As filed with the Securities and Exchange Commission on June 14, 1996.
Registration No. _______________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
DI INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 1381
(State or other jurisdiction of (Primary Standard Industrial
incorporation or organization) Classification Code Number)
74-2144774
(I.R.S. Employer
Identification No.)
450 GEARS ROAD, SUITE 625
HOUSTON, TEXAS 77067
(713) 874-0202
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Ivar Siem, Chairman of the Board, Chief Executive Officer and President
450 Gears Road, Suite 625
Houston, Texas 77067
(713) 874-0202
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
COPIES TO:
John R. Boyer, Jr. Casey W. Doherty
Boyer, Ewing & Harris Incorporated Cokinos, Bosien & Young
Nine Greenway Plaza, Suite 3100 1500 Liberty Tower
Houston, Texas 77046 2919 Allen Parkway
(713) 871-2025 Houston, Texas 77019
(713) 535-5500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon
as practicable after the effective date of this Registration Statement and at
consummation of the mergers (the "Mergers") contemplated by the Agreements and
Plans of Merger dated May 7, 1996, attached as Appendices A and B to the
Prospectus/Proxy Statement forming a part of this Registration Statement.
If the securities being registered on this Form are being offered
in connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of Each Amount Proposed Maximum Proposed Maximum Amount of
Class of Securities to be Offering Aggregate Registration
to be Registered Registered Price Per Share (1) Offering Price (1) Fee
<S> <C> <C> <C> <C>
Common Stock 79,274,756 $0.57 $45,186,611 $15,581.59
</TABLE>
(1) Estimated pursuant to Rule 457(f)(2), solely for the purposes of
calculating the registration fee in connection with the shares of Common Stock
registered hereby, based on the book value of the securities to be received by
the registrant upon consummation of the Mergers.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
CROSS REFERENCE SHEET
(Pursuant to Item 501(b) of
Regulation S-K Showing the Location in
the Proxy Statement/Prospectus of the
Information Required by Part I of Form S-4)
<TABLE>
<CAPTION>
FORM S-4 ITEM LOCATION IN PROSPECTUS/PROXY STATEMENT
- ----------------------------------------------------- -------------------------------------------------------------
<S> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus.......... Forepart of the Registration Statement; Outside Front Cover
Page of Prospectus/Proxy Statement
2. Inside Front and Outside Back Cover Pages
of Prospectus................................... Inside Front Cover Page of Prospectus/Proxy Statement;
Available Information; Incorporation of Certain Documents by
Reference; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information................... Summary; Outside Front Cover Page of Prospectus/Proxy
Statement; Risk Factors
4. Terms of the Transaction........................ Summary; The Mergers; The Rig Merger Agreement; The
Somerset Merger Agreement
5. Pro Forma Financial Information................. Summary; DI Industries, Inc. Unaudited Pro Forma Consolidated
Financial Statements
6. Material Contracts with the Company Being
Acquired........................................ Not Applicable
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters.............................. Not Applicable
8. Interests of Named Experts and Counsel.......... Not Applicable
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities..................................... Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3
Registrants..................................... Not Applicable
11. Incorporation of Certain Information by
Reference....................................... Not Applicable
-i-
12. Information with Respect to S-2 or S-3
Registrants..................................... Not Applicable
13. Incorporation of Certain Information by
Reference....................................... Not Applicable
14. Information with Respect to Registrants Other
Than S-3 or S-2 Registrants..................... Summary; Business of the Company
C. INFORMATION ABOUT THE COMPANY BEING
ACQUIRED
15. Information with Respect to S-3
Companies....................................... Not Applicable
16. Information with Respect to S-2 or
S-3 Companies................................... Not Applicable
17. Information with Respect to Companies
Other Than S-3 or S-2 Companies................. Summary; The Rig Companies; Somerset
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations are to be Solicited.............. Notice of Meeting; Outside Front Cover Page; Summary; The Annual Meeting;
The Mergers; The Rig Merger Agreement; The Somerset Merger Agreement;
Election of Directors; Approval of the Stock Option Plan; Security
Ownership of Certain Beneficial Owners and Management; Proposal
to Amend Articles of Incorporation;
19. Information if Proxies, Consents or
Authorizations are not to be Solicited in an
Exchange Offer.................................. Not Applicable
</TABLE>
ii
<PAGE>
[LOGO]
DI INDUSTRIES, INC.
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 Wyndham Greenspoint Hotel,
12400 Greenspoint Drive, Houston, Texas, 77060 on August _, 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
Prospectus/Proxy Statement:
1. To adopt and approve the Agreement and Plan of Merger (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 22,773.26 shares, or an
aggregate of 11,386,630 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 28,250.748 shares, or an
aggregate of 28,250,748 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 (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 39,637.378 shares, or an
aggragate of 39,637,378 (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 Amendment (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 (the "Charter Amendment") (1) changing the name of the
Company to "_______________________", (2) increasing the number of
authorized shares of Company Common Stock from 75,000,000 shares to
300,000,000 shares and (3) 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; which
Charter Amendment shall be automatically effected upon the approval and
ultimate consummation of the Somerset Merger.
6. 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 and the Somerset Merger Agreement
(collectively, the "Merger Agreements") are attached to the Prospectus/Proxy
Statement as Appendices A and B, respectively.
The Board of Directors of the Company has fixed the close of business
on _______, 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 the Charter Amendment. 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, THE
CHARTER AMENDMENT 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, THE CHARTER AMENDMENT AND THE STOCK OPTION PLAN, AND THE ELECTION OF
THE NOMINEES FOR DIRECTOR NAMED IN THE ACCOMPANYING PROSPECTUS/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 _____________________________________
July __ , 1996 IVAR SIEM, CHAIRMAN OF THE BOARD,
PRESIDENT & CHIEF EXECUTIVE OFFICER
<PAGE>
PROSPECTUS/PROXY STATEMENT
DI INDUSTRIES, INC.
This Prospectus/Proxy Statement (the "Prospectus/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 ____, 1996, at the Wyndham Greenspoint Hotel, 12400
Greenspoint Drive, Houston, Texas 77060, and at any adjournments or
postponements thereof (the "Annual Meeting").
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 (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 22,773.26 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 28,250.748
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 (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 39,637.378 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 all of the amendments contemplated by the Charter Amendment (as
defined hereinafter).
The Shareholders will also be asked to consider and vote on a proposal
to adopt and approve an amendment to the Company's Articles of Incorporation
(the "Charter Amendment") (1) changing the name of the Company to "________,"
(2) increasing the number of authorized shares of the Company Common Stock from
75,000,000 shares to 300,000,000 shares, and (3) 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 (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 Charter Amendment shall 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.
-1-
Copies of the Rig Merger Agreement and the Somerset Merger Agreement
(collectively, the "Merger Agreements") are attached to this Prospectus/Proxy
Statement as Appendices A and B, respectively. This Prospectus/Proxy Statement
and the accompanying form of proxy are first being mailed to the Shareholders on
or about July ___, 1996.
This Prospectus/Proxy Statement also constitutes the prospectus of the
Company with respect to the registration and issuance under the Securities Act
of 1933, as amended (the "Securities Act"), of up to 79,274,756 shares of the
Company Common Stock to be issued in the Mergers, in accordance with the terms
of each of the Merger Agreements.
THE SHARES OF THE COMPANY COMMON STOCK TO BE ISSUED IN THE MERGERS HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus/Proxy Statement is July ___, 1996.
-2-
AVAILABLE INFORMATION
The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (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 American Stock Exchange (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.
The Company has filed with the Commission a Registration Statement on
Form S-4 (together with any amendments or supplements thereto, the "Registration
Statement") under the Securities Act with respect to the shares of the Company
Common Stock to be issued in connection with the Mergers. This Prospectus/Proxy
Statement does not contain all of the information set forth in the Registration
Statement and the exhibits thereto, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. Such additional
information may be obtained from the Commission's principal office in
Washington, D.C. Statements contained in this Prospectus/Proxy Statement (or in
any document incorporated into this Prospectus/Proxy Statement by reference) as
to the contents of any contract or other document referred to herein (or
therein) are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT IN
CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES 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. THIS
PROSPECTUS/PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, NOR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A PROXY,
IN ANY JURISDICTION, TO OR FROM ANY PERSON TO OR FROM WHOM IT IS NOT LAWFUL TO
MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY
OF THIS PROSPECTUS/PROXY STATEMENT NOR ANY DISTRIBUTION OF SECURITIES MADE
HEREUNDER SHALL 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.
-3-
<PAGE>
TABLE OF CONTENTS
AVAILABLE INFORMATION...................................................3
SUMMARY.................................................................8
The Companies......................................................8
The Annual Meeting.................................................9
Stock Ownership of Management and Affiliates.......................10
Risk Factors.......................................................10
The Rig Merger and the Rig Merger Agreement........................10
The Somerset Merger and the Somerset Merger Agreement..............11
The Charter Amendment..............................................13
The Stock Option Plan..............................................13
Recommendation of the Board of Directors...........................13
Resale Restrictions................................................13
Accounting Treatment...............................................14
No Solicitation....................................................14
No Appraisal Rights................................................14
Dividend Policies..................................................14
Listing of Shares; Market and Market Price.........................15
Certain Relationships and Related Transactions.....................15
Recent Developments................................................16
Selected Historical and Pro Forma Combined Financial Data..........17
THE ANNUAL MEETING......................................................19
General............................................................19
Matters to be Considered at the Annual Meeting.....................19
Voting at the Annual Meeting; Record Date..........................19
Voting of Proxies..................................................20
Revocability of Proxies............................................20
Solicitation of Proxies............................................21
RISK FACTORS............................................................21
Intense Competition; Industry Conditions...........................21
Dependence on Merger Rigs..........................................21
Losses from Operations.............................................22
No Fairness Opinion................................................22
Leverage and Liquidity.............................................22
International Operations...........................................22
Absence of Dividends on the Company Common Stock...................22
Limitations on the Availability of the Company's Net Operating
Loss Carryforwards...............................................23
Rig Fleet Age and Deferred Maintenance.............................23
Operational Risks..................................................23
Governmental and Environmental Matters.............................23
Recent Changes/Dependence on Key Personnel.........................24
Control Considerations.............................................24
-4-
THE MERGERS.............................................................24
Effect of the Mergers..............................................24
Background of the Mergers..........................................26
Reasons for the Mergers/Recommendations of the Board of Directors..29
Certain Relationships and Related Transactions.....................30
Accounting Treatment...............................................30
Restrictions on Resales by Affiliates/Registration Rights..........30
No Solicitation....................................................31
No Appraisal Rights................................................32
THE RIG MERGER AGREEMENT................................................32
Effective Time of the Merger.......................................32
Manner and Basis of Converting Shares..............................32
Rig 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
THE SOMERSET MERGER AGREEMENT...........................................36
Effective Time of the Merger.......................................36
Manner and Basis of Converting Shares..............................36
Somerset Shadow Warrants...........................................37
Conditions to the Merger...........................................37
Representations and Warranties.....................................37
Certain Covenants; Conduct of Business Prior to the Merger.........38
Termination or Amendment of the Merger Agreement...................38
Expenses...........................................................38
Indemnification....................................................39
Charter Amendment..................................................39
SHAREHOLDERS' AGREEMENT.................................................39
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES...................40
MARKET PRICES, DIVIDEND AND DISTRIBUTIONS...............................41
DI INDUSTRIES, INC. UNAUDITED
PRO FORMA FINANCIAL INFORMATION.....................................42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................47
Financial Condition And Liquidity..................................47
Results of Operations..............................................48
Comparison of the Three Months Ended March 31, 1996 and 1995.......48
Comparison of the Fiscal Year Ended December 31, 1995 to
the Twelve Months Ended December 31, 1994......................49
-5-
Comparison of the Nine Month Period Ended December 31,
1994 and 1993....................................................51
Income Taxes and Other.............................................53
Industry Trends....................................................54
BUSINESS OF THE COMPANY.................................................54
Discontinued and Suspended Operations..............................55
Industry Segments..................................................55
Industry Conditions................................................55
Contract Drilling and Workover.....................................56
General............................................................61
Litigation.........................................................63
THE RIG COMPANIES.......................................................63
SOMERSET................................................................64
ELECTION OF DIRECTORS...................................................64
General Information................................................64
Recommendation of the Board of Directors...........................65
Directors and Nominees for Director................................65
Executive Officers.................................................66
Compensation of Directors..........................................67
Compensation of Executive Officers.................................67
Board Committees...................................................68
Report of the Compensation Committee and Stock Option Committee
on Executive Compensation......................................69
Stock Performance Graph............................................70
Section 16(a) Compliance...........................................70
APPROVAL OF THE STOCK OPTION PLAN.......................................72
Summary of the Stock Option Plan...................................72
Federal Income Tax Consequences....................................73
Board Recommendation...............................................73
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT......................................................73
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................75
PROPOSAL TO AMEND ARTICLES OF INCORPORATION.............................76
Background.........................................................76
Proposed Charter Amendment.........................................77
Recommendations and Required Affirmative Vote......................77
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY.............................78
General............................................................78
Company Common Stock...............................................78
Company Preferred Stock............................................78
Rights to Purchase Preferred Stock.................................78
-6-
Stock Option Plans.................................................78
Shares Eligible for Future Sale....................................79
Stockholder Vote Required to Approve Certain
Business Combinations............................................79
Transfer Agent and Registrar.......................................79
INDEPENDENT ACCOUNTANTS.................................................79
LEGAL MATTERS...........................................................79
EXPERTS.................................................................80
SHAREHOLDER PROPOSALS...................................................80
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.
APPENDIX B
Agreement and Plan of Merger Between DI Industries, Inc. and Somerset
Investment Corp.
APPENDIX C
DI Industries, Inc. 1996 Employee Stock Option Plan
-7-
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN THIS
PROSPECTUS/PROXY STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION AND FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS
PROSPECTUS/PROXY STATEMENT. ALL REFERENCES TO THE "COMPANY" IN THE
PROSPECTUS/PROXY STATEMENT REFER TO DI INDUSTRIES, INC. AND ITS SUBSIDIARIES,
UNLESS THE CONTEXT OTHERWISE REQUIRES.
THE COMPANIES
THE COMPANY. DI Industries, Inc., a Texas corporation formed in 1980, is
engaged primarily in the business of providing onshore contract drilling and
well workover 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 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 -
Background of the Mergers."
-8-
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 are currently
attempting to secure the financing for such capital contribution. Messrs.
William R. Ziegler and Steven A. Webster, both affiliates of Somerset, are also
nominees for the Board of Directors. The 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.
THE ANNUAL MEETING
DATE, TIME AND PLACE. The Annual Meeting will be held at 9:00 a.m. local
time, on, August __, 1996, at the Wyndham Greenspoint Hotel, 12400 Greenspoint
Drive, Houston, Texas 77060.
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM. Holders of record of the
Company Common Stock at the close of business on __________, 1996 (the "Record
Date") are entitled to notice of and to vote at the Annual Meeting. At such
date, there were ______________ 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, and (5) a proposal to adopt and approve the Charter
Amendment, which shall be automatically effected upon the approval and ultimate
consummation of the Somerset Merger; and to transact such other business as may
properly come before the Annual Meeting.
VOTE REQUIRED. The adoption and approval of the Somerset Merger Agreement
and the Charter Amendment will each require the affirmative vote of the holders
of two-thirds of the total number of shares of
-9-
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, _____ shares of the
Company Common Stock, representing approximately ____% of the outstanding shares
of the Company Common Stock. The Company has been advised that executive
officers, directors and their affiliates holding ______ shares, or _____% 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."
RISK FACTORS
The Company and its business are subject to numerous significant risk
factors. See "Risk Factors."
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 22,773.26 shares of Company Common Stock, or an
aggregate of 11,386,630 shares of Company Common Stock (subject to adjustment),
and (ii) each of the LRAC Shares will be converted into the right to receive
28,250.748 shares of Company Common Stock, or an aggregate of 28,250,748 shares
of Company Common Stock (subject to adjustment). The foregoing exchange ratios
are based on 38,669,378 shares of Company Common Stock being issued and
outstanding as of the effective time (the "Effective Time") of the Rig Merger as
described in the Rig Merger Agreement, and 968,000 shares of Company Common
Stock being subject to options issued by the Company, excluding the Dillard
Option (as defined hereinafter) 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
Rig Merger will be increased or decreased by a number of shares 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."
-10-
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,
and (2) the Somerset Merger becoming effective. 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. 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 39,637.378 shares of
the Company Common Stock, or an aggregate of 39,637,378 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 38,669,378 shares of
Company Common Stock being issued and outstanding as of the Effective Time of
the Somerset Merger as described in the Somerset Merger Agreement, 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
-11-
pursuant to the Somerset Merger will be increased or decreased by a number of
shares 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 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, and (2) the Rig Merger becoming effective. 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.
-12-
CHARTER AMENDMENT. 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 the Charter Amendment to be adopted without any
further action required by the Shareholders.
THE CHARTER AMENDMENT
The Shareholders will also be asked to consider and vote on a proposal to
adopt and approve the Charter Amendment, which will (1) change the name of the
Company to "________," (2) increase the number of authorized shares of the
Company Common Stock from 75,000,000 shares to 300,000,000 shares, and (3)
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. The
Charter Amendment 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 CHARTER AMENDMENT 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 CHARTER AMENDMENT. For a discussion of the factors considered by
the Board of Directors in reaching its decision, see "Proposal to Amend Articles
of Incorporation Recommendations and Required Affirmative Vote."
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 by
the Board of Directors in reaching its decision, see "Approval of Stock Option
Plan Board Recommendation."
RESALE RESTRICTIONS
All of the shares of Company Common Stock received by the shareholders of
Somerset, RTO and LRAC in the Mergers will be freely transferable, except that
the shares of Company Common Stock received by persons who at the time of the
Annual Meeting are deemed to be "affiliates" (as such term is defined under the
Securities
-13-
Act) of the Company, LRAC, RTO or Somerset may be resold by them only in certain
permitted circumstances. Such shares will also be subject to restrictions
imposed by the Shareholders' Agreement (described below) and entitled to certain
registrations rights.
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 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.
-14-
LISTING OF SHARES; MARKET AND MARKET PRICE
The Company Common Stock is listed on the AMEX under the symbol "DRL." At
______, 1996, there were approximately ____ holders of record of the Company
Common Stock.
The following table sets forth the high and low sale prices of the Company
Common Stock reported by the American Stock Exchange for the periods indicated:
HIGH LOW
Year Ended December 31, 1996
First Quarter ................................ $ 0.7500 $ 0.3750
Second Quarter (through June, 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 June __, 1996, the last reported sale price of the Company Common Stock
on the AMEX was $__________ 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 (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 a new Company issue of 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 a condition to the
closing of the Mergers, the Company is required to rescind the Subscription. The
$4,000,000 payment made by Norex for
-15-
the Subscription will be simultaneously refunded to Norex out of the proceeds of
a $4,000,000 loan to be provided by Norex. 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 (the "Registration
Rights Agreement"), that requires the Company, upon the occurrence of certain
events, to register for sale under the Securities Act the shares received by any
of such parties and certain of their assignees pursuant to the Mergers. 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 Prospectus/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
As provided for in the Merger Agreements, on June 10, 1996, Norex advanced
$1,000,000 to the Company pursuant to a term loan bearing interest at a rate of
12% per annum and maturing on the earlier of October 31, 1996 or the Effective
Time. The term loan is secured by a pledge of certain of the domestic
receivables of the Company (the "Norex Lien").
On June 3, 1996, Western Oil Well Service Co., a wholly owned subsidiary of
the Company ("Western"), entered into a definitive agreement to sell its
operational assets to Pool Company ("Pool"), a subsidiary of Pool Energy
Services Co., for $3,950,000 in cash.
Under the agreement, Western will sell to Pool all of its operational
assets, which include 23 carrier- mounted workover rigs. Western currently
provides well workover services principally in Montana, Utah and North Dakota.
Pool will also assume all of Western's capital leases associated primarily with
transportation equipment and certain real estate leases. The Company anticipates
closing this transaction during June 1996.
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.
-16-
<PAGE>
SUMMARY SELECTED HISTORICAL AND PROFORMA COMBINED FINANCIAL DATA
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 Prospectus/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 Prospectus/Proxy
Statement. For a description of the various information regarding the pro forma
data, see "DI Industries, Inc. Unaudited Pro Forma Financial Information."
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.
-17-
<PAGE>
DI INDUSTRIES, INC.
SUMMARY PRO FORMA FINANCIAL INFORMATION
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Year Ended December 31, 1995
--------------------------------------------------------------------------
WESTERN(1) MERGER(1)
PRO FORMA PRO FORMA
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 on Sale of Assets ..................... 466 2,660 3,126 3,126
Loss from Continuing Operations ............ (12,675) 2,199 (10,476) (113) (10,589)
Net Loss ................................... (13,447) 2,199 (11,248) (113) (11,361)
Earnings (loss) per common and
common equivalent share from
continuing operations ...................... $ (0.33) $ (0.27) $ (0.10)
Earnings (loss) per common and
common equivalent share .................... $ (0.35) $ (0.29) $ (0.11)
Weighted average number of common
and common equivalent shares ............... 38,669 38,669 110,017
</TABLE>
<TABLE>
<CAPTION>
As of or for the Three Months Ended March 31, 1996
--------------------------------------------------------------------------
WESTERN(1) MERGER(1)
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT:
Revenues ................................... $ 20,102 $ (1,659) $ 18,443 $ 18,443
Operating Loss ............................. (1,253) (26) (1,279) (28) (1,307)
Gain on Sale of Assets ..................... 15 2,665 2,680 2,680
Net Loss ................................... (1,491) 2,641 1,150 (148) 1,002
Net Loss Applicable to Common Stock ........ (1,641) 2,641 1,000 2 1,002
Earnings (loss) per common and
common equivalent share from
continuing operations ...................... $ (0.04) $ (0.03) $ (0.01)
Earnings (loss) per common and
common equivalent share .................... $ (0.04) $ (0.03) $ (0.01)
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."
-18-
<PAGE>
THE ANNUAL MEETING
GENERAL
This Prospectus/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 ---, 1996, at 9:00 a.m.,
local time, at the Wyndham Greenspoint Hotel, 12400 Greenspoint Drive, Houston,
Texas 77060, and at any adjournments or postponements thereof. This
Prospectus/Proxy Statement also constitutes the Prospectus of the Company with
respect to the registration and issuance under the Securities Act of up to
79,274,756 shares of Company Common Stock issuable in connection with the
Mergers.
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,
and (5) a proposal to adopt and approve the Charter Amendment, which shall
automatically be effected upon the consummation of the Somerset Merger. The
Shareholders will also consider and vote upon such other business as may
properly come before the Annual Meeting.
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 THE
CHARTER 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 CHARTER 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 ________, 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 _________ shares of
Company Common Stock outstanding and entitled to vote, which were held by
approximately __ holders of record. 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 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
-19-
(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 the Charter Amendment 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 _______ shares of Company Common Stock, representing approximately
___ of the outstanding shares of Company Common Stock. See "Security Ownership
of Certain Beneficial Owners and Management." Directors and executive officers
and affiliates holding ________ shares of Company Common Stock, or ______% 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 the Charter Amendment will require the favorable
vote of the holders of an additional ________ shares of Company Common Stock,
representing approximately _______% 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 --------- shares of Company Common Stock, representing approximately
____% 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 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
Prospectus/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 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.
-20-
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.
RISK FACTORS
INTENSE COMPETITION; INDUSTRY CONDITIONS
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.
See "The Mergers - Background of the Mergers," "Management's Discussion and
Analysis of the Company's Financial Condition and Results of Operations -
Industry Trends" and "Business of the Company Industry Conditions."
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.
