subsidiary to perform geothermal
drilling in Central America and has completed projects in Guatemala and El
Salvador and is currently working on projects in Mexico. The Company will
continue to market its services into selected international markets.
Although certain consolidations have occurred within the land drilling
industry, an oversupply of land drilling rigs still exists. There is a general
shortage in the industry of used drill pipe, and the cost of obtaining new and
used drill pipe is substantially higher than in prior periods and is currently
escalating. At present, the Company does not have a critical shortage of drill
pipe or other equipment but, depending on rig utilization, will need to purchase
additional drill pipe for rigs in service.
The depressed conditions in the oil and gas drilling industry also
caused a substantial portion of the labor force with drilling experience to
leave the industry. As a result of the continuing overcapacity in the drilling
industry and the Company's practice during recent years of first laying off
employees with the least amount of drilling experience, the Company has not
experienced significant shortages of trained labor. However, an increase in
demand for contract drilling services could cause shortages of trained
employees.
These industry trends are a major factor in managements's decision to
pursue the Mergers. See "The Mergers - Background of the Mergers."
BUSINESS OF THE COMPANY
The Company is a Texas corporation formed in 1980 and is engaged
primarily in the business of providing onshore contract drilling and well
workover services to firms in the oil and gas industry. The Company and its
subsidiaries conducts operations in Texas, Louisiana, Oklahoma, Ohio,
Pennsylvania, New York, Michigan, Montana, Utah, North Dakota, and other states;
and currently has operations in Argentina, Venezuela and Mexico. The Company's
principal office is located at 450 Gears Road, Suite 625, Houston, Texas 77067,
and its telephone number is (713) 874-0202.
The Company's principal operating strategy is to continue its focus on
oil and gas contract drilling in targeted regions in the United States,
particularly those with existing and potential gas production, and selected
foreign opportunities, especially in Central and South America. The Company
plans to pursue this strategy through aggressive marketing of its best equipment
and acquiring and refurbishing other existing equipment. In addition, the
Company may make acquisitions of drilling equipment that open new markets and
present the potential for attractive rates of return.
In early 1996, the Company began implementing a new strategy which
involves significant changes to the Company's organization, focusing the
Company's activities on higher margin markets and altering the Company's
corporate structure to provide a more efficient operating structure.
This proposed Mergers represent a significant step in accomplishing the
Company's new strategy in that the 18 ultra deep drilling rigs and the capital
to refurbish them will enable the Company to focus on higher margin markets
where drilling projects are of a longer duration than the Company's current
markets.
On April 9, 1996, the employment of the Company's Chief Executive
Officer was terminated, signaling the beginning of significant organizational
changes. The Company is currently searching for an new Chief Executive Officer.
Other significant personnel and organizational changes have been made and
additional changes will be made in the near term.
-52-
At the beginning of 1996, the Company's corporate structure consisted of
15 legal entities. The Company has already eliminated 4 of these entities and
plans to continue to review and hopefully further streamline its corporate
structure.
In connection with this overall restructuring and the implementation of
the new strategy, the Company anticipates incurring some one-time non-recurring
expenses. While the Company has not yet quantified these further charges, it
plans to do so during the third quarter of 1996. These charges will be
recognized as a one-time restructuring charge during the third quarter of 1996.
DISCONTINUED AND SUSPENDED OPERATIONS
On June 7, 1995 the Company entered into an agreement to sell its
producing oil and gas properties, effective April 1, 1995, for a cash sales
price of $4.2 million, subject to certain adjustments. The sale was closed
August 9, 1995. Proceeds from this transaction were used to pay off the
Company's production term note which had an outstanding balance of approximately
$1.5 million, purchase two certificates of deposit totaling approximately $1.4
million as collateral for two letters of credit that were then outstanding under
the Company's revolving line of credit, with the remainder of the proceeds,
approximately $1.3 million used for working capital purposes.
The December 31, 1994 Consolidated Balance Sheet has been restated with
all assets and liabilities associated with the oil and gas properties identified
as Discontinued Operations. The Consolidated Statements of Operations for the
periods presented identifies the income (loss) from producing oil and gas
operations. As a result of the sale of the oil and gas properties, the Company
has recorded a $768,000 non-cash loss.
On June 24, 1996, the Company completed the sale of the Company's
Western Division to Pool Company, a Texas corporation ("Pool") for $3,950,000 in
cash pursuant to an agreement entered into on June 3, 1996. The Western Division
was headquartered in Glendive, Montana, with a district office in Roosevelt,
Utah, and provided well workover services in Montana, Utah and North Dakota. The
Western Division consisted of 23 carrier-mounted workover rigs and certain real
estate owned by the Company in Glendive, Montana and Roosevelt, Utah. A workover
is a repair, maintenance or modification of a producing well designed to remedy
mechanical problems in the well, productivity problems in the formation or other
difficulties in extracting oil and gas. Workover services are vital to the oil
and gas producing industry as most producing wells eventually encounter these
problems. Workover services include repairing and replacing down-hole production
equipment, opening additional productive intervals, re-completion of wells to
new producing zones, completing newly drilled wells, drilling out of plugs and
packers, and the converting producing wells to injection wells during enhanced
recovery operations. Pursuant to the purchase agreement, Pool assumed the
obligations of the Company under its real and personal property leases relating
to the division.
The Company has, in the past, provided shaft drilling equipment for
commercial drilling operations (large diameter shaft drilling, mining, and
water/disposal wells). No such activities were carried out in 1995 and this
business segment will be discontinued.
INDUSTRY SEGMENTS
Reference is made to Note 8 of the Notes to Consolidated Financial
Statements for information regarding the Company's industry segments.
INDUSTRY CONDITIONS
OPERATING RESULTS. The Company reported a net loss of $13,447,000,
$2,209,000 and $2,658,000 for the year ended December 31, 1995; the nine months
ended December 31, 1994; and the year ended March 31, 1994, respectively. The
future profitability of the Company is substantially dependent upon improvement
in the
-53-
utilization of, and contract rates earned by, its oil and gas drilling and
workover rigs. No assurance can be given that the Company's operation will
obtain profitable levels in the future.
OIL AND GAS INDUSTRY. The Company experiences intense competition in its
onshore drilling markets. The contract drilling industry is cyclical and is
characterized by high capital and maintenance costs. Due to an oversupply of
rigs, the onshore drilling market is highly competitive and no one competitor is
dominant. While price is a primary factor in the selection of drilling
contractors, a contractor's safety record, crew quality, service record and
equipment capability are also important factors. Certain of the Company's
competitors have greater financial resources than the Company.
The Company's operations are materially dependent upon the levels of
activity in the exploration, development and production of oil and gas in the
United States and worldwide. Such activity levels are affected both by
short-term and long-term trends in the prices of oil and natural gas. In recent
years, oil and natural gas prices, and therefore the level of drilling and
exploration activity, have been volatile. Worldwide military, political and
economic events have contributed to, and are likely to continue to contribute
to, such price volatility. Any prolonged reduction in oil and natural gas prices
would depress the level of exploration and development activity and would result
in a corresponding decline in the demand for the Company's services and
therefore have a material adverse effect on the Company's revenues and
profitability.
The Company's domestic oil and gas contract drilling operations have
been severely depressed for the past several years, largely as a result of
significant declines in oil and gas prices and associated reductions of oil and
gas drilling activities and the oversupply of drilling equipment. These
conditions have resulted in both low contract rates and low levels of rig
utilization; although demand for land drilling rigs has shown improvement during
the last quarter of 1995 and first two quarters of 1996. The Company's future
success will depend in large part upon a general economic improvement in the
domestic oil and gas and contract drilling industries, which cannot be predicted
with certainty.
In response to the depressed domestic activity, the Company has focused
on foreign opportunities, especially the Central and South American markets
where the Company's International Division has in recent years conducted
drilling operations in Argentina, Guatemala, El Salvador, Venezuela and Mexico.
There has been an increase in oil and gas drilling activities in South America
due to privatization efforts and geothermal drilling in Mexico and Central
America. The Company will consider additional expansion into selected
international markets.
There is a general shortage in the industry of used drill pipe, and the
cost of obtaining new and used drill pipe is substantially higher than in prior
periods and is currently escalating. At present, the Company has an adequate,
but not a surplus, supply of drill pipe and drill collars and has began a
gradual replacement program in the last half of 1995 that will continue in 1996.
Also, depending on rig utilization, the Company may need to purchase additional
drill pipe for rigs in service or placed in service.
OILFIELD SERVICE AND SUPPLY INDUSTRY. The Company has a major repair and
fabrication yard located in Houston, Texas. This facility is currently utilized
for the primary purpose of servicing the Company's own rig and equipment
requirements but has capabilities for third party services if industry
conditions improve.
CONTRACT DRILLING AND WORKOVER
At May 31, 1996, the Company owned or operated 106 drilling and workover
rigs, with 84 located in the United States, eight drilling rigs in Argentina,
ten drilling and workover rigs in Venezuela, and four drilling rigs in Mexico.
This includes the 23 workover rigs sold on June 24, 1996 to Pool. See "Business
of the Company - Discontinued and Suspended Operations." Under a typical oil and
gas drilling contract, the Company provides its customers with drilling rigs and
related equipment, as well as field personnel. The Company considers a rig which
is presently working to be an "active" rig. Rigs which are not working but which
are currently being actively marketed are viewed as "idle." "Inactive" rigs are
rigs which are not working and are
-54-
not currently being actively marketed. "Inventoried" rigs are being held for
parts or to be sold. Inactive rigs may require additional capital expenditures
to reactivate them for service. The Company estimates that the costs required to
reactivate its inactive rigs may range between $20,000 to $500,000 per rig. The
Company's contract drilling and well workover operations are conducted through
four operating subsidiaries in the United States organized by geographic
location and the nature of the business conducted, one operating division in
Argentina, one operating division in Venezuela and one operating division in
Mexico.
MID-CONTINENT DIVISION. The Company's Mid-Continent Division is
headquartered in Houston, Texas, with district offices in Houston and Midland,
Texas and Shreveport, Louisiana, and provides oil and gas contract drilling
services primarily in the states of Texas, Louisiana, Arkansas and Oklahoma. Of
the Mid-Continent Division's 33 rigs, 29 have rated depth capacities of over
10,000 feet, eight of which are rated at 20,000 feet or deeper.
EASTERN DIVISION. The Eastern Division is headquartered in Midvale,
Ohio, and drills gas wells in Ohio, Pennsylvania and New York, principally at
depths of 7,000 feet or less. The Eastern Division operates eight rigs.
Historically, the Eastern Division contracts to drill packages of several wells.
The Eastern Division's operations are limited during the spring of each year due
to "frost laws" of the jurisdictions in which it operates which restrict
movement of equipment on public roads during such period.
NORTHERN DIVISION. The Northern Division is headquartered in Mt.
Pleasant, Michigan, and drills oil and gas wells principally in Michigan, at
depths of 1,000 to 18,000 feet. Prior to the INDrillers, L.L.C. joint venture
discussed below, the Northern Division had nine rigs, with one rated up to 2,500
feet, five rated 6,000 to 8,500 feet, and three rated at up to 20,000 feet. The
Northern Division's operations are also limited during the spring of each year
due to "frost laws" of the jurisdictions in which it operates which restrict
movement of equipment on public roads during such periods.
On March 28, 1996, the Company completed the formation of a limited
liability company, INDrillers L.L.C., which is jointly owned between its
wholly-owned subsidiary, Drillers, Inc., and Dart Energy Corp. It has been
formed to combine the Michigan contract drilling operations of Drillers, Inc.
with the Michigan contract drilling operations of Indril, a division of Dart
Energy Corp. Drillers, Inc. and Dart Energy each contributed five drilling rigs
to the limited liability company with Drillers, Inc. having a 65% interest and
Dart Energy having a 35% interest in the limited liability company. Drillers,
Inc. and Indril are the two leading deep well drilling contractors in Michigan,
and the formation of this limited liability company is expected to result in
more efficient scheduling of drilling equipment and improved operating and cost
efficiencies with the increase in rig fleet size.
INTERNATIONAL DIVISION. The International Division is headquartered in
Houston, Texas, with offices in Buenos Aires and Neuquen, Argentina; Barinas,
Valle De La Pascua, El Tigre, and Guasdualito, Venezuela; and Morelia, Mexico.
The international Division has active drilling operations in Argentina,
Venezuela and Mexico.
ARGENTINA DIVISION. The Company owns and operates seven active drilling
rigs in Argentina, including four drilling rigs that were shipped to Argentina
from the United States in November, 1994, and one rig held for parts. The
Argentina Division provides oil and gas contract drilling services, primarily in
the Neuquen area, on daywork and turnkey contracts. The Argentina drilling rigs
have rated depths of 6,000 to 12,000 feet.
VENEZUELA DIVISION. The Company owns four land-based drilling rigs and
two land-based workover rigs in Venezuela. In addition, the Company operates
four drilling rigs under a labor contract. Two of the drilling rigs and the two
workover rigs were acquired in an acquisition effective September 1, 1994. Two
drilling rigs were shipped to Venezuela from the United States in September and
November, 1994. The Venezuela Division provides oil and gas contract drilling
services under daywork contracts and workover services under hourly contracts.
The Venezuela drilling rigs have rated depths of 10,500 to 15,000 feet.
MEXICO DIVISION. In November, 1994, the Company, through its 90% owned
subsidiary, DI/Perfensa Inc., commenced a geothermal project in Mexico with four
drilling rigs. One of the drilling rigs was shipped to
-55-
Mexico from El Salvador and three of the drilling rigs were shipped to Mexico
from the United States. This geothermal project was completed in November, 1995.
A new geothermal drilling project requiring one drilling rig began in December
1995 and is expected to extend for approximately fifteen months. The other three
rigs in Mexico are currently stacked. The Mexico drilling rigs have rated depths
of 10,000 to 16,000 feet.
DRILLING AND WORKOVER EQUIPMENT. A land drilling rig of the general type
operated by the Company consists of engines, drawworks, mast, pumps, blowout
preventers, drill pipe and related equipment. The size and type of rig utilized
depends, among other factors, upon well depth and site conditions. An active
maintenance and replacement program during the life of a drilling rig permits
upgrading of components on an individual basis. Over the life of a typical rig,
due to the normal wear and tear of operating up to 24 hours a day, several of
the major components, such as engines, mud pumps and drill pipe, are replaced or
rebuilt on a periodic basis as required, while other components, such as the
substructure, mast and drawworks, can be utilized for extended periods of time
with proper maintenance. The Company considers its active and idle drilling rigs
to be wellmaintained and capable of performing contracts undertaken
competitively within the industry.
A workover rig is a mobile carrier-mounted rig designed to perform
routine maintenance and remedial operations on existing oil and gas wells. The
type of workover rig operated by the Company consists of a portable engine,
drawworks and a mast supported by portable skid-mounted pumps, tanks and
hydraulic-powered drilling equipment. As with other rigs, maintenance and
replacement of the major components due to normal wear are necessary to maintain
the equipment in operable condition throughout the life of the rig.
The majority of the Company's existing drilling rigs were built during
the years 1979 - 1981, the period of the industry's most recent rig building
cycle. Some maintenance on its stacked rigs has been deferred. Through its
programs of rig upgrades and refurbishment, the Company believes that it will be
able to maintain its rig operations over time to meet its future needs; however,
such upgrading and refurbishment may require increasing amounts of capital and,
to the extent the Company is unable to continue such programs, it will have
fewer rigs available for service.
The Company also owns various vehicles and other ancillary equipment used
in the operation of its rigs. This equipment consists of bulldozers, trucks,
large air compressors and other support equipment.
-56-
The following table describes the oil and gas rigs owned and operated by
the Company or INDrillers, L.L.C. at May 31, 1996, and the status of each rig
during the preceding 45 days:
<TABLE>
<CAPTION>
YEAR BUILT/ RATED
RIG NO. REBUILT DRAWWORKS DEPTH LOCATION STATUS
- - - ------- ----------- --------- ----- -------- ------
MID-CONTINENT DIVISION
- - - ----------------------
<S> <C> <C> <C> <C> <C>
1 1957/1980 Brewster N-85 15,000' N-Louisiana Active
2 1957/1981 Brewster N-85 15,000' N-Louisiana Active
3 1960/1982 Cont-Emsco A-550 13,500' E-Texas Active
4 1956/1983 Brewster N-75 12,500' N-Louisiana Inactive
6 1957/1980 Brewster N-85 15,000' N-Louisiana Active
7 1978 National 55 12,500' N-Louisiana Active
8 1979 Gard-Denver 1500 20,000' N-Louisiana Inactive
9 1955/1986 Brewster N-95 26,000' S-Texas Active
10 1964/1989 Gard-Denver 800 14,000' N-Louisiana Active
12 1980 Gard-Denver 700 12,500' N-Louisiana Active
13 1981 Brewster N-75B 15,000' N-Louisiana Active
15 1965/1989 National 610 14,000' N-Louisiana Active
17 1981 Mac 400 5,000' N-Louisiana Inactive
23 1960 Mid-Cont U-15 9,000' Oklahoma Inactive
24 1955/1980 Brewster N-55 11,000' E-Texas Inactive
25 1960/1978 Brewster N-46 11,000' Texas Inventoried
26 1958/1979 Cont-Emsco GB-500 10,000' N-Louisiana Inventoried
27 1958/1981 Cont-Emsco GB-500 10,000' W-Texas Inactive
30 1960/1983 Mid-Cont U-15 11,000' Oklahoma Inactive
36 1957/1978 Cont-Emsco GB-350 8,500' Oklahoma Inactive
37 1979 Failing 8000 10,000' Utah Inactive
39 1980/1989 Gard-Denver 800 14,000' E-Texas Active
40 1979 Gard-Denver 1100E 20,000' S-Texas Active
42 1981 Cont-Emsco Elec. hst.II 25,000' S-Texas Active
43 1981 Ideco 1200E 20,000' S-Texas Active
44 1982 Gard-Denver 1500E 25,000' S-Texas Idle
46 1981 Gard-Denver 1100-UE 20,000' E-Texas Inventoried
48 1981 Ideco 3000-UE 30,000' Oklahoma Inventoried
61 1954/1980 Bethlemen S-45-E 9,000' W-Texas Idle
62 1978 Ideco Hydrair H-35 10,500' S-Texas Idle
63 1976/1982 Gard-Denver 700 13,000' E-Texas Idle
66 1982 Ideco-Hydrair H-35 10,500' S-Texas Idle
93 * 1981 Mid-Continent 712-UE 16,000' S-Texas Active
EASTERN DIVISION
- - - ----------------
202 1981 Wilson Mogul 42 8,000' N/W Penn. Idle
203 1980 Wilson Mogul 42 8,000' N/E Ohio Active
204 1979 Wilson Mogul 42 6,500' N/E Ohio Active
206 1979 Wilson 65 10,000' N/E Ohio Idle
207 1969/1983 Wilson Mogul 38 5,300' N/E Ohio Idle
208 1980 Wilson Mogul 42 6,500' N/W Penn. Idle
209 1965/1984 Wilson Mogul 42 6,500' N/E Ohio Idle
215 1980 Wilson Mogul 42 6,500' N/W Penn. Active
NORTHERN DIVISION
- - - -----------------
47 1982 Ideco 1200E 20,000' Michigan Inactive
49 1982 Ideco 1200E 20,000' Michigan Idle
116 1980 Speedstar 55-40 2,500' Indiana Idle
211 1971/1985 Wilson Mogul 42 6,100' Michigan Idle
-57-
INDRILLERS, L.LC.
- - - -----------------
41 1981 Ideco 1200E 20,000' Michigan Idle
53 1976 Cabot 1287 6,500' Michigan Active
56 1980 Ideco DIR 700 8,500' Michigan Active
57 1977 Ideco DIR 550 6,000' Michigan Active
58 1977 Ideco DIR 700 8,500' Michigan Active
1 Challenger 260 5,000' Michigan Active
2 Ideco 550 7,000' Michigan Idle
3 Challenger 320 5,000' Michigan Active
4 Challenger 320 5,000' Michigan Idle
5 Ideco 800 Self Prop. 10,000' Michigan Active
DRILLERS INTERNATIONAL S.A. (ARGENTINA)
- - - ---------------------------------------
448 1958 Ideco H-525 7,500' Argentina Inactive/Parts
449 1960/1993 Ideco H-40 6,000' Argentina Idle
454 1981 Ideco BIR 800 12,000' Argentina Idle
455 1981 Ideco BIR 800 12,000' Argentina Active
450 1980/1994 Ideco the CompanyR 700 8,500' Argentina Active
459 1980/1994 Ideco the CompanyR 700 8,500' Argentina Active
472 1981/1994 Cabot 750 10,500' Argentina Idle
473 1981/1994 Cabot 900 12,000' Argentina Active
DI/PERFENSA INC. (MEXICO)
- - - -------------------------
19 1981/1994 National 80 B 16,000' Mexico Idle
20 1980/1994 BDW-800 16,000' Mexico Idle
31 1978/1994 Cabot 750 10,000' Mexico Idle
69 1981 Ideco BIR 800 12,000' Mexico Active
DRILLERS INC. D.I. DE VENEZUELA, C. A.
- - - --------------------------------------
407 1980 Wilson Mogul 42(workover) 8,000' Venezuela Idle
408 * 1980 Cabot 1,000 12,000' Venezuela Active
412 * 1980 National 610-E 12,000' Venezuela Active
417 * 1981 Cont.-Emsco D-3 14,000' Venezuela Active
421 * 1978 Cont.-Emsco C-1 15,000' Venezuela Active
423 1981/1996 Mid-Continent 712-U 15,000' Venezuela Active
441 1980 Wilson Mogul 42(workover) 8,000' Venezuela Idle
451 1981 Cabot 900 12,000' Venezuela Idle
452 1975/1994 Cabot 900 12,000' Venezuela Active
453 1982/1994 Ideco-Hydrair H-35 10,500' Venezuela Active
</TABLE>
- - - ------------
* Rig operated by the Company under a labor contract with owner.
The following table describes the status of drilling rigs owned by the
Company at May 31, 1996, that are being held for sale:
<TABLE>
<CAPTION>
YEAR BUILT/ RATED DEPTH/
RIG NO. REBUILT DRAWWORKS DIAMETER LOCATION STATUS
- - - ------- ----------- --------- ------------ -------- ------
<S> <C> <C> <C> <C> <C>
111 1969/1982/1994 Hydraulic-2-Man Rig 14,000' Oklahoma Sale Pending
112 1971/1986 DI/Hughes CSD-820 12'-15' dia Texas Inventoried
114 1981/1988 DI/Hughes CSD-820 12'-15' dia Ohio Inventoried
118 1969/1980 DI/Hughes CSD-820 12'-15' dia Ohio Inventoried
262 1972 Wilson Mogul 42 6,500' Ohio Inventoried
267 1956 Mayhew 3000 2,500' Ohio Inventoried
</TABLE>
CONTRACTS. The Company's contracts for drilling oil and gas wells and
workover operations are obtained either through competitive bidding or as a
result of negotiations with customers. The Company's
-58-
oil and gas drilling contracts provide for compensation on a "daywork,"
"footage" or "turnkey" basis. Under daywork contracts, the Company receives a
fixed amount per day for drilling the well, and the customer bears a major
portion of out-of-pocket costs of drilling. Under footage contracts, the Company
is paid a fixed amount for each foot drilled, regardless of the time required or
the problems encountered in drilling the well. The Company pays more of the
out-of-pocket costs associated with footage contracts than with daywork
contracts. Under turnkey contracts, the Company agrees to drill a well to a
specified depth for a fixed price, regardless of the time required or the
problems encountered in drilling the well. Footage and turnkey contracts
generally involve a higher degree of risk to the Company than daywork contracts
because the Company bears the cost of unanticipated down-hole problems and price
escalation. "Hourly" contracts call for the Company to provide a rig and crew,
for which it is paid on an hourly basis. The work currently conducted by the
Mid-Continent Division is primarily daywork with some turnkey contracts. Almost
all of the wells drilled by the Eastern Division are drilled pursuant to footage
contracts. The Northern Division's wells are drilled under footage and daywork
contracts. Almost all of the work historically conducted by the Western Division
was on an hourly basis. The International Division's wells are drilled under
daywork, footage and turnkey contracts.
The Company primarily markets its oil and gas drilling and workover rigs
on a regional basis through employee salesmen located in Houston, Texas;
Shreveport, Louisiana; Mt. Pleasant, Michigan; Glendive, Montana; Midvale, Ohio;
Neuquen and Buenos Aires, Argentina; Barinas, Venezuela and Morelia, Mexico.
These salesmen utilize personal contacts and industry periodicals and
publications to determine which operators are planning to drill oil and gas
wells or need workover services in the immediate future. Once the Company has
been placed on the "bid list" for a particular operator, the Company will
normally be given the opportunity to bid on all future wells for that operator
on an area basis. Repeat business from previous customers accounts for a
substantial portion of the Company's business.
COMPETITION. The contract oil and gas drilling business is highly
competitive and, in recent years, has suffered from a substantial oversupply of
rigs resulting in severe price competition. Companies generally compete on the
basis of price, workforce experience, equipment suitability and availability,
reputation, expertise and financial capability. While competition is primarily
on a regional basis, rigs can be moved from one region to another in response to
changes in levels of drilling activity, subject to crew availability and
mobilization expenses. The Company's ability to obtain drilling contracts is
dependent primarily on the level of domestic oil and gas exploration and
development activity, as well as the Company's ability to acquire and retain
qualified personnel. The Company's ability to continue to generate business in
the future will depend, in part, on its ability to adapt to new technology and
drilling techniques as they become available. A number of the Company's
competitors have substantially greater financial resources than the Company.
CUSTOMERS. The Company's oil and gas contract drilling customers include
large and small independent producers and major oil companies. A significant
portion of the Company's international drilling contracts are with national
utility or national petroleum companies in Mexico, Central America and South
America.
GENERAL
EMPLOYEES. At May 31, 1996, the Company had approximately 1,056
employees. The Company believes that its relationship with its employees is
satisfactory.
GOVERNMENTAL REGULATIONS. Many aspects of the Company's operations are
affected by political developments and by federal, state, foreign and local laws
and regulations relating to the energy industry. The adoption of laws and
regulations curtailing exploration and development drilling for oil and gas for
economic and other policy related reasons would adversely affect the Company's
operations by limiting demand for contract drilling and exploration and
production. The Company cannot determine to what extent
-59-
future operations and earnings of the Company may be affected by new
legislation, new regulations or changes in existing regulations.
The Company's activities are also subject to laws and regulations
relating to environmental protection and pollution control, including certain
regulations that control the discharge of materials into the environment or
require remediation of contaminations. Usually, these environmental laws and
regulations impose "strict liability," rendering a person liable without regard
to negligence or fault. Although the Company's cost of compliance with such
legislation and regulations has not been material to date, such laws and
regulations may substantially increase the cost of the Company's activities and
may prevent or delay the commencement or continuance of a given operation. The
Company believes that such legislation and regulations have not had a materially
adverse effect on its present method of operations. In the future, federal,
state and local government environmental controls may require the Company to
make significant expenditures, although the magnitude of such expenditures
cannot be predicted.
The Company is subject to the requirements of the Occupational Safety
and Health Act ("OSHA") and comparable state statutes. The OSHA hazard
communication standard, the Environmental Protection Agency "community
right-to-know" regulations under Title III of the Federal Superfund Amendment
and Reauthorization Act and comparable state statutes require the Company to
organize information about the hazardous materials used in its operations. The
Company will likely be required to increase its expenditures during the next
several years to comply with higher industry and regulatory safety standards
such as those described above. Such expenditures cannot be accurately estimated
at this time.
INTERNATIONAL OPERATIONS AND RISKS. An increasingly significant portion
of the Company's revenues are attributable to international operations. Risks
associated with operating in international markets include foreign exchange
restrictions and currency fluctuations, foreign taxation, changing political
conditions and foreign and domestic monetary policies, expropriation,
nationalization, nullification, modification or renegotiation or contracts, war
and civil disturbances or other risks that may limit or disrupt markets. For
example, the Company currently operates in three countries in Latin America,
each of which has experienced major currency fluctuations in the recent past.
The ability of the Company to compete in the international well servicing and
drilling markets may be adversely affected by foreign governmental regulations
that favor or require the awarding of such contracts to local contractors, or by
regulations requiring foreign contractors to employ citizens of, or purchase
supplies from, a particular jurisdiction. No predictions can be made as to what
foreign governmental regulations may be enacted in the future that could be
applicable to the Company's operations.
The Company's primary international contract drilling operations are in
South America, Mexico and Central America. These international contract drilling
operations are primarily covered by drilling contracts which:
1. In the case of Venezuela, are structured where payment is
split between partial payment in United States dollars and the
balance paid in local currency;
2. In the case of Argentina, provide for payment in Argentina
Pesos, which are pegged at the same equivalent rate as the U.S.
dollar at this time; and
3. In the case of Mexico, provide for payment in Mexican Pesos,
however, the contract provides for an increase in contract
payments under an indexed basis to compensate for the
devaluation of the Mexican Peso in December, 1994.
-60-
A significant portion of costs and expenses relating to the Company's
international operations are comprised of goods and services procured in the
respective foreign countries and paid for in the respective countries'
currencies.
The Company is subject to taxation in many jurisdictions, and the final
determination of its tax liabilities involves the interpretation of the statutes
and requirements of various domestic and foreign taxing authorities. Foreign
income tax returns of foreign subsidiaries are subject to examination by foreign
tax authorities. In the opinion of management, any provision ultimately
determined to be required as a result of such examinations or assessments will
not be material to the Company's financial position or operations.
To date, the Company has not incurred material currency fluctuation and,
currently has not entered into any currency hedges to protect it from such
losses. During the year ended December 31, 1995, the Company realized currency
gains of $888,000.
RISKS IN CONTRACT DRILLING. The Company's operations are subject to the
many hazards inherent in the drilling business, including blowouts, cratering,
fires and collisions. These hazards could cause personal injury and loss of
life, suspend drilling operations or seriously damage or destroy the property
and equipment involved and, in addition to environmental damage, could cause
damage to producing formations and surrounding areas. Although the Company
maintains insurance against many of these hazards, the Company does not have
casualty or other insurance with respect to the rigs themselves, and such other
insurance is subject to substantial deductibles and provides for premium
adjustments based on claims. Certain other matters are also excluded from
coverage, such as loss of earnings on certain rigs.
INSURANCE. The Company believes that it is adequately insured against
normal and foreseeable risks in its operations in accordance with industry
standards; however, such insurance may not be adequate to protect the Company
against liability from all consequences of well disasters, extensive fire damage
or damage to the environment. The Company maintains appropriate insurance with
respect to workers' compensation liability. The contract drilling industry's
level of workers' compensation costs has increased over the past few years and
constitutes a substantial portion of the Company's direct labor operating costs.
The Company does not carry business interruption insurance. No assurance can be
given that the Company will be able to maintain adequate insurance in the future
at rates which are commercially reasonable.
At March 31, 1994, American Premier, formerly named the Penn Central
Corporation, was the owner of 20,690,105 unregistered shares, 53.5%, of the
Company's outstanding common stock. In June 1994, Norex, a wholly-owned
subsidiary of Norex America, Inc. ("Norex America"), completed the purchase of
all shares of the Company Common Stock owned by American Premier. Shortly
thereafter and in accordance with regulatory filings made at the time of the
purchase transaction, Norex reduced its ownership to 18,730,105 shares, or less
than 50% of the outstanding shares of the Company's common stock. In October
1995, Norex transferred 8,300,000 shares to Pronor. Norex America beneficially
owns approximately 47% of Pronor.
Prior to June 2, 1994, certain of the Company's insurance coverage,
including workers' compensation and excess liability coverage, was arranged by
American Premier as part of a program which American Premier provided to its
subsidiaries. Subsequent to the sale of the Company Common Stock by American
Premier to Norex, the Company has obtained workers' compensation, excess
liability coverage and certain other insurance from other sources. The Company
and American Premier entered into an agreement pursuant to which the Company
agreed to reimburse American Premier for all amounts advanced by American
Premier from time to time on behalf of the Company in connection with American
Premier's administration of the Company's workers' compensation and certain
other insurance programs for the periods between July 20, 1989 and the closing
of the sale of Company Common Stock by American Premier to Norex. The amounts
reimbursable to American Premier at December 31, 1995 and December 31, 1994
relating to this program were $1,900,000, and $1,229,000, respectively.
-61-
DRILLING AND WORKOVER EQUIPMENT. For information regarding the Company's
drilling and workover equipment, see "Business of the Company - Contract
Drilling and Workover."
FACILITIES. The Company leases its principal executive office in
Houston, Texas, for approximately $9,000 per month pursuant to a lease extending
through November 1996. In addition, the Company owns field locations in
Fillmore, Louisiana; Mt. Pleasant, Michigan; Glendive, Montana; Midvale, Ohio;
Woodward and Oklahoma City, Oklahoma; and Edinburg, Houston and Midland, Texas.
LITIGATION
The Company is involved in litigation incidental to the conduct of its
business, none of which it believes is, individually or in the aggregate,
material to its financial condition.
The Company is proceeding against Charleston Industries, Inc.
("Charleston"), who was a 50 percent partner in a joint venture, to recover
Charleston's respective portion of a $1,800,000 settlement paid by the Company
in previously concluded litigation (in which Charleston was a co-defendant). A
judgment has been rendered in favor of the Company against Charleston in the
state of Oklahoma. Charleston filed for protection under the United States
Bankruptcy Act and the Company has filed a claim against Charleston in
bankruptcy court. The future recovery of the Company's claim, and the term of
recovery, is uncertain.
THE RIG COMPANIES
RTO is a privately owned company based in Oklahoma City, Oklahoma. RTO
owns partial interests in 10 of the Merger Rigs. LRAC is a privately owned
Delaware corporation based in Dallas, Texas. LRAC owns whole or partial
interests in all of the Merger Rigs. The sole shareholder of RTO is Roy T.
Oliver, Jr. and the principal shareholders of LRAC are corporations and
partnerships owned or controlled by Mike L. Mullen. Messrs. Mullen and Oliver
have been active participants in the used oil field service equipment market for
over 15 years.
The Merger Rigs are all electric (SCR) rigs which are capable of
drilling to depths of 20,000 feet or greater and include five 3,000 horsepower
and nine 2,000 horsepower rigs. The Merger Rigs have been held in stacked mode
in locations in Texas, Oklahoma and Wyoming, in some cases for extended periods
of time. The Company believes that the Merger Rigs are generally in good
condition but would require refurbishment and drill pipe and related equipment
to be put back into domestic service, and, in certain cases, extensive
modification to be put into international service. The Company estimates that it
would need to spend between $400,000 and $750,000 per rig to place this fleet in
"drill ready" condition for domestic service and a minimum of $750,000 per rig
for international service. To be placed in service, each rig would also require
a 12,000 to 30,000 foot string of drill pipe (with collars) at an estimated cost
of approximately $30 per foot.
The following table describes the Merger Rigs:
<TABLE>
<CAPTION>
YEAR BUILT/
MANUFACTURER AND MODEL RATED DEPTH LOCATION REBUILT
- - - ---------------------- ----------- -------- -----------
<S> <C> <C> <C>
3,000 HP DRILLING RIGS
National 1625DE, S/N T-2939 30,000 feet Oklahoma City 1980-1981
National 1625DE, S/N T-3039 30,000 feet Oklahoma City 1980-1981
National 1625DE, S/N 7-2952 30,000 feet Fort Stockton, TX 1980-1981
Oilwell E-3000 S/N H46-101 30,000 feet Oklahoma City 1981
Continental Emsco C-3, Type II S/N 90 30,000 feet Oklahoma City 1981
2,000 HP DRILLING RIGS
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National 132OUE, S/N T-2801 25,000 feet Lysite, WY 1979
National 132OUE, S/N 1167N 25,000 feet Houston, TX 1981
National 132OUE, S/N 78 25,000 feet Oklahoma City 1981
Oilwell E-2000, S/N H47-169UK 25,000 feet Oklahoma City 1982
Oilwell E-2000, S/N H47-199UK 25,000 feet Oklahoma City 1982
Oilwell E-2000, S/N H47-128UK 25,000 feet Houston, TX 1981
Oilwell E-2000, S/N H47-134UK 25,000 feet Oklahoma City 1981
Oilwell E-2000, S/N H47-160UK 25,000 feet Oklahoma City 1981-1982
Continental-Emsco C2 Type II, S/N87 25,000 feet Oklahoma City 1981
1,500 HP DRILLING RIG
National 110UE, S/N 1103N 25,000 feet Oklahoma City 1981
1,400 HP DRILLING RIGS
Midcontinent 914EC, S/N 147C 20,000 feet Oklahoma City 1981
1,000 HP AND UNDER DRILLING RIGS
Continental-Emsco D-3, S/N57 20,000 feet Duncan, OK 1982
Continental-Emsco D-3, S/N66 20,000 feet Oklahoma City 1982
</TABLE>
The historical financial statements of RTO are not included herein
because the historical operations of RTO are inconsistent and not comparable
with the future anticipated operations of the Company. The historical financial
statements of LRAC are not included herein because LRAC was created early in
1996 for the sole purpose of the consummation of the Mergers and, accordingly,
has no historical operations.
SOMERSET
Somerset Investment Corp. is a Texas corporation which has been recently
formed to receive a $25,000,000 capital contribution from the Somerset
Shareholders and to participate in the Somerset Merger, for which the Somerset
Shareholders have secured the financing.
The historical financial statements of Somerset are not included herein
because Somerset was created early in April of 1996 for the sole purpose of the
consummation of the Mergers. Somerset has no historical operations and its sole
asset at the Closing Date will be $25 million in cash.
ELECTION OF DIRECTORS
GENERAL INFORMATION
Five directors are proposed to be elected at the Annual Meeting, only
one of which, Ivar Siem, is currently a director of the Company. Each director
will serve until the next annual meeting of shareholders or until his successor
is elected and has qualified. The Board of Directors currently consists of five
directors.
The persons named in the accompanying proxy may act with discretionary
authority to vote for a new management nominee should any nominee named in this
Proxy Statement become unavailable for election, although management is unaware
of any circumstances likely to render any nominee unavailable for election.
Unless the shareholder has specified otherwise, the persons named in the
accompanying proxy will vote such shareholder's shares of Company Common Stock
in favor of the nominees listed below.
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RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS BELIEVES THAT THE ELECTION OF THE PERSONS LISTED
BELOW AS DIRECTORS OF THE COMPANY IS IN THE BEST INTEREST OF THE COMPANY AND THE
SHAREHOLDERS. THE BOARD OF DIRECTORS THEREFORE RECOMMENDS A FOR VOTE FOR THE
NOMINEES AND IT IS INTENDED THAT THE PROXIES NOT MARKED TO THE CONTRARY WILL BE
SO VOTED.
The Articles of Incorporation of the Company do not permit cumulative
voting. A plurality of the votes of the holders of the outstanding shares of
Company Common Stock represented at a meeting at which a quorum is present may
elect directors.
DIRECTORS AND NOMINEES FOR DIRECTOR
The following table sets forth certain information regarding the current
members of and nominees for the Board of Directors.
YEAR FIRST
BECAME A
NAME AGE POSITION WITH COMPANY DIRECTOR
- - - ---- --- --------------------- ----------
Ivar Siem 50 Chairman of the Board, President 1995
and Chief Executive Officer
Roy T. Oliver 43 Director Nominee --
Steven A. Webster 44 Director Nominee --
William R. Ziegler 54 Director Nominee --
Peter M. Holt 48 Director Nominee --
Douglas Y. Bech 50 Director (not standing for reelection) 1994
Michael J. Delouche 39 Director (not standing for reelection) 1994
William C. Walker 72 Director (not standing for reelection) 1992
IVAR SIEM has been Chairman since August 8, 1995, and President and
Chief Executive Officer since April 12, 1996. He has been an international
consultant in energy, technology and finance since 1985. He is a member of the
Board of Directors of several privately held and publicly traded companies,
including; Chairman of Blue Dolphin Energy Company, an oil and gas pipeline and
exploration company, since 1992; Director of Norex America, a company with
certain investments in the oil and gas, cruise and shipping industries, since
1992; and Director of DSND ASA, a Norwegian service company which operates
specialty vessels and provides subsea engineering services, since 1993. Norex
America is an affiliate of the Company by reason of its beneficial ownership of
26.97% of the Company Common Stock through its wholly owned subsidiary, Norex.
Also, Norex America owns 47% of Pronor, which owns 21.46% of the Company Common
Stock. See "Security Ownership of Certain Beneficial Owners and Management."
ROY T. OLIVER, JR. has been the Chairman and Chief Executive Officer of
USRE, a worldwide supplier of drilling equipment, since its organization in
1980.
STEVEN A. WEBSTER has been the Chairman, Chief Executive Officer and
Treasurer of Falcon Drilling Company, Inc., a marine oil and gas drilling
contractor, since its organization in 1991. He serves as a director of Crown
Resources Corporation (a mining company) and as trust manager of Camden Property
Trust and is a managing member of SDA and a general partner of SCP.
WILLIAM R. ZIEGLER has been a partner of the law firm of Parson & Brown
since May 1994. Prior to that time he was a partner in the law firm of Whitman
Breed Abbott & Morgan and a predecessor firm
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for over five years. Mr. Ziegler is a director of Falcon Drilling Company, Inc.,
a partner of SCP and a managing member of SDA. See "Certain Relationships and
Related Transactions."
PETER M. HOLT has been the President, Chief Executive Officer and
principal owner of the Holt Companies, comprised of two Caterpillar dealerships
in central/south Texas and western Ohio and various other business interests.
DOUGLAS Y. BECH has been a partner in the law firm of Akin, Gump,
Strauss, Hauer & Feld, L.L.P., Houston, Texas since October 1994. From May 1993
to July 1994, Mr. Bech was a partner in the law firm of Gardere & Wynne, L.L.P.,
Houston, Texas and from 1977 to May of 1993, he was a partner in the law firm of
Andrews & Kurth, L.L.P., Houston, Texas. Mr Bech currently serves as a director
of Pride Refining, Inc., the managing general partner of Pride Companies, L.P.,
an oil refining company, and Wainoco Oil Corporation, an oil and gas production
and oil refining company.
MICHAEL J. DELOUCHE has served on a contractual basis in the
Controllership function of Norex America, Inc. and Norex Drilling, Ltd. since
1991. For two years prior to such time, Mr. Delouche was a Manager with KPMG
Peat Marwick.
WILLIAM C. WALKER has been an independent management consultant since
1985 and served as President of Loffland Brothers Company until his retirement
in 1989. Mr. Walker currently also serves as a director of Aztec Manufacturing
Company, a privately held oilfield equipment company.
The Board of Directors met five times during the year ended December 31,
1995 and acted one time by written consent.
EXECUTIVE OFFICERS
Set forth below is certain information concerning the executive officers
of the Company.
NAME AGE POSITION WITH COMPANY
- - - ---- --- ---------------------
Ivar Siem 50 Chairman of the Board, President and Chief
Executive Officer
Terrell L. Sadler 47 Vice President - Domestic Drilling
Michael Parrish 52 Chief Operating Officer - International
Operations
James R. Bigard 66 Sr. Vice President - Operations
William G. Poplin 61 Sr. Vice President, Sales and Marketing
Thomas L. Easley 50 Treasurer
Bill R. Merchant 52 Assistant Treasurer and Secretary
David W. Wehlmann 37 Vice President and Controller
TERRELL L. SADLER joined the Company in 1989 as the Ark-La-Tx District
Manager and became Vice President - Domestic Drilling in 1996.
MICHAEL PARRISH joined the company in June 1995 as Chief Operating
Officer of International Operations. From 1993 through 1995 he was Vice
President - Incentive Drilling for Santa Fe International Corporation having
responsibility for worldwide development of international land and marine
incentive drilling operations. From 1968 through 1992 he was involved in
international land and marine contract drilling management responsibilities as
Executive Vice President of Sedco Forex.
JAMES R. BIGARD joined the Company in 1990 as Vice President. Mr. Bigard
has spent more than 45 years directly involved in the oil and gas drilling
industry. Mr. Bigard is a director of Isabella Bank & Trust, the Michigan Oil
and Gas Association and the International Association of Drilling Contractors.
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WILLIAM G. POPLIN joined the Company in November 1990 as Vice President
and has been Vice President of Sales and Marketing since 1994. He has also
served as President of DI International, Inc., a wholly-owned subsidiary of the
Company, since 1992.
THOMAS L. EASLEY joined the Company in May 1995 as Vice President and
Chief Financial Officer. He became Treasurer and ceased to be Vice President and
Chief Financial Officer in July, 1996. From 1992 through April 1995 he was Vice
President and Chief Financial Officer of Huthnance International, Inc. From 1984
through 1991, he served as Vice President and Chief Financial Officer of Granada
Foods Corporation and Granada Biosciences, Inc.
BILL R. MERCHANT joined the Company in 1986 as Chief Accounting officer
and was Treasurer of the Company from 1990 to July, 1996. He has been Secretary
of the Company since 1994 and became Assistant Treasurer in July, 1996.
DAVID W. WEHLMANN joined the Company in July 1996 as Vice President and
Controller. From November 1994 until he joined the Company, Mr. Wehlmann was
Vice President and Chief Accounting Officer of EnerVest Management Company,
L.C., a privately held oil and gas property acquisition and management company.
Mr. Wehlmann was Controller of Convest Energy Corporation from April 1991 to
November 1994. Convest Energy Corporation is a publicly held oil and gas
exploration and production company.
COMPENSATION OF DIRECTORS
Non-employee directors are entitled to a fee of $1,000 for each meeting
attended and are reimbursed for travel and related expenses incurred in
connection therewith.
The Company's 1987 Director Plan currently reserves 250,000 shares of
Company Common Stock for issuance upon the exercise of options. The 1987
Director Plan was adopted to further the growth, development and financial
success of the Company by focusing the attention of the participants toward
improving the Company's consolidated long-range performance by affording
participants an opportunity to acquire a proprietary interest in the Company.
The 1987 Director Plan is administered by the Stock Option Committee and
eligibility is limited to persons who are elected and serve as directors of the
Company and who are not officers or employees of the Company. All determinations
of the Stock Option Committee are made by a quorum of Stock Option Committee
members. Under the 1987 Director Plan, options to purchase 15,000 shares are
awarded to each non-employee director upon initial election or appointment to
the Board.
The Company maintains directors' and officers' liability insurance and
its Bylaws provide for mandatory indemnification of directors and officers to
the fullest extent permitted by Texas law.
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE. The following table reflects the aggregate
cash compensation paid to the Chief Executive Officer of the Company and to each
of the Company's executive officers whose compensation exceeded $100,000 for
services rendered during the fiscal year ended December 31, 1995:
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<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
---------------------------------- --------------------------------
AWARDS PAYOUTS
-------------------- ----------
OTHER RESTRICTED
ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
YEAR SALARY($) BONUS($) COMPENSATION AWARD(S)($) SARs(#) PAYOUTS($) COMPENSATION($)(3)
---- --------- -------- ------------ ----------- ------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Max M. Dillard 1995 $212,180 $-0- $-0- $-0- -0- $-0- $4,244
President and Chief
Executive Officer (2) 1994(4) $155,500 -0- -0- -0- -0- -0- 3,111
1994(5) $201,667 -0- -0- -0- -0- -0- 4,033
1993(5) $189,000 -0- -0- -0- -0- -0- 3,780
</TABLE>
- - - ------------
(1) No executive officer of the Company, other than the Chief Executive
Officer, earned an aggregate salary and bonus of more than $100,000
during the period indicated.
(2) Mr. Dillard resigned as President and Chief Executive Officer on
April 9, 1996.
(3) Consists of amounts contributed by the Company to match a portion of Mr.
Dillard's contributions under the Company's 401(k) Savings Incentive
Plan.
(4) For the nine-month transition period ended December 31.
(5) For the fiscal year ended March 31.
EMPLOYMENT AGREEMENTS. The Company and Mr. Dillard were parties to an
employment agreement. Mr. Dillard's employment as President and Chief Executive
Officer of the Company terminated on April 9, 1996. The Company believes that,
pursuant to such employment agreement, Mr. Dillard is entitled to severance in
the form of a salary continuation payments equal to 24 months of his salary and
benefits. Mr. Dillard contends that he is entitled to severance in the form of
salary continuation payments equal to 48 months. The resolution of this dispute
is uncertain.
A management fee of $10,000 per month has been billed to and accrued by
the Company for Mr. Siem's services to the Company starting July 1995, which fee
will be paid as the Company's cash flow permits.
OPTION/SAR GRANTS TABLE. There were no stock options or stock
appreciation rights ("SAR") granted to the Chief Executive Officer during 1995.
AGGREGATE OPTION/SAR EXERCISES IN 1995 AND YEAR-END OPTION/SAR VALUES.
There were no options exercised during 1995 and, other than the Dillard Option,
there were no unexercised options granted to the Chief Executive Officer
outstanding at December 31, 1995. Pursuant to a Stock Option Agreement dated
September 4, 1987, Mr. Dillard was granted an option under the 1982 Stock Option
and Long-Term Incentive Plan for Key Employees to purchase up to 1,000,000
shares of the Company Common Stock. The Company believes that the Dillard Option
terminated upon the termination of Mr. Dillard's employment on April 9, 1996.
Mr. Dillard contends that the Dillard Option has not terminated and remains in
effect. The resolution of this dispute regarding the validity of the Dillard
Option is uncertain.
-67-
BOARD COMMITTEES
The Board of Directors has appointed from among its members three
standing committees of the Board, the Compensation Committee, the Stock Option
Committee and the Audit Committee.
The Audit Committee is composed of Messrs. Bech and Delouche. The
principal functions of the Audit Committee include overseeing the performance
and reviewing the scope of the audit function of the Company's independent
auditors. The Audit Committee also is to review, among other things, audit plans
and procedures, the Company's policies with respect to conflicts of interest and
the prohibition of the use of corporate funds or assets for improper purposes,
changes in accounting policies and the use of independent auditors for non-audit
services.
The Compensation Committee and the Stock Option Committee are described
below. See "Election of Directors - Report of the Compensation Committee and
Stock Option Committee on Executive Compensation."
The Board of Directors has not formed a Nominating Committee and all
nominations are made by the Board of Directors as a whole.
REPORT OF THE COMPENSATION COMMITTEE AND STOCK OPTION COMMITTEE ON EXECUTIVE
COMPENSATION
At varying times during 1995, the Compensation Committee and the Stock
Option Committee consisted of C. Wayne Nance, Hamilton Robinson, Jr., Michael J.
Delouche and William C. Walker, all of whom were "disinterested" for purposes of
Rule 16b-3 under the Securities Exchange Act of 1934. The Compensation Committee
is responsible for reviewing the performance of management and making decisions
regarding executive compensation, which decisions are reported to the full Board
of Directors. Decisions regarding grants under the Company's 1982 Employee Plan
(as defined hereinafter) are made solely by the Stock Option Committee in order
to satisfy the Rule 16b-3 requirement of disinterested administration of such
Plan. Such decisions are reported by the Stock Option Committee to the
Compensation Committee and to the full Board of Directors. Messrs. Nance and
Robinson resigned from the Board of Directors on August 14, 1995, and November
15, 1995, respectively. Mr. Delouche was elected to the Compensation Committee
and the Stock Option Committee on November 15, 1995.
COMPENSATION OF EXECUTIVE OFFICERS
The objective of the Compensation Committee and the Stock Option
Committee is to provide executive compensation programs to attract employees and
retain qualified individuals. To achieve this objective, the Compensation
Committee and the Stock Option Committee endeavor to maintain an appropriate
relationship between executive pay and the operational and financial results of
the Company, while at the same time attracting and retaining key executives,
particularly in a period of continuation of relatively depressed conditions in
the oil and gas land drilling industry.
The executive compensation administered by the Compensation Committee
and the Stock Option Committee presently consists of annual base salary and
stock option grants. Under this system, a significant portion of an executive's
compensation is linked to the Company's performance. Although the Company does
not have a formal annual incentive bonus program and did not award any bonuses
to the executive officers during 1995, the Compensation Committee has the
authority to approve bonuses or, subject to the approval of the full Board, to
adopt a formal annual incentive bonus program should the Compensation Committee
deem such actions to be warranted by the Company's performance.
Annual Base Salaries. Based on currently available public information,
the Compensation Committee believes that the base salaries and the total annual
cash compensation of the Company's
-68-
executive officers are lower than the average for the executive officers of its
"peer group" identified in the Stock Performance Graph which follows this
report. The Compensation Committee, at its meeting in November 1995, limited
executive officers' salary increases to a 3.0% cost-of-living adjustment
effective November 1, 1995. In the opinion of the Compensation Committee, these
salary adjustments were necessary for the Company to retain key personnel.
Stock Option Grants. Employee stock options represent an important
component of the performance-based part of the Company's compensation system. By
providing executives with a long-term incentive, stock options directly align
their interests with those of the Company's shareholders. Such incentives can be
particularly important to the retention and motivation of key personnel in
periods when industry conditions and the Company's performance would not warrant
significant merit increases in base salary or annual incentive bonuses. Stock
options under the 1982 Employee Plan are granted at exercise prices equal to the
fair market value of the Company's stock on the date of grant, become
exercisable in 20% increments over a five-year period and have a ten-year term.
During 1995, the Stock Option Committee granted to executive officers of
the Company options to acquire an aggregate of 71,000 shares of the Company
Common Stock. Such grants were awarded in amounts deemed by the Stock Option
Committee to be commensurate with the respective positions of such executives
and their ability to positively impact the Company's performance. The grants
were viewed by the Stock Option Committee as important to the motivation and
retention of the key personnel who received them.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
The Compensation Committee did not increase Mr. Dillard's $212,180
annual base salary in 1995.
During 1989, Mr. Dillard was granted an option under the 1982 Employee
Plan to acquire an aggregate of one million shares of the Company Common Stock.
These options expired upon Mr. Dillard's resignation.
Section 162(m) of the Internal Revenue Code of 1986, as amended,
disallows a corporation's deduction for remuneration, paid to its chief
executive officer and its four other highest compensated officers in excess of
$1 million per person. As neither the Company's Chief Executive Officer nor any
of its other officers has received remuneration in excess of such limitation in
1995 or is anticipated to receive remuneration in excess of such limitation in
1996, the Compensation Committee has deferred making any recommendation to the
Board as to what policy the Company should adopt with respect to remuneration of
the executive officers of the Company in excess of such limitation, until such
times as it appears that such limitation may be exceeded.
Compensation Committee: William C. Walker
Michael J. Delouche
Stock Option Committee: William C. Walker
Michael J. Delouche
STOCK PERFORMANCE GRAPH
The following performance graph compares the performance of the Company
Common Stock to the American Stock Exchange Market Value Index and to a
Company-determined Industry Peer Group index. The Industry Peer Group, unlike
the Company, derives a large percentage of its revenue from foreign operations
or oil and gas production, and is comprised of the following land drilling
companies: Energy Service Company, Inc.; Nabors Industries, Inc.; Noble Drilling
Corporation; Parker Drilling Company;
-69-
Tucker Drilling Company; and Unit Corporation. The graph assumes that $100 was
invested on December 31, 1990 in the Company Common Stock in each index and that
all dividends were reinvested. The Company has not declared any dividends during
the period covered by this graph.
COMPARISON OF FIVE YEAR CUMULATIVE RETURN
AMONG DI INDUSTRIES, INC., AMERICAN STOCK EXCHANGE
MARKET VALUE INDEX, AND COMPANY-DETERMINED
INDUSTRY PEER GROUP
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
Calendar Year
-------------------------------------------------
1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ----
DI Industries, Inc. ...... 100.00 54.55 63.64 68.18 54.55 54.55
Industry Peer Group ...... 100.00 76.27 74.67 114.99 94.73 153.62
AMEX Broad Market ........ 100.00 123.17 124.86 148.34 131.04 168.90
This graph depicts the past performance of the Company's Common Stock
and in no way should be used to predict future performance. The Company does not
make or endorse any predictions as to future share performance.
The foregoing price performance comparisons shall not be deemed
incorporated by reference by any general statement incorporating by reference
this Proxy Statement into any filing under the Securities Act or under the
Exchange Act, except to the extent that the Company specifically incorporates
this graph by reference, and shall not otherwise be deemed filed under such
Acts.
SECTION 16(A) COMPLIANCE
Pursuant to Section 16(a) of the Exchange Act and Commission
Regulations, the Company's directors, executive officers, and shareholders who
own more than ten percent of the Company Common Stock, are required to file
reports of stock ownership and changes in ownership with the Commission and the
AMEX and to furnish the Company with copies of all such reports they file.
Based on its review of such reports from reporting persons, the Company
believes that during 1995 all filing requirements applicable to its directors,
executive officers and greater than 10 percent shareholders were complied with
except as follows: Form 4 filings covering grants of stock options in November
1994 and November 1995 due December 10, 1994 and 1995, respectively, to Mr.
Merchant were filed on February 3, 1995 and February 8, 1996, respectively, Form
4 filings covering grants of stock options in November 1994 and November 1995
due December 10, 1994 and 1995, respectively, to Mr. Poplin were filed on
-70-
February 3, 1995 and February 9, 1996, respectively, and a Form 4 filing
covering a grant of stock options to Mr. Easley in May, 1995 due June 10, 1995
was filed on June 12, 1995.
