<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 27, 1997.
REGISTRATION NO. 333-36593
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
GREY WOLF, INC.
(FORMERLY DI INDUSTRIES, INC.)
(Exact name of registrant as specified in its charter)
<TABLE>
<C> <C>
TEXAS 74-2144774
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
10370 RICHMOND AVENUE, SUITE 600
HOUSTON, TEXAS 77042-4136
(713) 435-6100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
T. SCOTT O'KEEFE
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
10370 RICHMOND AVENUE, SUITE 600
HOUSTON, TEXAS 77042-4136
(713) 435-6100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
<TABLE>
<C> <C>
NICK D. NICHOLAS SETH R. MOLAY, P.C.
PORTER & HEDGES, L.L.P. AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
700 LOUISIANA, 35TH FLOOR 1700 PACIFIC AVENUE, SUITE 4100
HOUSTON, TEXAS 77002 DALLAS, TEXAS 75201
(713) 226-0600 (214) 969-2800
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
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> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 27, 1997
25,000,000 Shares
GREY WOLF, INC.
[GREY WOLF LOGO] Common Stock
($.10 par value)
------------------
Of the 25,000,000 shares (the "Shares") of common stock, par value $.10 per
share ("Common Stock"), of Grey Wolf, Inc. (formerly DI Industries, Inc.) being
offered hereby (the "Offering"), 12,500,000 shares are being sold by Grey Wolf,
Inc. ("Grey Wolf" or the "Company") and 12,500,000 shares are being sold by the
Selling Shareholders named under "Principal and Selling Shareholders." The
Company will not receive any of the proceeds from the sale of Shares by the
Selling Shareholders.
The Common Stock is traded on the American Stock Exchange ("AMEX") under the
symbol "GW." On October 24, 1997, the last reported sale price of the Common
Stock on the AMEX was $8.9375 per share. See "Price Range of Common Stock and
Dividend Policy."
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE SHARES, SEE "RISK FACTORS" BEGINNING ON PAGE 11 HEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) SHAREHOLDERS
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Per Share............................ $ $ $ $
Total(2)............................. $ $ $ $
</TABLE>
(1) Before deducting expenses payable by the Company estimated at $600,000.
(2) The Company and the Selling Shareholders have granted the Underwriters
options, exercisable for 30 days from the date of this Prospectus, to
purchase a maximum of 1,875,000 additional shares from the Company and
1,875,000 shares from the Selling Shareholders to cover
over-allotments of Shares. If the options are exercised in full, the total
Price to Public will be $ , Underwriting Discounts and Commissions will
be $ , Proceeds to Company will be $ and Proceeds to
Selling Shareholders will be $ .
The Shares are offered by the several Underwriters when, as and if
delivered to and accepted by the Underwriters and subject to their right to
reject orders in whole or in part. It is expected that the Shares will be ready
for delivery on or about , 1997, against payment in immediately
available funds.
CREDIT SUISSE FIRST BOSTON
BT ALEX. BROWN
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
HOWARD, WEIL, LABOUISSE, FRIEDRICHS
INCORPORATED
JOHNSON RICE & COMPANY L.L.C.
Prospectus dated , 1997
<PAGE> 3
[GRAPHICS INCLUDE A MAP SHOWING THE GEOGRAPHIC EXTENT OF THE COMPANY'S
MARKET AREAS. THE MARKET AREAS DEPICTED ARE: THE ARK-LA-TEX (NORTHEAST TEXAS,
SOUTHERN ARKANSAS AND NORTHERN LOUISIANA); SOUTH TEXAS; GULF COAST (SOUTHEAST
TEXAS AND SOUTHERN LOUISIANA) AND VENEZUELA.]
[GRAPHICS INCLUDE A BAR CHART SHOWING THE GROWTH RATE IN THE COMPANY'S
DOMESTIC RIG FLEET ON A MONTHLY BASIS, FROM 45 MARKETED RIGS AND 27 RIGS IN
INVENTORY IN JANUARY 1997 TO 100 MARKETED RIGS AND 27 RIGS IN INVENTORY IN
SEPTEMBER 1997. AN ADJACENT TABLE SHOWS THE COMPANY'S CURRENT RIG FLEET AS
FOLLOWS: ARK-LA-TEX REGION 21; SOUTH TEXAS REGION 30; GULF COAST REGION 37;
VENEZUELA 6; OTHER DOMESTIC 16; INVENTORY 23; AND 133 RIGS IN TOTAL.]
[A SECOND BAR CHART DEPICTS THE GROWTH IN AVERAGE DAY RATES RECEIVED BY THE
COMPANY IN ITS THREE CORE DOMESTIC MARKETS, THE ARK-LA-TEX, GULF COAST AND SOUTH
TEXAS MARKETS. THE GRAPH SHOWS GENERALLY RISING AVERAGE DAY RATES OVER THE EIGHT
MONTH PERIOD FROM $5,596 IN JANUARY TO $7,732 IN AUGUST 1997.]