-21-
LOSSES FROM OPERATIONS
The historical financial data for the Company reflect net losses of
$13,447,000 and $3,502,000 (unaudited) for the calendar years ended December 31,
1995 and 1994, which included a non-cash impairment provision of $5,290,000
during the fourth quarter of 1995 for certain drilling rigs and equipment. This
provision was the result of market indications that the carrying amount was not
fully recoverable based on appraisals, comparable sales data and management
estimates. The Company continues to experience losses, realizing a loss of
$1,641,000 for the quarter ended March 31, 1996. Of the proceeds of the Somerset
Merger, approximately $19,400,000 will be available to the Company after
expenses and maximum cash payments pursuant to the Cash Option under the Rig
Merger Agreement. These funds will be utilized for rig refurbishment and other
general corporate purposes. The Company may also need additional capital in the
future. There can be no assurance that any capital needed for the future will be
available on acceptable terms.
NO FAIRNESS OPINION
The Company has not obtained an independent fairness opinion regarding the
Mergers. 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.
LEVERAGE AND LIQUIDITY
Following the completion of the Mergers, the Company will have
approximately $16 million of debt obligations. 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. In addition, the loan agreements governing the Company's
term loan with NorlandsBanken AS and the 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. These restrictions could limit the Company's flexibility in
responding to changing market conditions.
INTERNATIONAL OPERATIONS
A major portion of the Company's revenues has been attributable to
international operations. Revenues from international sources accounted for
approximately 48.1 percent and 52.7 percent of the Company's operating revenues
for the three-month period ended March 31, 1996 and the year ended December 31,
1995, respectively. In addition to the risks inherent in the drilling business
(See "Risk Factors - Operational Risks"), the Company's international operations
are subject to certain political, economic and other uncertainties, including,
among others, risks of war and civil disturbances, expropriation,
nationalization, renegotiation or modification of existing contracts, taxation
policies, foreign exchange restrictions, international monetary fluctuations and
other hazards arising out of foreign operations.
ABSENCE OF DIVIDENDS ON THE COMPANY COMMON STOCK
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.
-22-
LIMITATIONS ON THE AVAILABILITY OF THE COMPANY'S NET OPERATING LOSS
CARRYFORWARDS
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.
RIG FLEET AGE AND DEFERRED MAINTENANCE
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.
OPERATIONAL RISKS
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.
GOVERNMENTAL AND ENVIRONMENTAL MATTERS
Many aspects of the Company's operations are affected by domestic and
foreign political developments and are subject to numerous domestic and foreign
governmental regulations that may relate directly or indirectly to the contract
drilling industry. The regulations applicable to the Company's operations
include certain regulations that control the discharge of materials into the
environment or require remediation of contaminations, under certain
circumstances. Usually these environmental laws and regulations impose "strict
liability," rendering a person liable without regard to negligence or fault on
the part of such person. Such environmental laws and regulations may expose the
Company to liability for the conduct of, or conditions caused by, others, or for
acts of the Company that were in compliance with all applicable laws at the time
such acts were performed.
-23-
It has been the Company's experience that the environmental laws, rules and
regulations of the United States are more stringent than those found in foreign
jurisdictions, and therefore the requirements of foreign jurisdictions do not,
in general, impose an additional compliance burden on the Company.
RECENT CHANGES/DEPENDENCE ON KEY PERSONNEL
The Company is seeking to find a replacement for Max M. Dillard, its former
President and Chief Executive Officer, whose employment was terminated effective
April 9, 1996. Although several attractive candidates have been identified who
have expressed interest in this position, no agreement has been reached with a
successor to Mr. Dillard. Mr. Dillard also resigned as a director of the Company
on June 10, 1996. The Company believes that its operations are dependent to some
degree upon a relatively small group of its management personnel, the loss of
any of whom could have a material adverse effect on the Company.
CONTROL CONSIDERATIONS
Upon consummation of the Mergers, the Company Parties, the LRAC/RTO
Shareholders and the Somerset Shareholders will own 15.8%, 33.6% and 33.6%,
respectively, or 83.0% in the aggregate, of the 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.
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 22,773.26 shares of Company Common Stock, or an aggregate
of 11,386,630 shares of Company Common Stock (subject to adjustment), and (3)
each of the LRAC Shares will be converted into the right to receive 28,250.748
shares of Company Common Stock, or an aggregate of 28,250,748 shares of Company
Common Stock (subject to adjustment). 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. 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. Based upon the capitalization of
the Company as of the Record Date, approximately 39,637,378 shares of Company
Common Stock will be issued in the Rig Merger, assuming the Cash Option is not
exercised. 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
-24-
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.
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 39,637.378 shares of
Company Common Stock, or an aggregate of 39,637,378 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 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. 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.
-25-
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
be as few as 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 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
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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.
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
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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.
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.
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. 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.
For purposes of the appraisal, the value represents the approximated gross
sale proceeds that might be realized in a moderate or reasonably short time
frame, within approximately 120 days, in order to locate a buyer while noting
various intervening variables such as: psychological attractiveness, removal
time and expense, physical deterioration quantity, etc. The orderly liquidation
concept also maintains that the responsibility (risk) and incurred cost of
removal of purchases remain with the buyer, and that there is no actual or
implied warranty or guarantee on the equipment and/or inventory which is to be
sold. Additionally, 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 is unique in that it mutually shares some
of the elemental criteria present in both the liquidation and fair market value
concepts. Once all comparable research is satisfied, then relationships are made
by compensating in the areas lacking in similarity as well as any intervening
variable (i.e. psychological attractiveness, deterioration, quantity {caution
should be exercised with quantity - as there is sometimes an inverse
relationship between quantity and price, typically excessive quantity is casual
to lower recovery value}, economic and market factors, etc.) Having positive or
adverse effects on the subject equipment. Another factor having a casual effect
on the numerical result 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 exemplifies a forced time constraint where the
values could fall to the lower end of the spectrum. No differently than
liquidation value, the orderly liquidation concept considers the difficulty of
removal.
The Board of Directors believed that the Company, the second largest United
States based operator of domestic land drilling rigs, had substantial in-house
expertise in valuing drilling rigs, and 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,
Company's management believed that the valuation of the Rig Appraiser was fair.
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.
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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.
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. 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 principal 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.
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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."
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."
The Registration Rights Agreement Parties have entered into a Registration
Rights Agreement that requires the Company, in certain circumstances, to
register for sale under the Securities Act the shares received by any of such
parties and certain of their assignees pursuant to the Mergers. See
"Restrictions on Resales by Affiliates/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 BY AFFILIATES/REGISTRATION RIGHTS
RESALES BY AFFILIATES. The shares of Company Common Stock to be issued
pursuant to the Merger Agreements are being registered under the Securities Act
pursuant to the Registration Statement and may generally be resold freely
without further registration. However, because some of the persons acquiring
Company Common Stock in the Mergers may be deemed to be affiliates of parties to
the Mergers, such persons will not be able to resell the Company Common Stock
received by them in connection with the Merger unless 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 or (3) sold
in compliance with Rule 145 under the Securities Act (or, in the case of persons
who become affiliates of the Company, which will include SDA, SCP, certain of
the LRAC/RTO Shareholders and certain affiliates thereof, Rule 144 under the
Securities Act.). The Company will not be required to maintain the effectiveness
of the Registration Statement for the purpose of such resales.
Pursuant to Rule 145, the sale of Company Common Stock received by such
affiliates pursuant to the Merger Agreements will be subject to certain
restrictions. Such persons may sell Company Common Stock under Rule 145 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 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,
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and (3) 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.
Persons who may be deemed to be affiliates of Somerset, LRAC or RTO
generally include individuals or entities that control, are controlled by or are
under common control with, such party and may include certain officers and
directors of each such party as well as principal shareholders of such party.
LISTING ON THE AMEX. The Company Common Stock is currently listed for
trading on the AMEX and it is anticipated that such stock will continue to be
traded thereon immediately following consummation of the Mergers. The Company
will file a listing application with the AMEX with respect to the listing of
additional shares of Company Common Stock to be issued in the Mergers, as well
as the shares of Company Common Stock issuable upon exercise of the Rig Shadow
Warrants and the Somerset Shadow Warrants.
REGISTRATION RIGHTS. Under the Registration Rights Agreement, 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, 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.
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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 PROSPECTUS/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.
MANNER AND BASIS OF CONVERTING SHARES
By virtue of the Rig Merger, 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.
By virtue of the Rig Merger, 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.
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.
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
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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.
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
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; (3) 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; (4)
the Somerset Merger shall have become effective in accordance with and as
provided in the Somerset Merger Agreement; (5) 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; (6) 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
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Exchange Act and Rules 10b-6 and 10b-13 promulgated under the Exchange Act; and
(7) 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; and (3) the Shareholders' Agreement shall have been
executed and delivered by SDA, Norex Drilling, and Pronor.
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,
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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 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 Prospectus/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 Prospectus/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
-35-
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 PROSPECTUS/PROXY STATEMENT SHOULD CAREFULLY
READ AND REVIEW THE ENTIRE SOMERSET MERGER AGREEMENT AND SHOULD NOT RELY
EXCLUSIVELY UPON THE FOLLOWING SUMMARY.
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.
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.
As soon as practical after the Effective Time, the Company is required to
deliver to the Somerset Shareholders certificates representing the Company
Common Stock issuable to them as discussed above. No exchange of the Somerset
certificates will be required.
-36-
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
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 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; (3) 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; (4) the Registration Rights Agreement shall be in full force and
effect; (5) the Rig Merger shall become effective in accordance with and as
provided in the Rig Merger Agreement; and (6) 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; and (3) the Shareholders' Agreement shall have been executed and
delivered by the Mullen/Oliver Group, Norex Drilling, and Pronor.
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.
-37-
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.
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.
-38-
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 Prospectus/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 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 Prospectus/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 AMENDMENT
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 the Charter Amendment 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 hold up to an aggregate of 91,747,603 shares, or up to
77.8% 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 (the "Independent
Directors") shall be persons who are not officers of the Company and do not
represent and are not related to any concentrated or family holdings of shares
of stock of the Company (including any of the Shareholders' Agreement Parties).
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
-39-
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. See "Risk Factors - Control Considerations."
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion addresses the United States federal income tax
consequences of the Mergers to the Company and the Shareholders, but does not
address the tax consequences of the Mergers to the persons who are shareholders
of LRAC, RTO, or Somerset prior to the consummation of the Mergers.
The Company has been advised by 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, the
Company, Somerset, or LRAC to recognize taxable income or loss or cause RTO to
be subject to any corporate tax liability.
EACH SHAREHOLDER OF LRAC, RTO OR SOMERSET SHOULD CONSULT A TAX ADVISOR
REGARDING THE TAX CONSEQUENCES OF THE MERGERS. The tax consequences to the
shareholders of LRAC, RTO or Somerset of the Mergers depend upon whether the
Mergers qualify as Reorganizations. A Merger will qualify as a Reorganization
only if a number of requirements imposed under the Code are satisfied with
respect to the Merger, including requirements that concern the status of LRAC,
RTO and Somerset and their shareholders prior to the consummation of the
Mergers. Neither the Company, its counsel nor its other advisors or
representatives have made any representation or warranty (1) that the Mergers
qualify as Reorganizations or (2) concerning any of the tax consequences of the
Mergers to the shareholders of LRAC, RTO or Somerset. A ruling has not been
requested from the Internal Revenue Service in connection with the Mergers.
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 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 LRAC 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 stock
issued pursuant to the Sub Merger plus the amount of cash paid to the LRAC
Shareholders in connection with the Cash Option.
-39-
MARKET PRICES, DIVIDEND AND DISTRIBUTIONS
The Company Common Stock is listed on the American Stock
Exchange under the symbol "DRL." At June 28, 1996, there were approximately
_______ shareholders of record of the Company Common
Stock.
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 (through June, 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 June 28, 1996, the last reported sale price of the Company's common
stock on the AMEX was $_________ 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.
-41-
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.
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.
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.
-42-
<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.
43
<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> <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) 3,126 3,126
2,677(3)
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 2,668 2,786 - 2,786
Income (Loss) from Continuing Operations (12,675) 2,199 (10,476) (113) (10,589)
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) $ 2,199 $ (11,248) $ (113) $ (11,361)
========== ========== ========= ========== ==========
Primary Earning (loss) per share:
From continuing operations $ (.33) $ (.27) $ (.10)
From discontinued operations (.02) (.02) (.01)
---------- --------- ----------
Net income per common share $ (.35) $ (.29) $ (.11)
========== ========= ==========
Fully Diluted Earning (loss) per share:
From continuing operations $ (.33) $ (.27) $ (.10)
From discontinued operations (.02) (.02) (.01)
---------- --------- ----------
Net loss per common share $ (.35) $ (.29) $ (.11)
========== ========= ==========
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.
44
<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) 2,680 2,680
2,677(3)
Interest expense (262) 2(2) (260) (120)(f) (380)
Minority Interest (2) (2) (2)
---------- ---------- ---------- ---------- ----------
Other income (expense), net (238) 2,667 2,429 (120) 2,309
Income (Loss) Before Income Taxes (1,491) 2,641 1,150 (148) 1,002
Income Tax Provision
Current - - - - -
Deferred - - - - -
---------- ---------- ---------- ---------- ----------
Net income tax provision - - - - -
Net Income (Loss) (1,491) 2,641 1,150 (148) 1,002
Series B preferred stock subscription dividend (150) (150) 150 (f) -
---------- ---------- ---------- ---------- ----------
Net Income (Loss) Applicable to Common Stock $ (1,641) $ 2,641 $ 1,000 $ 2 $ 1,002
========== ========== ========== ========== ==========
Primary Earning (loss) per share:
From continuing operations $ (.04) $ (.03) $ .01
From discontinued operations - - -
---------- ---------- ----------
Net income (loss) per common share $ (.04) $ (.03) $ .01
========== ========== ==========
Fully Diluted Earning (loss) per share:
From continuing operations $ (.04) $ (.03) $ .01
From discontinued operations - - -
---------- ---------- ----------
Net income (loss) per common share $ (.04) $ (.03) $ .01
========== ========== ==========
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.
45
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.
(3) To record the gain on the sale of the operational assets of
Western.
MERGERS
BALANCE SHEET -
(a) To record the issuance of 39,637,378 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 31,709,902 shares of 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.
-46-
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.
During the fourth quarter of 1995, Norex subscribed to, and paid $4,000,000
for, 4,000 shares of the Series B Preferred Stock. This stock was to be a
redeemable preferred with cumulative annual dividends of 15% per annum. The
Subscription is required to be rescinded as a condition to the Mergers. The
$4,000,000 payment made by Norex for the Subscription will be refunded out of
the proceeds of a $4,000,000 term loan from Norex pursuant to the Term Loan
Agreement. This term loan will bear interest at a rate of 12% and will have a
one year maturity.
The $10,000,000 NordlandsBanken AS term 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. As of March 31, 1996,
the Company was not in compliance with a certain financial covenant in this loan
agreement and, subsequent to such date, received a waiver with respect to such
covenant from NordlandsBanken AS.
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 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 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.
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.
-47-
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."
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.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
(in thousands, except percentages)
-------------------------------------------------------------
1996 Percent of 1995 Percent of
(Unaudited) Revenues (Unaudited) Revenues
-------- ------ ---------- ------
<S> <C> <C> <C> <C>
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)
======== ========
</TABLE>
(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.
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. 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.
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 are expected to be 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
-48-
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.
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
<TABLE>
<CAPTION>
For the Year Ended
December 31,
(in thousands, except percentages)
-----------------------------------------------------------
Percent of 1994 Percent of
1995 Revenues (Unaudited) Revenues
------- ----- ------- -----
REVENUES
<S> <C> <C> <C> <C>
Contract Drilling:
US ......................................................... $44,797 $49,530
International
Mexico an d 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
======= =======
</TABLE>
(1) Operating Expenses excludes expenses for depreciation and amortization,
general and administrative, bad debt and legal.
-49-
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 start-up in Argentina, during January 1995,
of four drilling rigs to supplement the three rigs then 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. 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. 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 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. 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 contracts. 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 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, 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.
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.
-50-
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.
COMPARISON OF NINE MONTH PERIODS ENDED DECEMBER 31, 1994 TO 1993
<TABLE>
<CAPTION>
For the Nine Months
Ended December 31,
(in thousands, except percentages)
----------------------------------------------------------
Percent of 1993 Percent of
1994 Revenues (Unaudited) Revenues
------- ------ ------- -----
<S> <C> <C> <C> <C>
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
======= =======
</TABLE>
(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
-51-
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 then operating in Argentina, the purchase of the
operating drilling rigs in Venezuela and the sale of certain drilling equipment
to Costa Rica. The revenue increase for the Northern Division is due to
increased drilling activity in Michigan. 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 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
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 Mid- Continent 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.
-52-
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.
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.
-53-
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.
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.
-54-
In addition, the Company may make acquisitions of drilling equipment that open
new markets and present the potential for attractive rates of return.
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.
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 there are
no current plans for activating this business segment unless there is increased
demand for such specialized drilling technology.
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 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'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
-55-
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.
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 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.
-56-
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 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.
WESTERN DIVISION (WORKOVER OPERATIONS). The Company's Western Division is
headquartered in Glendive, Montana, with a district office in Roosevelt, Utah,
and provides well workover services in Montana, Utah and North Dakota. The
Western Division operates 22 carrier-mounted workover rigs and has one rig
stacked for parts. 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.
The Company entered into an agreement with Pool Company, a Texas
corporation ("Pool"), on June 3, 1996, pursuant to which Pool has agreed to
purchase substantially all of the assets of the workover division, including 23
workover rigs and the real estate owned by the Company in Glendive, Montana and
Roosevelt, Utah for $3,950,000 cash. The transaction is expected to close in
June 1996. Pool would also assume the obligations of the Company under its real
and personal property leases relating to the division.
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 well- maintained 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
-57-
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 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.
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
- ------ --------- ------------- ------ ----------- -------
<S> <C> <C> <C> <C> <C>
MID-CONTINENT DIVISION
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
-58-
YEAR BUILT/ RATED
RIG NO. REBUILT DRAWWORKS DEPTH LOCATION STATUS
- ------ --------- ------------- ------ ----------- -------
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
* Rig operated by the Company under a labor contract with owner.
-59-
The following table describes the Western Division's workover rigs owned by
the Company at May 31, 1996, and the status of each rig during the preceding 45
days:
YEAR BUILT/ RATED
RIG NO. REBUILT UNIT DRAWWORKS DEPTH LOCATION STATUS
- ------- -------- ---- --------- ----- -------- ------
304 1983 Cooper (Self-propelled) Cooper LTO 350 12,000' E-Montana Idle
306 1969/1985 Hopper (Self-propelled) Hopper GXXTA 14,000' E-Montana Active
307 1983 Cooper (Self-propelled) Cooper LTO 350 12,000' E-Montana Active
308 1974 Franks 300 Explorer III Cooper LTO 350 12,000' E-Montana Active
309 1981 Franks 400 Explorer III Franks 1287-160 14,000' N-Dakota Active
310 1981 Cooper (Self-propelled) Cooper LTO 350 12,000' E-Montana Inactive
311 1981 Franks 300 Explorer III Franks 1287-160 12,000' E-Montana Active
312 1976 Franks 500 Explorer III Franks 1287-160 18,000' N/E Utah Active
314 1977 Franks 400 Explorer III Franks 1287-160 14,000' E-Montana Idle
315 1978 Franks 400 Explorer III Franks 1287-160 14,000' E-Montana Active
316 1981 Franks 500 Explorer III Franks 1287-160 18,000' E-Montana Idle
318 1975 Wilson Mogul Wilson-Mogul 42 18,000' N/E Utah Active
319 1975 Hopper (Self-propelled) Hopper GXXTA 18,000' N/E Utah Active
320 1978 Franks 400 Explorer III Franks 1287-160 17,000' N/E Utah Active
321 1978 Franks 400 Explorer III Franks 1287-160 14,000' E-Montana Active
322 1979 Franks 400 Explorer III Franks 1287-160 17,000' N/E Utah Active
323 1979 Franks 400 Explorer III Franks 1287-160 14,000' N-Dakota Active
324 1980 Franks 400 Explorer III Franks 1287-160 14,000' N/E Utah Active
326 1981 Franks 300 Explorer III Franks 1287-160 17,000' E-Montana Active
327 1982 Franks 300 Explorer III Franks 1287-160 12,000' E-Montana Active
328 1982 Franks 300 Explorer III Franks 1287-160 14,000' N-Dakota Active
329 1982 Franks 400 Explorer III Franks 1287-160 17,000' N/E Utah Active
331 1982 Hopper (Self-propelled) Hopper GXHTA 14,000' E-Montana Active
The following table describes the status of drilling rigs owned by the
Company at May 31, 1996, that are being held for sale:
YEAR BUILT/ RATED DEPTH/
RIG NO. REBUILT DRAWWORKS DIAMETER LOCATION STATUS
- ------- ------- --------- -------- -------- ------
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 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 conducted by the Western Division is on an hourly basis. The
International Division's wells are drilled under daywork, footage and turnkey
contracts.
-60-
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 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. 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.
-61-
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.
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. Contract drilling of oil and gas wells and are
subject to a number of risks and hazards including blowouts, cratering, fires
and explosions, any of which could cause personal injury or loss of life, damage
to property or equipment, and suspension of operations. In addition, there is
also the risk that damage to the environment could result from some of the
Company's operations, particularly through oil spillage or uncontrolled fires.
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
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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.
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; Edinburg, Houston and Midland, Texas; and
Roosevelt, Utah.
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.
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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
- ---------------------- ----------- -------- -------
3,000 HP DRILLING RIGS
<S> <C> <C> <C>
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
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>
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. The Somerset
Shareholders are currently attempting to secure the financing for such capital
contribution.
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.
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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
Prospectus/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.
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 members of
and nominees for 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 53 Director Nominee --
Peter M. Holt 47 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
-65-
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 for over five years. Mr. Ziegler is
a director of Falcon Drilling Company, Inc. and an affiliate of Somerset. 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 Caterpiller 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 46 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 Vice President and Chief Financial Officer
Bill R. Merchant 52 Treasurer and Secretary
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.
-66-
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.
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. 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
has been Treasurer of the Company since 1990 and the Secretary of the Company
since 1994.
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 $100,000 for
services rendered during the fiscal year ended December 31, 1995:
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<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------------- -------------------------------------
AWARDS PAYOUTS
---------------------- -----------
OTHER RESTRICTED ALL OTHER
NAME AND PRINCIPAL ANNUAL STOCK OPTIONS/ LTIP COMPENSATION
POSITION (1) YEAR SALARY ($) BONUS ($) COMPENSATION AWARD(S)($) SARS (#) PAYOUTS ($) ($)(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 1994 (4) $155,500 -0- -0- -0- -0- -0- 3,111
Executive Officer (2) 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.
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.
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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 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
-69-
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; 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.
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[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
COMPARISON OF FIVE YEAR CUMULATIVE RETURN
AMONG DI INDUSTRIES, INC., AMERICAN STOCK EXCHANGE
MARKET VALUE INDEX, AND COMPANY-DETERMINED
INDUSTRY PEER GROUP
<TABLE>
<CAPTION>
Calendar Year
-----------------------------------------
1990 1991 1992 1993 1994 1995
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
There can be no assurance that the Company's share performance will
continue into the future with the same or similar trends depicted in the graph
above. 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 Prospectus/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
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.
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APPROVAL OF THE STOCK OPTION PLAN
Effective June ___, 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 Internal Revenue Code of 1986, as
amended (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 June ______, 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 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.
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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 ______________ shares, or ____%, of the
Company Common Stock outstanding.