APPROVAL OF THE STOCK OPTION PLAN
Effective July ___, 1996, the Board of Directors approved the Company's
1996 Employee Stock Option Plan, conditioned upon approval by the Shareholders.
The Stock Option Plan authorizes the granting of (i) incentive stock options
("ISOs"), as defined in Section 422 of the Code and (ii) other nonqualified
stock options ("NQSOs"). The purpose of the Stock Option Plan is to secure for
the Company and the Shareholders the benefits that flow from providing certain
employees with the incentive to further the business of the Company inherent in
ownership of the Company Common Stock.
The Company also maintains the 1982 Stock Option and Long-Term Incentive
Plan for Key Employees (the "1982 Employee Plan") and the 1987 Stock Option Plan
for Non-Employee Directors (the "1987 Director Plan"). See "Description of the
Capital Stock of the Company - Stock Option Plans."
The following is a brief summary of the material provisions of the Stock
Option Plan. This summary is qualified in its entirety by reference to the full
text of the Stock Option Plan, a copy of which is included herewith as Appendix
C and made a part hereof.
SUMMARY OF THE STOCK OPTION PLAN
The Stock Option Plan provides for the granting of options to purchase a
total of not more than 7,000,000 shares of Company Common Stock, which shares
have been reserved for issuance under the Stock Option Plan. Shares to be issued
under the Stock Option Plan are to be issued by the Company from its authorized
but unissued shares of Company Common Stock. All options to be granted under the
Stock Option Plan are conditioned upon the approval of the Stock Option Plan by
the Shareholders and no further options will be granted if such approval is not
received. Any options granted prior to the Annual Meeting will be subject to
possible rescission if such approval is not received.
The Stock Option Plan is administered by a Stock Option Committee (the
"Committee"), which is required to consist of two or more persons who are
disinterested persons within the meaning of Rule 16b-3 promulgated under the
Securities Exchange Act of 1934. The Committee has complete discretion in
granting options under the Stock Option Plan. The Board of Directors may from
time to time alter, amend, suspend or discontinue the Stock Option Plan and make
rules for its administration. The Stock Option Plan will automatically terminate
effective July ______, 2006.
Options may be granted under the Stock Option Plan for terms up to but
not exceeding 10 years from the date of grant. No ISO may be granted under the
Stock Option Plan to an individual who is not an employee of the Company.
Additionally, no ISO may be granted under the Stock Option Plan to an employee
who, immediately before such option is granted, owns (or is deemed by the Code
to own) stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company unless such option is not exercisable after the
expiration of five years from the date that the option is granted. The aggregate
fair market value (determined at the time an option is granted) of the Company
Common Stock with respect to which ISOs are exercisable for the first time by
any employee in any calendar year (under all plans of the Company) may not
exceed $100,000. The purchase price per share of Company Common Stock
purchasable under options granted pursuant to the Stock Option Plan will be
determined by the Committee but, in the case of ISOs, may not be less than 100%
of the fair market value of a share of Company Common Stock at the time the ISOs
are granted; provided, however, that such option price per share of Company
Common Stock purchasable under an ISO granted to an employee who, immediately
before such ISO is granted, owns stock possessing more than 10% of the total
combined voting power of all
-71-
classes of stock of the Company may not be less than 110% of the fair market
value at the time the ISO is granted. Options granted under the Stock Option
Plan may not be transferable or assignable in any form or fashion, other than by
will or by the laws of decent and distribution, and each option may be
exercised, during the lifetime of the employee receiving such option, only by
that employee.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the current Federal income tax rules
related to the grant and exercise of ISOs and NQSOs, based on the current
provisions of the Code and the existing regulations thereunder.
A grantee of an ISO does not recognize taxable income either on the date
of grant or on the date of exercise. Upon the exercise of the ISO, however, the
difference between the fair market value of the Company Common Stock received
and the option price may be subject to the alternative minimum tax. Upon
disposition of shares of Company Common Stock acquired from the exercise of an
ISO, long-term capital gain or loss is generally recognized in an amount equal
to the difference between the amount realized on the sale or disposition and the
exercise price. If the grantee disposes of the shares of Company Common Stock
within two years of the date of grant or within one year of the date of
exercise, however, the grantee will recognize ordinary income equal to the
lesser of (i) the amount realized at the disposition, or (ii) the difference
between the fair market value of the shares of Company Common Stock received on
the date of exercise and the exercise price. Any remaining gain or loss is
treated as short-term or long-term capital gain or loss, depending on the period
of time the shares are held. The Company is not entitled to a tax deduction upon
either exercise of an ISO or disposition of shares of Company Common Stock
acquired pursuant to such exercise, except to the extent that a grantee
recognizes ordinary income in the disposition of such shares.
A grantee of a NQSO will not recognize taxable income upon the grant of
the option. Upon a grantee's exercise of a NQSO, (1) the grantee will recognize
ordinary income in an amount equal to the difference between the exercise price
of the shares purchased pursuant to the NQSO and their fair market value on the
exercise date, and (2) the Company will be entitled to a tax deduction in an
amount equal to such difference.
BOARD RECOMMENDATION
The affirmative vote of a majority of the outstanding shares of the
Company Common Stock represented at a meeting at which a quorum is present is
required for approval of the Stock Option Plan. THE BOARD OF DIRECTORS HAS
APPROVED THE STOCK OPTION PLAN AND BELIEVES IT IS ADVISABLE AND IN THE BEST
INTERESTS OF THE COMPANY AND THE SHAREHOLDERS TO ADOPT SUCH PLAN. ACCORDINGLY,
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
STOCK OPTION PLAN.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
As indicated below, the directors and certain principal shareholders
beneficially own in the aggregate 18,891,405 shares, or 48.6%, of the Company
Common Stock outstanding as of July 15, 1996.
The following table reflects the beneficial ownership of the Company
Common Stock as of July 15, 1996 and on a pro forma basis (assuming the Cash
Options are not exercised) with respect to (i) all persons known by the Company
to be the beneficial owner of more than five percent of the Company Common
Stock, (ii) directors and nominees for director of the Company and (iii)
directors and officers of the Company as a group:
-72-
As of July 15, 1996 Pro Forma
---------------------- ------------------------
Name and Address of Beneficial Number Percent Number Percent
Owner, Identity of Group of Shares of Class of Shares of Class
- - - ------------------------------ --------- -------- --------- --------
Norex America, Inc. 10,430,105(1) 26.86% 10,430,105(1) 8.85%
P.O. Box HM 429
Hamilton, HM, BX, Bermuda
Pronor Holdings Ltd. 8,300,000(1) 21.37% 8,300,000(1) 7.04%
% Morgan and Morgan Trust
Corp.
Road Town, Pasca Estate
Tortola, British Virgin Islands
Somerset Capital Partners -- * 39,535,578(2) 33.53%
69 Delaware Avenue
Buffalo, New York 14202
Mike L. Mullen -- * 18,830,359(3) 15.97%
8411 Preston Road, Suite 730-LB2
Dallas, Texas 75225
Directors (3)
Douglas Y. Bech 4,200(4) * 4,200(4) *
Ivar Siem 10,433,105(4)(5) 26.86% 10,433,105(4)(5) 8.85%
William C. Walker 10,000(4) * 10,000(4) *
Director Nominees
Roy T. Oliver, Jr. 14,464,031(6) 12.27%
William R. Ziegler 5,000 * 39,540,578(7) 33.54%
Steven A. Webster 39,535,578(8) 33.53%
Directors and Executive
Officers as a group
(11 persons) 10,591,405(9) 27.16% 64,581,814(10) 54.71%
- - - ------------
* Indicates less than one percent.
(1) Norex America, through its wholly owned subsidiary, Norex, owns 10,430,105
shares of the Company. Norex America owns a beneficial interest of
approximately 47% of Pronor, which owns 8,300,000 shares of the Company.
Both Pronor and Norex disclaim control and beneficial ownership of each
other. See Note (5) below regarding Mr. Ivar Siem's beneficial ownership
of Norex America.
(2) Includes 9,488,539 shares owned directly by SCP, as well as 30,047,039
shares owned by SDA, which is controlled by SCP. The Series A Preferred
Stock is currently convertible into 720,000 shares of Company Common
Stock. Upon such conversion, SDA and SCP would have the right under the
Somerset Shadow Warrants to immediately purchase up to 720,000 shares of
Company Common Stock, resulting in SCP beneficially owning 40,867,578
shares of Company Common Stock. Messrs. Ziegler and Webster are general
partners of SCP, which is the managing member of SDA. Therefore, both
Messrs. Ziegler and Webster are deemed to beneficially own SCP's shares.
(3) Includes 15,204,107 shares beneficially owned by EER, and 3,626,252 shares
beneficially owned by GCT, both of which are controlled by Mullen. The
Series A Preferred Stock is currently convertible into 720,000 shares of
Company Common Stock. Upon such conversion, EER and GCT would have the
right under the Rig Shadow Warrants to purchase up to 342,928 shares of
Company Common Stock, resulting in Mullen beneficially owning 19,173,287
shares of Company Common Stock.
-73-
(4) Includes the following shares that may be purchased upon the exercise of
options granted under the Company's 1987 Stock Option Plan for
Non-Employee Directors that are currently exercisable or that will become
exercisable within 60 days: 3,000 for Mr. Bech; 3,000 for Mr. Siem; and
9,000 for Mr. Walker. The directors of the Company and director nominees
who are not listed do not own a beneficial interest in any shares of
Common Stock.
(5) Includes 3,000 shares pursuant to exercisable stock options referred to in
Note (4) and 10,430,105 shares of Company Common Stock owned by Norex and
beneficially owned by Norex America. Mr. Siem is one of five potential
beneficiaries in a trust which controls Norex America.
(6) Includes 11,357,385 shares of Company Common Stock owned directly by Mr.
Oliver, as well as 3,106,646 shares beneficially owned by USRE, which is
wholly-owned and controlled by Mr. Oliver. The Series A Preferred Stock is
currently convertible into 720,000 shares of Company Common Stock. Upon
such conversion, Mr. Oliver and USRE would have the right under the Rig
Shadow Warrants to purchase up to 263,411 shares of Company Common Stock,
resulting in Mullen beneficially owning 14,727,442 shares of Company
Common Stock.
(7) Includes 5,000 shares of Company Common Stock owned directly by Mr.
Ziegler, as well as 39,535,578 shares beneficially owned by SCP, of which
Mr. Ziegler is a general partner.
(8) Includes 39,535,578 shares beneficially owned by SCP, of which Mr. Webster
is a general partner.
(9) Includes shares owned directly or beneficially by the current directors
and executive officers, and includes 159,000 shares that may be purchased
upon the exercise of options granted under the 1982 Employee Plan and the
1987 Director Plan that are currently exercisable or that will become
exercisable within 60 days.
(10) Includes shares owned directly or beneficially by the director nominees
and current executive officers, and includes 147,000 shares that may be
purchased upon the exercise of options granted under the 1982 Employee
Plan and the 1987 Director Plan that are currently exercisable or that
will become exercisable within 60 days.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At March 31, 1994, American Premier was the owner of 20,690,105 shares,
or 53.5%, of the Company Common Stock at that time. In June 1994, Norex
completed the purchase of all shares of the Company's common stock owned by
American Premier. Shortly thereafter and in accordance with regulatory filings
made at the time of the purchase transaction, Norex reduced its ownership to
18,730,105 shares, or 48.4%, of the outstanding shares of the Company's common
stock. In October 1995, Norex transferred 8,300,000 shares to Pronor. Norex
America, the parent company of Norex, beneficially owns approximately 47% of
Pronor.
Prior to June 2, 1994, the Company was included in an insurance and
bonding program that American Premier provided for its subsidiaries. Under the
program, American Premier paid for all of the expenses associated with the
program and invoiced its subsidiaries for their proportionate shares of the
program costs. The amount reimbursable to American Premier at December 31,1995
relating to this program was $1,900,000.
During 1995, Mr. Bech was a partner in a law firm that performed legal
services for the Company.
During the fourth quarter of 1995, Norex subscribed to and paid
$4,000,000 for 4,000 shares of the Series B Preferred Stock, to be issued
subsequent to December 31, 1995. As of the date hereof, the Series B Preferred
Stock has not been issued. During May of 1996, the Company and Norex agreed
that, upon consummation of the Mergers, the Company would rescind the
Subscription and refund the $4,000,000 payment made by Norex for the
Subscription out of the proceeds of a $4,000,000 loan to be provided by
-74-
Norex. If the Mergers are not consummated, the Subscription will not be
rescinded and the 4,000 shares of Series B Preferred Stock will be issued.
On June 10, 1996, Norex advanced $1,000,000 to the Company, as provided
for in the Merger Agreements. The loan bears interest at a rate of 12% per
annum, will mature on the earlier of October 31, 1996 or the Effective Time and
is secured by a pledge of certain domestic receivables of the Company. The term
loan was repaid with interest on July 1, 1996.
PROPOSAL TO AMEND ARTICLES OF INCORPORATION:
NAME CHANGE AMENDMENT
BACKGROUND
The Board of Directors believes that, in order to reflect a change in
strategy and the management restructuring, the name "DI Industries, Inc." should
be changed to "________________." The Somerset Merger Agreement provides that
the Articles of Incorporation of the Company shall be amended to change the name
of the Company to "________________" (the "Name Change Amendment"). Accordingly,
the consummation of the Somerset Merger will automatically effect the Name
Change Authorization Amendment. Notwithstanding this, the Board of Directors is
proposing that the Name Change Amendment be separately approved and adopted by
the Shareholders at the Annual Meeting. If the Name Change Amendment is
separately adopted by the Shareholders, the name of the Company could be changed
by the Board of Directors in the event the Somerset Merger is not consummated
without any further action by the Shareholders.
PROPOSED AMENDMENT
The Board of Directors has declared it advisable and has adopted, and
recommends that the Shareholders adopt the Name Change Amendment to revise
Article One of the Company's Articles of Incorporation by deleting such Article
in its entirety and substituting therefor the following:
"The name of the corporation is ________________."
RECOMMENDATIONS AND REQUIRED AFFIRMATIVE VOTE
The affirmative vote of the holders of two-thirds of the shares of the
Company Common Stock outstanding and entitled to vote at the Annual Meeting is
required to adopt the Name Change Amendment. THE BOARD OF DIRECTORS HAS APPROVED
THE NAME CHANGE AMENDMENT AND BELIEVES IT IS IN THE BEST INTERESTS OF THE
COMPANY AND THE SHAREHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE NAME CHANGE AMENDMENT. The
approval and ultimate consummation of the Somerset Merger will automatically
effect the Name Change Amendment. The Company intends, however, to effect the
Name Change Amendment, if adopted by the Shareholders, irrespective of whether
the Somerset Merger is approved or consummated.
PROPOSAL TO AMEND ARTICLES OF INCORPORATION:
SHARE AUTHORIZATION AMENDMENT
BACKGROUND
As of July 15, 1996, there were issued and outstanding 38,836,378 shares
of Company Common Stock and 90,000 shares of Series A Convertible Redeemable
Preferred Stock. In addition, _______ shares
-75-
of the Company Common Stock were reserved for issuance and issuable (i) pursuant
to certain of the Company employee benefit plans, or (ii) upon the exercise of
outstanding employee or non-employee director stock options and warrants. Up to
an aggregate of approximately 79,071,156 shares will be issuable in the Mergers
and another 3,440,000 shares will be potentially issuable under the Shadow
Warrants. The authorized capital stock of the Company currently consists of
75,000,000 shares of the Company Common Stock and 1,000,000 shares of preferred
stock. Consequently, there are not a sufficient number of shares of Company
Common Stock available to permit the Company to consummate the Mergers. To
permit the Company to consummate the Mergers and to provide the Company the
flexibility to issue the Company Common Stock in future transactions should the
Board of Directors determine it is appropriate, the Somerset Merger Agreement
provides that the Articles of Incorporation of the Company shall be amended to
increase the number of authorized shares of the Company Common Stock to
300,000,000 shares. Accordingly, the consummation of the Somerset Merger will
automatically effect the Share Authorization Amendment. Notwithstanding this,
the Board of Directors is proposing that the Share Authorization Amendment be
separately approved and adopted by the Shareholders at the Annual Meeting. If
the Share Authorization Amendment is separately adopted by the Shareholders, the
additional shares of the Company Common Stock would be available for future
issuance at the discretion of the Board of Directors in the event the Somerset
Merger is not consummated without further action by the Shareholders. Any such
future issuance could, depending on the circumstances of any such issuance,
result in dilution of existing shareholders' interests. Although there are no
pending or proposed transactions, financings or other uses currently
contemplated by the Board of Directors for the issuance of the additional shares
of the Company Common Stock other than as described in this Proxy Statement with
respect to the Mergers and the Stock Option Plan, preliminary discussions have
occurred between the Company and various third parties regarding a merger of, or
acquisition by, the Company.
PROPOSED AMENDMENT
The Board of Directors has declared it advisable and has adopted, and
recommends that the Shareholders adopt the Share Authorization Amendment to
revise the first sentence of Article Four of the Company's Articles of
Incorporation by deleting such sentence in its entirety and substituting
therefor the following:
"The corporation shall have the authority to issue an aggregate
of 301,000,000 shares, consisting of 1,000,000 shares of
Preferred Stock, par value $1.00 per share ("Preferred Stock")
and 300,000,000 shares of Common Stock, par value $0.10 per share
("Common Stock").
RECOMMENDATIONS AND REQUIRED AFFIRMATIVE VOTE
The affirmative vote of the holders of two-thirds of the shares of the
Company Common Stock outstanding and entitled to vote at the Annual Meeting is
required to adopt the Share Authorization Amendment. THE BOARD OF DIRECTORS HAS
APPROVED THE SHARE AUTHORIZATION AMENDMENT AND BELIEVES IT IS IN THE BEST
INTERESTS OF THE COMPANY AND THE SHAREHOLDERS. ACCORDINGLY, THE BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE SHARE
AUTHORIZATION AMENDMENT. The approval and ultimate consummation of the Somerset
Merger will automatically effect the Share Authorization Amendment. The Company
intends, however, to effect the Share Authorization Amendment, if adopted by the
Shareholders, irrespective of whether the Somerset Merger is approved or
consummated.
-76-
PROPOSAL TO AMEND ARTICLES OF INCORPORATION;
VOTING AMENDMENT
BACKGROUND
The TBCA requires that the Articles of Incorporation of the Company may
be altered, amended or repealed, or new Articles of Incorporation may be
adopted, only upon the affirmative vote of two-thirds of the outstanding shares
entitled to vote thereon, and that the Shareholders may (i) adopt a plan of
merger or consolidation, or (ii) authorize a sale, lease, exchange or other
disposition of all or substantially all of the property and assets of the
Company only upon the affirmative vote of two-thirds of the outstanding shares
entitled to vote thereon (the matters described in (i) and (ii) are sometimes
referred to hereinafter collectively as "Fundamental Corporate Events"). The
TBCA provides that the vote required for approval of Fundamental Corporate
Events may be reduced to not less than a majority of the outstanding shares
entitled to vote if the Articles of Incorporation so provide. The Board of
Directors believes that the two-thirds voting requirement will limit the ability
of the Company to enter into certain potential transactions in the future and
that a requirement of the affirmative vote of only a majority of the shares
entitled to vote will provide greater flexibility for the Company. While the
Board of Directors acknowledges that any such change in the voting requirement
might adversely affect certain of the Shareholders by decreasing their ability
to block Fundamental Corporate Events, the Board of Directors feels that the
Company and its Shareholders in general would benefit from the flexibility that
would result from such a change. Accordingly, the Somerset Merger Agreement
provides that the Articles of Incorporation be amended to provide that any
action requiring the consent of more than a majority of the issued and
outstanding stock of the Company under the TBCA shall only require the consent
of majority of the issued and outstanding stock of the Company. Thus, the
consummation of the Somerset Merger will automatically effect the Voting
Amendment. Notwithstanding this, the Board of Directors is proposing that the
Voting Amendment be separately approved and adopted by the Shareholders at the
Annual Meeting. If the Voting Amendment is separately approved by the
Shareholders, the Voting Amendment could be effected by the Board of Directors
in the event the Somerset Merger is not consummated without any further action
by the Shareholders. The Company does not have any current plans with respect to
any Fundamental Corporate Events other than as set forth in this Proxy
Statement.
PROPOSED AMENDMENT
The Board of Directors has declared it advisable and has adopted, and
recommends that the Shareholders adopt the Voting Amendment to add Article
Thirteen to the Company's Articles of Incorporation stating the following:
ARTICLE XIII
"If, with respect to any action to be taken by the shareholders
of the Corporation, any provisions of the Texas Business Corporation Act
would, but for this Article XIII, require the vote or concurrence of the
holders of shares having more than a majority of the votes entitled to
be voted thereon, or of any class or series thereof, the vote or
concurrence of the holders of shares having only a majority of the votes
entitled to be cast thereon, or of any class or series thereof, shall be
required with respect to any such action."
RECOMMENDATIONS AND REQUIRED AFFIRMATIVE VOTE
The affirmative vote of the holders of two-thirds of the shares of the
Company Common Stock outstanding and entitled to vote at the Annual Meeting is
required to adopt the Voting Amendment. THE BOARD OF DIRECTORS HAS APPROVED THE
VOTING AMENDMENT AND BELIEVES IT IS IN THE BEST INTERESTS OF THE COMPANY AND THE
SHAREHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
-77-
THE SHAREHOLDERS VOTE FOR THE VOTING AMENDMENT. The approval and ultimate
consummation of the Somerset Merger will automatically effect the Voting
Amendment. The Company intends, however, to effect the Voting Amendment, if
adopted by the Shareholders, irrespective of whether the Somerset Merger is
approved or consummated.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The authorized capital stock of the Company as of the date hereof
consists of 75,000,000 shares of Company Common Stock, par value $.10 per share,
and 1,000,000 shares of Preferred Stock, par value $1 per share. As of the
Record Date, there are issued and outstanding 38,836,378 shares of Company
Common Stock and 90,000 shares of Series A Convertible Redeemable Preferred
Stock.
In accordance with the requirements of the Merger Agreements, the
Articles of Incorporation of the Company will be amended to provide that the
authorized capital stock of the Company shall consist of 1,000,000 shares of
preferred stock, par value $1 per share, and 300,000,000 of common stock, par
value $0.10 per share.
COMPANY COMMON STOCK
There are currently issued and outstanding 38,836,378 shares of Company
Common Stock. There are no shares of Company Common Stock held as treasury
shares. In addition, an aggregate of 699,200 shares of Company Common Stock are
reserved for issuance and are issuable pursuant to or upon the exercise of
outstanding options and 5,333,333 shares would be issuable upon the exercise of
certain warrants which would be issued in connection with the Series B Preferred
Stock discussed below.
COMPANY PREFERRED STOCK
There are 200,000 shares of Series A Convertible Redeemable Preferred
Stock, par value $1 per share, authorized, of which 90,000 shares are currently
issued and outstanding. The Series A Preferred Stock is subject to both
mandatory and optional redemption provisions and is convertible into 720,000
shares of Company Common Stock. The Series A Preferred Stock confers no right to
vote on any matter to be voted on by the Shareholders. The holders of Series A
Preferred Stock are entitled to a preferential distribution upon the voluntary
or involuntary liquidation, dissolution, or winding up of the Company. The
holders of Series A Preferred Stock are not entitled to preferential payments of
cumulative or non-cumulative dividends.
RIGHTS TO PURCHASE PREFERRED STOCK
Norex has subscribed to and paid $4,000,000 for 4,000 shares of the
Series B Preferred Stock, which as of the date hereof, have not been issued.
During May of 1996, the Company and Norex agreed that, upon consummation of the
Mergers, the Company would rescind the Subscription and refund the $4,000,000
payment made by Norex out of the proceeds of a $4,000,000 loan to be provided by
Norex. If the Mergers are not consummated, the Subscription will not be
rescinded and the 4,000 shares of Series B Preferred Stock will be issued.
STOCK OPTION PLANS
The Company's 1982 Employee Plan reserves 2,500,000 shares of the
Company Common Stock for issuance upon the exercise of options. Under the 1982
Employee Plan as of July 15, 1996, options to
-78-
purchase _______ shares of the Company Common Stock were outstanding, options to
purchase 40,600 shares of the Company Common Stock have been previously
exercised and options to purchase 1,869,000 shares of Company Common Stock were
available for grant. The Company's 1987 Director Plan reserves 250,000 shares of
the Company Common Stock for issuance upon the exercise of options and provides
for the automatic grant of options to purchase shares of the Company Common
Stock to any non-employee who becomes a director of the Company. Under the 1987
Director Plan as of July 15, 1996, options to purchase 58,800 shares of Company
Common Stock were outstanding and options to purchase 191,200 shares of Company
Common Stock were available for grant until June 30, 1997. The exercise price of
stock options under both the 1982 Employee Plan and the 1987 Director Plan
approximates the fair market value of the stock at the time the option is
granted. Options become exercisable in 20% increments over a five-year period
and expire on the tenth anniversary of the date of grant. If the Stock Option
Plan is approved, an additional 7,000,000 shares of the Company Common Stock
will be reserved for issuance thereunder.
SHAREHOLDER VOTE REQUIRED TO APPROVE CERTAIN BUSINESS COMBINATIONS
In accordance with the provisions of the TBCA, a plan of merger or
exchange must be approved by the affirmative vote of the holders of at least
two-thirds of the Company Common Stock. If the Charter Amendment is effected,
the vote required to approve such actions will be reduced to a majority of the
shares entitled to vote.
TRANSFER AGENT AND REGISTRAR
The transfer agent for Company Common Stock is American Stock Transfer &
Trust Company, 6201 15th Avenue, Third Floor, Brooklyn, New York 11219, (718)
921-8261.
INDEPENDENT AUDITORS
It is expected that representatives of Deloitte & Touche LLP will be
present at the Annual Meeting to respond to appropriate questions of
Shareholders and to make a statement if they so desire.
The financial statements and the related financial statement schedule as
of December 31, 1995 and 1994 and for the years ended December 31, 1995, the
nine months ended December 31, 1994 and the year ended March 31, 1994 included
in this Proxy Statement have been audited by Deloitte & Touche LLP independent
auditors, as stated in their reports, which are included herein, and have been
so included in reliance upon the reports of such firm given upon their authority
as experts in accounting and auditing.
-79-
FORWARD LOOKING STATEMENTS
THIS PROXY STATEMENT CONTAINS STATEMENTS WHICH, TO THE EXTENT THAT THEY
ARE NOT RECITATIONS OF HISTORICAL FACT, CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE
EXCHANGE ACT. ALL FORWARD LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES.
THE FORWARD LOOKING STATEMENTS CONTAINED IN THIS PROXY STATEMENT ARE INTENDED TO
BE MADE SUBJECT TO THE SAFE HARBOR PROTECTIONS PROVIDED BY SECTION 27A OF THE
SECURITIES ACT AND 21E OF THE EXCHANGE ACT.
SHAREHOLDER PROPOSALS
Proposals intended to be presented by Shareholders at the Company 1997
Annual Meeting of Shareholders must be received by the Company, at the address
set forth on the first page of this Proxy Statement, not later than May 1, 1997,
in order to be included in the Company's proxy material and form of proxy
relating to such meeting. Shareholder proposals must also be otherwise eligible
for inclusion.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. The reports, proxy statements and other
information filed by the Company with the Commission can be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commissioner's
Regional Offices at Seven World Trade Center, New York, New York 10048 and at
Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material can also be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W. Washington,
D.C. 20549. The Company Common Stock is listed and traded on the AMEX and
certain of the Company's reports, proxy statements and other information can be
inspected at the offices of the AMEX, 86 Trinity Place, New York, New York
10006.
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INDEX TO FINANCIAL STATEMENTS
DI INDUSTRIES, INC.
Independent Auditors' Report ...................................... F-2
Consolidated Balance Sheets as of December 31, 1994
and 1995 (audited) and March 31, 1996 (unaudited) ............. F-3
Consolidated Statements of Operations for the Three Months
Ended March 31, 1996 and 1995 (unaudited), Year Ended
December 31, 1995, the Nine Months Ended December 31,
1994 and the Year Ended March 31, 1994 ........................ F-4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1996 and 1995 (unaudited), Year Ended
December 31, 1995, the Nine Months Ended December 31,
1994 and the Year Ended March 31, 1994 ........................ F-5
Consolidated Statements of Shareholders' Equity for the
Three Months Ended March 31, 1996 (unaudited),
For the Year Ended December 31, 1995, the
Nine Months Ended December 31, 1994 and the
Year Ended March 31, 1994 ..................................... F-6
Notes to the Consolidated Financial Statements .................... F-7
Financial Statement Schedule:
Schedule VIII - Valuation and Qualifying Accounts ............ F-20
F-1
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
of DI Industries, Inc.:
We have audited the accompanying consolidated balance sheets of DI
Industries, Inc. and its subsidiaries (the "Company") as of December 31, 1995
and 1994, and the related consolidated statements of operations, cash flows and
shareholders' equity for the year ended December 31, 1995, the nine months ended
December 31, 1994 and the year ended March 31, 1994. Our audits also included
the financial statement schedule listed in the Index. These financial statements
and the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1995 and 1994, and the results of its operations and its cash flows for the year
ended December 31, 1995, the nine months ended December 31, 1994 and for the
year ended March 31, 1994 in conformity with generally accepted accounting
principles. Also, in our opinion, such 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.
Deloitte & Touche LLP
Houston, Texas
March 28, 1996
[June 10, 1996 as to Note 13]
F-2
<PAGE>
DI INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31,
March 31, ---------------------------
1996 1995 1994
-------- -------- --------
ASSETS (unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents .............................................. $ 996 $ 1,859 $ 1,628
Restricted cash - insurance deposits ................................... 1,862 1,612 --
Accounts receivable, net of allowance
of $1,935, $1,951 and $2,066 at
March 31, 1996 and December 31, 1995
and 1994, respectively ............................................... 17,789 19,423 16,864
Rig inventory and supplies ............................................. 2,902 2,498 3,650
Assets held for sale ................................................... 2,398 2,398 2,516
Prepaids and other current assets ...................................... 2,815 3,806 4,080
Discontinued operations ................................................ -- -- 3,238
-------- -------- --------
Total current assets ................................................. 28,762 31,596 31,976
-------- -------- --------
Property and equipment:
Land, buildings and improvements ....................................... 3,523 3,523 4,044
Drilling and well service equipment .................................... 39,910 39,039 36,179
Furniture and fixtures ................................................. 1,094 1,136 1,017
Less: accumulated depreciation and amortization ........................ (18,797) (17,788) (10,454)
-------- -------- --------
Net property and equipment ........................................... 25,730 25,910 30,786
-------- -------- --------
Other noncurrent assets ................................................... 277 277 98
-------- -------- --------
$ 54,769 $ 57,783 $ 62,860
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ................................... $ 1,644 $ 1,315 $ 5,585
Accounts payable - trade ............................................... 10,246 12,529 7,240
Accrued workers' compensation .......................................... 2,672 3,357 2,963
Payroll and related employee costs ..................................... 4,029 3,172 1,081
Customer advances ...................................................... 60 116 1,349
Other accrued liabilities .............................................. 3,862 3,604 1,296
-------- -------- --------
Total current liabilities ............................................ 22,513 24,093 19,514
-------- -------- --------
Long-term liabilities:
Long-term debt net of current maturities ............................... 10,379 11,146 10,224
Other long-term liabilities and minority interest ...................... 2,774 1,950 2,081
Series A Preferred stock - mandatory redeemable ........................ 900 900 1,900
-------- -------- --------
Total long-term liabilities .......................................... 14,053 13,996 14,205
-------- -------- --------
Commitments and contingent liabilities
Shareholders' equity:
Series B Preferred stock, $1 par value; 10 shares
authorized, 4 shares subscribed ...................................... 4,150 4,000 --
Common stock, $.10 par value; 75,000 shares authorized;
38,669 issued and outstanding at 1996, 1995 and 1994 ................. 3,867 3,867 3,867
Additional paid-in capital ............................................. 46,458 46,458 46,458
Deficit ................................................................ (36,272) (34,631) (21,184)
-------- -------- --------
Total shareholders' equity ........................................... 18,203 19,694 29,141
-------- -------- --------
$ 54,769 $ 57,783 $ 62,860
======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
DI INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine
March 31, Year Ended Months Ended Year Ended
---------------------- December 31, December 31, March 31,
1996 1995 1995 1994 1994
-------- -------- --------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Contract drilling ........................................ $ 20,102 $ 22,344 $ 94,709 $ 50,987 $ 67,855
Costs and expenses:
Drilling operations ...................................... 18,936 22,524 93,825 48,988 62,574
Depreciation and amortization ............................ 1,097 1,113 4,832 2,377 3,523
Provision for SFAS #121 asset impairment ................. -- -- 5,290 -- --
General and administrative ............................... 720 653 3,555 2,074 2,910
Employment severance ..................................... 602 -- -- -- --
-------- -------- --------- -------- --------
Total costs and expenses ............................ 21,355 24,290 107,502 53,439 69,007
-------- -------- --------- -------- --------
Operating loss .............................................. (1,253) (1,946) (12,793) (2,452) (1,152)
-------- -------- --------- -------- --------
Other income (expense):
Interest income .......................................... 11 30 292 353 120
Gain on sale of assets ................................... 15 43 466 277 126
Interest expense ......................................... (262) (346) (1,472) (332) (257)
Minority interest ........................................ (2) -- (56) 17 (189)
Gain from foreign currency, net .......................... -- -- 888 -- --
Other, net ............................................... -- -- -- (123) (32)
-------- -------- --------- -------- --------
Other income (expense), net ............................ (238) (273) 118 192 (232)
-------- -------- --------- -------- --------
Loss from continuing operations ............................. (1,491) (2,219) (12,675) (2,260) (1,384)
Discontinued operations:
Income (loss) from oil and gas operations ................ -- (11) (4) 51 (1,274)
Loss from sale of oil and gas properties ................. -- -- (768) -- --
-------- -------- --------- -------- --------
Income (loss) from discontinued operations ............. -- (11) (772) 51 (1,274)
-------- -------- --------- -------- --------
Loss before income taxes .................................... (1,491) (2,230) (13,447) (2,209) (2,658)
Income taxes ................................................ -- -- -- -- --
-------- -------- --------- -------- --------
Net loss .................................................... (1,491) (2,230) (13,447) (2,209) (2,658)
Preferred Stock subscription dividend requirement ........... (150) -- -- -- --
-------- -------- --------- -------- --------
Net loss applicable to common stock ......................... $ (1,641) $ (2,230) $ (13,447) $ (2,209) $ (2,658)
======== ======== ========= ======== ========
Loss per common share:
From continuing operations ............................... $ (.04) $ (.06) $ (.33) $ (.06) $ (.04)
From discontinued operations ............................. -- -- (.02) -- (.03)
-------- -------- --------- -------- --------
Net loss per share .......................................... $ (.04) $ (.06) $ (.35) $ (.06) $ (.07)
======== ======== ========= ======== ========
Weighted average common shares outstanding .................. 38,669 38,669 38,669 38,641 38,416
======== ======== ========= ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
DI INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine
March 31, Year Ended Months Ended Year Ended
---------------------- December 31, December 31, March 31,
1996 1995 1995 1994 1994
-------- -------- --------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................ $(1,491) $(2,230) $(13,447) $ (2,209) $(2,658)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ......................... 1,097 1,113 4,832 2,377 3,523
Provision for SFAS #121 asset impairment ............... -- -- 5,290 -- --
Gain on sale of assets ................................. (15) (16) (466) (277) (126)
Discontinued operations -
Loss from sale of oil and gas properties ............ -- -- 768 -- --
Provision for doubtful accounts ....................... -- 45 291 122 287
Net effect of changes in assets and liabilities
related to operating accounts ......................... 886 3,266 4,802 (3,056) 365
Discontinued operations ................................. -- 180 419 1,134 448
------- ------- -------- -------- -------
Cash provided by (used in) operating activities ....... 477 2,358 2,489 (1,909) 1,839
------- ------- -------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions ........................ (921) (1,207) (5,657) (9,250) (2,849)
Proceeds from sale of equipment ......................... 19 28 737 323 453
Proceeds from sale of discontinued operations ........... -- -- 4,200 -- --
------- ------- -------- -------- -------
Cash used in investing activities ..................... (902) (1,179) (720) (8,927) (2,396)
------- ------- -------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt borrowings ......................................... 167 -- 2,066 18,703 --
Debt repayments ......................................... (605) (2,348) (5,490) (8,576) (2,022)
Debt (repayments) borrowing - discontinued
operations ............................................ -- -- (2,114) (321) 2,880
Sale of preferred stock subscriptions ................... -- -- 4,000 -- --
------- ------- -------- -------- -------
Cash provided by (used in) financing activities ....... (438) (2,348) (1,538) 9,806 858
------- ------- -------- -------- -------
Net increase (decrease) in cash and cash equivalents ....... (863) (1,169) 231 (1,030) 301
Cash and cash equivalents, beginning of period ............. 1,859 2,141 1,628 2,658 2,357
------- ------- -------- -------- -------
Cash and cash equivalents, end of period ................... $ 996 $ 972 $ 1,859 $ 1,628 $ 2,658
======= ======= ======== ======== =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
DI INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Series B
Common Preferred
Stock Stock Additional
$.10 par $1 par Paid-in
Value Value Capital Deficit Total
------ ------ ------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1993 .................................... $3,842 $ -- $46,283 $(16,317) $ 33,808
Net loss ................................................ -- -- -- (2,658) (2,658)
------ ------ ------- -------- --------
Balance, March 31, 1994 .................................... 3,842 -- 46,283 (18,975) 31,150
Issuance of Common Stock ................................ 25 -- 175 -- 200
Net Loss ................................................ -- -- -- (2,209) (2,209)
------ ------ ------- -------- --------
Balance, December 31, 1994 ................................. 3,867 -- 46,458 (21,184) 29,141
Net Loss ................................................ -- -- -- (13,447) (13,447)
Series B Preferred Stock Subscribed ..................... -- 4,000 -- -- 4,000
------ ------ ------- -------- --------
Balance, December 31, 1995 ................................. $3,867 $4,000 $46,458 $(34,631) $ 19,694
Net Loss ................................................ -- -- -- (1,491) (1,491)
Series B Preferred Stock Dividend Requirement ........... -- 150 -- (150) --
------ ------ ------- -------- --------
Balance, March 31, 1996 (unaudited) ........................ $3,867 $4,150 $46,458 $(36,272) $ 18,203
====== ====== ======= ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
DI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION. The consolidated
financial statements include the accounts of DI Industries, Inc. and its
majority-owned subsidiaries ("the Company"). All significant intercompany
accounts and transactions are eliminated in consolidation. Accumulated earnings
of the minority interest owner is shown as separate items in the consolidated
financial statements. At March 31, 1994, American Premier Underwriters, Inc.,
("American Premier"), formerly The Penn Central Corporation ("Penn Central"),
owned 20,690,105 shares (approximately 54%) of the unregistered common stock of
DI Industries, Inc. In June 1994, Norex Drilling Ltd. ("Norex Drilling"), a
wholly-owned subsidiary of Norex America, Inc. ("Norex America"), completed the
purchase of all shares of the Company's common stock owned by American Premier.
Shortly thereafter and in accordance with regulatory filings made at the time of
the purchase transaction, Norex Drilling reduced its ownership to 18,730,105
shares, or less than 50%, of the outstanding shares of the Company's common
stock. In October 1995, Norex Drilling transferred 8,300,000 shares to Pronor
Holdings Ltd. ("Pronor"). Norex America beneficially owns approximately 47% of
Pronor.
Effective December 31, 1994, the Company changed its fiscal year end from
March 31 to December 31 to enhance the comparability of the Company's results of
operations with other drilling companies. Accordingly, the accompanying
financial statements include the results of the Company's operations for the
nine months ended December 31, 1994 and the year ended March 31, 1994. See note
4 for results of the comparable nine months.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
items) necessary to present fairly the financial position and stockholders'
equity of the Company as of March 31, 1996 and the results of operations and
cash flows for the three-month period ended March 31, 1996 and 1995. The results
of operations for the periods presented are not necessarily indicative of the
results to be expected for the full year.
INVENTORY. Inventory consists primarily of drilling and support equipment
and is stated at the lower of specifically identified cost or market.
ASSETS HELD FOR SALE. Assets held for sale are primarily comprised of
drilling rigs and equipment and is stated at the Company's net book value.
Management believes the carrying value is less than net realizable value on the
basis of purchase offers received in 1995 and 1996 to date.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Depreciation is provided principally using the straight-line method over the
expected useful lives of the assets as follows: drilling rigs, 8 to 13 years
with assigned salvage values; other drilling and workover equipment, 2 to 13
years; buildings and improvements, 10 to 30 years; and furniture and fixtures, 5
to 12 years.
The Company's producing oil and gas properties were sold on August 9, 1995.
Such properties were recorded using the full-cost method of accounting. Under
this method, all costs incurred in connection with the exploration for and
development of oil and gas were capitalized. Depreciation, depletion and
amortization of oil and gas properties was computed on the basis of physical
units, with oil and gas converted to a common unit of measure based on the
approximate relative energy content. Unamortized costs were compared to the
present value of estimated future net revenues and any excess was charged to
expense during the period in which the excess occurred.
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
effective for years beginning after December 15, 1995. As the FASB encourages
earlier application, the Company adopted the provisions of SFAS No. 121 during
the fourth quarter of 1995. This new accounting standard requires certain assets
to be reviewed for impairment whenever events or circumstances indicate the
carrying amount may not be recoverable. The Company provided a non-cash
impairment provision of $5,290,000 in the fourth quarter of 1995 for certain
drilling rigs and equipment due to market indications that the carrying
F-7
amounts were not fully recoverable. Net realizable value was determined based
upon appraisal, comparable sale data and management estimates.
REVENUE RECOGNITION. Revenue from turnkey drilling contracts is recognized
using the percentage-of-completion method based upon costs incurred to date and
estimated total contract costs. Revenue from daywork, footage and hourly
drilling contracts is recognized based upon the provisions of the contract.
Provision is made currently for anticipated losses, if any, on uncompleted
contracts.
FOREIGN CURRENCY TRANSLATION. The functional currency of the Company's
foreign operations is the U.S. Dollar. Revenues and expenses of these foreign
operations are remeasured into U.S. dollars on the respective transaction dates
and foreign currency transaction gains or losses are included in the
Consolidated Statements of Operations. Unrealized translation gains or losses,
if material, are recorded as a component in Shareholders' Equity.
LOSS PER SHARE. Loss per share of common stock is based upon the weighted
average number of shares of common stock outstanding. The Company's outstanding
stock options and warrants are considered common stock equivalents but are not
included in the computation since their inclusion would be either insignificant
or antidilutive during the periods presented in the accompanying financial
statements.
INCOME TAXES. The Company accounts for income taxes based upon Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109") which requires recognition of deferred income tax liabilities and assets
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. Under this method, deferred
income tax liabilities and assets are determined based on the temporary
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities and available tax credit carryforwards.
CASH FLOW INFORMATION. Cash flow statements are prepared using the indirect
method. The Company considers all unrestricted highly liquid investments with a
maturity of three months or less at the time of purchase to be cash equivalents.
RESTRICTED CASH. Restricted cash consists of an investment in an interest
bearing certificate of deposit totaling $1.1 million at December 31, 1995 and
March 31, 1996 as collateral for a letter of credit securing insurance deposits
with the remainder on deposit with a third party administrator committed for
future settlement of workers' compensation claims. The carrying value of the
investment approximates the current market value.
RECLASSIFICATION AND OTHER. Certain prior year amounts were reclassified to
conform to current year presentation. Dollar amounts shown in the tabulations in
the notes to consolidated financial statements are stated in thousands, unless
otherwise indicated.
(2) EMPLOYEE BENEFIT PLAN
The Company has a defined contribution employee benefit plan covering
substantially all of its employees. The Company matches individual employee
contributions up to 2% of the employee's compensation. Employer matching
contributions under the plan totaled $24,000 and $21,000 for the three months
ending March 31, 1996 and 1995 respectively; $144,000 for the year ended
December 31, 1995; $55,000 for the nine months ended December 31, 1994 and
$132,000 for the year ended March 31, 1994.
(3) PROPERTY TRANSACTIONS
As part of the Company's continued expansion into the international
markets, effective September 1, 1994, the Company purchased the Venezuelan
drilling operations of An-Son Drilling Company of Colombia S.A. ("An-Son"). This
acquisition included two oil and gas drilling rigs, two workover rigs, certain
other oilfield equipment, operating contracts for each of the rigs and a labor
contract to operate one drilling rig. The purchase price for this transaction
F-8
was $4,100,000 consisting of $300,000 in cash, an acquisition note payable of
$1,900,000, of which $1,700,000 was paid during 1995, and the remainder by
issuance during 1995 of the Company's Series A redeemable preferred stock (the
"Series A Preferred") valued at $1,900,000.
Pursuant to the acquisition agreement, the Company conducted a post-closing
audit of the acquired companies in 1995 and asserted claims for purchase price
credit from An-Son in the amount of $1,398,000. This claim was settled in March,
1996 with the Company receiving credits of $1,213,000. At December 31, 1995,
$200,000 of the acquisition note remained unpaid which was offset against the
settlement with the remaining credit of $1,013,000 recorded as reductions in the
accompanying financial statements as follows: Notes Receivable ($591,000);
Accounts Receivable-Allowance for Doubtful Accounts ($408,000); Drilling Rigs
and Equipment ($103,000); Accrued Liabilities ($111,000); Note Payable and
accrued interest ($213,000); and, Series A Preferred issued to An-Son of 100,000
shares or ($1,000,000).
In September 1994, the Company purchased three drilling rigs from McRae
Energy Corporation for a total purchase price of $1,500,000. The Company paid a
cash down payment of $200,000 with the remaining $1,300,000 to be paid from cash
flow as defined in the purchase agreement. The three rigs were refurbished in
1994 by the Company. Two of the drilling rigs were added to the Company's
drilling fleet in Argentina and one drilling rig was added to the Company's
drilling fleet in Venezuela.
(4) COMPARATIVE OPERATING RESULTS
The following financial information for the year ended December 31, 1995
and 1994, and for the nine months ended December 31, 1994 and 1993 is presented
for comparative purposes. The financial information for the twelve months ended
December 31, 1994 and the nine months ended December 31, 1993 is unaudited (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Twelve Nine Months Ended
Year Ended Months Ended December 31,
December 31, December 31, -------------------------
1995 1994 1994 1993
--------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue ................................................... $ 94,709 $ 65,393 $ 50,987 $ 53,449
Total costs and expenses .................................. (107,502) (69,183) (53,439) (53,263)
--------- -------- -------- --------
Operating income (loss) ................................... (12,793) (3,790) (2,452) 186
Other income (expense) .................................... 118 233 192 (273)
Discontinued operations ................................... (772) 55 51 (1,278)
--------- -------- -------- --------
Net loss .................................................. $ (13,447) $ (3,502) $ (2,209) $ (1,365)
========= ======== ======== ========
Loss per share of common stock ............................ $ (.35) $ (.09) $ (.06) $ (.04)
========= ======== ======== ========
Weighted average common shares outstanding ................ 38,669 38,641 38,641 38,416
========= ======== ======== ========
</TABLE>
F-9
(5) INCOME TAXES
The provision for income taxes shown in the consolidated statements of
operations differs from the amount that would be computed if the loss before
income taxes were multiplied by the federal income tax rate (statutory rate)
applicable in each year. The reasons for this difference are as follows:
<TABLE>
<CAPTION>
Three Months Ended Year Nine Months Year
March 31, Ended Ended Ended
-------------------- December 31, December 31, March 31,
1996 1995 1995 1994 1994
----- ----- ------- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Tax at statutory rate ................................. $(507) $(758) $(4,572) $(751) $(904)
Increase (decrease) in taxes resulting from:
Provision for asset impairment ..................... -- -- 1,799 -- --
Discontinued operations - sale of oil
and gas assets .................................... -- -- 1,559 -- --
Unrecognized net operating loss
carryforward ...................................... 507 758 1,214 751 904
----- ----- ------- ----- -----
Provision for income taxes ............................ $-- $-- $ -- $-- $ --
===== ===== ======= ===== =====
</TABLE>
For the three months ended March 31, 1996, the company had a pretax net
loss of $982,000 and $509,000 for domestic and foreign operations, respectively.
For the year ended December 31, 1995, the Company had a pretax net loss of
$4,629,000 and $8,818,000 for its domestic and foreign operations, respectively.
For the nine months ended December 31, 1994, the Company had a pretax net loss
of $1,853,000 and $356,000 for its domestic and foreign operations,
respectively. For the year ended March 31, 1994, the Company had pretax net
losses of $3,213,000 and pretax net income of $555,000 for its domestic and
foreign operations respective.
The operations of the Company generated net operating loss ("NOL") and
investment tax credit ("ITC") carryforwards which expire at various times
through 2010 and 2000, respectively. Under provisions of the federal income tax
code, such carryforwards generally can be utilized only to reduce future taxable
income or income taxes payable, if any, of the individual subsidiary that
produced the NOL or ITC carryforward. In addition, NOL and ITC carryforwards are
subject to annual limitations on the amount that the Company can utilize because
of the change in the ownership of the Company in 1989 and a change in the
ownership of the Company's principal stockholder in 1991 and the change in the
Company's principal stockholder on June 2, 1994. The amounts of these
limitations are presently undeterminable. The Company estimates that at December
31, 1995 its tax NOL and ITC carryforwards, before consideration of the
limitations aggregated approximately $64 million and $2.4 million, respectively.
At March 31, 1996, the Company estimates that its tax NOL or ITC carryforwards,
before limitation aggregated approximately $65 million and $2.4 million,
respectively. However, the ultimate utilization of the NOL and ITC
carryforwards, if any, will be substantially limited as a result of the change
in the ownership of the Company and a change in the ownership of the Company's
principal stockholder. Tax NOL carryforwards generated since the last change of
the Company's ownership totals approximately $7.7 million and is not subject to
the annual limitations discussed above. See Note 13.
The Company accounts for income taxes based upon Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which
requires recognition of deferred income tax liabilities and assets for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. Based on an analysis of the
Company's gross deferred tax asset (taking into consideration applicable
statutory carryforward periods and other limitations), the Company has
determined that the recognition criteria set forth in SFAS No. 109, have not
been met and, accordingly, the gross deferred tax asset is reduced fully by a
valuation allowance.
F-10
Deferred income taxes reflect the gross tax effect of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
and tax reporting purposes, and (b) operating loss and tax credit carryforwards.
The tax effects of the significant items comprising the Company's net
deferred tax asset as of the dates shown are as follows:
March 31, December 31,
1996 1995 1994
-------- -------- --------
(unaudited)
Deferred tax asset:
Reserves not currently deductible ...... $ 1,812 $ 1,804 $ 1,902
Operating loss carryforwards ........... 10,949 10,438 9,134
Tax credit carryforwards ............... 2,400 2,400 2,400
-------- -------- --------
15,161 14,642 13,436
Deferred tax liability:
Differences between book and tax
basis of property .................... (5,375) (5,303) (5,984)
-------- -------- --------
9,786 9,339 7,452
Valuation allowance ........................ (9,786) (9,339) (7,452)
-------- -------- --------
Net deferred tax asset ..................... $ -- $ -- $ --
======== ======== ========
The analysis of the likelihood of realizing the gross deferred tax asset
will be reviewed and updated periodically. Any required adjustments to the
valuation allowance will be made in the period in which the developments on
which they are based become known.
F-11
(6) DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995 1994
------- ------- -------
(unaudited)
<S> <C> <C> <C>
$10,000 term loan agreement between the Company and NordlandsBanken AS,
secured by most of the Company's US domestic oil and gas drilling
equipment; bearing interest at prime plus 21/8% (fixed at 8% through
June 12, 1996), with 36 equal monthly principal installments
beginning June 12, 1995 (Amended October 1, 1995, bearing interest
at LIBOR plus 21/8% with 36 equal monthly installments beginning
January 1997). The Company has the option to pay interest quarterly
and/or semi-annually .................................................. $ 9,444 $ 9,444 $10,000
Acquisition payable - An-Son Drilling ..................................... -- -- 1,900
Non-interest bearing note to McRae Energy Corporation, payable from
available cash flow, as defined ....................................... 1,300 1,300 1,300
$2,500 revolving line of credit, which converted to a term loan in
1995, with a bank, secured by the Company's accounts receivable,
bearing interest at the bank's prime rate plus 1% (9.75% at
December 31, 1995 and 1994, respectively) ............................. 288 575 975
Capital leases, secured by transportation and other equipment,
bearing interest at 10% to 14% ........................................ 866 733 807
Insurance premium financed over 12 months with certain insurance agencies
due in equal monthly installments ..................................... 46 270 680
Promissory note payable secured by trust deed to certain land and building,
bearing interest at 4%, due in equal monthly installments through
July 15, 1997 ......................................................... 30 47 55
Promissory note payable secured by trust deed to certain land and building,
bearing interest at 9.75%, due in equal monthly installments through
September 1, 1997 ..................................................... 49 92 92
------- ------- -------
12,023 12,461 15,809
Less current maturities ................................................... 1,644 1,315 5,585
------- ------- -------
Long-term debt ............................................................ $10,379 $11,146 $10,224
======= ======= =======
DISCONTINUED OPERATIONS:
$3,000 term note with a bank, secured by all the Company's oil and gas
producing properties, bearing interest at the bank's prime rate
plus 1.25% (10% at December 31, 1994) payable in monthly installments
equal to 75% of the net proceeds from production subject to minimum
semi-annual payments through March 10, 1997. This loan was fully
paid during 1995 ...................................................... $ -- $ -- $ 2,114
======= ======= =======
</TABLE>
The loan agreement with NordlandsBanken AS, contains both affirmative and
negative covenants. The Company must maintain minimum working capital and
adjusted net worth levels and is restricted, among other things, from incurring
additional debt, paying dividends, and selling or acquiring assets except within
permitted limitations. See Note 13.
F-12
The revolving $2,500,000 bank line of credit was converted to a term loan
in 1995 with the balance of $575,000 at December 31, 1995 being paid in monthly
installments through June 1996. The weighted average outstanding balance for the
three months ended March 31, 1996, the year ended December 31, 1995 and the nine
months ended December 31, 1994 was $383,000, $867,000 and $508,000, respectively
and bearing weighted average interest of 9.75%, 10% and 8.85%, respectively.
The production loan, which was fully paid in 1995, had a weighted average
balance of $1,233,000 and $2,600,000 during the year ended December 31, 1995 and
the nine months ended December 31, 1994, respectively, bearing weighted average
interest of 8.62% and 8.85%, respectively.
During 1995, the Company issued 190,000 shares, out of 200,000 authorized,
of Series A Preferred valued at $1,900,000. The Series A Preferred is redeemable
in cash at a redemption price payable from available cumulative Venezuelan
positive net cash flows, as defined, commencing the first fiscal quarter
following the original issuance date. The Company may redeem, at any time, the
Series A Preferred upon consent of the holders or upon written notice commencing
five years from the original issuance date. At the election of the Company
dividends may be declared and payable in common stock equivalent to the value of
the dividends. Each Series A Preferred holder of record has no voting right on
any matters voted on by stockholders of the Company. As referred to in Note 3,
during March 1996, 100,000 shares of Series A Preferred, totaling $1,000,000,
were returned to the Company in settlement of asserted claims against An-Son. At
December 31, 1995, the balance of the Series A Preferred has been adjusted to
reflect this settlement.
Annual maturities of the debt outstanding at March 31, 1996 are as follows
(in thousands): 1996 - $792,000; 1997 - $3,428,000; 1998 - $4,654,000; 1999 -
$3,149,000; and 2000 - $0.
(7) CAPITAL STOCK AND STOCK OPTION PLANS
On April 28, 1994, the Company retired a $400,000 promissory note by
issuing 251,429 shares of the Company's common stock and $200,000 of cash.
During the fourth quarter of 1995, Norex Drilling subscribed to and paid
$4,000,000 for a new Company issue of Series B Preferred Stock (the "Series B
Preferred"), to be issued subsequent to December 31, 1995. This stock is in the
form of 4,000 shares (10,000 authorized) of Series B 15% Senior Cumulative
Redeemable Preferred, par value $1. This stock has annual dividends of 15% per
annum, payable through issuance of additional preferred shares for the first
three years. After December 31, 1998, dividends are payable in cash, as declared
by the Company's Board of Directors. The Series B Preferred: (1) have
liquidation preferences senior to the Company's common shares and Series A
Preferred; (2) may be redeemed only in total after January 1, 1997, at the
option of the Company and (3) have a warrants feature permitting the holder to
convert $4,000,000 of Preferred Stock into common shares of the Company at $.75
per share, exercisable 20% as of January 1, 1996, increasing by 1.667% per month
thereafter through January 1, 1997 and 2.5% per month from February 1, 1997
through January 1, 1999.