The areas depicted on this map are referred to in this Prospectus as the
Company's Ark-La-Tex, South Texas, Gulf Coast and Venezuela markets.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT
COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus and incorporated herein by
reference, and by the consolidated financial statements, including the notes
thereto, incorporated by reference in this Prospectus. Unless otherwise
indicated, all information in this Prospectus assumes there will be no exercise
of the Underwriters' over-allotment options. Unless the context indicates
otherwise, references in this Prospectus to "Grey Wolf" or the "Company" mean
Grey Wolf, Inc. and its subsidiaries and predecessors. In September 1997, the
Company changed its corporate name from DI Industries, Inc. to Grey Wolf, Inc.
Unless otherwise indicated, the information contained herein gives effect to the
acquisition of substantially all of the operating assets of Justiss Drilling
Company (the "Justiss Acquisition"), which is described herein.
THE COMPANY
The Company is a leading provider of contract land drilling services in the
U.S. with a domestic fleet of 127 rigs. In addition to its domestic operations,
the Company operates a fleet of six rigs in Venezuela, giving the Company a
total of 133 rigs, 110 of which are currently marketed. The Company believes it
has the largest fleet of drilling rigs in its Gulf Coast and South Texas markets
and the second largest fleet in its Ark-La-Tex market. The Company has an
inventory of 23 non-marketed rigs that it intends to refurbish and reactivate
during the remainder of 1997 and 1998 to meet demand for quality drilling assets
in its core domestic markets or internationally.
The Company focuses on its three core domestic drilling markets as it
believes these markets have historically maintained higher utilization rates and
day rates than other domestic markets. Internationally, the Company concentrates
its efforts in Venezuela, where the Company intends to increase its market
presence and is currently bidding on a number of potential drilling projects.
BUSINESS STRATEGY
In April 1996, the Company initiated a reorganization of its operations
that consisted of replacing substantially all of the senior management and the
members of the Board of Directors of the Company and implementing a new business
strategy. This business strategy seeks to achieve increased cash flow and
earnings through:
(1) focusing on core markets and establishing leading positions in
these markets;
(2) refurbishing and reactivating inventoried rigs to satisfy
increases in demand;
(3) acquiring land drilling businesses and assets to capitalize on
anticipated improvements in the industry and
(4) attracting and retaining qualified personnel to support the
Company's increased level of operations.
Focus on Core Markets. The Company believes it currently has the leading
market position in its Gulf Coast and South Texas markets, and the second
leading market position in its Ark-La-Tex market. By focusing on its core
markets and establishing leading positions in these markets, the Company is able
to achieve economies of scale and provide an infrastructure to acquire,
refurbish and reactivate rigs in these markets in a cost-effective manner.
Refurbishment and Reactivation of Inventoried Rigs. Since the beginning of
the fourth quarter of 1996, the Company has refurbished and reactivated 17 rigs
and an additional nine rigs are planned for refurbishment and reactivation
during the remainder of 1997, eight of which are currently being refurbished.
The Company estimates that the nine rigs it plans to refurbish during the
remainder of 1997 can be reactivated for service at an average cost of
approximately $1.7 million per rig, including the cost of new drill pipe, which
is well below the current cost of construction for new drilling rigs with
comparable capabilities. The remaining 14 rigs in the Company's inventory are
planned for refurbishment and reactivation during 1998.
3
<PAGE> 5
Acquisitions. The Company has aggressively implemented its new business
strategy by acquiring 90 land drilling rigs in 12 transactions since August
1996. Five of these acquisitions were of companies with long operating histories
in the Company's Ark-La-Tex, Gulf Coast and South Texas markets. The other
acquisitions have provided the Company with additional inventory of drilling
rigs suited for refurbishment and reactivation in the Company's core domestic
markets or internationally. The following table summarizes the Company's
acquisitions since August 1996:
<TABLE>
<CAPTION>
NUMBER OF RIGS ACQUIRED
AND STATUS UPON ACQUISITION
--------------------------------
DATE TRANSACTION MARKETED INVENTORIED TOTAL
---- ----------- -------- ----------- -----
<S> <C> <C> <C> <C>
October-November 1997(1) Justiss Acquisition 12(1) -- 12
Kaiser-Francis Rig
August 1997 Purchase -- 6 6
June 1997 GWDC Acquisition 18 -- 18
January 1997 Flournoy Acquisition 13 -- 13
December 1996 Diamond M Acquisition 10 -- 10
October 1996 Mesa Acquisition 3 3 6
August 1996 RTO/LRAC Acquisition -- 18 18
Various Additional Rig Purchases 1 6 7
-- -- --
57 33 90
== == ==
</TABLE>
- ---------------
(1) Nine of the 12 rigs which the Company contracted to purchase in the Justiss
Acquisition were acquired on October 21, 1997. The remaining three rigs are
expected to be purchased by the end of November 1997, as each completes a
turnkey drilling contract for a well in progress.
Attracting and Retaining Qualified Personnel. The Company believes that its
executive management and operating personnel are among the most experienced and
highly skilled professionals in the contract drilling industry. Thomas P.