The following table reflects the beneficial ownership of the Company Common
Stock as of June ____, 1996 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:
<TABLE>
<CAPTION>
AS OF JUNE ___, 1996 PRO FORMA
------------------------- -----------------------------
NAME AND ADDRESS OF BENEFICIAL NUMBER PERCENT NUMBER PERCENT
OWNER, IDENTITY OF GROUP OF SHARES OF CLASS OF SHARES OF CLASS
- ------------------------ --------- -------- --------- --------
<S> <C> <C> <C> <C>
Norex America, Inc. 10,430,105(1) 26.97% 10,430,105 (1) 8.84%
P.O. Box HM 429
Hamilton, HM, BX, Bermuda
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AS OF JUNE ___, 1996 PRO FORMA
------------------------- -----------------------------
NAME AND ADDRESS OF BENEFICIAL NUMBER PERCENT NUMBER PERCENT
OWNER, IDENTITY OF GROUP OF SHARES OF CLASS OF SHARES OF CLASS
- ------------------------ --------- -------- --------- --------
Pronor Holdings Ltd. 8,300,000(1) 21.46% 8,300,000 (1) 7.04%
% Morgan and Morgan Trust Corp.
Road Town, Pasca Estate
Tortola, British Virgin Islands
Somerset Capital Partners -- * 39,637,378 (2) 33.61%
69 Delaware Avenue
Buffalo, New York 14202
Mike L. Mullen -- * 18,878,845 (3) 16.01%
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) 26.98% 10,433,105 (4)(5) 8.85%
William C. Walker 10,000(4) * 10,000 (4) *
Director Nominees
Roy T. Oliver, Jr. 14,501,275 (6) 12.30%
William R. Ziegler 5,000 * 39,642,378 (7) 33.61%
Steven A. Webster 39,637,378 (8) 33.61%
Directors and Executive Officers
as a group (11 persons) 10,593,605(9) 27.28% 64,723,058 (10) 54.81%
* Indicates less than one percent.
</TABLE>
(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 9,512,971 shares owned directly by SCP, as well as 30,124,407
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 40,357,378 shares of
Company Common Stock. Messr. Ziegler and Webster are general partners of
SCP which is the managing member of SDA. Therefore both Messr. Ziegler and
Webster are deemed to beneficially own SCP's shares.
(3) Includes 15,243,256 shares beneficially owned by EER, and 3,635,589 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 19,221,773
shares of Company Common Stock.
(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.
-74-
(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 11,386,630 shares of Company Common Stock owned directly by Mr.
Oliver, as well as 3,114,645 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 14,764,686 shares of Company Common
Stock.
(7) Includes 5,000 shares of Company Common Stock, as well as 39,637,378 shares
beneficially owned by SCP, of which Mr. Ziegler is a general partner.
(8) Includes 39,637,378 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 161,200 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 161,200 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. 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. This stock was to be a
redeemable preferred with cumulative annual dividends of 15% per annum. The
Subscription is required to be rescinded as a condition to the Mergers. The
$4,000,000 payment made by Norex for the Subscription will be refunded out of
the proceeds of a $4,000,000 term loan from Norex pursuant to the Term Loan
Agreement. This term loan will bear interest at a rate of 12% and will have a
one-year maturity.
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.
-75-
PROPOSAL TO AMEND ARTICLES OF INCORPORATION
BACKGROUND
As of June _____, 1996, there were issued and outstanding __________ shares
of Company Common Stock and 90,000 shares of Series A Convertible Redeemable
Preferred Stock. In addition, _______ shares 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 79,274,756 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 (the "Share Authorization Amendment"). 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 Prospectus/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.
Additionally, 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.
Finally, 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
-76-
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. The Company does not have any current plans with respect to
any Fundamental Corporate Events other than as set forth in this
Prospectus/Proxy Statement.
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 (the "Voting Amendment"). Accordingly, 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.
PROPOSED CHARTER AMENDMENT
The Board of Directors has declared it advisable and has adopted, and
recommends that the Shareholders adopt:
(1) 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 ________________."
(2) 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"); and
(3) 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 Charter Amendment. THE BOARD OF DIRECTORS HAS APPROVED THE
CHARTER 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 CHARTER AMENDMENT. The approval and ultimate
consummation of the Somerset
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Merger will automatically effect the amendments contemplated in the Charter
Amendment. The Company intends, however, to effect the amendments contemplated
by the Charter 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 date
hereof, there are issued and outstanding 38,669,378 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 $.10
per share.
COMPANY COMMON STOCK
There are currently issued and outstanding 38,669,378 shares of Company
Common Stock. There are no shares of Company Common Stock held as treasury
shares. In addition, an aggregate of 968,000 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
The Company has received the Subscription and the $4,000,000 purchase price
for the issuance of 4,000 shares of Series B Preferred Stock. However, the
Company has not established the Series B Preferred Stock nor its relative rights
and preferences, nor has any Series B Preferred Stock been issued. As a
condition precedent to the Mergers, the Subscription for the Series B Preferred
Stock will be canceled and the subscription amount of $4,000,000 will be repaid
with the proceeds of a loan from Norex.
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. At March 31, 1996,
options to purchase 534,900 shares of the Company Common Stock were available
for grant under the 1982 Employee Plan. 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. At March 31, 1996, options under the 1987 Director Plan to purchase
174,100 shares of the Company Common Stock were available for grant until June
30, 1997. The exercise price
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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.
SHARES ELIGIBLE FOR FUTURE SALE
Of the __________ shares of Company Common Stock currently outstanding as
of June ______, 1996, approximately _______ shares are either "restricted
securities" or held by "affiliates" of the Company as such terms are defined in
Rule 144 adopted under the Securities Act. In addition, _______ shares of the
authorized shares of Company Common Stock are reserved for issuance upon the
exercise by employees and directors of outstanding options. No prediction can be
made regarding the effect, if any, that eventual market sales of the
above-mentioned shares will have on the market price for the common stock
prevailing from time to time. There is a possibility that a substantial number
of such shares may be resold in the public market and that such sales may
adversely affect prevailing market prices of the Company Common Stock.
The shares of Company Common Stock to be issued pursuant to the Merger
Agreements are being registered under the Securities Act pursuant to the
Registration Statement and may generally be resold freely without further
registration. However, because some of the persons acquiring Company Common
Stock in the Mergers may be deemed to be affiliates of parties to the Mergers,
such persons will not be able to resell the Company Common Stock received by
them in connection with the Merger unless 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 or (3) sold in compliance
with Rule 145 under the Securities Act (or, in the case of persons who become
affiliates of the Company, which will include the Somerset Shareholders, certain
of the LRAC/RTO Shareholders and certain affiliates thereof, Rule 144 under the
Securities Act). See "The Mergers Restrictions on Resales by
Affiliates/Registration Rights."
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.
LEGAL MATTERS
Certain legal matters in connection with the Company Common Stock issued
pursuant to the Mergers and certain federal income tax consequences of the
Mergers to the Company and the Shareholders will be passed upon for the Company
by Cokinos, Bosien & Young, Houston, Texas.
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EXPERTS
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 Prospectus/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.
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 Prospectus/Proxy Statement, not later than
______, 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.
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INDEX TO FINANCIAL STATEMENTS
DI INDUSTRIES, INC.
<TABLE>
<S> <C>
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)
December 31,
March 31, --------------------
1996 1995 1994
-------- -------- --------
ASSETS (unaudited)
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>
Nine
Three Months Ended Year Ended Months Ended Year Ended
March 31, 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>
Year Nine Months Year
Three Months Ended Ended Ended Ended
March 31, 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
<PAGE>
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
DI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
DI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Year Ended Months Ended Nine 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
DI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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>
Year Nine Months Year
Three Months Ended Ended Ended Ended
March 31, 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.
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
DI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
DI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
F-12
DI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
DI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
DI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
DI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
DI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
DI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
DI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
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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
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
The Form of Non-Competition Agreement referenced hereto as Exhibit F does not
differ in any material respect from the Form of Non-Competition Agreement filed
as Exhibit 10.14 to this Registration Statement. As such, the Form of
Non-Competition Agreement has not been included as an exhibit to this agreement.
57
EXHIBIT G
FORM OF WARRANT
The Form of Warrant referenced hereto as Exhibit G does not differ in any
material respect from the Form of Warrant filed as Exhibit 10.11 to this
Registration Statement. As such, the Form of Warrant has not been included as an
exhibit to this agreement.
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>
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).
2
(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.
18
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.
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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.
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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.
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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 10.18 to
this Registration 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 10.11 to this
Registration 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>
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.
- 1 -
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
- 2 -
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
- 3 -
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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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Article 1302-7.06 of the Texas Miscellaneous Corporation Laws Act,
the articles of incorporation of a Texas corporation may provide that a director
of that corporation shall not be liable, or shall be liable only to the extent
provided in the articles of incorporation, to the corporation or its
shareholders for monetary damages for acts or omissions in the director's
capacity as a director, except that the articles of incorporation cannot provide
for the elimination or limitation of liability of a director to the extent that
the director is found liable for (i) a breach of the director's duty of loyalty
to the corporation or its shareholders, (ii) acts or omissions not in good faith
that constitutes a breach of duty of the director to the corporation or an act
or omission that involves intentional misconduct or a knowing violation of the
law, (iii) any transaction from which the director received an improper personal
benefit, or (iv) an act or omission for which the liability of a director is
expressly provided by an applicable statute. Article XII of the Company's
Articles of Incorporation, as amended, states that a director of the Company
shall not be liable to the Company or its shareholders for monetary damages
except to the extent otherwise expressly provided by the statutes of the State
of Texas.
In addition, Article 2.02-1 of the TBCA authorizes a Texas corporation to
indemnify a person who was, is, or is threatened to be made a named defendant or
respondent in a proceeding, including any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative,
arbitrative, or investigative because the person is or was a director. The
indemnification is permitted only if it is determined that the person (1)
conducted himself in good faith; (2) reasonably believed (a) in the case of
conduct in his official capacity as a director of the corporation, that his
conduct was in the corporation's best interests; and (b) in all other cases,
that his conduct was at least not opposed to the corporation's best interests;
and (3) in the case of any criminal proceeding, had no reasonable cause to
believe his conduct was unlawful. A person may be indemnified under Article
2.02-1 against judgments, penalties (including excise and similar taxes), fines,
settlements, and reasonable expenses actually incurred by the person (including
court costs and attorneys' fees), but if the person is found liable to the
corporation or is found liable on the basis that personal benefit was improperly
received by him, the indemnification is limited to reasonable expenses actually
incurred and may not be made in respect of any proceeding in which the person
has been found liable for willful or intentional misconduct in the performance
of his duty to the corporation. A corporation is obligated under Article 2.02-1
to indemnify a director or officer against reasonable expenses incurred by him
in connection with a proceeding in which he is named defendant or respondent
because he is or was a director or officer if he has been wholly successful, on
the merits or otherwise, in the defense of the proceeding. Under Article 2.02-1
a corporation may (i) indemnify and advance expenses to an officer, employee,
agent or other person who are or were serving at the request of the corporation
as a director, officer, partner venturer, proprietor, trustee, employee, agent
or similar functionary of another entity to the same extent that it may
indemnify and advance expenses to directors, (ii) indemnify and advance expenses
to directors and such other persons to such further extent, consistent with law,
as may be provided in the corporation's articles of incorporation, bylaws,
action of its board of directors, or contract or as permitted by common law and
(iii) purchase and maintain insurance or another arrangement on behalf of
directors and such other persons against any liability asserted against him and
incurred by him in such a capacity or arising out of his status as such a
person. The Bylaws of the Company set forth specific provisions for
indemnification of directors, officers, agents and other persons which are
substantially identical to the provisions of Article 2.02-1 described above. The
Company maintains directors and officers insurance.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
The exhibits listed in the Exhibit Index below are filed as part of the
Registration Statement
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
2.1* -- Agreement and Plan of Merger dated May 7, 1996, among DI Industries, Inc., DI Merger
Sub, Inc., Roy T. Oliver, Jr., Mike L. Mullen, R.T. Oliver, Inc. and Land Rig Acquisition
Corp.
2.1.1* -- Amendment to Agreement and Plan of Merger dated May 7, 1996, among DI Industries,
Inc., DI Merger Sub, Inc., Roy T. Oliver, Jr., Mike L. Mullen, R.T. Oliver, Inc. and Land
Rig Acquisition Corp.
2.2* -- Agreement and Plan of Merger dated May 7, 1996, among DI Industries, Inc. and Somerset
Investment Corp.
2.2.1* -- Amendment to Agreement and Plan of Merger dated May 7, 1996, among DI Industries,
Inc. and Somerset Investment Corp.
3.1# -- Articles of Incorporation of DI Industries, Inc., as amended.
3.2# -- By-Laws of DI Industries, Inc., as amended.
3.3# -- Statement of Resolutions Establishing the Series A Convertible Redeemable Preferred
Stock.
4.1# -- Stock Registration Agreement dated July 20, 1989 among DI Industries, Inc., the
Pennsylvania Company, Hamilton Robinson & Company, Incorporated, Spinnaker Investor
Partners, L.P., Spinnaker Partners, Hamilton Robinson & Co., Inc. Managed Account No.
1 and Max M. Dillard. (Filed as Exhibit 4.6 to Registration Statement No. 33-33270.)
4.2# -- $10,000,000 Loan Agreement dated December 12, 1994, between Drillers, Inc. and
NordlandsBanken AS. (Filed as Exhibit 4.11 to Transition Report on Form 10-K for
December 31, 1994).
4.3# -- Restated $2,500,000 Loan Agreement and Revolver Note dated September 15, 1994
between DI Energy, Inc., et al. and Charter National Bank-Colonial.
4.4# -- Amendment No. 1 dated October 1, 1995, to $10,000,000 Loan Agreement dated
December 2, 1994 between Drillers, Inc. and NordlandsBanken A.S. (Filed as Exhibit 4.13
to Annual Report Form 10-K for December 31, 1995.)
4.5# -- $574,998 Term Note dated December 13, 1995, between Drillers, Inc. and Charter National
Bank - Colonial. (Filed as Exhibit 4.13 to Annual Report Form 10-K for December 31,
1995.)
5.1** -- Opinion of Cokinos, Bosien & Young.
10.1# -- IADC Model Form "Footage" Drilling Contract (February 1986). (Filed as Exhibit 10.3
to Registration Statement No. 33-33270.)
10.2# -- IADC Model Form "Daywork" Drilling Contract (February 1986). (Filed as Exhibit 10.4
to Registration Statement No. 33-33270.)
10.3# -- IADC Model Form "Turnkey" Drilling Contract (February 1988.) (Filed as Exhibit 10.5
to Registration Statement No. 33-33270.)
10.4# -- Drillers Inc. 1982 Stock Option and Long-Term Incentive Plan for Key Employees. (Filed
with Drillers Inc. 1982 Annual Meeting definitive proxy solicitation materials.)
10.5# -- Drillers Inc. Stock Option Plan for Non-Employee Directors. (Filed with Drillers Inc. 1982
Annual Meeting definitive proxy solicitation materials.)
10.6# -- DI Industries, Inc. 1987 Stock Option Plan for Non-Employee Directors. (Filed with DI
Industries, Inc. 1987 Annual Meeting definitive proxy solicitation materials.)
10.7# -- Stock Purchase Agreement dated June 23, 1989 by and
among DI Industries, Inc., The Penn Central Corporation,
the Pennsylvania Company and Holden Rig Company. (Filed as
Exhibit 0.6 to Annual Report on Form 10-K for March 31,
1989).
10.8# -- Employment Agreement dated November 17, 1994, between
the Company and Max M. Dillard (Filed as Exhibit 10.10 to
Transition Report on Form 10-K for December 31, 1994).
10.9* -- Shareholders' Agreement dated May 7, 1996, among Somerset Drilling Associates, L.L.C.,
Roy T. Oliver, Jr., U.S. Rig and Equipment, Inc., Mike Mullen Energy Equipment
Resource, Inc., GCT Investments, Inc., Mike L. Mullen, Norex Drilling Ltd., and Pronor
Holdings, Ltd.
10.9.1* -- Amendment to Shareholders' Agreement dated May 7, 1996, among Somerset Drilling
Associates, L.L.C., Roy T. Oliver, Jr., U.S. Rig and Equipment, Inc., Mike Mullen Energy
Equipment Resource, Inc., GCT Investments, Inc., Mike L. Mullen, Norex Drilling Ltd.,
and Pronor Holdings, Ltd.
10.10* -- Form of Shadow Warrant to be issued to the shareholders of Somerset Investment
Corporation.
10.11* -- Form of Shadow Warrant to be issued to the shareholders of R.T. Oliver, Inc. and Land Rig
Acquisition Corporation.
10.12* -- Registration Rights Agreement dated May 7, 1996, among
Somerset Drilling Associates, L.L.C., Roy T. Oliver, Jr.,
U.S. Rig and Equipment, Inc., Mike Mullen Energy Equipment
Resource, Inc., GCT Investments, Inc., Norex Drilling
Ltd., and Pronor Holdings, Ltd.
10.12.1* -- Amendment to Registration Rights Agreement dated May 7,
1996, among Somerset Drilling Associates, L.L.C., Roy T.
Oliver, Jr., U.S. Rig and Equipment, Inc., Mike Mullen
Energy Equipment Resource, Inc., GCT Investments, Inc.,
Norex Drilling Ltd., and Pronor Holdings, Ltd.
10.13* -- Investment Monitoring Agreement dated May 7, 1996,
among DI Industries, Inc., Somerset Capital Partners and
Somerset Drilling Associates, L.L.C.
10.14* -- Form of Non-Competition Agreement to be executed among DI Industries, Inc., Roy T.
Oliver, Jr., U.S. Rig and Equipment, Inc., Mike L. Mullen and Mike Mullen Energy
Equipment Resource, Inc.
10.15* -- Promissory Note in the principal amount of $1,000,000 executed by DI Industries, Inc.
delivered to Norex Drilling Ltd.
10.16* -- Security Agreement executed among DI Industries, Inc. and Norex Drilling Ltd.
10.17* -- DI Industries, Inc. 1996 Employee Stock Option Plan.
10.18* -- Form of Term Loan Agreement to be executed among DI Industries, Inc. and Norex Drilling
Ltd.
11.1* -- Statement regarding computation of per share earnings.
20* -- Appraisal of the Merger Rigs by Superior Auctioneers and Marketing, Inc.
22.1* -- List of Subsidiaries
23.1* -- Consent of Deloitte & Touche LLP.
23.2** -- Consent of Cokinos, Bosien & Young contained in their opinion filed as Exhibit 5.1.
23.3* -- Consent of Superior Auctioneers and Marketing, Inc.
24* -- Powers of Attorney (included on signature page).
27* -- Financial Data Schedule (included in Prospectus/Proxy Statement).
</TABLE>
- ------
*Filed herewith.
** To be filed by amendment.
#Incorporated by reference herein.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering;
(b)(1) The undersigned registrant hereby undertake as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(2) The registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (1) immediately preceding, or (ii) that
purports to meet the requirements of section 10(a)(3) of the Act and
is used in connection with an offering of securities subject to Rule
415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and
that, for purposes of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 14 of the instructions to Form S-4, within one business
day of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registrations statement when it became effective.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF TEXAS,
ON JUNE 14, 1996.
DI INDUSTRIES, INC.
By: /S/ IVAR SIEM
Ivar Siem, President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Ivar Siem with power to act as his true
and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all subsequent pre- and post-effective amendments and
supplements to this Registration Statement, and to file the same, or cause to be
filed the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that any said attorney-in-fact and agent or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
/S/ IVAR SIEM Chairman of the Board, June 14, 1996
(IVAR SIEM) President and Chief
Executive Officer
/S/ THOMAS L. EASLEY Vice President and
(THOMAS L. EASLEY) Chief Financial Officer June 14, 1996
/S/ BILL R. MERCHANT Chief Accounting Officer June 14, 1996
(BILL R. MERCHANT)
________________________ Director June 14, 1996
(DOUGLAS Y. BECH)
/S/ MICHAEL J. DELOUCHE Director June 14, 1996
(MICHAEL J. DELOUCHE)
/S/ WILLIAM C. WALKER Director June 14, 1996
(WILLIAM C. WALKER)
Exhibit 2.1
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.
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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
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
The Form of Non-Competition Agreement referenced hereto as Exhibit F does not
differ in any material respect from the Form of Non-Competition Agreement filed
as Exhibit 10.14 to this Registration Statement. As such, the Form of
Non-Competition Agreement has not been included as an exhibit to this agreement.
57
EXHIBIT G
FORM OF WARRANT
The Form of Warrant referenced hereto as Exhibit G does not differ in any
material respect from the Form of Warrant filed as Exhibit 10.11 to this
Registration Statement. As such, the Form of Warrant has not been included as an
exhibit to this agreement.
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
Exhibit 2.2
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).
2
(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.
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(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.
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(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.
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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.
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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 10.18 to
this Registration 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 10.11 to this
Registration 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
Exhibit 10.9
SHAREHOLDERS' AGREEMENT
SHAREHOLDERS' AGREEMENT (this "Agreement") made as of this 7th day of
May, 1996, by and among Somerset Drilling Associates, L.L.C., a Delaware limited
liability company ("Somerset"), Roy T. Oliver, Jr., an individual ("Oliver"),
U.S. Rig and Equipment, Inc., an Oklahoma corporation ("USRE"), Mike Mullen
Energy Equipment Resource, Inc., a Texas corporation ("EER"), GCT Investments,
Inc., a Texas corporation ("GCT"), Mike L. Mullen, an individual ("Mullen" and
together with Oliver, USRE, EER and GCT, the "Mullen/Oliver Group"), Norex
Drilling Ltd., a Bermuda corporation ("Norex Drilling"), and Pronor Holdings
Ltd., a British Virgin Island corporation ("Pronor" and, together with Norex
Drilling, the "Drilling Group") (Somerset, the Mullen/Oliver Group, Norex
Drilling and Pronor are hereinafter sometimes referred to individually as a
"Shareholder" and collectively as the "Shareholders.")
WHEREAS, Norex Drilling and Pronor are stockholders of DI Industries,
Inc., a Texas corporation (the "Corporation");
WHEREAS, pursuant to two separate merger agreements of even date
herewith, Somerset and the Mullen/Oliver Group will receive, upon the effective
date of the mergers contemplated by those agreements (the "Mergers"), Common
Stock of the Corporation;
WHEREAS, upon the effectiveness of a charter amendment to be effected
in connection with the Mergers, the Corporation will have authorized capital
stock consisting of two hundred million (200,000,000) shares of Common Stock,
par value $.10 per share (the "Common Stock"), of which 117,944,134 shares will
be issued and outstanding upon the effectiveness of the Mergers (assuming no
exercise of the Cash Option, as defined in the merger agreement pursuant to
which the Mullen/Oliver Group are to receive Common Stock), and one million
(1,000,000) shares of
1
Preferred Stock, par value $1.00 per share, of which 90,000 shares of Series A
Convertible Redeemable Preferred Stock will be issued and outstanding upon the
effectiveness of the Mergers;
WHEREAS, upon the effectiveness of the Mergers, and assuming no
exercise of the Cash Option, each of the Shareholders will own (or control, as
indicated) the number of such shares of Common Stock and the number of warrants
set forth opposite its respective name on EXHIBIT A attached hereto;
WHEREAS, the Shareholders, in order to ensure continuity of management
necessary for the success of the Corporation's business, consider it in the best
interests of the Corporation and the Shareholders to agree to make provision for
the control and management of the affairs of the Corporation;
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual promises herein contained, the parties hereto, each intending to be
legally bound, hereby agree as follows:
1. EFFECTIVE DATE. This Agreement shall become effective upon the
effectiveness of the Mergers, except that Section 10 shall become effective as
of the date hereof.
2. RESTRICTIONS ON TRANSFERABILITY OF SHARES. Each of the Shareholders
agrees not to sell, assign, transfer (with or without consideration) or
otherwise dispose of, or pledge or otherwise create a security interest in or
lien or other encumbrance upon any of the shares that he or it now or hereafter
may hold, own or control, nor shall any such shares be transferable, except as
permitted under, pursuant to and in compliance with the terms and conditions of
this
2
Agreement. Any sale, assignment, transfer or other disposition or encumbrance
contrary to the provisions of this Agreement shall be null and void and of no
effect.