The Company's 1982 Stock Option and Long-Term Incentive Plan for Key
Employees (the "1982 Plan") reserves 2,500,000 shares of the Company's common
stock for issuance upon the exercise of options. At March 31, 1996, options to
purchase 534,900 shares of common stock were available for grant under the 1982
Plan. The Company's 1987 Stock Option Plan for Non-Employee Directors (the "1987
Director Plan") reserves 250,000 shares of common stock for issuance upon the
exercise of options and provides for the automatic grant of options to purchase
shares of common stock to any non-employee who becomes a director of the
Company. At March 31, 1996, options under the 1987 Director Plan to purchase
174,100 shares of common stock were available for grant until June 30, 1997. The
exercise price of stock options under both the 1982 Plan and the 1987 Director
Plan approximates the fair market value of the stock at the time the option is
granted. Options become exercisable in 20% increments over a five-year period
and expire on the tenth anniversary of the date of grant.
F-13
Stock option activity for both plans was as follows:
Number Option
Of Shares Price Range
--------- ----------------
(in thousands)
Outstanding March 31, 1993 ....................... 1,814 $0.88 -- $3.63
Granted ...................................... 291 $0.94 -- $1.25
Canceled ..................................... (70) $0.94 -- $3.63
Outstanding March 31, 1994 ....................... 2,035 $0.88 -- $2.38
Granted ...................................... 103 $0.88 -- $0.94
Exercised .................................... (2) $0.88
Canceled ..................................... (148) $0.88 -- $1.63
Outstanding December 31, 1994 .................... 1,988 $0.88 -- $2.38
Granted ...................................... 253 $0.69 -- $0.88
Canceled ..................................... (267) $0.94 -- $2.38
Outstanding December 31, 1995 .................... 1,974 $0.69 -- $1.63
Granted ...................................... --
Canceled ..................................... (19) $0.69 -- $1.25
Outstanding March 31, 1996 (unaudited) ........... 1,955 $0.69 -- $1.63
Exercisable at March 31, 1996 (unaudited) ........ 1,510 $0.88 -- $1.63
F-14
(8) BUSINESS SEGMENT INFORMATION
The following table sets forth the Company's operations according to the
industry segments in which it operates.
<TABLE>
<CAPTION>
Nine Months
Three Months Ended Year Ended Ended Year Ended
March 31, December 31, December 31, March 31,
1996 1995 1995 1994 1994
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
CONTINUING OPERATIONS
Revenues ............................... $ 20,102 $ 22,344 $ 94,709 $ 50,987 $ 67,855
======== ======== ======== ======== ========
Operating loss ......................... $ (1,491) $ (2,219) $(12,675) $ (2,260) $ (1,384)
======== ======== ======== ======== ========
Identifiable assets:
Contract drilling ................... $ 54,769 $ 60,555 $ 57,783 $ 62,838 $ 40,303
Corporate cash equivalents .......... -- -- -- 22 22
-------- -------- -------- -------- --------
$ 54,769 $ 60,555 $ 57,783 $ 62,860 $ 40,325
======== ======== ======== ======== ========
Capital expenditures:
Contract drilling ................... $ 921 $ 1,207 $ 5,949 $ 13,197 $ 2,292
Other ............................... -- -- -- 228 127
-------- -------- -------- -------- --------
$ 921 $ 1,207 $ 5,949 $ 13,425 $ 2,419
======== ======== ======== ======== ========
Depreciation and amortization:
Contract drilling ................... $ 1,097 $ 1,113 $ 4,832 $ 2,217 $ 3,346
Other ............................... -- -- -- 160 177
-------- -------- -------- -------- --------
$ 1,097 $ 1,113 $ 4,832 $ 2,377 $ 3,523
======== ======== ======== ======== ========
DISCONTINUED OPERATIONS: (Oil and
Gas Properties)
Revenues ............................... $ -- $ 462 $ 462 $ 1,732 $ 2,549
Operating income (loss) ................ -- (11) (4) 86 186
Identifiable assets .................... -- 6,450 -- 6,837 6,588
Capital Expenditures ................... -- 10 -- 1,391 799
Depreciation, depletion and amortization -- 166 166 642 1,040
</TABLE>
Revenues reported by industry segments consist principally of domestic and
foreign revenues from unaffiliated customers as reported in the consolidated
statements of operations since intersegment revenues are not significant.
Revenues from the Company's foreign operations in Mexico, Central America,
Argentina and Venezuela were $9,673,000 and $12,512,000 for the three months
ended March 31, 1996 and 1995, respectively, $49,912,000 for the year ended
December 31, 1995, $10,472,000 for the nine months ended December 31, 1994, and
$11,562,000 for the year ended March 31, 1994, resulting in an operating profit
of $507,000 and an operating loss of $491,000 for the three months ended March
31, 1996 and 1995, respectively, $8,818,000 for the year ended December 31,
1995, $88,000 for the nine months ended December 31, 1994; and $1,046,000 for
the year ended March 31, 1994. Assets identified to these foreign operations
totaled $19,693,000 and $20,420,000 at March 31, 1996 and 1995, respectively,
$18,714,000 at December 31, 1995; $15,336,000 at December 31, 1994; and
$6,237,000 at March 31, 1994.
During the three months ended March 31, 1996, the year ended December 31,
1995, the nine months ended December 31, 1994 and the year ended March 31, 1994;
no customer accounted for more than 10% of the Company's consolidated revenues.
F-15
(9) RELATED-PARTY TRANSACTIONS
Prior to June 2, 1994, certain of the Company's insurance coverage,
including workers' compensation and excess liability coverage, was arranged by
American Premier as part of a program which American Premier provided to its
subsidiaries. Subsequent to the sale of the Company's common shares, the Company
has obtained workers' compensation, excess liability coverage and certain other
insurance from other sources. The Company and American Premier entered into an
agreement pursuant to which the Company agreed to reimburse American Premier for
all amounts advanced by American Premier from time to time on behalf of the
Company in connection with American Premier's administration of the Company's
workers' compensation and certain other insurance programs for the periods
between July 20, 1989 and the closing of the common stock transaction. The
amounts reimbursable to American Premier at March 31, 1996, December 31, 1995
and December 31, 1994 relating to this program were $2,050,000, $1,900,000, and
$1,229,000, respectively. Subsequent to the common shares purchase by Norex
Drilling, the Company obtained workers' compensation, excess liability coverage
and certain other insurance from other sources.
During the year ended March 31,1994, Thermal Drilling, Inc. ("Thermal"),
the minority interest owner of the Company's majority-owned subsidiary,
DI/Perfensa Inc. ("DI/Perfensa"), borrowed and repaid with interest certain sums
from DI/Perfensa. At March 31, 1996, and December 31, 1995 and 1994 no amounts
were due. At March 31, 1996 and December 31, 1995, $60,000 was due to
DI/Perfensa from the President of Thermal.
(10) SUPPLEMENTAL CASH FLOW INFORMATION
The effects of the changes in operating accounts on cash flows from
operating activities are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
THREE MONTHS ENDED YEAR ENDED ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1995 1995 1994 1994
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Restricted cash ............................... $ (250) $ -- $(1,612) $ -- $ --
Accounts and notes receivable ................. 1,634 (660) (3,558) (5,334) 4
Inventory ..................................... (404) 1,045 1,152 (1,214) 250
Assets held for sale .......................... -- -- 118 -- --
Other current assets .......................... 991 980 274 (2,222) 222
Other noncurrent assets ....................... -- (54) (179) (1) --
Accounts payable .............................. (2,283) 1,857 5,289 3,244 700
Accrued workers' compensation ................. (685) 238 394 (800) (60)
Customer advances ............................. (56) 343 (1,233) 985 (420)
Other current liabilities ..................... 1,115 (531) 4,288 503 (520)
Other noncurrent liabilities .................. 822 74 -- 1,800 --
Minority interest ............................. 2 (26) (131) (17) 189
------- ------- ------- ------- -------
Net effects ................................. $ 886 $ 3,266 $ 4,802 $(3,056) $ 365
======= ======= ======= ======= =======
</TABLE>
During the three months ended March 31, 1996 and 1995, the Company entered
into capital leases which totaled $130,000 and $0, respectively and during the
year ended December 31, 1995, the Company entered into capital leases which
totaled $265,000. During the nine months ended December 31, 1994, the Company
entered into capital leases which totaled $640,000 and exchanged $1,900,000 of
acquisition note payable, $1,900,000 of Series A preferred and a $1,300,000 note
payable, for property (see Note 3). During the year ended March 31, 1994 the
Company entered into capital leases which totaled $289,000. The Company made
interest payments of $262,000 and $346,000 for the three months ended March 31,
1996 and 1995, respectively, $1,472,000 for the
F-16
year ended December 31, 1995, $332,000 for the nine months ended December 31,
1994, and $257,000 for the year ended March 31, 1994.
(11) LEASE COMMITMENTS
The Company leases certain office space under noncancellable lease
agreements accounted for as operating leases. At March 31, 1996, lease
commitments under noncancellable operating leases with an initial term of more
than one year are $70,000. Rental expense under operating leases was $24,000 and
$27,000 for the three months ended March 31, 1996 and 1995, respectively,
$101,000 for the year ended December 31, 1995, $77,000 for the nine months ended
December 31, 1994 and $109,000 for the year ended March 31, 1994.
Leases, which transfer substantially all the risks and benefits of
ownership associated with the underlying property to the Company, are accounted
for as capital leases. The present value of the required lease payments is
recorded as property and equipment, and the related debt is recorded as
obligations under capital leases. The debt is amortized as each lease payment is
made. Property under capital leases, consisting of field trucks and automobiles
aggregating approximately $866,000 and $700,000 at March 31, 1996 and 1995,
respectively, $733,000 at December 31, 1995, $807,000 at December 31, 1994, and
$457,000 at March 31, 1994, respectively, is included in drilling and well
service equipment.
Lease payments under these capital leases totaled approximately $74,000 and
$70,000 for the three months ended March 31, 1996 and 1995, respectively,
$280,000 for the year ended December 31, 1995 and $175,000 for the nine months
ended December 31, 1994, with annual payments due of $368,000 in 1996, $210,000
in 1997 and $149,000 in 1998.
(12) CONTINGENCIES
The Company is proceeding against Charlestown Industries, Inc. (a 50%
"Partner"), who was a co-defendant in the joint venture to recover their
respective portion of the OFS 1987, Mid-Year et al v DI Exploration Lawsuit of
which $1,800,000 was paid by the Company. A judgment has been rendered in favor
of the Company against the Partner in the state of Oklahoma. The future recovery
of the amount, and term of recovery, is uncertain and no credit has been
recorded as of March 31, 1996. Charlestown Industries filed for protection with
the US Bankruptcy Act and the Company's claim is scheduled for hearing in June
1996.
The Company is involved in litigation incidental to the conduct of its
business, none of which management believes is, individually or in the
aggregate, material to the Company's consolidated financial condition or results
of operations.
Substantially all of the Company's contract drilling activities are
conducted with independent oil and gas companies in the United States or with
national utility or national petroleum companies in Mexico, Central America and
South America. Historically, the Company has not required collateral or other
security to support the related receivables from such customers. However, the
Company has required certain customers to deposit funds in escrow prior to the
commencement of drilling. Actions typically taken by the Company in the event of
nonpayment include filing a lien on the customer's producing properties and
filing suit against the customer.
(13) EVENT SUBSEQUENT TO MARCH 31, 1996
As of March 31, 1996, the Company was not in compliance with a certain
financial covenant in the NordlandsBanken AS loan agreement and subsequent to
such date, received a waiver with respect to such covenant from NordlandsBanken
AS.
On May 7, 1996 the Company entered into two separate definitive merger
agreements to effect a $25 million equity infusion and deep drilling equipment
acquisition transaction.
F-17
Under the first agreement, R. T. Oliver, Inc. ("RTO") and Land Rig
Acquisition Corporation ("LRAC") will merge with a new subsidiary of the Company
in exchange for 39,637,378 shares of DI common stock or 31,709,902 shares of DI
common stock if the LRAC and RTO shareholders exercise an option to receive up
to $5 million in cash. In addition, warrants will also be issued to acquire up
to 1,720,000 additional shares of DI common stock, the exercise of which is
contingent upon the occurrence of certain events. These mergers will result in
the acquisition of 18 inactive, deep capacity land drilling rigs which includes
five 3,000 horsepower and nine 2,000 horsepower land rigs which are rated for
depths of 25,000 feet or greater. The Company believes that these rigs can be
brought up to operating condition within a reasonable time on an economic basis
and that this group of rigs represents a significant concentration of the
relatively small number of such deep drilling land rigs currently available in
the market.
Under the second agreement, a subsidiary of Somerset Drilling Associates,
L.L.C. ("Somerset"), a privately-held investment limited liability company, will
be merged into the Company in exchange for 39,637,378 shares of DI common stock
and warrants to acquire up to 1,720,000 shares of DI common stock, the exercise
of which is contingent upon the occurrence of certain events. This merger
transaction will result in a $25 million equity infusion into the Company and it
is anticipated that these funds will be used for combined rig fleet
refurbishment, funding of the above described cash option and general corporate
purposes.
There are certain conditions to closing of these transactions including
approval by the Company's shareholders, the effectiveness of a registration
statement with the Securities and Exchange Commission covering the issuance of
the shares, and the cancellation of the 1995 subscription by Norex Drilling,
Ltd. ("Norex") for 4,000 shares of Series B Preferred Stock and related Series B
Warrants. The $4,000,000 subscription will be repaid to Norex by the Company
with the proceeds from a term loan that will be made by Norex to the Company.
Somerset is currently arranging financing for its equity infusion which it
expects to complete within 30 days.
The proposed merger will result in an ownership change in the Company as
defined by Section 382 of the Internal Revenue Code which will further limit the
ultimate utilization of the Company's NOL carryforwards referred to in Note 5.
On June 3, 1996, the Company signed a definitive agreement to sell the
operational assets of Western Oil Well Service Co., a wholly owned subsidiary of
the Company, for $3.95 million in cash. Pursuant to the terms of the agreement,
the buyer will also assume all existing leases of Western which primarily
include leases for vehicles. It is anticipated that the transaction will close
during June 1996.
On June 10, 1996, Norex Drilling, Ltd. advanced $1,000,000 to the Company
pursuant to a Promissory Note (the "Note") and Commercial Security Agreement as
provided for in the Merger Agreements. The Note bears interest at 12% per annum
and will mature on October 31, 1996 or the Closing Date of the Mergers,
whichever occurs first. The Company's domestic accounts receivable will be
pledged under the security agreement.
F-18
(14) QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the three months ended March 31,
1996, the year ended December 31, 1995, the nine months ended December 31, 1994
and the year ended March 31, 1994 are set forth below. Certain reclassification
have been made to the quarterly financial data to conform with the amounts
presented in the Consolidated Statements of Operations.
QUARTER ENDED
MARCH
1996
-------------
Revenues .............................................. $ 20,102
Gross profit (loss) (1) ............................... 1,166
Operating loss ........................................ (1,253)
Net loss-continuing operations ........................ (1,491)
Discontinued operations ............................... --
Net loss .............................................. (1,491)
Net loss applicable to common stock ................... (1,641)
Net loss per common share ............................. (.04)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
1995 1995 1995 1995 TOTAL
-------- --------- -------- --------- -------
<S> <C> <C> <C> <C> <C>
Revenues ...................................... $ 22,344 $ 23,151 $ 27,106 $ 22,108 $ 94,709
Gross profit (loss) (1) ....................... (180) (814) 448 1,430 884
Operating loss ................................ (180) (814) (1,565) (10,234) (12,793)
Net loss-continuing operations ................ (2,219) (1,122) (1,234) (8,100) (12,675)
Discontinued operations ....................... (11) (543) (116) (102) (772)
Net loss ...................................... (2,230) (1,665) (1,350) (8,202) (13,447)
Net loss per common share ..................... (.06) (.04) (.03) (.22) (.35)
</TABLE>
QUARTER ENDED
-------------------------------------------
JUNE SEPTEMBER DECEMBER
1994 1994 1994 TOTAL
--------- -------- -------- -------
Revenues ....................... $ 14,331 $ 17,215 $ 19,441 $ 50,987
Gross profit(1) ................ 29 545 1,425 1,999
Operating loss ................. (1,292) (837) (323) (2,452)
Net loss-continuing operations . (935) (872) (453) (2,260)
Discontinued operations ........ 14 49 (12) 51
Net loss ....................... (921) (823) (465) (2,209)
Net loss per common share ...... (.03) (.02) (.01) (.06)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------
JUNE SEPTEMBER DECEMBER MARCH
1993 1993 1993 1994 TOTAL
-------- --------- -------- --------- -------
<S> <C> <C> <C> <C> <C>
Revenues .............................. $ 15,494 $ 20,402 $ 17,553 $ 14,406 $ 67,855
Gross profit (1) ...................... 1,557 2,245 1,014 465 5,281
Operating income (loss) ............... 16 834 (541) (1,461) (1,152)
Net income (loss)-continuing operations (31) 551 (597) (1,307) (1,384)
Discontinued operations ............... 56 (1,385) 31 24 (1,274)
Net income (loss) ..................... 25 (834) (566) (1,283) (2,658)
Net loss per common share ............. -- (.02) (.01) (.04) (.07)
</TABLE>
(1) Gross Profit is computed as consolidated revenues less operating expenses
(which excludes expenses for Depreciation and Amortization, General and
Administrative, Bad Debt and Legal).
F-19
SCHEDULE VIII
DI INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS COLLECTIONS BALANCE AT
BEGINNING CHARGED TO AND END
OF PERIOD ALLOWANCE WRITE-OFFS OF PERIOD
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Year Ended March 31, 1994:
Allowance for doubtful accounts receivable ................... $2,400 $ 287 $ (516) $2,171
====== ====== ====== ======
Nine Months Ended December 31, 1994:
Allowance for doubtful accounts receivable ................... $2,171 $ 122 $ (227) $2,066
====== ====== ====== ======
Year Ended December 31, 1995:
Allowance for doubtful accounts receivable ................... $2,066 $ 291 $ (406) $1,951
====== ====== ====== ======
Three Months Ended March 31, 1996 (unaudited):
Allowance for doubtful accounts receivable ................... $1,951 $- $ (16) $1,935
====== ====== ====== ======
</TABLE>
F-20
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG
DI INDUSTRIES, INC.,
DI MERGER SUB, INC.,
ROY T. OLIVER, JR.,
MIKE L. MULLEN,
R.T. OLIVER, INC.
AND
LAND RIG ACQUISITION CORP.
MAY 7, 1996
TABLE OF CONTENTS
PAGE
ARTICLE I
THE MERGER
1.1 The Merger...........................................................1
1.2 Closing Date.........................................................2
1.3 Consummation of the Merger...........................................2
1.4 Effects of the Merger................................................2
1.5 Certificate of Incorporation; Bylaws.................................2
1.6 Directors and Officers...............................................2
1.7 Cash Option..........................................................2
1.8 Conversion of Securities.............................................4
1.9 Exchange of Certificates; Fractional Shares..........................5
1.10 Stock Legends........................................................5
1.11 Taking of Necessary Action; Further Action...........................5
1.12 Adjustment...........................................................6
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 Representations and Warranties of DI and Sub.........................6
2.2 Representations and Warranties of LRAC and RTO......................16
ARTICLE III
COVENANTS OF LRAC PRIOR TO THE EFFECTIVE TIME
3.1 Conduct of Business by LRAC and RTO Pending the Merger..............21
3.2 Registration Statement and Proxy Statement..........................22
3.3 Approval of Shareholders of LRAC and RTO............................22
3.4 Inquiries and Negotiations..........................................22
3.5 Access to Information...............................................22
3.6 Nonpublic Information...............................................22
ARTICLE IV
COVENANTS OF DI PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business by DI Pending the Merger........................23
4.2 Approval of Shareholders of DI......................................24
4.3 Registration Statement and Proxy Statement..........................25
4.4 Reservation of DI Stock.............................................25
i
4.5 American Stock Exchange Listing.....................................25
4.6 Inquiries and Negotiations..........................................25
4.7 Financial Statements of DI..........................................26
4.8 Access to Information...............................................26
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Accountants' Letters................................................27
5.2 Filings; Consents; Reasonable Efforts...............................27
5.3 Notification of Certain Matters.....................................27
5.4 Agreement to Defend.................................................27
5.5 Expenses............................................................28
5.6 DI's Board of Directors.............................................28
5.7 Indemnification.....................................................28
5.8 Tax Opinion.........................................................29
5.9 Tax Returns.........................................................29
5.10 Other Agreements....................................................29
5.11 Interim Financing...................................................30
5.12 Storage of Rigs.....................................................30
ARTICLE VI
CONDITIONS
6.1 Conditions to Obligation of Each Party to Effect the Merger.........30
6.2 Additional Conditions to Obligations of DI..........................31
6.3 Additional Conditions to Obligations of LRAC and RTO................32
ARTICLE VII
MISCELLANEOUS
7.1 Termination.........................................................33
7.2 Effect of Termination...............................................34
7.3 Waiver and Amendment................................................34
7.4 Survival of Representations, Warranties and Agreements..............35
7.5 Public Statements...................................................35
7.6 Reorganization Status...............................................35
7.7 No Other Representations or Warranties..............................35
7.8 Assignment..........................................................35
7.9 Notices.............................................................35
7.10 Governing Law.......................................................36
7.11 Severability........................................................37
7.12 Counterparts........................................................37
ii
7.13 Headings............................................................37
7.14 Entire Agreement; Third Party Beneficiaries.........................37
7.15 Disclosure Letter...................................................37
7.16 Consent to Specific Performance.....................................37
LIST OF SCHEDULES AND EXHIBITS
Schedule A .......... Description of Rigs
Schedule B .......... List of LRAC Shareholders
Schedule C .......... Excess Assets
Schedule D .......... RTO Liabilities
Exhibit A .......... Board Designees
Exhibit B .......... Form of Credit Agreement
Exhibit C .......... Form of Legal Opinion of Novakov, Davidson & Flynn
Exhibit D .......... Form of Legal Opinion of Short Wiggins Margo & Adler
Exhibit E .......... Form of Legal Opinion of Cokinos, Bosien & Young
Exhibit F .......... Form of Non-Competition Agreement
Exhibit G .......... Form of Warrant
iii
INDEX OF DEFINED TERMS
Agreement .............................................................1
Benefit Program or Agreement..................................................11
Cash Option .............................................................1
Cash Option Shares.............................................................3
CERCLA ............................................................15
Closing Date .............................................................2
Code .............................................................1
Commission .............................................................9
Current Discussions...........................................................25
DGCL .............................................................1
DI .............................................................1
DI Acquisition Transaction....................................................26
DI Charter .............................................................6
DI Commission Filings..........................................................9
DI Common Stock .............................................................1
DI Disclosure Letter...........................................................7
DI Environmental Permits......................................................14
DI ERISA Affiliate............................................................11
DI Meeting .............................................................3
DI Preferred Stock.............................................................7
DI Series A Preferred Stock....................................................7
DI Series B Preferred Stock....................................................7
DI Series B Warrants...........................................................7
DI Subsidiary .............................................................7
Effective Time .............................................................2
Environmental Laws............................................................14
ERISA ............................................................11
Excess Assets ............................................................18
Exchange Act .............................................................9
Governmental Authority........................................................15
HSR Act .............................................................8
LRAC .............................................................1
LRAC Cash Option Price.........................................................2
LRAC Cash Option Shares........................................................3
LRAC Charter ............................................................17
LRAC Common Stock .............................................................1
LRAC Shares .............................................................4
M/O Acquisition Transaction...................................................22
M/O Common Stock .............................................................1
M/O Shares .............................................................4
Mailing Date ............................................................25
Merger .............................................................1
MME ............................................................30
iv
Mullen .............................................................1
Non-Competition Agreement.....................................................29
Nonsurviving Corporations......................................................1
Norex ............................................................30
Norex Lien ............................................................30
OGCA .............................................................1
Oliver .............................................................1
Plan ............................................................11
Proxy Statement ............................................................25
RCRA ............................................................15
Registration Statement........................................................25
Rigs ............................................................18
RTO .............................................................1
RTO Cash Option Price..........................................................3
RTO Cash Option Shares.........................................................3
RTO Charter ............................................................17
RTO Common Stock .............................................................1
RTO Environmental Permits.....................................................20
RTO Liabilities ............................................................18
RTO Shares .............................................................4
Securities Act .............................................................5
Somerset ............................................................22
Sub .............................................................1
Surviving Corporation..........................................................1
Tax Returns ............................................................13
Taxes ............................................................13
USRE ............................................................29
v
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger, dated as of the 7th day of May, 1996
(the "Agreement"), is among DI Industries, Inc., a Texas corporation ("DI"), DI
Merger Sub, Inc., a newly formed Delaware corporation and a wholly owned
subsidiary of DI ("Sub"), Roy T. Oliver, Jr. ("Oliver"), Mike L. Mullen
("Mullen"), R.T. Oliver, Inc., an Oklahoma corporation ("RTO"), and Land Rig
Acquisition Corp., a Delaware corporation ("LRAC").
WHEREAS, subject to and in accordance with the terms and conditions of
this Agreement, the respective Boards of Directors of DI, Sub, RTO and LRAC, and
DI as the sole stockholder of Sub, have approved the merger of Sub and RTO with
and into LRAC (the "Merger"), whereby the issued and outstanding shares of
common stock, no par value, of LRAC ("LRAC Common Stock") not owned directly or
indirectly by LRAC, and the issued and outstanding shares of common stock, par
value $1.00 per share, of RTO ("RTO Common Stock" and, together with the LRAC
Common Stock, "M/O Common Stock") not owned directly or indirectly by RTO will
be converted into the right to receive shares of common stock, par value $.10
per share, of DI ("DI Common Stock"), except to the extent that holders of M/O
Common Stock have elected to receive cash for a portion of the M/O Common Stock,
as provided in Section 1.7 hereof (the "Cash Option");
WHEREAS, Oliver and Mullen are the principal stockholders of LRAC and
RTO and will be receiving DI Common Stock in the Merger;
WHEREAS, for federal income tax purposes, it is intended that the
Merger shall qualify as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, the parties hereto desire to set forth certain
representations, warranties and covenants made by each to the other as an
inducement to the consummation of the Merger;
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties and covenants herein contained, the parties hereto
hereby agree as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. Subject to and in accordance with the terms and
conditions of this Agreement and in accordance with the General Corporation Law
of the State of Delaware (the "DGCL") and the Oklahoma General Corporation Act
("OGCA"), at the Effective Time (as defined in Section 1.3) Sub and RTO shall be
merged with and into LRAC. As a result of the Merger, the separate corporate
existence of Sub and RTO (sometimes referred to herein as the "Nonsurviving
Corporations") shall cease and LRAC shall continue as the surviving corporation
(sometimes referred to herein as the "Surviving Corporation") and all the
properties, rights, privileges, powers and franchises of the Nonsurviving
Corporations shall vest in the Surviving
1
Corporation, without any transfer or assignment having occurred, and all debts,
liabilities, obligations and duties of the Nonsurviving Corporations shall
attach to the Surviving Corporation, all in accordance with the DGCL and the
OGCA.
1.2 CLOSING DATE. The closing of the transactions contemplated by this
Agreement shall take place at the offices of Cokinos, Bosien & Young as soon as
practicable after the satisfaction or waiver of the conditions set forth in
Article VI or at such other time and place and on such other date as the parties
hereto shall agree, provided, that the closing conditions set forth in Article
VI shall have been satisfied or waived at or prior to such time. The date on
which such closing occurs is herein referred to as the "Closing Date."
1.3 CONSUMMATION OF THE MERGER. As soon as practicable on the Closing
Date, the parties hereto will cause the Merger to be consummated by filing (i)
with the Secretary of State of Delaware a certificate of merger in such form as
required by, and executed in accordance with the relevant provisions of, the
DGCL and (ii) with the Secretary of State of Oklahoma a certificate of merger in
such form as required by, and executed in accordance with the relevant
provisions of, the OGCA. The "Effective Time" of the Merger as that term is used
in this Agreement shall mean such time as the certificate of merger is duly
filed with the Secretary of State of Delaware and the certificate of merger is
duly filed with the Secretary of State of Oklahoma, or at such later time (not
to exceed 90 days after the Closing Date) as is specified in the certificates of
merger pursuant to the mutual agreement of the parties hereto.
1.4 EFFECTS OF THE MERGER. The Merger shall have the effects set forth
in the applicable provisions of the DGCL and the OGCA.
1.5 CERTIFICATE OF INCORPORATION; BYLAWS. The Certificate of
Incorporation of LRAC, as in effect immediately prior to the Effective Time,
shall be the Certificate of Incorporation of the Surviving Corporation and
thereafter shall continue to be its Certificate of Incorporation until amended
as provided therein and under the DGCL. The bylaws of LRAC, as in effect
immediately prior to the Effective Time, shall be the bylaws of the Surviving
Corporation and thereafter shall continue to be its bylaws until amended as
provided therein and under the DGCL.
1.6 DIRECTORS AND OFFICERS. The directors of Sub immediately prior to
the Effective Time shall be the directors of the Surviving Corporation at and
after the Effective Time, each to hold office in accordance with the Certificate
of Incorporation and bylaws of the Surviving Corporation, and the officers of
Sub immediately prior to the Effective Time shall be the officers of the
Surviving Corporation at and after the Effective Time, in each case until their
respective successors are duly elected or appointed and qualified. The directors
and officers of DI at and after the Effective Time shall be as provided in
Section 5.6.
1.7 CASH OPTION. Holders of M/O Common Stock may elect to receive cash
for their shares of such stock in connection with the Merger in accordance with
the following:
(a) Any holder of LRAC Common Stock may elect to receive
$17,818.25 per share in cash (the "LRAC Cash Option Price") for some or
all of such holder's shares, in
2
lieu of receiving DI Common Stock therefor pursuant to Section 1.8
hereof, by delivering to DI a duly executed letter of transmittal in
the form agreed to by the parties hereto, together with the certificate
or certificates for the shares of LRAC Common Stock as to which the
Cash Option is being elected, before the close of business on the last
business day prior to the date of the meeting of DI stockholders which
shall be held to approve this Agreement and the Merger and all other
matters contemplated hereby (the "DI Meeting"). The shares with respect
to which such election is timely made are herein sometimes called "LRAC
Cash Option Shares."All such elections shall be revocable in accordance
with the terms of such letter of transmittal until the close of
business on the last business day prior to the date of the DI Meeting
and, if required by law, at any time which is later than 60 days after
the date on which the Proxy Statement (as hereinafter defined) is first
mailed to stockholders of DI, if the Merger has not theretofore been
consummated. If the Cash Option is duly elected and remains unrevoked
at the close of business on the last business day prior to the date of
the DI Meeting with respect to no more than 200 shares of LRAC Common
Stock, cash in an amount determined by multiplying the LRAC Cash Option
Price by the number of LRAC Cash Option Shares will be distributed to
the holders of LRAC Cash Option Shares. If the Cash Option is duly
elected and remains unrevoked at the close of business on the last
business day prior to the date of the DI Meeting with respect to more
than 200 shares of LRAC Common Stock:
(i) three million five hundred sixty-three thousand
six hundred fifty dollars ($3,563,650) in cash , and
(ii) that number of shares of DI Common Stock into
which the LRAC Cash Option Shares in excess of 200 would
otherwise have been converted under Section 1.8 hereof,
will be distributed on a pro rata basis to the holders of the LRAC Cash
Option Shares (subject to the provisions of Section 1.8).
(b) Any holder of RTO Common Stock may elect to receive
$14,363.50 per share in cash (the "RTO Cash Option Price") for some or
all of such holder's shares, in lieu of receiving DI Common Stock
therefor pursuant to Section 1.8 hereof, by delivering to DI a duly
executed letter of transmittal in the form agreed to by the parties
hereto, together with the certificate or certificates for the shares of
RTO Common Stock as to which the Cash Option is being elected, before
the close of business on the last business day prior to the date of the
DI Meeting. The shares with respect to which such election is timely
made are herein sometimes called "RTO Cash Option Shares" and, together
with the LRAC Cash Option Shares, the "Cash Option Shares." All such
elections shall be revocable in accordance with the terms of such
letter of transmittal until the close of business on the last business
day prior to the date of the DI Meeting and, if required by law, at any
time which is later than 60 days after the date on which the Proxy
Statement (as hereinafter defined) is first mailed to stockholders of
DI, if the Merger has not theretofore been consummated. If the Cash
Option is duly elected and remains unrevoked at the close of business
on the last business day prior to the date of the DI Meeting with
respect to no more than 100 shares of RTO Common Stock, cash in an
amount
3
determined by multiplying the RTO Cash Option Price by the number of
RTO Cash Option Shares will be distributed to the holders of RTO Cash
Option Shares. If the Cash Option is duly elected and remains unrevoked
at the close of business on the last business day prior to the date of
the DI Meeting with respect to more than 100 shares of RTO Common
Stock:
(i) one million four hundred thirty-six thousand
three hundred fifty dollars ($1,436,350) in cash , and
(ii) that number of shares of DI Common Stock into
which the RTO Cash Option Shares in excess of 100 would
otherwise have been converted under Section 1.8 hereof,
will be distributed on a pro rata basis to the holders of the RTO Cash
Option Shares (subject to the provisions of Section 1.8).
(c) Payment for those Cash Option Shares purchased pursuant to
the terms of this Section 1.7 will be delivered to holders of such
shares as soon as practicable after the Effective Time of the Merger.
All elections to receive cash for M/O Common Stock pursuant to this
Section 1.7 shall automatically terminate if this Agreement is
terminated for any reason. In the event of such termination, the
certificates for the shares of M/O Common Stock delivered to DI will be
promptly returned to the persons entitled thereto.
1.8 CONVERSION OF SECURITIES. Subject to the terms and conditions of
this Agreement at the Effective Time, by virtue of the Merger and without any
action on the part of DI, LRAC, Sub, RTO or their respective stockholders:
(a) (i) Each share of LRAC Common Stock issued and outstanding
immediately prior to the Effective Time (unless the holder thereof
shall have duly elected to receive cash therefor pursuant to the Cash
Option and the terms thereof set forth in Section 1.7(a) hereof), other
than any shares of LRAC Common Stock to be canceled pursuant to Section
1.8(b) (the "LRAC Shares"), shall be converted into the right to
receive 28,250.748 shares of DI Common Stock and (ii) each share of RTO
Common Stock issued and outstanding immediately prior to the Effective
Time, other than any shares of RTO Common Stock to be canceled pursuant
to Section 1.8(b) (the "RTO Shares" and, together with the LRAC Shares,
the "M/O Shares"), shall be converted into the right to receive
22,773.26 shares of DI Common Stock; provided, however, that no
fractional shares of DI Common Stock shall be issued, and, in lieu
thereof, a cash payment shall be made in accordance with Section 1.9(b)
hereof. The parties hereto acknowledge that the foregoing exchange
ratio is based upon the representation of the parties as to their
current capitalization as set forth in paragraphs 2.1(b) and 2.2(b).
(b) Each LRAC Share held in the treasury of LRAC, each RTO
Share held in the treasury of RTO and each LRAC Share or RTO Share
owned by DI or any direct or indirect wholly owned subsidiary of DI or
of LRAC or RTO immediately prior to the
4
Effective Time shall be cancelled and extinguished without any
conversion thereof and no payment shall be made with respect thereto.
(c) Each share of common stock, par value $.01 per share, of
Sub issued and outstanding immediately prior to the Effective Time
shall be converted into one share of common stock, no par value, of the
Surviving Corporation.
1.9 EXCHANGE OF CERTIFICATES; FRACTIONAL SHARES.
(a) As soon as practicable after the Effective Time, DI shall
make the cash payment pursuant to the Cash Option in accordance with
Section 1.7 hereof, and deliver to the stockholders of LRAC and RTO
certificates representing the DI Common Stock issuable to them pursuant
to the terms of Section 1.8(a) hereof.
(b) No fraction of a share of DI Common Stock shall be issued,
but in lieu thereof each holder of M/O Common Stock who would otherwise
be entitled to a fraction of a share of DI Common Stock shall, upon
surrender of the certificate formerly representing M/O Common Stock
held by such holder to DI, be paid an amount in cash equal to the value
of such fraction of a share based upon the closing sales price of DI
Common Stock, as reported on the American Stock Exchange, on the first
day on which there is a reported trade in the DI Common Stock after the
Effective Time. No interest shall be paid on such amount. All shares of
M/O Common Stock held by a record holder shall be aggregated for
purposes of computing the number of shares of DI Common Stock to be
issued pursuant to this Article I and cash in lieu of fractional shares
payable hereunder.
(c) None of DI, Sub, RTO, LRAC or the Surviving Corporation
shall be liable to a holder of the M/O Shares for any amount properly
paid or shares of DI Common Stock properly delivered to a public
official pursuant to applicable property, escheat or similar laws.
1.10 STOCK LEGENDS. Certificates representing shares of DI Common Stock
issued to persons deemed to be affiliates (as that term is used for purposes of
Rule 145 under the Securities Act of 1933, as amended (the "Securities Act")) of
LRAC or RTO on the date of the approval of the stockholders of those
corporations referred to in Section 3.3 hereof, shall bear the legend set forth
below:
These shares were issued in a transaction to which Rule 145
promulgated under the Securities Act of 1933 applies. These
shares may only be transferred in accordance with the terms of
such Rule.
1.11 TAKING OF NECESSARY ACTION; FURTHER ACTION. The parties hereto
shall take all such reasonable and lawful action as may be necessary or
appropriate in order to effectuate the Merger as promptly as possible. If, at
any time after the Effective Time, any such further action is necessary or
desirable to carry out the purposes of this Agreement and to vest the Surviving
Corporation with full right, title to and possession of all assets, property,
rights, privileges,
5
powers and franchises of the Nonsurviving Corporations, such corporations shall
direct their officers and directors to take all such lawful and necessary
action.
1.12 ADJUSTMENT. If for any reason on the Closing Date the number of
shares of DI Common Stock which are issued and outstanding or subject to
outstanding options or warrants is less than indicated in Section 2.1(b) hereof,
the aggregate number of shares issuable to the shareholders of LRAC and RTO
pursuant to Section 1.8 shall be reduced by an equivalent number of shares. If
the number of shares of DI Common Stock issued and outstanding or subject to
outstanding options or warrants on the Closing Date exceeds the number of shares
indicated in Section 2.1(b), the aggregate number of shares issuable pursuant to
Section 1.8 shall be increased by an equivalent number of shares. Any such
increase or decrease shall be allocated 71.273% to LRAC shareholders and 28.727%
to RTO shareholders. The parties hereto acknowledge that the continued
exercisability of an option to purchase one million shares of DI Common Stock
previously granted to Max M. Dillard is uncertain and that, so long as the
uncertainty exists on the Closing Date, the shares subject to that option will
not be deemed to be subject to outstanding options for the purposes of this
Section.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 REPRESENTATIONS AND WARRANTIES OF DI AND SUB. DI and Sub hereby
jointly and severally represent and warrant to LRAC, RTO, Mullen and Oliver
that, as of the date hereof:
(a) ORGANIZATION AND COMPLIANCE WITH LAW. Each of DI and the
DI Subsidiaries (as hereinafter defined) is a corporation or
partnership duly organized, validly existing and, with respect to
corporations and limited partnerships, in good standing under the laws
of the jurisdiction in which it is chartered or organized and has all
requisite corporate or partnership power and corporate or partnership
authority and all necessary governmental authorization to own, lease
and operate all of its properties and assets and to carry on its
business as now being conducted, except where the failure to be so
organized, existing or in good standing or to have such governmental
authority would not have a material adverse effect on the financial
condition, results of operations or business of DI and the DI
Subsidiaries, taken as a whole. To the knowledge of DI, each of DI and
the DI Subsidiaries that is a corporation or a limited partnership is
duly qualified as a foreign corporation or partnership to do business,
and is in good standing, in each jurisdiction in which the property
owned, leased or operated by it or the nature of the business conducted
by it makes such qualification necessary, except in such jurisdictions
where the failure to be duly qualified does not and would not, either
individually or in the aggregate, have a material adverse effect on the
financial condition, results of operation or business of DI and the DI
Subsidiaries, taken as a whole. To the knowledge of DI, each of DI and
the DI Subsidiaries is in compliance with all applicable laws,
judgments, orders, rules and regulations, domestic and foreign, except
where failure to be in such compliance would not have a material
adverse effect on the financial condition, results of operations or
business of DI and the DI Subsidiaries, taken as a whole. DI has
heretofore delivered to LRAC and RTO true and complete copies of DI's
Articles of Incorporation (the "DI
6
Charter") and bylaws, and the Certificate of Incorporation of each of
DI and Sub, as in existence on the date hereof.
A "DI Subsidiary" means any corporation or other entity of
which at least a majority of the outstanding shares of voting stock or
other ownership interests having by the terms thereof ordinary power to
vote generally for the election of the board of directors (or persons
performing similar functions) of such corporation or entity
(irrespective of whether or not at the time, in the case of a
corporation, stock of any other class or classes of such corporation
shall have or might have voting power by reason of the happening of any
contingency) is at the time directly or indirectly owned or controlled
by DI or one or more of the DI Subsidiaries or by DI and one or more of
the DI Subsidiaries. A list of all DI Subsidiaries is set forth in
Section 2.1(a) of the disclosure letter delivered by DI to LRAC and RTO
on the date hereof (the "DI Disclosure Letter").
(b) CAPITALIZATION.
(i) As of the date hereof, the authorized capital
stock of DI consists of 75,000,000 shares of Common Stock, par
value $.10 per share, and 1,000,000 shares of preferred stock,
par value $1.00 per share (the "DI Preferred Stock"). As of
the date hereof, there are issued and outstanding 38,669,378
shares of DI Common Stock and 90,000 shares of Series A
Convertible Redeemable Preferred Stock, par value $1.00 per
share, of DI ("DI Series A Preferred Stock"), which is
convertible into 720,000 shares of DI Common Stock. DI has
received a subscription and the purchase price for 4,000
shares of Series B 15% Cumulative Redeemable Preferred Stock,
par value $1.00 per share, of DI ("DI Series B Preferred
Stock"). There are no shares of DI Common Stock or DI
Preferred Stock held as treasury shares. As of the date
hereof, an aggregate of 968,000 shares of DI Common Stock are
reserved for issuance and issuable pursuant to or upon the
exercise of outstanding options and 5,333,333 shares would be
issuable upon exercise of certain warrants which would be
issued in connection with the DI Series B Preferred Stock (the
"DI Series B Warrants"). DI will reserve for issuance, out of
its authorized but unissued capital stock, such number of
shares of DI Common Stock as may be issuable upon consummation
of the Merger. All issued shares of DI Common Stock and DI
Preferred Stock are validly issued, fully paid and
nonassessable and, except as set forth in Section 2.1(b) of
the DI Disclosure Letter, no holder thereof is entitled to
preemptive rights. Assuming the correctness of the
representations of LRAC and RTO set forth at Section
2.2(b)(i), all shares of DI Common Stock to be issued pursuant
to the Merger, when issued in accordance with this Agreement,
will be validly issued, fully paid and nonassessable, and the
issuance thereof will not violate the preemptive rights of any
person. Except as set forth in Section 2.1(b) of the DI
Disclosure Letter, DI is not a party to, and is not aware of,
any voting agreement, voting trust or similar agreement or
arrangement relating to any class or series of its capital
stock, or any agreement or arrangement providing for
registration rights with respect to any capital stock or other
securities of DI, other than those that have expired or been
terminated prior to the date hereof.
7
(ii) Except as set forth in this Section 2.1(b) and
Section 2.1(b) of the DI Disclosure Letter, and except for
issuances contemplated by this Agreement in connection with
the Merger, there are not now, and at the Effective Time there
will not be, any (A) shares of capital stock or other equity
securities of DI, DI or Sub outstanding (other than DI Common
Stock issued pursuant to the exercise of DI options and
warrants as described herein) or (B) outstanding options,
warrants, scrip, rights to subscribe for, calls or commitments
of any character whatsoever relating to, or securities or
rights convertible into or exchangeable for, shares of any
class of capital stock of DI or Sub, or contracts,
understandings or arrangements to which DI, Delco or Sub is a
party, or by which any of them is or may be bound, to issue
additional shares of its capital stock or options, warrants,
scrip or rights to subscribe for, or securities or rights
convertible into or exchangeable for, any additional shares of
its capital stock.
(iii) Except as set forth in Section 2.1(b) of the DI
Disclosure Letter, all outstanding shares of capital stock of
the DI Subsidiaries are owned by DI, a wholly owned subsidiary
of DI or individuals who hold nominal quantities of shares on
behalf of DI or such a subsidiary as director's qualifying
shares, free and clear of all liens, charges, encumbrances,
adverse claims and options of any nature which are material to
DI and the DI Subsidiaries, taken as a whole.
(iv) As of the date hereof, the authorized capital
stock of Sub consists of 1,000 shares of common stock, par
value $.01 per share, all of which are validly issued, fully
paid and nonassessable and are owned by DI.
(c) AUTHORIZATION AND VALIDITY OF AGREEMENT. DI and Sub have
all requisite corporate power and authority to enter into this
Agreement and to perform their respective obligations hereunder. The
execution and delivery by DI and Sub of this Agreement and the
consummation by each of them of the transactions contemplated hereby
have been duly authorized by all necessary corporate action (subject
only to approval of the stockholders of DI). On or prior to the date
hereof, the Board of Directors of DI has determined to recommend the
approval of the Merger, and such determination is in effect as of the
date hereof. This Agreement has been duly executed and delivered by DI
and Sub and is the valid and binding obligation of DI and Sub and
enforceable against them in accordance with its terms.
(d) NO APPROVALS OR NOTICES REQUIRED; NO CONFLICT WITH
INSTRUMENTS TO WHICH DI OR ANY OF THE DI SUBSIDIARIES IS A PARTY.
Neither the execution and delivery of this Agreement nor the
performance by DI or Sub of its obligations hereunder, nor the
consummation of the transactions contemplated hereby by DI and Sub will
(i) conflict with the DI Charter or the bylaws of DI or the charter or
bylaws of any of the DI Subsidiaries; (ii) assuming satisfaction of the
requirements set forth in clause (iii) below, violate any provision of
law applicable to DI or any of the DI Subsidiaries; (iii) except for
(A) requirements of federal or state securities laws, (B) requirements
arising out of the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), (C ) requirements of notice filings
in such foreign jurisdictions as may be applicable, and (D)
8
the filing of certificates of merger in accordance with the DGCL and
the OGCA, require any consent or approval of, or filing with or notice
to, any public body or authority, domestic or foreign, under any
provision of law applicable to DI or any of the DI Subsidiaries; or
(iv) require any consent, approval or notice under, or violate, breach,
be in conflict with or constitute a default (or an event that, with
notice or lapse of time or both, would constitute a default) under, or
permit the termination of any provision of, or result in the creation
or imposition of any lien upon any properties, assets or business of DI
or any of the DI Subsidiaries under, any note, bond, indenture,
mortgage, deed of trust, lease, franchise, permit, authorization,
license, contract, instrument or other agreement or commitment or any
order, judgment or decree to which DI or any of the DI Subsidiaries is
a party or by which DI or any of the DI Subsidiaries or any of its or
their assets or properties is bound or encumbered, except (A) those
that have already been given, obtained or filed, (B) those that are
required pursuant to agreements governing indebtedness, as set forth in
Section 2.1(d) of the DI Disclosure Letter, which will be obtained
prior to the Effective Time, and (C) those that, in the aggregate,
would not have a material adverse effect on the financial condition,
results of operations or business of DI and the DI Subsidiaries, taken
as a whole.
(e) COMMISSION FILINGS; FINANCIAL STATEMENTS. Since December
31, 1994, DI and each of the DI Subsidiaries have filed all reports,
registration statements and other filings, together with any amendments
required to be made with respect thereto, that they have been required
to file with the Securities and Exchange Commission (the "Commission")
under the Securities Act and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All reports, registration statements and
other filings (including all notes, exhibits and schedules thereto and
documents incorporated by reference therein) filed by DI with the
Commission since January 1, 1996, through the date of this Agreement,
together with any amendments thereto, are sometimes collectively
referred to as the "DI Commission Filings."DI has heretofore delivered
to LRAC and RTO copies of the DI Commission Filings. As of the
respective dates of their filings with the Commission, the DI
Commission Filings complied in all material respects with the
Securities Act or the Exchange Act, as applicable, and the rules and
regulations of the Commission thereunder, and did not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.
All contracts of DI and the DI Subsidiaries required to be
filed as exhibits to the DI Commission Filings pursuant to the rules
and regulations of the Commission have been filed.
Each of the historical consolidated financial statements
(including any related notes or schedules) included in the DI
Commission Filings was prepared in accordance with generally accepted
accounting principles applied on a consistent basis (except as may be
noted therein or in the notes or schedules thereto) and complied in all
material respects with all applicable rules and regulations of the
Commission. Such consolidated financial statements fairly present the
consolidated financial position of DI, as of the dates thereof
9
and the results of operations, cash flows and changes in shareholders'
equity for the periods then ended. To the extent the DI Commission
Filings include unaudited interim consolidated financial statements,
such statements reflect, in the opinion of management, all adjustments
which consist of only normal recurring adjustments necessary to present
fairly the results of operations for such periods. To the extent the DI
Commission Filings include pro forma consolidating financial statements
of DI, such statements (including any related notes or schedules) were
prepared in accordance with generally accepted accounting principles
applied on a consistent basis and complied in all material respects
with all applicable rules and regulations of the Commission, and no
other pro forma financial statements or schedules were required by the
applicable rules and regulations of the Commission to be included in
the DI Commission Filings. The pro forma adjustments included in such
pro forma financial statements of DI have been properly applied to the
historical amounts in the computation of the pro forma financial
statements and the assumptions described in the notes to such pro forma
financial information provide a reasonable basis for presenting the
direct effects of the transactions reflected therein and the pro forma
adjustments give appropriate effect to those assumptions. As of the
date hereof, DI has no liabilities, absolute or contingent, that may
reasonably be expected to have a material adverse effect on the
financial condition, results of operations or business of DI and the DI
Subsidiaries, taken as a whole, that are not reflected in the DI
Commission Filings, except those set forth in Section 2.1 (e) of the DI
Disclosure Letter.
(f) CONDUCT OF BUSINESS IN THE ORDINARY COURSE; ABSENCE OF
CERTAIN CHANGES AND EVENTS. Since December 31, 1995, except as
contemplated by this Agreement or as disclosed in or contemplated by
the DI Commission Filings or as set forth in Section 2.1(f) of the DI
Disclosure Letter, DI and the DI Subsidiaries have conducted their
business only in the ordinary and usual course, and there has not been
(i) any material adverse change in the financial condition, results of
operations or business of DI and the DI Subsidiaries, taken as a whole,
or any condition, event or development that reasonably may be expected
to result in any such material adverse change; (ii) any material change
by DI in its accounting methods, principles or practices; (iii) any
revaluation by DI or any of the DI Subsidiaries of any of its or their
assets, including, without limitation, writing down the value of fixed
assets or inventory or writing off notes or accounts receivable other
than in the ordinary course of business; (iv) any entry by DI or any of
the DI Subsidiaries into any commitment or transaction material to DI
and the DI Subsidiaries, taken as a whole, outside the ordinary course
of business involving consideration on the part of DI and/or the DI
Subsidiaries of more than $200,000; (v) any declaration, setting aside
or payment of any dividends or distributions in respect of the DI
Common Stock or DI Preferred Stock, or any redemption, purchase or
other acquisition of any of its securities or any securities of any of
the DI Subsidiaries; (vi) any damage, destruction or loss (whether or
not covered by insurance) materially adversely affecting the properties
or business of DI and the DI Subsidiaries, taken as a whole; (vii) any
increase in indebtedness for borrowed money other than borrowing under
existing credit facilities; (viii) any granting of a security interest
or lien on any material property or assets of DI and the DI
Subsidiaries, taken as a whole, other than (A) liens for taxes not due
and payable or which are being contested in good faith; (B) mechanics',
warehousemen's and other statutory liens incurred in the ordinary
course of business; and (C) defects and irregularities in title and
encumbrances
10
which are not substantial in character or amount and do not materially
impair the use of the property or asset in question; or (ix) any
establishment of any bonus, insurance, severance, deferred
compensation, pension, retirement, profit sharing, stock option
(including, without limitation, the granting of stock options, stock
appreciation rights, performance awards or restricted stock awards),
stock purchase or other employee benefit plan, any material change in
the manner or method under which the contribution obligation or other
obligations of DI or the DI Subsidiaries with respect to any of the
foregoing are determined, or any other increase in the compensation
payable or to become payable to any officers or key employees of DI or
any of the DI Subsidiaries.
(g) LITIGATION. Except as disclosed in the DI Commission
Filings or as set forth in Section 2.1(g) of the DI Disclosure Letter,
there are no claims, actions, suits, investigations, inquiries or
proceedings pending or, to the knowledge of DI, threatened against or
affecting DI or any of the DI Subsidiaries or any of their respective
properties at law or in equity, or any of their respective employee
benefit plans or fiduciaries of such plans, or before or by any
federal, state, municipal or other governmental agency or authority, or
before any arbitration board or panel, wherever located, that
individually or in the aggregate if adversely determined would have a
material adverse effect on the financial condition, results of
operations or business of DI and the DI Subsidiaries, taken as a whole,
or that involve the risk of criminal liability.
(h) EMPLOYEE BENEFIT PLANS.
(i) No later than 20 days prior to the Closing Date,
DI will provide a description of each of the following which
is sponsored, maintained or contributed to by DI, a DI
Subsidiary or any corporation, trade, business or entity under
common control with DI or a DI Subsidiary within the meaning
of Section 414(b), (c), (m) or (o) of the Code or Section 4001
of ERISA (a "DI ERISA Affiliate") for the benefit of its
employees, or has been so sponsored, maintained or contributed
to within six years prior to the Closing Date:
(A) each "employee benefit plan" ("Plan") as
such term is defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"); and
(B) each personnel policy, stock option
plan, collective bargaining agreement, bonus plan or
arrangement, incentive award plan or arrangement,
vacation policy, severance pay plan, policy or
agreement, deferred compensation agreement or
arrangement, executive compensation or supplemental
income arrangement, consulting agreement, employment
agreement and each other employee benefit plan,
agreement, arrangement, program, practice or
understanding that is not described in Section
2.1(h)(i)(A) ("Benefit Program or Agreement").
11
True and complete copies of each of the Plans, Benefit
Programs or Agreements, related trusts, if applicable, and all
amendments thereto, have been furnished to LRAC and RTO or
will be provided no later than 20 days prior to the Closing
Date.
(ii) Except as otherwise set forth in Section 2.1(h)
of the DI Disclosure Letter,
(A) none of DI, any DI Subsidiary or any DI
ERISA Affiliate contributes to or has an obligation
to contribute to, or has at any time contributed to
or had an obligation to contribute to, a plan subject
to Title IV of ERISA, including, without limitation,
a multiemployer plan within the meaning of Section
3(37) of ERISA;
(B) each Plan and each Benefit Program or
Agreement has been administered, maintained and
operated in all material respects in accordance with
the terms thereof and in compliance with its
governing documents and applicable law (including,
where applicable, ERISA and the Code);
(C) there is no matter pending with respect
to any of the Plans or Benefit Programs or Agreements
before any governmental agency, and there are no
actions, suits or claims pending (other than routine
claims for benefits) or threatened against, or with
respect to, any of the Plans or Benefit Programs or
Agreements or their assets;
(D) no act, omission or transaction has
occurred which would result in imposition on DI, any
DI Subsidiary or any DI ERISA Affiliate of breach of
fiduciary duty liability damages or penalty under
ERISA or a tax imposed pursuant to Chapter 43 of
Subtitle D of the Code; and
(E) the execution and delivery of this
Agreement and the consummation of the transactions
contemplated hereby will not require DI, any DI
Subsidiary or any DI ERISA Affiliate to make a larger
contribution to, or pay greater benefits under, any
Plan or Benefit Program or Agreement than it
otherwise would or create or give rise to any
additional vested rights or service credits under any
Plan or Benefit Program or Agreement.
(iii) Termination of employment of any employee of
DI, any DI Subsidiary or any DI ERISA Affiliate immediately
after consummation of the transactions contemplated by this
Agreement would not result in payments under the Plans or
Benefit Programs or Agreements which, in the aggregate, would
result in imposition of the sanctions imposed under Sections
280G and 4999 of the Code.
12
(iv) No later than 20 days prior to the Closing Date,
DI will disclose to LRAC and RTO any Plan that may not be
unilaterally amended or terminated in its entirety without
liability except as to benefits accrued thereunder prior to
such amendment or termination.
(v) No later than 20 days prior to the Closing Date,
DI will disclose to LRAC and RTO any union or collective
bargaining agreements to which any of the employees of DI, any
of the DI Subsidiaries or any DI ERISA Affiliate are subject.
(vi) Except as otherwise set forth in Section 2.1(h)
of the DI Disclosure Letter, none of the Plans or Benefit
Programs or Agreements provides retiree health or life
benefits to employees or former employees or their spouses or
dependents.