Richards, the Company's President and CEO, has 31 years of contract drilling
industry experience and the Company's four Senior Vice Presidents have an
average of 23 years of related experience. Many of the Company's operating
personnel joined the Company in connection with acquisitions completed since
August 1996, bringing to the Company additional customer relationships and
operating experience in their markets. The Company's ability to retain these
employees and attract additional quality employees has allowed the Company to
expand its operations and customer base significantly while ensuring quality
service to its customers.
RIG FLEET
The Company has assembled a fleet of quality drilling rigs to meet the
needs of its customers in each of the markets it serves. The following table
sets forth certain information with respect to the drilling rigs owned by the
Company after giving pro forma effect to the Justiss Acquisition:
<TABLE>
<CAPTION>
DIESEL
DIVISION ELECTRIC MECHANICAL TOTAL
-------- -------- ---------- -----
<S> <C> <C> <C>
Ark-La-Tex(1)(2).................................... 9 17 26
South Texas(1)...................................... 10 23 33
Gulf Coast(1)(3).................................... 19 10 29
Venezuela........................................... -- 6 6
Indrillers.......................................... 1 9 10
Eastern............................................. -- 6 6
Inventory........................................... 19 4 23
-- -- ---
58 75 133
== == ===
</TABLE>
- ---------------
(1) One of the Company's core domestic markets.
(2) Includes two mechanical rigs remaining to be purchased in the Justiss
Acquisition.
(3) Includes one mechanical rig remaining to be purchased in the Justiss
Acquisition.
4
<PAGE> 6
INDUSTRY OVERVIEW
The domestic land drilling industry is undergoing a period of rapid
consolidation. The Company believes that from January 1, 1996 through September
30, 1997 there have been at least 34 completed or pending transactions involving
the acquisition of a combined total of approximately 466 rigs, the majority of
which were acquired by six land rig companies including the Company. Recent and
pending transactions by the Company accounted for 12 of these transactions
involving the acquisition of 90 rigs, of which 57 were actively marketed at the
time of acquisition and 33 were inventoried for later refurbishment.
Industry sources estimate that the supply of domestic land drilling rigs
available for work in the U.S. has declined from over 5,000 rigs in 1982 to
1,400 rigs currently. The Company believes the demand for land drilling rigs in
the Company's core markets has increased over the past 12 months principally due
to improved oil and gas drilling and production economics resulting from
increased use of 3-D seismic, directional drilling and enhanced recovery
techniques. For the first six months of 1997, industry sources estimate that the
average active domestic land rig count was 750 as compared to 652 for the full
year 1996, and 626 for the first six months of 1996. The Company's utilization
rates in its three core domestic markets averaged over 97% for the first nine
months of 1997. By increasing the size of its rig fleet through acquisitions and
refurbishments, the Company has increased its market share in its three core
domestic markets during a period of rapidly rising demand and day rates for land
drilling rigs in those key markets. The Company's larger fleet of marketable
rigs, higher rig utilization rates and increasing day rates have significantly
improved the Company's financial performance since the third quarter of 1996.
RECENT AND PENDING ACQUISITIONS
The Company has entered into a series of transactions since August 1996
that have significantly increased the size of its rig fleet, refocused its
operations, established its market position with the largest or second largest
rig fleet in its core domestic markets and positioned the Company to benefit
from anticipated increases in demand in the land drilling industry. The most
significant acquisition transactions are:
- The Justiss Acquisition. On September 15, 1997, the Company entered into
a definitive agreement to acquire substantially all of the operating
assets of Justiss Drilling Company ("Justiss"), a division of Justiss Oil
Company, Inc. The assets include a fleet of 12 operating drilling rigs
and related equipment which are currently operating in the Company's
Ark-La-Tex and Gulf Coast markets. The total purchase price for the
Justiss Acquisition is $36.1 million in cash of which $28.6 million was
paid on October 21, 1997 upon delivery of nine of the 12 rigs to be
acquired. The remaining three rigs are expected to be purchased and the
balance of the purchase price paid ($7.5 million) by the end of November
1997, as each rig completes a turnkey drilling contract for a well in
progress. The closing of the Justiss Acquisition with respect to the
remaining three rigs is subject to the satisfaction of certain conditions
to closing. Accordingly, there can be no assurance that the purchase of
the remaining rigs will be completed.
- Kaiser-Francis Rig Purchase. In August 1997, the Company acquired six
drilling rigs and related drilling equipment from Kaiser-Francis Oil
Company for a cash purchase price of $25.4 million (the "Kaiser-Francis
Rig Purchase"). Five of the six rigs are currently held in inventory for
refurbishment and one is currently being refurbished.
- GWDC Acquisition. In June 1997, the Company acquired Grey Wolf Drilling
Company ("GWDC") which owned a fleet of 18 operating drilling rigs and
related assets located in the Company's Gulf Coast market (the "GWDC
Acquisition"). The consideration for the GWDC Acquisition consisted of
$61.6 million in cash and 14.0 million shares of Common Stock. The GWDC
Acquisition established the Company's presence in its Gulf Coast market
and provided the Company with additional infrastructure to facilitate
reactivation of its rigs held in inventory.