2.1 RIGHT OF FIRST REFUSAL.
2.1.1 If any Shareholder shall have received a bona
fide offer in writing from a third-party purchaser in an arm's-length
transaction to purchase some or all of his or its shares which he or it wishes
to accept ("Offering Shareholder"), such Offering Shareholder shall first offer,
by notice in writing, to sell those of his or its shares subject to such offer
to the other Shareholders ("other Shareholders"), all as more fully set forth
herein. Such notice of offer shall be in writing; shall be delivered to the
other Shareholders; shall set forth the name, residence and business address of
the bona fide offeror and sufficient facts concerning the bona fide offeror to
enable the other Shareholders to arrive at an informed judgment as to the bona
fides of such offer and the background and financial and business capabilities
of such offeror; and shall contain a copy of the bona fide offer. The bona fide
offer shall set forth the representations and warranties requested of the
Offering Shareholder and all items affecting the price. Such notice shall be
delivered simultaneously to each of the other Shareholders.
2.1.2 Upon an Offering Shareholder giving notice
to the other Shareholders of receipt of a bona fide offer as provided in
paragraph 2.1.1 above, the other Shareholders, pro rata in accordance with their
relative proportion of shares then held by them (the "Offer Percentage"), shall
have the option to purchase the shares owned by the Offering Shareholder and
subject to the bona fide offer.
(i) The other Shareholders shall each
advise the Offering Shareholder in writing within twenty (20) days after
delivery to him or it of the notice of offer by the Offering Shareholder, as to
whether or not he or it shall accept the offer in whole or in part
3
and if only in part, the extent to which he or it wishes to accept the offer. If
the offer of the Offering Shareholder is duly accepted as to all of his or its
shares subject to the bona fide offer, the closing of the sale shall be held
within fifteen (15) days after notice of acceptance, at the date, time and place
specified by the purchaser(s) by written notice given at least five (5) days
prior to the closing date. The other Shareholders may, at their election,
indicate in their written acceptance of the offer that they desire to accept the
offer with respect to a number of shares in excess of their Offer Percentage (an
"Excess Share Notice"). In the event that any of the other Shareholders do not
accept the offer with respect to their full Offer Percentage, then each of the
Shareholders who have delivered Excess Share Notices shall be deemed to have
accepted the offer with respect to the greater of (i) its relative Offer
Percentage of the remaining offered shares, or (ii) the number of shares
indicated in its Excess Share Notice.
(ii) The aggregate purchase price for all of
the shares of the Offering Shareholder to be purchased by the other Shareholders
pursuant to this Section 2.1.2 shall be the purchase price set forth in the bona
fide third party offer and such purchase shall be on such other terms and
conditions as are set forth in the bona fide third party offer.
2.1.3 If the offer of the Offering Shareholder is not
accepted with respect to all of the shares subject to the bona fide offer as
aforesaid, all acceptances and offers relating to such shares shall be deemed to
be void as at the end of such twenty (20)-day period.
2.1.4 If the other Shareholders do not exercise their
options to purchase all of the shares of the Offering Shareholder subject to the
bona fide offer, the Offering Shareholder may, within ninety (90) days after the
date on which notice of such bona fide offer was given, sell all of such shares
to the bona fide offeror (subject to the tag along rights provided in Section
2.2 of this Agreement) on the terms and conditions set forth in the bona fide
offer, and
4
the bona fide offeror shall thereupon become a stockholder of the Corporation
possessing all of the same rights and obligations as did the Offering
Shareholder, including the restrictions on resale set forth in this Agreement,
which Agreement shall be binding upon him in all respects as though originally a
party hereto. The bona fide offeror shall, as a condition of the transfer,
execute and deliver to the Corporation pursuant to Section 16 hereof an
acknowledgment in the form of EXHIBIT C ("Acknowledgment") and any other
documents that the other Shareholders reasonably request to evidence his
agreement to the foregoing. If such sale to the bona fide offeror is not
completed as aforesaid within such period, the Offering Shareholder shall not
sell his or her shares in the Corporation without again offering the same for
sale as herein provided.
2.2 TAG-ALONG RIGHTS.
2.2.1 If the other Shareholders have not notified the
Offering Shareholder of their acceptance of its offer with respect to all of the
shares subject to its offer within the twenty (20)-day period specified above,
the Offering Shareholder shall notify the other Shareholders of such failure (a
"Tag Along Notice"). As a condition of any sale by the Offering Shareholder of
the shares pursuant to such offer, each of the other Shareholders, at his or its
option, shall be entitled to sell a number of shares of the Corporation equal to
his Pro Rata Portion to the bona fide offeror (in such case the number of shares
to be sold by the Offering Shareholder shall be reduced by the number of shares
being sold by the other Shareholders) on the same terms and conditions as set
forth in the bona fide offer, and the contract of sale for the shares of the
Offering Shareholder with the bona fide offeror shall not be valid unless it
provides for the purchase by the bona fide offeror of such Pro Rata Portion
(defined below) of the shares of the other Shareholders exercising their
tag-along rights. Such rights shall be exercised by written notice to the
Offering Shareholder within the ten (10)-day period following the date of
5
the Tag Along Notice. Failure to give any notice during said ten (10)-day period
shall be deemed to be an election by the non-Offering Shareholder not to
exercise such tag-along rights.
2.2.2 For purposes of paragraph 2.2.1 above, the term
"Pro Rata Portion" shall mean (i) a percentage (expressed as a decimal fraction
rounded to the nearest one-hundredth) obtained by dividing (A) the aggregate
number of shares held by a Shareholder by (B) the total number of issued and
outstanding shares of the Corporation held collectively by all of the
Shareholders, multiplied by (ii) the number of shares subject to the bona fide
offer.
2.3 EXCLUSIONS FROM RESTRICTIONS ON TRANSFERABILITY OF SHARES,
RIGHT OF FIRST REFUSAL AND TAG-ALONG RIGHTS. The restrictions contained in this
Section 2 shall not apply to any transfer of shares (i) to the spouse or
children of the transferor, or to a trust of which there are no beneficiaries
other than the spouse or one or more lineal descendants of the transferor, (ii)
by way of bequest or inheritance upon death, (iii) to an affiliate of a
transferring Shareholder, (iv) by Somerset to its members, (v) by the
Mullen/Oliver Group to those persons specified in SCHEDULE 2.3 hereto, pursuant
to the agreements currently in effect and governing the rights of such persons
as investors in one or more of the members of the Mullen/Oliver Group, (vi) in
an offering of equity securities of the Corporation registered under the
Securities Act of 1933, as amended, (vii) meeting the requirements of paragraph
(f) of Rule 144 promulgated under the Securities Act of 1933, (viii) which,
together with any other previous transfers that are part of the same series of
related transactions, results in a reduction in the number of shares held by a
Voting Group of ten percent (10%) or less compared to the number of shares held
by such Voting Group on the date hereof, as adjusted to reflect subsequent stock
splits, stock dividends, recapitalizations or similar transactions, or (ix) by
Pronor to Orkla (as hereinafter defined) in connection with the satisfaction of
the indebtedness of Pronor to Orkla described below or any
6
bona fide pledge of shares to secure full recourse indebtedness of a party
hereto. Under no circumstances may shares be sold, transferred or otherwise
disposed of to any person who, if not already a Shareholder, has not complied
with the provisions of Section 16 hereof, and any transferee or recipient of
shares under this paragraph 2.3 shall be subject to the same restrictions under
this Agreement as were applicable to the original transferor of the shares;
provided, however, that a transferee or recipient of shares pursuant to clauses
(iv), (v), (viii) or (ix) (if, immediately after such transfer, the transferee
and its affiliates owns less than 10% of the outstanding Common Stock of the
Corporation) or (vi) or (vii) of the preceding sentence (an "Unrestricted
Transferee") shall not be subject to this Agreement. The parties of this
Agreement acknowledge that they have been advised by Pronor that it has
previously pledged its shares to secure the repayment of indebtedness owed to
Orkla A/S, a Norwegian corporation ("Orkla").
3. MANAGEMENT OF THE CORPORATION. The following provisions shall govern
the management and operations of the Corporation:
3.1 BOARD OF DIRECTORS.
3.1.1 Notwithstanding any provision of the Articles
of Incorporation or the Bylaws of the Corporation, each Shareholder agrees that
(i) the Board of Directors (the "Board") shall direct the business of the
Corporation and (ii) the Shareholders shall not, in their capacity as
stockholders, initiate any action or propose any resolution for the
consideration of stockholders, at a meeting, by consent or otherwise, that has
not been formally presented to the stockholders by the Board; provided, however,
that nothing herein shall prevent a Shareholder from voting its shares in the
manner it deems appropriate on any matter properly presented to the
stockholders; and provided further that nothing herein shall prevent
Shareholders from enforcing their respective rights to designate directors as
provided in this Agreement. The Shareholders
7
shall vote their shares to cause the relevant corporate documents to provide
that the business and affairs of the Corporation and each Material Subsidiary
(as defined below) shall be managed by its Board consisting of five (5)
directors.
3.1.2 During the term of this Agreement, the
Shareholders shall vote all shares owned or controlled by them to elect and
maintain as directors of the Corporation and of any subsidiary whose assets or
revenues at any time exceed 35% of the assets or revenues of the Corporation and
its subsidiaries, taken as a whole, determined on a consolidated basis in
accordance with generally accepted accounting principles (a "Material
Subsidiary") (A) one (1) individual nominated by Somerset, (B) one (1)
individual nominated by the Mullen/Oliver Group, (C) one (1) individual
nominated by the Drilling Group, and (D) two (2) individuals who are not
officers of the Corporation or any of its subsidiaries and who neither are
related to the officers of the Corporation nor represent concentrated or family
holdings of the shares of the stock of the Corporation (including the parties to
this Agreement) (the "Non-Party Directors"). The members of the Board initially
nominated pursuant to the preceding sentence are listed on SCHEDULE 3.1.2
attached hereto, which members shall serve pursuant to the terms of this
Agreement until their successors, if any, are designated and elected as
contemplated hereby.
3.1.3 Any director to be nominated by a Shareholder
group pursuant to Section 3.1.2 must be unanimously designated by the members of
such group. In the event of the failure of any party to this Agreement to
nominate a director pursuant to Section 3.1.2, the Shareholders shall vote the
shares to elect a Non-Party Director to the seat that otherwise would have been
filled by the nominee of such party.
3.1.4 The Non-Party Directors may be removed and
replaced in accordance with the Bylaws of the Corporation. None of the three
directors nominated by a
8
Shareholder or a Shareholder group may be removed unless such Shareholder,
Shareholder group or the Board, if the director was nominated by it, desires to
remove such director, with or without cause. If any of the Drilling Group,
Somerset, the Mullen/Oliver Group, or the Board desire to remove any director
pursuant to the preceding sentence, each of the other Shareholders shall vote
all shares owned by them in favor of such removal. In the event of a vacancy on
the Board resulting from such removal or otherwise, including, without
limitation, death or resignation of a director, the Shareholders shall vote all
shares owned by them in favor of the appointment of a nominee of the Drilling
Group, Somerset or the Mullen/Oliver Group, as the case may be, depending on
whether the directorship was previously held by a director nominated by them in
accordance with subsection 3.1.2 above, and each of the Shareholders shall vote
all shares owned or controlled by them to elect and maintain any individual so
nominated as a director of the Corporation (subject to removal as provided
herein), and to take any action that may be taken by a Shareholder of the
Corporation in accordance with the Articles of Incorporation and By-laws of the
Corporation and the Texas Business Corporation Act to ensure that any such
individual is so elected.
3.2 FREEZE OUT TRANSACTIONS. The Shareholders agree to vote
against any merger of the Corporation or other acquisition transaction that does
not treat all Shareholders equally in their capacity as holders of securities of
the same class (E.G.. by providing cash to some Shareholders and securities to
other Shareholders), unless Shareholders holding at least 90% of the shares then
owned by the Shareholders agree to vote in favor of such transaction.
3.3 STANDSTILL. In the event that at any time during the term
of this Agreement any Shareholder or Shareholder group (including any affiliate
of such Shareholder or Shareholder group) acquires additional securities of the
Corporation which gives such
9
Shareholder or Shareholder group combined voting power, on a fully diluted
basis, in excess of the voting power of such Shareholder or Shareholder group
upon the effectiveness of the Mergers (such additional securities representing
combined voting power in excess of the voting power of such Shareholder or
Shareholder group upon effectiveness of the Mergers being hereinafter referred
to as the "Excess Shares"), such Shareholder agrees that such Excess Shares
owned by such Shareholder will be voted proportionally in the manner in which
the shares owned by the other stockholders, including the other Shareholders not
part of a group with such Shareholder, are voted on all matters which require
stockholder approval.
During the term of this Agreement each Shareholder agrees that:
(i) it will not solicit proxies or consents with respect to
any matter which is placed before the stockholders; provided, however,
that nothing shall prevent a Shareholder from voting its shares (other
than the Excess Shares) as it deems appropriate in accordance with the
provisions of this Agreement and stating the reasons therefor; and
(ii) it will not deposit any shares in a voting trust, or
subject any shares to a voting trust agreement or similar agreement or
combine with or act in concert with respect to the voting of shares
with any other stockholder (other than the voting agreements set forth
in this Agreement and the irrevocable proxies delivered pursuant
hereto).
3.4 VOTING AGREEMENTS; IRREVOCABLE PROXIES. Each Shareholder
shall execute and deliver such consents, proxies, certificates, instruments and
other documents as shall be necessary or advisable to carry out and make
effective the voting agreements set forth in Sections 3.1, 3.2 and 3.3 above,
including, without limitation, the execution and delivery prior to the
effectiveness of the Mergers of irrevocable proxies (the "Proxies"),
substantially in the form of
10
EXHIBIT B attached hereto. Notwithstanding any other provisions contained herein
or in the Proxies, any proxy created hereunder shall terminate upon the
termination of this Agreement, unless otherwise required by law. It is the
intention of the parties hereto that this Agreement comply in all respects with
the requirements of Articles 2.30 and 2.29 of the Texas Business Corporation
Act, governing voting agreements among stockholders and irrevocable proxies,
respectively. If any provision of this Agreement or of any proxy delivered
pursuant hereto, including, without limitation, the Proxies, or the application
of any such provision to any person or entity or circumstance, shall be held
invalid, the remainder of this Agreement and of any such proxy, and the
application of any such provision to any person or circumstance other than those
to which it is held invalid, shall not be affected thereby.
4. STOCK CERTIFICATE LEGEND. There shall be forthwith placed
conspicuously on every stock certificate representing shares now outstanding and
on every such certificate which may hereafter be acquired by any party to this
Agreement or by any successor or permitted transferee thereof (other than an
Unrestricted Transferee) or in which any such party, successor or permitted
transferee (other than an Unrestricted Transferee) has an interest, the
following legend:
"The shares of stock evidenced by this certificate or any certificate
issued in exchange or transfer therefor are held subject to the
provisions of a Shareholders' Agreement dated as of May 7, 1996, which
provides, among other things, for the grant of an irrevocable proxy,
the restriction of the transfer of such shares and agreements
concerning the voting of such shares, a copy of which Shareholders'
Agreement is on file and may be examined at the principal office of the
Corporation."
5. DEPOSIT OF SHAREHOLDERS' AGREEMENT. A counterpart of this Agreement
and all amendments thereto shall be deposited at the principal office of the
Corporation and may be examined by any Shareholder during normal business hours.
11
6. ARTICLES OF INCORPORATION AND BYLAWS. In the event of any conflict
between the provisions of the Articles of Incorporation or Bylaws of the
Corporation or any Material Subsidiary and this Agreement, the provisions of
this Agreement shall control and the Shareholders shall use their best efforts
to cause the Articles of Incorporation or Bylaws of the Corporation or any
Material Subsidiary, to the extent required by applicable law, to be amended to
provide for terms and conditions substantially similar to those contained in
this Agreement.
7. TERMINATION. This Agreement shall terminate upon the occurrence of
any of one of the following events:
(1) the mutual agreement in writing of the Shareholders; or
(2) liquidation or dissolution of the Corporation; or
(3) the sale of all the shares held by the Shareholders or all or
substantially all of the assets of the Corporation; or
(4) the expiration of four (4) years from the date of
effectiveness of this Agreement; or
(5) No more than one (1) person is a Shareholder; or
(6) No more than one (1) of the Voter Groups own the Minimum
Percentage; or
(7) No more than two of the Voting Groups own the Minimum
Percentage, and a majority in interest of the members of each
of the remaining Voting Groups elect that the Agreement shall
be terminated;
provided, however, that with respect to the right to require the Shareholders to
vote for the election of the director nominated by that party pursuant to
Section 3.1.2 hereof, such right shall terminate with respect to each of
Somerset, the Drilling Group or the Mullen/Oliver Group, as the case may be, in
the event that the number of shares owned by Somerset, the Drilling Group or the
Mullen/Oliver Group, as the case may be, is less than the Minimum Percentage (as
defined in Section 8.3).
12
8. CERTAIN DEFINITIONS. As used herein the following terms shall have
the meanings set forth below:
8.1 The term "affiliate" means, with respect to any person,
any other person that directly or indirectly controls or is controlled by or is
under common control with such person.
8.2 The term "control" as used herein means the power to
exercise a controlling influence over such person, and a person shall be deemed
to control another person if that person (i) owns beneficially, directly or
indirectly, 10% or more of the voting securities or voting interests of such
person, or (ii) creates, establishes or uses a trust, proxy, power of attorney,
pooling arrangement or other device with the purpose or effect of divesting such
person of beneficial ownership of such securities, or (iii) provides directly or
indirectly the funds for the acquisition by such other person of any shares of
the Corporation.
8.3 The term "Minimum Percentage" shall mean, with respect to
Somerset, the Drilling Group, or the Mullen/Oliver Group, the ownership by such
person or group, collectively with their respective affiliates, of seven and
one-half percent (7 1/2%) or more of the total number of shares of the Common
Stock of the Corporation outstanding.
8.4 The term "party to this Agreement" as used herein shall
mean any person signatory to this Agreement, any transferee of any Shareholder
that is required to execute and deliver to the Corporation an Acknowledgment
pursuant to Section 16 hereof in connection with its acquisition of shares.
8.5 The term "person" as used herein means any individual,
corporation, company, partnership, joint venture, trust, association,
unincorporated organization, or other entity or group.
13
8.6 The term "shares" as used herein shall be deemed to refer
to all the shares of the Common Stock of the Corporation, or warrants to
purchase such Common Stock, owned by the Shareholders at the time of execution
of this Agreement; any additional shares of the Common Stock of the Corporation
hereafter acquired by any Shareholder; any shares of the Common Stock of the
Corporation hereafter issued in exchange therefor by way of reclassification of
shares, merger, consolidation, reorganization, recapitalization or otherwise;
any additional shares issued to the respective Shareholders by reason of stock
dividends, share distributions, increases in the outstanding shares; and (unless
the context does not permit such interpretation) any shares of the Common Stock
of the Corporation issuable to any Shareholder upon exercise of options,
warrants, rights, and conversion rights or privileges.
8.7 The term "Shareholder" as used herein shall include, in
addition to the original parties signatory hereto (other than the Corporation),
any transferee of any Shareholder that is required to execute and deliver to the
Corporation an Acknowledgment pursuant to Section 15 hereof, in each respect
only so long as such party holds shares.
8.8 The term "Voting Group" as used herein shall mean each of
Somerset, the Drilling Group, and the Mullen/Oliver Group, and their affiliates.
9. MERGER. In the event of the merger of the Corporation into any
corporation, this Agreement shall continue in effect and thereafter any
references in this Agreement to the Corporation shall refer to the surviving
corporation pursuant to such merger.
10. APPROVAL OF MERGERS. The Drilling Group agrees to vote all shares
owned or controlled by them in favor of the approval of the Mergers and the
election as directors of the Corporation of the persons listed on Schedule 3.1.2
hereto.
14
11. FURTHER ASSURANCES. The parties agree to make, execute and deliver
any and all agreements, instruments and documents, and to do any and all other
acts, deeds and things, which may be necessary or advisable to carry out the
provisions of this Agreement or to effectuate the intent and purpose thereof.
12. NOTICES. Any and all notices, designations, consents, offers,
acceptances or other communications provided for herein shall be given in
writing by certified or registered mail, telecopier, Federal Express, Express
Mail, or personal delivery against written receipt addressed, transmitted or
delivered, to the respective addresses of the parties set forth on the signature
pages hereto, or to such other address as may be designated by any of them in a
notice given to the other parties hereto as provided above.
Each such notice shall be deemed given at the time it is received by
the addressee.
13. INVALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect any other provision of this Agreement, and this
Agreement shall be construed in all respects as if any invalid or unenforceable
provisions were omitted.
14. AMENDMENT. This Agreement (and the Proxies) supersede and cancel
all prior agreements and understandings among the parties hereto, and contain
all of the terms and conditions agreed upon by the parties, with respect to the
subject matter hereof, and none of the parties shall be bound by any
representations, warranties, covenants or conditions with respect thereto not
expressly set forth herein. No modification of this Agreement shall be binding
or given effect unless the same shall be in writing and signed by all of the
parties.
15. BENEFIT AND BINDING OBLIGATION. This Agreement shall inure to the
benefit of and shall bind the respective personal representatives, successors
and permitted assigns of the parties. All of the provisions of this Agreement
shall apply to all of the shares.
15
16. BINDING ON TRANSFEREES. The provisions of this Agreement shall be
binding upon transferees of Shareholders (other than Unrestricted Transferees).
No Shareholder shall transfer capital stock of the Corporation to any person not
a party hereto (other than an Unrestricted Transferee) unless said person shall
execute an Acknowledgment of the terms hereof and agrees to be bound hereby, and
execute and deliver to the other Shareholders an irrevocable proxy substantially
in the form of Exhibit B attached hereto. Upon execution of any such form, said
new stockholder shall be deemed to be a party hereto subject to the obligations
created hereby. Notwithstanding the foregoing, the right of a party to this
Agreement to require the Shareholders to vote for the director nominated by such
party shall not be transferable to any person other than an affiliate of that
Shareholder. For the purposes of this Section, members of Somerset shall be
deemed to be affiliates of Somerset.
17. WAIVER. Any failure by a party hereto to comply with any
obligation, agreement or condition herein may be expressly waived in writing by
each of the other parties hereto, but such waiver or failure to insist upon
strict compliance with such obligation, agreement or condition shall not operate
as a wavier of, or estoppel with respect to, any such subsequent or other
failure.
18. 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.
16
19. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the law of the State of Texas (without giving effect to its
conflict of law provisions). Exclusive venue for any action or proceeding
relating to the interpretation or enforcement of this Agreement shall lie in
Harris County, Texas.
20. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one instrument.
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto as of the date and year first above written.
69 Delaware Avenue SOMERSET DRILLING ASSOCIATES, L.L.C.
Buffalo, New York 14202 by Somerset Capital Partners, its Managing
Member
By:/s/ WILLIAM R. ZIEGLER
William R. Ziegler, Partner
Cedar House NOREX DRILLING LTD.
41 Cedar Avenue
Hamilton, HM-12, Bermuda
Telephone No.: +1 441 283 2058 By:/s/ FRANK CAPSTICK
Telefax No.: +1 441 283 3231 Frank Capstick
President
c/o Morgan & Morgan Trust Corp. Ltd. PRONOR HOLDINGS LTD.
Road Town
Pasea Estate
Tortola, British Virgin Islands By:/s/ FRANK CAPSTICK
Telephone No.: +1 441 293 2058 Frank Capstick
Telefax No.: +1 441 293 3231 President
c/o U.S. Rig and Equipment, Inc. /s/ ROY T. OLIVER, JR.
6601 S.W. 29th Street Roy T. Oliver, Jr.
Oklahoma City, OK 73179
17
c/o Mike Mullen Energy Equipment /s/ MIKE L. MULLEN
Resource, Inc. Mike L. Mullen
8411 Preston Road
Suite 730, LB2
Dallas, TX 75225
18
U.S. RIG AND EQUIPMENT, INC.
By:/s/ ROY T. OLIVER, JR.
Roy T. Oliver, Jr.