(i) TAXES. All returns and reports, including, without
limitation, information and withholding returns and reports ("Tax
Returns"), of or relating to any foreign, federal, state or local tax,
assessment or other governmental charge ("Taxes") that are required to
be filed on or before the Closing Date by or with respect to DI or any
of the DI Subsidiaries, or any other corporation that is or was a
member of an affiliated group (within the meaning of Section 1504(a) of
the Code) of corporations of which DI was a member for any period
ending on or prior to the Closing Date, have been or will be duly and
timely filed. All such tax returns were correct and complete in all
respects and all Taxes, including interest and penalties, owed by DI or
any DI Subsidiaries (whether or not shown on any Tax Return) have been
paid. All U.S. federal income Tax Returns of or with respect to DI and
the DI Subsidiaries have been audited by the applicable governmental
authority, or the applicable statute of limitations has expired, for
all periods up to and including the taxable year ended March 31, 1992.
There is no material claim against DI or any of the DI Subsidiaries
with respect to any Taxes, and no assessment, deficiency or adjustment
has been asserted or proposed with respect to any Tax Return of or with
respect to DI or any of the DI Subsidiaries. The total amounts set up
as liabilities for current and deferred Taxes in the consolidated
financial statements of DI included in the DI Commission Filings have
been prepared in accordance with generally accepted accounting
principles and are sufficient to cover the payment of all Taxes,
including any penalties or interest thereon and whether or not assessed
or disputed, that are, or are hereafter found to be, or to have been,
due with respect to the operations of DI and the DI Subsidiaries
through the periods covered thereby or the current life or use of their
respective assets. DI and each of the DI Subsidiaries have (and as of
the Closing Date will have) made all deposits (including estimated tax
payments for taxable years for which the consolidated federal income
tax return is not yet due) required with respect to Taxes. No waiver or
extension of any statute of limitations as to any federal, local or
foreign Tax matter has been given by or requested from DI or any of the
DI Subsidiaries. Neither DI nor any of the DI Subsidiaries has filed
consolidated income tax returns with any corporation, other than
consolidated federal and state income Tax Returns by DI, for any
taxable period which is not now closed by the applicable statute of
limitations. None of the assets of DI or the DI Subsidiaries are
required to be treated as being owned by any
13
other person pursuant to the "safe harbor" leasing provisions of
Section 168(f)(8) of the Code prior to its repeal.
(j) ENVIRONMENTAL MATTERS. Except for matters that in the
aggregate would not have a material adverse effect on the financial
condition, results of operations or business of DI and the DI
Subsidiaries, taken as a whole, (i) the properties, operations and
activities of DI and the DI Subsidiaries comply with all applicable
Environmental Laws (as defined below); (ii) DI and the DI Subsidiaries
and the properties and operations of DI and the DI Subsidiaries are not
subject to any existing, pending or, to the knowledge of DI, threatened
action, suit, investigation, inquiry or proceeding by or before any
governmental authority under any Environmental Law; (iii) all notices,
permits, licenses, or similar authorizations, if any, required to be
obtained or filed by DI or the DI Subsidiaries under any Environmental
Law in connection with any aspect of the business of DI or the DI
Subsidiaries, including without limitation those relating to the
treatment, storage, disposal or release of a hazardous substance or
solid waste ("DI Environmental Permits"), have been duly obtained or
filed and will remain valid and in effect after the Merger, and DI and
the DI Subsidiaries are in compliance with the terms and conditions of
all such DI Environmental Permits; (iv) there are no physical or
environmental conditions existing on any property of DI and the DI
Subsidiaries or resulting from DI's and the DI Subsidiaries' operations
or activities, past or present, at any location that would give rise to
any on-site or, to DI's knowledge, off-site remedial obligations under
any Environmental Law; (v) since the effective date of the relevant
requirements of applicable Environmental Laws, all hazardous substances
or solid wastes generated by DI and the DI Subsidiaries or used in
connection with their properties or operations have been transported
only by carriers authorized under Environmental Laws to transport such
substances and wastes, and disposed of only at treatment, storage, and
disposal facilities authorized under Environmental Laws to treat, store
or dispose of such substances and wastes, and, to the knowledge of DI,
such carriers and facilities have been and are operating in compliance
with such authorizations and are not the subject of any existing,
pending, or threatened action, investigation, or inquiry by any
governmental authority in connection with any Environmental Laws; (vi)
there has been no exposure of any person or property to hazardous
substances, solid waste, or any pollutant or contaminant, nor has there
been any release of hazardous substances, solid waste, or any pollutant
or contaminant into the environment by DI or the DI Subsidiaries or in
connection with their properties or operations that could reasonably be
expected to give rise to any claim for damages or compensation; and
(vii) DI and the DI Subsidiaries shall make available to LRAC all
internal and external environmental audits and studies and all
correspondence on substantial environmental matters in the possession
of DI and the DI Subsidiaries relating to any of the current or former
properties or operations of DI and the DI Subsidiaries.
For purposes of this Agreement, the term "Environmental Laws"
shall mean any and all laws, statutes, ordinances, rules, regulations,
orders or determinations of any Governmental Authority (as defined
below) pertaining to health or the environment currently in effect in
any and all jurisdictions in which the party in question and its
subsidiaries own property or conduct business, including without
limitation, the Clean Air Act, as amended, the Comprehensive
Environmental, Response, Compensation, and
14
Liability Act of 1980, as amended ("CERCLA"), the Federal Water
Pollution Control Act, as amended, the Occupational Safety and Health
Act of 1970, as amended, the Resource Conservation and Recovery Act of
1976, as amended ("RCRA"), the Safe Drinking Water Act, as amended, the
Toxic Substances Control Act, as amended, the Superfund Amendments and
Reauthorization Act of 1986, as amended, the Hazardous Materials
Transportation Act, as amended, any state laws pertaining to the
handling of oil and gas exploration and production wastes or the use,
maintenance, and closure of pits and impoundments, and all other
environmental conservation or protection laws. For purposes of this
Agreement, the terms "hazardous substance" and "release" have the
meanings specified in CERCLA, and the terms "solid waste" and
"disposal" have the meanings specified in RCRA; provided, however, that
to the extent the laws of the state in which the property is located
establish a meaning for "hazardous substance, "release, "solid waste"
or "disposal" that is broader than that specified in either CERCLA or
RCRA, such broader meaning shall apply. For purposes of this Agreement,
the term "Governmental Authority" includes the United States, as well
as any other foreign jurisdiction or state, county, city and political
subdivisions in which the party in question owns property or conducts
business, and any agency, department, commission, board, bureau or
instrumentality of any of them that exercises jurisdiction over the
party in question.
(k) SEVERANCE PAYMENTS. Except as disclosed in Section 2.1(k)
of the DI Disclosure Letter, none of DI or the DI Subsidiaries will owe
a severance payment or similar obligation to any of their respective
employees, officers or directors as a result of the Merger or the
transactions contemplated by this Agreement, nor will any of such
persons be entitled to an increase in severance payments or other
benefits as a result of the Merger or the transactions contemplated by
this Agreement in the event of the subsequent termination of their
employment.
(1) VOTING REQUIREMENTS. The affirmative vote of DI, as the
sole stockholder of Sub, and of the holders of two thirds of the
outstanding shares of DI Common Stock is the only vote of the holders
of any class or series of the capital stock of DI necessary to approve
this Agreement and the Merger.
(m) DIVIDEND RESTRICTIONS. Section 2.1(m) of the DI Disclosure
Letter contains a description of each restriction, limitation or
encumbrance, of any kind, on the ability of DI or any DI Subsidiary to
pay dividends on its respective capital stock.
(n) PERSONAL PROPERTY. DI or a DI Subsidiary (as the case may
be) owns all drilling rigs and other personal property reflected on the
books and records of DI or in the DI Commission Filings, in each case
free and clear of all liens, claims and other encumbrances, except for
those (i) described in Section 2.1(n) of the DI Disclosure Letter, (ii)
that are reflected in the DI Commission Filings, or (iii) that do not
materially affect the value of such personal property or limit the
ability of DI or the DI Subsidiary to use such personal property
substantially as it is currently being used and which are not otherwise
material, in the aggregate, to DI and the DI Subsidiaries, taken as a
whole. Section 2.1(n) of the DI Disclosure Letter also sets forth a
list (by lessee or licensee) and a summary description of all personal
property leases to which DI or a DI Subsidiary is a party and
15
which relates to personal property having a fair market value in excess
of $100,000. DI or such DI Subsidiary (as the case may be) has a valid
leasehold interest in each such personal property lease held by it as
of the date of this Agreement, in each case free and clear of all
liens, claims and other encumbrances, except for those (i) described in
Section 2.1(n) of the DI Disclosure Letter, (ii) that are reflected in
the DI Commission Filings, or (iii) that do not materially affect the
value of such leasehold interest or limit the ability of DI or the DI
Subsidiary to use such leasehold interest substantially as it is
currently being used and which are not otherwise material, in the
aggregate, to DI and the DI Subsidiaries, taken as a whole.
(o) INSURANCE. DI and each DI Subsidiary has in effect valid
and effective policies of insurance, issued by companies believed by DI
to be sound and reputable, insuring DI or such DI Subsidiary (as the
case may be) for losses arising from or out of damage to its properties
and claims for personal injury or property damage in such amounts and
covering such losses as is, in the opinion of DI, typical and
reasonable for a company in DI's business, and subject to deductibles
that are, in the opinion of DI, reasonable in amount.
(p) CERTAIN FEES. Neither DI nor any DI Subsidiary nor any of
their officers, directors or employees has employed any broker or
finder or incurred any liability for DI or any DI Subsidiary for any
financial advisory, brokerage or finders' fees or commissions payable
by DI or any DI Subsidiary in connection with the transactions
contemplated hereby.
(q) INTERIM OPERATIONS OF SUB. Sub was formed solely for the
purpose of engaging in the transaction contemplated hereby, has engaged
in no other business activities and has conducted its operations only
as contemplated hereby.
2.2 REPRESENTATIONS AND WARRANTIES OF LRAC AND RTO. LRAC, RTO, Mullen
and Oliver hereby jointly and severally represent and warrant to DI as to LRAC,
and RTO and Oliver jointly and severally represent and warrant to DI as to RTO,
that:
(a) ORGANIZATION AND COMPLIANCE WITH LAW. LRAC is a
corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware. RTO is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Oklahoma. Each of LRAC and RTO has all requisite corporate power and
corporate authority and all necessary governmental authorization to
own, lease and operate all of its properties and assets and to carry on
its business as now being conducted. Each of LRAC and RTO is duly
qualified as a foreign corporation to do business, and is in good
standing, in each jurisdiction in which the property owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification necessary. Each of LRAC and RTO is in compliance with all
applicable laws, judgments, orders, rules and regulations, domestic and
foreign, except where failure to be in such compliance would not have a
material adverse effect on the financial condition, results of
operations or business of such corporation. Each of LRAC and RTO has
heretofore
16
delivered to DI true and complete copies of its Certificate of
Incorporation (the "LRAC Charter" and "RTO Charter,"respectively) and
bylaws as in existence on the date hereof. Neither LRAC nor RTO owns
any securities or other ownership interests in any other entity.
(b) CAPITALIZATION.
(i) The authorized capital stock of LRAC consists of
1,500 shares of LRAC Common Stock, no par value. As of the
date hereof, there are issued and outstanding 1,000 shares of
LRAC Common Stock. The authorized capital stock of RTO
consists of 25,000 shares of RTO Common Stock, par value $1.00
per share. As of the date hereof, there are issued and
outstanding 500 shares of RTO Common Stock. No shares of M/O
Common Stock are held as treasury shares or subject to any
liens or other encumbrances. All issued shares of M/O Common
Stock are validly issued, fully paid and nonassessable and no
holder thereof is entitled to preemptive rights. Neither LRAC
nor RTO is a party to, nor is any of them aware of, any voting
agreement, voting trust or similar agreement or arrangement
relating to any class or series of its capital stock, or any
agreement or arrangement providing for registration rights
with respect to any of their capital stock or other
securities.
(ii) Except as set forth in this Section 2.2(b) there
are not now, and at the Effective Time there will not be, any
(A) shares of capital stock or other equity securities of LRAC
or RTO outstanding or (B) outstanding options, warrants,
scrip, rights to subscribe for, calls or commitments of any
character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of any class of
capital stock of LRAC or RTO, or contracts, understandings or
arrangements to which LRAC or RTO is a party, or by which any
of them is or may be bound, to issue additional shares of its
capital stock or options, warrants, scrip or rights to
subscribe for, or securities or rights convertible into or
exchangeable for, any additional shares of its capital stock.
(c) AUTHORIZATION AND VALIDITY OF AGREEMENT. Each of LRAC and
RTO has all requisite corporate power and authority to enter into this
Agreement and to perform its obligations hereunder. The execution and
delivery by each of LRAC and RTO of this Agreement and the consummation
by each of them of the transactions contemplated hereby have been duly
authorized by all necessary corporate action. This Agreement has been
duly executed and delivered by LRAC and RTO and is the valid and
binding obligation of LRAC and RTO enforceable against each of them in
accordance with its terms.
(d) NO APPROVALS OR NOTICES REQUIRED; NO CONFLICT. Neither the
execution and delivery of this Agreement nor the performance by LRAC
and RTO of their obligations hereunder, nor the consummation of the
transactions contemplated hereby by LRAC and RTO will (i) conflict with
the LRAC Charter, the RTO Charter or the bylaws of LRAC or RTO; (ii)
assuming satisfaction of the requirements set forth in clause (iii)
below, violate any provision of law applicable to LRAC or RTO; (iii)
except for (A)
17
requirements of federal or state securities laws, (B) requirements
arising out of the HSR Act, (C) requirements of notice filings in such
foreign jurisdictions as may be applicable, and (D) the filing of
certificates of merger in accordance with the DGCL and the OGCA to
effect the Merger, require any consent or approval of, or filing with
or notice to, any public body or authority, domestic or foreign, under
any provision of law applicable to LRAC or RTO; or (iv) require any
consent, approval or notice under, or violate, breach, be in conflict
with or constitute a default (or an event that, with notice or lapse of
time or both, would constitute a default) under, or permit the
termination of any provision of, or result in the creation or
imposition of any lien upon any properties, assets or business of LRAC
or RTO under, any note, bond, indenture, mortgage, deed of trust,
lease, franchise, permit, authorization, license, contract, instrument
or other agreement or commitment or any order, judgment or decree to
which LRAC or RTO is a party or by which LRAC or RTO or any of its
assets or properties is bound or encumbered.
(e) ASSETS AND BUSINESS. Neither LRAC nor RTO carry on, nor
have either of them ever carried on, a business or other activity,
except that RTO has been engaged in the business of buying and selling
used oil rigs and related machinery equipment and supplies, and, except
for the assets of RTO described on Schedule C hereto (the "Excess
Assets"), their only assets are the drilling rigs and related
machinery, equipment and supplies described on Schedule A hereto (the
"Rigs") and all documents or records relating to the Rigs. LRAC and RTO
cumulatively have good and indefeasible title to the Rigs free and
clear of any liens or encumbrances (which representation is made
jointly and severally by LRAC, RTO, Mullen and Oliver). The Rigs
include all of the equipment made available to DI for its inspection
and, since the date on which the Rigs were inspected by DI, there has
been no material change in any of the Rigs. Neither LRAC nor RTO has
entered into any contract or agreement other than this Agreement and
the agreements contemplated hereby and, except for the liabilities of
RTO described on Schedule D hereto (the "RTO Liabilities"), neither of
them has any liabilities, whether absolute or contingent, or asserted
or unasserted. Neither LRAC, RTO, Mullen nor Oliver has any current
actual knowledge of any material latent defect in any of the Rigs.
(f) LITIGATION. There are no claims, actions, suits,
investigations, inquiries or proceedings pending or, to the knowledge
of LRAC or RTO, threatened against or affecting LRAC or RTO or any of
their properties at law or in equity, or before or by any federal,
state, municipal or other governmental agency or authority, or before
any arbitration board or panel, wherever located, or that involve the
risk of criminal liability.
(g) TAXES. All Tax Returns of or relating to any Tax that are
required to be filed on or before the Closing Date by or with respect
to LRAC or RTO, or any other corporation that is or was a member of an
affiliated group (within the meaning of Section 1504(a) of the Code) of
corporations of which LRAC or RTO was a member for any period ending on
or prior to the Closing Date, have been or will be duly and timely
filed. All such tax returns were correct and complete in all respects
and all Taxes, including interest and penalties, owed by LRAC or RTO
(whether or not shown on any Tax Return) have been paid. LRAC and RTO
do not owe any Taxes, interest or penalties with respect to any periods
prior to the Closing whether or not a Tax Return is required to have
been filed with respect to such period prior to the Closing Date
(including but not limited to any Taxes arising from the consummation
of the transactions contemplated in this Agreement
18
or the organization of LRAC). There is no claim against LRAC or RTO
with respect to any Taxes, and no assessment, deficiency or adjustment
has been asserted or proposed with respect to any Tax Return of or with
respect to LRAC or RTO.
As of the Closing Date, there is no plan or intention by the
stockholders of LRAC or RTO to sell, exchange or otherwise dispose of a
number of shares of DI Common Stock received in the Merger that would
reduce such stockholders' ownership of DI Common Stock to a number of
shares having a value, as of the date of the Merger, of less than 50%
of the value of all of the formerly outstanding M/O Shares as of the
same date.
Set forth on Schedule A hereto are the bases of the assets of
LRAC and RTO for U.S. federal income tax purposes as of the date
hereof.
(h) EMPLOYEES. Neither LRAC nor RTO has, nor, except for the
previous employment by RTO of Oliver, has either of them ever had, any
employees, and neither of them will owe a severance payment or similar
obligation to any of its officers or directors, or to any other person,
as a result of the Merger or the transactions contemplated by this
Agreement.
(i) VOTING REQUIREMENTS. The affirmative vote of a majority of
the holders of all of the outstanding shares of LRAC Common Stock is
the only vote of the holders of any class or series of the capital
stock of LRAC necessary to approve this Agreement and the Merger, and
the affirmative vote of all of the holders of all of the outstanding
shares of LRAC Common Stock has been obtained in compliance with the
DGCL. Set forth on Schedule B hereto is a list of the stockholders of
LRAC as of the date hereof. Each such stockholder is an accredited
investor as defined in Rule 501 of Regulation D, promulgated under the
Securities Act. The affirmative vote of a majority of the holders of
all of the outstanding shares of RTO Common Stock is the only vote of
the holders of any class or series of the capital stock of RTO
necessary to approve this Agreement and the Merger, and the affirmative
vote of Oliver, who is the sole stockholder of RTO, has been obtained
in compliance with the OGCA. No holders of LRAC Common Stock or RTO
Common Stock have any appraisal rights under the relevant provisions of
the DGCL and the OGCA.
(j) CERTAIN FEES. Neither LRAC nor RTO, nor any of their
officers, directors or employees has employed any broker or finder or
incurred any liability for LRAC or RTO for any financial advisory,
brokerage or finders' fees or commissions payable by LRAC or RTO in
connection with the transactions contemplated hereby.
(k) HSR ACT STATUS. The "ultimate parent entities" of LRAC and
RTO have, in the aggregate, "annual net sales" and "total assets" of
less than $100,000,000, as such terms are defined under the HSR Act.
(l) NO AFFILIATION. Neither LRAC, RTO, Mullen nor Oliver have
any ownership interest in Somerset or any affiliate of Somerset.
Neither Somerset nor either
19
of the partners of its managing member have any ownership interest in
LRAC or RTO, directly or indirectly.
(m) INVESTMENT REPRESENTATIONS. Each of Mullen and Oliver
represents that: (i) he has such knowledge and experience in financial
and business matters as to be capable of evaluating the merits and
risks of his prospective investment in the DI Common Stock; (ii) he has
received all the information he has requested from DI and considers
necessary or appropriate for deciding whether to enter into this
Agreement; (iii) he has the ability to bear the economic risks of his
prospective investment; and (iv) he has the capacity to protect its own
interests in connection with this Agreement and the Merger.
(n) ENVIRONMENTAL MATTERS. Except for matters that in the
aggregate would not have a material adverse effect on the financial
condition, results of operations or business of RTO, (i) the
properties, operations and activities of RTO comply with all applicable
Environmental Laws; (ii) RTO and the properties and operations of RTO
are not subject to any existing, pending or, to the knowledge of RTO,
threatened action, suit, investigation, inquiry or proceeding by or
before any governmental authority under any Environmental Law; (iii)
all notices, permits, licenses, or similar authorizations, if any,
required to be obtained or filed by RTO under any Environmental Law in
connection with any aspect of the business of RTO, including without
limitation those relating to the treatment, storage, disposal or
release of a hazardous substance or solid waste ("RTO Environmental
Permits"), have been duly obtained or filed and will remain valid and
in effect after the Merger, and RTO is in compliance with the terms and
conditions of all such RTO Environmental Permits; (iv) there are no
physical or environmental conditions existing on any property of RTO or
resulting from RTO's operations or activities, past or present, at any
location that would give rise to any on-site or, to RTO's knowledge,
off-site remedial obligations under any Environmental Law; (v) since
the effective date of the relevant requirements of applicable
Environmental Laws, all hazardous substances or solid wastes generated
by RTO or used in connection with their properties or operations have
been transported only by carriers authorized under Environmental Laws
to transport such substances and wastes, and disposed of only at
treatment, storage, and disposal facilities authorized under
Environmental Laws to treat, store or dispose of such substances and
wastes, and, to the knowledge of RTO, such carriers and facilities have
been and are operating in compliance with such authorizations and are
not the subject of any existing, pending, or threatened action,
investigation, or inquiry by any governmental authority in connection
with any Environmental Laws; (vi) there has been no exposure of any
person or property to hazardous substances, solid waste, or any
pollutant or contaminant, nor has there been any release of hazardous
substances, solid waste, or any pollutant or contaminant into the
environment by RTO or in connection with their properties or operations
that could reasonably be expected to give rise to any claim for damages
or compensation; and (vii) RTO shall make available to DI all internal
and external environmental audits and studies and all correspondence on
substantial environmental matters in the possession of RTO relating to
any of the current or former properties or operations of RTO. There are
no underground storage tanks on any property owned by RTO.
20
ARTICLE III
COVENANTS OF LRAC PRIOR TO THE EFFECTIVE TIME
3.1 CONDUCT OF BUSINESS BY LRAC AND RTO PENDING THE MERGER. Each of
LRAC and RTO (and Mullen and Oliver for the purposes of paragraphs (d) and (e)
hereof) covenants and agrees that, from the date of this Agreement until the
Effective Time, unless DI shall otherwise agree in writing or as otherwise
expressly contemplated by this Agreement:
(a) It shall not directly or indirectly do any of the
following: (i) issue, sell, pledge, dispose of or encumber any of its
capital stock or assets; (ii) amend or propose to amend its charter or
bylaws; (iii) split, combine or reclassify any outstanding capital
stock, or declare, set aside or pay any dividend payable in cash,
stock, property or otherwise with respect to its capital stock whether
now or hereafter outstanding (provided, that RTO may distribute the
Excess Assets to Oliver, its sole stockholder); (iv) redeem, purchase
or acquire or offer to acquire, any of its capital stock; (v) enter
into any contract, agreement, commitment or arrangement with respect to
any of the matters set forth in this Section 3.1(a); (vi) enter into,
adopt or amend or terminate any bonus, profit sharing, compensation,
termination, stock option, stock appreciation right, restricted stock,
performance unit, stock equivalent, stock purchase, pension,
retirement, deferred compensation, employment, severance or other
employee benefit agreement, trust, plan, fund or other arrangement for
the benefit or welfare of any director, officer or employee; (vii) pay
compensation or fringe benefits to any director, officer or employee;
(viii) voluntarily incur any other obligation as liability other than
under this Agreement and the agreements contemplated hereby; or (ix)
enter into any business or activity of any kind whatsoever.
(b) It shall use its reasonable efforts (i) to preserve intact
its business organization, (ii) to maintain in effect any of its
authorizations or similar rights, (iii) to maintain and keep the Rigs
and its other properties in as good a repair and condition as presently
exists, except for deterioration due to ordinary wear and tear and
damage due to casualty; and (iv) to maintain in full force and effect
insurance comparable in amount and scope of coverage to that currently
maintained by it.
(c) It shall not make or agree to make any expenditure other
than as may be necessary to maintain and insure its assets.
(d) It shall not acquire or agree to acquire any ownership
interest in Somerset or any of its members, or otherwise enter into any
transaction or arrangement with Somerset, its members, or any of their
affiliates other than the mergers and other agreements and transactions
contemplated pursuant to the terms hereof, or permit any of the
foregoing to acquire any ownership interest in LRAC or RTO.
(e) Except as otherwise contemplated by this Agreement, it
shall not take any action, or omit to take any action, that would, or
that reasonably could be expected to, result in any of the
representations and warranties set forth in this Agreement becoming
untrue or any of the conditions to the Merger set forth in Article VI
not being satisfied. It
21
will use its best efforts to promptly advise DI orally and in writing
of any change or event having, or which, insofar as reasonably can be
foreseen, would have, a material adverse effect on it.
(f) RTO shall satisfy or eliminate the RTO Liabilities.
3.2 REGISTRATION STATEMENT AND PROXY STATEMENT. LRAC and RTO shall
cooperate with DI in preparing the Registration Statement and the Proxy
Statement (as defined below in Section 4.3). Each of LRAC and RTO represents and
agrees that the Registration Statement and Proxy Statement (with respect to
information concerning LRAC or RTO provided by them specifically for use
therein) will not 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 not misleading. LRAC or RTO will advise DI promptly in
writing if prior to the Effective Time it shall obtain knowledge of any facts
that would make it necessary to amend or supplement the Proxy Statement or the
Registration Statement in order to make the statements therein not misleading or
to comply with applicable law.
3.3 APPROVAL OF SHAREHOLDERS OF LRAC AND RTO. LRAC has obtained in
accordance with the DGCL and the LRAC Charter and bylaws the approval of its
stockholders to this Agreement and the Merger. RTO has obtained in accordance
with the OGCA and the RTO Charter and bylaws the approval of its stockholders to
this Agreement and the Merger.
3.4 INQUIRIES AND NEGOTIATIONS. LRAC, RTO, their affiliates and their
respective officers, directors, employees, representatives and agents shall
immediately cease any existing discussions or negotiations with any parties
conducted heretofore with respect to any acquisition of all or any material
portion of the assets of, or any equity interest in, LRAC or RTO or any business
combination with LRAC or RTO (an "M/O Acquisition Transaction"). Unless and
until this Agreement is terminated in accordance with Section 7.1 hereof,
neither LRAC, RTO nor any of their officers, directors, employees,
representatives or agents, shall, directly or indirectly, encourage, solicit,
participate in or initiate discussions or negotiations with, or provide any
information to, any corporation, partnership, person or other entity or group
(other than DI or Somerset Drilling Associates, L.L.C. ("Somerset"), any
affiliate or associate of DI or Somerset, or any designees of DI or Somerset)
concerning any M/O Acquisition Transaction.
3.5 ACCESS TO INFORMATION. Between the date hereof and the Effective
Time, LRAC and RTO will give DI and its authorized representatives reasonable
access to all employees, offices and other facilities and to all books and
records of LRAC and RTO will permit DI to make such inspections as DI may
reasonably require and will cause their officers to furnish DI with such
information with respect to the properties of LRAC and RTO as DI may from time
to time reasonably request.
3.6 NONPUBLIC INFORMATION. To the extent DI discloses to LRAC or RTO
material information with respect to DI and/or the DI Subsidiaries which has not
been disclosed in the DI Commission Filings or otherwise publicly disclosed by
DI, whether such disclosure is made pursuant to Section 4.7 or 4.8 of this
Agreement or otherwise, neither LRAC, RTO nor any of their affiliates will
divulge or disclose such information prior to such information becoming
22
generally available to the public or use such information in a manner which is
in violation of the Securities Act.
3.7 AUDITED STATEMENTS. On or before May 31, 1996, each of LRAC and RTO
shall provide to DI a balance sheet and income statement prepared in accordance
with generally accepted accounting principles for the period ended April 30,
1996, audited in accordance with generally accepted auditing standards by the
firm of Gross & Kimball, Certified Public Accountants, in the case of LRAC, and
Lee Arbogast, CPA, in the case of RTO.
ARTICLE IV
COVENANTS OF DI PRIOR TO THE EFFECTIVE TIME
4.1 CONDUCT OF BUSINESS BY DI PENDING THE MERGER. DI covenants and
agrees that, from the date of this Agreement until the Effective Time, unless
LRAC and RTO shall otherwise agree in writing or as otherwise expressly
contemplated by this Agreement or set forth in Section 4.1 of the DI Disclosure
Letter:
(a) The business of DI and the DI Subsidiaries shall be
conducted only in, and DI and the DI Subsidiaries shall not take any
action except in, the ordinary course of business and consistent with
past practice; in addition, from and after the date of this Agreement,
DI shall not, and shall not permit any of the DI Subsidiaries to, enter
into any new drilling contracts with terms of six months or longer with
respect to any of DI's drilling rigs, without giving prior written
notice to LRAC and RTO.
(b) DI shall not , except as contemplated by this Agreement,
directly or indirectly do any of the following: (i) issue, sell,
pledge, dispose of or encumber, or permit any DI Subsidiary to issue,
sell, pledge, dispose of or encumber, (A) any capital stock of DI or
any DI Subsidiary except upon the exercise of options or warrants or
upon conversion of any convertible securities of DI outstanding as of
the date of this Agreement or (B) other than in the ordinary course of
business and consistent with past practice and not relating to the
borrowing of money, any assets of DI or any DI Subsidiary; (ii) amend
or propose to amend the respective charters or bylaws of DI or any DI
Subsidiary; (iii) split, combine or reclassify any outstanding capital
stock, or declare, set aside or pay any dividend payable in cash,
stock, property or otherwise with respect to its capital stock whether
now or hereafter outstanding; (iv) redeem, purchase or acquire or offer
to acquire, or permit any of the DI Subsidiaries to redeem, purchase or
acquire or offer to acquire, any of its or their capital stock; or (v)
except in the ordinary course of business and consistent with past
practice, enter into any contract, agreement, commitment or arrangement
with respect to any of the matters set forth in this Section 4.1(b);
(vi) enter into, adopt or amend or terminate any bonus, profit sharing,
compensation, termination, stock option, stock appreciation right,
restricted stock, performance unit, stock equivalent, stock purchase,
pension, retirement, deferred compensation or other employee benefit
agreement, trust, plan, fund or other arrangement for the benefit or
welfare of any director, officer or employee; (vii) enter into any
employment or severance agreement with any director or officer, or with
any employee if the compensation involved exceeds $100,000 per annum
for employment agreements or a total of $50,000 for severance
23
agreements; (viii) except for normal increases in the ordinary course
of business consistent with past practice that, in the aggregate, do
not result in a material increase in benefits or compensation expense,
increase in any manner the compensation or fringe benefits of any
director, officer or employee; or (ix) pay to any director, officer or
employee any benefit not required by any employee benefit agreement,
trust, plan, fund or other arrangement as in effect on the date hereof,
except as permitted hereunder.
(c) DI shall use its reasonable efforts (i) to preserve intact
the business organization of DI and each of the DI Subsidiaries, (ii)
to maintain in effect any authorizations or similar rights of DI and
each of the DI Subsidiaries, (iii) to keep available the services of
its and their current officers and key employees, (iv) to preserve the
goodwill of those having business relationships with it and the DI
Subsidiaries, (v) to maintain and keep its properties and the
properties of the DI Subsidiaries in as good a repair and condition as
presently exists, except for deterioration due to ordinary wear and
tear and damage due to casualty, and (vi) to maintain in full force and
effect insurance comparable in amount and scope of coverage to that
currently maintained by it and the DI Subsidiaries.
(d) DI shall not make or agree to make, or permit any of the
DI Subsidiaries to make or agree to make, any capital expenditure other
than as previously disclosed in the DI Commission Filings or those made
in the ordinary course of business and consistent with past practice.
(e) DI shall, and shall cause the DI Subsidiaries to, perform
their respective obligations under any contracts and agreements to
which any of them is a party or to which any of their assets is
subject, except to the extent such failure to perform would not have a
material adverse effect on DI and the DI Subsidiaries, taken as a
whole, and except for such obligations as DI or the DI Subsidiaries in
good faith may dispute.
(f) Except as otherwise contemplated by this Agreement, DI
shall not, and shall not permit any of the DI Subsidiaries to, take any
action, or omit to take any action, that would, or that reasonably
could be expected to, result in any of the representations and
warranties set forth in this Agreement becoming untrue or any of the
conditions to the Merger set forth in Article VI not being satisfied.
DI will use its reasonable efforts to promptly advise LRAC and RTO
orally and in writing of any change or event having, or which, insofar
as reasonably can be foreseen, would have, a material adverse effect on
DI and the DI Subsidiaries, taken as a whole.
4.2 APPROVAL OF SHAREHOLDERS OF DI. Subject to the terms and conditions
of Section 4.6, DI shall use its best efforts, in accordance with the Texas
Business Corporation Act, the DI Charter and bylaws and the Articles of
Incorporation and bylaws of DI, to obtain the approval of its stockholders and
the stockholder's of DI of this Agreement and the Merger. Subject to the terms
and conditions of Section 4.6, the Board of Directors of DI (i) shall recommend
that the stockholders of DI and the stockholder's of DI vote to approve this
Agreement and the Merger; (ii) shall use its reasonable efforts to solicit from
stockholders of DI proxies or consents in favor
24
of such adoption; and (iii) shall take all other action reasonably necessary to
secure a vote of its stockholders in favor of such adoption.
4.3 REGISTRATION STATEMENT AND PROXY STATEMENT. Promptly after the date
of this Agreement, DI will prepare and file a registration statement (the
"Registration Statement") on Form S-4 with the Commission under the Securities
Act with respect to the offering, sale and delivery of the shares of DI Common
Stock to be issued pursuant to the Merger and the mergers described in paragraph
6.1(i) and a proxy statement and related proxy materials (the "Proxy Statement")
with respect to the meeting of stockholders of DI referred to in Section 4.2;
and will use their best efforts to cause such Registration Statement to become
effective as soon as practicable after filing. DI agrees that the Registration
Statement and the Proxy Statement (except with respect to information concerning
LRAC or RTO furnished by or on behalf of them specifically for use therein, for
which information they shall be responsible) will comply as to form in all
material respects with the requirements of the Securities Act and the Exchange
Act and the respective rules and regulations adopted thereunder, and will not
contain any untrue statement of any material fact or omit to state any material
fact required to be stated therein or necessary to make the statements made
therein not misleading. DI will advise LRAC and RTO in writing if prior to the
Effective Time it shall obtain knowledge of any fact that would, in its opinion,
make it necessary to amend or supplement the Registration Statement or the Proxy
Statement in order to make the statements therein not misleading or to comply
with applicable law. The date on which the Proxy Statement is mailed to
stockholders of DI is hereinafter referred to as the "Mailing Date."
4.4 RESERVATION OF DI STOCK. Subject to the increase in the number of
authorized shares of DI Common Stock to be effected by the merger described in
paragraph 6.1(h), DI shall reserve for issuance, out of its authorized but
unissued capital stock, such number of shares of DI Common Stock as may be
issuable upon consummation of the Merger.
4.5 AMERICAN STOCK EXCHANGE LISTING. DI shall use all reasonable
efforts to cause the shares of DI Common Stock to be issued in the Merger to be
approved for listing on the American Stock Exchange, subject to official notice
of issuance, prior to the Closing Date.
4.6 INQUIRIES AND NEGOTIATIONS. DI, its affiliates and their respective
officers, directors, employees, representatives and agents shall immediately
cease any existing discussions or negotiations, if any, with any parties
conducted heretofore with respect to any acquisition of all or any material
portion of the assets of, or any equity interest in, DI or any of the DI
Subsidiaries or any business combination with DI or any of the DI Subsidiaries,
except for those identified in Section 4.6 of the DI Disclosure Letter (the
"Current Discussions"). Except with respect to the Current Discussions, DI may,
directly or indirectly, furnish information and access only in response to
unsolicited requests therefor, to any corporation, partnership, person or other
entity or group pursuant to confidentiality agreements, and may participate in
discussions and negotiate with such entity or group concerning any merger, sale
of assets, sale of shares of capital stock or similar transaction involving DI,
or any DI Subsidiary or division of DI, if such entity or group has submitted a
written proposal to the Board of Directors of DI relating to any such
transaction and the Board of Directors of DI by a majority vote determines in
its good faith judgment, based as to legal matters on the written opinion of
legal counsel, that failing to take such action would
25
constitute a breach of the Board of Directors' fiduciary duty. The Board of
Directors of DI shall provide a copy of any such written proposal and any such
opinion to LRAC and RTO immediately after receipt thereof and thereafter keep
LRAC and RTO promptly advised of any development with respect thereto. Except as
set forth above, neither DI or any of its affiliates, nor any of its or their
respective officers, directors, employees, representatives or agents, shall,
directly or indirectly, encourage, solicit, participate in or initiate
discussions or negotiations with, or provide any information to, any
corporation, partnership, person or other entity or group (other than LRAC and
RTO, any affiliate or associate of them or any designees of them or as
contemplated by this Agreement) concerning any merger, sale of assets, sale of
shares of capital stock or similar transaction involving DI or any subsidiary or
division of DI (a "DI Acquisition Transaction"); provided, however, that nothing
herein shall prevent the Board of Directors of DI from taking, and disclosing to
DI's shareholders a position contemplated by Rules 14d-9 and 14e- 2 promulgated
under the Exchange Act with regard to any tender offer; provided, further, that
the Board of Directors of DI shall not recommend that the shareholders of DI
tender their DI Shares in connection with any such tender offer unless the Board
of Directors of DI by a majority vote determines in its good faith judgment,
based as to legal matters on the written opinion of legal counsel, that failing
to take such action would constitute a breach of such Board's fiduciary duty.
4.7 FINANCIAL STATEMENTS OF DI. As soon as practicable but in any event
within 30 days after the end of each calendar month commencing with April 1996
through the Effective Time or earlier termination of this Agreement in
accordance with Section 7.1, DI will deliver to LRAC and RTO unaudited
consolidated and consolidating balance sheets of DI and the DI Subsidiaries as
at the end of such calendar month, together with unaudited summaries of
consolidated earnings of DI and the DI Subsidiaries for such calendar month. As
soon as practicable but in any event within 45 days after the end of each fiscal
quarter of DI, commencing with March 31, 1996, through the Effective Time or
earlier termination of this Agreement in accordance with Section 7.1, DI will
deliver to LRAC and RTO unaudited consolidated and consolidating balance sheets
of DI and the DI Subsidiaries as at the end of such fiscal quarter and as at the
end of the comparative fiscal quarter of the preceding year, together with the
related unaudited statements of consolidated income and cash flows for the
fiscal quarters then ended. All such financial statements of DI shall present
fairly, in all material respects, the financial position, results of operations
and cash flows of DI and the DI Subsidiaries as at or for the periods indicated
(and, in the case of all such financial statements which are interim financial
statements, shall contain all adjustments necessary so to present fairly) and
shall be prepared in accordance with generally accepted accounting principles
(other than to omit certain footnotes which might be required thereby and
subject, in the case of interim financial statements, to normal year-end
adjustments) consistent with past practice, except as otherwise indicated in
such statements. All such financial statements of DI shall be certified, on
behalf of DI, by the President and the chief financial officer of DI.
4.8 ACCESS TO INFORMATION. Between the date hereof and the Effective
Time, DI will give LRAC and RTO and their authorized representatives reasonable
access to all employees, offices and other facilities and to all books and
records of DI and the DI Subsidiaries, will permit LRAC and RTO to make such
inspections as they may reasonably require and will cause DI's officers and
those of the DI Subsidiaries to furnish LRAC and RTO with such financial and
26
operating data and other information with respect to the business and properties
of DI and the DI Subsidiaries as LRAC or RTO may from time to time reasonably
request.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 ACCOUNTANTS' LETTERS.
(a) LRAC and RTO shall use their reasonable efforts to cause
the firm of Gross & Kimball, Certified Public Accountants, in the case
of LRAC, and Lee Arbogast, CPA, in the case of RTO, to deliver a letter
dated as of the date of the Proxy Statement, and addressed to
themselves and DI, in form and substance reasonably satisfactory to DI
and customary in scope and substance for agreed upon procedures letters
delivered by independent public accountants in connection with
registration statements and proxy statements similar to the
Registration Statement and Proxy Statement.
(b) DI shall use its reasonable efforts to cause Deloitte &
Touche LLP to deliver a letter dated as of the date of the Proxy
Statement, and addressed to itself and LRAC and RTO in form and
substance reasonably satisfactory to LRAC and RTO and customary in
scope and substance for agreed upon procedures letters delivered by
independent public accountants in connection with registration
statements and proxy statements similar to the Registration Statement
and Proxy Statement.
5.2 FILINGS; CONSENTS; REASONABLE EFFORTS. Subject to the terms and
conditions of this Agreement, LRAC, RTO and DI shall (i) make all necessary
filings with respect to the Merger and this Agreement under the HSR Act, the
Securities Act, the Exchange Act and applicable blue sky or similar securities
laws and shall use all reasonable efforts to obtain required approvals and
clearances with respect thereto; (ii) obtain all consents, waivers, approvals,
authorizations and orders required in connection with the authorization,
execution and delivery of this Agreement and the consummation of the Merger; and
(iii) take, or cause to be taken, all appropriate action, and do, or cause to be
done, all things necessary, proper or advisable to consummate and make effective
as promptly as practicable the transactions contemplated by this Agreement.
5.3 NOTIFICATION OF CERTAIN MATTERS. LRAC and RTO shall give prompt
notice to DI, and DI shall give prompt notice to LRAC and RTO, orally and in
writing, of (i) the occurrence, or failure to occur, of any event which
occurrence or failure would be likely to cause any representation or warranty
contained in this Agreement to be untrue or inaccurate at any time from the date
hereof to the Effective Time, and (ii) any material failure of LRAC, RTO or DI,
as the case may be, or any officer, director, employee or agent thereof, to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by it hereunder.
5.4 AGREEMENT TO DEFEND. If any claim, action, suit, investigation or
other proceeding by any governmental body or other person or other legal or
administrative proceeding is commenced that questions the validity or legality
of the transactions contemplated hereby or
27
seeks damages in connection therewith, the parties hereto agree to cooperate and
use their reasonable efforts to defend against and respond thereto.
5.5 EXPENSES. DI agrees to pay the reasonable legal fees and
disbursements of LRAC and RTO incurred in connection with the organization of
LRAC and the negotiation, preparation and performance of this Agreement and the
agreements and transactions contemplated hereby, up to a maximum of $60,000.
Except as set forth above, whether or not the Merger is consummated, all costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expense, except as
otherwise provided in Section 7.2.
5.6 DI'S BOARD OF DIRECTORS. DI's Board of Directors will recommend to
the shareholders of DI that the individuals set forth on Exhibit "A" be elected
at the meeting of the shareholders of DI referred to in Section 4.2 hereof.
5.7 INDEMNIFICATION.
(a) From and after the Effective Time, DI and the Surviving
Corporation shall, to the fullest extent permitted under applicable
law, indemnify, defend and hold harmless Mullen, Oliver and each other
person who is an officer or director of LRAC or RTO against all losses,
claims, damages, costs, expenses, liabilities or judgments or amounts
that are paid in settlement with the approval of the indemnifying party
(which approval shall not be unreasonably withheld) of or in connection
with any claim, action, suit, proceeding or investigation whether
asserted or claimed prior to, or at or after, the Effective Time to the
extent, and only to the extent, such claim arises from any untrue
statement of a material fact in the Registration Statement and Proxy
Statement or any omission to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, except to the extent such claim is subject to
indemnification pursuant to Section 5.7(b) hereof (and DI and the
Surviving Corporation will pay expenses in advance of final disposition
of any such action or proceeding to each indemnified party to the full
extent permitted by law).
(b) Mullen and Oliver shall, to the fullest extent permitted
under applicable law, indemnify, defend and hold harmless DI, the
Surviving Corporation, the DI Subsidiaries, and any officer or director
of the foregoing against all losses, claims, damages costs, expenses,
liabilities or judgments or amounts that are paid in settlement with
the approval of the indemnifying party (which approval shall not be
unreasonably withheld) of or in connection with any claim, action,
suit, proceeding or investigation, whether asserted or claimed prior
to, or at or after, the Effective Time, to the extent, and only to the
extent, such claim arises from (i) any untrue statement of material
fact in the Registration Statement and Proxy Statement or omission to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading which is made or omitted in
reliance on and in conformity with written information provided by
Mullen or Oliver or any of their representatives or affiliates
specifically for use therein or (ii) any breach of any representation
or warranty of Mullen, Oliver, LRAC or RTO that survives the Effective
Time in accordance with Section 7.4 (and Mullen and
28
Oliver will pay expenses in advance of final disposition of any such
action or proceeding to each indemnified party to the full extent
permitted by law). In addition, Oliver shall, to the fullest extent
permitted under applicable law, indemnify, defend and hold harmless DI,
the Surviving Corporation, the DI Subsidiaries, and any officer or
director of the foregoing against all liabilities of RTO arising prior
to the Effective Time to which any of them may become subject by reason
of the Merger.
(c) The defense of any such claim, action, suit, proceeding or
investigation shall be conducted by the indemnifying party. If the
indemnifying party has failed to conduct such defense, the indemnified
parties may retain counsel satisfactory to them and the indemnifying
party shall pay all reasonable fees and expenses of such counsel for
the indemnified parties promptly as statements therefor are received.
The party not conducting the defense will use reasonable efforts to
assist in the vigorous defense of any such matter, provided that such
party shall not be liable for any settlement of any claim effected
without its written consent, which consent, however, shall not be
unreasonably withheld. Any indemnified party wishing to claim
indemnification under this Section 5.7, upon learning of any such
claim, action, suit, proceeding or investigation, shall notify the
indemnifying party (but the failure so to notify a party shall not
relieve such party from any liability which it may have under this
Section 5.7 except to the extent such failure materially prejudices
such party). If the indemnifying party is responsible for the
attorneys' fees of the indemnified parties, then the indemnified
parties as a group may retain only one law firm to represent them with
respect to each such matter unless there is, under applicable standards
of professional conduct, a conflict on any significant issue between
the positions of any two or more indemnified parties.
(d) The provisions of this Section 5.7 are intended to be for
the benefit of, and shall be enforceable by, the parties hereto and
each indemnified party, his heirs and his representatives.
5.8 TAX OPINION. DI covenants and agrees that during the two-year
period following the Merger it will not sell or otherwise dispose of assets of
LRAC and RTO vested in the Surviving Corporation, other than in the ordinary
course of business, having a fair market value in excess of 10% of the fair
market value of the net assets or 30% of the fair market value of the gross
assets of LRAC and RTO as of the Effective Time, without first obtaining an
opinion of counsel that such sale or disposition will not affect the
qualification of the Merger as a reorganization within the meaning of Section
368(a) of the Code.
5.9 TAX RETURNS. Mullen and Oliver agree to cause Tax Returns to be
filed for LRAC and RTO for any taxable periods ending on or as of the Closing,
including specifically but not limited to the federal income tax returns for the
foregoing which are required with respect to the short taxable years ending on
the Closing.
5.10 OTHER AGREEMENTS. Mullen and Oliver agree to execute and deliver
at the Closing a Non-Competition Agreement in the form of Exhibit F hereto (the
"Non-Competition Agreement") and to cause U.S. Rig and Equipment, Inc. ("USRE")
and Mike Mullen Energy
29
Equipment Resource, Inc. ("MME") to execute and deliver the Non-Competition
Agreement at the Closing.
5.11 INTERIM FINANCING. DI shall be permitted to borrow from Norex
Drilling, Ltd. ("Norex") prior to the Closing up to Three Million Dollars
($3,000,000), with such loan (i) bearing interest at the rate of twelve percent
(12%) per annum, (ii) being secured by a pledge of the receivables of DI and the
DI Subsidiaries (the "Norex Lien"), (iii) maturing on the Closing Date, and (iv)
being otherwise made pursuant to terms and conditions deemed appropriate by DI.
5.12 STORAGE OF RIGS. Oliver agrees that, after the Closing Date, the
Rigs that are currently stored at locations owned, directly or indirectly, by
Oliver may be stored by DI free of charge at their present location.
ARTICLE VI
CONDITIONS
6.1 CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
(a) This Agreement and the Merger shall have been approved and
adopted by the requisite vote of the stockholders of DI, as may be
required by law, by the rules of the American Stock Exchange and by any
applicable provisions of their charters or bylaws.
(b) Any waiting period (and any extension thereof) applicable
to the consummation of the Merger under the HSR Act shall have expired
or been terminated.
(c) No order shall have been entered and remain in effect in
any action or proceeding before any foreign, federal or state court or
governmental agency or other foreign, federal or state regulatory or
administrative agency or commission that would prevent or make illegal
the consummation of the Merger.
(d) The Registration Statement shall be effective on the
Closing Date, and all post-effective amendments filed shall have been
declared effective or shall have been withdrawn; and no stop-order
suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the
knowledge of the parties, threatened by the Commission.
(e) There shall have been obtained any and all material
permits, approvals and consents of securities or blue sky commissions
of any jurisdiction, and of any other governmental body or agency, that
reasonably may be deemed necessary so that the consummation of the
Merger and the transactions contemplated thereby will be in compliance
with applicable laws, the failure to comply with which would have a
material adverse effect on the business, financial condition or results
of operations of DI, the Surviving Corporation and their subsidiaries,
taken as a whole after consummation of the Merger.
30
(f) The shares of DI Common Stock issuable upon consummation
of the Merger shall have been approved for listing on the American
Stock Exchange, subject to official notice of issuance.
(g) All approvals of private persons or corporations, (i) the
granting of which is necessary for the consummation of the Merger or
the transactions contemplated in connection therewith and (ii) the
non-receipt of which in the aggregate would have a material adverse
effect on the business, financial condition or results of operations of
the Surviving Corporation and its subsidiaries, taken as a whole after
the consummation of the Merger, shall have been obtained.
(h) The mergers provided for in the Agreement and Plan of
Merger of even date herewith by and among Somerset, Somerset Investment
Corp. and DI shall have become effective in accordance with and as
provided in that Agreement.
(i) The subscription of Norex for 4,000 shares of DI Series B
Preferred Stock, and the related DI Series B Warrants, shall have been
canceled and the subscription price of $4 million shall have been
repaid with the proceeds of a Credit Agreement in substantially the
form of Exhibit B hereto between DI and Norex, and such Credit
Agreement shall be in full force and effect.
(j) The Cash Option shall be in compliance in all material
respects with, or DI shall have obtained appropriate exemptions with
respect to the Cash Option from, all federal and state laws, including,
without limitation, Section 14 of the Exchange Act and Rules 10b-6 and
10b-13 promulgated under the Exchange Act.
(k) The Registration Rights Agreement of even date herewith
among DI, Oliver and certain other principal shareholders of DI shall
be in full force and effect.
6.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF DI. The obligation of DI to
effect the Merger is, at the option of DI, also subject to the fulfillment of
the following conditions:
(a) The representations and warranties of LRAC and RTO
contained in Section 2.2 shall be accurate in all material respects as
of the date of this Agreement and (except to the extent such
representations and warranties speak specifically as of an earlier
date) as of the Mailing Date or the Closing Date, in each case as
though such representations and warranties had been made at and as of
that time; all of the terms, covenants and conditions of this Agreement
to be complied with and performed by LRAC and RTO on or before the
Mailing Date or the Closing Date, as the case may be, shall have been
duly complied with and performed in all material respects; and a
certificate to the foregoing effect dated the Mailing Date or the
Closing Date, as the case may be, and signed by the chief executive
officers of LRAC and RTO shall have been delivered to DI.
(b) Since the date of this Agreement, neither LRAC nor RTO
shall have suffered any damage, destruction or loss materially
adversely affecting its property and DI
31
shall have received a certificate signed by the chief executive
officers of LRAC and RTO dated the Closing Date to such effect.
(c) DI shall have received from Novakov, Davidson & Flynn,
counsel to LRAC, an opinion dated the Closing Date, covering the
matters set forth in Exhibit C.
(d) DI shall have received from Short Wiggins Margo & Adler,
counsel to RTO, an opinion dated the Closing Date, covering the matters
set forth in Exhibit D.
(e) The Non-Competition Agreement shall have been executed and
delivered by Mullen, Oliver, USRE and MME.
(f) The RTO Liabilities shall have been satisfied or otherwise
eliminated to the satisfaction of DI.
6.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF LRAC AND RTO. The
obligation of LRAC and RTO to effect the Merger is, at the option of LRAC and
RTO, also subject to the fulfillment of the following conditions:
(a) The representations and warranties of DI contained in
Section 2.1 shall be accurate in all material respects as of the date
of this Agreement and (except to the extent such representations and
warranties speak specifically as of an earlier date) as of the Mailing
Date or the Closing Date, in each case as though such representations
and warranties had been made at and as of that time; all of the terms,
covenants and conditions of this Agreement to be complied with and
performed by DI on or before the Mailing Date or the Closing Date, as
the case may be, shall have been duly complied with and performed in
all material respects; and a certificate to the foregoing effect dated
the Mailing Date or the Closing Date, as the case may be, and signed by
the chief executive officer of DI shall have been delivered to LRAC and
RTO.
(b) Since the date of this Agreement, no material adverse
change in the financial condition, results of operations or business of
DI and the DI Subsidiaries, taken as a whole, shall have occurred, and
DI and the DI Subsidiaries shall not have suffered any damage,
destruction or loss materially adversely affecting the property or
business of DI and the DI Subsidiaries, taken as a whole, and LRAC and
RTO shall have received a certificate signed by the chief executive
officer of DI dated the Closing Date to such effect. (It is
specifically acknowledged that the continuing accrual of operating
losses by DI and the DI Subsidiaries at a rate which does not exceed
the rate at which operating losses were accrued by DI and the DI
Subsidiaries, on a consolidated basis, during the year ending December
31, 1995, shall not be considered a material adverse change.)
(c) DI shall have taken such action as may be necessary to
elect the persons designated pursuant to Section 5.6 to the DI Board of
Directors effective as of the Effective Time.
32
(d) LRAC and RTO shall have received from Cokinos, Bosien &
Young, counsel to DI, an opinion dated the Closing Date covering the
matters set forth in Exhibit E.
(e) DI shall have executed and issued to the stockholders of
LRAC and RTO warrants in the form of Exhibit G hereto to purchase up to
an aggregate of 1,720,000 shares of DI Common Stock. The warrants shall
be issued in the same proportion that shares of DI Common Stock are
issued pursuant to the Merger.
(f) Norex shall have released the Norex Lien.
(g) The Shareholders Agreement of even date herewith among
Somerset and certain of the principal shareholders of LRAC, RTO and DI
shall have been executed and delivered by Somerset, Norex Drilling and
Pronor (as defined therein).
ARTICLE VII
MISCELLANEOUS
7.1 TERMINATION. This Agreement may be terminated and the Merger and
the other transactions contemplated herein may be abandoned at any time prior to
the Effective Time, whether prior to or after approval by the stockholders of
DI:
(a) by mutual consent of DI and LRAC and RTO;
(b) by either DI or LRAC and RTO if (i) the Merger has not
been effected on or before October 31, 1996, (ii) a final, unappealable
order of a judicial or administrative authority of competent
jurisdiction to restrain, enjoin or otherwise prevent a consummation of
this Agreement or the transactions contemplated in connection herewith
shall have been entered, or (iii) the required approval of the
stockholders of DI provided for in Section 4.2 is not obtained;
(c) by DI if (i) since the date of this Agreement there has
been a material adverse change in the financial condition of LRAC and
RTO or (ii) there has been a material breach of any representation or
warranty or covenant set forth in this Agreement by LRAC or RTO which
breach has not been cured within twenty business days following receipt
by LRAC and RTO of notice of such breach; or
(d) by LRAC and RTO if (i) since the date of this Agreement
there has been a material adverse change in the results of operations,
financial condition or business of DI and the DI Subsidiaries, taken as
a whole, or (ii) there has been a material breach of any representation
or warranty or covenant set forth in this Agreement by DI which breach
has not been cured within twenty business days following receipt by DI
of notice of such breach.
33
7.2 EFFECT OF TERMINATION.
(a) In the event of any termination of this Agreement pursuant
to Section 7.1, (i) the provisions Section 5.5 shall survive any such
termination, and (ii) such termination shall not relieve any party from
liability for any breach of this Agreement.
(b) In the event of any termination of this Agreement pursuant
to Section 7.1(b)(iii) or Section 7.1(d)(ii), LRAC and RTO would suffer
direct and substantial damages, which damages cannot be determined with
reasonable certainty. To compensate LRAC and RTO, DI agrees to pay to
them, as their sole and exclusive remedy, an amount equal to all of the
expenses incurred by LRAC and RTO in connection with this Agreement,
the negotiations leading to its execution, their examination and
investigation of DI, the preparation and negotiation of the Agreement
and related agreements, and in all other ways related to the Merger,
including, but not limited to, all fees and expenses incurred by LRAC
and RTO to investment bankers, accountants, attorneys and other agents,
plus the sum of $500,000 in the case of a termination pursuant to
Section 7.1(d)(ii) or $250,000 in the case of a termination pursuant to
Section 7.1(b)(iii) as liquidated damages immediately upon termination.