- Flournoy Acquisition. In January 1997, the Company acquired the operating
assets of Flournoy Drilling Company, which included 13 operating land
drilling rigs and other assets located in the Company's South Texas
market, in exchange for 12.4 million shares of Common Stock and $800,000
5
<PAGE> 7
in cash (the "Flournoy Acquisition"). As a result of the Flournoy Acquisition,
the Company believes it is currently the largest land drilling contractor in its
South Texas market.
- Diamond M Acquisition. In December 1996, the Company acquired the assets
of Diamond M Onshore, Inc. for $26.0 million in cash (the "Diamond M
Acquisition"). The assets consisted of ten operating land drilling rigs
and other related assets located in South Texas.
- Mesa Acquisition. In October 1996, the Company acquired six diesel
electric SCR drilling rigs, three of which were operating, from Mesa
Drilling, Inc. ("Mesa") in exchange for 5.5 million shares of Common
Stock (the "Mesa Acquisition"). The Mesa Acquisition established the
Company's presence in South Texas.
- RTO/LRAC Acquisition. In August 1996, the Company acquired 18 land
drilling rigs in exchange for 39.4 million shares of Common Stock (the
"RTO/LRAC Acquisition"). These 18 rigs provided the Company with a supply
of additional rigs suitable for refurbishment and reactivation.
In addition to these transactions, the Company completed five additional
acquisitions during the second and third quarters of 1997 that added a total of
seven drilling rigs to the Company's fleet, one of which was operating and six
of which were added to the Company's inventory of rigs held for refurbishment
(the "Additional Rig Purchases"). See "Business -- Recent and Pending
Acquisitions."
RECENT OPERATING PERFORMANCE
On October 22, 1997, the Company announced operating results for the third
quarter of 1997. The Company reported net income of $2.7 million, or $.02 per
common share, for the three months ended September 30, 1997, compared with net
income of $808,000, or $.01 per common share, for the third quarter of 1996.
Revenues were $63.8 million and $22.0 million for the three months ended
September 30, 1997 and 1996, respectively. For the nine months ended September
30, 1997, the Company reported net income of $6.1 million, or $.04 per common
share, compared with a net loss of $159,000, or $.01 per common share, for the
nine months of 1996. Revenues for the first nine months of 1997 were $139.8
million compared with $61.3 million for the first nine months of 1996. EBITDA
(as defined below) for the three months and nine months ended September 30,
1997, was $16.1 million and $26.7 million, respectively. These results are
subject to review and final audit for the year ended December 31, 1997. If audit
adjustments are necessary, audited results could differ materially from these
quarterly results. For the third quarter of 1997, the Company maintained a
utilization rate of 84% for its marketed rigs. The Company's rig fleet operated
a total of 7,011 rig days in the third quarter of 1997 compared with 2,847 rig
days for the third quarter of 1996. For the first nine months of 1997, the
Company's fleet operated a total of 15,992 rig days compared to 8,228 rig days
for the nine months ended September 30, 1996. The average revenues per rig day
for the third quarter of 1997 were $9,093. The Company's third quarter results
include the results from the 18 rigs acquired in the GWDC Acquisition and an
additional seven rigs that have been refurbished and reactivated in its core
markets.
6
<PAGE> 8
THE OFFERING
Shares of Common Stock Offered by the
Company................................. 12,500,000
Shares of Common Stock Offered by
Selling Shareholders.................... 12,500,000
Shares of Common Stock to be Outstanding
after the Offering...................... 164,335,391(1)
Use of Proceeds......................... The net proceeds of the Offering
will be used: (i) to repay
indebtedness incurred under the
Company's revolving line of credit
to finance substantially all of the
purchase price for nine rigs
acquired at the initial closing of
the Justiss Acquisition in October
1997; (ii) to pay the purchase
price for the remaining three rigs
expected to be acquired in the
Justiss Acquisition or, if any of
the rigs are purchased before the
closing of the Offering, to repay
additional indebtedness incurred
under the Company's revolving line
of credit for the purchases; (iii)
for capital expenditures for the
refurbishment of rigs and (iv) for
general corporate purposes, which
may include future acquisitions.
American Stock Exchange Symbol.......... GW
- ---------------
(1) Based on shares outstanding at September 30, 1997. Does not include: (i)
5,557,400 shares issuable upon exercise of stock options outstanding; (ii)
489,600 shares issuable upon exercise of outstanding warrants; (iii) 244,800
shares issuable upon conversion of Series A Preferred Stock and (iv) the
number of shares, if any, that may be contingently issuable in connection
with the Flournoy Acquisition in the event of a significant decline in the
price of the Common Stock. See "Shares Available for Future Sale."