President
MIKE MULLEN ENERGY EQUIPMENT
RESOURCE, INC.
By:/s/ MIKE L. MULLEN
Mike L. Mullen
President
GCT INVESTMENTS, INC.
By:/s/ MIKE L. MULLEN
Mike L. Mullen
President
19
EXHIBIT A
SHAREHOLDERS; STOCK OWNERSHIP
<TABLE>
<CAPTION>
No. of Shares of Common No. of Warrants To
Stock To Be Owned Upon Be Owned Upon
HOLDER EFFECTIVENESS OF THE MERGERS* EFFECTIVENESS OF MERGERS
<S> <C> <C>
Norex Drilling Ltd. ............................................... 10,430,105 --
Pronor Holdings Ltd. .............................................. 8,300,000 --
Somerset Drilling Associates, L.L.C ............................... 39,637,378 1,720,000
Roy T. Oliver, Jr ................................................. 11,386,630 494,104
U.S. Rig and Equipment, Inc. ...................................... 3,114,645 135,155
Mike Mullen Energy Equipment Resource, Inc.** ..................... 15,243,256 661,457
GCT Investments, Inc. ............................................. 3,635,589 157,761
---------- ---------
TOTAL ......... 91,747,603 3,168,477
</TABLE>
- ------------------
* Assuming no exercise of the Cash Option.
** Includes shares owned by PRD Rig Partnership 1995, Ltd. and EER National
78 Partnership, Ltd., limited partnerships of which EER is the general
partner.
20
EXHIBIT B
IRREVOCABLE PROXY COUPLED WITH AN INTEREST
KNOW ALL MEN BY THESE PRESENTS that the undersigned together with [its
successors and assigns] [his heirs, personal representatives, successors and
assigns] hereby irrevocably appoint those individuals and entities identified on
ANNEX I attached hereto, acting as a group, attorney and proxy with full power
of substitution, with full discretion, to vote all the shares of the Common
Stock, par value $.10 per share, of DI Industries, Inc., a Texas corporation
(the "Corporation"), now owned or hereafter acquired by the undersigned (the
"Shares"), standing in the names of the undersigned at any and all meetings of
stockholders or adjournments thereof (and, to the extent permitted by law, to
exercise such voting power by execution of written consents without a meeting),
as fully as the undersigned would be entitled to vote if personally present,
hereby ratifying all that said respective attorney and proxy or its substitutes
may do by virtue hereof; provided, however, that this proxy is only exercisable
to the extent provided in, and must be voted in accordance with, the terms of
the voting agreements set forth in subsections 3.1.2 and 3.1.3 of that certain
Shareholders' Agreement of even date herewith by and among the undersigned and
the other parties thereto (the "Shareholders' Agreement").
This proxy is required by the terms of said Shareholders' Agreement in
consideration therefor.
THIS PROXY IS IRREVOCABLE, it being understood and agreed that this
proxy is coupled with an interest in the Corporation and the Shares sufficient
in law to support an irrevocable power within the meaning of Section 2.29 of
Texas Business Corporation Act.
21
This proxy shall terminate upon the occurrence of one of the following
events, whichever shall first occur, (i) termination of the Shareholders'
Agreement or (ii) the termination of the Shareholders' Agreement with respect to
the undersigned or the individuals and entities identified on ANNEX I attached
hereto.
The existence of this proxy and its irrevocability is noted
conspicuously on the face of the certificate or certificates representing the
Shares on which voting rights are hereby granted as more fully described in the
Shareholders' Agreement,
IN WITNESS WHEREOF, the undersigned has hereunto duly executed and
delivered this proxy as of the __________ day of ______________, 1996.
[SHAREHOLDER]
22
ANNEX I
[OTHER SHAREHOLDERS]
23
Exhibit C
ACKNOWLEDGMENT AND AGREEMENT
The undersigned wishes to receive from
_________________________________ ("Transferor") certain shares (the "Shares")
of the Stock, (par value $ per share,] of DI INDUSTRIES, INC., a Texas
corporation (the "Corporation");
The Shares are subject to that certain Shareholders' Agreement, dated
as of _____________, 1996 (the "Agreement");
The undersigned has been given a copy of the Agreement and afforded
ample opportunity in which to read it, and the undersigned is thoroughly
familiar with its terms;
Pursuant to Section ____ of the Agreement, the corporation is
prohibited from issuing certificates evidencing ownership of the Shares to
certain persons unless and until such persons first acknowledge the terms
thereof and agree to be bound thereby; and
The undersigned wishes to receive such a certificate;
NOW, THEREFORE, in consideration of the premises and to induce the
Corporation to issue such a certificate to the undersigned, the undersigned does
hereby acknowledge and agree that (i) he has been given a copy of the Agreement
and ample opportunity in which to read it, and the undersigned is thoroughly
familiar with its terms, (ii) the Shares are subject to the Agreement, and (iii)
the undersigned does hereby agree fully to be bound thereby.
This ________ day of _______________, 19__.
--------------------------------
24
SCHEDULE 3.1.2
INITIAL DIRECTOR NOMINEES
I. INITIAL SOMERSET NOMINEE
William R. Ziegler
II. INITIAL DRILLING GROUP NOMINEE
Ivar Siem
III. INITIAL MULLEN/OLIVER GROUP NOMINEE
Roy T. Oliver, Jr.
IV. INITIAL INDEPENDENT NOMINEES
Steven A. Webster
[ ]
25
Exhibit 10.9.1
AMENDMENT
TO
SHAREHOLDERS' AGREEMENT
AMENDMENT TO SHAREHOLDERS' AGREEMENT (this "Amendment") made as of this
11th day of June, 1996, by and among Somerset Drilling Associates, L.L.C., a
Delaware limited liability company ("Somerset"), Somerset Capital Partners, a
New York general partnership and the Managing Member of Somerset ("SCP" and,
together with Somerset, the "Somerset Group"), Roy T. Oliver, Jr., an individual
("Oliver"), U.S. Rig and Equipment, Inc., an Oklahoma corporation ("USRE"), Mike
Mullen Energy Equipment Resource, Inc., a Texas corporation ("EER"), GCT
Investments, Inc., a Texas corporation ("GCT"), Mike L. Mullen, an individual
("Mullen"), Norex Drilling Ltd., a Bermuda corporation ("Norex Drilling"), and
Pronor Holdings Ltd., a British Virgin Island corporation ("Pronor").
WHEREAS, Somerset, Oliver, USRE, EER, GCT, Mullen, Norex Drilling and
Pronor are parties to a Shareholders' Agreement dated May 7, 1996 (the
"Shareholders' Agreement"), which was entered into in contemplation of, INTER
ALIA, the receipt by Somerset of Common Stock and certain related warrants of DI
Industries, Inc., a Texas corporation (the "Corporation"), pursuant to a merger
contemplated by a merger agreement of even date with the Shareholders'
Agreement;
WHEREAS, that merger agreement has been revised to provide that some of
the shares of Common Stock and warrants of the Corporation that were to have
been received by Somerset will be received instead by SCP;
WHEREAS, the parties wish to amend the Shareholders' Agreement to
reflect the foregoing;
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual promises herein contained, the parties hereto, each intending to be
legally bound, hereby agree as follows:
<PAGE>
1. ADDITION OF SCP. SCP is hereby added as a party to the Shareholders'
Agreement, and is entitled to all of the rights and subject to all of the
obligations of the parties to the Shareholders' Agreement. Whenever in the
Shareholders' Agreement any rights are to be exercised or obligations are
imposed upon a shareholder group, the reference to Somerset shall be deemed to
refer to the Somerset Group.
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
Shareholders' Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, this Amendment has been executed by the parties
hereto as of the date and year first above written.
69 Delaware Avenue SOMERSET DRILLING ASSOCIATES, L.L.C.
Buffalo, New York 14202 by Somerset Capital Partners, its
Managing Member
By:/s/ WILLIAM R. ZIEGLER
William R. Ziegler, Partner
69 Delaware Avenue SOMERSET CAPITAL PARTNERS
Buffalo, New York 14202
By:/s/ WILLIAM R. ZIEGLER
William R. Ziegler, Partner
Cedar House NOREX DRILLING LTD.
41 Cedar Avenue
Hamilton, HM-12, Bermuda
Telephone No.: +1 441 283 2058 By:/s/ FRANK CAPSTICK
Telefax No.: +1 441 283 3231 Name: Frank Capstick
Title: President
c/o Morgan & Morgan Trust Corp. Ltd. PRONOR HOLDINGS LTD.
Road Town
Pasea Estate
Tortola, British Virgin Islands By:/s/ FRANK CAPSTICK
Telephone No.: +1 441 293 2058 Name: Frank Capstick
Telefax No.: +1 441 293 3231 Title: Attorney-In-Fact
c/o U.S. Rig and Equipment, Inc. /s/ ROY T. OLIVER, JR.
6601 S.W. 29th Street Roy T. Oliver, Jr.
Oklahoma City, OK 73179
c/o Mike Mullen Energy Equipment /s/ MIKE L. MULLEN
Resource, Inc. Mike L. Mullen
8411 Preston Road
Suite 730, LB2
Dallas, TX 75225
U.S. RIG AND EQUIPMENT, INC.
By:/s/ ROY T. OLIVER, JR.
Name: Roy T. Oliver, Jr.
Title: President
<PAGE>
MIKE MULLEN ENERGY EQUIPMENT
RESOURCE, INC.
By:/S/ MIKE L. MULLEN
Name: Mike L. Mullen
Title: President
GCT INVESTMENTS, INC.
By:/S/ MIKE L. MULLEN
Name: Mike L. Mullen
Title: President
Exhibit 10.10
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 Somerset Drilling Associates L.L.C., a Delaware limited liability company, or
permitted registered assigns (the "Warrantholder"), the right to subscribe for
and purchase from the Company 720,000 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 the warrant referred to in paragraph 6.3(f) of the Agreement and Plan
of Merger, dated May 7, 1996, between the Company and Somerset Investment Corp.,
a Texas corporation and a wholly owned subsidiary of the initial Warrantholder.
- --------------------------------------------------------------------------------
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
SOMERSET DRILLING ASSOCIATES, L.L.C., a Delaware limited liability company.
WHEREAS, the capitalized terms used herein have the meaning
given to such terms in Section 9; and
WHEREAS, Warrantholder, simultaneously with the acquisition of
this Shadow Warrant from the Company, is acquiring 39,637,378 shares of Common
Stock of the Company, 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 1,000,000 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 shall have the right to acquire a number of shares of Common Stock
equal 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, if any, resulting in
the issuance of the B Exercise Shares, or a portion thereof, the Warrantholder
shall have the right to acquire a number of shares of Common Stock equal 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 thereof;
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
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;
- 1 -
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 Shares issued by the Company and outstanding
as a result of an Exercise Event, up to a maximum of 720,000 A Warrant Shares
and 1,000,000 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 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
- 2 -
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 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
- 3 -
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 such 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 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 -
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 transfer, subject to adjustments that shall be as nearly
equivalent as may be practicable to the adjustments provided
for in this Section 6.
- 5 -
(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 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 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
- 6 -
prior to such adjustment, and of which the denominator shall
be the number of A 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 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
- 7 -
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 SHARES, A EXERCISE SHARE AND B EXERCISE SHARES: the
meaning specified in the preambles.
NASDAQ: the meaning specified in Section 6.1(d).
- 8 -
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) holder of this Shadow Warrant. Either the Company or
the holder of this 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.
9.4. 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
- 9 -
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:
SOMERSET DRILLING ASSOCIATES, L.L.C.
By: Somerset Capital Partners,
Managing Member
By
William R. Ziegler, Partner
Dated: , 1996
- 11 -
Exhibit 10.11
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 -
Exhibit 10.12
REGISTRATION RIGHTS AGREEMENT
By and Among
THE PRINCIPAL SHAREHOLDERS (DEFINED HEREIN)
and
DI INDUSTRIES, INC.
- --------------------------------------------------------------------------------
Common Stock, par value $.10 per share
- --------------------------------------------------------------------------------
Dated as of May 7, 1996
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
----
1. Registration under Securities Act, Etc................................1
1.1 Registration on Request......................................1
1.2 Piggy-Back Registration......................................3
1.3 Registration Procedures......................................4
1.4 Underwritten Offerings.......................................6
1.5 Preparation; Reasonable Investigation........................7
1.6 Qualification to Obligations under Registration Covenants....7
1.7 Indemnification..............................................8
2. Definitions..........................................................11
3. Rule 144 and Rule 144A...............................................12
4. Amendments and Waivers...............................................12
5. Nominees for Beneficial Owners.......................................12
6. Notices..............................................................12
7. Assignment...........................................................13
8. Calculation of Percentage Interests in Registrable Securities........13
9. No Inconsistent Agreements...........................................13
10. Remedies.............................................................13
11. Severability.........................................................13
12. Entire Agreement.....................................................13
13. Descriptive Headings.................................................14
14. Governing Law........................................................14
15. Counterparts.........................................................14
16. Term.................................................................14
<PAGE>
REGISTRATION RIGHTS AGREEMENT, dated as of May 7, 1996,
between DI Industries, Inc, a Texas corporation (the "Company"), Somerset
Drilling Associates, L.L.C., a Delaware limited liability company ("Somerset"),
Norex Drilling, Ltd., a Bermuda corporation ("Norex Drilling"), Pronor Holdings
Ltd., a British Virgin Islands corporation ("Pronor"), Roy T. Oliver, Jr.
("Oliver"), 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" and, together with Somerset, Norex
Drilling, Pronor, Oliver, USRE and EER, the "Principal Stockholders").
This Agreement is being entered into in connection with the
mergers (the "Mergers") of (i) Somerset Investment Corp., a Texas corporation,
with and into the Company pursuant to an Agreement and Plan of Merger of even
date herewith, and pursuant to which Somerset will receive shares of Common
Stock, par value $.10 per share, of the Company (the "Common Stock") and (ii) DI
Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of the
Company, and R.T. Oliver, Inc., an Oklahoma corporation, with and into Land Rig
Acquisition Corp., a Delaware corporation, and pursuant to which Oliver, USRE,
EER and GCT will receive shares of Common Stock. It is a condition precedent to
the obligations of the parties to those merger agreements to consummate the
Mergers that the parties hereto enter into this Agreement. Capitalized terms
used herein but not otherwise defined shall have the meanings given them in
Section 2.
1. REGISTRATION UNDER SECURITIES ACT, ETC.
1.1 REGISTRATION ON REQUEST.
(a) REQUEST. At any time, or from time to time, upon
the written request of one or more of the Principal Shareholders holding 25% or
more of the Registrable Securities (the "Initiating Holders") that the Company
effect the registration under the Securities Act of all or part of such
Initiating Holders' Registrable Securities, the Company promptly will give
written notice of such requested registration to all of the other Principal
Shareholders, and thereupon the Company will use reasonable efforts to effect,
at the earliest possible date, the registration under the Securities Act of (i)
the Registrable Securities which the Company has been so requested to register
by such Initiating Holders, and (ii) all other Registrable Securities which the
Company has been requested to register by the other Principal Shareholders (such
holders together with the Initiating Holders hereinafter are referred to as the
"Selling Holders") by written request given to the Company within 30 days after
the giving of such written notice by the Company, all to the extent requisite to
permit the disposition of the Registrable Securities so to be registered.
(b) REGISTRATION OF OTHER SECURITIES. Whenever the
Company shall effect a registration pursuant to this Section 1.1, no securities
other than Registrable Securities held by Principal Shareholders shall be
included among the securities covered by such registration unless Selling
Holders of greater than 51% of the Registrable Securities to be included in such
registration shall have consented in writing to the inclusion of such other
securities, which consent shall not be unreasonably withheld or delayed.
1
(c) REGISTRATION STATEMENT FORM. Registrations under
this Section 1.1 shall be on such appropriate registration form of the
Commission as shall be reasonably selected by the Company.
(d) EFFECTIVE REGISTRATION STATEMENT. A registration
requested pursuant to this Section 1.1 shall not be deemed to have been effected
unless a registration statement with respect thereto has become effective and
remained effective in compliance with the provisions of the Securities Act with
respect to the disposition of all Registrable Securities covered by such
registration statement for a period of at least 90 days.
(e) SELECTION OF UNDERWRITERS. Any offering of
Registrable Securities pursuant to this Section 1.1 shall be in the form of an
underwritten offering. The underwriter or underwriters of each underwritten
offering of the Registrable Securities so to be registered shall be selected by
the Selling Holders of at least 50% of the Registrable Securities to be included
in such registration and shall be reasonably acceptable to the Company.
(f) PRIORITY IN REQUESTED REGISTRATION. If the
managing underwriter of an underwritten offering shall advise the Company in
writing (and the Company shall so advise each Selling Holder of Registrable
Securities requesting registration of such advice) that, in its opinion, the
number of securities requested to be included in such registration is
sufficiently large to materially adversely affect the success of the offering,
the Company, except as provided in the following sentence, will include in such
registration, to the extent of the number and type which the Company is so
advised can be sold in such offering, Registrable Securities requested to be
included in such registration on the following basis:
(i) first, pro rata among the Initiating Holders; and
(ii) second, pro rata among the other Principal Shareholders.
As used herein, the term "pro rata" among a particular group of shareholders
shall mean allocated among such shareholders proportionally, on the basis of the
number of Registrable Securities held by each shareholder in such group as
compared to the total number of Registrable Securities held by all shareholders
in such group. To the extent that all of the Registrable Securities of
Initiating Holders so requested to be registered are excluded from the offering,
the holders of such Registrable Securities shall be deemed not to have used a
demand registration pursuant to this Section 1.1.
(g) LIMITATIONS ON REGISTRATION ON REQUEST.
Notwithstanding anything in this Section 1.1 to the contrary, the Company shall
not be required to take any action to file a registration statement pursuant to
this Section 1.1:
(i) within 180 days following the effective date of the
Mergers or within 120 days following the effective date of any
subsequent registered offering of the Company's securities;
2
(ii) with respect to any offering having an aggregate sales
price (before deduction of underwriting discounts and expenses of sale)
of less than $5,000,000;
(iii) with respect to any offering having an aggregate sales
price (before deduction of underwriting discounts and expenses of sale)
of more than $10,000,000 unless such offering is firmly underwritten;
or
(iv) after (A) the Company has effected three such
registrations at the request of the Principal Shareholders (B) the
Company has effected such a registration at the request of any
Principal Shareholder within the previous six months, (C) the Principal
Shareholders making such request hold fewer than six million shares of
Registrable Securities, or (D) the expiration of the term of this
Agreement.
(h) EXPENSES. The Company will pay all Registration
Expenses in connection with any registration requested pursuant to this Section
1.1.
1.2 PIGGY-BACK REGISTRATION.
(a) RIGHT TO INCLUDE REGISTRABLE SECURITIES. If the Company at
any time proposes to file a registration statement to register any of its
securities of the same class as the Registrable Securities under the Securities
Act (except for a registration filed in connection with an employee benefit
plan, a transaction relating to a merger or business combination, a transaction
relating to an exchange offer, a transaction relating to an acquisition of
assets or securities, or a transaction otherwise described in Rule 145 of the
Securities Act), whether or not for sale for its own account, it will each such
time give prompt written notice to all holders of Registrable Securities of its
intention to do so and of such holders' rights under this Section 1.2. Upon the
written request of any such holder (a "Requesting Holder") (which request shall
specify the amount of Registrable Securities intended to be disposed of by such
Requesting Holder) made as promptly as practicable and in any event within 20
days after the receipt of any such notice (15 days if the Company states in such
written notice or gives telephonic notice to all registered holders of
Registrable Securities, with written confirmation to follow promptly thereafter,
stating that (i) such registration will be on Form S-3 and (ii) such shorter
period of time is required because of a planned filing date), the Company will
use reasonable efforts to effect the registration under the Securities Act of
all Registrable Securities which the Company has been so requested to register
by the Requesting Holders thereof. No registration effected under this Section
1.2 shall relieve the Company of its obligation to effect any registration upon
request under Section 1.1.
(b) PRIORITY IN INCIDENTAL REGISTRATIONS. If the managing
underwriter of any underwritten offering shall deliver a written opinion to the
holders of Registrable Securities that the total amount of Registrable
Securities requested to be included in such registration would have a material
adverse effect on such offering then the Company will include in such
registration, to the extent of the number which the Company is so advised can be
sold in (or
3
during the time of) such offering, first, all securities proposed by the Company
to be sold for its own account, and second, such Registrable Securities
requested to be included in such registration pursuant to this Agreement, pro
rata among Requesting Holders; PROVIDED that if securities are being offered for
the account of other persons or entities as well as the Company, such reduction
shall not represent a greater fraction of the number of securities intended to
be offered by holders of Registrable Securities than the fraction of similar
reductions imposed on such other persons or entities over the amount of
securities they intended to offer.
(c) EXPENSES. The Company will pay all Registration Expenses
in connection with any registration effected pursuant to this Section 1.2.
1.3 REGISTRATION PROCEDURES. If and whenever the Company is required to
effect the registration of any Registrable Securities under the Securities Act
as provided in Sections 1.1 and 1.2. the Company will, as expeditiously as
possible, use reasonable efforts to:
(i) prepare and (within 120 days after the end of the period
within which requests for registration may be given to the Company or
in any event as soon thereafter as practicable) file with the
Commission the requisite registration statement to effect such
registration and thereafter use reasonable efforts to cause such
registration statement to become effective;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities
Act with respect to the disposition of all Registrable Securities
covered by such registration statement for a period of at least 90
days;
(iii) furnish to each seller of Registrable Securities covered
by such registration statement, such number of conformed copies of such
registration statement and of each such amendment and supplement
thereto (in each case including all exhibits), such number of copies of
the prospectus contained in such registration statement (including each
preliminary prospectus and any summary prospectus) and any other
prospectus filed under Rule 424 under the Securities Act, in conformity
with the requirements of the Securities Act, and such other documents,
as such seller may reasonably request;
(iv) register or qualify all Registrable Securities and other
securities covered by such registration statement under such other
securities or blue sky laws of such States of the United States of
America where an exemption is not available and as the sellers of
Registrable Securities covered by such registration statement shall
reasonably request; keep such registration or qualification in effect
for so long as such registration statement remains in effect; and take
any other action which may be reasonably necessary or advisable to
enable such sellers to consummate the disposition in such jurisdictions
of the securities to be sold by
4
such sellers, except that (x) the Company shall not for any such
purpose be required to qualify generally to do business as a foreign
corporation in any jurisdiction wherein it would not but for the
requirements of this subdivision (iv) be obligated to be so qualified
or to consent to general service of process in any such jurisdiction
and (y) the Company shall not be required to register or qualify
Registrable Securities in any state where such qualification or
registration would place an undue burden on the Company or which would
require that the Company consent or agree to restrictions, covenants,
or qualifications which the Company deems unacceptable;
(v) cause all Registrable Securities covered by such
registration statement to be registered with or approved by such other
federal or state governmental agencies or authorities as may be
necessary in the opinion of counsel to the Company and counsel to the
underwriters to enable the seller or sellers thereof to consummate the
disposition of such Registrable Securities;
(vi) furnish at the effective date of such registration
statement and, if applicable, the date of the closing under the
underwriting agreement, to each seller of Registrable Securities, and
each such seller's underwriters, a signed counterpart of (x) an opinion
of counsel for the Company, dated the effective date of such
registration statement and (y) a "comfort" letter signed by the
independent public accountants who have certified the Company's
financial statements included or incorporated by reference in such
registration statement, covering substantially the same matters with
respect to such registration statement (and the prospectus included
therein) and, in the case of the accountants' comfort letter, with
respect to events subsequent to the date of such financial statements,
as are customarily covered in opinions of issuer's counsel and in
accountants' comfort letters delivered to the underwriters in
underwritten public offerings of securities and, in the case of the
accountants' comfort letter, such other financial matters, and, in the
case of the legal opinion, such other legal matters, as the sellers of
the Registrable Securities covered by such registration statement, or
the underwriters, may reasonably request;
(vii) notify each seller of Registrable Securities covered by
such registration statement at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, upon
discovery that, or upon the happening of any event as a result of
which, the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading, in the light of the
circumstances under which they were made, and at the request of any
such seller promptly prepare and furnish to it a reasonable number of
copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such
securities, such prospectus shall not include an untrue statement of a
material fact or omit to state a material fact required to be stated
5
therein or necessary to make the statements therein not misleading in
the light of the circumstances under which they were made;
(viii) otherwise comply with all applicable rules and
regulations of the Commission, and, if required, make available to its
security holders, as soon as reasonably practicable, an earnings
statement covering the period of at least twelve months, but not more
than eighteen months, beginning with the first full calendar month
after the effective date of such registration statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 promulgated thereunder, and promptly
furnish to each such seller of Registrable Securities a copy of any
amendment or supplement to such registration statement or prospectus;
(ix) keep each Selling Holder and each Requesting Holder
advised in writing as to the initiation and progress of any
registration under Section 1.1 or 1.2 hereunder, as the case may be;
(x) provide and cause to be maintained a transfer agent and
registrar (which, in each case, may be the Company) for all Registrable
Securities covered by such registration statement from and after a date
not later than the effective date of such registration; and
(xi) list all Registrable Securities covered by such
registration statement on any national securities exchange on which
Registrable Securities of the same class and, if applicable, series,
covered by such registration statement are then listed or on the Nasdaq
Stock Market ("Nasdaq") if the Registrable Securities are reported on
Nasdaq.