It is specifically agreed that such amount represents liquidated
damages and not a penalty.
(c) If the Merger is not consummated for any reason other than
as a result of a material breach by LRAC or RTO of any of their
representations, covenants or agreements contained in this Agreement,
and if, prior to December 31, 1996, DI, or their stockholders, publicly
announce, enter into a letter of intent relating to, enter into a
definitive agreement providing for, or consummate, a DI Acquisition
Transaction, DI agrees to pay to LRAC and RTO an amount equal to
thirty-three and one-third percent (33.3%) of the difference between
the consideration to be paid in the DI Acquisition Transaction
(including any and all distributions from DI to its stockholders from
the date hereof through the later of such announcement, letter of
intent, agreement or consummation) and $75 million. If such DI
Acquisition Transaction involves less than all of the outstanding
securities or assets of DI, the consideration to be paid in such DI
Acquisition Transaction shall be deemed to be the amount that would
have been attributable to all of such outstanding securities or assets,
as the case may be, if all of the same had been sold for a total
consideration proportionate to that paid for the portion thereof
actually sold (or with respect to which an agreement was reached or
letter executed, as the case may be).
(d) Any amounts payable to LRAC and RTO pursuant to this
Section shall be allocated among them as follows: LRAC - 71.273% and
RTO - 28.727%.
7.3 WAIVER AND AMENDMENT. Any provision of this Agreement may be waived
at any time by the party that is, or whose stockholders are, entitled to the
benefits thereof. This Agreement may not be amended or supplemented at any time,
except by an instrument in writing signed on behalf of each party hereto,
provided that after this Agreement has been approved and adopted by the
stockholders of DI, this Agreement may be amended only as may be permitted by
applicable provisions of the DGCL and the OGCA. The waiver by any party hereto
of any
34
condition or of a breach of another provision of this Agreement shall not
operate or be construed as a waiver of any other condition or subsequent breach.
The waiver by any party hereto of any of the conditions precedent to its
obligations under this Agreement shall not preclude it from seeking redress for
breach of this Agreement other than with respect to the condition so waived.
7.4 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. None of the
representations, warranties, covenants or agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Effective
Time, except for the terms of Article I, Article VII, Section 2.2 (g), Sections
2.2 (e), 5.5, 5.7 and 5.8, the Shareholders Agreement and the Non-Competition
Agreement.
7.5 PUBLIC STATEMENTS. LRAC, RTO and DI agree to consult with each
other prior to issuing any press release or otherwise making any public
statement with respect to the transactions contemplated hereby, and shall not
issue any such press release or make any such public statement prior to such
consultation, except as may be required by law or applicable stock exchange
policy.
7.6 REORGANIZATION STATUS. The parties hereto acknowledge that the
closing of the transactions contemplated hereunder is not contingent upon the
Merger qualifying as a reorganization within the meaning of Section 368(a) of
the Code.
7.7 NO OTHER REPRESENTATIONS OR WARRANTIES. Except as expressly set
forth in Article II, none of the parties to this Agreement have made any
representation or warranty whatsoever to any of the other parties to this
Agreement, and each such party hereby disclaims all liability and responsibility
for any other representation, warranty, statement, or information made or
communicated (orally or in writing) to the other party by any person, including
without limitation their representatives, officers or directors. Mullen, Oliver,
LRAC and RTO acknowledge that neither DI nor any of the DI Subsidiaries have
made any representation or warranty whatsoever relating to the tax consequences
of the Merger or the other transactions contemplated herein.
7.8 ASSIGNMENT. This Agreement shall inure to the benefit of and will
be binding upon the parties hereto and their respective legal representatives,
successors and permitted assigns. Except as set forth in this Agreement, this
Agreement shall not be assignable by the parties hereto.
7.9 NOTICES. All notices, requests, demands, claims and other
communications which are required to be or may be given under this Agreement
shall be in writing and shall be deemed to have been duly given if (i) delivered
in person or by courier, (ii) sent by telecopy or facsimile transmission or
(iii) mailed, certified first class mail, postage prepaid, return receipt
requested, to the parties hereto at the following addresses:
35
if to Mullen or LRAC: Land Rig Acquisition Corp.
8411 Preston Road
Suite 730, LB2
Dallas, Texas 75225
Attention: Mike L. Mullen
Telecopier No.: (214) 692-6101
with a copy to: Steven D. Davidson, Esq.
Novakov, Davidson & Flynn
Telecopier No.: (214) 969-7557
if to Oliver or RTO: R.T. Oliver, Inc.
6601 S.W. 29th Street
Oklahoma City, Oklahoma 73179
Attention: Roy T. Oliver, Jr.
Telecopier No.: (405) 745-4557
with a copy to: S. Thomas Adler, Esq.
Short Wiggins Margo & Adler
3100 Oklahoma Tower
210 Park Avenue
Oklahoma City, Oklahoma 73102
Telecopier No.: (405) 235-7025
if to DI or Sub: DI Industries, Inc.
450 Gears Road, Suite 625
Houston, Texas 77067
Attention: President
Telecopier No.: (713) 874-0193
with a copy to: Casey W. Doherty, Esq.
Cokinos, Bosien & Young
1500 Liberty Tower
2919 Allen Parkway
Houston, Texas 77019
Telecopier No.: (713) 535-5533
or such other address as any party shall have furnished to the other by notice
given in accordance with this Section 7.9. Such notices shall be effective, (i)
if delivered in person or by courier, upon actual receipt by the intended
recipient, (ii) if sent by telecopy or facsimile transmission, when the answer
back is received, or (iii) if mailed, upon the earlier of five days after
deposit in the mail and the date of delivery as shown by the return receipt
therefor.
7.10 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the substantive law of the State of Delaware without giving
effect to the principles of conflicts of law thereof. Exclusive venue shall lie
in Harris County, Texas, for any
36
action brought with respect to the interpretation or enforcement of the terms of
this Agreement or otherwise relating to the Merger, or the other transactions
contemplated herein.
7.11 SEVERABILITY. If any term, provision covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the terms, provision, covenants and
restrictions of this Agreement shall continue in full force and effect and shall
in no way be affected, impaired or invalidated.
7.12 COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be an original, but all of which together shall constitute one
and the same agreement.
7.13 HEADINGS. The Section headings herein are for convenience only and
shall not affect the construction hereof.
7.14 ENTIRE AGREEMENT; THIRD PARTY BENEFICIARIES. This Agreement
constitutes the entire agreement and supersede all other prior agreements and
understandings, both oral and written, among the parties or any of them, with
respect to the subject matter hereof and neither this nor any document delivered
in connection with this Agreement confers upon any person not a party hereto any
rights or remedies hereunder except as provided in Section 5.7.
7.15 DISCLOSURE LETTER. The DI Disclosure Letter, executed by DI as of
the date hereof, and delivered to LRAC and RTO on the date hereof, contains all
disclosure required to be made by DI under the various terms and provisions of
this Agreement. Each item of disclosure set forth in the DI Disclosure Letter
specifically refers to the Article and Section of the Agreement to which such
disclosure responds, and shall not be deemed to be disclosed with respect to any
other Article or Section of the Agreement.
7.16 CONSENT TO SPECIFIC PERFORMANCE. The parties hereto agree that it
is impossible to measure the monetary damage that would accrue to a party by
reason of a failure by any other party to perform any of the obligations
hereunder. Therefore, if any party shall institute any action or proceeding to
enforce the provisions hereof, any party against whom such action or proceeding
is brought hereby waives any claim or defense therein that the party seeking
such relief has an adequate remedy at law.
37
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.
DI INDUSTRIES, INC.
By:/s/ IVAR SIEM
Name: Ivar Siem
Title: President and Chief Executive Officer
DI MERGER SUB, INC.
By:/s/ IVAR SIEM
Name: Ivar Siem
Title: President and Chief Executive Officer
R.T. OLIVER, INC.
By:/s/ ROY T. OLIVER, JR.
Name: Roy T. Oliver, Jr.
Title: President
Attest:
By:/s/ MIKE OLIVER
Name: Mike Oliver
Title: Secretary
LAND RIG ACQUISITION CORP.
By:/s/ MIKE L. MULLEN
Name: Mike L. Mullen
Title: President
/s/ MIKE L. MULLEN
Mike L. Mullen
/s/ ROY T. OLIVER, JR.
Roy T. Oliver, Jr.
38
SCHEDULE A
DESCRIPTION OF RIGS
Schedule A to this agreement has been omitted pursuant to Item 601(b)(2) of
Regulation S-K. Registrant hereby agrees to provide a copy of Schedule A to the
Commission upon its request.
39
SCHEDULE B
LIST OF LRAC SHAREHOLDERS
Schedule B to this agreement has been omitted pursuant to Item 601(b)(2) of
Regulation S-K. Registrant hereby agrees to provide a copy of Schedule B to the
Commission upon its request.
40
SCHEDULE C
EXCESS ASSETS
Schedule C to this agreement has been omitted pursuant to Item 601(b)(2) of
Regulation S-K. Registrant hereby agrees to provide a copy of Schedule C to the
Commission upon its request.
41
SCHEDULE D
RTO LIABILITIES
Schedule D to this agreement has been omitted pursuant to Item 601(b)(2) of
Regulation S-K. Registrant hereby agrees to provide a copy of Schedule D to the
Commission upon its request.
42
EXHIBIT A
BOARD DESIGNEES
William R. Ziegler
Ivar Siem
Roy T. Oliver, Jr.
Steven A. Webster
Peter M. Holt
43
EXHIBIT B
FORM OF CREDIT AGREEMENT
TERM LOAN AGREEMENT
TERM LOAN AGREEMENT, dated as of _______, 1996, by and between
DI INDUSTRIES, INC., a Texas corporation (the "Borrower"), and NOREX DRILLING,
LTD., a Bermuda corporation (the "Lender").
WITNESSETH:
WHEREAS, the Lender has previously advanced $4,000,000 (the
"Advance") as an advance payment of the price payable pursuant to its
subscription (the "Subscription") for 4,000 shares of 15% Series B Cumulative
Redeemable Preferred Stock of the Borrower having a face value of $4,000,000
(the "Preferred Stock), which was to have been convertible into shares of the
Common Stock of the Borrower pursuant to certain warrants to be issued in
connection therewith (the "Warrants");
WHEREAS, the Preferred Stock has not been issued to the
Lender;
WHEREAS, it has been proposed that the Borrower and its
affiliates agree to be parties to certain mergers (the "Mergers") with Somerset
Investment Corp., R. T. Oliver, Inc., GCT Investments, Inc. and Land Rig
Acquisition Corp. (the "Merger Parties");
WHEREAS, the Lender is a shareholder of the Borrower and would
therefore benefit from the consummation of the Mergers;
WHEREAS, the Merger parties have required, as a condition to
their agreement to become parties to the Mergers, that (i) the Subscription be
rescinded and (ii) the Lender make a loan to the Borrower pursuant to the terms
set forth herein;
WHEREAS, the Borrower and the Lender have agreed that the
Subscription shall be rescinded pursuant to the terms set forth herein;
WHEREAS, the Lender has required, as a condition to agreeing
to rescind the Subscription, that it receive a payment from the Borrower as a
charge for the use by the Borrower of the Advance prior to the date hereof; and
WHEREAS, the Lender is willing to loan amounts to the Borrower
on the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants herein contained, the parties hereto agree as follows:
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ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the
following meanings:
"Agreement" shall mean this Term Loan Agreement, as the same
may from time to time be amended, modified, supplemented or extended.
"Business Day" shall mean any day on which commercial banks
are not authorized or required to close in the State of Texas.
"Dollars" and "$" shall mean lawful money of the United States
of America.
"Default" shall mean any Event of Default and any event which
with the lapse of time or the giving of notice or both could become an Event of
Default.
"Event of Default" shall mean any event specified as such in
Section 9.01.
"GAAP" shall mean generally accepted accounting principles
consistently applied.
"Lien" shall mean any mortgage, lien, pledge, charge, security
interest or encumbrance of any kind.
"Loan Documents" shall mean the Note, this Agreement and any
other documents required to be delivered pursuant hereto.
"Maturity Date" shall mean the first anniversary of the date
hereof.
"Person" shall mean any person, firm, corporation,
association, trust or other enterprise or any governmental or political
subdivision or agency, department or instrumentality thereof.
"Restricted Payment" shall mean (i) any declaration or payment
by the Borrower of any dividend or other distribution or payment on or in
respect of any share of its capital stock (other than stock dividends or
distributions) and (ii) any payment for the purchase, redemption or retirement
by the Borrower of its capital stock.
ARTICLE II
RESCISSION
Section 2.01. RESCISSION. Effective as of the date hereof, the
Subscription (including the right of the Lender to acquire the Warrants pursuant
to the Subscription) has been and is hereby rescinded, canceled, and terminated.
The Borrower and the Lender confirm and agree that the Preferred Stock has never
been issued.
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Section 2.02. RETURN OF ADVANCE. The Advance shall be returned
to the Lender on the date hereof. The repayment of the Advance pursuant to this
Section shall be funded with a Loan pursuant to the terms of this Agreement.
Section 2.03. TIME VALUE OF MONEY CHARGE. The Borrower shall
pay to the Lender on the date hereof a payment of $___________ as consideration
for the use of the Advance prior to the date hereof. [Payment to be calculated
based on fifteen percent (15%) per annum factor from December 29, 1995 until
payment].
ARTICLE III
TERM LOANS
Section 3.01. INITIAL LOAN. Subject to and upon the terms and
conditions herein set forth, the Lender agrees to make a term loan on the date
hereof in the amount of $4,000,000 (the "Initial Loan") to the Borrower, which
Initial Loan shall be repaid in accordance with the provisions hereof.
Section 3.02. ADDITIONAL LOANS. At the request of the
Borrower, the Lender may make additional term loans in an aggregate amount of
not more than $3,000,000 (each an "Additional Loan," the Initial Loan and each
Additional Loan, a "Loan", and collectively, the "Loans") to the Borrower but
only upon the agreement of the Board of Directors of the Lender, which agreement
the Lender may grant or withhold in its sole discretion. Any Additional Loan
shall be repaid in accordance with the provisions hereof.
Section 3.03. USE OF PROCEEDS OF LOANS. The proceeds of the
Loans shall be used for the repayment of the Advance and for working capital
purposes.
Section 3.04. THE NOTE. The Borrower's obligation to pay the
principal of and interest on the Initial Loan shall be evidenced by a promissory
note substantially in the form of Exhibit A hereto (the "Note"), in the
principal amount of $4,000,000. The Note shall be (i) appropriately completed in
conformity herewith, (ii) bear interest as provided in Article IV; (iii) mature
on the Maturity Date; and (iv) be entitled to the benefits of this Agreement. If
and when any Additional Loan is made, the Borrower shall execute and deliver to
the Lender a new Note in the aggregate principal amount of the Loans after
giving effect to such Additional Loan in substitution for the Note held by the
Lender at the time such Additional Loan is made.
ARTICLE IV
INTEREST
Section 4.01. RATES OF INTEREST. The Borrower hereby promises
to pay interest on the unpaid principal amount of each Loan from the date the
proceeds thereof are made
- 3 -
available to it until the due date thereof (whether at stated maturity, by
acceleration or otherwise) at the rate of 12% per annum.
Section 4.02. INTEREST PAYMENT DATES. Interest on each Loan
shall accrue from and including the date of such Loan to but excluding the date
of any repayment or prepayment thereof and shall be payable on the last Business
Day of each calendar quarter.
Section 4.03. OVERDUE PAYMENT OF PRINCIPAL AND INTEREST.
Overdue principal of, and overdue interest in respect of, each Loan, and other
amounts not paid when due hereunder, shall bear interest, payable on demand, at
a rate of 15% per annum.
Section 4.04. INTEREST LIMITATION. Notwithstanding any other
term of this Agreement or the Note or any other document referred to herein or
therein, the maximum amount of interest which may be charged or collected
hereunder or under any Note by the Lender shall be absolutely limited to, and
shall in no event exceed, the maximum amount of interest which could lawfully be
charged or collected under applicable law, so that the maximum of all amounts
constituting interest under applicable law, however computed, shall never exceed
such lawful maximum, and any term of this Agreement or the Note or any other
document referred to herein or therein which could be construed as providing for
interest in excess of such lawful maximum shall be and hereby is made expressly
subject to and modified by the provisions of this Section 4.04.
ARTICLE V
PAYMENTS
Section 5.01. PAYMENTS ON NON-BUSINESS DAYS. Whenever any
payment to be made hereunder or under the Note shall be stated to be due on a
day which is not a Business Day, the due date thereof shall be extended to the
next succeeding Business Day and, if a payment of principal has been so
extended, interest shall be payable on such principal at the applicable rate
during such extension.
Section 5.02. VOLUNTARY PREPAYMENTS. The Borrower may prepay
any Loan in whole or in part, without premium or penalty, from time to time
subject to the following: (i) the Borrower shall give the Lender prior written
notice, not later than two Business Days before the date of such prepayment, of
the amount of such prepayment, which notice shall be irrevocable, and (ii) each
prepayment shall be in an aggregate principal amount of not less than $500,000
(or the amount then remaining outstanding in respect of the Loans) or an
integral multiple thereof.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
In order to induce the Lender to enter into this Agreement and
to make the Loans, the Borrower represents and warrants to the Lender that:
- 4 -
Section 6.01. ORGANIZATION AND QUALIFICATION; NAMES. The
Borrower is a corporation duly organized and validly existing in good standing
under the laws of the State of Texas.
Section 6.02. CORPORATE POWER AND AUTHORIZATION. The Borrower
has the corporate power and legal right to own its assets, to transact the
business in which it is now engaged, and to execute and deliver, and to perform
its obligations under, the Loan Documents, and it has taken all action necessary
to authorize such execution, delivery and performance. Each Loan Document
constitutes the legal, valid and binding obligation of the Borrower, enforceable
against the Borrower in accordance with respective terms. Except for the consent
of Nordlandsbanken ASA, which has been duly and validly received, no consent of
any person or entity, and no consent, license, approval, authorization of, or
registration of or declaration with, any governmental authority, bureau or
agency is required in connection with the execution, delivery or performance by
the Borrower of the Loan Documents or the borrowings by the Borrower hereunder.
Section 6.03. NO LEGAL BAR. Neither the execution or delivery
by the Borrower of the Loan Documents nor the performance of its obligations
thereunder will (i) violate or contravene any provision of any existing law or
regulation, or of the certificate of incorporation or bylaws of the Borrower,
(ii) violate or contravene any provisions of any order or decree of any court or
governmental authority, bureau or agency, or any mortgage, security agreement,
contract or other agreement or instrument to which the Borrower is a party or
which purports to be binding on it or its properties or (iii) result in the
creation or imposition of any Lien on any of the properties of the Borrower.
Section 6.04. NO MATERIAL LITIGATION. No litigation or
administrative proceeding of or before any court or governmental body or agency
is now pending or, to the knowledge of the Borrower, threatened against the
Borrower or any of its properties, which if adversely determined would have a
material adverse effect on the financial condition, business or properties of
the Borrower.
Section 6.05. NO EVENT OF DEFAULT. No Event of Default has
occurred and is continuing.
ARTICLE VII
CONDITIONS PRECEDENT TO THE LOANS
Section 7.01. CONDITIONS PRECEDENT TO ALL LOANS. The
obligation of the Lender to make any Loan is subject to the satisfaction of each
of the following conditions precedent:
(a) before and after giving effect to such Loan, no
Event of Default shall have occurred and be continuing; and
(b) before and after giving effect to such Loan, the
representations and warranties in Article V shall be true and
correct as though made on the date of
- 5 -
such Loan, except for such changes as are specifically
permitted or contemplated hereunder.
Section 7.02. CONDITIONS PRECEDENT TO THE INITIAL LOAN. The
obligation of the Lender to make the initial Loan hereunder is subject to the
satisfaction of the following conditions precedent, in addition to the
applicable conditions precedent set forth in Section 7.01:
(a) the Borrower shall have delivered to the Lender
the Note duly executed by the Borrower;
(b) the Borrower shall have delivered to the Lender a
certified copy of resolutions of the Board of Directors of the
Borrower authorizing the execution, delivery and performance
of the Loan Documents; and
(c) the Borrower shall have delivered to the Lender
certificates of the Secretary or Assistant Secretary of the
Borrower dated the date of such borrowing certifying that
attached thereto is a true and complete copy of the
certificate of incorporation and by-laws of the Borrower as in
effect on the date of such certification.
ARTICLE VIII
COVENANTS
The Borrower covenants and agrees that so long as this
Agreement is in effect and the Lender has any commitment to lend hereunder and
until the Loans and the Note, together with interest, and all other obligations
incurred hereunder, are paid in full, it will comply with each of the following
obligations:
Section 8.01. PUNCTUAL PAYMENT. The Borrower shall duly and
punctually pay the principal of and interest on the Note, and any other amount
due under this Agreement.
Section 8.02. PAYMENT OF LIABILITIES. The Borrower shall pay
and discharge in the ordinary course of business all its obligations and
liabilities (including, without limitation, tax liabilities and other
governmental charges), except where the same may be contested in good faith by
appropriate proceedings, and maintain in accordance with GAAP appropriate
accruals for any of the same.
Section 8.03. NOTICE OF DEFAULT; LITIGATION; MATERIAL ADVERSE
CHANGE. The Borrower shall promptly give notice in writing to the Lender of the
occurrence of (a) any Default, (b) any material litigation or proceedings
affecting the Borrower or (c) any material adverse change in the financial
condition, business or properties of the Borrower.
Section 8.04. MAINTENANCE OF CORPORATE EXISTENCE; COMPLIANCE
WITH LAW. The Borrower shall maintain its corporate existence and comply with
all laws, regulations and
- 6 -
agreements applicable to it, its properties or its operations, the
non-compliance with which could materially and adversely affect its financial
condition, business, properties.
Section 8.05. PAYMENT OF TAXES, ETC. The Borrower shall pay
and discharge all taxes, assessments, and governmental charges or levies imposed
upon it which, if unpaid, might become a Lien or charge upon any of its
properties, unless the validity thereof shall be contested in good faith by
appropriate proceedings for which appropriate accruals are maintained in
accordance with GAAP.
Section 8.06. MERGER OR CONSOLIDATION. The Borrower shall not
consolidate with or merge into any other corporation or permit any Person to
consolidate with or merge into it or sell, convey, transfer or lease its
properties and assets substantially as an entirety to any person, unless, in the
case of a merger or consolidation, the Borrower shall be the surviving
corporation of such merger or consolidation.
Section 8.07. RESTRICTED PAYMENTS. The Borrower shall not
make, or set aside any sum for the making of, any Restricted Payment other than
the repayment of the Advance as contemplated hereby.
ARTICLE IX
EVENTS OF DEFAULT
Section 9.01. EVENTS OF DEFAULT. The following shall
constitute Events of Default hereunder:
(a) failure to make within five (5) days after the
date when due any payment of principal of or interest on the
Note or any other payment due hereunder;
(b) any representation or warranty made or given in
any Loan Document shall have been untrue, false or misleading
in any material respect on the date as of which made;
(c) default by the Borrower in the observance or
performance of any other covenant or agreement contained in
any Loan Document (other than as described in clause (a)
above), and the continuance of the same for 30 days after
notice from the Lender;
(d) the entry of a decree or order for relief by a
court having jurisdiction in the premises in respect of the
Borrower in an involuntary case under the federal bankruptcy
laws, as now constituted or hereafter amended, or any other
applicable federal or state insolvency or other similar law,
or appointing a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or similar official) of the Borrower,
or for any substantial part of any of its property, or
ordering the winding-up or
- 7 -
liquidation of any of its affairs, and the continuance of any
such decree or order unstayed and in effect for a period of 60
consecutive days;
(e) the commencement by the Borrower of a voluntary
case under the federal bankruptcy laws, as now constituted or
hereafter amended, or any other applicable federal or state
insolvency or other similar law, or the consent by it to the
appointment of or taking possession by a receiver, liquidator,
assignee, trustee, custodian, sequestrator (or other similar
official) of the Borrower or for any substantial part of any
of its property, or the making by it of any assignment for the
benefit of creditors, or the failure of the Borrower generally
to pay its debts as such debts become due, or the taking of
corporate action by the Borrower in furtherance of or which
might reasonably be expected to result in any of the
foregoing; and
(f) the entry of any judgments against the Borrower
aggregating more than $1,000,000 or any attachments or other
levy against the property of the Borrower with respect to
claims aggregating in excess of $1,000,000, if the same remain
unpaid, unappealed, undischarged, unbonded, unstayed or
undismissed, for a period of 30 days.
Section 9.02. REMEDIES. Following the occurrence and during
the continuance of an Event of Default, the Lender may (a) by written notice to
the Borrower at any time declare the Note and all amounts payable hereunder to
be immediately due and payable, whereupon all such amounts shall become
immediately due and payable without presentment, demand, protest or other notice
of any kind, all of which are hereby expressly waived to the extent permitted by
law, and (b) take any and all remedies and other actions permitted by law or by
any of the terms and provisions of the Loan Documents or any other documents
delivered to the Lender pursuant hereto.
ARTICLE X
MISCELLANEOUS
Section 10.01. NOTICES. All notices hereunder shall be in
writing and shall be conclusively deemed to have been received and shall be
effective (a) on the day on which delivered if delivered personally, or
transmitted by telex or telegram or telecopier, or (b) five Business Days after
the date on which the same is mailed, and shall be addressed:
if to the Borrower to:
DI Industries, Inc.
450 Gears Road, Suite 625
Houston, Texas 77067
Attention: President
Telecopier No.: (713) 874-0193
- 8 -
if to the Lender to:
Norex Drilling Ltd.
41 Cedar Avenue
Hamilton, HM-12, Bermuda
Telecopier No.: +1 441 283 3231
or at such other address as the party giving such notice shall have been advised
of in writing for such purpose by the party to which the same is directed.
Section 10.2. SURVIVAL OF THIS AGREEMENT. All covenants,
agreements, representations and warranties made herein or in any Loan Document
or in any certificate delivered pursuant hereto shall survive the execution by
the Borrower and delivery to the Lender of the Note and shall continue in full
force and effect until no further borrowing may be made hereunder and until the
the Note has been paid in full.
Section 10.03. EXPENSES OF THE LENDER. The Borrower will pay
all reasonable out-of-pocket expenses (including but not limited to reasonable
fees and disbursements of its counsel) incurred by the Lender in connection with
any legal action instituted or other steps taken by the Lender to enforce or
protect any rights of the Lender in connection with the Loan Documents or any
other documents delivered to the Lender pursuant thereto.
Section 10.04. AMENDMENT AND WAIVER. This Agreement may not be
changed or terminated orally. No amendment or waiver of any provision of any
Loan Document or other documents delivered to the Lender pursuant hereto, nor
any consent to any departure by the Borrower therefrom shall in any event be
effective unless the same shall be in writing and signed by the Lender, and then
such waiver or consent shall be effective only in the specific instance and for
the specific purpose for which it was given. Neither any failure nor any delay
on the part of the Lender in exercising any right, power or privilege hereunder
or under any Loan Document or other documents delivered to the Lender pursuant
hereto shall operate as a waiver thereof, nor shall a single or partial exercise
thereof preclude any other or further exercise or the exercise of any other
right, power or privilege. No notice to or demand on the Borrower in any case
shall entitle the Borrower to any other or further notice or demand in the same,
similar or other circumstances.
Section 10.05. APPLICABLE LAW. This Agreement and the rights
and obligations of the parties hereunder shall be governed by and construed in
accordance with the substantive law of the State of Texas.
Section 10.06 ASSIGNMENT. With the consent of the Borrower,
which shall not be unreasonably withheld or delayed, the Lender may, in
connection with a transfer of the Note, assign its rights under this Agreement
to the transferee of the Note.
- 9 -
IN WITNESS WHEREOF, the undersigned have caused this Agreement
to be executed, by their respective officers thereunto duly authorized, as of
the date first above written.
DI INDUSTRIES, INC.
By
Name:
Title:
NOREX DRILLING, LTD.
By
Name:
Title:
- 10 -
The Form of Credit Agreement referenced hereto as Exhibit B does not differ in
any material respect from the Form of Credit Agreement filed as Exhibit 10.18 to
this Registration Statement. As such, the Form of Credit Agreement has not been
included as an exhibit to this agreement.
44
EXHIBIT C
FORM OF LEGAL OPINION OF NOVAKOV, DAVIDSON & FLYNN
D I Industries, Inc.,
and
DI Merger Sub, Inc.
450 Gears Road
Suite 625
Houston, Texas 77067
Somerset Investment Corp.,
Somerset Capital Partners
and
Somerset and Drilling Associates, L.L.C.
69 Delaware Avenue
Buffalo, New York 14202
Roy T. Oliver, Jr.
and
R.T. Oliver, Inc.
6601 S.W. 29th Street
Oklahoma City, Oklahoma 73179
Gentlemen:
We have acted as counsel to Mike L. Mullen, an individual
("Mullen"), Land Rig Acquisition Corp., a Delaware corporation ("LRAC"), Mike
Mullen Energy Equipment Resource, Inc., a Texas corporation ("MMEER"), and GCT
Investments, Inc., a Texas corporation ("GCT"), in connection with (i) the
Agreement and Plan of Merger (the "Merger Agreement") dated as of May 7, 1996,
among DI Industries, Inc., a Texas corporation ("DI"), DI Merger Sub Inc., a
Delaware corporation and a wholly owned subsidiary of DI ("Sub"), Mullen, Roy T.
Oliver, Jr., an individual ("Oliver"), LRAC and Roy T. Oliver, Inc., an Oklahoma
corporation ("RTO"), and the related merger of Sub and RTO with and into LRAC
(the "Merger"), (ii) the Non-Competition Agreement dated as of the date hereof
among DI, Mullen, Oliver, U.S. Rig and Equipment, Inc., an Oklahoma corporation
("USR&E"), and MMEER (the "Non-Competition Agreement"), and (iii) the
Registration Rights Agreement dated May 7, 1996, among DI, Somerset Drilling
Associates, L.L.C., Norex Drilling, Ltd., Oliver, USR&E, MMEER, and GCT (the
"Registration Rights Agreement"). This opinion is being delivered pursuant to
Section 6.2(c) of the Merger Agreement. Capitalized terms used but not defined
herein are used with the same meanings as set forth in the Merger Agreement.
45
In connection with the offer, sale and delivery of the shares
of DI Common Stock to be issued to the shareholders of LRAC and RTO pursuant to
the Merger, DI has filed with the Securities and Exchange Commission (the
"Commission"), under the Securities Act of 1933, as amended (the "Act"), a
Registration Statement on Form S-4 (File No. _____) (the "Registration
Statement"), including a Proxy Statement/Prospectus of DI (as amended at the
time the Registration Statement became effective, the "Registration Statement"
and the "Proxy Statement/Prospectus," respectively).
Before rendering the opinions expressed below, we examined the
Registration Statement, the Proxy Statement/Prospectus, the Merger Agreement,
the Non-Competition Agreement, the Registration Rights Agreement and originals
or copies of such corporate records of MMEER, GCT and LRAC, and such agreements
and other documents and instruments as we deemed necessary for the purposes of
rendering the opinions set forth below. As to matters of fact relevant to the
opinions expressed below and as to factual matters arising in connection with
our examination of the corporate documents, records and instruments of MMEER,
GCT and LRAC, and other documents or writings, we have relied, to the extent we
deemed appropriate, upon the representations and warranties made by LRAC in the
Merger Agreement, and upon certificates and other communications of public
officials and corporate officers of MMEER, GCT and LRAC without further
investigation as to the facts set forth therein. We have assumed the genuineness
of all signatures, the legal capacity of natural persons, the authenticity of
all documents submitted to us as originals, the conformity to original documents
of all documents submitted to us as certified, conformed or photostatic copies
and the truthfulness of all statements of facts contained therein, and the due
authorization, execution and delivery by each of the parties other than Mullen,
LRAC, MMEER and GCT of all documents to which they are parties that were
examined by us (including, but not limited to, the Merger Agreement, the
Non-Competition Agreement and the Registration Rights Agreement). In addition,
we made, except to the extent hereinafter expressly stated, such other
investigations as we deemed necessary or appropriate for the purposes of
rendering the opinions expressed below, including, without limitation,
commissioning and reviewing a search of the public records of those states and
localities in which any of the Rigs or LRAC is located with respect to liens or
encumbrances of record.
Based on the foregoing, and subject to the limitations set
forth below, we are of the opinion that:
(i) LRAC is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware. Each of GCT and
MMEER is a corporation duly incorporated, validly existing and in good standing
under the laws of the State of Texas. Each of MMEER, GCT and LRAC has all
requisite corporate power and authority to carry on its business as now being
conducted;
(ii) The certificate of merger prepared for filing with the
Secretary of State of Delaware in connection with the Merger complies in all
material respects with the requirements of the Delaware General Corporation Law
("DGCL") and upon filing of such certificate with the Secretary of State of
Delaware and compliance with the provisions of the Oklahoma General Corporation
Act ("OGCA") regarding mergers of Oklahoma corporations with non-Oklahoma
46
corporations, the Merger will become effective in accordance with the terms of
the Merger Agreement and the applicable provisions of the DGCL and the OGCA;
(iii) The affirmative vote of the holders of a majority of the
shares of Common Stock of LRAC outstanding on the record date for the approval
of the stockholders of LRAC obtained in accordance with Section 3.3 of the
Merger Agreement is the only vote of the holders of any class or series of the
capital stock of LRAC necessary to approve the Merger Agreement and the Merger,
and such approval has been unanimously obtained;
(iv) LRAC has the requisite corporate power to merge with Sub
and RTO as contemplated by the Merger Agreement;
(v) The execution and delivery of the Merger Agreement did
not, and the consummation of the Merger will not, violate any provisions of
Certificate of Incorporation or Bylaws of LRAC; the execution and delivery of
the Non-Competition Agreement and the Registration Rights Agreement did not, and
the performance of the Non-Competition Agreement and the Registration Rights
Agreement will not, violate any provisions of Certificate of Incorporation or
Bylaws of MMEER; the execution and delivery of the Registration Rights Agreement
did not, and the performance of the Registration Rights Agreement will not,
violate any provisions of Certificate of Incorporation or Bylaws of GCT;
(vi) The Merger Agreement has been duly and validly
authorized, executed and delivered by LRAC and is a valid and binding agreement
of LRAC, enforceable in accordance with its terms, except as such enforceability
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws or court decisions affecting creditors' rights generally and by
other general equitable principles; the Registration Rights Agreement has been
duly and validly authorized, executed and delivered by each of MMEER and GCT and
is a valid and binding agreement of each of MMEER and GCT, enforceable in
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws or
court decisions affecting creditors' rights generally and by other general
equitable principles; and the Non-Competition Agreement has been duly and
validly authorized, executed and delivered by MMEER; and
(vii) To our knowledge, LRAC and RTO collectively have good
and indefeasible title to the Rigs as defined in the Merger Agreement, free and
clear of any liens or encumbrances.
(viii) None of the shareholders of LRAC have any appraisal
rights under the TBCA in connection with the Merger.
With respect to the opinion expressed in paragraph (vi) above,
we express no opinion as to the availability of specific performance, injunctive
relief, reformation or any other equitable remedies with respect to the
enforcement of any provision contained in the Merger Agreement, the Registration
Rights Agreement or the Non-Competition Agreement, and we have further assumed
that the Merger Agreement, the Registration Rights Agreement and the
NonCompetition have been duly executed and delivered by the parties thereto
other than Mullen,
47
LRAC, GCT and MMEER and constitute the legal, valid and binding obligation of
each of such other parties, enforceable in accordance with their terms.
Whenever any opinion expressed herein with respect to the
existence or absence of facts is qualified by the phrase "to our knowledge" such
phrase indicates that, except as otherwise expressed, (i) no information has
come to the attention of any partner or associate of this firm who has devoted
substantive attention to the transactions contemplated by the Merger Agreement
that has given any such person actual knowledge of the existence of such facts,
(ii) we have not undertaken any independent investigation to determine the
existence or absence of such facts and (iii) no inference as to our knowledge of
the existence of such facts should be drawn from the fact of our representation
of Mullen, LRAC, GCT and MMEER or our expression of such opinion.
In rendering the foregoing opinions, we render no opinion as
to any matters governed by any laws other than the laws of the State of Texas,
the applicable provisions of the DGCL and the applicable federal laws of the
United States of America. The opinions and statements expressed herein are
solely for your benefit and may not be relied upon by any other person without
our prior written permission.
Very truly yours,
NOVAKOV, DAVIDSON & FLYNN,
A Professional Corporation
48
EXHIBIT D
FORM OF LEGAL OPINION OF SHORT WIGGINS MARGO & ADLER
D I Industries, Inc.,
and
DI Merger Sub, Inc.
450 Gears Road
Suite 625
Houston, Texas 77067
Somerset Investment Corp.
Somerset Capital Partners
and
Somerset and Drilling Associates, L.L.C.
69 Delaware Avenue
Buffalo, New York 14202
Mike L. Mullen
and
Land Rig Acquisition Corp.
8411 Preston Road
Suite 730, LB2
Dallas, Texas 75225
Gentlemen:
We have acted as counsel to Roy T. Oliver, Jr., an individual
("Oliver"), R.T. Oliver, Inc., an Oklahoma corporation ("RTO"), and U. S. Rig
and Equipment, Inc., an Oklahoma corporation ("USR&E"), in connection with (i)
the Agreement and Plan of Merger (the "Merger Agreement") dated as of May 7,
1996, among DI Industries, Inc., a Texas corporation ("DI"), DI Merger Sub,
Inc., a Delaware corporation and a wholly owned subsidiary of DI ("Sub"), Mike
L. Mullen, an individual ("Mullen"), Oliver, Land Rig Acquisition Corp., a
Delaware corporation ("LRAC"), and RTO, and the related merger of Sub and RTO
with and into LRAC (the "Merger"), (ii) the Non-Competition Agreement dated as
of the date hereof among DI, Mullen, Oliver, USR&E, and Mike Mullen Energy
Equipment Resource, Inc., a Texas corporation ("MMEER") (the "Non-Competition
Agreement"), and (iii) the Registration Rights Agreement dated May 7, 1996,
among DI, Somerset Drilling Associates, L.L.C., Norex Drilling, Ltd., Oliver,
USR&E, MMEER and GCT Investments, Inc. (the "Registration Rights Agreement").
This opinion is being delivered pursuant to Section 6.2(d) of the Merger
Agreement. Capitalized terms used but not defined herein are used with the same
meanings as set forth in the Merger Agreement.
49
In connection with the offer, sale and delivery of the shares
of DI Common Stock to be issued to the shareholders of LRAC and RTO pursuant to
the Merger, DI has filed with the Securities and Exchange Commission (the
"Commission"), under the Securities Act of 1933, as amended (the "Act"), a
Registration Statement on Form S-4 (File No. _____) (the "Registration
Statement"), including a Proxy Statement/Prospectus of DI (as amended at the
time the Registration Statement became effective, the "Registration Statement"
and the "Proxy Statement/Prospectus," respectively).
Before rendering the opinions expressed below, we examined the
Registration Statement, the Proxy Statement/Prospectus, the Merger Agreement,
the Non-Competition Agreement, the Registration Rights Agreement and originals
or copies of such corporate records of RTO and USR&E, and such agreements and
other documents and instruments as we deemed necessary for the purposes of
rendering the opinions set forth below. As to matters of fact relevant to the
opinions expressed below and as to factual matters arising in connection with
our examination of the corporate documents, records and instruments of RTO and
USR&E, and other documents or writings, we have relied, to the extent we deemed
appropriate, upon the representations and warranties made by RTO in the Merger
Agreement, and upon certificates and other communications of public officials
and corporate officers of RTO and USR&E without further investigation as to the
facts set forth therein. We have assumed the genuineness of all signatures, the
legal capacity of natural persons, the authenticity of all documents submitted
to us as originals, the conformity to original documents of all documents
submitted to us as certified, conformed or photostatic copies and the
truthfulness of all statements of facts contained therein, and the due
authorization, execution and delivery by each of the parties other than Oliver,
RTO and USR&E of all documents to which they are parties that were examined by
us (including, but not limited to, the Merger Agreement, the Non-Competition
Agreement and the Registration Rights Agreement). In addition, we made, except
to the extent hereinafter expressly stated, such other investigations as we
deemed necessary or appropriate for the purposes of rendering the opinions
expressed below, including, without limitation, commissioning and reviewing a
search of the public records of those states and localities in which any of the
Rigs or RTO is located with respect to liens or encumbrances of record.
Based on the foregoing, and subject to the limitations set
forth below, we are of the opinion that:
(i) RTO is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Oklahoma. USR&E is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Oklahoma. Each of RTO and USR&E has all requisite corporate
power and authority to carry on its business as now being conducted;
(ii) The certificates of merger prepared for filing with the
Secretary of State of Delaware and the Secretary of State of Oklahoma in
connection with the Merger comply in all material respects with the requirements
of the Delaware General Corporation Law ("DGCL") and the Oklahoma General
Corporation Act ("OGCA"), respectively, and upon filing of such certificates
with the Secretary of State of Delaware and the Secretary of State of Oklahoma,
the
50
Merger will become effective in accordance with the terms of the Merger
Agreement and the applicable provisions of the DGCL and the OGCA;
(iii) The affirmative vote of the holders of a majority of the
shares of Common Stock of RTO outstanding on the record date for the approval of
the stockholders of RTO obtained in accordance with Section 3.3 of the Merger
Agreement is the only vote of the holders of any class or series of the capital
stock of RTO necessary to approve the Merger Agreement and the Merger, and such
approval has been unanimously obtained;
(iv) RTO has the requisite corporate power to merge with Sub
and LRAC as contemplated by the Merger Agreement;
(v) The execution and delivery of the Merger Agreement did
not, and the consummation of the Merger will not, violate any provisions of
Certificate of Incorporation or Bylaws of RTO; the execution and delivery of the
Non-Competition Agreement did not, and the performance of the Non-Competition
will not, violate any provisions of Certificate of Incorporation or Bylaws of
USR&E; the execution and delivery of the Registration Rights Agreement did not,
and the performance of the Registration Rights Agreement will not, violate any
provision of the Certificate of Incorporation or Bylaws of USR&E;
(vi) The Merger Agreement has been duly and validly
authorized, executed and delivered by RTO and is a valid and binding agreement
of RTO, enforceable in accordance with its terms, except as such enforceability
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws or court decisions affecting creditors' rights generally and by
other general equitable principles; the Registration Rights Agreement has been
duly and validly authorized, executed and delivered by USR&E and is a valid and
binding agreement of USR&E, enforceable in accordance with its terms, except as
such enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws or court decisions affecting creditors' rights
generally and by other general equitable principles; and the NonCompetition
Agreement has been duly and validly authorized, executed and delivered by USR&E;
and
(vii) To our knowledge, LRAC and RTO collectively have good
and indefeasible title to the Rigs as defined in the Merger Agreement, free and
clear of any liens or encumbrances.
(viii) None of the shareholders of RTO have any appraisal
rights under the OGCA in connection with the Merger.
With respect to the opinion expressed in paragraph (vi) above,
we express no opinion as to the availability of specific performance, injunctive
relief, reformation or any other equitable remedies with respect to the
enforcement of any provision contained in the Merger Agreement, the Registration
Rights Agreement or the Non-Competition Agreement, and we have further assumed
that the Merger Agreement, the Registration Rights Agreement and the
NonCompetition have been duly executed and delivered by the parties thereto
other than Oliver, RTO and USR&E and constitute the legal, valid and binding
obligation of each of such other parties, enforceable in accordance with their
terms.
51
Whenever any opinion expressed herein with respect to the
existence or absence of facts is qualified by the phrase "to our knowledge" such
phrase indicates that, except as otherwise expressed, (i) no information has
come to the attention of any partner or associate of this firm who has devoted
substantive attention to the transactions contemplated by the Merger Agreement
that has given any such person actual knowledge of the existence of such facts,
(ii) we have not undertaken any independent investigation to determine the
existence or absence of such facts and (iii) no inference as to our knowledge of
the existence of such facts should be drawn from the fact of our representation
of Oliver, RTO and USR&E or our expression of such opinion.
In rendering the foregoing opinions, we render no opinion as
to any matters governed by any laws other than the laws of the State of
Oklahoma, the applicable provisions of the DGCL and the applicable federal laws
of the United States of America. The opinions and statements expressed herein
are solely for your benefit and may not be relied upon by any other person
without our prior written permission.
Very truly yours,
WIGGINS MARGO & ADLER
52
FORM OF LEGAL OPINION OF COKINOS, BOSIEN & YOUNG
Somerset Investment Corp.,
Somerset Capital Partners
and
Somerset and Drilling Associates, L.L.C.
69 Delaware Avenue
Buffalo, New York 14202
Roy T. Oliver, Jr.
and
R.T. Oliver, Inc.
6601 S.W. 29th Street
Oklahoma City, Oklahoma 73179
Mike L. Mullen
and
Land Rig Acquisition Corp.
8411 Preston Road
Suite 730, LB2
Dallas, Texas 75225
Gentlemen:
We have acted as counsel to DI Industries, Inc., a Texas
corporation ("DI"), and DI Merger Sub, Inc., a Delaware corporation and a wholly
owned subsidiary of DI ("Sub"), in connection with (i) the Agreement and Plan of
Merger (the "Somerset Merger Agreement") dated as of May 7, 1996, between DI and
Somerset Investment Corp., a Texas corporation ("Somerset Sub"), and the related
merger of Somerset Sub with and into DI (the "Somerset Merger"), (ii) the
Agreement and Plan of Merger (the "M/O Merger Agreement" and, together with the
Somerset Merger Agreement, the "Merger Agreements") dated as of May 7, 1996,
among DI, Sub, Mike L. Mullen, an individual ("Mullen"), Roy T. Oliver, Jr., an
individual ("Oliver"), R.T. Oliver, Inc., an Oklahoma corporation ("RTO"), and
Land Rig Acquisition Corp., a Delaware corporation ("LRAC"), and the related
mergers of RTO and Sub with and into LRAC (the "M/O Merger" and, together with
the Somerset Merger, the "Mergers"), (iii) the Registration Rights Agreement
dated May 7, 1996, among Somerset Drilling Associates, L.L.C., a Delaware
limited liability company ("Somerset L.L.C."), Norex Drilling, Ltd., Oliver,
U.S. Rig and Equipment, Inc., Mike Mullen Energy Equipment Resource, Inc., GCT
Investments, Inc., and DI (the "Registration Rights Agreement"), and (iv) the
Investment Monitoring Agreement dated May 7, 1996, among DI, Somerset L.L.C. and
Somerset Capital Partners (the "Investment Monitoring Agreement"). This opinion
is being delivered pursuant to Section 6.3(d) of each of
53
the Merger Agreements. Capitalized terms used but not defined herein are used
with the same meanings as set forth in the Merger Agreements.
In connection with the offer, sale and delivery of the shares
of DI Common Stock to be issued to the shareholders of Somerset Sub, RTO and
LRAC pursuant to the Mergers, DI has filed with the Securities and Exchange
Commission (the "Commission"), under the Securities Act of 1933, as amended (the
"Act"), a Registration Statement on Form S-4 (File No. _____) (the "Registration
Statement"), including a Proxy Statement/Prospectus of DI (as amended at the
time the Registration Statement became effective, the "Registration Statement"
and the "Proxy Statement/Prospectus," respectively).
Before rendering the opinions expressed below, we examined the
Registration Statement, the Proxy Statement/Prospectus, the Merger Agreements,
the Registration Rights Agreement, the Investment Monitoring Agreement and
originals or copies of such corporate records of DI, Sub, and such agreements
and other documents and instruments as we deemed necessary for the purposes of
rendering the opinions set forth below. As to matters of fact relevant to the
opinions expressed below and as to factual matters arising in connection with
our examination of the corporate documents, records and instruments of DI and
Sub, and other documents or writings, we have relied, to the extent we deemed
appropriate, upon the representations and warranties made by DI and Sub in the
Merger Agreements, and upon certificates and other communications of public
officials and corporate officers of DI and Sub without further investigation as
to the facts set forth therein. We have assumed the genuineness of all
signatures, the legal capacity of natural persons, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified, conformed or photostatic copies and
the truthfulness of all statements of facts contained therein, and the due
authorization, execution and delivery by the parties other than DI and Sub of
all documents to which they are parties that were examined by us (including, but
not limited to, the Merger Agreements, the Registration Rights Agreement and the
Investment Monitoring Agreement). In addition, we made, except to the extent
hereinafter expressly stated, such other investigations as we deemed necessary
or appropriate for the purposes of rendering the opinions expressed below.
Based on the foregoing, and subject to the limitations set
forth below, we are of the opinion that:
(i) DI is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Texas and has all requisite
corporate power and authority to carry on its business as now being conducted as
described in the Proxy Statement/Prospectus; and Sub is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware and has all requisite corporate power and authority to carry on the
business now being conducted by DI as described in the Proxy
Statement/Prospectus;
(ii) The certificate of merger prepared for filing with the
Secretary of State of Delaware in connection with the M/O Merger complies in all
material respects with the requirements of the Delaware General Corporation Law
("DGCL") and the articles of merger prepared for filing with the Secretary of
State of Texas in connection with the Somerset Merger
54
comply in all material respects with the requirements of the Texas Business
Corporation Act ("TBCA"), and upon filing of such certificate with the Secretary
of State of Delaware, filing of such articles with the Secretary of State of
Texas, compliance with the provisions of the Oklahoma General Corporation Act
("OGCA") regarding mergers of Oklahoma corporations with non-Oklahoma
corporations, and the issuance of a certificate of merger with respect to the
Somerset Merger by the Secretary of State of Texas, the Mergers will become
effective in accordance with the terms of the Merger Agreements and the
applicable provisions of the DGCL, the TBCA and the OGCA;
(iii) The affirmative vote of the holders of two thirds of the
shares of DI Common Stock outstanding on the record date for the approval of the
stockholders of DI obtained in accordance with Section 4.2 of each of the Merger
Agreements is the only vote of the holders of any class or series of the capital
stock of DI necessary to approve the Merger Agreements and the Mergers;
(iv) DI has the requisite corporate power to merge with
Somerset Sub as contemplated by the Somerset Merger Agreement and issue the DI
Common Stock as contemplated by the Merger Agreements, and Sub has the requisite
corporate power to merge with RTO and LRAC as contemplated by the M/O Merger
Agreement;
(v) The execution and delivery of the Merger Agreements, the
Registration Rights Agreement and the Investment Monitoring Agreement did not,
and the consummation of the Mergers and the performance of the Registration
Rights Agreement and the Investment Monitoring Agreement will not, violate any
provisions of the Articles of Incorporation or Bylaws of DI or Sub and, to our
knowledge, will not violate or constitute a breach under, or require the consent
of any party to, any agreement or instrument to which DI or Sub is a party or to
which any of their assets are subject which has not been obtained, including the
consent of Nordlandsbanken AS under the Loan Agreement between Drillers, Inc., a
wholly owned Subsidiary of DI, and Nordlandsbanken AS dated December 12, 1994,
and the consent of Charter National Bank, which consent has been obtained;
(vi) Each of the Merger Agreements, the Registration Rights
Agreement and the Investment Monitoring Agreement has been duly and validly
authorized, executed and delivered by DI, and each of the Merger Agreements, the
Registration Rights Agreement and the Investment Monitoring Agreement is a valid
and binding agreement of DI, enforceable in accordance with its terms, except as
such enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws or court decisions affecting creditors' rights
generally and by other general equitable principles; and the M/O Merger
Agreement has been duly and validly authorized, executed and delivered by Sub,
and the M/O Merger Agreement is a valid and binding agreement of Sub,
enforceable in accordance with its terms, except as such enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium or other similar
laws or court decisions affecting creditors' rights generally and by other
general equitable principles;
(vii) The Registration Statement has become effective under
the Act, and to our knowledge, no stop order suspending the effectiveness of the
Registration Statement has been
55
issued and no proceedings for such purpose have been initiated or are pending or
threatened by the Commission under the Act;
(viii) The shares of DI Common Stock to be delivered in
connection with the Mergers are duly authorized and reserved for issuance and,
when issued in accordance with the terms and conditions of the Merger
Agreements, will be validly issued, fully paid and nonassessable; and
(ix) The subscription of Norex Drilling, Ltd. for 4,000 shares
of DI Series B Preferred Stock has been canceled and the $4 million subscription
price has been repaid with $4 million borrowed from Norex Drilling, Ltd.
pursuant to the Credit Agreement of even date herewith between DI and Norex
Drilling, Ltd.; and all of the DI Series B Warrants have been surrendered and
canceled.
With respect to the opinion expressed in paragraph (vi) above,
we express no opinion as to the availability of specific performance, injunctive
relief, reformation or any other equitable remedies with respect to the
enforcement of any provision contained in any of the Merger Agreements, the
Registration Rights Agreement or the Investment Monitoring Agreement, and we
have further assumed that the Merger Agreements, the Registration Rights
Agreement and the Investment Monitoring Agreement have been duly executed and
delivered by the parties thereto other than DI and Sub and constitute the legal,
valid and binding obligation of each of the parties thereto other than DI and
Sub, enforceable in accordance with their terms.
Whenever any opinion expressed herein with respect to the
existence or absence of facts is qualified by the phrase "to our knowledge" such
phrase indicates that, except as otherwise expressed, (i) no information has
come to the attention of any partner or associate of this firm who has devoted
substantive attention to the transactions contemplated by the Merger Agreement
that has given any such person actual knowledge of the existence of such facts,
(ii) we have not undertaken any independent investigation to determine the
existence or absence of such facts and (iii) no inference as to our knowledge of
the existence of such facts should be drawn from the fact of our representation
of DI and Sub or our expression of such opinion.
In rendering the foregoing opinions, we render no opinion as
to any matters governed by any laws other than the laws of the State of Texas,
the applicable provisions of the DGCL and the applicable federal laws of the
United States of America. The opinions and statements expressed herein are
solely for your benefit and may not be relied upon by any other person without
our prior written permission.
Very truly yours,
COKINOS, BOSIEN & YOUNG
56
EXHIBIT F
FORM OF NON-COMPETITION AGREEMENT
NON-COMPETITION AGREEMENT
AGREEMENT made as of this _______ day of ____________, 1996 (this
"Agreement"), between DI INDUSTRIES, INC., a Texas corporation with its
principal offices at 450 Gears Road, Suite 625, Houston, Texas 77067 ("Buyer"),
ROY T. OLIVER, JR., an individual ("Oliver"), U.S. RIG AND EQUIPMENT, INC., an
Oklahoma corporation, MIKE L. MULLEN, an individual ("Mullen"), and MIKE MULLEN
ENERGY EQUIPMENT RESOURCE, INC., a Texas corporation (Oliver, U.S. Rig and
Equipment, Inc., Mullen, and Mike Mullen Energy Equipment Resources, Inc. are
referred to herein, singly, as a "Seller" and, collectively, as the "Sellers").
WITNESSETH:
WHEREAS, concurrently herewith, Buyer will acquire certain drilling
rigs by means of the merger of R.T. Oliver, Inc. and Land Rig Acquisition Corp.,
two corporations affiliated with Mullen and Oliver, with DI Merger Sub, Inc., a
wholly owned subsidiary of Buyer (the "Merger");
WHEREAS, Sellers will continue to own or control certain other
land-based oil and gas drilling rigs of 1,500 or more horse power, and may
hereafter acquire additional similar equipment (the "Drilling Rigs");
WHEREAS, the parties hereto desire to set forth certain
representations, warranties and covenants made by each to the other as an
inducement to the consummation of the Merger; and
WHEREAS, the execution and delivery of this Agreement is a condition
precedent to the consummation of the Merger;
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties and covenants herein contained, the parties hereto
hereby agree as follows:
1. NON-COMPETITION.
For a period of three (3) years from the date hereof, without the
Buyer's prior written consent, the Sellers will not, directly or indirectly,
through subsidiaries, affiliates or otherwise, sell, lease or otherwise dispose
of or provide services relating to the sale, lease, or disposal of any direct or
indirect interest in any Drilling Rigs (or components constituting a substantial
portion of a Drilling Rig) which the Sellers know, or have reason to know, are
being acquired, directly or indirectly, for use in Venezuela or Colombia. Prior
to selling, leasing, or otherwise disposing of any of the Drilling Rigs, or
participating in any of the foregoing, the Seller shall attempt in good faith
and with exercise of all due diligence to confirm that the purchaser does not
intend to use the Drilling Rig in Venezuela or Colombia.
2. FIRST OFFER.
Subject to Section I hereof, and for a period of three (3) years from
the date hereof, prior to offering any Drilling Rig for sale the Sellers shall
(i) offer the Drilling Rig to the Buyer at a price which the Seller believes
represents the market value of such Drilling Rig and (ii) thereafter give the
Buyer a reasonable opportunity to inspect the Drilling Rig and make an offer to
purchase the same.
<PAGE>
3. RIGHTS AND REMEDIES UPON BREACH.
If a Seller breaches or threatens to commit a breach of any of the
provisions of this Agreement, then the Buyer shall have the right to specific
performance of this Agreement. Buyer shall also be entitled, in the case of any
actual breach of this Agreement, to an accounting from the Sellers, and shall be
entitled to all profits received by Seller in such transaction. These rights are
severally enforceable and in addition to, and not in lieu of, any other rights
and remedies available to the Buyer under law or in equity.