7
<PAGE> 9
SUMMARY FINANCIAL AND OPERATING DATA
The following summary financial data, except for the Other Financial Data
and the Drilling Rig Activity Data, for the years ended and as of December 31,
1996 and 1995 have been derived from the audited consolidated financial
statements of the Company. This data should be read in conjunction with such
consolidated financial statements and the notes thereto which are incorporated
by reference in this Prospectus. The following summary financial data for the
six-month periods ended June 30, 1997 and 1996 and as of June 30, 1997 have been
derived from the unaudited consolidated financial statements of the Company
which are incorporated by reference in this Prospectus, and which include all
adjustments, consisting of normal recurring adjustments, that the Company
considers necessary for a fair presentation of its financial position and
results of operations for these periods. Operating results for the six-month
period ended June 30, 1997 are not necessarily indicative of the results that
may be expected for the entire year. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
The pro forma data in the table should be read in conjunction with the
unaudited pro forma consolidated financial data and the notes thereto included
elsewhere in this Prospectus. The pro forma financial data does not purport to
represent what the Company's financial condition or results of operations
actually would have been had the Transactions (as defined in Unaudited Pro Forma
Consolidated Financial Data) in fact occurred on the assumed dates or to project
the Company's financial condition or results of operations for any future period
or date. See "Unaudited Pro Forma Consolidated Financial Data."
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------------- -----------------------------------
HISTORICAL HISTORICAL
PRO FORMA(1) ----------------- PRO FORMA(2) --------------------
1997 1997 1996 1996 1996 1995
------------ ------- ------- ------------ -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND DRILLING RIG ACTIVITY
DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................... $119,201 $76,046 $39,285 $218,840 $ 81,767 $ 94,709
Drilling operations costs... 96,635 62,132 38,318 192,885 80,388 93,825
Depreciation and
amortization............. 13,376 5,180 2,221 28,649 4,689 4,832
General and
administrative........... 4,248 3,369 1,795 7,659 4,274 3,555
Provision for asset
impairment(3)............ -- -- -- -- -- 5,290
Non-recurring charges(4).... -- -- 602 6,131 6,131 --
-------- ------- ------- -------- -------- --------
Operating income (loss)..... 4,942 5,365 (3,651) (16,484)(8) (13,715)(8) (12,793)
Interest expense(5)......... 8,078 1,535 466 16,159 1,220 1,472
Other income, net........... 1,484 880 3,150 1,719 4,058 1,590
-------- ------- ------- -------- -------- --------
Income (loss) from
continuing operations.... (1,652) 4,710 (967) (30,924) (10,877) (12,675)
Loss from discontinued
operations(6)............ -- -- -- -- -- (772)
-------- ------- ------- -------- -------- --------
Income (loss) before income
taxes.................... (1,652) 4,710 (967) (30,924) (10,877) (13,447)
Income taxes................ -- 1,356 -- 845 845 --
-------- ------- ------- -------- -------- --------
Net income (loss)........... $ (1,652) $ 3,354 $ (967) $(31,769) $(11,722) $(13,447)
======== ======= ======= ======== ======== ========
Net income (loss) applicable
to common shares......... $ (1,892) $ 3,114 $(1,267) $(31,782) $(12,137) $(13,447)
======== ======= ======= ======== ======== ========
Net income (loss) per common
share.................... $ (.01) $ .02 $ (.03) $ (.19) $ (.18) $ (.35)
======== ======= ======= ======== ======== ========
Weighted average common and
common equivalent shares
outstanding.............. 164,040 135,756 38,682 163,969 67,495 38,669
======== ======= ======= ======== ======== ========
OTHER FINANCIAL DATA (UNAUDITED):
EBITDA(7)................... $ 18,318 $10,545 $ (828) $ 18,296(8) $ (2,895)(8) $ (2,671)
</TABLE>
8
<PAGE> 10
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------ ------------------------------
HISTORICAL HISTORICAL
PRO FORMA(1) --------------- PRO FORMA(2) ---------------
1997 1997 1996 1996 1996 1995
------------ ------ ------ ------------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
DRILLING RIG ACTIVITY DATA (UNAUDITED)(9):
Average utilization rate of
drilling rigs available for
service...................... 77% 74% 63% 81% 63% 66%
Average revenues per day(10).... $8,018 $8,473 $7,459 $8,296 $7,610 $7,739
Drilling rigs available for
service -- end of period..... 101 88 49 96 52 58
Inventoried drilling rigs -- end
of period.................... 32 26 7 35 25 22
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL
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PRO FORMA(11) DECEMBER 31,
JUNE 30, JUNE 30, -------------------
1997 1997 1996 1995
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(IN THOUSANDS)
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BALANCE SHEET DATA:
Working capital............................. $ 99,192 $ 56,817 $ 6,195 $ 7,503
Property and equipment, net................. 372,542 308,642 88,476 25,910
Total assets................................ 525,356 419,081 117,819 57,783
Long-term debt net of current maturities.... 176,211 176,211 26,846 11,146
Series A preferred stock -- mandatory
redeemable............................... 305 305 764 900
Shareholders' equity........................ 252,760 146,485 64,646 19,694
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(1) Gives effect to (i) the Offering and application of the net proceeds
therefrom to repay all amounts outstanding under the Bank Credit Facility
(as defined herein) assumed to be borrowed to consummate the Justiss
Acquisition, (ii) the issuance of the Senior Notes (as defined herein) and
application of the net proceeds therefrom to consummate the GWDC
Acquisition and repay all amounts then outstanding under the Bank Credit
Facility and (iii) the consummation of the Flournoy Acquisition and the
GWDC Acquisition as if such acquisitions had occurred as of January 1,
1996 for the pro forma statement of operations data, other financial data
and drilling rig activity data. The Kaiser-Francis Rig Purchase and the
Additional Rig Purchases have no pro forma effect on statement of
operations data because the rigs had no material operations or costs for
the period presented.