The Company may require each seller of Registrable Securities, as to which any
registration is being effected, to furnish the Company such information
regarding such seller and the distribution of such securities, as required by
law or the Commission, or which the Company's counsel otherwise deems
appropriate.
Each holder of Registrable Securities agrees that, upon
receipt of any notice from the Company of the happening of any event of the kind
described in subdivision (vii) of this Section 1.3, such holder will forthwith
discontinue such holder's disposition of Registrable Securities pursuant to the
registration statement relating to such Registrable Securities until such
holder's receipt of the copies of the supplemented or amended prospectus
contemplated by subdivision (vii) of this Section 1.3 and, if so directed by the
Company, will deliver to the Company (at the Company's expense) all copies,
other than permanent file copies, then in such holder's possession of the
prospectus relating to such Registrable Securities current at the time of
receipt of such notice.
6
1.4 UNDERWRITTEN OFFERINGS.
(a) REQUESTED UNDERWRITTEN OFFERINGS. If requested by the
underwriters for any underwritten offering by holders of Registrable Securities
pursuant to a registration requested under Section 1.1, the Company will use all
reasonable efforts to enter into an underwriting agreement with such
underwriters for such offering, such agreement to be reasonably satisfactory in
substance and form to each such holder and the underwriters and to contain such
representations and warranties by the Company and such other terms as are
generally prevailing in agreements of that type, including, without limitation,
indemnities to the effect and to the extent provided in Section 1.7. The holders
of the Registrable Securities proposed to be sold by such underwriters will
reasonably cooperate with the Company in the negotiation of the underwriting
agreement. Such holders of Registrable Securities to be sold by such
underwriters shall be parties to such underwriting agreement and may, at their
option, require that any or all of the representations and warranties by, and
the other agreements on the part of, the Company to and for the benefit of such
underwriters shall also be made to and for the benefit of such holders of
Registrable Securities and that any or all of the conditions precedent to the
obligations of such underwriters under such underwriting agreement be conditions
precedent to the obligations of such holders of Registrable Securities. Any such
holder of Registrable Securities shall not be required to make any
representations or warranties to or agreements with the Company or the
underwriters other than representations, warranties or agreements regarding such
holder, such holder's Registrable Securities and such holder's intended method
of distribution or any other representations required by applicable law.
(b) INCIDENTAL UNDERWRITTEN OFFERINGS. If the Company proposes
to register any of its securities under the Securities Act as contemplated by
Section 1.2 and such securities are to be distributed by or through one or more
underwriters, the Company will, if requested by any Requesting Holder of
Registrable Securities, use reasonable efforts to arrange for such underwriters
to include all the Registrable Securities to be offered and sold by such
Requesting Holder among the securities of the Company to be distributed by such
underwriters. The holders of Registrable Securities to be distributed by such
underwriters shall be parties to the underwriting agreement between the Company
and such underwriters and may, at their option, require that any or all of the
representations and warranties by, and the other agreements on the part of, the
Company to and for the benefit of such underwriters shall also be made to and
for the benefit of such holders of Registrable Securities and that any or all of
the conditions precedent to the obligations of such underwriters under such
underwriting agreement be conditions precedent to the obligations of such
holders of Registrable Securities. Any such Requesting Holder of Registrable
Securities shall not be required to make any representations or warranties to or
agreements with the Company or the underwriters other than representations,
warranties or agreements regarding such Requesting Holder, such Requesting
Holder's Registrable Securities and such Requesting Holder's intended method of
distribution or any other representations required by applicable law.
1.5 PREPARATION; REASONABLE INVESTIGATION. In connection with the
preparation and filing of each registration statement under the Securities Act
pursuant to this Agreement, the Company (i) shall give the holders of
Registrable Securities registered under such registration
7
statement, their underwriters, if any, and their respective counsel and
accountants the reasonable opportunity to participate in the preparation of such
registration statement, each prospectus included therein or filed with the
Commission, and each amendment thereof or supplement thereto, and (ii) shall
promptly notify the registered holders of Registrable Securities and their
counsel of any stop order issued or threatened by the Commission and take all
reasonable actions required to prevent the entry of such stop order or to remove
it if entered.
1.6 QUALIFICATION TO OBLIGATIONS UNDER REGISTRATION COVENANTS. The
Company shall be entitled to postpone for a reasonable period of time (but not
exceeding 120 days) the filing of any registration statement otherwise required
to be prepared and filed by it pursuant to Section 1.1 if (i) the Company
determines, in its reasonable judgment, that such registration and offering
would interfere with any financing, acquisition, corporate reorganization or
other material transaction involving the Company or any of its affiliates or
(ii) the Company is in possession of information concerning it or its business
and affairs, the public disclosure of which would have a material adverse effect
on the Company and which the Company has determined it is not legally obligated
to disclose, and the Company promptly gives the holders of Registrable
Securities requesting registration thereof pursuant to Section 1.1 written
notice of such determination, containing a general statement of the reasons for
such postponement and an approximation of the anticipated delay. If the Company
shall so postpone the filing of a registration statement, Initiating Holders
requesting registration thereof pursuant to Section 1.1 shall have the right to
withdraw the request for registration by giving written notice to the Company
within 30 days after receipt of the notice of postponement and, in the event of
such withdrawal, such request shall not be counted for purposes of the requests
for registration to which holders of Registrable Securities are entitled
pursuant to Section 1.1 hereof. Notwithstanding any language contained in this
Agreement to the contrary, no holder of Registrable Securities shall have any
right to require that the Company effect the registration of any Registrable
Securities pursuant to Sections 1.1 or 1.2 above at any time after such holder,
together with its Affiliates, holds less than five million shares of Common
Stock.
1.7 INDEMNIFICATION.
(a) INDEMNIFICATION BY THE COMPANY. The Company will, and
hereby does, indemnify and hold harmless, in the case of any registration
statement filed pursuant to Section 1.1 or 1.2, each seller of any Registrable
Securities covered by such registration statement and each other Person who
participates as an underwriter in the offering or sale of such securities and
each other Person, if any, who controls such seller or any such underwriter
within the meaning of the Securities Act, and their respective directors,
officers, partners, employees and affiliates against any losses, claims, damages
or liabilities, joint or several, to which such seller or underwriter or any
such director, officer, partner, employee, affiliate or controlling person may
become subject under the Securities Act or otherwise, including, without
limitation, the reasonable fees and expenses of legal counsel, insofar as such
losses, claims, damages or liabilities (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any registration statement under which such securities were registered under the
Securities Act, any preliminary prospectus, final prospectus or summary
prospectus contained
8
therein, or any amendment or supplement thereto, or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein in light of the circumstances in which
they were made not misleading, and the Company will reimburse such seller or
underwriter and each such director, officer, partner, employee, affiliate and
controlling Person for any legal or any other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim,
liability, action or proceeding; PROVIDED, that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage, liability (or
action or proceeding in respect thereof) or expense arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in such registration statement, any such preliminary prospectus,
final prospectus, summary prospectus, amendment or supplement in reliance upon
and in conformity with written information furnished to the Company through an
instrument duly executed by or on behalf of such seller or underwriter, as the
case may be, specifically stating that it is for use in the preparation thereof.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of such seller or any such director, officer,
employee, affiliate, partner or controlling person and shall survive the
transfer of such securities by such seller.
(b) INDEMNIFICATION BY THE SELLERS. As a condition to
including any Registrable Securities in any registration statement, the Company
shall have received an undertaking satisfactory to it from the prospective
seller of such Registrable Securities, to indemnify and hold harmless the
Company, and each director of the Company, each officer of the Company and each
other Person, if any, who participates as an underwriter in the offering or sale
of such securities and each other Person who controls the Company or any such
underwriter within the meaning of the Securities Act, and their respective
directors, officers, partners, employees and affiliates, against any losses,
claims, damages or liabilities, joint or several, to which such person may
become subject under the Securities Act or otherwise, including, without
limitation, the reasonable fees and expenses of legal counsel, insofar as such
losses, claims, damages or liabilities (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any registration statement under which such securities were registered under the
Securities Act, any preliminary prospectus, final prospectus or summary
prospectus contained therein, or any amendment or supplement thereto, or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein in light of the
circumstances in which they were made not misleading, and to reimburse such
person for any legal or any other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, liability,
action or proceeding; but only to the extent that any such loss, claim, damage,
liability (or action or proceeding in respect thereof) or expense arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in such registration statement, any such preliminary
prospectus, final prospectus, summary prospectus, amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company through an instrument duly executed by or on behalf of such seller,
specifically stating that it is for use in the preparation thereof; provided,
however, that the liability of such indemnifying party under this Section 1.7(b)
shall be limited to the amount of proceeds received by such indemnifying party
in
9
the offering giving rise to such liability. Such indemnity shall remain in full
force and effect, regardless of any investigation made by or on behalf of the
Company or any such director, officer or controlling person and shall survive
the transfer of such securities by such seller.
(c) NOTICES OF CLAIMS, ETC. Within ten days of receipt by an
indemnified party of notice of the commencement of any action or proceeding
involving a claim referred to in the preceding subdivisions of this Section 1.7,
such indemnified party will, if a claim in respect thereof is to be made against
an indemnifying party, give written notice to the latter of the commencement of
such action; PROVIDED, HOWEVER, that the failure of any indemnified party to
give notice as provided herein shall not relieve the indemnifying party of its
obligations under the preceding subdivisions of this Section 1.7, except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice. In case any such action is brought against an indemnified party the
indemnifying party shall be entitled to participate in and to assume the defense
thereof, jointly with any other indemnifying party similarly notified to the
extent that it may wish, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party for any legal
or other expenses subsequently incurred by the latter in connection with the
defense thereof, PROVIDED, HOWEVER, that if the indemnified party reasonably
believes it is advisable for it to be represented by separate counsel because
there exists a conflict of interest between its interests and those of the
indemnifying party with respect to such claim, or there exist defenses available
to such indemnified party which may not be available to the indemnifying party,
or if the indemnifying party shall fail to assume responsibility for such
defense, the indemnified party may retain counsel satisfactory to it and the
indemnifying party shall pay all reasonable fees and expenses of such counsel.
No indemnifying party shall be liable for any settlement of any action or
proceeding effected without its written consent. No indemnifying party shall,
without the consent of the indemnified party, consent to entry of any judgment
or enter into any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such indemnified party of a
release from all liability in respect to such claim or litigation or which
requires action by the indemnified party.
(d) CONTRIBUTION. If the indemnification provided for in this
Section 1.7 shall for any reason be held by a court to be unavailable to an
indemnified party under subparagraph (a) or (b) hereof in respect of any loss,
claim, damage or liability, or any action in respect thereof, then, in lieu of
the amount paid or payable under subparagraph (a) or (b) hereof, the indemnified
party and the indemnifying party under subparagraph (a) or (b) hereof shall
contribute to the aggregate losses, claims, damages and liabilities (including
legal or other expenses reasonably incurred in connection with investigating the
same), (i) in such proportion as is appropriate to reflect the relative fault of
the Company and the prospective sellers of Registrable Securities covered by the
registration statement which resulted in such loss, claim, damage or liability,
or action in respect thereof, with respect to the statements or omissions which
resulted in such loss, claim, damage or liability, or action in respect thereof,
as well as any other relevant equitable considerations or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as shall be appropriate to reflect the relative benefits received by
the Company and such prospective sellers from the offering of the securities
10
covered by such registration statement. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation. Such prospective sellers' obligations to
contribute as provided in this subparagraph (d) are several in proportion to the
relative value of their respective Registrable Securities covered by such
registration statement and not joint. In addition, no Person shall be obligated
to contribute hereunder any amounts in payment for any settlement of any action
or claim effected without such Person's consent, which consent shall not be
unreasonably withheld or delayed.
(e) OTHER INDEMNIFICATION. Indemnification and contribution
similar to that specified in the preceding subdivisions of this Section 1.7
(with appropriate modifications) shall be given by the Company and each seller
of Registrable Securities with respect to any required registration or other
qualification of securities under any federal or state law or regulation of any
governmental authority other than the Securities Act.
(f) INDEMNIFICATION PAYMENTS. The indemnification and
contribution required by this Section 1.7 shall be made by periodic payments of
the amount thereof during the course of the investigation or defense, as and
when bills are received or expense, loss, damage or liability is incurred.
2. DEFINITIONS. As used herein, unless the context otherwise requires,
the following terms have the following respective meanings:
"AFFILIATE" means, with respect to any person, any other person that
directly or indirectly controls or is controlled by or is under common control
with such person.
"COMMISSION" means the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
or any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time. Reference to a
particular section of the Securities Exchange Act of 1934, as amended, shall
include a reference to the comparable section, if any, of any such similar
federal statute.
"INITIATING HOLDER" is defined in Section 1.1.
"PERSON" means any individual, corporation, partnership, trust,
incorporated or unincorporated association, joint venture, joint stock company,
government (or an agency or political subdivision thereof) or other entity of
any kind.
"REGISTRABLE SECURITIES" means (i) the shares of Common Stock owned on
the date hereof by the parties hereto or issued or issuable to the parties
hereto pursuant to the exercise of options (whether or not presently or then
exercisable) or warrants or the conversion of convertible securities owned by
them on the date hereof, and (ii) any Related Registrable
11
Securities. As to any particular Registrable Securities, such securities shall
cease to be Registrable Securities when (a) a registration statement with
respect to the sale of such securities shall have become effective under the
Securities Act and such securities shall have been disposed of in accordance
with such registration statement, (b) they shall have been distributed to the
public pursuant to Rule 144 (or any successor provision) under the Securities
Act, (c) they shall have been otherwise transferred, new certificates for them
not bearing a legend restricting further transfer shall have been delivered by
the Company and subsequent public distribution of them shall not require
registration of them under the Securities Act, or (d) they shall have ceased to
be outstanding. All references to percentages of Registrable Securities shall be
calculated pursuant to Section 8.
"REGISTRATION EXPENSES" means all expenses incident to the Company's
performance of or compliance with Section 1, including, without limitation, all
registration, filing and NASD fees, all fees and expenses of complying with
securities or blue sky laws, all word processing, duplicating and printing
expenses, messenger and delivery expenses, the fees and disbursements of counsel
for the Company and of its independent public accountants, including the
expenses of "cold comfort" letters required by or incident to such performance
and compliance, and any fees and disbursements of underwriters customarily paid
by issuers or sellers of securities (excluding any underwriting discounts or
commissions with respect to the Registrable Securities or any other fee measured
by the number or amount of Registrable Securities).
"RELATED REGISTRABLE SECURITIES" means any securities of the Company
issued or issuable with respect to the securities by way of a dividend or stock
split or in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization or otherwise.
"REQUESTING HOLDER" is defined in Section 1.2.
"SECURITIES ACT" means the Securities Act of 1933, or any similar
federal statute, and the rules and regulations of the Commission thereunder, all
as the same shall be in effect at the time. References to a particular section
of the Securities Act of 1933 shall include a reference to the comparable
section, if any, of any such similar statute.
"SELLING HOLDER" is defined in Section 1.1.
3. RULE 144 AND RULE 144A. Upon the request of any holder of
Registrable Securities, the Company will deliver to such holder a written
statement as to whether it has complied with the requirements of Rules 144 or
144A under the Securities Act.
4. AMENDMENTS AND WAIVERS. This Agreement may be amended with the
written consent of the Company and the Company may take any action herein
prohibited, or omit to perform any act herein required to be performed by it,
only if the Company shall have obtained the written consent to such amendment,
action or omission to act, of the holder or holders of at least 50% of the
Registrable Securities affected by such amendment, action or
12
omission to act, Each holder of any Registrable Securities at the time or
thereafter outstanding shall be bound by any consent authorized by this Section
4, whether or not such Registrable Securities shall have been marked to indicate
such consent.
5. NOMINEES FOR BENEFICIAL OWNERS. In the event that any Registrable
Securities are held by a nominee for the beneficial owner thereof, the
beneficial owner thereof may, at its election in writing delivered to the
Company, be treated as the holder of such Registrable Securities for purposes of
any request or other action by any holder or holders of Registrable Securities
pursuant to this Agreement or any determination of any number or percentage of
shares of Registrable Securities held by any holder or holders of Registrable
Securities contemplated by this Agreement. If the beneficial owner of any
Registrable Securities so elects, the Company may require assurances and
evidence reasonably satisfactory to it of such owner's beneficial ownership of
such Registrable Securities.
6. NOTICES. All notices, demands and other communications to any party
hereto provided for or permitted hereunder shall be made in writing and shall be
by registered or certified first-class mail, return receipt requested, telex,
telegram, telecopier, reputable courier service or personal delivery, addressed
to it in the manner set forth on the signature page hereto, or at such other
address as it shall have furnished to the other parties hereto in writing. All
such notices and communications shall be deemed to have been duly given: when
delivered by hand, if personally delivered; one business day after being sent by
reputable courier service; three business days after being deposited in the
mail, postage prepaid, if mailed; when answered back, if telexed; and when
receipt is acknowledged, if telecopied.
7. ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and, with respect to the
Company, its respective successors and assigns and, with respect to each other
party hereto, any holder who is an affiliate or successor entity to such party
or a transferee therefrom of any Registrable Securities, subject to the
provisions respecting the minimum numbers of percentages of shares of
Registrable Securities required in order to be entitled to certain rights, or
take certain actions, contained herein. The parties hereto, other than the
Company (and not any other holder of Registrable Securities or any other
Person), shall be permitted, in connection with a transfer or disposition of
Registrable Securities, to eliminate or impose conditions or constraints on the
ability of the transferee, as a holder of Registrable Securities, to request a
registration pursuant to Sections 1.1 and 1.2 and shall provide the Company with
copies of such conditions or constraints and the identity of such transferees.
8. CALCULATION OF PERCENTAGE INTERESTS IN REGISTRABLE SECURITIES. For
purposes of this Agreement, all references to a percentage of the Registrable
Securities shall be calculated based upon the number of shares of Registrable
Securities outstanding or issuable pursuant to outstanding options (whether or
not presently or then exercisable), warrants or convertible securities at the
time such calculation is made.
13
9. NO INCONSISTENT AGREEMENTS. The Company will not hereafter enter
into any agreement with respect to its securities which is inconsistent with the
rights granted to the holders of Registrable Securities in this Agreement.
10. REMEDIES. Each party hereto and each holder of Registrable
securities is entitled to exercise all rights granted by law, including recovery
of damages; such rights not to extend to incidental or consequential damages.
11. SEVERABILITY. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions contained herein shall not be in any way impaired
thereby, it being intended that all of the rights and privileges of the
Purchaser shall be enforceable to the fullest extent permitted by law.
12. ENTIRE AGREEMENT. This Agreement is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein and
therein. This Agreement supersedes all prior agreements and understandings
between the Company and any of the other parties with respect to such subject
matter. Specifically, but not by way of limitation, this Agreement will, upon
effectiveness, supersede, with respect to Norex Drilling and Pronor, the
Registration Rights Agreement dated July 20, 1989, among the Company,
Pennsylvania Company, the HR Shareholders (as defined therein) and Max M.
Dillard.
13. DESCRIPTIVE HEADINGS. The descriptive headings of the several
sections and paragraphs of this Agreement are inserted for reference only and
shall not limit or otherwise affect the meaning hereof.
14. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the State of Texas applicable to agreements made and to be performed entirely
within such State.
15. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts shall together constitute one and the same instrument.
16. TERM. This Agreement shall be effective for the period commencing
on the date hereof and expiring on June 30, 2001.
14
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their respective officers thereunto duly authorized as
of the date first above written.
ADDRESS
450 Gears Road DI INDUSTRIES, INC.
Suite 625
Houston, Texas 77067 By:/s/ IVAR SIEM
Ivar Siem
President and Chief Executive
Officer
69 Delaware Avenue SOMERSET DRILLING ASSOCIATES, L.L.C.
Buffalo, New York 14202 by Somerset Capital Partners, its
Managing Member
By:/s/ WILLIAM R. ZIEGLER
William R. Ziegler, Partner
Cedar House NOREX DRILLING LTD.
41 Cedar Avenue
Hamilton, HM-12, Bermuda
Telephone No.: +1 441 283 2058 By:/s/ FRANK CAPSTICK
Telefax No.: +1 441 283 3231 Frank Capstick
President
c/o Morgan & Morgan Trust Corp. Ltd. PRONOR HOLDINGS LTD.
Road Town
Pasea Estate
Tortola, British Virgin Islands By:/s/ FRANK CAPSTICK
Telephone No.: +1 441 293 2058 Frank Capstick
Telefax No.: +1 441 293 3231 Attorney-in-Fact
c/o U.S. Rig and Equipment, Inc. /s/ ROY T. OLIVER, JR.
6601 S.W. 29th Street Roy T. Oliver, Jr.
Oklahoma City, OK 73179
c/o Mike Mullen Energy Equipment /s/ MIKE L. MULLEN
Resource, Inc. Mike L. Mullen
8411 Preston Road
Suite 730, LB2
Dallas, TX 75225
15
U.S. RIG AND EQUIPMENT, INC.
By:/S/ ROY T. OLIVER, JR.
Roy T. Oliver, Jr.
President
MIKE MULLEN ENERGY EQUIPMENT
RESOURCE, INC.
By:/S/ MIKE L. MULLEN
Mike L. Mullen
President
GCT INVESTMENTS, INC.
By:/S/ MIKE L. MULLEN
Mike L. Mullen
President
16
Exhibit 10.12.1
AMENDMENT
TO
REGISTRATION RIGHTS AGREEMENT
AMENDMENT TO REGISTRATION RIGHTS AGREEMENT (this "Amendment")
made as of this 11th day of June, 1996, by and among DI Industries, Inc., a
Texas corporation (the "Company"), Somerset Drilling Associates, L.L.C., a
Delaware limited liability company ("Somerset"), Somerset Capital Partners, a
New York general partnership and the Managing Member of Somerset ("SCP"), Roy T.
Oliver, Jr., an individual ("Oliver"), U.S. Rig and Equipment, Inc., an Oklahoma
corporation ("USRE"), Mike Mullen Energy Equipment Resource, Inc., a Texas
corporation ("EER"), GCT Investments, Inc., a Texas corporation ("GCT"), Mike L.
Mullen, an individual ("Mullen"), Norex Drilling Ltd., a Bermuda corporation
("Norex Drilling"), and Pronor Holdings Ltd., a British Virgin Island
corporation ("Pronor").