The Sellers acknowledge and agree that the provisions of this Agreement
are reasonable in geographical and temporal scope and in all other respects. If
any court determines that any of the provisions of this Agreement or any part
hereof is invalid or unenforceable, the remainder of the provisions of this
Agreement shall not thereby be affected and shall be given full effect, without
regard to the invalid portions. If any court determines that any of the
provisions of this Agreement or any part hereof are unenforceable because of the
duration or the geographic scope of such provisions, such court shall have the
power to reduce the duration or scope of such provisions, as the case may be,
and in its reduced form such provisions shall then be enforceable.
4. WAIVER OF BREACH.
The waiver by any party hereof of the breach of any provisions hereof,
which waiver must be in writing to be effective, shall not operate or be
construed to operate as a waiver by such party of any subsequent breach by any
other party of any provisions hereof.
5. MISCELLANEOUS.
(a) This Agreement contains the entire agreement between the parties
hereto and supersedes and replaces any and all agreements and understandings
existing prior to the date of this Agreement, whether written or oral, express
or implied, between the parties concerning the subject matter hereof, except
only those agreements and understandings executed in connection with the Merger.
(b) The terms and conditions hereof may be changed only by an agreement
in writing signed by each of the parties hereto.
(c) This Agreement shall be governed by and construed in accordance
with the laws of the State of Texas without regard to principles of conflicts of
law. Exclusive venue for any action or proceeding relating to the interpretation
or enforcement of this Agreement shall lie in Harris County, Texas.
(d) This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns.
(e) Any notices to be delivered by the parties hereunder shall be in
writing and are effective upon the date received.
(f) Common nouns and pronouns shall be deemed to refer to the singular
or plural, as the context may require.
-2-
IN WITNESS WHEREOF, the parties hereby have executed this Agreement as
of the date first above written.
DI INDUSTRIES, INC.
By:
Mike L. Mullen Name:
Title:
MIKE MULLEN ENERGY EQUIPMENT
RESOURCE, INC.
By:
Name: Roy T. Oliver, Jr.
Title:
U.S. RIG AND EQUIPMENT, INC.
By:
Name:
Title:
-3-
57
EXHIBIT G
FORM OF WARRANT
SHADOW WARRANT
THIS SHADOW WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE
OF THIS SHADOW WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION
OR AN EXEMPTION THEREFROM UNDER SUCH ACT.
THIS SHADOW WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE
OF THIS SHADOW WARRANT ARE HELD SUBJECT TO THE PROVISIONS OF A STOCKHOLDERS'
AGREEMENT DATED AS OF MAY 7, 1996, WHICH PROVIDES, AMONG OTHER THINGS, FOR THE
GRANT OF AN IRREVOCABLE PROXY AND THE IMPOSITION OF RESTRICTIONS ON THE TRANSFER
OF SHARES, A COPY OF WHICH STOCKHOLDERS AGREEMENT IS ON FILE AND MAY BE EXAMINED
AT THE PRINCIPAL OFFICE OF THE COMPANY.
DI INDUSTRIES, INC.
SHADOW WARRANT
This certifies that, for $10.00 and other good and valuable
consideration, DI Industries, Inc, a Texas corporation (the "Company"), grants
to [M/O recipient], or permitted registered assigns (the "Warrantholder"), the
right to subscribe for and purchase from the Company ________ validly issued,
fully paid and nonassessable shares (the "A Warrant Shares") of the Company's
Common Stock, par value $0.10 per share (the "Common Stock"), at the purchase
price per share of $1.25 (the "A Exercise Price"), and 1,000,000 validly issued,
fully paid and nonassessable shares (the "B Warrant Shares" and, together with
the A Warrant Shares, the "Warrant Shares") of Common Stock at the purchase
price of $1.00 per share (the "B Exercise Price" and, together with the A
Exercise Price, the "Exercise Price"), exercisable at the times permitted
herein, all subject to the terms, conditions and adjustments set forth in this
Shadow Warrant. This Shadow Warrant is one of the warrants referred to in
paragraph 6.3(e) of the Agreement and Plan of Merger (the "Merger Agreement"),
dated May 7, 1996, among the Company, DI Merger Sub, Inc., Roy T. Oliver, Jr.,
Mike L. Mullen, R.T. Oliver, Inc. ("RTO") and Land Rig Acquisition Corp.
("LRAC") .
- - - --------------------------------------------------------------------------------
Dated: Houston, Texas
, 1996
<PAGE>
THIS IS A SHADOW WARRANT AGREEMENT (the "Shadow Warrant")
dated , 1996, by and between DI INDUSTRIES, INC., a Texas corporation, and [M/O
recipient]
WHEREAS, the capitalized terms used herein have the meaning
given to such terms in Section 9; and
WHEREAS, Warrantholder and the other stockholders of RTO and
LRAC, simultaneously with the acquisition of this Shadow Warrant from the
Company, are acquiring an aggregate of 39,637,378 shares of Common Stock of the
Company [assumes no exercise of Cash Option], which constitute approximately
331/3 % of the shares of Common Stock on a fully diluted basis (excluding the
shares of Common Stock into which the Series A Preferred Stock, defined below,
is convertible and the shares of Common Stock for which the Dillard Option,
defined below, may be exercisable);
WHEREAS, the Company presently has an obligation to issue up
to 720,000 shares of its Common Stock (the "A Exercise Shares") upon conversion
of its Series A Convertible Redeemable Preferred Stock, par value $1.00 per
share (the "Series A Preferred Stock"), and may have an obligation to issue up
to 1,00,000 shares of its Common Stock (the "B Exercise Shares" and, together
with the A Exercise Shares, the "Exercise Shares") upon exercise of an option
granted to Max M. Dillard (the "Dillard Option");
WHEREAS, the parties desire that in the event of (i) the
exercise by the holder of the Series A Preferred Stock of its conversion rights,
resulting in the issuance of the A Exercise Shares, or a portion thereof, the
Warrantholder and the other stockholders of RTO and LRAC, pursuant to similar
warrants, shall have the right to acquire a number of shares of Common Stock
equal, in the aggregate, to the number of A Exercise Shares issued and
outstanding, up to a maximum of 720,000 shares of Common Stock (the "A Warrant
Shares") or (ii) the exercise by the holder of the Dillard Option of his
exercise rights, resulting in the issuance of the B Exercise Shares, or a
portion thereof, the Warrantholder and the other stockholders of RTO and LRAC,
pursuant to similar warrants, shall have the right to acquire a number of shares
of Common Stock equal, in the aggregate, to the number of B Exercise Shares
issued and outstanding, up to a maximum of 1,000,000 shares of Common Stock (the
"B Warrant Shares" and, together with the A Warrant Shares, the "Warrant
Shares");
WHEREAS, all rights to acquire A Warrant Shares shall become
exercisable only upon issuance of the A Exercise Shares (an "A Exercise Event")
and all rights to acquire B Warrant Shares shall become exercisable only upon
issuance of the B Exercise Shares (a "B Exercise Event" and, together with an A
Exercise Event, and "Exercise Event"), to the extent of [
]% thereof (the "Exercise Percentage"), which percentage is equal to the
percentage of Common Stock of the Company issued pursuant to the Merger
Agreement to which the Warrantholder is entitled;
WHEREAS, in the event adjustments are made by their terms in
the number of Exercise Shares, similar and proportionate adjustments shall be
made in the number of Warrant Shares issued upon exercise of this Shadow Warrant
pursuant hereto; and
- 1 -
WHEREAS, the parties desire that these intents and principles
be observed in the event of corporate changes or other events or conditions
which may occur which are not contemplated by this Shadow Warrant;
NOW THEREFORE, in consideration of the premises and covenants
and upon the terms and conditions hereinafter set forth, the parties agree as
follows:
1. Duration and Exercise of Shadow Warrant;
TERMINATION; LIMITATION ON EXERCISE; PAYMENT OF TAXES.
1.1. EXERCISABILITY; AMOUNT OF WARRANT SHARES SUBJECT TO
SHADOW WARRANT. This Shadow Warrant shall be exercisable by the Warrantholder
during the Exercise Period only upon the occurrence of an Exercise Event and
only to the extent of the Exercise Percentage of Exercise Shares issued by the
Company and outstanding as a result of an Exercise Event, i.e., [ ]% of a
Warrant Share for each Exercise Share issued and outstanding, up to a maximum of
_______ A Warrant Shares and _____ B Warrant Shares. The expiration, redemption,
cancellation or other termination of a right by a holder thereof to acquire A
Exercise Shares shall automatically reduce PRO TANTO the amount of A Exercise
Shares and, proportionately, the A Warrant Shares hereunder and the expiration,
redemption, cancellation or other termination of a right by a holder thereof to
acquire B Exercise Shares shall automatically reduce PRO TANTO the amount of B
Exercise Shares and, proportionately, the B Warrant Shares hereunder. The
Exercise Period shall commence on the date hereof and shall terminate upon the
exercise of this Shadow Warrant for the full amount of Warrant Shares provided
hereby as so reduced in accordance herewith; provided, however, that if this
Shadow Warrant shall not have been so exercised in full it shall nevertheless
expire at 5 P.M., local, Houston time on the first anniversary of written notice
to the Warrantholder of the issuance of the maximum amount of Exercise Shares
less any Exercise Shares the rights to which have expired, been redeemed,
canceled or otherwise terminated. On each occasion on which an Exercise Event
occurs, the Company shall give the holder of the Shadow Warrant written notice
thereof setting forth all material information relating to the Exercise Event,
including the number of Exercise Shares being issued and the corresponding
number of Warrant Shares for which the Shadow Warrant is then exercisable and
any adjustments thereto (the "Exercise Event Notice"), within 30 days of the
Company first obtaining notice of such Exercise Event. The Warrantholder shall,
at its option, exercise the Shadow Warrant for the number of Warrant Shares set
forth in the Exercise Notice, on or before the first anniversary of receipt of
the Exercise Event Notice, after which time the Shadow Warrant shall expire as
to the Warrant Shares which were the subject of the Exercise Event Notice. In
the event the Shadow Warrant shall expire with respect to all Warrant Shares for
reasons other than its exercise as provided herein, the Warrantholder agrees to
surrender the Shadow Warrant to the company on demand.
1.2. DURATION AND EXERCISE OF SHADOW WARRANT. This Shadow
Warrant may be exercised by the Shadow Warrantholder by (a) the surrender of
this Shadow Warrant to the Company, with a duly executed exercise form in a form
reasonably acceptable to the Company specifying the number of Warrant Shares to
be purchased, during normal business hours on any Business Day and (b) the
delivery of payment to the Company, for the account of the Company, by cash or
by certified or bank cashier's check, of the Exercise Price for the number of
Warrant
- 2 -
Shares specified in the exercise form in lawful money of the United States of
America. The Company agrees that such Warrant Shares shall be deemed to be
issued to the Warrantholder as the record holder of such Warrant Shares as of
the close of business on the date on which this Shadow Warrant shall have been
surrendered and payment made for the Warrant Shares as aforesaid. A stock
certificate or certificates for the Warrant Shares specified in the exercise
form shall be delivered to the Warrantholder as promptly as practicable
thereafter. The stock certificate or certificates so delivered shall be in such
denominations as may be reasonably specified by the Warrantholder in the
exercise form. If this Shadow Warrant shall have been exercised only in part,
the Company shall, at the time of delivery of the stock certificate or
certificates, redeliver to the Warrantholder the Shadow Warrant containing a
notation reflecting the partial exercise thereof and evidencing the rights to
purchase the remaining Warrant Shares, which Shadow Warrant shall in all other
respects be identical with this Shadow Warrant. No adjustments shall be made on
Warrant Shares issuable on the exercise of this Shadow Warrant for any cash
dividends paid or payable to holders of record of Common Stock prior to the date
as of which the Warrantholder shall be deemed to be the record holder of such
Warrant Shares.
1.3. PAYMENT OF TAXES. The issuance of certificates for
Warrant Shares shall be made without charge to the Warrantholder for any stock
transfer or other issuance tax in respect thereto; PROVIDED, HOWEVER, that the
Warrantholder shall be required to pay any and all taxes which may be payable in
respect of any transfer involved in the issuance and delivery of any certificate
in a name other than that of the then Warrantholder as reflected upon the books
of the Company.
1.4. DIVISIBILITY OF SHADOW WARRANT. This Shadow Warrant is
divisible and may be divided into two or more Shadow Warrants, with such
amendments hereto as may appropriately effect the division thereof. Subject to
the restrictions on transfer referred to in Section 2, the Shadow Warrants may
be transferred of record in whole or in part as the then Warrantholder may
specify without charge to such Warrantholder (other than any applicable transfer
taxes).
2. RESTRICTIONS ON TRANSFER; RESTRICTIVE LEGENDS.
Except as otherwise permitted by this Section 2, each Shadow
Warrant shall (and each Shadow Warrant issued upon direct or indirect transfer
or in substitution for any Shadow Warrant pursuant to Section 1.4 or Section 4
shall) be stamped or otherwise imprinted with a legend in substantially the
following form:
"THIS SHADOW WARRANT AND ANY SHARES ACQUIRED UPON THE
EXERCISE OF THIS SHADOW WARRANT HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM UNDER SUCH ACT."
"THIS SHADOW WARRANT AND ANY SHARES ACQUIRED UPON THE
EXERCISE OF THIS SHADOW WARRANT ARE HELD SUBJECT TO THE
PROVISIONS OF A STOCKHOLDERS' AGREEMENT DATED AS OF
- 3 -
MAY 7, 1996, WHICH PROVIDES, AMONG OTHER THINGS, FOR THE GRANT
OF AN IRREVOCABLE PROXY AND THE IMPOSITION OF RESTRICTIONS ON
THE TRANSFER OF SHARES, A COPY OF WHICH STOCKHOLDERS AGREEMENT
IS ON FILE AND MAY BE EXAMINED AT THE PRINCIPAL OFFICE OF THE
COMPANY."
Except as otherwise permitted by this Section 2, each stock certificate for
Warrant Shares issued upon the exercise of the Shadow Warrant and each stock
certificate issued upon the permitted direct or indirect transfer of any such
Warrant Shares shall be stamped or otherwise imprinted with a legend in
substantially the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND MAY NOT BE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION
OR AN EXEMPTION THEREFROM UNDER SUCH ACT."
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE HELD
SUBJECT TO THE PROVISIONS OF A STOCKHOLDERS' AGREEMENT DATED
AS OF MAY 7, 1996, WHICH PROVIDES, AMONG OTHER THINGS, FOR THE
GRANT OF AN IRREVOCABLE PROXY AND THE IMPOSITION OF
RESTRICTIONS ON THE TRANSFER OF SHARES, A COPY OF WHICH
STOCKHOLDERS AGREEMENT IS ON FILE AND MAY BE EXAMINED AT THE
PRINCIPAL OFFICE OF THE COMPANY."
Notwithstanding the foregoing, the Warrantholder may require
the Company to issue a stock certificate for Warrant Shares without a Securities
Act legend, if either (i) such Warrant Shares have been registered for resale
under the Securities Act or (ii) the Warrantholder has received an opinion of
counsel reasonably satisfactory to the Company that such registration is not
required with respect to such Warrant Shares.
3. RESERVATION AND REGISTRATION OF WARRANT SHARES, ETC.
The company covenants and agrees that all Warrant Shares which
are issued upon the exercise of this Shadow Warrant will, upon issuance, be
validly issued, fully paid and nonassessable and free from all taxes, liens,
security interests, charges and other encumbrances with respect to the issue
thereof, other than taxes in respect of any transfer occurring contemporaneously
with such issue. The company further covenants and agrees that, during the
period within which this Shadow Warrant may be exercised, the Company will at
all times have authorized and reserved, and keep available free from preemptive
rights, a sufficient number of shares of Common Stock to provide for the
exercise of the rights represented by this Shadow Warrant, and will at its
expense, upon each issuance of shares, procure such listing thereof as then may
be required on all stock exchanges on which the Common Stock is then listed. The
Company further covenants and agrees that it will, from time to time, take all
such action as may be required
- 4 -
to assure that the par value per share of the Warrant Shares is at all times
equal to or less than the then effective Exercise Price.
4. EXCHANGE, LOSS OR DESTRUCTION OF SHADOW WARRANT.
Subject to the terms and conditions hereof, upon surrender of
this Shadow Warrant to the Company with a duly executed assignment form and
funds sufficient to pay any transfer tax, the Company shall, without charge,
execute and deliver a new Shadow Warrant of like tenor in the name of the
assignee named in such assignment form and this Shadow Warrant shall promptly be
canceled. Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of this Shadow Warrant and, in the
case of loss, theft or destruction, of such bond or indemnification as the
Company may reasonably require, and, in the case of such mutilation, upon
surrender and cancellation of this Shadow Warrant, the Company will execute and
deliver a new Shadow Warrant of like tenor. The term "Shadow Warrant" as used in
this Agreement shall be deemed to include the Shadow Warrant issued in
substitution or exchange for this Shadow Warrant.
5. OWNERSHIP OF SHADOW WARRANT.
The Company may deem and treat the person in whose name this
Shadow Warrant is registered as the holder and owner hereof (notwithstanding any
notations of ownership or writing hereon made by anyone other than the Company)
for all purposes and shall not be affected by any notice to the contrary, until
presentation of this Shadow Warrant for registration of transfer as provided in
Section 4.
6. CERTAIN ADJUSTMENTS.
6.1. The number of Warrant Shares purchasable upon the
exercise of this Shadow Warrant shall be subject to adjustment as follows:
(a) REORGANIZATION, ETC. If any capital
reorganization of the Company, or any reclassification of the
Common Stock, or any consolidation of the Company with or
merger of the Company with or into any other person or any
sale, lease or other transfer of all or substantially all of
the assets of the Company to any other person, shall be
effected in such a way that the holders of Common Stock shall
be entitled to receive stock, other securities or assets
(whether such stock, other securities or assets are issued or
distributed by the Company or another person) with respect to
or in exchange for Common Stock, then, upon exercise of this
Shadow Warrant the Warrantholder shall have the right to
receive as Warrant Shares the kind and amount of stock, other
securities or assets receivable upon such reorganization,
reclassification, consolidation, merger or sale, lease or
other transfer by a holder of the number of shares of Common
Stock that such Warrantholder would have been entitled to
receive upon exercise of this Shadow Warrant had this Shadow
Warrant been exercised immediately before such reorganization,
reclassification, consolidation, merger or sale, lease or
other
- 5 -
transfer, subject to adjustments that shall be as nearly
equivalent as may be practicable to the adjustments provided
for in this Section 6.
(b) INCREASES OR DECREASES IN EXERCISE SHARES. If at
any time after issuance of this Shadow Warrant, the number of
Exercise Shares shall have been increased or decreased
pursuant to the provisions of the Series A Preferred Stock or
the Dillard Option, then the Warrant Shares shall likewise be
increased or reduced on a proportionate basis so that the
Warrantholder shall be entitled to exercise this Shadow
Warrant for Warrant Shares in an amount equal to the Exercise
Percentage of the number of Exercise Shares, as increased or
decreased at the time of such increase or reduction.
(c) EQUITABLE ADJUSTMENTS. It is the intent of this
Section that the right of the Warrantholder on one hand to
exercise this Shadow Warrant for the appropriate amount of
Warrant Shares and the right of the Company on the other hand
to protect against dilution of the other securityholders of
the Company be preserved to the extent possible so that if an
event or condition occurs as to which the provisions of this
Article are not strictly applicable, or if strictly
applicable, would not fairly protect the right of the
Warrantholder or the right of the Company in accordance with
the essential intent and principles of this Shadow Warrant,
the Board of Directors of the Company in good faith shall be
authorized to make an adjustment in the application of such
provisions, in accordance with such essential intent and
principles so as to protect such rights to the extent
feasible.
(d) FRACTIONAL SHARES. No fractional shares of Common
Stock or scrip shall be issued to any Warrantholder in
connection with the exercise of this Shadow Warrant. Instead
if any fractional shares of Common Stock would otherwise be
issuable to such Warrantholder, the Company will pay to such
Warrantholder a cash adjustment in respect of such fractional
interest in an amount equal to that fractional interest of the
Closing Price per share of Common Stock on the date of such
exercise.
As used in this Section 6.1(d), the term "Closing
Price" shall mean the closing price per share of the Company's
Common Stock on the principal national securities exchange on
which the Common Stock is listed or admitted to trading or, if
not listed or traded on any such exchange, on the National
Market System (the "National Market System") of the National
Association of Securities Dealers Automated Quotations System
("NASDAQ"), or if not listed or traded on any such exchange or
system, the average of the bid and asked price per share on
NASDAQ or, if such quotations are not available, the fair
market value per share of the Company's Common Stock as
reasonably determined by the Board of Directors of the
Company.
(e) EXERCISE PRICE ADJUSTMENT. Whenever the number of
A Warrant Shares purchasable upon the exercise of the Shadow
Warrant is increased, as herein provided, the A Exercise Price
payable for the exercise of this Shadow
- 6 -
Warrant shall be adjusted by multiplying such A Exercise Price
immediately prior to such adjustment by a fraction, of which
the numerator shall be the number of A Warrant Shares
purchasable upon the exercise of the Shadow Warrant
immediately prior to such adjustment, and of which the
denominator shall be the number of Warrant Shares purchasable
immediately thereafter. Whenever the number of B Warrant
Shares purchasable upon the exercise of the Shadow Warrant is
increased, as herein provided, the B Exercise Price payable
for the exercise of this Shadow Warrant shall be adjusted by
multiplying such B Exercise Price immediately prior to such
adjustment by a fraction, of which the numerator shall be the
number of B Warrant Shares purchasable upon the exercise of
the Shadow Warrant immediately prior to such adjustment, and
of which the denominator shall be the number of B Warrant
Shares purchasable immediately thereafter.
6.2. NO ADJUSTMENT FOR DIVIDENDS. Except as provided in
Section 6.1, no adjustment in respect of any dividends shall be made during the
term of this Shadow Warrant or upon the exercise of this Shadow Warrant.
6.3. NOTICE OF ADJUSTMENT. Whenever the number of Exercise
Shares is adjusted, as herein provided, the Company shall promptly mail by first
class, postage prepaid, to the Warrantholder, notice of such adjustment or
adjustments and a certificate of the chief financial officer of the Company
setting forth the number of A Exercise Shares, B Exercise Shares, A Warrant
Shares and B Warrant Shares after such adjustment, setting forth a brief
statement of the facts requiring such adjustment and setting forth the
computation by which such adjustment was made.
7. CERTAIN NOTIFICATIONS.
7.1. NOTICES OF CORPORATE ACTION. In the event of
(a) any taking by the Company of a record of the
holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive
any dividend or other distribution, or any right to subscribe
for, purchase or otherwise acquire any shares of stock of any
class or any other securities or property, or to receive any
other right, or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of
the Company or any consolidation or merger involving the
Company and any other party or any transfer of all or
substantially all of the assets of the Company to any other
party, or
(c) any voluntary or involuntary dissolution
liquidation or winding-up of the Company,
the Company will mail to the Warrantholder a notice specifying (i) the date or
expected date on which any such record is to be taken for the purpose of such
dividend, distribution or right and the amount and character of any such
dividend, distribution or right and (ii) the date or expected
- 7 -
date on which any such reorganization, reclassification, recapitalization,
consolidation, merger, transfer, dissolution, liquidation or winding-up is to
take place and the time, if any such time is to be fixed, as of which the
holders of record of Common Stock (or other securities) shall be entitled to
exchange their shares of Common Stock (or other securities) for the securities
or other property deliverable upon such reorganization, reclassification,
recapitalization, consolidation, merger, transfer, dissolution, liquidation or
winding-up. Such notice shall be mailed at least 20 days prior to the date
herein specified in the foregoing subdivision (i) or (ii).
7.2. PRE-MERGER NOTIFICATION. In the event that any exercise
of this Shadow Warrant by the Warrantholder shall require the filing of a
Pre-Merger Notification with the Federal Trade Commission and/or the Department
of Justice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules promulgated thereunder (the "HSR Act"), each of the
Company and the Warrantholder shall use its respective reasonable efforts to
furnish, or cause to be furnished, such information and to promptly file, or
cause to be filed, such documents as may be required in order to comply with the
HSR Act and each such party will cooperate fully in order that all necessary
filings in connection therewith may be completed as soon as possible after the
determination by either party that such filing is required. In such event, each
of the Company and the Warrantholder shall use its respective reasonable efforts
to respond promptly to any request for additional information received in
connection with an HSR Act filing, and each party shall promptly notify the
other party of any such request for additional information.
8. DEFINITIONS. As used herein, unless the context otherwise
requires, the following terms have the following respective meanings:
BUSINESS DAY: any day other than a Saturday, Sunday or a day
on which national banks are authorized by law to close in Houston, Texas.
CLOSING PRICE: the meaning specified in Section 6.1(d).
COMPANY: DI Industries, Inc., a Texas corporation.
DILLARD OPTION: the meaning specified in the preambles.
EXCHANGE ACT: the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the SEC thereunder, all as the same shall be in
effect at the time.
EXERCISE PRICE, A EXERCISE PRICE AND B EXERCISE PRICE: the
meaning specified on the cover of this Shadow Warrant.
EXERCISE EVENT, A EXERCISE EVENT AND B EXERCISE EVENT: the
meaning specified in the preambles.
EXERCISE EVENT NOTICE: the meaning specified in Section 1.1.
EXERCISE PERCENTAGE: the meaning assigned in the preambles.
- 8 -
EXERCISE SHARES, A EXERCISE SHARE AND B EXERCISE SHARES: the
meaning specified in the preambles.
NASDAQ: the meaning specified in Section 6.1(d).
NATIONAL MARKET SYSTEM: the meaning specified in Section
6.1(d).
SEC: the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act or the Exchange Act,
whichever is the relevant statute for the particular purpose.
SECURITIES ACT: the Securities Act of 1933, as amended, and
the rules and regulations of the commission thereunder, all as the same shall be
in effect at the time.
SERIES A PREFERRED STOCK: the meaning specified in the
preambles.
SHADOW WARRANT: the meaning specified in the preambles hereto.
WARRANTHOLDER: the meaning specified in this Shadow Warrant.
WARRANT SHARES, A WARRANT SHARES AND B WARRANT SHARES: the
meaning specified on the cover of this Shadow Warrant and in the preambles.
9. MISCELLANEOUS.
9.1. ENTIRE AGREEMENT. This Shadow Warrant constitutes the
entire agreement between the Company and the Warrantholder with respect to the
Shadow Warrant.
9.2. BINDING EFFECTS; BENEFITS. This Shadow Warrant shall
inure to the benefit of and shall be binding upon the Company and the
Warrantholder and their respective heirs, legal representatives, successors and
assigns. Nothing in this Shadow Warrant, expressed or implied, is intended to or
shall confer on any person other than the Company and the Warrantholder, or
their respective heirs, legal representatives, successors or assigns, any
rights, remedies, obligations or liabilities under or by reason of this Shadow
Warrant.
9.3. AMENDMENTS AND WAIVERS. This Shadow Warrant may not be
modified or amended except by an instrument or instruments in writing signed by
(i) the Company and (ii) the holder of this Shadow Warrant. Either the Company
or the holder of such Shadow Warrant may, by an instrument in writing, waive
compliance by the other party with any term or provision of this Shadow Warrant
on the part of such other party hereto to be performed or complied with. The
waiver by any such party of a breach of any term or provision of this Shadow
Warrant shall not be construed as a waiver of any subsequent breach.
- 9 -
9.4. SECTION AND OTHER HEADINGS. The section and other
headings contained in this Shadow Warrant are for reference purposes only and
shall not be deemed to be a part of this Shadow Warrant or to affect the meaning
or interpretation of this Shadow Warrant.
9.5. FURTHER ASSURANCES. Each of the Company and the
Warrantholder shall do and perform all such further acts and things and execute
and deliver all such other certificates, instruments and documents as the
Company or the Warrantholder may, at any time and from time to time, reasonably
request in connection with the performance of any of the provisions of this
Shadow Warrant.
9.6. NOTICES. All notices and other communications required or
permitted to be given under this Shadow Warrant shall be in writing and shall be
deemed to have been duly given if delivered personally or sent by United States
mail, postage prepaid, to the parties hereto at the following addresses or to
such other address as any party hereto shall hereafter specify by notice to the
other party hereto:
(a) if to the Company, addressed to:
DI Industries, Inc.
450 Gears Road
Suite 625
Houston, Texas 77067
(b) if to the Warrantholder, addressed to the address
of such Warrantholder appearing on the books of the Company.
Except as otherwise provided herein, all such notices and communications shall
be deemed to have been received on the date of delivery thereof, if delivered
personally, or on the third Business Day after the mailing thereof.
9.7. SEPARABILITY. Any term or provision of this Shadow
Warrant which is invalid or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the terms and
provisions of this Shadow Warrant or affecting the validity or enforceability of
any of the terms or provisions of this Shadow Warrant in any other jurisdiction.
9.8. GOVERNING LAW. This Shadow Warrant shall be deemed to be
a contract made under the laws of the State of Texas and for all purposes shall
be governed by and construed in accordance with the laws of such State
applicable to such agreements made and to be performed entirely within such
State.
9.9. NO RIGHTS OR LIABILITIES AS STOCKHOLDER. Nothing
contained in this Shadow Warrant shall be determined as conferring upon the
Warrantholder any rights as a stockholder of the company or as imposing any
liabilities on the Warrantholder to purchase any securities, whether such
liabilities are asserted by the Company or by creditors or stockholders of the
Company or otherwise.
- 10 -
IN WITNESS WHEREOF, the parties hereto have caused this Shadow
Warrant to be signed by their duly authorized officers.
DI INDUSTRIES, INC.
By
Name:
Title:
[M/O recipient]
Dated: , 1996
- 11 -
58
Exhibit 2.1.1
AMENDMENT
DATED JUNE 11, 1996
TO THE
AGREEMENT AND PLAN OF MERGER
AMONG
DI INDUSTRIES, INC.,
DI MERGER SUB, INC.,
ROY T. OLIVER, JR.,
MIKE L. MULLEN,
R.T. OLIVER, INC.
AND
LAND RIG ACQUISITION CORP.
DATED MAY 7, 1996
<PAGE>
AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This Amendment to Agreement and Plan of Merger, dated as of the 11th
day of June, 1996 (the "Amendment"), is among DI Industries, Inc., a Texas
corporation ("DI"), DI Merger Sub, Inc., a newly formed Delaware corporation and
a wholly owned subsidiary of DI ("Sub"), Roy T. Oliver, Jr. ("Oliver"), Mike L.
Mullen ("Mullen"), R.T. Oliver, Inc., an Oklahoma corporation ("RTO"), and Land
Rig Acquisition Corporation, a Delaware corporation ("LRAC").
WHEREAS, DI, Sub, Oliver, Mullen, RTO and LRAC have entered into an
Agreement and Plan of Merger, dated as of the 7th day of May, 1996 (the "Merger
Agreement"), and wish to amend the Merger Agreement in certain respects,
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, the parties hereto hereby agree as follows:
1. AMENDMENT TO SECTION 7.2. Paragraph (c) of Section 7.2 of the Merger
Agreement is hereby amended and restated to read as follows:
"(c) If the Merger is not consummated for any reason other
than as a result of a material breach by LRAC or RTO of any of their
representations, covenants or agreements contained in this Agreement,
and if, prior to December 31, 1996, DI, or their stockholders, publicly
announce, enter into a letter of intent relating to, enter into a
definitive agreement providing for, or consummate, a DI Acquisition
Transaction, DI agrees to pay to LRAC and RTO an amount equal to
thirty-three and one-third percent (33.3%) of the difference between
the consideration paid in the DI Acquisition Transaction (including any
and all distributions from DI to its stockholders from the date hereof
through the later of such announcement, letter of intent, agreement or
consummation) and the Threshold Amount (defined below). The "Threshold
Amount" shall be $30 million if such DI Acquisition Transaction
involves all of the outstanding securities or assets of DI. If such DI
Acquisition Transaction involves less than all of the outstanding
securities or assets of DI, the Threshold Amount shall be reduced by a
proportionate amount (e.g., if one half of the assets of DI are sold in
such DI Acquisition Transaction, the Threshold Amount shall be $15
million)."
2. CONSENT TO AMENDMENT TO ARTICLES. Oliver, Mullen, RTO and LRAC
hereby consent to amendments to the Articles of Incorporation of DI contemplated
by the Agreement and Plan of Merger dated May 7, 1996, by and between DI and
Somerset Investment Corp, as amended by an Amendment of even date herewith.
3. COUNTERPARTS. This Amendment may be executed in counterparts, each
of which shall be an original, but all of which together shall constitute one
and the same agreement.
4. EFFECT OF AMENDMENT. Except as specifically amended hereby, the
Merger Agreement shall remain in full force and effect.
1
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.
DI INDUSTRIES, INC.
By: /s/ IVAR SIEM
Name: Ivar Siem
Title: Chairman, President and
Chief Executive Officer
DI MERGER SUB, INC.
By: /s/ IVAR SIEM
Name: Ivar Siem
Title: President
R.T. OLIVER, INC.
By: /s/ ROY T. OLIVER, JR.
Name: Roy T. Oliver, Jr.
Title: President
Attest:
By: /s/ MIKE OLIVER
Name: Mike Oliver
Title: Secretary
LAND RIG ACQUISITION CORPORATION
By: /s/ MIKE L. MULLEN
Name: Mike L. Mullen
Title: President
/s/ MIKE L. MULLEN
Mike L. Mullen
/s/ ROY T. OLIVER, JR.
Roy T. Oliver, Jr.
2
<PAGE>
SECOND AMENDMENT
DATED JULY 26, 1996
TO THE
AGREEMENT AND PLAN OF MERGER
AMONG
DI INDUSTRIES, INC.,
DI MERGER SUB, INC.,
ROY T. OLIVER, JR.,
MIKE L. MULLEN,
R.T. OLIVER, INC.
AND
LAND RIG ACQUISITION CORP.
DATED MAY 7, 1996
AS AMENDED JUNE 11, 1996
<PAGE>
SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This Second Amendment to Agreement and Plan of Merger, dated as of the
26th day of July, 1996 (the "Amendment"), is among DI Industries, Inc., a Texas
corporation ("DI"), DI Merger Sub, Inc., a newly formed Delaware corporation and
a wholly owned subsidiary of DI ("Sub"), Roy T. Oliver, Jr. ("Oliver"), Mike L.
Mullen ("Mullen"), R.T. Oliver, Inc., an Oklahoma corporation ("RTO"), and Land
Rig Acquisition Corporation, a Delaware corporation ("LRAC").
WHEREAS, DI, Sub, Oliver, Mullen, RTO and LRAC have entered into an
Agreement and Plan of Merger, dated as of the 7th day of May, 1996, as amended
on June 11, 1996 (the "Merger Agreement"), and wish to amend the Merger
Agreement in certain respects,
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, the parties hereto hereby agree as follows:
1. AMENDMENT TO SECTION 6.1. Paragraph (d) of Section 6.1 of the Merger
Agreement is hereby deleted in its entirety and a new paragraph (h) shall be
added to Section 6.3 to read as follows:
"(h) A registration statement on Form S-3 covering the resale of the
DI Common Stock to be issued pursuant to Section 1.8 hereof shall be
effective on the Closing Date, and all post-effective amendments filed
shall have been declared effective or shall have been withdrawn; and no
stop-order suspending the effectiveness thereof shall have been issued and
no proceedings for that purpose shall have been initiated or, to the
knowledge of the parties, threatened by the Commission."
2. COUNTERPARTS. This Amendment may be executed in counterparts, each of
which shall be an original, but all of which together shall constitute one and
the same agreement.
3. EFFECT OF AMENDMENT. Except as specifically amended hereby, the Merger
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.
DI INDUSTRIES, INC.
By:
Name: Ivar Siem
Title: Chairman, President and Chief
Executive Officer
1
DI MERGER SUB, INC.
By:
Name: Ivar Siem
Title: President
R.T. OLIVER, INC.
By:
Name: Roy T. Oliver, Jr.
Title: President
Attest:
By:
Name: Mike Oliver
Title: Secretary
LAND RIG ACQUISITION CORPORATION
By:
Name: Mike L. Mullen
Title: President
Mike L. Mullen
Roy T. Oliver, Jr.
2
<PAGE>
APPENDIX B
Exhibit 2.2.0
AGREEMENT AND PLAN OF MERGER
BETWEEN
DI INDUSTRIES, INC.
AND
SOMERSET INVESTMENT CORP.
MAY 7, 1996
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I
THE MERGER
1.1 The Merger...................................................1
1.2 Closing Date.................................................1
1.3 Consummation of the Merger...................................2
1.4 Effects of the Merger........................................2
1.5 Articles of Incorporation; Bylaws............................2
1.6 Directors and Officers.......................................2
1.7 Conversion of Securities.....................................2
1.8 Exchange of Certificates; Fractional Shares..................3
1.9 Stock Legends................................................3
1.10 Taking of Necessary Action; Further Action...................4
1.11 Adjustment...................................................4
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 Representations and Warranties of DI.........................4
2.2 Representations and Warranties of Somerset Sub..............14
ARTICLE III
COVENANTS OF SOMERSET SUB PRIOR TO THE EFFECTIVE TIME
3.1 Conduct of Somerset Sub Pending the Merger..................17
3.2 Registration Statement and Proxy Statement..................18
3.3 Approval of Sole Stockholder of Somerset Sub................18
3.4 Access to Information.......................................18
3.5 Nonpublic Information.......................................18
ARTICLE IV
COVENANTS OF DI PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business by DI Pending the Merger................19
4.2 Approval of Stockholders of DI..............................20
4.3 Registration Statement and Proxy Statement..................20
4.4 Reservation of DI Stock.....................................21
4.5 American Stock Exchange Listing.............................21
4.6 Inquiries and Negotiations..................................21
4.7 Financial Statements of DI..................................22
i
4.8 Access to Information.......................................22
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Accountants' Letter.........................................22
5.2 Filings; Consents; Reasonable Efforts.......................23
5.3 Notification of Certain Matters.............................23
5.4 Agreement to Defend.........................................23
5.5 Expenses....................................................23
5.6 DI's Board of Directors.....................................23
5.7 Indemnification.............................................23
ARTICLE VI
CONDITIONS
6.1 Conditions to Obligation of Each Party to Effect the Merger.25
6.2 Additional Conditions to Obligations of DI..................26
6.3 Additional Conditions to Obligations of Somerset Sub........27
ARTICLE VII
MISCELLANEOUS
7.1 Termination.................................................28
7.2 Effect of Termination.......................................28
7.3 Waiver and Amendment........................................29
7.4 Survival of Representations, Warranties and Agreements......29
7.5 Public Statements...........................................29
7.6 Reorganization Status.......................................29
7.7 No Other Representations or Warranties......................30
7.8 Assignment..................................................30
7.9 Notices.....................................................30
7.10 Governing Law...............................................31
7.11 Severability................................................31
7.12 Counterparts................................................31
7.13 Headings....................................................31
7.14 Entire Agreement; Third Party Beneficiaries.................31
7.15 Disclosure Letter...........................................31
7.16 Consent to Specific Performance.............................31
ii
LIST OF EXHIBITS
Exhibit A ............. Board Designees
Exhibit B ............. Form of Credit Agreement
Exhibit C ............. Form of Legal Opinion of Parson & Brown
Exhibit D ............. Form of Legal Opinion of Cokinos, Bosien & Young
Exhibit E ............. Form of Warrant
iii
INDEX OF DEFINED TERMS
Agreement .............................................................1
Benefit Program or Agreement...................................................9
CERCLA ............................................................13
Closing Date .............................................................1
Code .............................................................9
Commission .............................................................7
Current Discussions...........................................................21
DI .............................................................1
DI Acquisition Transaction....................................................21
DI Charter .............................................................5
DI Commission Filings..........................................................7
DI Common Stock .............................................................1
DI Disclosure Letter...........................................................5
DI Environmental Permits......................................................12
DI ERISA Affiliate.............................................................9
DI Preferred Stock.............................................................5
DI Series A Preferred Stock....................................................5
DI Series B Preferred Stock....................................................5
DI Subsidiary .............................................................5
Effective Time .............................................................2
Environmental Laws............................................................12
ERISA .............................................................9
Exchange Act .............................................................7
Governmental Authority........................................................13
HSR Act .............................................................6
Mailing Date ............................................................21
Merger .............................................................1
Mullen ............................................................17
Norex ............................................................25
Norex Lien ............................................................25
Oliver ............................................................17
Plan .............................................................9
Proxy Statement ............................................................20
RCRA ............................................................13
Registration Statement........................................................20
Securities Act .............................................................3
Series B Warrants .............................................................5
Somerset Charter ............................................................14
Somerset Common Stock..........................................................1
Somerset L.L.C. .............................................................1
Somerset Shares .............................................................2
Somerset Sub .............................................................1
Surviving Corporation..........................................................1
iv
Surviving Corporation Common Stock.............................................2
Tax Returns ............................................................11
Taxes ............................................................11
TBCA .............................................................1
v
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger, dated as of the 7th day of May, 1996
(the "Agreement"), is among DI Industries, Inc., a Texas corporation ("DI"), and
Somerset Investment Corp., a Texas corporation ("Somerset Sub").
WHEREAS, subject to and in accordance with the terms and conditions of
this Agreement, the respective Boards of Directors of DI and Somerset Sub have
approved the merger of Somerset Sub with and into DI (the "Merger"), whereby the
issued and outstanding shares of common stock, par value $.01 per share, of
Somerset Sub ("Somerset Common Stock"), all of which is owned by Somerset
Drilling Associates, L.L.C. ("Somerset L.L.C."), will be converted into the
right to receive shares of common stock, par value $.10 per share, of DI ("DI
Common Stock");
WHEREAS, the Merger is intended to be treated as a purchase for
accounting purposes; and
WHEREAS, the parties hereto desire to set forth certain
representations, warranties and covenants made by each to the other as an
inducement to the consummation of the Merger;
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties and covenants herein contained, the parties hereto
hereby agree as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. Subject to and in accordance with the terms and
conditions of this Agreement and in accordance with the Texas Business
Corporation Act (the "TBCA"), at the Effective Time (as defined in Section 1.3)
Somerset Sub shall be merged with and into DI. As a result of the Merger, the
separate corporate existence of Somerset Sub shall cease and DI shall continue
as the surviving corporation (sometimes referred to herein as the "Surviving
Corporation") and all the properties, rights, privileges, powers and franchises
of Somerset Sub shall vest in the Surviving Corporation, without any transfer or
assignment having occurred, and all debts, liabilities, obligations and duties
of Somerset Sub shall attach to the Surviving Corporation, all in accordance
with the TBCA.
1.2 CLOSING DATE. The closing of the transactions contemplated by this
Agreement shall take place at the offices of Cokinos, Bosien & Young as soon as
practicable after the satisfaction or waiver of the conditions set forth in
Article VI or at such other time and place and on such other date as DI and
Somerset Sub shall agree, provided, that the closing conditions set forth in
Article VI shall have been satisfied or waived at or prior to such time. The
date on which such closing occurs is herein referred to as the "Closing Date."
1
1.3 CONSUMMATION OF THE MERGER. As soon as practicable on the Closing
Date, the parties hereto will cause the Merger to be consummated by filing with
the Secretary of State of Texas articles of merger in such form as required by,
and executed in accordance with the relevant provisions of, the TBCA. The
"Effective Time" of the Merger as that term is used in this Agreement shall mean
such time as the articles of merger are duly filed with the Secretary of State
of Texas and the Secretary of State of Texas has issued a certificate of merger
or at such later time (not to exceed 90 days after the Closing Date) as is
specified in the articles of merger pursuant to the mutual agreement of DI and
Somerset Sub.
1.4 EFFECTS OF THE MERGER. The Merger shall have the effects set forth
in the applicable provisions of the TBCA.
1.5 ARTICLES OF INCORPORATION; BYLAWS. The Articles of Incorporation of
DI, as in effect immediately prior to the Effective Time, shall be amended as of
the Effective Time so that Article One thereof reads in its entirety: "The name
of the corporation is [TO BE DETERMINED], Inc."; and the first sentence of
Article Four thereof reads in its entirety: "The corporation shall have the
authority to issue an aggregate of 201,000,000 shares , consisting of 1,000,000
shares of Preferred Stock, par value $1.00 per share ("Preferred Stock") and
200,000,000 shares of Common Stock, par value $0.10 per share ("Common Stock")."
and, as so amended, such Articles of Incorporation shall be the Articles of
Incorporation of the Surviving Corporation and thereafter shall continue to be
its Articles of Incorporation until amended as provided therein and under the
TBCA. The bylaws of DI, as in effect immediately prior to the Effective Time,
shall be the bylaws of the Surviving Corporation and thereafter shall continue
to be its bylaws until amended as provided therein and under the TBCA.
1.6 DIRECTORS AND OFFICERS. The directors of DI as of the Effective
Time, after giving effect to the changes contemplated by Section 5.6, shall be
the directors of the Surviving Corporation at and after the Effective Time, each
to hold office in accordance with the Articles of Incorporation and bylaws of
the Surviving Corporation, and the officers of DI immediately prior to the
Effective Time shall be the officers of the Surviving Corporation at and after
the Effective Time, in each case until their respective successors are duly
elected or appointed and qualified.
1.7 CONVERSION OF SECURITIES. Subject to the terms and conditions of
this Agreement, at the Effective Time, by virtue of the Merger and without any
action on the part of DI, Somerset Sub or their respective stockholders:
(a) Each share of Somerset Common Stock issued and outstanding
immediately prior to the Effective Time, other than any shares of
Somerset Common Stock to be canceled pursuant to Section 1.7(b) (the
"Somerset Shares"), shall be converted into 39,637.378 fully paid and
nonassessable shares of common stock, par value $.10 per share, of the
Surviving Corporation ("Surviving Corporation Common Stock"); provided,
however, that no fractional shares of Surviving Corporation Common
Stock shall be issued, and, in lieu thereof, a cash payment shall be
made in accordance with Section 1.8(b) hereof. The parties hereto
acknowledge that the foregoing exchange ratio is based upon the
representation of the parties as to their current capitalization set
forth in paragraphs 2.1(b) and 2.2(b).
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(b) Each Somerset Share held in the treasury of Somerset Sub
and each Somerset Share owned by DI or any direct or indirect wholly
owned subsidiary of DI or of Somerset Sub immediately prior to the
Effective Time shall be canceled and extinguished without any
conversion thereof and no payment shall be made with respect thereto.
(c) The shares of DI Common Stock and DI Series A Preferred
Stock (defined below) issued and outstanding immediately prior to the
Effective Time shall not be converted or exchanged in any manner, but
each such share shall remain outstanding as one share of Surviving
Corporation Common Stock or one share of Surviving Corporation Series A
Preferred Stock, respectively.
(d) Except as provided in paragraph 6.1(j), each option and
warrant of DI exercisable for DI Common Stock outstanding immediately
prior to the Effective Time shall remain outstanding after the Merger.
1.8 EXCHANGE OF CERTIFICATES; FRACTIONAL SHARES.
(a) As soon as practicable after the Effective Time, the
Surviving Corporation shall deliver to Somerset L.L.C. a certificate or
certificates representing the Surviving Corporation Common Stock
issuable to Somerset L.L.C. pursuant to the terms of Section 1.7(a)
hereof.
(b) No fraction of a share of Surviving Corporation Common
Stock shall be issued, but in lieu thereof each holder of Somerset
Common Stock who would otherwise be entitled to a fraction of a share
of Surviving Corporation Common Stock shall, upon surrender of the
certificate formerly representing Somerset Common Stock held by such
holder to the Surviving Corporation, be paid an amount in cash equal to
the value of such fraction of a share based upon the closing sales
price of Surviving Corporation Common Stock, as reported on the
American Stock Exchange, on the first day on which there is a reported
trade in the Surviving Corporation Common Stock after the Effective
Time. No interest shall be paid on such amount. All shares of Somerset
Common Stock held by a record holder shall be aggregated for purposes
of computing the number of shares of Surviving Corporation Common Stock
to be issued pursuant to this Article I and cash in lieu of fractional
shares payable hereunder.
(c) None of DI, Somerset Sub or the Surviving Corporation
shall be liable to a holder of the Somerset Shares for any amount
properly paid or shares of Surviving Corporation Common Stock properly
delivered to a public official pursuant to applicable property, escheat
or similar laws.
1.9 STOCK LEGENDS. Certificates representing shares of Surviving
Corporation Common Stock issued to persons deemed to be affiliates of Somerset
Sub (as that term is used for purposes of Rule 145 under the Securities Act of
1933, as amended (the "Securities Act")) on the date of the approval of Somerset
Sub's sole stockholder referred to in Section 3.3 hereof, shall bear the legend
set forth below:
3
These shares were issued in a transaction to which Rule 145
promulgated under the Securities Act of 1933 applies. These
shares may only be transferred in accordance with the terms of
such Rule.
1.10 TAKING OF NECESSARY ACTION; FURTHER ACTION. The parties hereto
shall take all such reasonable and lawful action as may be necessary or
appropriate in order to effectuate the Merger as promptly as possible. If, at
any time after the Effective Time, any such further action is necessary or
desirable to carry out the purposes of this Agreement and to vest the Surviving
Corporation with full right, title to and possession of all assets, property,
rights, privileges, powers and franchises of Somerset Sub, Somerset Sub shall
direct its officers and directors to take all such lawful and necessary action.
1.11 ADJUSTMENT. If for any reason on the Closing Date the number of
shares of DI Common Stock which are issued and outstanding or subject to
outstanding options or warrants is less than indicated in Section 2.1(b) hereof,
the aggregate number of shares issuable to Somerset L.L.C. pursuant to Section
1.7 shall be reduced by an equivalent number of shares. If the number of shares
of DI Common Stock issued and outstanding or subject to outstanding options or
warrants on the Closing Date exceeds the number of shares indicated in Section
2.1(b), the aggregate number of shares issuable pursuant to Section 1.7 shall be
increased by an equivalent number of shares. The parties hereto acknowledge that
the continued exercisability of an option to purchase one million shares of DI
Common Stock previously granted to Max M. Dillard is uncertain and that, so long
as that uncertainty exists on the Closing Date, the shares subject to that
option will not be deemed to be subject to outstanding options for the purposes
of this Section.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 REPRESENTATIONS AND WARRANTIES OF DI. DI hereby represents and
warrants to Somerset Sub that, as of the date hereof:
(a) ORGANIZATION AND COMPLIANCE WITH LAW. Each of DI and the
DI Subsidiaries (as hereinafter defined) is a corporation or
partnership duly organized, validly existing and, with respect to
corporations and limited partnerships, in good standing under the laws
of the jurisdiction in which it is chartered or organized and has all
requisite corporate or partnership power and corporate or partnership
authority and all necessary governmental authorization to own, lease
and operate all of its properties and assets and to carry on its
business as now being conducted, except where the failure to be so
organized, existing or in good standing or to have such governmental
authority would not have a material adverse effect on the financial
condition, results of operations or business of DI and the DI
Subsidiaries, taken as a whole. Each of DI and the DI Subsidiaries that
is a corporation or a limited partnership is duly qualified as a
foreign corporation or partnership to do business, and is in good
standing, in each jurisdiction in which the property owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification necessary, except in such jurisdictions where the failure
to be duly qualified does not and would not, either individually or in
the aggregate, have a
4
material adverse effect on the financial condition, results of
operation or business of DI and the DI Subsidiaries, taken as a whole.
To the knowledge of DI, each of DI and the DI Subsidiaries is in
compliance with all applicable laws, judgments, orders, rules and
regulations, domestic and foreign, except where failure to be in such
compliance would not have a material adverse effect on the financial
condition, results of operations or business of DI and the DI
Subsidiaries, taken as a whole. DI has heretofore delivered to Somerset
Sub true and complete copies of DI's Articles of Incorporation (the "DI
Charter") and bylaws as in existence on the date hereof.
A "DI Subsidiary" means any corporation or other entity of
which at least a majority of the outstanding shares of voting stock or
other ownership interests having by the terms thereof ordinary power to
vote generally for the election of the board of directors (or persons
performing similar functions) of such corporation or entity
(irrespective of whether or not at the time, in the case of a
corporation, stock of any other class or classes of such corporation
shall have or might have voting power by reason of the happening of any
contingency) is at the time directly or indirectly owned or controlled
by DI or one or more of the DI Subsidiaries or by DI and one or more of
the DI Subsidiaries. A list of all DI Subsidiaries is set forth in
Section 2.1(a) of the disclosure letter delivered by DI to Somerset Sub
on the date hereof (the "DI Disclosure Letter").
(b) CAPITALIZATION.
(i) As of the date hereof, the authorized capital
stock of DI consists of 75,000,000 shares of DI Common Stock,
par value $.10 per share, and 1,000,000 shares of preferred
stock, par value $1.00 per share ("DI Preferred Stock"). As of
the date hereof, there are issued and outstanding 38,669,378
shares of DI Common Stock and 90,000 shares of Series A
Convertible Redeemable Preferred Stock, par value $1.00 per
share, of DI ("DI Series A Preferred Stock"), which is
convertible into 720,000 shares of DI Common Stock. DI has
received a subscription and the purchase price for 4,000
shares of Series B 15% Cumulative Redeemable Preferred Stock,
par value $1.00 per share, of DI ("DI Series B Preferred
Stock"). There are no shares of DI Common Stock or DI
Preferred Stock held as treasury shares. As of the date
hereof, an aggregate of 968,000 shares of DI Common Stock are
reserved for issuance and issuable pursuant to or upon the
exercise of outstanding options and 5,333,333 shares would be
issuable upon exercise of certain warrants which would be
issued in connection with the DI Series B Preferred Stock (the
"Series B Warrants"). DI will reserve for issuance, out of its
authorized but unissued capital stock, such number of shares
of DI Common Stock as may be issuable upon consummation of the
Merger. All issued shares of DI Common Stock and DI Preferred
Stock are validly issued, fully paid and nonassessable and,
except as set forth in Section 2.1(b) of the DI Disclosure
Letter, no holder thereof is entitled to preemptive rights.
Assuming the correctness of the representations of Somerset
Sub set forth at Section 2.2(b)(i), all shares of DI Common
Stock to be issued pursuant to the Merger, when issued in
accordance with this Agreement, will be validly issued, fully
paid and nonassessable and the issuance thereof will not
violate the preemptive rights of any
5
person. Except as set forth in Section 2.1(b) of the DI
Disclosure Letter, DI is not a party to, and is not aware of,
any voting agreement, voting trust or similar agreement or
arrangement relating to any class or series of its capital
stock or the capital stock of DI, or any agreement or
arrangement providing for registration rights with respect to
any capital stock or other securities of DI, other than those
that have expired or been terminated prior to the date hereof.
(ii) Except as set forth in this Section 2.1(b) and
Section 2.1(b) of the DI Disclosure Letter, and except for
issuances contemplated by this Agreement in connection with
the Merger, there are not now, and at the Effective Time there
will not be, any (A) shares of capital stock or other equity
securities of DI outstanding (other than DI Common Stock
issued pursuant to the exercise of DI options as described
herein) or (B) outstanding options, warrants, scrip, rights to
subscribe for, calls or commitments of any character
whatsoever relating to, or securities or rights convertible
into or exchangeable for, shares of any class of capital stock
of DI, or contracts, understandings or arrangements to which
DI is a party, or by which either of them is or may be bound,
to issue additional shares of its capital stock or options,
warrants, scrip or rights to subscribe for, or securities or
rights convertible into or exchangeable for, any additional
shares of its capital stock.
(iii) Except as set forth in Section 2.1(b) of the DI
Disclosure Letter, all outstanding shares of capital stock of
the DI Subsidiaries are owned by DI, a wholly owned subsidiary
of DI or individuals who hold nominal quantities of shares on
behalf of DI or such a subsidiary as director's qualifying
shares, free and clear of all liens, charges, encumbrances,
adverse claims and options of any nature which are material to
DI and the DI Subsidiaries, taken as a whole.
(c) AUTHORIZATION AND VALIDITY OF AGREEMENT. DI has all
requisite corporate power and authority to enter into this Agreement
and to perform its obligations hereunder. The execution and delivery by
DI of this Agreement and the consummation by it of the transactions
contemplated hereby have been duly authorized by all necessary
corporate action, subject to the approval of the stockholders of DI.
This Agreement has been duly executed and delivered by DI and is the
valid and binding obligation of DI and enforceable against DI in
accordance with its terms.
(d) NO APPROVALS OR NOTICES REQUIRED; NO CONFLICT WITH
INSTRUMENTS TO WHICH DI OR ANY OF THE DI SUBSIDIARIES IS A PARTY.