(2) Gives effect to (i) the Offering and the application of the net proceeds
therefrom to repay all amounts outstanding under the Bank Credit Facility
assumed to be borrowed to consummate the Justiss Acquisition, (ii) the
issuance of the Senior Notes and application of the net proceeds therefrom
to consummate the GWDC Acquisition and repay all amounts then outstanding
under the Bank Credit Facility and (iii) the consummation of the
Transactions as if they had occurred as of January 1, 1996 for the pro
forma statement of operations data, other financial data and drilling rig
activity data. The Kaiser-Francis Rig Purchase and the Additional Rig
Purchases have no pro forma effect on statement of operations data because
the rigs had no material operations or costs for the period presented.
(3) Represents impairment to certain drilling rigs and equipment caused by
market indications that the carrying amounts were not recoverable. See
note 1 to the Company's consolidated financial statements incorporated by
reference in this Prospectus.
(4) For the six months ended June 30, 1996, represents employment severance
costs for the Company's former President and Chief Executive Officer. For
the year ended December 31, 1996, primarily represents such employment
severance costs and costs to exit the Argentine and Mexican markets. See
note 11 to the Company's consolidated financial statements incorporated by
reference in this Prospectus.
(5) Pro forma interest expense reflects the Senior Notes bearing interest at
an annual rate of 8 7/8%, but does not give effect to interest earned on
proceeds of the Senior Notes offering prior to application thereof.
(6) To account for the discontinued operations of DI Energy, Inc. effective
April 1, 1995.
(7) EBITDA (operating income (loss) before depreciation and amortization,
provision for asset impairment and non-recurring charges) is presented
here to provide additional information about the Company's operations.
EBITDA should not be considered as an alternative to net income, as
determined in accordance with generally accepted accounting principles
("GAAP"), as an indicator of the Company's operating performance or as an
alternative to cash flows (as determined in accordance with GAAP) as a
better measure of liquidity.
(Notes continued on following page)
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(8) Includes $8.1 million of operating losses related to the Company's
operations in Argentina and Mexico which have since been discontinued.
(9) Excludes the Company's workover rigs.
(10) Represents total contract drilling revenues divided by the total number of
rig days worked by the Company's drilling rig fleet operated during the
period.
(11) Pro forma balance sheet data gives effect to the following as if they
occurred on June 30, 1997: (i) the Justiss Acquisition; (ii) the
Kaiser-Francis Rig Purchase; (iii) the Additional Rig Purchases and (iv)
the Offering and application of the net proceeds therefrom to repay all
amounts then outstanding under the Bank Credit Facility.
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RISK FACTORS
Prospective investors should carefully evaluate all of the information
contained and incorporated by reference in this Prospectus and, in particular,
the following before making an investment in the Shares:
DEPENDENCE ON OIL AND GAS INDUSTRY; INDUSTRY CONDITIONS
The Company's current business and operations are substantially dependent
upon conditions in the oil and gas industry and, specifically, the exploration
and production expenditures of oil and gas companies. The demand for contract
land drilling and related services is directly influenced by oil and gas prices,
expectations about future prices, the cost of producing and delivering oil and
gas, government regulations, local and international political and economic
conditions, including the ability of the Organization of Petroleum Exporting
Countries ("OPEC") to set and maintain production levels and prices, the level
of production by non-OPEC countries and the policies of the various governments
regarding exploration and development of their oil and gas reserves. There can
be no assurance that current levels of oil and gas exploration expenditures will
be maintained or that demand for the Company's services will reflect the level
of such expenditures.
HISTORY OF LOSSES FROM OPERATIONS
Although the Company had net income of $6.1 million for the first nine
months of 1997, the Company has a history of losses and has not had a profitable
full year since 1991. The Company incurred net losses of $11.7 million and $13.4
million for the years ended December 31, 1996 and 1995, respectively, and $2.2
million for nine months ended December 31, 1994. The calendar year 1996 loss
includes non-recurring charges of $6.1 million while the 1995 loss includes a
provision for asset impairment of $5.3 million. Profitability in the future will
depend upon many factors, but largely upon utilization rates and day rates for
the Company's drilling rigs. There can be no assurance that current utilization
rates and day rates will not decline or that the Company will not experience
losses.