WHEREAS, the Company, Somerset, Oliver, USRE, EER, GCT, Mullen, Norex
Drilling and Pronor are parties to a Registration Rights Agreement dated May 7,
1996 (the "Registration Rights Agreement"), which was entered into in
contemplation of, INTER ALIA, the receipt by Somerset of Common Stock and
certain related warrants of the Company, pursuant to a merger contemplated by a
merger agreement of even date with the Registration Rights Agreement;
WHEREAS, that merger agreement has been revised to provide that some of
the shares of Common Stock and warrants of the Company that were to have been
received by Somerset will be received instead by SCP;
WHEREAS, the parties wish to amend the Registration Rights Agreement to
reflect the foregoing;
1
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual promises herein contained, the parties hereto, each intending to be
legally bound, hereby agree as follows:
1. ADDITION OF SCP. SCP is hereby added as a party to the Registration
Rights Agreement, is included as a "Principal Shareholder," as defined in the
Registration Rights Agreement, and is entitled to all of the rights and subject
to all of the Principal Shareholders under the Registration Rights Agreement.
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
Registration Rights Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, this Amendment has been executed by the parties
hereto as of the date and year first above written.
450 Gears Road DI INDUSTRIES, INC.
Suite 625
Houston, Texas 77067 By:/s/ IVAR SIEM
Name: Ivar Siem
Title: Chairman, President and Chief
Executive Officer
69 Delaware Avenue SOMERSET DRILLING ASSOCIATES, L.L.C.
Buffalo, New York 14202 by Somerset Capital Partners, its
Managing Member
By:/s/ WILLIAM R. ZIEGLER
William R. Ziegler, Partner
2
69 Delaware Avenue SOMERSET CAPITAL PARTNERS
Buffalo, New York 14202
By:/s/ WILLIAM R. ZIEGLER
William R. Ziegler, Partner
Cedar House NOREX DRILLING LTD.
41 Cedar Avenue
Hamilton, HM-12, Bermuda
Telephone No.: +1 441 283 2058 By:/s/ FRANK CAPSTICK
Telefax No.: +1 441 283 3231 Name: Frank Capstick
Title: President
c/o Morgan & Morgan Trust Corp. Ltd. PRONOR HOLDINGS LTD.
Road Town
Pasea Estate
Tortola, British Virgin Islands By:/s/ FRANK CAPSTICK
Telephone No.: +1 441 293 2058 Name: Frank Capstick
Telefax No.: +1 441 293 3231 Title: Attorney-In-Fact
c/o U.S. Rig and Equipment, Inc. /s/ ROY T. OLIVER, JR.
6601 S.W. 29th Street Roy T. Oliver, Jr.
Oklahoma City, OK 73179
c/o Mike Mullen Energy Equipment /s/ MIKE L. MULLEN
Resource, Inc. Mike L. Mullen
8411 Preston Road
Suite 730, LB2
Dallas, TX 75225
U.S. RIG AND EQUIPMENT, INC.
By:/s/ ROY T. OLIVER, JR.
Name: Roy T. Oliver, Jr.
Title: President
3
MIKE MULLEN ENERGY EQUIPMENT
RESOURCE, INC.
By:/s/ MIKE L. MULLEN
Name: Mike L. Mullen
Title: President
GCT INVESTMENTS, INC.
By:/s/ MIKE L. MULLEN
Name: Mike L. Mullen
Title: President
4
Exhibit 10.13
INVESTMENT MONITORING AGREEMENT
INVESTMENT MONITORING AGREEMENT (hereinafter referred to as this
"Agreement"), dated as of May 7, 1996, by and among DI Industries, Inc., a Texas
corporation (the "Company"), SOMERSET CAPITAL PARTNERS, a New York general
partnership (the "Investment Monitor") and Somerset Drilling Associates, L.L.C.
("Somerset Drilling").
WITNESSETH:
WHEREAS, pursuant to an Agreement and Plan of Merger of even date
herewith between the Company and Somerset Investment Corp., a wholly owned
subsidiary of Somerset Drilling, Somerset Drilling will invest in the Company by
merging Somerset Investment Corp. with and into the Company (the "Merger"),
whereby the issued and outstanding shares of common stock, par value $.01 per
share, of Somerset Investment Corp. will be converted into the right to receive
shares of common stock, par value $.10 per share, of the Company (the
"Investment");
WHEREAS, the Investment Monitor is the managing member of Somerset
Drilling;
WHEREAS, as an inducement to the consummation of the Merger and the
making of the Investment, the parties have agreed that the Investment Monitor
will oversee the Investment on behalf of Somerset Drilling, and the Investment
Monitor is willing to undertake such responsibility on the terms and conditions
set forth herein;
NOW, THEREFORE, in consideration of the conditions and mutual
agreements hereinafter set forth, the parties hereto agree as follows:
1. The parties agree that the Investment Monitor will monitor the
Investment, on behalf of Somerset Drilling, commencing on the effective date of
the Merger ("Commencement Date").
2. The Company shall pay to the Investment Monitor a fee, in payment
for its services to be rendered hereunder, equal to $75,000 (the "Fee"), payable
on the Commencement Date.
3. Nothing herein shall require the Investment Monitor to devote full
time to its duties hereunder, the Investment Monitor hereby agrees to devote
such of its time and activity during normal business days and hours as it, in
its sole discretion, shall deem necessary for the accomplishment of its duties
hereunder.
4. The Investment Monitor shall not be liable to Somerset Drilling or
any of its members on account of any compensation received or action taken
pursuant to this Agreement.
5. Somerset Drilling hereby agrees to hold the Investment Monitor
harmless from and indemnify the Investment Monitor against all actions,
proceedings, claims and demands (herein referred to as "Claims") which may be
brought against, suffered or incurred by the Investment Monitor by reason of its
performance or nonperformance of its duties under the terms of this Agreement
(including all reasonable legal, professional and other expenses incurred),
except any
<PAGE>
such Claim that arises from the willful misconduct, gross negligence or fraud of
the Investment Monitor in the performance or nonperformance of its obligations
or duties hereunder.
6. No modification of this Agreement, or any part hereof, shall be
valid or effective unless in writing and signed by the party or parties sought
to be charged therewith.
7. This Agreement contains the entire understanding of the parties and
supersedes any prior agreements and understandings between the parties with
respect to its subject matter.
8. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, without regard to choice of law or conflicts
of law principles.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
DI INDUSTRIES, INC.
By: /s/ IVAR SIEM
Name:
Title:
SOMERSET CAPITAL PARTNERS
By: /s/ WILLIAM R. ZIEGLER
William R. Ziegler, partner
SOMERSET DRILLING ASSOCIATES, L.L.C., by
Somerset Capital Partners, its
Managing Member
By: /s/ WILLAIM ZIEGLER
William R. Ziegler, partner
Exhibit 10.14
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-
Exhibit 10.15
PROMISSORY NOTE
U.S. $1,000,000.00 Houston, Texas June 10, 1996
For value received, the undersigned, DRILLERS, INC., a Texas
corporation (the "Maker"), hereby promises to pay to the order of NOREX DRILLING
LTD., a Bermuda corporation (the "Payee"), at Cedar House, 41 Cedar Avenue,
Hamilton, HM-12, Bermuda, or at such other place and to such other party or
parties as the owner and holder hereof may from time to time designate in
writing, the principal sum of ONE MILLION AND NO/100 DOLLARS ($1,000,000.00).
Interest shall accrue on the unpaid principal indebtedness represented by this
Promissory Note (the "Note") at the per annum rate of twelve percent (12%), with
no compounding.
The principal and interest evidenced by this Note shall be payable on
the first of the following dates to occur: (i) October 31, 1996, or (ii) the
Closing Date, as such term is defined in that certain Agreement and Plan of
Merger dated May 7, 1996 between DI Industries, Inc., a Texas corporation, and
Somerset Investment Corp., a Texas corporation.
All past due installments of principal shall bear interest at the rate
of fifteen percent (15%) per annum. All payments shall first be applied to
accrued interest, if any, with the balance of the payment reducing the unpaid
principal balance hereof.
The Maker may from time to time prepay this Note, in whole or in part,
without notice or penalty.
The occurrence or existence of any of the following events or
conditions shall constitute an "Event of Default":
(a) the failure of the Maker to pay when due any of the payments
required pursuant to this Note, and such failure is not cured within three (3)
days of written notice thereof;
(b) the assignment by the Maker of any of its assets for the benefit of
its creditors or the application by the Maker to any court for the appointment
of a trustee or receiver for any of the assets of the Maker or the commencement
of any proceedings relating to the Maker under any bankruptcy, reorganization,
arrangement, readjustment of debts or other insolvency law of any jurisdiction,
or the entering of an order appointing such trustee or receiver or adjudicating
the Maker bankrupt or insolvent or approving the petition in any such
proceedings; or
(c) the occurrence of any event of default specified in that certain
Security Agreement dated the date hereof delivered by the Maker to the Payee.
Initial for Identification
-------------
<PAGE>
If an Event of Default shall occur, the holder hereof may, at the
option of the holder, without demand, notice or presentment, declare the entire
unpaid principal balance of this Note, together with all accrued unpaid interest
thereon, to be due and payable immediately. Upon any such declaration, the
principal of this Note and any such accrued interest shall become and be
immediately due and payable, and the holder hereof may thereupon proceed to
protect and enforce the obligations of the Maker hereunder either by suit in
equity or by action of law or by other appropriate proceedings, whether for
specific performance (to the extent permitted by law) of any covenant or
agreement contained herein or in aid of the exercise of any power granted
herein, or proceed to enforce the payment of this Note or to enforce any other
legal or equitable right of the holder hereof, including the right to foreclose
or otherwise enforce all liens or security interests securing payment hereof.
If an Event of Default shall occur and this Note is placed in the hands
of an attorney for collection, or if suit is filed hereon, or if this Note shall
be collected by legal proceedings or through a probate or bankruptcy court, the
Maker agrees to pay all costs of collection, including reasonable attorneys'
fees.
The Maker waives notice, presentment, demand for payment, protest,
notice of protest and non-payment or dishonor, notice of acceleration, notice of
intent to accelerate, notice of intent to demand, diligence in collecting,
grace, and all other formalities of any kind, and consents to all extensions
without notice for any period or periods of time and partial payments, before or
after maturity, all without prejudice to the holder. The holder shall similarly
have the right to deal in any way, at any time, with one or more of the Maker
without notice to any other party, and to grant any such party any extension of
time for payment of any of said indebtedness, or to release or substitute part
or all of the collateral securing this Note, or to grant any other indulgences
or forbearances whatsoever, without notice to any other party and without any
way affecting the personal liability of any party hereunder.
All agreements between the Maker and the holder hereof, whether now
existing or hereafter arising and whether written or oral, are hereby limited so
that in no contingency, whether by reason of acceleration of the maturity hereof
or otherwise, shall the interest paid or agreed to be paid to the holder thereof
exceed the maximum amount permissible under applicable law. The Maker agrees
that during the full term hereof the maximum lawful interest for this Note
determined under Texas law shall be the Indicated Rate Ceiling as specified in
Article 5069-1.04 of V.A.T.S. All interest paid or agreed to be paid to the
holder hereof shall, to the extent permitted by applicable law, be amortized,
prorated, allocated, and spread throughout the full period of this Note until
payment in full of the principal of this Note (including the period of any
renewal or extension hereof) so that the rate of interest hereon is uniform
throughout the term hereof. This paragraph shall control all agreements between
the undersigned and the holder hereof relating to the obligations evidenced by
this Note.
This Note shall be construed in accordance with the laws of the State
of Texas and the laws of the United States applicable to transactions in Texas.
-2-
Any notice to be given pursuant to this Note to the Makers shall be
given at 450 Gears Road, Suite 625, Houston, Texas 77067. Any notice to be given
pursuant to this Note to the Payee or any holder hereof shall be given at the
address indicated in the first paragraph of this Note.
Any check, draft, money order or other instrument given in payment of
all or any portion of any amounts due hereunder may be accepted by the holder
hereof and handled in collection in the customary manner, but the same shall not
constitute payment hereunder or diminish any rights of the holder hereof except
to the extent that actual cash proceeds of such instrument are unconditionally
received by the holder and applied to the indebtedness in the manner elsewhere
herein provided.
It is agreed that time is of the essence with respect to this Note.
DRILLERS, INC.,
a Texas corporation
By:/S/ BILL R. MERCHANT
Bill R. Merchant, Treasurer
-3-
Initial for Identification
-------------
Exhibit 10.16
SECURITY AGREEMENT
DATED JUNE 10, 1996
DEBTOR(S): SECURED PARTY:
DRILLERS, INC. NOREX DRILLING LTD.
450 Gears Road, Suite 625 Cedar House
Houston, Texas 77067 41 Cedar Avenue
(713) 874-0193 fax Hamilton, HM-12, Bermuda
(hereinafter referred to as "Debtor") 1-441-293-3231 fax
(hereinafter referred to as
"Secured Party")
FOR VALUE RECEIVED, the receipt, adequacy and sufficiency of
which are hereby acknowledged, Debtor grants to Secured Party the security
interest (and the pledges and assignments) hereinafter set forth and agrees with
Secured Party as follows:
A. OBLIGATIONS SECURED. The security interest and pledges and
assignments as applicable granted hereby are to secure punctual payment and
performance of the following: (i) that certain promissory note of even date
herewith in the original principal sum of ONE MILLION AND NO/100 DOLLARS
($1,000,000), executed by Debtor and payable to the order of Secured Party, and
any and all extensions, renewals, modifications and rearrangements thereof; (ii)
certain other promissory notes which may be delivered by the Debtor to the
Secured Party subsequent to the date hereof and prior to October 31, 1996, and
all extensions, renewals, modifications and rearrangements thereof (all of which
are herein separately and collectively referred to as the "Obligations"). Debtor
acknowledges that the Secured Party may from time to time assign one or more of
the Obligations and agrees that regardless of such assignment (i) this Security
Agreement shall continue to secure such Obligations and (ii) unless otherwise
agreed between the Secured Party and the assignee(s), the Secured Party shall
thereafter hold the security interest granted pursuant to this Agreement as
trustee for the benefit of such assignee(s).
B. USE OF COLLATERAL. Debtor represents, warrants and
covenants that the Collateral will be used by the Debtor primarily for business
use.
C. DESCRIPTION OF COLLATERAL. Debtor hereby grants to Secured
Party a security interest in (and hereby pledges and assigns as applicable) and
agrees that Secured Party shall continue to have a security interest in (and a
pledge and assignment of, as applicable) all accounts of Debtor now owed by
United States citizens or entities formed under the laws of the United States
(including any state of the U.S.A.) as well as any and all such accounts that
may hereafter arise or be acquired by Debtor, and all the proceeds and products
thereof, including without limitation, all notes, drafts, acceptances,
instruments and chattel paper arising therefrom, and all returned or repossessed
goods arising from or relating to any such accounts, or other proceeds of any
sale or other disposition of inventory.
D. REPRESENTATIONS, WARRANTIES AND COVENANTS OF DEBTOR. Debtor
represents and warrants as follows:
1. OWNERSHIP; NO ENCUMBRANCES. Except for the security
interest (and pledges and assignments as applicable) granted hereby, the Debtor
is, and as to any property acquired after the date hereof which is included
within the Collateral, Debtor will be the owner of all such Collateral free and
clear from all charges, liens, security interests, adverse claims and
encumbrances of any and every nature whatsoever, except the lien of Charter
National Bank- Colonial which shall be released on or before June 30, 1996.
2. NO FINANCING STATEMENTS. There is no financing statement or
similar filing now on file in any public office covering any part of the
Collateral, and Debtor will not execute and there will not be on file in any
public office any financing statement or similar filing except the financing
statements filed or to be filed in favor of Secured Party.
<PAGE>
3. ACCURACY OF INFORMATION. All information furnished to
Secured Party concerning Debtor, the Collateral and the Obligations, or
otherwise for the purpose of obtaining or maintaining credit, is or will be at
the time the same is furnished, accurate and complete in all material respects.
4. AUTHORITY. Debtor has full right and authority to execute
and perform this Agreement and to create the security interest (and pledges and
assignment as applicable) created by this Agreement. The making and performance
by Debtor of this Agreement will not violate any articles of incorporation,
bylaws or similar document respecting Debtor, any provision of law, any order of
court or governmental agency, or any indenture or other agreement to which
Debtor is a party, or by which Debtor or any of Debtor's property is bound, or
be in conflict with, result in a breach of or constitute (with due notice and/or
lapse of time) a default under any such indenture or other agreement, or result
in the creation or imposition of any charge, lien, security interest, claim or
encumbrance of any and every nature whatsoever upon the Collateral, except as
contemplated by this Agreement, except the terms of any agreement with Charter
National Bank-- Colonial and Nordlandsbanken AS.
5. ADDRESSES. The address of Debtor designated at the
beginning of this Agreement is the chief executive office of the Debtor. Debtor
agrees not to change such address without advance written notice to Secured
Party.
E. GENERAL COVENANTS. Debtor covenants and agrees as follows:
1. OPERATION OF THE COLLATERAL. Debtor agrees to maintain and
use the Collateral solely in the conduct of its own business, in a careful and
proper manner. Debtor shall comply in all respects with all applicable statutes,
laws, ordinances and regulations. Debtor shall not use the Collateral in any
unlawful manner or for any unlawful purpose, or in any manner or for any purpose
that would expose the Collateral to unusual risk, or to penalty, forfeiture or
capture, or that would render inoperative any insurance in connection with the
Collateral.
2. NO ENCUMBRANCES. Debtor agrees not to suffer or permit any
charge, lien, security interest, adverse claim or encumbrance of any and every
nature whatsoever against the Collateral or any part thereof.
3. NO TRANSFER. Except as otherwise provided in this Agreement
with respect to inventory, Debtor shall not, without the prior written consent
of Secured Party, sell, assign, transfer, lease, charter, encumber, hypothecate
or dispose of the Collateral, or any part thereof, or interest therein, or offer
to do any of the foregoing.
4. NOTICES AND REPORTS. Debtor shall promptly notify Secured
Party in writing of any change in the name, identity or structure of Debtor, any
charge, lien, security interest, claim or encumbrance asserted against the
Collateral, any litigation against Debtor or the Collateral, any theft, loss,
injury or similar incident involving the Collateral, and any other material
matter adversely affecting Debtor or the Collateral. Debtor shall furnish such
other reports, information and data regarding Debtor's financial condition and
operations, the Collateral and such other matters as Secured Party may request
from time to time.
5. ADDITIONAL FILINGS. Debtor agrees to execute and deliver
such financing statement or statements, or amendments thereof or supplements
thereto, or other documents as Secured Party may from time to time require in
order to comply with the Texas Uniform Commercial Code (or other applicable
state law of the jurisdiction where any of the Collateral is located) and to
preserve and protect the Secured Party's rights to the Collateral.
6. PROTECTION OF COLLATERAL. Secured Party, at its option,
whether before or after default, but without any obligation whatsoever to do so,
may (a) discharge taxes, claims, charges, liens, security interests, assessments
or other encumbrances of any and every nature whatsoever at any time levied,
placed upon or asserted against the Collateral, (b) pay any filing, recording,
registration, licensing or certification fees or other fees and charges related
to the Collateral, or (c) take any other action to preserve and protect the
Collateral and Secured Party's rights and remedies under this Agreement as
Secured Party may deem necessary or appropriate. Debtor
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agrees that Secured Party shall have no duty or obligation whatsoever to take
any of the foregoing action. Debtor agrees to promptly reimburse Secured Party
upon demand for any payment made or any expense incurred by the Secured Party
pursuant to this authorization. These payments and expenditures, together with
interest thereon from date incurred until paid by Debtor at the maximum contract
rate allowed under applicable laws, which Debtor agrees to pay, shall constitute
additional Obligations and shall be secured by and entitled to the benefits of
this Agreement.
7. INSPECTION. Debtor shall at all reasonable times allow
Secured Party by or through any of its officers, agents, attorneys or
accountants, to examine the Collateral, wherever located, and to examine and
make copies of or extracts from Debtor's books and records.
8. FURTHER ASSURANCES. Debtor shall do, make, procure, execute
and deliver all such additional and further acts, things, deeds, interests and
assurances as Secured Party may request from time to time to protect, assure and
enforce Secured Party's rights and remedies.
F. ADDITIONAL PROVISIONS REGARDING ACCOUNTS. The following
provisions shall apply to all accounts included within the Collateral:
1. DEFINITIONS. The term "account," as used in this Agreement,
shall have the same meaning as set forth in the Uniform Commercial Code of Texas
in effect as of the date of execution hereof, and as set forth in any amendment
to the Uniform Commercial Code of Texas to become effective after the date of
execution hereof, and also shall include all present and future notes,
instruments, documents, general intangibles, drafts, acceptances and chattel
paper of Debtor, and the proceeds thereof.
2. ADDITIONAL WARRANTIES. As of the time any account becomes
subject to the security interest (or pledge or assignment as applicable) granted
hereby, Debtor shall be deemed further to have warranted as to each and all of
such accounts as follows: (a) each account and all papers and documents relating
thereto are genuine and in all respects what they purport to be; (b) each
account is valid and subsisting and arises out of a bona fide sale of goods sold
and delivered to, or out of and for services theretofore actually rendered by
the Debtor to, the account debtor named in the account; (c) the amount of the
account represented as owing is the correct amount actually and unconditionally
owing except for normal cash discounts and is not subject to any set-offs,
credits, defenses, deductions or countercharges; and (d) Debtor is the owner
thereof free and clear of any charges, liens, security interests, adverse claims
and encumbrances of any and every nature whatsoever.
3. COLLECTION OF ACCOUNTS. Secured Party shall have the right
in its own name or in the name of the Debtor, or after default, to require
Debtor forthwith to transmit all proceeds of collection of accounts to Secured
Party, to notify any and all account debtors to make payments of the accounts
directly to Secured Party, to demand, collect, receive, receipt for, sue for,
compound and give acquittal for, any and all amounts due or to become due on the
accounts and to endorse the name of the Debtor on all commercial paper given in
payment or part payment thereof, and in Secured Party's discretion to file any
claim or take any other action or proceeding that Secured Party may deem
necessary or appropriate to protect and preserve and realize upon the accounts
and related Collateral. Unless and until Secured Party so elects to collect
accounts, Debtor shall continue to collect accounts, account for same to Secured
Party. After default, in order to assure collection of accounts in which Secured
Party has a security interest (or which have been pledged or assigned to Secured
Party as applicable) hereunder, Secured Party may notify the post office
authorities to change the address for delivery of mail addressed to Debtor to
such address as Secured Party may designate, and to open and dispose of such
mail and receive the collections of accounts included herewith. Secured Party
shall have no duty or obligation whatsoever to collect any account, or to take
any other action to preserve or protect the Collateral; however, Debtor releases
Secured Party from any claim or claims for loss or damage arising from any act
or omission of Secured Party and its officers, directors, employees or agents,
should Secured Party elect to collect any account or take possession of any
Collateral.
4. IDENTIFICATION AND ASSIGNMENT OF ACCOUNTS. Upon Secured
Party's request, or after default, Debtor shall take such action and execute and
deliver such documents as Secured Party may request in order to identify,
confirm, mark, segregate and assign accounts and to evidence Secured Party's
interest in same. Without
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limitation of the foregoing, Debtor, upon request, agrees to assign accounts to
Secured Party, identify and mark accounts as being subject to the security
interest (or pledge or assignment as applicable) granted hereby, mark Debtor's
books and records to reflect such security interests, pledges and assignments,
and forthwith to transmit to Secured Party in the form received by Debtor any
and all proceeds of collection of such accounts.