Neither the execution and delivery of this Agreement nor the
performance by DI of its obligations hereunder, nor the consummation of
the transactions contemplated hereby by DI will (i) conflict with the
DI Charter or the bylaws of DI or the charter or bylaws of any of the
DI Subsidiaries; (ii) assuming satisfaction of the requirements set
forth in clause (iii) below, violate any provision of law applicable to
DI or any of the DI Subsidiaries; (iii) except for (A) requirements of
federal or state securities laws, (B) requirements arising out of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), (C) requirements of notice filings in such foreign
jurisdictions as may be applicable, and (D)
6
the filing of a certificate of merger in accordance with the TBCA,
require any consent or approval of, or filing with or notice to, any
public body or authority, domestic or foreign, under any provision of
law applicable to DI or any of the DI Subsidiaries; or (iv) require any
consent, approval or notice under, or violate, breach, be in conflict
with or constitute a default (or an event that, with notice or lapse of
time or both, would constitute a default) under, or permit the
termination of any provision of, or result in the creation or
imposition of any lien upon any properties, assets or business of DI or
any of the DI Subsidiaries under, any note, bond, indenture, mortgage,
deed of trust, lease, franchise, permit, authorization, license,
contract, instrument or other agreement or commitment or any order,
judgment or decree to which DI or any of the DI Subsidiaries is a party
or by which DI or any of the DI Subsidiaries or any of its or their
assets or properties is bound or encumbered, except (A) those that have
already been given, obtained or filed, (B) those that are required
pursuant to agreements governing indebtedness, as set forth in Section
2.1(d) of the DI Disclosure Letter, which will be obtained prior to the
Effective Time, and (C) those that, in the aggregate, would not have a
material adverse effect on the financial condition, results of
operations or business of DI and the DI Subsidiaries, taken as a whole.
(e) COMMISSION FILINGS; FINANCIAL STATEMENTS. Since December
31, 1994, DI and each of the DI Subsidiaries have filed all reports,
registration statements and other filings, together with any amendments
required to be made with respect thereto, that they have been required
to file with the Securities and Exchange Commission (the "Commission")
under the Securities Act and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All reports, registration statements and
other filings (including all notes, exhibits and schedules thereto and
documents incorporated by reference therein) filed by DI with the
Commission since January 1, 1996, through the date of this Agreement,
together with any amendments thereto, are sometimes collectively
referred to as the "DI Commission Filings." DI has heretofore delivered
to Somerset Sub copies of the DI Commission Filings. As of the
respective dates of their filings with the Commission, the DI
Commission Filings complied in all material respects with the
Securities Act or the Exchange Act, as applicable, and the rules and
regulations of the Commission thereunder, and did not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.
All contracts of DI and the DI Subsidiaries required to be
filed as exhibits to the DI Commission Filings pursuant to the rules
and regulations of the Commission have been filed.
Each of the historical consolidated financial statements
(including any related notes or schedules) included in the DI
Commission Filings was prepared in accordance with generally accepted
accounting principles applied on a consistent basis (except as may be
noted therein or in the notes or schedules thereto) and complied in all
material respects with all applicable rules and regulations of the
Commission. Such consolidated financial statements fairly present the
consolidated financial position of DI as of the dates thereof
7
and the results of operations, cash flows and changes in shareholders'
equity for the periods then ended. To the extent the DI Commission
Filings include unaudited interim consolidated financial statements,
such statements reflect, in the opinion of management, all adjustments
which consist of only normal recurring adjustments necessary to present
fairly the results of operations for such periods. To the extent the DI
Commission Filings include the pro forma consolidating financial
statements of DI, such statements (including any related notes or
schedules) were prepared in accordance with generally accepted
accounting principles applied on a consistent basis and complied in all
material respects with all applicable rules and regulations of the
Commission, and no other pro forma financial statements or schedules
were required by the applicable rules and regulations of the Commission
to be included in the DI Commission Filings. The pro forma adjustments
included in such pro forma financial statements of DI have been
properly applied to the historical amounts in the computation of the
pro forma financial statements and the assumptions described in the
notes to such pro forma financial information provide a reasonable
basis for presenting the direct effects of the transactions reflected
therein and the pro forma adjustments give appropriate effect to those
assumptions. As of the date hereof, DI has no liabilities, absolute or
contingent, that may reasonably be expected to have a material adverse
effect on the financial condition, results of operations or business of
DI and the DI Subsidiaries, taken as a whole, that are not reflected in
the DI Commission Filings, except those set forth in Section 2.1 (e) of
the DI Disclosure Letter.
(f) CONDUCT OF BUSINESS IN THE ORDINARY COURSE; ABSENCE OF
CERTAIN CHANGES AND EVENTS. Since December 31, 1995, except as
contemplated by this Agreement or as disclosed in or contemplated by
the DI Commission Filings or as set forth in Section 2.1(f) of the DI
Disclosure Letter, DI and the DI Subsidiaries have conducted their
business only in the ordinary and usual course, and there has not been
(i) any material adverse change in the financial condition, results of
operations or business of DI and the DI Subsidiaries, taken as a whole,
or any condition, event or development that reasonably may be expected
to result in any such material adverse change; (ii) any material change
by DI in its accounting methods, principles or practices; (iii) any
revaluation by DI or any of the DI Subsidiaries of any of its or their
assets, including, without limitation, writing down the value of fixed
assets or inventory or writing off notes or accounts receivable other
than in the ordinary course of business; (iv) any entry by DI or any of
the DI Subsidiaries into any commitment or transaction material to DI
and the DI Subsidiaries, taken as a whole, outside the ordinary course
of business involving consideration on the part of DI and/or the DI
Subsidiaries of more than $200,000; (v) any declaration, setting aside
or payment of any dividends or distributions in respect of the DI
Common Stock or DI Preferred Stock, or any redemption, purchase or
other acquisition of any of its securities or any securities of any of
the DI Subsidiaries; (vi) any damage, destruction or loss (whether or
not covered by insurance) materially adversely affecting the properties
or business of DI and the DI Subsidiaries, taken as a whole; (vii) any
increase in indebtedness for borrowed money other than borrowing under
existing credit facilities; (viii) any granting of a security interest
or lien on any material property or assets of DI and the DI
Subsidiaries, taken as a whole, other than (A) liens for taxes not due
and payable or which are being contested in good faith; (B) mechanics',
warehousemen's and other statutory liens incurred in the ordinary
course of business; and (C) defects and irregularities in title and
encumbrances
8
which are not substantial in character or amount and do not materially
impair the use of the property or asset in question; or (ix)
establishment of any bonus, insurance, severance, deferred
compensation, pension, retirement, profit sharing, stock option
(including, without limitation, the granting of stock options, stock
appreciation rights, performance awards or restricted stock awards),
stock purchase or other employee benefit plan, any material change in
the manner or method under which the contribution obligation or other
obligations of DI or the DI Subsidiaries with respect to any of the
foregoing are determined, or any other increase in the compensation
payable or to become payable to any officers or key employees of DI or
any of the DI Subsidiaries.
(g) LITIGATION. Except as disclosed in the DI Commission
Filings or as set forth in Section 2.1(g) of the DI Disclosure Letter,
there are no claims, actions, suits, investigations, inquiries or
proceedings pending or, to the knowledge of DI, threatened against or
affecting DI or any of the DI Subsidiaries or any of their respective
properties at law or in equity, or any of their respective employee
benefit plans or fiduciaries of such plans, or before or by any
federal, state, municipal or other governmental agency or authority, or
before any arbitration board or panel, wherever located, that
individually or in the aggregate if adversely determined would have a
material adverse effect on the financial condition, results of
operations or business of DI and the DI Subsidiaries, taken as a whole,
or that involve the risk of criminal liability.
(h) EMPLOYEE BENEFIT PLANS.
(i) No later than 20 days prior to the Closing Date,
DI will provide a description of each of the following which
is sponsored, maintained or contributed to by DI, a DI
Subsidiary or any corporation, trade, business or entity under
common control with DI or a DI Subsidiary within the meaning
of Section 414(b), (c), (m) or (o) of the Internal Revenue
Code of 1986, as amended (the "Code"); or Section 4001 of
ERISA (a "DI ERISA Affiliate") for the benefit of its
employees, or has been so sponsored, maintained or contributed
to within six years prior to the Closing Date:
(A) each "employee benefit plan" ("Plan") as
such term is defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"); and
(B) each personnel policy, stock option
plan, collective bargaining agreement, bonus plan or
arrangement, incentive award plan or arrangement,
vacation policy, severance pay plan, policy or
agreement, deferred compensation agreement or
arrangement, executive compensation or supplemental
income arrangement, consulting agreement, employment
agreement and each other employee benefit plan,
agreement, arrangement, program, practice or
understanding that is not described in Section
2.1(h)(i)(A) ("Benefit Program or Agreement").
9
True and complete copies of each of the Plans, Benefit
Programs or Agreements, related trusts, if applicable, and all
amendments thereto, have been furnished to Somerset Sub or
will be provided no later than 20 days prior to the Closing
Date.
(ii) Except as otherwise set forth in Section 2.1(h)
of the DI Disclosure Letter,
(A) none of DI, any DI Subsidiary or any DI
ERISA Affiliate contributes to or has an obligation
to contribute to, or has at any time contributed to
or had an obligation to contribute to, a plan subject
to Title IV of ERISA, including, without limitation,
a multiemployer plan within the meaning of Section
3(37) of ERISA;
(B) each Plan and each Benefit Program or
Agreement has been administered, maintained and
operated in all material respects in accordance with
the terms thereof and in compliance with its
governing documents and applicable law (including,
where applicable, ERISA and the Code);
(C) there is no matter pending with respect
to any of the Plans or Benefit Programs or Agreements
before any governmental agency, and there are no
actions, suits or claims pending (other than routine
claims for benefits) or threatened against, or with
respect to, any of the Plans or Benefit Programs or
Agreements or their assets;
(D) no act, omission or transaction has
occurred which would result in imposition on DI, any
DI Subsidiary or any DI ERISA Affiliate of breach of
fiduciary duty liability damages or penalty under
ERISA or a tax imposed pursuant to Chapter 43 of
Subtitle D of the Code; and
(E) the execution and delivery of this
Agreement and the consummation of the transactions
contemplated hereby will not require DI, any DI
Subsidiary or any DI ERISA Affiliate to make a larger
contribution to, or pay greater benefits under, any
Plan or Benefit Program or Agreement than it
otherwise would or create or give rise to any
additional vested rights or service credits under any
Plan or Benefit Program or Agreement.
(iii) Termination of employment of any employee of
DI, any DI Subsidiary or any DI ERISA Affiliate immediately
after consummation of the transactions contemplated by this
Agreement would not result in payments under the Plans or
Benefit Programs or Agreements which, in the aggregate, would
result in imposition of the sanctions imposed under Sections
280G and 4999 of the Code.
10
(iv) No later than 20 days prior to the Closing Date,
DI will disclose to Somerset Sub any Plan that may not be
unilaterally amended or terminated in its entirety without
liability except as to benefits accrued thereunder prior to
such amendment or termination.
(v) No later than 20 days prior to the Closing Date,
DI will disclose to Somerset Sub any union or collective
bargaining agreements to which any of the employees of DI, any
of the DI Subsidiaries or any DI ERISA Affiliate are subject.
(vi) Except as otherwise set forth in Section 2.1(h)
of the DI Disclosure Letter, none of the Plans or Benefit
Programs or Agreements provides retiree health or life
benefits to employees or former employees or their spouses or
dependents.
(i) TAXES. All returns and reports, including, without
limitation, information and withholding returns and reports ("Tax
Returns"), of or relating to any foreign, federal, state or local tax,
assessment or other governmental charge ("Taxes") that are required to
be filed on or before the Closing Date by or with respect to DI or any
of the DI Subsidiaries, or any other corporation that is or was a
member of an affiliated group (within the meaning of Section 1504(a) of
the Code) of corporations of which DI was a member for any period
ending on or prior to the Closing Date, have been or will be duly and
timely filed. All such tax returns were correct and complete in all
respects and all Taxes, including interest and penalties, owed by DI or
any DI Subsidiaries (whether or not shown on any Tax Return) have been
paid. All U.S. federal income Tax Returns of or with respect to DI and
the DI Subsidiaries have been audited by the applicable governmental
authority, or the applicable statute of limitations has expired, for
all periods up to and including the taxable year ended March 31, 1992.
There is no material claim against DI or any of the DI Subsidiaries
with respect to any Taxes, and no assessment, deficiency or adjustment
has been asserted or proposed with respect to any Tax Return of or with
respect to DI or any of the DI Subsidiaries. The total amounts set up
as liabilities for current and deferred Taxes in the consolidated
financial statements of DI included in the DI Commission Filings have
been prepared in accordance with generally accepted accounting
principles and are sufficient to cover the payment of all Taxes,
including any penalties or interest thereon and whether or not assessed
or disputed, that are, or are hereafter found to be, or to have been,
due with respect to the operations of DI and the DI Subsidiaries
through the periods covered thereby or the current life or use of their
respective assets. DI and each of the DI Subsidiaries have (and as of
the Closing Date will have) made all deposits (including estimated tax
payments for taxable years for which the consolidated federal income
tax return is not yet due) required with respect to Taxes. No waiver or
extension of any statute of limitations as to any federal, local or
foreign Tax matter has been given by or requested from DI or any of the
DI Subsidiaries. Neither DI nor any of the DI Subsidiaries has filed
consolidated income tax returns with any corporation, other than
consolidated federal and state income Tax Returns by DI, for any
taxable period which is not now closed by the applicable statute of
limitations. None of the assets of DI or the DI Subsidiaries are
required to be treated as being owned by any
11
other person pursuant to the "safe harbor" leasing provisions of
Section 168(f)(8) of the Code prior to its repeal.
(j) ENVIRONMENTAL MATTERS. Except for matters that in the
aggregate would not have a material adverse effect on the financial
condition, results of operations or business of DI and the DI
Subsidiaries, taken as a whole, (i) the properties, operations and
activities of DI and the DI Subsidiaries comply with all applicable
Environmental Laws (as defined below); (ii) DI and the DI Subsidiaries
and the properties and operations of DI and the DI Subsidiaries are not
subject to any existing, pending or, to the knowledge of DI, threatened
action, suit, investigation, inquiry or proceeding by or before any
governmental authority under any Environmental Law; (iii) all notices,
permits, licenses, or similar authorizations, if any, required to be
obtained or filed by DI or the DI Subsidiaries under any Environmental
Law in connection with any aspect of the business of DI or the DI
Subsidiaries, including without limitation those relating to the
treatment, storage, disposal or release of a hazardous substance or
solid waste ("DI Environmental Permits"), have been duly obtained or
filed and will remain valid and in effect after the Merger, and DI and
the DI Subsidiaries are in compliance with the terms and conditions of
all such DI Environmental Permits; (iv) there are no physical or
environmental conditions existing on any property of DI and the DI
Subsidiaries or resulting from DI's and the DI Subsidiaries' operations
or activities, past or present, at any location that would give rise to
any on-site or, to DI's knowledge, off-site remedial obligations under
any Environmental Law; (v) since the effective date of the relevant
requirements of applicable Environmental Laws, all hazardous substances
or solid wastes generated by DI and the DI Subsidiaries or used in
connection with their properties or operations have been transported
only by carriers authorized under Environmental Laws to transport such
substances and wastes, and disposed of only at treatment, storage, and
disposal facilities authorized under Environmental Laws to treat, store
or dispose of such substances and wastes, and, to the knowledge of DI,
such carriers and facilities have been and are operating in compliance
with such authorizations and are not the subject of any existing,
pending, or threatened action, investigation, or inquiry by any
governmental authority in connection with any Environmental Laws; (vi)
there has been no exposure of any person or property to hazardous
substances, solid waste, or any pollutant or contaminant, nor has there
been any release of hazardous substances, solid waste, or any pollutant
or contaminant into the environment by DI or the DI Subsidiaries or in
connection with their properties or operations that could reasonably be
expected to give rise to any claim for damages or compensation; and
(vii) DI and the DI Subsidiaries shall make available to Somerset Sub
all internal and external environmental audits and studies and all
correspondence on substantial environmental matters in the possession
of DI and the DI Subsidiaries relating to any of the current or former
properties or operations of DI and the DI Subsidiaries.
For purposes of this Agreement, the term "Environmental Laws"
shall mean any and all laws, statutes, ordinances, rules, regulations,
orders or determinations of any Governmental Authority (as defined
below) pertaining to health or the environment currently in effect in
any and all jurisdictions in which the party in question and its
subsidiaries own property or conduct business, including without
limitation, the Clean Air Act, as amended, the Comprehensive
Environmental, Response, Compensation, and
12
Liability Act of 1980, as amended ("CERCLA"), the Federal Water
Pollution Control Act, as amended, the Occupational Safety and Health
Act of 1970, as amended, the Resource Conservation and Recovery Act of
1976, as amended ("RCRA"), the Safe Drinking Water Act, as amended, the
Toxic Substances Control Act, as amended, the Superfund Amendments and
Reauthorization Act of 1986, as amended, the Hazardous Materials
Transportation Act, as amended, any state laws pertaining to the
handling of oil and gas exploration and production wastes or the use,
maintenance, and closure of pits and impoundments, and all other
environmental conservation or protection laws. For purposes of this
Agreement, the terms "hazardous substance" and "release" have the
meanings specified in CERCLA, and the terms "solid waste" and
"disposal" have the meanings specified in RCRA; provided, however, that
to the extent the laws of the state in which the property is located
establish a meaning for "hazardous substance," "release," "solid waste"
or "disposal" that is broader than that specified in either CERCLA or
RCRA, such broader meaning shall apply. For purposes of this Agreement,
the term "Governmental Authority" includes the United States, as well
as any other foreign jurisdiction or state, county, city and political
subdivisions in which the party in question owns property or conducts
business, and any agency, department, commission, board, bureau or
instrumentality of any of them that exercises jurisdiction over the
party in question.
(k) SEVERANCE PAYMENTS. Except as disclosed in Section 2.1(k)
of the DI Disclosure Letter, none of DI or the DI Subsidiaries will owe
a severance payment or similar obligation to any of their respective
employees, officers or directors as a result of the Merger or the
transactions contemplated by this Agreement, nor will any of such
persons be entitled to an increase in severance payments or other
benefits as a result of the Merger or the transactions contemplated by
this Agreement in the event of the subsequent termination of their
employment.
(l) VOTING REQUIREMENTS. The affirmative vote of the holders
of two thirds of the outstanding shares of DI Common Stock is the only
vote of the holders of any class or series of the capital stock of DI
necessary to approve this Agreement and the Merger.
(m) DIVIDEND RESTRICTIONS. Section 2.1(m) of the DI Disclosure
Letter contains a description of each restriction, limitation or
encumbrance, of any kind, on the ability of DI or any DI Subsidiary to
pay dividends on its respective capital stock.
(n) PERSONAL PROPERTY. DI or a DI Subsidiary (as the case may
be) owns all drilling rigs and other personal property reflected on the
books and records of DI or in the DI Commission Filings, in each case
free and clear of all liens, claims and other encumbrances, except for
those (i) described in Section 2.1(n) of the DI Disclosure Letter, (ii)
that are reflected in the DI Commission Filings, or (iii) that do not
materially affect the value of such personal property or limit the
ability of DI or the DI Subsidiary to use such personal property
substantially as it is currently being used and which are not otherwise
material, in the aggregate, to DI and the DI Subsidiaries, taken as a
whole. Section 2.1(n) of the DI Disclosure Letter also sets forth a
list (by lessee or licensee) and a summary description of all personal
property leases to which DI or a DI Subsidiary is a party and which
relates to personal property having a fair market value in excess of
$100,000. DI or
13
such DI Subsidiary (as the case may be) has a valid leasehold interest
in each such personal property lease held by it as of the date of this
Agreement, in each case free and clear of all liens, claims and other
encumbrances, except for those (i) described in Section 2.1(n) of the
DI Disclosure Letter, (ii) that are reflected in the DI Commission
Filings, or (iii) that do not materially affect the value of such
leasehold interest or limit the ability of DI or the DI Subsidiary to
use such leasehold interest substantially as it is currently being used
and which are not otherwise material, in the aggregate, to DI and the
DI Subsidiaries, taken as a whole.
(o) INSURANCE. DI and each DI Subsidiary has in effect valid
and effective policies of insurance, issued by companies believed by DI
to be sound and reputable, insuring DI or such DI Subsidiary (as the
case may be) for losses arising from or out of damage to its properties
and claims for personal injury or property damage in such amounts and
covering such losses as is, in the opinion of DI, typical and
reasonable for a company in DI's business, and subject to deductibles
that are, in the opinion of DI, reasonable in amount.
(p) CERTAIN FEES. Neither DI nor any DI Subsidiary nor any of
their officers, directors or employees has employed any broker or
finder or incurred any liability for DI or any DI Subsidiary for any
financial advisory, brokerage or finders' fees or commissions payable
by DI or any DI Subsidiary in connection with the transactions
contemplated hereby.
2.2 REPRESENTATIONS AND WARRANTIES OF SOMERSET SUB. Somerset Sub hereby
represents and warrants to DI that:
(a) ORGANIZATION AND COMPLIANCE WITH LAW. Somerset Sub is a
corporation duly organized, validly existing and in good standing under
the laws of the State of Texas and has all requisite corporate power
and corporate authority and all necessary governmental authorization to
own, lease and operate all of its properties and assets and to carry on
its business as now being conducted. Somerset Sub is duly qualified as
a foreign corporation to do business, and is in good standing, in each
jurisdiction in which the property owned, leased or operated by it or
the nature of the business conducted by it makes such qualification
necessary. Somerset Sub is in compliance with all applicable laws,
judgments, orders, rules and regulations, domestic and foreign, except
where failure to be in such compliance would not have a material
adverse effect on the financial condition, results of operations or
business of Somerset Sub. Somerset Sub has heretofore delivered to DI
true and complete copies of Somerset Sub's Articles of Incorporation
(the "Somerset Charter") and bylaws as in existence on the date hereof.
Somerset Sub does not own any securities or other ownership interests
in any other entity.
14
(b) CAPITALIZATION.
(i) The authorized capital stock of Somerset Sub
consists of 1,000 shares of Somerset Common Stock, par value
$.01 per share. As of the date hereof, there are issued and
outstanding 1,000 shares of Somerset Common Stock, all of
which are owned by Somerset L.L.C. No shares of Somerset
Common Stock are held as treasury shares. All issued shares of
Somerset Common Stock are validly issued, fully paid and
nonassessable and no holder thereof is entitled to preemptive
rights and are held free and clear of any liens, claims, or
other encumbrances. Somerset Sub is not a party to, and is not
aware of, any voting agreement, voting trust or similar
agreement or arrangement relating to any class or series of
its capital stock, or any agreement or arrangement providing
for registration rights with respect to any capital stock or
other securities of Somerset Sub.
(ii) Except as set forth in this Section 2.2(b) there
are not now, and at the Effective Time there will not be, any
(A) shares of capital stock or other equity securities of
Somerset Sub outstanding or (B) outstanding options, warrants,
scrip, rights to subscribe for, calls or commitments of any
character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of any class of
capital stock of Somerset Sub, or contracts, understandings or
arrangements to which Somerset Sub is a party, or by which it
is or may be bound, to issue additional shares of its capital
stock or options, warrants, scrip or rights to subscribe for,
or securities or rights convertible into or exchangeable for,
any additional shares of its capital stock.
(c) AUTHORIZATION AND VALIDITY OF AGREEMENT. Somerset Sub has
all requisite corporate power and authority to enter into this
Agreement and to perform its obligations hereunder. The execution and
delivery by Somerset Sub of this Agreement and the consummation by it
of the transactions contemplated hereby have been duly authorized by
all necessary corporate action. This Agreement has been duly executed
and delivered by Somerset Sub and is the valid and binding obligation
of Somerset Sub enforceable against it in accordance with its terms.
(d) NO APPROVALS OR NOTICES REQUIRED; NO CONFLICT WITH
INSTRUMENTS TO WHICH SOMERSET SUB IS A PARTY. Neither the execution and
delivery of this Agreement nor the performance by Somerset Sub of its
obligations hereunder, nor the consummation of the transactions
contemplated hereby by Somerset Sub will (i) conflict with the Somerset
Charter or the bylaws of Somerset Sub; (ii) assuming satisfaction of
the requirements set forth in clause (iii) below, violate any provision
of law applicable to Somerset Sub; (iii) except for (A) requirements of
federal or state securities laws, (B) requirements arising out of the
HSR Act, (C) requirements of notice filings in such foreign
jurisdictions as may be applicable, and (D) the filing of a certificate
of merger in accordance with the TBCA, require any consent or approval
of, or filing with or notice to, any public body or authority, domestic
or foreign, under any provision of law applicable to Somerset Sub; or
(iv) require any consent, approval or notice under, or violate, breach,
15
be in conflict with or constitute a default (or an event that, with
notice or lapse of time or both, would constitute a default) under, or
permit the termination of any provision of, or result in the creation
or imposition of any lien upon any properties, assets or business of
Somerset Sub under, any note, bond, indenture, mortgage, deed of trust,
lease, franchise, permit, authorization, license, contract, instrument
or other agreement or commitment or any order, judgment or decree to
which Somerset Sub is a party or by which Somerset Sub or any of its
assets or properties is bound or encumbered.
(e) ASSETS AND BUSINESS. Somerset Sub does not carry on and
has never carried on a business or other activity. Somerset Sub has not
entered into any contract or agreement other than this Agreement and
the agreements contemplated hereby and has no liabilities, whether
absolute or contingent, or asserted or unasserted.
(f) LITIGATION. There are no claims, actions, suits,
investigations, inquiries or proceedings pending or, to the knowledge
of Somerset Sub, threatened against or affecting Somerset Sub or any of
its properties at law or in equity, or before or by any federal, state,
municipal or other governmental agency or authority, or before any
arbitration board or panel, wherever located, or that involve the risk
of criminal liability.
(g) TAXES. All Tax Returns of or relating to any Tax that are
required to be filed on or before the Closing Date by or with respect
to Somerset Sub, or any other corporation that is or was a member of an
affiliated group (within the meaning of Section 1504(a) of the Code) of
corporations of which Somerset Sub was a member for any period ending
on or prior to the Closing Date, have been or will be duly and timely
filed. All such tax returns were correct and complete in all respects
and all Taxes, including interest and penalties, owed by Somerset Sub
(whether or not shown on any Tax Return) have been paid. There is no
claim against Somerset Sub with respect to any Taxes, and no
assessment, deficiency or adjustment has been asserted or proposed with
respect to any Tax Return of or with respect to Somerset Sub.
(h) EMPLOYEES. Somerset Sub does not have and has never had
any employees, and will not owe a severance payment or similar
obligation to any of its officers or directors, or to any other person,
as a result of the Merger or the transactions contemplated by this
Agreement.
(i) VOTING REQUIREMENTS. The affirmative vote of Somerset
L.L.C., as the holder of all of the outstanding shares of Somerset
Common Stock, is the only vote of the holders of any class or series of
the capital stock of Somerset Sub necessary to approve this Agreement
and the Merger, and has been obtained in compliance with the TBCA. No
approval of the members of Somerset L.L.C. is necessary with respect to
this Agreement or the Merger.
(j) CERTAIN FEES. Neither Somerset Sub nor any of its
officers, directors or employees has employed any broker or finder or
incurred any liability for Somerset Sub for any financial advisory,
brokerage or finders' fees or commissions payable by Somerset Sub in
connection with the transactions contemplated hereby.
16
(k) HSR ACT STATUS. The "ultimate parent entities" of Somerset
Sub have, in the aggregate, "annual net sales" and "total assets" of
less than $100,000,000, as such terms are defined under the HSR Act.
(l) NO AFFILIATION. Somerset L.L.C. does not have any
ownership interest in R. T. Oliver, Inc. or Land Rig Acquisition Corp.,
or any affiliate of either of them. Neither Mike L. Mullen ("Mullen"),
Roy T. Oliver, Jr. ("Oliver"), R.T. Oliver, Inc. nor Land Rig
Acquisition Corp. has any ownership interest in Somerset L.L.C.,
directly or indirectly.
(m) INVESTMENT REPRESENTATIONS. Somerset L.L.C. represents
that: (i) it has such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks of
its prospective investment in the DI Common Stock; (ii) it has received
all the information it has requested from DI and considers necessary or
appropriate for deciding whether to enter into this Agreement; (iii) it
has the ability to bear the economic risks of its prospective
investment; and (iv) it has the capacity to protect its own interests
in connection with this Agreement and the Merger.
ARTICLE III
COVENANTS OF SOMERSET SUB PRIOR TO THE EFFECTIVE TIME
3.1 CONDUCT OF SOMERSET SUB PENDING THE MERGER. Somerset Sub covenants
and agrees that, from the date of this Agreement until the Effective Time,
unless DI shall otherwise agree in writing or as otherwise expressly
contemplated by this Agreement:
(a) Somerset Sub shall not directly or indirectly do any of
the following: (i) issue, sell, pledge, dispose of or encumber any of
its capital stock or assets; (ii) amend or propose to amend the charter
or bylaws of Somerset Sub; (iii) split, combine or reclassify any
outstanding capital stock, or declare, set aside or pay any dividend
payable in cash, stock, property or otherwise with respect to its
capital stock whether now or hereafter outstanding; (iv) redeem,
purchase or acquire or offer to acquire any of its capital stock; (v)
enter into any contract, agreement, commitment or arrangement with
respect to any of the matters set forth in this Section 3.1(a); (vi)
enter into any bonus, profit sharing, compensation, termination, stock
option, stock appreciation right, restricted stock, performance unit,
stock equivalent, stock purchase, pension, retirement, deferred
compensation, employment, severance or other employee benefit
agreement, trust, plan, fund or other arrangement for the benefit or
welfare of any director, officer or employee; (vii) pay compensation or
fringe benefits to any director, officer or employee; (viii)
voluntarily incur any other obligation or liability other than under
this Agreement and the agreements contemplated hereby; or (ix) enter
into any business or activity of any kind whatsoever.
(b) Somerset Sub shall use its reasonable efforts (i) to
preserve intact the business organization of Somerset Sub and (ii) to
maintain in effect any authorizations or similar rights of Somerset
Sub.
17
(c) Somerset Sub shall not make or agree to make any
expenditure.
(d) Somerset Sub shall not acquire or agree to acquire any
ownership interest in R. T. Oliver, Inc. or Land Rig Acquisition Corp.,
or otherwise enter into any transaction or arrangement with Mullen,
Oliver, R.T. Oliver, Inc. or Land Rig Acquisition Corp., other than the
mergers and other agreements and transactions contemplated pursuant to
the terms hereof, or permit any of the foregoing to acquire any
ownership interest in Somerset.
(e) Except as otherwise contemplated by this Agreement,
Somerset Sub shall not take any action, or omit to take any action,
that would, or that reasonably could be expected to, result in any of
the representations and warranties set forth in this Agreement becoming
untrue or any of the conditions to the Merger set forth in Article VI
not being satisfied. Somerset Sub will use its best efforts to promptly
advise DI orally and in writing of any change or event having, or
which, insofar as reasonably can be foreseen, would have, a material
adverse effect on Somerset Sub.
3.2 REGISTRATION STATEMENT AND PROXY STATEMENT. Somerset Sub shall
cooperate with DI in preparing the Registration Statement and the Proxy
Statement (as defined below in Section 4.3). Somerset Sub represents and agrees
that the Registration Statement and Proxy Statement (with respect to information
concerning Somerset Sub provided by Somerset Sub specifically for use therein)
will not 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 not misleading. Somerset Sub will advise DI promptly in writing if prior
to the Effective Time it shall obtain knowledge of any facts that would make it
necessary to amend or supplement the Proxy Statement or the Registration
Statement in order to make the statements therein not misleading or to comply
with applicable law.
3.3 APPROVAL OF SOLE STOCKHOLDER OF SOMERSET SUB. Somerset Sub has
obtained in accordance with the TBCA and the Somerset Sub Charter and bylaws the
approval of its sole stockholder of this Agreement and the Merger.
3.4 ACCESS TO INFORMATION. Between the date hereof and the Effective
Time, Somerset Sub will give DI and its authorized representatives such
financial and other information with respect to Somerset Sub as DI may from time
to time reasonably request.
3.5 NONPUBLIC INFORMATION. To the extent DI discloses to Somerset Sub
or Somerset L.L.C. material information with respect to DI and/or the DI
Subsidiaries which has not been disclosed in the DI Commission Filings or
otherwise publicly disclosed by DI, whether such disclosure is made pursuant to
Section 4.7 or 4.8 of this Agreement or otherwise, neither Somerset Sub,
Somerset L.L.C., nor any of their affiliates will divulge or disclose such
information prior to such information becoming generally available to the public
or use such information in a manner which is in violation of the Securities Act;
PROVIDED, that Somerset L.L.C. may disclose confidential information subject to
appropriate confidentiality restrictions in connection with obtaining financing.
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ARTICLE IV
COVENANTS OF DI PRIOR TO THE EFFECTIVE TIME
4.1 CONDUCT OF BUSINESS BY DI PENDING THE MERGER. DI covenants and
agrees that, from the date of this Agreement until the Effective Time, unless
Somerset Sub shall otherwise agree in writing or as otherwise expressly
contemplated by this Agreement or set forth in Section 4.1 of the DI Disclosure
Letter:
(a) The business of DI and the DI Subsidiaries shall be
conducted only in, and DI and the DI Subsidiaries shall not take any
action except in, the ordinary course of business and consistent with
past practice; in addition, from and after the date of this Agreement,
DI shall not, and shall not permit any of the DI Subsidiaries to, enter
into any new drilling contracts with terms of six months or longer with
respect to any of DI's drilling rigs without giving prior written
notice to Somerset Sub
(b) DI shall not , except as contemplated by this Agreement,
directly or indirectly do any of the following: (i) issue, sell,
pledge, dispose of or encumber, or permit any DI Subsidiary to issue,
sell, pledge, dispose of or encumber, (A) any capital stock of DI or
any DI Subsidiary except upon the exercise of options or warrants or
upon conversion of any convertible securities of DI outstanding as of
the date of this Agreement or (B) other than in the ordinary course of
business and consistent with past practice and not relating to the
borrowing of money, any assets of DI or any DI Subsidiary; (ii) amend
or propose to amend the respective charters or bylaws of DI or any DI
Subsidiary; (iii) split, combine or reclassify any outstanding capital
stock, or declare, set aside or pay any dividend payable in cash,
stock, property or otherwise with respect to its capital stock whether
now or hereafter outstanding; (iv) redeem, purchase or acquire or offer
to acquire, or permit any of the DI Subsidiaries to redeem, purchase or
acquire or offer to acquire, any of its or their capital stock; or (v)
except in the ordinary course of business and consistent with past
practice, enter into any contract, agreement, commitment or arrangement
with respect to any of the matters set forth in this Section 4.1(b);
(vi) enter into, adopt or amend or terminate any bonus, profit sharing,
compensation, termination, stock option, stock appreciation right,
restricted stock, performance unit, stock equivalent, stock purchase,
pension, retirement, deferred compensation, or other employee benefit
agreement, trust, plan, fund or other arrangement for the benefit or
welfare of any director, officer or employee; (vii) enter into any
employment or severance agreement with any director or officer, or with
any employee if the compensation involved exceeds $100,000 per annum
for employment agreements or a total of $50,000 for severance
agreements; (viii) except for normal increases in the ordinary course
of business consistent with past practice that, in the aggregate, do
not result in a material increase in benefits or compensation expense,
increase in any manner the compensation or fringe benefits of any
director, officer or employee; or (ix) pay to any director, officer or
employee any benefit not required by any employee benefit agreement,
trust, plan, fund or other arrangement as in effect on the date hereof
or permitted hereunder.
(c) DI shall use its reasonable efforts (i) to preserve intact
the business organization of DI and each of the DI Subsidiaries, (ii)
to maintain in effect any
19
authorizations or similar rights of DI and each of the DI Subsidiaries,
(iii) to keep available the services of its and their current officers
and key employees, (iv) to preserve the goodwill of those having
business relationships with it and the DI Subsidiaries, (v) to maintain
and keep its properties and the properties of the DI Subsidiaries in as
good a repair and condition as presently exists, except for
deterioration due to ordinary wear and tear and damage due to casualty,
and (vi) to maintain in full force and effect insurance comparable in
amount and scope of coverage to that currently maintained by it and the
DI Subsidiaries.
(d) DI shall not make or agree to make, or permit any of the
DI Subsidiaries to make or agree to make, any capital expenditure other
than as previously disclosed in the DI Commission Filings or those made
in the ordinary course of business and consistent with past practice.
(e) DI shall, and shall cause the DI Subsidiaries to, perform
their respective obligations under any contracts and agreements to
which any of them is a party or to which any of their assets is
subject, except to the extent such failure to perform would not have a
material adverse effect on DI and the DI Subsidiaries, taken as a
whole, and except for such obligations as DI or the DI Subsidiaries in
good faith may dispute.
(f) Except as otherwise contemplated by this Agreement, DI
shall not, and shall not permit any of the DI Subsidiaries to, take any
action, or omit to take any action, that would, or that reasonably
could be expected to, result in any of the representations and
warranties set forth in this Agreement becoming untrue or any of the
conditions to the Merger set forth in Article VI not being satisfied.
DI will use its reasonable efforts to promptly advise Somerset Sub
orally and in writing of any change or event having, or which, insofar
as reasonably can be foreseen, would have, a material adverse effect on
DI and the DI Subsidiaries, taken as a whole.
4.2 APPROVAL OF STOCKHOLDERS OF DI. Subject to the terms and conditions
of Section 4.6, DI shall use its best efforts, in accordance with the TBCA and
the DI Charter and bylaws, to obtain the approval of its stockholders of this
Agreement and the Merger. Subject to the terms and conditions of Section 4.6,
the Board of Directors of DI (i) shall recommend that the stockholders of DI
vote to approve this Agreement and the Merger; (ii) shall use its reasonable
efforts to solicit from stockholders of DI proxies or consents in favor of such
approval; and (iii) shall take all other action reasonably necessary to secure a
vote of its stockholders in favor of such approval.
4.3 REGISTRATION STATEMENT AND PROXY STATEMENT. Promptly after the date
of this Agreement, DI will prepare and file a registration statement (the
"Registration Statement") on Form S-4 with the Commission under the Securities
Act with respect to the offering, sale and delivery of the shares of DI Common
Stock to be issued pursuant to the Merger and the mergers described in paragraph
6.1(j) and a proxy statement and related proxy materials (the "Proxy Statement")
with respect to the meeting of stockholders of DI referred to in Section 4.2;
and will use their best efforts to cause such Registration Statement to become
effective as soon as practicable after filing. DI agrees that the Registration
Statement and the Proxy Statement
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(except with respect to information concerning Somerset Sub furnished by or on
behalf of Somerset Sub specifically for use therein, for which information
Somerset Sub shall be responsible) will comply as to form in all material
respects with the requirements of the Securities Act and the Exchange Act and
the respective rules and regulations adopted thereunder, and will not contain
any untrue statement of any material fact or omit to state any material fact
required to be stated therein or necessary to make the statements made therein
not misleading. DI will advise Somerset Sub in writing if prior to the Effective
Time it shall obtain knowledge of any fact that would, in its opinion, make it
necessary to amend or supplement the Registration Statement or the Proxy
Statement in order to make the statements therein not misleading or to comply
with applicable law. The date on which the Proxy Statement is mailed to
stockholders of DI is hereinafter referred to as the "Mailing Date."
4.4 RESERVATION OF DI STOCK. Subject to the increase in the number of
authorized shares of DI Common Stock to be effected by the Merger, DI shall
reserve for issuance, out of its authorized but unissued capital stock, such
number of shares of DI Common Stock as may be issuable upon consummation of the
Merger.
4.5 AMERICAN STOCK EXCHANGE LISTING. DI shall use all reasonable
efforts to cause the shares of DI Common Stock to be issued in the Merger to be
approved for listing on the American Stock Exchange, subject to official notice
of issuance, prior to the Closing Date.
4.6 INQUIRIES AND NEGOTIATIONS. DI, its affiliates and their respective
officers, directors, employees, representatives and agents shall immediately
cease any existing discussions or negotiations, if any, with any parties
conducted heretofore with respect to any acquisition of all or any material
portion of the assets of, or any equity interest in, DI or any of the DI
Subsidiaries or any business combination with DI or any of the DI Subsidiaries,
except for those identified in Section 4.6 of the DI Disclosure Letter (the
"Current Discussions"). Except with respect to the Current Discussions, DI may,
directly or indirectly, furnish information and access only in response to
unsolicited requests therefor, to any corporation, partnership, person or other
entity or group pursuant to confidentiality agreements, and may participate in
discussions and negotiate with such entity or group concerning any merger, sale
of assets, sale of shares of capital stock or similar transaction involving DI,
or any DI Subsidiary or division of DI, if such entity or group has submitted a
written proposal to the Board of Directors of DI relating to any such
transaction and the Board of Directors of DI by a majority vote determines in
its good faith judgment, based as to legal matters on the written opinion of
legal counsel, that failing to take such action would constitute a breach of the
Board of Directors' fiduciary duty. The Board of Directors of DI shall provide a
copy of any such written proposal to Somerset Sub immediately after receipt
thereof and thereafter keep Somerset Sub promptly advised of any development
with respect thereto. Except as set forth above, neither DI or any of its
affiliates, nor any of its or their respective officers, directors, employees,
representatives or agents, shall, directly or indirectly, encourage, solicit,
participate in or initiate discussions or negotiations with, or provide any
information to, any corporation, partnership, person or other entity or group
(other than Somerset Sub or any affiliate, associate or designee of Somerset Sub
or as contemplated by this Agreement) concerning any merger, sale of assets,
sale of shares of capital stock or similar transaction involving DI or any
subsidiary or division of DI (a "DI Acquisition Transaction") provided, however,
that nothing herein shall prevent the Board of Directors of DI from taking, and
disclosing to DI's shareholders
21
a position contemplated by Rules 14d-9 and 14e-2 promulgated under the Exchange
Act with regard to any tender offer; provided, further, that the Board of
Directors of DI shall not recommend that the shareholders of DI tender their DI
Shares in connection with any such tender offer unless the Board of Directors of
DI by a majority vote determines in its good faith judgment, based as to legal
matters on the written opinion of legal counsel, that failing to take such
action would constitute a breach of such Board's fiduciary duty.
4.7 FINANCIAL STATEMENTS OF DI. As soon as practicable but in any event
within 30 days after the end of each calendar month commencing with April 1996
through the Effective Time or earlier termination of this Agreement in
accordance with Section 7.1, DI will deliver to Somerset Sub unaudited
consolidated and consolidating balance sheets of DI and the DI Subsidiaries as
at the end of such calendar month, together with unaudited summaries of
consolidated earnings of DI and the DI Subsidiaries for such calendar month. As
soon as practicable but in any event within 45 days after the end of each fiscal
quarter of DI, commencing with March 31, 1996, through the Effective Time or
earlier termination of this Agreement in accordance with Section 7.1, DI will
deliver to Somerset Sub unaudited consolidated and consolidating balance sheets
of DI and the DI Subsidiaries as at the end of such fiscal quarter and as at the
end of the comparative fiscal quarter of the preceding year, together with the
related unaudited statements of consolidated income and cash flows for the
fiscal quarters then ended. All such financial statements of DI shall present
fairly, in all material respects, the financial position, results of operations
and cash flows of DI and the DI Subsidiaries as at or for the periods indicated
(and, in the case of all such financial statements which are interim financial
statements, shall contain all adjustments necessary so to present fairly) and
shall be prepared in accordance with generally accepted accounting principles
(other than to omit certain footnotes which might be required thereby and
subject, in the case of interim financial statements, to normal year-end
adjustments) consistent with past practice, except as otherwise indicated in
such statements. All such financial statements of DI shall be certified, on
behalf of DI, by the President and the chief financial officer of DI.
4.8 ACCESS TO INFORMATION. Between the date hereof and the Effective
Time, DI will give Somerset Sub and its authorized representatives reasonable
access to all employees, offices and other facilities and to all books and
records of DI and the DI Subsidiaries, will permit Somerset Sub to make such
inspections as Somerset Sub may reasonably require and will cause DI's officers
and those of the DI Subsidiaries to furnish Somerset Sub with such financial and
operating data and other information with respect to the business and properties
of DI and the DI Subsidiaries as Somerset Sub may from time to time reasonably
request.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 ACCOUNTANTS' LETTER. DI shall use its reasonable efforts to cause
Deloitte & Touche LLP to deliver a letter dated as of the date of the Proxy
Statement, and addressed to itself and Somerset Sub in form and substance
reasonably satisfactory to Somerset Sub and customary in scope and substance for
agreed upon procedures letters delivered by independent public accountants in
connection with registration statements and proxy statements similar to the
Registration Statement and Proxy Statement.
22
5.2 FILINGS; CONSENTS; REASONABLE EFFORTS. Subject to the terms and
conditions of this Agreement, Somerset Sub and DI shall (i) make all necessary
filings with respect to the Merger and this Agreement under the HSR Act, the
Securities Act, the Exchange Act and applicable blue sky or similar securities
laws and shall use all reasonable efforts to obtain required approvals and
clearances with respect thereto; (ii) obtain all consents, waivers, approvals,
authorizations and orders required in connection with the authorization,
execution and delivery of this Agreement and the consummation of the Merger; and
(iii) take, or cause to be taken, all appropriate action, and do, or cause to be
done, all things necessary, proper or advisable to consummate and make effective
as promptly as practicable the transactions contemplated by this Agreement.
5.3 NOTIFICATION OF CERTAIN MATTERS. Somerset Sub shall give prompt
notice to DI, and DI shall give prompt notice to Somerset Sub, orally and in
writing, of (i) the occurrence, or failure to occur, of any event which
occurrence or failure would be likely to cause any representation or warranty
contained in this Agreement to be untrue or inaccurate at any time from the date
hereof to the Effective Time, and (ii) any material failure of Somerset Sub or
DI, as the case may be, or any officer, director, employee or agent thereof, to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by it hereunder.
5.4 AGREEMENT TO DEFEND. If any claim, action, suit, investigation or
other proceeding by any governmental body or other person or other legal or
administrative proceeding is commenced that questions the validity or legality
of the transactions contemplated hereby or seeks damages in connection
therewith, the parties hereto agree to cooperate and use their reasonable
efforts to defend against and respond thereto.
5.5 EXPENSES. DI agrees to pay the reasonable legal fees and
disbursements of Somerset L.L.C. and Somerset Sub incurred in connection with
the organization of Somerset Sub and the negotiation, preparation and
performance of this Agreement and the agreements and transactions contemplated
hereby, up to a maximum of $200,000. In addition, DI agrees to pay one half of
the fee of Robert Greer for his services as a consultant to Somerset L.L.C. in
connection with the Merger (i.e., $30,000 of the total fee of $60,000). Except
as set forth above, whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expense, except as
otherwise provided in Section 7.2.
5.6 DI'S BOARD OF DIRECTORS. DI's Board of Directors will recommend to
the shareholders of DI that the individuals set forth on Exhibit "A" be elected
at the meeting of the shareholders of DI referred to in Section 4.2 hereof.
5.7 INDEMNIFICATION.
(a) From and after the Effective Time, the Surviving
Corporation shall, to the fullest extent permitted under applicable
law, indemnify, defend and hold harmless Somerset L.L.C. and each
person who is an officer or director of Somerset Sub against all
losses, claims, damages, costs, expenses, liabilities or judgments or
amounts that are paid in settlement with the approval of the
indemnifying party (which approval shall not be
23
unreasonably withheld) of or in connection with any claim, action,
suit, proceeding or investigation whether asserted or claimed prior to,
or at or after, the Effective Time to the extent, and only to the
extent, such claim arises from any untrue statement of a material fact
in the Registration Statement and Proxy Statement or any omission to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading, except to the extent such
claim is subject to indemnification pursuant to Section 5.7(b) hereof
(and the Surviving Corporation will pay expenses in advance of final
disposition of any such action or proceeding to each indemnified party
to the full extent permitted by law).
(b) Somerset L.L.C. shall, to the fullest extent permitted
under applicable law, indemnify, defend and hold harmless the Surviving
Corporation, the DI Subsidiaries, and any officer or director of the
foregoing against all losses, claims, damages costs, expenses,
liabilities or judgments or amounts that are paid in settlement with
the approval of the indemnifying party (which approval shall not be
unreasonably withheld) of or in connection with any claim, action,
suite, proceeding or investigation, whether asserted or claimed prior
to, or at or after, the Effective Time, to the extent, and only to the
extent, such claim arises from any untrue statement of material fact in
the Registration Statement and Proxy Statement or omission to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading which is made or omitted in reliance
on and in conformity with written information provided by Somerset Sub
or Somerset L.L.C. or any of their representatives or affiliates
specifically for use therein (and Somerset L.L.C. will pay expenses in
advance of final disposition of any such action or proceeding to each
indemnified party to the full extent permitted by law).
(c) The defense of any such claim, action, suit, proceeding or
investigation shall be conducted by the indemnifying party. If the
indemnifying party has failed to conduct such defense, the indemnified
parties may retain counsel satisfactory to them and the indemnifying
party shall pay all reasonable fees and expenses of such counsel for
the indemnified parties promptly as statements therefor are received.
The party not conducting the defense will use reasonable efforts to
assist in the vigorous defense of any such matter, provided that such
party shall not be liable for any settlement of any claim effected
without its written consent, which consent, however, shall not be
unreasonably withheld. Any indemnified party wishing to claim
indemnification under this Section 5.7, upon learning of any such
claim, action, suit, proceeding or investigation, shall notify the
indemnifying party (but the failure so to notify a party shall not
relieve such party from any liability which it may have under this
Section 5.7 except to the extent such failure materially prejudices
such party). If the indemnifying party is responsible for the
attorneys' fees of the indemnified parties, then the indemnified
parties as a group may retain only one law firm to represent them with
respect to each such matter unless there is, under applicable standards
of professional conduct, a conflict on any significant issue between
the positions of any two or more indemnified parties.
(d) The provisions of this Section 5.7 are intended to be for
the benefit of, and shall be enforceable by, the parties hereto and
each indemnified party, his heirs and his representatives.
24
5.8 INTERIM FINANCING. DI shall be permitted to borrow from Norex
Drilling, Ltd. ("Norex") prior to the Closing up to Three Million Dollars
($3,000,000), with such loan (i) bearing interest at the rate of twelve percent
(12%) per annum, (ii) being secured by a pledge of the receivables of DI and the
DI Subsidiaries (the "Norex Lien"), (iii) maturing on the Closing Date and (iv)
being otherwise made pursuant to terms and conditions deemed appropriate by DI.
ARTICLE VI
CONDITIONS
6.1 CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
(a) This Agreement and the Merger shall have been approved and
adopted by the requisite vote of the stockholders of DI, as may be
required by law, by the rules of the American Stock Exchange and by any
applicable provisions of its charter or bylaws.
(b) Any waiting period (and any extension thereof) applicable
to the consummation of the Merger under the HSR Act shall have expired
or been terminated.
(c) No order shall have been entered and remain in effect in
any action or proceeding before any foreign, federal or state court or
governmental agency or other foreign, federal or state regulatory or
administrative agency or commission that would prevent or make illegal
the consummation of the Merger.
(d) The Registration Statement shall be effective on the
Closing Date, and all post-effective amendments filed shall have been
declared effective or shall have been withdrawn; and no stop-order
suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the
knowledge of the parties, threatened by the Commission.
(e) There shall have been obtained any and all material
permits, approvals and consents of securities or blue sky commissions
of any jurisdiction, and of any other governmental body or agency, that
reasonably may be deemed necessary so that the consummation of the
Merger and the transactions contemplated thereby will be in compliance
with applicable laws, the failure to comply with which would have a
material adverse effect on the business, financial condition or results
of operations of the Surviving Corporation and its subsidiaries, taken
as a whole after consummation of the Merger.
(f) The shares of Surviving Corporation Common Stock issuable
upon consummation of the Merger shall have been approved for listing on
the American Stock Exchange, subject to official notice of issuance.
(g) All approvals of private persons or corporations, (i) the
granting of which is necessary for the consummation of the Merger or
the transactions contemplated in connection therewith and (ii) the
non-receipt of which in the aggregate would have a
25
material adverse effect on the business, financial condition or results
of operations of the Surviving Corporation and its subsidiaries, taken
as a whole after the consummation of the Merger, shall have been
obtained.
(h) The Registration Rights Agreement of even date herewith
among DI, Somerset L.L.C. and certain other principal shareholders of
DI shall be in full force and effect.
(i) The mergers provided for in the Agreement and Plan of
Merger of even date herewith by and among R. T. Oliver, Inc., Land Rig
Acquisition Corp., DI and DI Merger Sub, Inc. shall have become
effective in accordance with and as provided in that Agreement.
(j) The subscription of Norex for 4,000 shares of DI Series B
Preferred Stock, and the related DI Series B Warrants, shall have been
canceled, and the subscription price of $4 million shall have been
repaid with the proceeds of a Credit Agreement in substantially the
form of Exhibit B hereto between DI and Norex, and such Credit
Agreement shall be in full force and effect.
6.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF DI. The obligation of DI to
effect the Merger is, at the option of DI, also subject to the fulfillment of
the following conditions:
(a) The representations and warranties of Somerset Sub
contained in Section 2.2 shall be accurate in all material respects as
of the date of this Agreement and (except to the extent such
representations and warranties speak specifically as of an earlier
date) as of the Mailing Date or the Closing Date, in each case as
though such representations and warranties had been made at and as of
that time; all of the terms, covenants and conditions of this Agreement
to be complied with and performed by Somerset Sub on or before the
Mailing Date or the Closing Date, as the case may be, shall have been
duly complied with and performed in all material respects; and a
certificate to the foregoing effect dated the Mailing Date or the
Closing Date, as the case may be, and signed by the chief executive
officer of Somerset Sub shall have been delivered to DI.
(b) Since the date of this Agreement, no material adverse
change in the financial condition of Somerset Sub shall have occurred,
Somerset Sub shall not have suffered any loss materially adversely
affecting the property of Somerset Sub, and DI shall have received a
certificate signed by the chief executive officer of Somerset Sub dated
the Closing Date to such effect.
(c) DI shall have received from Parson & Brown, counsel to
Somerset Sub, an opinion dated the Closing Date, covering the matters
set forth in Exhibit C.
(d) Somerset L.L.C. shall have contributed to the capital of
Somerset Sub at least $25,000,000 in cash.
26
6.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF SOMERSET SUB. The
obligation of Somerset Sub to effect the Merger is, at the option of Somerset
Sub, also subject to the fulfillment of the following conditions:
(a) The representations and warranties of DI contained in
Section 2.1 shall be accurate in all material respects as of the date
of this Agreement and (except to the extent such representations and
warranties speak specifically as of an earlier date) as of the Mailing
Date or the Closing Date, in each case as though such representations
and warranties had been made at and as of that time; all of the terms,
covenants and conditions of this Agreement to be complied with and
performed by DI on or before the Mailing Date or the Closing Date, as
the case may be, shall have been duly complied with and performed in
all material respects; and a certificate to the foregoing effect dated
the Mailing Date or the Closing Date, as the case may be, and signed by
the chief executive officer of DI shall have been delivered to Somerset
Sub.
(b) Since the date of this Agreement, no material adverse
change in the financial condition, results of operations or business of
DI and the DI Subsidiaries, taken as a whole, shall have occurred, and
DI and the DI Subsidiaries shall not have suffered any damage,
destruction or loss materially adversely affecting the property or
business of DI and the DI Subsidiaries, taken as a whole, and Somerset
Sub shall have received a certificate signed by the chief executive
officer of DI dated the Closing Date to such effect. (It is
specifically acknowledged that the continuing accrual of operating
losses by DI and the DI Subsidiaries at a rate which does not exceed
the rate at which operating losses were accrued by DI and the DI
Subsidiaries, on a consolidated basis, during the year ending December
31, 1995, shall not be considered a material adverse change.)
(c) DI shall have taken such action as may be necessary to
elect the persons designated pursuant to Section 5.6 to the DI Board of
Directors effective as of the Effective Time.
(d) Somerset Sub shall have received from Cokinos, Bosien &
Young, counsel to DI, an opinion dated the Closing Date covering the
matters set forth in Exhibit D.
(e) The Investment Monitoring Agreement of even date herewith
by and between DI and Somerset Capital Partners, the Managing Member of
Somerset L.L.C., shall be in full force and effect.
(f) DI shall have executed and issued to Somerset L.L.C. a
warrant in the form of Exhibit E hereto to purchase up to 1,720,000
shares of DI Common Stock.
(g) The Shareholders Agreement of even date herewith among
certain of the principal shareholders of Somerset Sub and DI shall have
been executed and delivered by Oliver, USRE, EER, GCT, Norex Drilling
and Pronor (as defined therein).
(h) Norex shall have released the Norex Lien.