DEPENDENCE ON KEY PERSONNEL; NEW BUSINESS STRATEGY
Since April 1996, the Company has hired a majority of its current senior
management team. In addition, in August 1996, the shareholders of the Company
elected a Board of Directors comprised of five members, all but one of whom were
elected for the first time. In connection with the Flournoy Acquisition, another
new member was added to the Company's Board of Directors effective January 31,
1997 and two additional new members were added to the Company's Board of
Directors in connection with the GWDC Acquisition in June 1997. The Company
believes that its operations are dependent upon a small group of relatively new
management personnel, the loss of any one of whom could have a material adverse
effect on the Company's financial condition and results of operations. Material
changes in the Company's management and business strategy have only recently
occurred. The Company is therefore unable to predict the effect of these changes
on the Company's financial condition and results of operations. The Company's
ability to meet its substantially increased debt service and principal payments
will depend, in part, on the success of the Company's new business strategy.
There can be no assurance these material changes in the Company's management and
business strategy will result in the improvement of the Company's financial
condition and results of operations.
COMPETITION
The land drilling industry is a highly competitive and cyclical business
characterized by high capital and maintenance costs. Drilling contracts are
usually awarded on a competitive bid basis and, while an operator may consider
factors such as quality of service and type and location of equipment as well as
the ability to provide ancillary services, price and rig availability are the
primary factors in determining which contractor is awarded a job. An
increasingly important competitive factor in the land drilling industry is the
ability to provide drilling equipment adaptable to, and personnel familiar with,
new technologies and drilling techniques as they become available. The land
drilling business is also highly fragmented. As a result, even though the
Company has the largest or second largest rig fleet in its three core domestic
markets, the Company estimates that its market share represents only 15% to 30%
of the overall market share in each of these three core
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markets. Certain of the Company's competitors have greater financial and human
resources than the Company, which may enable them to better withstand periods of
low rig utilization, to compete more effectively on the basis of price and
technology, to build new rigs or acquire existing rigs and to provide rigs more
quickly than the Company in periods of high rig utilization. A number of the
Company's competitors have also announced plans to refurbish and reactivate rigs
from their inventory of stacked rigs. The deployment of these additional rigs to
the Company's core markets could further intensify competition based on pricing
and rig availability. There can be no assurance that the Company will be able to
compete successfully against its competitors in the future or that the level of
competition will allow the Company to obtain adequate margins from its drilling
services.
RISKS ASSOCIATED WITH TURNKEY DRILLING
Contract drilling services performed under turnkey drilling contracts have
historically represented, and are expected to continue to represent, a
significant component of the Company's revenues. Under a turnkey drilling
contract, the Company contracts to drill a well to a contract depth under
specified conditions for a fixed price. In addition, the Company provides
technical expertise and engineering services, as well as most of the equipment
required for the well, and is compensated when the contract terms have been
satisfied. On a turnkey well, the Company often subcontracts for related
services and manages the drilling process. The risks to the Company on a turnkey
drilling contract are substantially greater than on a well drilled on a daywork
basis because the Company assumes most of the risks associated with drilling
operations generally assumed by the operator in a daywork contract, including
risk of blowout, loss of hole, stuck drill string, machinery breakdowns,
abnormal drilling conditions and risks associated with subcontractors' services,
supplies and personnel. Although the Company has obtained insurance coverage in
the past to reduce certain of the risks inherent in turnkey drilling operations,
there can be no assurance that such coverage will be obtained or available in
the future. The occurrence of an uninsured or under-insured loss could have a
material adverse effect on the Company's financial position and results of
operations.
OPERATING HAZARDS AND INSURANCE
The Company's operations are subject to the many hazards inherent in the
land drilling business, including blowouts, cratering, fires, explosions, loss
of hole, lost or stuck drill strings and damage or loss from adverse weather.
These hazards could also cause personal injury and loss of life, substantial
damage to the environment, suspension of drilling operations or serious damage
to or destruction of the property and equipment involved and damage to producing
formations and surrounding areas. The Company maintains insurance coverage
against some but not all operating hazards. However, such insurance may not be
sufficient to protect the Company against liability for all consequences of well
disasters such as personal injury, damage to the Company's rigs, damage to the
property of others or damage to the environment. The insurance maintained by the
Company is subject to substantial deductibles and provides for premium
adjustments based on claims. In view of difficulties that may be encountered in
renewing such insurance at reasonable rates, no assurance can be given that the
Company will be able to maintain the type and amount of coverage that it
considers adequate. The occurrence of a significant event for which the Company
is not fully insured could have a material adverse effect on the Company's
financial position and results of operations. See "Business -- Insurance."