G. EVENTS OF DEFAULT. Debtor shall be in default hereunder
upon the happening of any of the following events or conditions: (i) non-payment
when due (whether by acceleration of maturity or otherwise) of any payment of
principal, interest or other amount due on any Obligation, and such non-payment
is not cured within five (5) days of written notice thereof; (ii) the occurrence
of any event which under the terms of any evidence of indebtedness, indenture,
loan agreement, security agreement or similar instrument permits the
acceleration of maturity of any obligation of Debtor (whether to Secured Party
or to others); (iii) any representation or warranty made by Debtor to Secured
Party in connection with this Agreement, the Collateral or the Obligations, or
in any statements or certificates, proves incorrect in any material respect as
of the date of the making or the issuance thereof; (iv) default occurs in the
observance or performance of, or if Debtor fails to furnish adequate evidence of
performance of, any provision of this Agreement or of any note, assignment,
transfer, other agreement, document or instrument delivered by Debtor to Secured
Party in connection with this Agreement, the Collateral or the Obligations, and
such default is not cured within ten (10) days of notice thereof; (v)
dissolution, liquidation, termination of existence, insolvency, business failure
or winding-up of Debtor or any maker, endorser, guarantor, surety or other party
liable in any capacity for any of the Obligations; or (vi) the filing of a
petition in bankruptcy by or against, or the application for appointment of a
receiver or any other legal custodian for any part of the property of, or the
assignment for the benefit of creditors by, or the commencement of any
proceedings under any bankruptcy, rearrangement, reorganization, insolvency or
similar laws for the relief of debtors by or against, the Debtor or any maker,
endorser, guarantor, surety or other party primarily or secondarily liable for
any of the Obligations.
H. REMEDIES. Upon the occurrence of an event of default, or if
Secured Party deems payment or performance of the Obligations to be insecure,
Secured Party, at its option, shall be entitled to exercise any one or more of
the following remedies (all of which are cumulative):
1. DECLARE OBLIGATIONS DUE. Secured Party, at its option, may
declare the Obligations or any part thereof immediately due and payable, without
demand, notice of intention to accelerate, notice of acceleration, notice of
non-payment, presentment, protest, notice of dishonor, or any other notice
whatsoever, all of which are hereby waived by Debtor and any maker, endorser,
guarantor, surety or other party liable in any capacity for any of the
Obligations.
2. REMEDIES. Secured Party shall have all of the rights and
remedies provided for in this Agreement and in any other agreements executed by
Debtor, the rights and remedies in the Uniform Commercial Code of Texas, and any
and all of the rights and remedies at law or in equity, all of which shall be
deemed cumulative. Without limiting the foregoing, Debtor agrees that Secured
Party shall have the right to: (a) require Debtor to assemble the Collateral and
make it available to Secured Party at a place designated by Secured Party that
is reasonably convenient to both parties, which Debtor agrees to do; (b) take
possession of the Collateral, with or without process of law, and, in this
connection, enter any premises where the Collateral is located to remove same,
to render it unusable, or to dispose of same on such premises; (c) sell, lease
or otherwise dispose of the Collateral, by public or private proceedings, for
cash or credit, without assumption of credit risk; and/or (d) whether before or
after default, collect and receipt for, compound, compromise, and settle, and
give releases, discharges and acquittances with respect to, any and all amounts
owed by any person or entity with respect to the Collateral. Unless the
Collateral is perishable or threatens to decline speedily in value or is of a
type customarily sold on a recognized market, Secured Party will send Debtor
reasonable notice of the time and place of any public sale or of the time after
which any private sale or other disposition will be made. Any requirement of
reasonable notice to Debtor shall be met if such notice is mailed, postage
prepaid, to Debtor at the address of Debtor designated at the beginning of this
Agreement, at least five (5) days before the day of any public sale or at least
five (5) days before the time after which any private sale or other disposition
will be made.
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3. EXPENSES. Debtor shall be liable for and agrees to pay the
reasonable expenses incurred by Secured Party in enforcing its rights and
remedies, in retaking, holding, testing, repairing, and proving, selling,
leasing or disposing of the Collateral, or like expenses, including, without
limitation, attorneys' fees and legal expenses incurred by Secured Party. These
expenses, together with interest thereon from date incurred until paid by Debtor
at the maximum contract rate allowed under applicable laws, which Debtor agrees
to pay, shall constitute additional Obligations and shall be secured by and
entitled to the benefits of this Agreement.
4. PROCEEDS; SURPLUS; DEFICIENCIES. Proceeds received by
Secured Party from disposition of the Collateral shall be applied toward Secured
Party's expenses and other Obligations and in such order or manner as Secured
Party may elect. Debtor shall be entitled to any surplus if one results after
lawful application of the proceeds. Debtor shall remain liable for any
deficiency.
5. REMEDIES CUMULATIVE. The rights and remedies of Secured
Party are cumulative and the exercise of any one or more of the rights or
remedies shall not be deemed an election of rights or remedies or a waiver of
any other right or remedy. Secured Party may remedy any default and may waive
any default without waiving the default remedied or without waiving any other
prior or subsequent default.
I. OTHER AGREEMENTS.
1. SAVINGS CLAUSE. Notwithstanding any provision to the
contrary herein, or in any of the documents evidencing the Obligations or
otherwise relating thereto, no such provision shall require the payment or
permit the collection of interest in excess of the maximum permitted by
applicable usury laws. If any such excessive interest is so provided for, then
in such event (i) the provisions of this paragraph shall govern and control,
(ii) neither the Debtor nor his heirs, legal representatives, successors or
assigns or any other party liable for the payment thereof shall be obligated to
pay the amount of such interest to the extent that it is in excess of the
maximum amount permitted by law, (iii) any such excess interest that may have
been collected shall be, at the option of the holder of the instrument
evidencing the Obligations, either applied as a credit against the then unpaid
principal amount thereof or refunded to the maker thereof, and (iv) the
effective rate of interest shall be automatically reduced to the maximum lawful
rate under applicable usury laws as now or hereafter construed by the courts
having jurisdiction.
2. JOINT AND SEVERAL RESPONSIBILITY. If this Security
Agreement is executed by more than one Debtor, the obligations of all such
Debtors shall be joint and several.
3. WAIVERS. Debtor and any maker, endorser, guarantor, surety
or other party liable in any capacity respecting the Obligations hereby waive
demand, notice of intention to accelerate, notice of acceleration, notice of
non-payment, presentment, protest, notice of dishonor and any other notice
whatsoever.
4. SEVERABILITY. Any provision hereof found to be invalid by
courts having jurisdiction shall be invalid only with respect to such provision
(and then only to the extent necessary to avoid such invalidity). The offending
provision shall be modified to the minimum extent possible to confer upon
Secured Party the benefits intended thereby. Such provision as modified and the
remaining provisions hereof shall be construed and enforced to the same extent
as if such offending provision (or portion thereof) had not been contained
herein, to the maximum extent possible.
5. USE OF COPIES. Any carbon, photographic or other
reproduction of any financing statement signed by Debtor is sufficient as a
financing statement for all purposes, including without limitation, filing in
any state as may be permitted by the provisions of the Uniform Commercial Code
of such state.
6. RELATIONSHIP TO OTHER AGREEMENTS. This Security Agreement
and the security interests (and pledges and assignments as applicable) herein
granted are in addition to (and not in substitution, novation or discharge of)
any and all prior or contemporaneous security agreements, security interests,
pledges, assignments, liens, rights, titles or other interests in favor of
Secured Party or assigned to Secured Party by others in connection
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with the Obligations. All rights and remedies of Secured Party in all such
agreements are cumulative, but in the event of actual conflict in terms and
conditions, the terms and conditions of the latest security agreement shall
govern and control.
7. NOTICES. Any notice or demand given to either party in
connection with this Agreement, the Collateral or the Obligations shall be
deemed given and effective if (i) delivered in person or by courier, (ii) sent
by telecopy or facsimile transmission to the number designated at the beginning
of this Agreement, or (iii) mailed, postage prepaid, certified, return receipt
requested, addressed to the party at the address designated at the beginning of
this Agreement. Such notice 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 (5) days after deposit in the mail or the date of
delivery as shown by the return receipt therefor.
8. HEADINGS AND GENDER. Paragraph headings in this Agreement
are for convenience only and shall be given no meaning or significance in
interpreting this Agreement. All words used herein shall be construed to be of
such gender or number as the circumstances require.
9. AMENDMENTS. Neither this Agreement nor any of its
provisions may be changed, amended, modified, waived or discharged orally, but
only by an instrument in writing signed by the party against whom enforcement of
the change, amendment, modification, waiver or discharge is sought.
10. BINDING EFFECT. The provisions of this Security Agreement
shall be binding upon the heirs, executors, administrators, personal
representatives, successors and assigns of Debtor, and the rights, powers and
remedies of Secured Party hereunder shall inure to the benefit of the successors
and assigns of Secured Party.
11. GOVERNING LAW. This Security Agreement shall be governed
by the law of the State of Texas and applicable federal law.
IN WITNESS WHEREOF, the undersigned have executed this
Agreement effective as of the date first above written.
DEBTOR:
DRILLERS, INC.,
a Texas corporation
By:/s/ BILL R. MERCHANT
Bill R. Merchant, Treasurer
SECURED PARTY:
NOREX DRILLING LTD.,
a Bermuda corporation
By:/s/ FRANK CAPSTICK
Frank Capstick, President
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Exhibit 10.17
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
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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,
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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.
- 7 -
Exhibit 10.18
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 $4,000,000
(the "Preferred Stock), which was to have been convertible into shares of the
Common Stock of the Borrower pursuant to certain warrants to be issued in
connection therewith (the "Warrants");
WHEREAS, the Preferred Stock has not been issued to the
Lender;
WHEREAS, it has been proposed that the Borrower and its
affiliates agree to be parties to certain mergers (the "Mergers") with Somerset
Investment Corp., R. T. Oliver, Inc., GCT Investments, Inc. and Land Rig
Acquisition Corp. (the "Merger Parties");
WHEREAS, the Lender is a shareholder of the Borrower and would
therefore benefit from the consummation of the Mergers;
WHEREAS, the Merger parties have required, as a condition to
their agreement to become parties to the Mergers, that (i) the Subscription be
rescinded and (ii) the Lender make a loan to the Borrower pursuant to the terms
set forth herein;
WHEREAS, the Borrower and the Lender have agreed that the
Subscription shall be rescinded pursuant to the terms set forth herein;
WHEREAS, the Lender has required, as a condition to agreeing
to rescind the Subscription, that it receive a payment from the Borrower as a
charge for the use by the Borrower of the Advance prior to the date hereof; and
WHEREAS, the Lender is willing to loan amounts to the Borrower
on the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants herein contained, the parties hereto agree as follows:
- 1 -
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the
following meanings:
"Agreement" shall mean this Term Loan Agreement, as the same
may from time to time be amended, modified, supplemented or extended.
"Business Day" shall mean any day on which commercial banks
are not authorized or required to close in the State of Texas.
"Dollars" and "$" 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.
- 2 -
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 -
Exhibit 11.1
DI INDUSTRIES, INC. AND SUBSIDIARIES
COMPUTATION OF PRIMARY AND FULLY DILUTED LOSS PER SHARE
(In thousands except share amounts)
<TABLE>
<CAPTION>
Three Nine
Months Ended Year Ended Months Ended Year Ended
March 31, December 31, December 31, March 31,
1996 1995 1994 1994
----------- ----------- -------- --------
<S> <C> <C> <C> <C>
Weighted average shares of common stock outstanding ........... 38,669 38,669 38,641 38,416
Stock options (treasury stock method) ......................... --(A) --(A) 26(A) 6 (A)
----------- ----------- -------- --------
Weighted average shares for primary loss per
share calculation ......................................... 38,669 38,669 38,667 38,422
Stock options (treasury stock method) ......................... --(B) --(B) --(B) --(B)
Weighted average shares for fully diluted loss
per share calculation ..................................... 38,669 38,669 38,667 38,422
=========== =========== ======== ========
Net loss applicable to common stock ........................... $ (1,641) $ (13,447) $ (2,209) $ (2,658)
=========== =========== ======== ========
Loss per common share:
Primary ................................................... $ (.04) $ (.35) $ (.06) $ (.07)
=========== =========== ======== ========
Fully diluted ............................................. $ (.04) $ (.35) $ (.06) $ (.07)
=========== =========== ======== ========
</TABLE>
Note: Reference is made to Note 1 to Consolidated Financial Statements regarding
computation of per share amounts.
(A) Included in accordance with Regulation S-K Item 601(b)(11) although
not required to be provided for by Accounting Principles Board Opinion
No. 15 because the effect is insignificant.
(B) Closing price less than average price, therefore not included in
accordance with Regulation S-K Item 601(b) (11).
Exhibit 20
APPRAISAL
FOR
U.S. RIG & EQUIPMENT
6601 SW 29TH STREET
OKLAHOMA CITY, OKLAHOMA 73179
APRIL 4, 1996
Mr. Roy Oliver
U.S. Rig & Equipment
6601 SW 29th Street
Oklahoma City, Oklahoma 73179
Dear Mr. Oliver:
Enclosed is the appraisal that you requested on U.S. Rig & Equipment's (18)
drilling rigs. The purpose of the appraisal is to determine orderly liquidation
value as of April 1996 for the function of updating the equipment's collateral
value. It should not be used for any other function.
The total orderly liquidation value is $23,700,000.00. This value represents a
gross amount. Allowances have not been made for sales commissions, advertising,
moving, make ready and security expenses or any other expenses which might be
associated with a sale or liquidation. The equipment is summarized on a separate
summary page in the body of the report. A definition of the above purpose and
the methodology used in determining value is also included.
The equipment was inspected March 19-22, 1996, while located in various counties
in Oklahoma and Texas. Generally, it was judged to be in good condition. Because
of time and cost constraints, some equipment listed on the inventory was not
inspected. Values and conditions on that equipment should be considered
hypothetical.
We have retained a copy of this report, the equipment listings and original
notes from which it was prepared. These records will be kept confidential.
This report has been prepared in accordance with the principles and procedures
for the evaluation and valuation of personal property, as prescribed by THE
INTERNATIONAL SOCIETY OF APPRAISERS (ISA).
Sincerely,
SUPERIOR APPRAISALS
/s/ Daniel J. Kruse
Daniel J. Kruse, CAI
Chairman of the Board
Dated: _____________________
ORDERLY LIQUIDATION VALUE CONCEPT
The approximated gross sale proceeds that might be realized in a moderate or
reasonably short time frame, within approximately 120 days, in order to locate a
buyer while noting various intervening variables such as: Psychological
attractiveness, removal time and expense, physical deterioration, quantity, etc.
The orderly liquidation concept also maintains that the responsibility (risk)
and incurred cost of removal of purchases remain with the buyer, and that there
is no actual or implied warranty or guarantee on the equipment and/or inventory
which is to be sold. Additionally, 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.
METHODOLOGY
The orderly liquidation concept is unique in that it mutually shares some of the
elemental criteria present in both the liquidation and fair market value
concepts. Once all comparable research is satisfied, then relationships are made
by compensating in the areas lacking in similarity as well as any intervening
variable (i.e. psychological attractiveness, deterioration, quantity {caution
should be exercised with quantity - as there is sometimes an inverse
relationship between quantity and price, typically excessive quantity is causal
to lower recovery value}, economic and market factors, etc.)
having positive or adverse effects on the subject equipment.
Another factor having a causal effect on the numerical result 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 exemplifies a
forced time constraint where the values could fall to the lower end of the
spectrum. No differently than liquidation value, the orderly liquidation concept
considers the difficulty of removal.
3
TERMS AND CONDITIONS
(TO WHICH THE APPRAISAL IS SUBJECT)
This appraisal report is given subject to the terms and conditions hereinafter
set forth, all of which are a part hereof unless expressly set aside in writing
either on the pages of this appraisal or by a writing attached to the report
signed by all parties concerned.
1. Unless otherwise stated herein, this report is based only on the
readily apparent identity of the item(s) appraised, and no further
opinion nor guarantee of authenticity, genuineness or attribution of
authorship is made.
2. Unless otherwise stated herein, the appraisal value(s) is based
on the whole ownership and possessory interest undiminished by any
liens, fractional interests or any other form of encumbrance or
alienation.
3. Proper emphasis on relevant facts, data or opinions have been
fully stated and are assumed correct in obtaining the numerical
results.
4. The subject items have been identified to the best of the
appraiser's knowledge.
5. The appraisal service fee is based on a flat rate structure and
is not in the form of a commission, rebate, division of brokerage,
referral or any other fee contingent on the final numerical results.
6. The appraiser(s) has no present or contemplated future interest
in the subject property or any other interest impeding a fair
numerical result unless so stated.
7. The value concepts by which this report is structured are stated
in the cover letter.
8. The valuation for equipment must not be used in conjunction with
any other appraisal. The total valuation of equipment in this report
applies only under the use at time of inspection.
9. Superior Appraisals is not required to appear in court or give
testimony in reference to this appraisal unless previous
arrangements
4
have been made.
10. In some cases, recovery values could be affected upwardly or
downwardly, based on the reputation of the present ownership and
maintenance of the subject matter.
11. This report is made at the request of the party named for
his/her/its use. It is not an indication or certificate of title or
ownership. The identification of the interest of the requesting
party is simply that represented to the appraiser by such party and
no inquiry or investigation has been made nor is any opinion given
as to the truth of such representation.
12. The value(s) expressed herein is based on the appraiser's best
judgement and opinion and is not a representation or warranty that
the item(s) will realize that value if offered for sale at auction
or otherwise. The value(s) expressed is based on current information
on the date made and no opinion is hereby expressed as to any
further value nor, unless otherwise expressly stated, as to any past
value.
13. Stated values are given item by item unless clearly stated as
being per lot. The total of individual item values shall not be
construed as an appraisal value for the whole lot, but merely as the
addition of single values. Where values are given by lot, the value
per lot is for the whole and no opinion is given as to individual
proportionate values within the lot.
14. Unless otherwise stated herein, value(s) expressed is based on
the general expertise and qualifications of the appraiser as to the
appropriate market and valuation of the item(s) and purpose
involved. Where particular detailed information is relied on, it
will be so stated in writing.
15. Where an appraisal is based on a sample of a larger whole, it
will be so stated and it is based on the assumption that the sample
delivered is representative and fair. No opinion or warranty is
hereby made as to the fairness or representative nature of any large
whole from which the sample was drawn.
16. Where an appraisal is based not only on the item(s), but also on
data or documentation supplied therewith, this certificate shall so
state by making references thereto and, where appropriate, attaching
copies hereto.
5
17. Unless expressly stated, the condition of the item(s) is good
for its type, with serious deficiencies and repairs noted. Ordinary
wear and tear common to this type of item is not noted.
18. Superior Appraisals reserves the right to recall all copies of
this report to correct any errors, make deletions or additions, if
found necessary.
19. No portion of this report may be reproduced, copied or used in
any manner by anyone without the previous written consent of
Superior Appraisals and then only in its entirety including all
cover letters and material.
20. Should, in conjunction with this appraisal, additional services
of the appraiser be requested by the client, his agent or attorney,
or the Court (such as for added time researching for other value
purposes, pretrial conferences, court appearances, court
preparation, etc.), compensation for same shall be at the customary
daily rate charged by Superior Appraisals at the time and shall be
paid by the client upon receipt of a statement.
6
DEFINITION OF CONDITION TERMS
The following is an explanation of the conditions used in describing the
equipment:
EXCELLENT: Recently purchased. Extremely limited use. Practically new mechanical
condition.
VERY GOOD: In exceptionally good mechanical condition. Has just been completely
overhauled or has had such limited use that no repairs or worn parts replacement
is necessary. Very low hours.
GOOD: No known mechanical defects except any that may be described. In operating
condition, but may have some worn parts that will need repair or replacement in
the near future.
FAIR: Has seen considerable service and may require general overhaul in the near
future.
POOR: Has seen hard service. Is worn and needs repairs.
7
APPRAISAL SUMMARY
FOR
U. S. RIG & EQUIPMENT
Rig No. 1 - OILWELL E-3000 1,700,000.00
Rig No. 2 - NATIONAL 1625-DE, S/N-T2939 1,900,000.00
Rig No. 3 - CONTINENTAL EMSCO C-3 1,400,000.00
Rig No. 4 - NATIONAL 1625-DE, S/N-T2952 1,900,000.00
Rig No. 5 - NATIONAL 1625-DE, S/N-T3039 1,900,000.00
Rig No. 6 - NATIONAL 1320-UE, S/N-78 900,000.00
Rig No. 7 - NATIONAL 1320-UE, S/N-1167N 1,250,000.00
Rig No. 8 - NATIONAL 1320-UE, S/N-T2801 1,500,000.00
Rig No. 9 - 1982 OILWELL E-2000, S/N-H47199UK 1,475,000.00
Rig No. 10 - 1980 OILWELL E-2000, S/N-H47169 1,275,000.00
Rig No. 11 - 1981 OILWELL E-2000, S/N-H4716OUK 1,600,000.00
Rig No. 12 - 1981 OILWELL E-2000, S/N-H47134UK 1,100,000.00
Rig No. 13 - 1981 OILWELL E-2000, S/N-H47128UK 1,600,000.00
Rig No. 14 - CONTINENTAL EMSCO C-2 1,100,000.00
Rig No. 15 - OILWELL 840-E 1,400,000.00
Rig No. 16 - 1981 MID-CONTINENT U-914-EC 600,000.00
Rig No. 17 - CONTINENTAL EMSCO D-3, S/N-66 500,000.00
Rig No. 18 - CONTINENTAL EMSCO D-3, S/N-57 600,000.00
TOTAL: $23,700,000.00
8
EQUIPMENT INVENTORY
This Equipment Inventory Schedule to this appraisal has been omitted pursuant to
Item 601(b)(2) of Regulation S-K. Registrant hereby agrees to provide a copy of
such Schedule to the Commission upon its request.
9
Exhibit 22.1
DI INDUSTRIES, INC.
LIST OF SUBSIDIARIES
State/Country of
SUBSIDIARY INCORPORATION
------------------------
Drillers, Inc. ........................................ Texas
DI Energy, Inc. ....................................... Texas
DI International, Inc. ................................ Texas
DI Drilling, Inc. ..................................... Delaware
Western Oil Well Service Co. .......................... Montana
Cubby Drilling, Inc. .................................. Delaware
Butler-Johnson, Inc. .................................. Delaware
DI Services, Inc. ..................................... Texas
DI/Perfensa Inc. (90%-Owned) .......................... Texas
Drillers de Mexico .................................. Mexico
Drillers International, S.A ........................... Argentina
Perforaciones Andinas S.A ............................. Panama
Drillers Inc. DI de Venezuela, C. A ................... Venezuela
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this registration statement of DI Industries, Inc. on
Form S-4 of our reports dated March 28, 1996 (June 10, 1996 as to Note 13) and
to the references to us under the heading "Experts" in the Prospectus/Proxy,
which is part of this registration statement.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Houston, Texas
June 14, 1996
Exhibit 23.3
June 13, 1996
The Board of Directors of
DI Industries, Inc.
We hereby consent to the use in the DI Industries, Inc. Registration Statement
on Form S-4 (the "Registration Statement") of all or part of our appraisal dated
April 4, 1996, and to any and all references made to us or to such appraisal in
the Prospectus/Proxy Statement constituting part of the Registration Statement.
Very truly yours,
SUPERIOR AUCTIONEERS & MARKETING, INC.
/s/ CHARLES R. SMITH
Charles R. Smith, CPA
President
<PAGE>
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<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 2,858
<SECURITIES> 0
<RECEIVABLES> 19,740
<ALLOWANCES> 1,951
<INVENTORY> 2,902
<CURRENT-ASSETS> 28,762
<PP&E> 44,527
<DEPRECIATION> 18,797
<TOTAL-ASSETS> 54,769
<CURRENT-LIABILITIES> 22,513
<BONDS> 0
900
4,150
<COMMON> 3,867
<OTHER-SE> 10,186
<TOTAL-LIABILITY-AND-EQUITY> 54,769
<SALES> 94,709
<TOTAL-REVENUES> 94,709
<CGS> 93,825
<TOTAL-COSTS> 107,502
<OTHER-EXPENSES> (1,590)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,472
<INCOME-PRETAX> (13,447)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,675)
<DISCONTINUED> (772)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,447)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
</TABLE>