27
ARTICLE VII
MISCELLANEOUS
7.1 TERMINATION. This Agreement may be terminated and the Merger and
the other transactions contemplated herein may be abandoned at any time prior to
the Effective Time, whether prior to or after approval by the stockholders of
DI:
(a) by mutual consent of DI and Somerset Sub;
(b) by either DI or Somerset Sub if (i) the Merger has not
been effected on or before October 31, 1996, (ii) a final, unappealable
order of a judicial or administrative authority of competent
jurisdiction to restrain, enjoin or otherwise prevent a consummation of
this Agreement or the transactions contemplated in connection herewith
shall have been entered, or (iii) the required approval of the
stockholders of DI provided for in Section 4.2 is not obtained;
(c) by DI if (i) since the date of this Agreement there has
been a material adverse change in the financial condition of Somerset
Sub, or (ii) there has been a material breach of any representation or
warranty or covenant set forth in this Agreement by Somerset Sub which
breach has not been cured within twenty business days following receipt
by Somerset Sub of notice of such breach; or
(d) by Somerset Sub if (i) since the date of this Agreement
there has been a material adverse change in the results of operations,
financial condition or business of DI and the DI Subsidiaries, taken as
a whole, or (ii) there has been a material breach of any representation
or warranty or covenant set forth in this Agreement by DI which breach
has not been cured within twenty business days following receipt by DI
of notice of such breach.
7.2 EFFECT OF TERMINATION.
(a) In the event of any termination of this Agreement pursuant
to Section 7.1, (i) the provisions of Section 5.5 shall survive any
such termination, and (ii) such termination shall not relieve any party
from liability for any breach of this Agreement.
(b) In the event of any termination of this Agreement pursuant
to Section 7.1(b)(iii) or Section 7.1(d)(ii), Somerset Sub would suffer
direct and substantial damages, which damages cannot be determined with
reasonable certainty. To compensate Somerset Sub, DI agrees to pay to
it, as its sole and exclusive remedy, an amount equal to all of the
expenses incurred by Somerset Sub in connection with this Agreement,
the negotiations leading to its execution, Somerset Sub's examination
and investigation of DI, the preparation and negotiation of the
Agreement and related agreements, and in all other ways related to the
Merger, including, but not limited to, all fees and expenses incurred
by Somerset Sub to investment bankers, accountants, attorneys and other
agents, plus the sum of $500,000 in the case of a termination pursuant
to Section 7.1(d)(ii) or $250,000 in
28
the case of a termination pursuant to Section 7.1(b)(iii) as liquidated
damages immediately upon termination. It is specifically agreed that
such amount represents liquidated damages and not a penalty.
(c) If the Merger is not consummated for any reason other than
as a result of a material breach by Somerset Sub of any of its
representations, covenants or agreements contained in this Agreement,
and if, prior to December 31, 1996, DI, or its stockholders, publicly
announce, enter into a letter of intent relating to, enter into a
definitive agreement providing for, or consummate, a DI Acquisition
Transaction, DI agrees to pay to Somerset Sub an amount equal to
thirty-three and one-third percent (33.3%) of the difference between
the consideration to be paid in the DI Acquisition Transaction
(including any and all distributions from DI to its stockholders from
the date hereof through the later of such announcement, letter of
intent, agreement or consummation) and $75 million. If such DI
Acquisition Transaction involves less than all of the outstanding
securities or assets of DI, the consideration to be paid in such DI
Acquisition Transaction shall be deemed to be the amount that would
have been attributable to all of such outstanding securities or assets,
as the case may be, if all of the same had been sold for a total
consideration proportionate to that paid for the portion thereof
actually sold (or with respect to which an agreement was reached or
letter executed, as the case may be).
7.3 WAIVER AND AMENDMENT. Any provision of this Agreement may be waived
at any time by the party that is, or whose stockholders are, entitled to the
benefits thereof. This Agreement may not be amended or supplemented at any time,
except by an instrument in writing signed on behalf of each party hereto,
provided that after this Agreement has been approved and adopted by the
stockholders of DI, this Agreement may be amended only as may be permitted by
applicable provisions of the TBCA. The waiver by any party hereto of any
condition or of a breach of another provision of this Agreement shall not
operate or be construed as a waiver of any other condition or subsequent breach.
The waiver by any party hereto of any of the conditions precedent to its
obligations under this Agreement shall not preclude it from seeking redress for
breach of this Agreement other than with respect to the condition so waived.
7.4 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. None of the
representations, warranties, covenants or agreements contained in this Agreement
or in any instrument delivered pursuant to this Agreement shall survive the
Effective Time, except for the terms of Article I, Article VII, Sections 5.5 and
5.7, the Stockholders Agreement, the Registration Rights Agreement and the
Investment Monitoring Agreement.
7.5 PUBLIC STATEMENTS. Somerset Sub and DI agree to consult with each
other prior to issuing any press release or otherwise making any public
statement with respect to the transactions contemplated hereby, and shall not
issue any such press release or make any such public statement prior to such
consultation, except as may be required by law or applicable stock exchange
policy.
7.6 REORGANIZATION STATUS. The parties hereto acknowledge that the
closing of the transactions contemplated hereunder is not contingent upon the
Merger qualifying as a reorganization within the meaning of Section 368(a) of
the Code.
29
7.7 NO OTHER REPRESENTATIONS OR WARRANTIES. Except as expressly set
forth in Article II, none of the parties to this Agreement have made any
representation or warranty whatsoever to any of the other parties to this
Agreement, and each such party hereby disclaims all liability and responsibility
for any other representation, warranty, statement, or information made or
communicated (orally or in writing) to the other party by any person, including
without limitation their representatives, officers or directors. Somerset Sub
acknowledges that neither DI nor any of the DI Subsidiaries have made any
representation or warranty whatsoever relating to the tax consequences of the
Merger or the other transactions contemplated herein.
7.8 ASSIGNMENT. This Agreement shall inure to the benefit of and will
be binding upon the parties hereto and their respective legal representatives,
successors and permitted assigns. Except as set forth in this Agreement, this
Agreement shall not be assignable by the parties hereto.
7.9 NOTICES. All notices, requests, demands, claims and other
communications which are required to be or may be given under this Agreement
shall be in writing and shall be deemed to have been duly given if (i) delivered
in person or by courier, (ii) sent by telecopy or facsimile transmission or
(iii) mailed, certified first class mail, postage prepaid, return receipt
requested, to the parties hereto at the following addresses:
if to Somerset Sub: Somerset Investment Corp.
69 Delaware Avenue
Buffalo, New York 14202
Attention: Thomas H. O'Neill, Jr.
Telecopier No.: (716) 842-2514
with a copy to: Parson & Brown
666 Third Avenue
New York, New York 10017
Attention: Edwin T. Markham, Esq.
Telecopier No.: (212) 682-9112
if to DI: DI Industries, Inc.
450 Gears Road
Suite 625
Houston, Texas 77067
Attention: President
Telecopier No.: (713) 874-0193
with a copy to: Casey W. Doherty, Esq.
Cokinos, Bosien & Young
1500 Liberty Tower
2919 Allen Parkway
Houston, Texas 77019
Telecopier No.: (713) 535-5533
30
or such other address as any party shall have furnished to the other by notice
given in accordance with this Section 7.9. Such notices shall be effective, (i)
if delivered in person or by courier, upon actual receipt by the intended
recipient, (ii) if sent by telecopy or facsimile transmission, when the answer
back is received, or (iii) if mailed, upon the earlier of five days after
deposit in the mail and the date of delivery as shown by the return receipt
therefor.
7.10 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the substantive law of the State of Texas without giving
effect to the principles of conflicts of law thereof. Exclusive venue shall lie
in Harris County, Texas, for any action brought with respect to the
interpretation or enforcement of the terms of this Agreement or otherwise
relating to the Merger or the other transactions contemplated herein.
7.11 SEVERABILITY. If any term, provision covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the terms, provision, covenants and
restrictions of this Agreement shall continue in full force and effect and shall
in no way be affected, impaired or invalidated.
7.12 COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be an original, but all of which together shall constitute one
and the same agreement.
7.13 HEADINGS. The Section headings herein are for convenience only and
shall not affect the construction hereof.
7.14 ENTIRE AGREEMENT; THIRD PARTY BENEFICIARIES. This Agreement
constitutes the entire agreement and supersedes all other prior agreements and
understandings, both oral and written, among the parties or any of them, with
respect to the subject matter hereof and neither this nor any document delivered
in connection with this Agreement confers upon any person not a party hereto any
rights or remedies hereunder except as provided in Section 5.7.
7.15 DISCLOSURE LETTER. The DI Disclosure Letter, executed by DI as of
the date hereof, and delivered to Somerset Sub on the date hereof, contains all
disclosure required to be made by DI under the various terms and provisions of
this Agreement. Each item of disclosure set forth in the DI Disclosure Letter
specifically refers to the Article and Section of the Agreement to which such
disclosure responds, and shall not be deemed to be disclosed with respect to any
other Article or Section of the Agreement.
7.16 CONSENT TO SPECIFIC PERFORMANCE. The parties hereto agree that it
is impossible to measure the monetary damages that would accrue to a party by
reason of a failure by any other party to perform any of the obligations
hereunder. Therefore, if any party shall institute any action or proceeding to
enforce the provisions hereof, any party against whom such action or proceeding
is brought hereby waives any claim or defense therein that the party seeking
such relief has an adequate remedy at law.
31
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.
DI INDUSTRIES, INC.
By: /s/ IVAR SIEM
Name: Ivar Siem
Title: President and Chief Executive
Officer
SOMERSET INVESTMENT CORP.
By: /s/ WILLIAM R. ZIEGLER
Name: William R. Ziegler
Title: President
SOMERSET DRILLING ASSOCIATES, L.L.C.,
by Somerset Capital Partners, its
Managing Member (with respect to
Section 5.7 only)
By: /s/ WILLIAM R. ZIEGLER
William R. Ziegler, Partner
32
EXHIBIT A
BOARD DESIGNEES
William R. Ziegler
Ivar Siem
Roy T. Oliver, Jr.
Steven A. Webster
Peter M. Holt
33
EXHIBIT B
FORM OF CREDIT AGREEMENT
The Form of Credit Agreement referenced hereto as Exhibit B does not differ in
any material respect from the Form of Credit Agreement filed as Exhibit B to the
Rig Merger Agreement attached as Appendix A to this Proxy Statement. As such,
the Form of Credit Agreement has not been included as an exhibit to this
agreement.
34
EXHIBIT C
FORM OF LEGAL OPINION OF PARSON & BROWN
D I Industries, Inc.,
and
DI Merger Sub, Inc.
450 Gears Road
Suite 625
Houston, Texas 77067
Roy T. Oliver, Jr.
and
R.T. Oliver, Inc.
6601 S.W. 29th Street
Oklahoma City, Oklahoma 73179
Mike L. Mullen
and
Land Rig Acquisition Corp.
8411 Preston Road
Suite 730, LB2
Dallas, Texas 75225
Gentlemen:
We have acted as counsel to Somerset Investment Corp., a Texas
corporation ("Somerset Sub"), Somerset Drilling Associates, L.L.C., a Delaware
limited liability company ("Somerset L.L.C."), and Somerset Capital Partners, a
New York general partnership, in connection with (i) the Agreement and Plan of
Merger (the "Merger Agreement") dated as of May 7, 1996, among Somerset Sub and
DI Industries, Inc., a Texas corporation ("DI"), and the related merger of
Somerset Sub with and into DI (the "Merger"), (ii) the Registration Rights
Agreement dated May 7, 1996, among Somerset L.L.C., Norex Drilling, Ltd., Roy T.
Oliver, Jr., U.S. Rig and Equipment, Inc., Mike Mullen Energy Equipment
Resource, Inc., GCT Investments, Inc. and DI (the "Registration Rights
Agreement"), and (iii) the Investment Monitoring Agreement dated May 7, 1996,
among DI, Somerset L.L.C. and Somerset Capital Partners (the "Investment
Monitoring Agreement"). This opinion is being delivered pursuant to Section
6.2(c) of the Merger Agreement. Capitalized terms used but not defined herein
are used with the same meanings as set forth in the Merger Agreement.
In connection with the offer, sale and delivery of the shares
of DI Common Stock to be issued to the shareholders of Somerset Sub pursuant to
the Merger, DI has filed with the Securities and Exchange Commission (the
"Commission"), under the Securities Act of 1933, as
35
amended (the "Act"), a Registration Statement on Form S-4 (File No. _____) (the
"Registration Statement"), including a Proxy Statement/Prospectus of DI (as
amended at the time the Registration Statement became effective, the
"Registration Statement" and the "Proxy Statement/Prospectus," respectively).
Before rendering the opinions expressed below, we examined the
Registration Statement, the Proxy Statement/Prospectus, the Merger Agreement,
the Registration Rights Agreement, the Investment Monitoring Agreement and
originals or copies of such corporate records of Somerset Sub and Somerset
L.L.C., and such agreements and other documents and instruments as we deemed
necessary for the purposes of rendering the opinions set forth below. As to
matters of fact relevant to the opinions expressed below and as to factual
matters arising in connection with our examination of the corporate documents,
records and instruments of Somerset Sub and Somerset L.L.C., and other documents
or writings, we have relied, to the extent we deemed appropriate, upon the
representations and warranties made by Somerset Sub in the Merger Agreement, and
upon certificates and other communications of public officials and corporate
officers of Somerset Sub and Somerset L.L.C. without further investigation as to
the facts set forth therein. We have assumed the genuineness of all signatures,
the legal capacity of natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or photostatic copies and the
truthfulness of all statements of facts contained therein, and the due
authorization, execution and delivery by the parties other than Somerset Sub,
Somerset L.L.C. and Somerset Capital Partners of all documents to which they are
parties that were examined by us (including, but not limited to, the Merger
Agreement, the Registration Rights Agreement and the Investment Monitoring
Agreement). In addition, we made, except to the extent hereinafter expressly
stated, such other investigations as we deemed necessary or appropriate for the
purposes of rendering the opinions expressed below.
Based on the foregoing, and subject to the limitations set
forth below, we are of the opinion that:
(i) Somerset Sub is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Texas and has all
requisite corporate power and authority to carry on its business as now being
conducted; and Somerset L.L.C. is a limited liability company duly formed,
validly existing and in good standing under the laws of the State of Delaware
and has all requisite corporate power and authority to carry on its business as
now being conducted;
(ii) The affirmative vote of Somerset L.L.C., as the sole
shareholder of Somerset Sub, obtained in accordance with Section 3.3 of the
Merger Agreement is the only vote of the holders of any class or series of the
capital stock of Somerset necessary to approve the Merger Agreement and the
Merger;
(iii) Somerset Sub has the requisite corporate power to merge
with DI as contemplated by the Merger Agreement;
36
(iv) The execution and delivery of the Merger Agreement, the
Registration Rights Agreement and the Investment Monitoring Agreement did not,
and the consummation of the Merger and the performance of the Registration
Rights Agreement and the Investment Monitoring Agreement will not, violate any
provisions of Articles of Incorporation or Bylaws of Somerset Sub or the Limited
Liability Company Agreement of Somerset L.L.C.; and
(v) The Merger Agreement has been duly and validly authorized,
executed and delivered by Somerset Sub, and is a valid and binding agreement of
Somerset Sub, enforceable in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws or court decisions affecting creditors' rights
generally and by other general equitable principles; each of the Registration
Rights Agreement and the Investment Monitoring Agreement has been duly and
validly authorized, executed and delivered by Somerset L.L.C., and is a valid
and binding agreement of Somerset L.L.C., enforceable in accordance with its
terms, except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws or court decisions affecting
creditors' rights generally and by other general equitable principles; and the
Investment Monitoring Agreement has been duly and validly authorized, executed
and delivered by Somerset Capital Partners, and is a valid and binding agreement
of Somerset Capital Partners, enforceable in accordance with its terms, except
as such enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws or court decisions affecting creditors' rights
generally and by other general equitable principles.
With respect to the opinion expressed in paragraph (v) above,
we express no opinion as to the availability of specific performance, injunctive
relief, reformation or any other equitable remedies with respect to the
enforcement of any provision contained in the Merger Agreement, the Registration
Rights Agreement or the Investment Monitoring Agreement, and we have further
assumed that the Merger Agreement, the Registration Rights Agreement and the
Investment Monitoring Agreement have been duly executed and delivered by the
parties thereto other than Somerset Sub, Somerset L.L.C., and Somerset Capital
Partners and constitute the legal, valid and binding obligation of each of such
other parties thereto, enforceable in accordance with their terms.
Whenever any opinion expressed herein with respect to the
existence or absence of facts is qualified by the phrase "to our knowledge" such
phrase indicates that, except as otherwise expressed, (i) no information has
come to the attention of any partner or associate of this firm who has devoted
substantive attention to the transactions contemplated by the Merger Agreement
that has given any such person actual knowledge of the existence of such facts,
(ii) we have not undertaken any independent investigation to determine the
existence or absence of such facts and (iii) no inference as to our knowledge of
the existence of such facts should be drawn from the fact of our representation
of Somerset Sub, Somerset L.L.C., and Somerset Capital Partners or our
expression of such opinion.
William R. Ziegler, a partner in this firm, is a general
partner of Somerset Capital Partners, the Managing Member of Somerset L.L.C.,
and beneficially owns 5,000 shares of DI Common Stock.
37
In rendering the foregoing opinions, we render no opinion as
to any matters governed by any laws other than the laws of the State of New York
and the applicable federal laws of the United States of America. The opinions
and statements expressed herein are solely for your benefit and may not be
relied upon by any other person without our prior written permission.
Very truly yours,
PARSON & BROWN
38
EXHIBIT D
FORM OF LEGAL OPINION OF COKINOS, BOSIEN & YOUNG
Somerset Investment Corp.,
Somerset Capital Partners
and
Somerset and Drilling Associates, L.L.C.
69 Delaware Avenue
Buffalo, New York 14202
Roy T. Oliver, Jr.
and
R.T. Oliver, Inc.
6601 S.W. 29th Street
Oklahoma City, Oklahoma 73179
Mike L. Mullen
and
Land Rig Acquisition Corp.
8411 Preston Road
Suite 730, LB2
Dallas, Texas 75225
Gentlemen:
We have acted as counsel to DI Industries, Inc., a Texas
corporation ("DI"), and DI Merger Sub, Inc., a Delaware corporation and a wholly
owned subsidiary of DI ("Sub"), in connection with (i) the Agreement and Plan of
Merger (the "Somerset Merger Agreement") dated as of May 7, 1996, between DI and
Somerset Investment Corp., a Texas corporation ("Somerset Sub"), and the related
merger of Somerset Sub with and into DI (the "Somerset Merger"), (ii) the
Agreement and Plan of Merger (the "M/O Merger Agreement" and, together with the
Somerset Merger Agreement, the "Merger Agreements") dated as of May 7, 1996,
among DI, Sub, Mike L. Mullen, an individual ("Mullen"), Roy T. Oliver, Jr., an
individual ("Oliver"), R.T. Oliver, Inc., an Oklahoma corporation ("RTO"), and
Land Rig Acquisition Corp., a Delaware corporation ("LRAC"), and the related
mergers of RTO and Sub with and into LRAC (the "M/O Merger" and, together with
the Somerset Merger, the "Mergers"), (iii) the Registration Rights Agreement
dated May 7, 1996, among Somerset Drilling Associates, L.L.C., a Delaware
limited liability company ("Somerset L.L.C."), Norex Drilling, Ltd., Oliver,
U.S. Rig and Equipment, Inc., Mike Mullen Energy Equipment Resource, Inc., GCT
Investments, Inc., and DI (the "Registration Rights Agreement"), and (iv) the
Investment Monitoring Agreement dated May 7, 1996, among DI, Somerset L.L.C. and
Somerset Capital Partners (the "Investment Monitoring Agreement"). This opinion
is being delivered pursuant to Section 6.3(d) of each of
39
the Merger Agreements. Capitalized terms used but not defined herein are used
with the same meanings as set forth in the Merger Agreements.
In connection with the offer, sale and delivery of the shares
of DI Common Stock to be issued to the shareholders of Somerset Sub, RTO and
LRAC pursuant to the Mergers, DI has filed with the Securities and Exchange
Commission (the "Commission"), under the Securities Act of 1933, as amended (the
"Act"), a Registration Statement on Form S-4 (File No. _____) (the "Registration
Statement"), including a Proxy Statement/Prospectus of DI (as amended at the
time the Registration Statement became effective, the "Registration Statement"
and the "Proxy Statement/Prospectus," respectively).
Before rendering the opinions expressed below, we examined the
Registration Statement, the Proxy Statement/Prospectus, the Merger Agreements,
the Registration Rights Agreement, the Investment Monitoring Agreement and
originals or copies of such corporate records of DI, Sub, and such agreements
and other documents and instruments as we deemed necessary for the purposes of
rendering the opinions set forth below. As to matters of fact relevant to the
opinions expressed below and as to factual matters arising in connection with
our examination of the corporate documents, records and instruments of DI and
Sub, and other documents or writings, we have relied, to the extent we deemed
appropriate, upon the representations and warranties made by DI and Sub in the
Merger Agreements, and upon certificates and other communications of public
officials and corporate officers of DI and Sub without further investigation as
to the facts set forth therein. We have assumed the genuineness of all
signatures, the legal capacity of natural persons, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified, conformed or photostatic copies and
the truthfulness of all statements of facts contained therein, and the due
authorization, execution and delivery by the parties other than DI and Sub of
all documents to which they are parties that were examined by us (including, but
not limited to, the Merger Agreements, the Registration Rights Agreement and the
Investment Monitoring Agreement). In addition, we made, except to the extent
hereinafter expressly stated, such other investigations as we deemed necessary
or appropriate for the purposes of rendering the opinions expressed below.
Based on the foregoing, and subject to the limitations set
forth below, we are of the opinion that:
(i) DI is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Texas and has all requisite
corporate power and authority to carry on its business as now being conducted as
described in the Proxy Statement/Prospectus; and Sub is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware and has all requisite corporate power and authority to carry on the
business now being conducted by DI as described in the Proxy
Statement/Prospectus;
(ii) The certificate of merger prepared for filing with the
Secretary of State of Delaware in connection with the M/O Merger complies in all
material respects with the requirements of the Delaware General Corporation Law
("DGCL") and the articles of merger prepared for filing with the Secretary of
State of Texas in connection with the Somerset Merger
40
comply in all material respects with the requirements of the Texas Business
Corporation Act ("TBCA"), and upon filing of such certificate with the Secretary
of State of Delaware, filing of such articles with the Secretary of State of
Texas, compliance with the provisions of the Oklahoma General Corporation Act
("OGCA") regarding mergers of Oklahoma corporations with non-Oklahoma
corporations, and the issuance of a certificate of merger with respect to the
Somerset Merger by the Secretary of State of Texas, the Mergers will become
effective in accordance with the terms of the Merger Agreements and the
applicable provisions of the DGCL, the TBCA and the OGCA;
(iii) The affirmative vote of the holders of two thirds of the
shares of DI Common Stock outstanding on the record date for the approval of the
stockholders of DI obtained in accordance with Section 4.2 of each of the Merger
Agreements is the only vote of the holders of any class or series of the capital
stock of DI necessary to approve the Merger Agreements and the Mergers;
(iv) DI has the requisite corporate power to merge with
Somerset Sub as contemplated by the Somerset Merger Agreement and issue the DI
Common Stock as contemplated by the Merger Agreements, and Sub has the requisite
corporate power to merge with RTO and LRAC as contemplated by the M/O Merger
Agreement;
(v) The execution and delivery of the Merger Agreements, the
Registration Rights Agreement and the Investment Monitoring Agreement did not,
and the consummation of the Mergers and the performance of the Registration
Rights Agreement and the Investment Monitoring Agreement will not, violate any
provisions of the Articles of Incorporation or Bylaws of DI or Sub and, to our
knowledge, will not violate or constitute a breach under, or require the consent
of any party to, any agreement or instrument to which DI or Sub is a party or to
which any of their assets are subject which has not been obtained, including the
consent of Nordlandsbanken AS under the Loan Agreement between Drillers, Inc., a
wholly owned Subsidiary of DI, and Nordlandsbanken AS dated December 12, 1994,
and the consent of Charter National Bank, which consent has been obtained;
(vi) Each of the Merger Agreements, the Registration Rights
Agreement and the Investment Monitoring Agreement has been duly and validly
authorized, executed and delivered by DI, and each of the Merger Agreements, the
Registration Rights Agreement and the Investment Monitoring Agreement is a valid
and binding agreement of DI, enforceable in accordance with its terms, except as
such enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws or court decisions affecting creditors' rights
generally and by other general equitable principles; and the M/O Merger
Agreement has been duly and validly authorized, executed and delivered by Sub,
and the M/O Merger Agreement is a valid and binding agreement of Sub,
enforceable in accordance with its terms, except as such enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium or other similar
laws or court decisions affecting creditors' rights generally and by other
general equitable principles;
(vii) The Registration Statement has become effective under
the Act, and to our knowledge, no stop order suspending the effectiveness of the
Registration Statement has been
41
issued and no proceedings for such purpose have been initiated or are pending or
threatened by the Commission under the Act;
(viii) The shares of DI Common Stock to be delivered in
connection with the Mergers are duly authorized and reserved for issuance and,
when issued in accordance with the terms and conditions of the Merger
Agreements, will be validly issued, fully paid and nonassessable; and
(ix) The subscription of Norex Drilling, Ltd. for 4,000 shares
of DI Series B Preferred Stock has been canceled and the $4 million subscription
price has been repaid with $4 million borrowed from Norex Drilling, Ltd.
pursuant to the Credit Agreement of even date herewith between DI and Norex
Drilling, Ltd.; and all of the DI Series B Warrants have been surrendered and
canceled.
With respect to the opinion expressed in paragraph (vi) above,
we express no opinion as to the availability of specific performance, injunctive
relief, reformation or any other equitable remedies with respect to the
enforcement of any provision contained in any of the Merger Agreements, the
Registration Rights Agreement or the Investment Monitoring Agreement, and we
have further assumed that the Merger Agreements, the Registration Rights
Agreement and the Investment Monitoring Agreement have been duly executed and
delivered by the parties thereto other than DI and Sub and constitute the legal,
valid and binding obligation of each of the parties thereto other than DI and
Sub, enforceable in accordance with their terms.
Whenever any opinion expressed herein with respect to the
existence or absence of facts is qualified by the phrase "to our knowledge" such
phrase indicates that, except as otherwise expressed, (i) no information has
come to the attention of any partner or associate of this firm who has devoted
substantive attention to the transactions contemplated by the Merger Agreement
that has given any such person actual knowledge of the existence of such facts,
(ii) we have not undertaken any independent investigation to determine the
existence or absence of such facts and (iii) no inference as to our knowledge of
the existence of such facts should be drawn from the fact of our representation
of DI and Sub or our expression of such opinion.
In rendering the foregoing opinions, we render no opinion as
to any matters governed by any laws other than the laws of the State of Texas,
the applicable provisions of the DGCL and the applicable federal laws of the
United States of America. The opinions and statements expressed herein are
solely for your benefit and may not be relied upon by any other person without
our prior written permission.
Very truly yours,
COKINOS, BOSIEN & YOUNG
42
EXHIBIT E
FORM OF WARRANT
The Form of Warrant referenced hereto as Exhibit E does not differ in any
material respect from the Form of Warrant filed as Exhibit G to the Rig Merger
Agreement attached as Appendix A to this Proxy Statement. As such, the Form of
Warrant has not been included as an exhibit to this agreement.
43
Exhibit 2.2.1
AMENDMENT
DATED JUNE 11, 1996
TO THE
AGREEMENT AND PLAN OF MERGER
BETWEEN
DI INDUSTRIES, INC.
AND
SOMERSET INVESTMENT CORP.
DATED MAY 7, 1996
AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This Amendment to Agreement and Plan of Merger, dated as of the 11th day
of June, 1996 (the "Amendment"), is between DI Industries, Inc., a Texas
corporation ("DI"), and Somerset Investment Corp., a Texas corporation
("Somerset Sub").
WHEREAS, DI and Somerset Sub have entered into an Agreement and Plan of
Merger, dated as of the 7th day of May, 1996 (the "Merger Agreement");
WHEREAS, since the date of the Merger Agreement, (i) Somerset Drilling
Associates, L.L.C. ("Somerset L.L.C."), formerly the sole shareholder of
Somerset Sub, has transferred Common Stock of Somerset Sub to Somerset Capital
Partners ("SCP"), a New York general partnership and the Managing Member of
Somerset L.L.C., and (ii) the parties have agreed to increase the number of
authorized shares of DI Common Stock to 300,000,000, rather than to 200,000,000;
and
WHEREAS, DI and Somerset Sub wish to amend the Merger Agreement to reflect
the foregoing and in certain other respects,
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, the parties hereto hereby agree as follows:
1. CONSENT TO TRANSFE DI hereby consents to the transfer by Somerset
L.L.C. to SCP of shares of Common Stock of Somerset Sub.
2. AMENDMENTS TO REFLECT TRANSFER. In order to reflect the transfer of
Common Stock of Somerset Sub to SCP, the Merger Agreement is hereby amended in
the following respects:
(A) Paragraph (a) of Section 1.8 of the Merger Agreement is hereby
amended and restated to read as follows:
"(a) As soon as practicable after the Effective Time, the Surviving
Corporation shall deliver to the shareholders of Somerset Sub certificates
representing the Surviving Corporation Common Stock issuable to them
pursuant to the terms of Section 1.7(a) hereof."
(B) Section 1.11 of the Merger Agreement is hereby amended and
restated to read as follows:
"1.11 ADJUSTMENT. If for any reason on the Closing Date the number
of shares of DI Common Stock which are issued and outstanding or subject
to outstanding options or warrants is less than indicated in Section
2.1(b) hereof, the aggregate number of shares issuable to the shareholders
of Somerset Sub pursuant to Section 1.7 shall be reduced by an equivalent
number of shares. If the number of shares of DI Common Stock issued and
1
outstanding or subject to outstanding options or warrants on the Closing
Date exceeds the number of shares indicated in Section 2.1(b), the
aggregate number of shares issuable pursuant to Section 1.7 shall be
increased by an equivalent number of shares. The parties hereto
acknowledge that the continued exercisability of an option to purchase one
million shares of DI Common Stock previously granted to Max M. Dillard is
uncertain and that, so long as that uncertainty exists on the Closing
Date, the shares subject to that option will not be deemed to be subject
to outstanding options for the purposes of this Section."
(C) Paragraph (a) of Section 5.7 of the Merger Agreement is hereby
amended and restated to read as follows:
"(a) From and after the Effective Time, the Surviving Corporation
shall, to the fullest extent permitted under applicable law, indemnify,
defend and hold harmless each person who is a shareholder, officer or
director of Somerset Sub against all losses, claims, damages, costs,
expenses, liabilities or judgments or amounts that are paid in settlement
with the approval of the indemnifying party (which approval shall not be
unreasonably withheld) of or in connection with any claim, action, suit,
proceeding or investigation whether asserted or claimed prior to, or at or
after, the Effective Time to the extent, and only to the extent, such
claim arises from any untrue statement of a material fact in the
Registration Statement and Proxy Statement or any omission to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, except to the extent such claim is
subject to indemnification pursuant to Section 5.7(b) hereof (and the
Surviving Corporation will pay expenses in advance of final disposition of
any such action or proceeding to each indemnified party to the full extent
permitted by law)."
(D) Paragraph (d) of Section 6.2 of the Merger Agreement is hereby
amended and restated to read as follows:
"(d) The shareholders of Somerset Sub shall have contributed to the
capital of Somerset Sub at least $25,000,000 in cash."
(E) Paragraph (f) of Section 6.3 of the Merger Agreement is hereby
amended and restated to read as follows:
"(f) DI shall have executed and issued to the stockholders of
Somerset Sub warrants in the form of Exhibit E hereto to purchase up to an
aggregate of 1,720,000 shares of DI Common Stock. The warrants shall be
issued in the same proportion that shares of DI Common Stock are issued
pursuant to the Merger."
3. AMENDMENT RELATING TO AMENDMENT TO ASection 1.5 of the Merger
Agreement is hereby amended and restated to read as follows:
2
"1.5 ARTICLES OF INCORPORATION; BYLAWS. The Articles of
Incorporation of DI, as in effect immediately prior to the Effective Time,
shall be amended as of the Effective Time so that:
(i) Article One thereof reads in its entirety:
"The name of the corporation is [TO BE DETERMINED], Inc.";
(ii) the first sentence of Article Four thereof reads in its
entirety:
"The corporation shall have the authority to issue an
aggregate of 301,000,000 shares , consisting of 1,000,000 shares of
Preferred Stock, par value $1.00 per share ("Preferred Stock") and
300,000,000 shares of Common Stock, par value $0.10 per share
("Common Stock")"; and
(iii) a new Article Thirteen shall be added to read as follows:
"If, with respect to any action to be taken by the
shareholders of the Corporation, any provisions of the Texas
Business Corporation Act would, but for this Article XIII, require
the vote or concurrence of the holders of shares having more than a
majority of the votes entitled to be voted thereon, or of any class
or series thereof, the vote or concurrence of the holders of shares
having only a majority of the votes entitled to be cast thereon, or
of any class or series thereof, shall be required with respect to
any such action."
and, as so amended, such Articles of Incorporation shall be the Articles
of Incorporation of the Surviving Corporation and thereafter shall
continue to be its Articles of Incorporation until amended as provided
therein and under the TBCA. The bylaws of DI, as in effect immediately
prior to the Effective Time, shall be the bylaws of the Surviving
Corporation and thereafter shall continue to be its bylaws until amended
as provided therein and under the TBCA."
4. AMENDMENT TO SECTION 7.2Paragraph (c) of Section 7.2 of the Merger
Agreement is hereby amended and restated to read as follows:
"(c) If the Merger is not consummated for any reason other than as a
result of a material breach by Somerset Sub of any of its representations,
covenants or agreements contained in this Agreement, and if, prior to
December 31, 1996, DI, or its stockholders, publicly announce, enter into
a letter of intent relating to, enter into a definitive agreement
providing for, or consummate, a DI Acquisition Transaction, DI agrees to
pay to Somerset Sub an amount equal to thirty-three and one-third percent
(33.3%) of the difference between the consideration paid in the DI
Acquisition Transaction (including any and all distributions from DI to
its stockholders from the date hereof through the later of such
announcement, letter of intent, agreement or consummation) and the
Threshold
3
Amount (defined below). The "Threshold Amount" shall be $30 million if
such DI Acquisition Transaction involves all of the outstanding securities
or assets of DI. If such DI Acquisition Transaction involves less than all
of the outstanding securities or assets of DI, the Threshold Amount shall
be reduced by a proportionate amount (e.g., if one half of the assets of
DI are sold in such DI Acquisition Transaction, the Threshold Amount shall
be $15 million)."
5. COUNTERPARTS. This Amendment may be executed in counterparts, each
of which shall be an original, but all of which together shall constitute one
and the same agreement.
6. EFFECT OF AMENDMENT. Except as specifically amended hereby, the
Merger Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.
DI INDUSTRIES, INC.
By:/s/ IVAR SIEM
Name: Ivar Siem
Title: Chairman, President and Chief
Executive Officer
SOMERSET INVESTMENT CORP.
By:/s/ WILLIAM R. ZIEGLER
Name: William R. Ziegler
Title: President
4
<PAGE>
SECOND AMENDMENT
DATED JULY 26, 1996
TO THE
AGREEMENT AND PLAN OF MERGER
BETWEEN
DI INDUSTRIES, INC.
AND
SOMERSET INVESTMENT CORP.
DATED MAY 7, 1996
AS AMENDED JUNE 11, 1996
<PAGE>
SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This Second Amendment to Agreement and Plan of Merger, dated as of the
26th day of July, 1996 (the "Amendment"), is between DI Industries, Inc., a
Texas corporation ("DI"), and Somerset Investment Corp., a Texas corporation
("Somerset Sub").
WHEREAS, DI and Somerset Sub have entered into an Agreement and Plan of
Merger, dated as of the 7th day of May, 1996, as amended on June 11, 1996 (the
"Merger Agreement"), and wish to amend the Merger Agreement in certain respects;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, the parties hereto hereby agree as follows:
1. AMENDMENT TO ARTICLE VI.Paragraph (d) of Section 6.1 of the Merger
Agreement is hereby deleted in its entirety and a new paragraph (i) shall be
added to Section 6.3 to read as follows:
"(i) A registration statement on Form S-3 covering the resale of the
DI Common Stock to be issued pursuant to Section 1.7 hereof shall be
effective on the Closing Date, and all post-effective amendments filed
shall have been declared effective or shall have been withdrawn; and no
stop-order suspending the effectiveness thereof shall have been issued and
no proceedings for that purpose shall have been initiated or, to the
knowledge of the parties, threatened by the Commission."
2. COUNTERPARTS. This Amendment may be executed in counterparts, each of
which shall be an original, but all of which together shall constitute one and
the same agreement.
3. EFFECT OF AMENDMENT. Except as specifically amended hereby, the Merger
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.
DI INDUSTRIES, INC.
By:
Name: Ivar Siem
Title: Chairman, President and Chief
Executive Officer
1
SOMERSET INVESTMENT CORP.
By:
Name: William R. Ziegler
Title: President
2
<PAGE>
APPENDIX C
DI INDUSTRIES, INC.
1996 EMPLOYEE STOCK OPTION PLAN
THIS 1996 EMPLOYEE STOCK OPTION PLAN (this "Plan") is adopted by the
Board of Directors (the "Board of Directors") of DI INDUSTRIES, INC., a Texas
corporation (the "Corporation"), effective the _____ day of _____________, 1996
(the "Adoption Date").
WITNESSETH:
WHEREAS, the Corporation believes that allowing certain employees to
obtain shares of common stock, $0.10 par value ("Common Stock"), of the
Corporation by granting stock options as hereinafter provided is beneficial to
the initial and continued success of the Corporation;
NOW, THEREFORE, the Corporation agrees to provide for the granting and
exercising of stock options to certain employees of the Corporation, subject to
the following conditions and provisions:
1. PURPOSE. The purpose of this Plan is to secure for the Corporation
and its shareholders the benefits that flow from providing certain employees
with the incentive inherent in common stock ownership. The Corporation
recognizes that an employee stock option plan may aid in attracting and
retaining employees of exceptional ability because of the opportunity offered to
acquire a proprietary interest in the business of the Corporation.
2. AMOUNT OF STOCK. The total number of shares of Common Stock to be
subject to options granted pursuant to this Plan may not exceed 7,000,000
shares. This total number of shares will be subject to appropriate increase or
decrease under Section 13 of this Plan in the event of a stock dividend, or upon
a subdivision, split-up, combination or reclassification of, the shares
purchasable under such options. In the event that options granted under this
Plan lapse or terminate without being exercised, additional options may be
granted covering the shares not purchased under such options.
3. STOCK OPTION COMMITTEE. The Board of Directors will from time to
time appoint a Stock Option Committee (hereinafter called the "Committee") to,
among other duties, serve under this Plan. Members of the Committee will serve
for such period of time as the Board of Directors may determine and will be
subject to removal by the Board of Directors at any time. The initial members of
the Committee will consist of either:
(i) two or more persons, each of whom are disinterested
persons within the meaning of Paragraph (c)(2) of Rule 16b-3 (or any
successor rule) ("Rule 16b-3") promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as
amended, as such term is interpreted from time to time; OR
(ii) the entire Board of Directors of the Corporation, so long
as each member of the Board of Directors is an individual who qualifies
as a disinterested person.
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The Board of Directors may, at any time, terminate the functions of the
Committee and reassume all powers and authority previously delegated to the
Committee; provided, however, that the Committee will have sole and exclusive
authority to grant options under this Plan to eligible employees, officers or
directors of the Corporation during any and all periods of time when any member
of the Board of Directors does not qualify as a disinterested person.
The Board of Directors will, in its discretion, establish such rules
and regulations as it may deem appropriate for the proper administration of the
Plan and will have full authority and power to interpret and construe any
provision of the Plan or the terms and conditions of any option outstanding
under the Plan. Decisions of the Board of Directors will be final, binding and
conclusive on all persons who have an interest in the Plan or any option
outstanding under the Plan.
4. STOCK OPTIONS. Any option granted under this Plan may be either an
"Incentive Stock Option" or a "Non-qualified Stock Option." An Incentive Stock
Option is any option granted under this Plan that is intended to qualify as an
incentive stock option under Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), or any equivalent successor provision of the Code, if
applicable. A Non-qualified Stock Option is any option granted under this Plan
that is not an Incentive Stock Option. Except as specifically provided herein,
the provisions of this Plan apply in the same manner to Incentive Stock Options
and the Non-qualified Stock Options. Notwithstanding the foregoing, in no event
shall an Incentive Stock Option be granted to an individual who is not an
employee of the Company. Notwithstanding the foregoing, in no event shall an
Incentive Stock Option be granted to an individual who is not an employee of the
Company.
5. ELIGIBILITY AND PARTICIPATION. Options may be granted pursuant to
this Plan only to employees of the Corporation or any parent or a subsidiary of
the Corporation (such employees being hereinafter sometimes called "employees").
For purposes of this Plan, the term "employee" shall be defined to inlude
individuals who perform personal services for the Corporation on a contract
basis. From time to time, the Committee may select the employees to whom options
may be granted and will determine the number of shares to be covered by each
option so granted. The aggregate fair market value (determined at the time an
option is granted) of the Common Stock with respect to which Incentive Stock
Options are exercisable for the first time by any employee in any calendar year
(under all such plans of the Corporation and a parent or subsidiary corporation)
may not exceed One Hundred Thousand Dollars ($100,000) or such greater or lesser
limit that may hereafter be imposed by the Code or other applicable law. Future
as well as present employees (including employees who are directors) will be
eligible to participate in this Plan. Directors who are not employees of the
Corporation or a parent or a subsidiary of the Corporation are not eligible to
participate in this Plan. No Incentive Stock Option may be granted under this
Plan to an employee who, immediately before such option is granted, owns (or is
attributed by the Code as owning) stock possessing more than ten percent (10%)
of the total combined voting power of all classes of stock of the Corporation or
any parent or subsidiary corporation, if any, unless (i) such option price is
specially valued as provided in Section 7 of this Plan and (ii) the term of such
option is limited as provided in Section 9 of this Plan. The holder of any
option granted pursuant to this Plan will not have any of the rights of a
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shareholder with respect to the shares covered by the option until one or more
certificates for such shares are delivered to such holder upon the due exercise
of the option.
For purposes of this Agreement, the fair market value of a share of
Common Stock on any particular date shall be the last sales price of the Common
Stock on that date as reported on a national securities exchange or on the
NASDAQ National Market System or, if last sale reporting quotation is not
available for the Common Stock, the average of the bid and ask prices for the
Common Stock at the end of the trading day, as reported by NASDAQ or in the
National Quotation Bureau, Inc.'s "Pink Sheets" or, if such quotations are not
available, such fair market value will be determined by the Committee, in
accordance with its discretion in making a bona fide, good faith determination
of fair market value, without regard to any restriction other than a restriction
that, by its terms, will never lapse.
6. OPTION AGREEMENT. The terms and provisions of each option granted
under this Plan will be set forth in an appropriate Stock Option Agreement
(hereinafter called an "Option Agreement") between the Corporation and the
employee receiving such option in a form to be approved by the Committee. Each
Option Agreement will state the number of shares of Common Stock purchasable
thereunder and will identify the option granted thereby as an Incentive Stock
Option or a Non-qualified Stock Option.
7. PRICE. The purchase price per share of Common Stock purchasable
under options granted pursuant to this Plan will be determined by the Committee
but, in the case of an Incentive Stock Option, may not be less than one hundred
percent (100%) of the fair market value of a share of Common Stock at the time
the Incentive Stock Options are granted. In the event an employee, immediately
before an Incentive Stock Option is granted to such employee, owns (or is
attributed by the Code as owning) stock possessing more than ten percent (10%)
of the total combined voting power of all classes of stock of the Corporation or
of its parent or subsidiary corporations, if any, then the purchase price per
share of Common Stock purchasable under the Incentive Stock Options granted to
such employee under this Plan may not be less than one hundred and ten percent
(110%) of the fair market value at the time the options are granted. The full
purchase price of shares purchased must be paid upon exercise of the option.
Under certain circumstances, such purchase price per share may be subject to
adjustment as referred to in Section 13 of this Plan.
8. EXERCISE PERIOD. The Committee will determine when each option may
be exercised in whole or in part, such exercise period to be contained in the
applicable Option Agreement. The Committee may, however, at any time, in its
sole discretion, amend any outstanding Option Agreement to shorten the time that
the option governed thereby is exercisable or to provide that the time for
exercising such option will be shortened upon the occurrence of a specified
event.
9. OPTION PERIOD. The Committee will determine the maximum period of
time within which options granted under this Plan must be exercised after the
granting of such option, which period must terminate by the terms of Option
Agreement pertaining to such option no later than ten (10) years from the date
that such option is granted. Notwithstanding the preceding sentence, in the
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event that an employee, immediately before an Incentive Stock Option is granted
to such employee, owns (or is deemed under applicable attribution rules
prescribed by the Code to own) stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Corporation or
any parent or subsidiary corporations, then no Incentive Stock Option granted to
such employee may be exercisable after the expiration of five (5) years from the
date that the Incentive Stock Option is granted. The actual expiration date
stated in an Option Agreement is hereinafter called the "Expiration Date".
Notwithstanding any other provision of this Plan to the contrary, no option may
be granted under this Plan after the tenth anniversary of the Adoption Date.
10. METHOD OF EXERCISING THE OPTION. Each Option Agreement will provide
that the option governed thereby may be exercised by the employee by delivering
to the Secretary of the Corporation (i) written notice from the employee
designating the number of shares of Common Stock with respect to which the
option is being exercised and (ii) the total purchase price for those shares of
Common Stock, which purchase price must be in the form of (a) cash or a
cashier's or certified check payable to the order of the Corporation, or (b) the
tender to the Corporation of such number of shares of Common Stock owned by the
employee having an aggregate fair market value as of the date of exercise that
is not greater than the total purchase price for the shares of Common Stock with
respect to which the option is being exercised and by paying the remaining
amount of the purchase price as provided in (a) above. The Board of Directors
will have the sole and exclusive discretion to determine whether or not property
other than cash or shares of Common Stock may be used to purchase shares of
Common Stock upon exercise of an option and, if so, to determine the value of
the property received.
11. TERMINATION. Each Option Agreement will provide that:
(a) If the employee for any reason whatsoever, other than
death or permanent and total disability, as defined in (b) below,
ceases to be employed by the Corporation, or a parent or subsidiary
corporation of the Corporation, and prior to such cessation, the
employee was employed at all times from the date of the granting of
such option until the date of such cessation, the option must be
exercised by the employee (to the extent that the employee is entitled
to do so at the date of cessation) within three (3) months following
the date of cessation of employment, subject to the Expiration Date;
provided, however, that if the employee is terminated for cause, the
option will immediately terminate. Notwithstanding the foregoing, the
Board of Directors may, in its sole discretion, extend for a reasonable
period the time in which an employee may exercise any Non-qualified
Stock Option after the date of cessation of employment, subject to the
Expiration Date.
(b) If the employee becomes permanently and totally disabled,
as hereinafter defined, while employed by the Corporation or a parent
or subsidiary corporation of the Corporation, and prior to such
disability the employee was employed at all times from the date of the
granting of the option until the date of disability, the option must be
exercised by the employee (to the extent that the employee is entitled
to do so at the date of disability) at any
- 4 -
time within one (1) year after the date of disability or the Expiration
Date, whichever is earlier.
"Permanently and totally disabled" means being unable to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to
result in death or which has lasted or can be expected to last for a
continuous period of not less than twelve (12) months. Such
determination of permanent and total disability must be made in
accordance with the requirements of Section 22(e)(3), and applicable
regulations, of the Code, or any other applicable method necessary for
the continued qualification of this Plan under Section 422 of the Code,
or any equivalent successor provision, if applicable. In the absence of
any specific requirements for this determination, the decision of the
Committee, as aided by any physicians designated by the Committee shall
be conclusive and the Board of Directors shall send written notice to
the employee of the determination that he has become permanently and
totally disabled.
(c) In the event that the employee dies while employed by the
Corporation or a parent or subsidiary corporation of the Corporation,
and prior to death the employee was employed at all times from the date
of the granting of the option until the date of death, the option must
be exercised (to the extent that the employee is entitled to do so at
the date of death) by a legatee or legatees of the employee under his
will, or by his personal representatives or distributes, at any time
within one (1) year after the date of death or the Expiration Date,
whichever is earlier.
Nothing in (a), (b) or (c) shall extend the time for
exercising any option granted pursuant to this Plan beyond the
Expiration Date.
12. ASSIGNABILITY. Each Option Agreement will provide that the option
granted thereby may not be transferable or assignable by the employee in any
form or fashion, other than by will or by the laws of decent and distribution,
and that the option may be exercised, during the lifetime of the employee, only
by the employee.
13. CHANGES IN CAPITAL STRUCTURE. Each Option Agreement will provide
that, subject to the provisions set forth in Section 14, if the option is
exercised subsequent to any stock split, reverse stock split, split-up,
recapitalization, merger, consolidation, combination or exchange of shares,
reorganization, or liquidation occurring after the date of the grant of the
option, as a result of which shares of any class have been issued in respect of
outstanding Common Stock or Common Stock has been changed into the same or a
different number of shares of the same or another class or classes, then the
employee so exercising the option will receive, for the aggregate price paid
upon such exercise, the aggregate number and class of shares that, if Common
Stock (as authorized at the date of the grant of the option) had been purchased
at the date of the grant of the option for the same aggregate price (on the
basis of the price per share set forth in Section 7 hereof) and had not been
disposed of, such employee would be holding, at the time of such exercise, as a
result of such purchase and all such stock splits, reverse stock splits,
split-ups, recapitalizations, mergers,
- 5 -
consolidations, combinations or exchanges of shares, reorganizations, or
liquidations; provided, however, that no fractional share may be issued upon any
such exercise, and the aggregate price paid will be appropriately reduced on
account of any fractional share not issued.
14. CORPORATE MERGER, CONSOLIDATION, ETC.. In the event of a
dissolution or liquidation of the Corporation or a merger or consolidation in
which the Corporation is not the surviving corporation, any outstanding options
hereunder may be terminated by the Corporation as of the effective date of such
dissolution, liquidation, merger or consolidation by giving notice to each
holder thereof of its intention to do so not less than ten (10) days preceding
such effective date and permitting the exercise of all of outstanding options
until such effective date, or the Expiration Date if earlier. Notwithstanding
the preceding sentence, if the Corporation is not the surviving corporation as a
result of the Corporation being reorganized or merged or consolidated with
another corporation while unexercised options are outstanding under this Plan,
the surviving corporation may assume the unexercised options outstanding under
this Plan or substitute new options in the surviving corporation for the
outstanding options; provided, however, that the excess of the aggregate fair
market value of the securities subject to the options immediately after the
substitution or assumption over the aggregate option price of such shares is not
less than the excess of the aggregate fair market value of the Common Stock
subject to the outstanding option immediately before such substitution or
assumption over the aggregate option price of such Common Stock. The existence
of this Plan or of options granted hereunder will not in any way prevent any
transaction described herein and no holder of options granted under this Plan
will have the right to prevent any such transaction.
15. PAYMENT OF TAXES UPON EXERCISE. If the Committee so requires, the
Option Agreement governing any Non-qualified Stock Option will include (i) an
acknowledgement by the employee receiving such Non-qualified Stock Option that
under currently applicable law, the employee's taxable income may include, at
the time of exercise of the option, the amount by which the fair market value of
the shares purchased pursuant to the option exceeds the purchase price paid and
(ii) the employee's authorization of the Corporation to withhold shares of
Common Stock purchased by the employee pursuant to the exercise of such option
of a value equivalent to the amount of tax required to be withheld by the
Corporation out of any taxable income derived by the employee upon exercise of
the option unless the employee delivers to the Corporation cash or other shares
of Common Stock owned by the employee in such amount.
16. REGISTRATION RIGHTS. The employees have no registration rights with
respect to the shares of Common Stock issuable upon exercise of the options
granted under this Plan.
17. SALE OF STOCK AFTER EXERCISE OF OPTION. Any employee exercising any
option under the terms of this Plan will be required to agree that, unless the
shares obtained as a result of such exercise have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), or may otherwise be
sold pursuant to an available exemption from such registration under the
Securities Act, such employee will not dispose of any such shares thereafter
without the prior approval of the Company. The Company intends to file a
registration statement with respect to the
- 6 -
shares issuable under the Plan in its fiscal year ending December 31, 1996, but
has no obligation to do so.
Any employee exercising any Incentive Stock Option under this Plan will
be required to agree that such employee will not dispose of the shares obtained
as a result of such exercise within two (2) years from the date of the grant of
the applicable option nor within one (1) year after the exercise of the
applicable option.
The restrictions on transfer set forth in this Section 17 will apply to
any new, additional or different securities the employee may receive or become
entitled to receive with respect to any shares received by such employee
pursuant to the exercise of any option granted under this Plan, including (but
not limted to) securities received by virtue of a share dividend, stock split,
reverse stock split, split-up, recapitalization, merger, consolidation,
combination or exchange of shares, reorganization, dissolution, liquidation or
any other change in the corporate or capital structure of the Corporation.
The Corporation will require that a legend be placed on any share
certificates issued through the exercise of any option granted under this Plan.
Such legend will be placed either on the front or back of such share
certificates and will note that the shares are governed by this Plan.
This Plan will be kept at the registered office of the Corporation and
will be available for inspection by any appropriate party.
18. AMENDMENT OF THE PLAN. The Board of Directors may from time to time
alter, amend, suspend or discontinue this Plan and make rules for its
administration, except that the Board of Directors may not amend this Plan in
any manner that would have the effect of preventing Incentive Stock Options
granted under this Plan from being considered "incentive stock options" as
defined in section 422 of the Code.
19. OPTIONS DISCRETIONARY. The granting of options under this Plan will
be entirely discretionary and nothing in this Plan will be deemed to give any
employee of the Corporation or any parent or subsidiary of the Corporation any
right to participate in this Plan or to receive options. No provision of this
Plan or any Option Agreement evidencing any options granted under this Plan will
confer any right upon any employee to be employed by the Corporation or any
parent or subsidiary of the Corporation for any period of specific duration.
20. STOCKHOLDER APPROVAL. This Plan will be submitted to the
shareholders of the Corporation (the "Shareholders") for approval and must be
approved by a majority vote of the Shareholders on or within twelve (12) months,
before or after, of the Adoption Date.
21. TERMINATION OF PLAN. Unless terminated earlier, this Plan shall
terminate ten (10) years from the Adoption Date. Any option outstanding under
this Plan at the time of the termination of this Plan will remain in effect
until such option is exercised or the Expiration Date thereof occurs, whichever
is earlier.
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<PAGE>
FORM OF PROXY CARD
(side 1 of proxy card)
DI INDUSTRIES, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS AUGUST 27, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Ivar Siem, ________________ and
______________, or any one or more of them, with full power of substitution, the
attorneys and proxies of the undersigned to vote the shares of common stock of
DI Industries, Inc., a Texas corporation (the "Company"), held of record by the
undersigned at the close of business on July 15, 1996, at the annual meeting of
shareholders of the Company to be held at the Greenspoint Club, 16925
Northchase, Houston, Texas 77060 on August 27, 1996 at 9:00 a.m. Houston time,
and at any adjournment thereof, as follows:
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE ELECTION OF
THE PERSONS SET FORTH ON THE REVERSE SIDE AS DIRECTORS AND FOR EACH OF THE OTHER
PROPOSALS.
THIS PROXY IS TO BE VOTED AS DIRECTED. IN THE ABSENCE OF SPECIFIC DIRECTION, IT
IS INTENDED TO VOTE THE SHARES REPRESENTED BY THIS PROXY FOR THE ELECTION OF
IVAR SIEM, ROY T. OLIVER, STEVEN A. WEBSTER, WILLIAM R. ZIEGLER AND PETER M.
HOLT, AS DIRECTORS AND FOR EACH OF THE OTHER PROPOSALS.
IMPORTANT: SIGNATURE REQUIRED ON REVERSE SIDE
(reverse side of proxy card)
You are urged to sign and return your proxy without delay in the return
envelope provided for that purpose, which requires no postage if mailed in the
United States or Canada.
(1) Election of directors.
[ ] FOR (except as withheld below) [ ] WITHHOLD VOTE
Nominees: Ivar Siem, Roy T. Oliver, Steven A. Webster, William R. Ziegler
and Peter M. Holt.
(Instructions: To withhold authority to vote for any individual nominee,
write that nominee's name on the following line.)
--------------------------------------------------------------------------
(2) Approval of the Rig Merger Agreement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(3) Approval of the Somerset Merger Agreement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(4) Approval of 1996 Employee Stock Option Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(5) Adoption and approval of the proposed amendment to the Articles of
Incorporation of the Company to change the name of the Company
to "______________________."
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(6) Adoption and approval of the proposed amendment to the Articles of
Incorporation of the Company to increase the number of authorized shares of
common stock of the Company from 75,000,000 shares to 300,000,000 shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(7) Adoption and approval of the proposed amendment to the Articles of
Incorporation of the Company to provide that any action requiring the
consent of more than a majority of the issued and outstanding stock of the
Company under the Texas Business Corporation Act shall only require the
consent of a majority of the issued and outstanding stock of the Company.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(8) As such proxies may in their discretion determine upon such other
matters as may properly come before the meeting.
DATED_______________, 1996 BY:______________________________
When signing this proxy, please date it and take care to have the signature
conform to the shareholder's name as it appears on this side of the proxy. If
shares are registered in the names of two or more persons, each person should
sign. Executors, administrators, trustees and guardians should so indicate when
signing.