RISKS OF ACQUISITION STRATEGY
As a key component of its new business strategy, the Company has pursued
and intends to continue to pursue acquisitions of complementary assets and
businesses. Certain risks are inherent in an acquisition strategy, such as
increasing leverage and debt service requirements and combining disparate
company cultures and facilities, which could adversely affect the Company's
operating results. The success of any completed acquisition will depend in part
on the Company's ability to integrate effectively the acquired business into the
Company. The process of integrating such acquired businesses may involve
unforeseen difficulties and may require a disproportionate amount of
management's attention and the Company's financial and other resources. Possible
future acquisitions may be for purchase prices significantly higher than those
paid for recent and pending acquisitions. No assurance can be given that the
Company will be able to continue to identify additional suitable acquisition
opportunities, negotiate acceptable terms, obtain financing for acquisi-
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tions on satisfactory terms or successfully acquire identified targets. The
Company's failure to achieve consolidation savings, to incorporate the acquired
businesses and assets into its existing operations successfully or to minimize
any unforeseen operational difficulties could have a material adverse effect on
the Company's financial condition and results of operations. See
"Business -- Recent and Pending Transactions."
SHORTAGES OF EQUIPMENT, SUPPLIES AND PERSONNEL
There is a general shortage of drilling equipment and supplies which the
Company believes may intensify. The costs and delivery times of equipment and
supplies are substantially greater than in prior periods and are currently
escalating. Accordingly, in 1996 the Company formed an alliance with a drill
pipe manufacturer that enables the Company to take delivery through 1998 of
29,300 joints of drill pipe in commonly used diameters at fixed prices plus
possible escalations for increases in the manufacturer's cost of raw materials.
As is common in the industry, the drill pipe supply alliance is not a formal
contractual agreement but represents an informal arrangement in which both
parties undertake to satisfy the supply objectives of the alliance. Due in part
to its alliance arrangement, the Company is not currently experiencing any
material shortages of, or material price increases in, drill pipe. The Company
believes that the alliance may reduce, but not eliminate, its exposure to price
increases and supply shortages of drill pipe. The Company and its supplier under
the drill pipe supply alliance have entered into a formal contractual
arrangement for the purchase and supply of an average quarterly quantity of
3,750 joints of drill pipe (a total of 15,000 joints) during 1999 at prices
based on the supplier's price list as of February 1997 less 5% (the "Drill Pipe
Agreement"). If the Company's source of supply through the alliance and the
Drill Pipe Agreement becomes unavailable or insufficient for any reason
(including by reason of additional rig acquisitions), the Company will likely
experience substantial delays in, and material price increases for, obtaining
substitute or additional supplies for drill pipe. Additionally, the Company may
be subject to shortages and price increases with respect to quantities in excess
of, and varieties of drill pipe not covered by, the alliance and the Drill Pipe
Agreement. Although the Company has formed similar informal supply alliances
with manufacturers and suppliers of other equipment and supplies, and is
attempting to establish arrangements to assure adequate availability of certain
other necessary equipment and supplies on satisfactory terms, there can be no
assurance that it will be able to do so. Shortages by the Company of drilling
equipment or supplies could delay and adversely affect its ability to refurbish
its inventory rigs and obtain contracts for its marketable rigs, which could
have a material adverse effect on its financial condition and results of
operations. See "Business -- Equipment and Supplies."
The demand for, and wage rates of, qualified rig crews have begun to rise
in the land drilling industry in response to the increasing number of active
rigs in service. Although the Company has not encountered material difficulty in
hiring and retaining qualified rig crews, such shortages have in the past
occurred in the industry and are again arising as demand for land drilling
services increases. The Company may experience shortages of qualified personnel
to operate its rigs, which could have a material adverse effect on the Company's
financial condition and results of operations.
GOVERNMENTAL REGULATIONS
Many aspects of the Company's operations are affected by domestic and
foreign political developments and are subject to numerous laws and regulations
that may relate directly or indirectly to the contract drilling industry. For
example, drilling operations are subject to extensive and evolving laws and
regulations governing environmental quality, pollution control, remediation of
contamination and preservation of natural resources. Such laws and regulations
pertain, among other things, to air emissions, waste management, spills and
other discharges, wetlands and endangered species protection and cleanup of
contamination. The Company's operations are often conducted in or near
ecologically sensitive areas, such as wetlands which, are subject to protective
measures. The handling of waste materials, some of which are classified as
hazardous substances is a routine part of the Company's operations.
Consequently, the regulations applicable to the Company's operations include
those with respect to containment, disposal and controlling the discharge of
hazardous oilfield waste and other nonhazardous waste material into the
environment, requiring removal and cleanup under certain circumstances, or
otherwise relating to the protection of the environment. Laws and regulations
protecting the environment have become more stringent in recent years and may in
certain circumstances
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impose strict liability, rendering a party liable for environmental damage
without regard to negligence or fault on the part of such party. Such laws and
regulations may expose the Company to liability for the conduct of, or
conditions caused by, others or for acts of the Company which were in compliance
with all applicable laws at the time such acts were performed. The Company may
also be exposed to environmental or other liabilities originating from
businesses and assets subsequently acquired by the Company. Compliance with such
laws and regulations may require significant capital expenditures. Although such
compliance costs to date have not had a material effect on the Company,
application of these requirements or the adoption of new requirements could have
a material adverse effect on the Company. In addition, the modification or
judicial interpretations of existing laws or regulations or the adoption of new
laws or regulations curtailing exploratory or development drilling for oil and
gas for economic, environmental or other reasons could have a material adverse
effect on the Company's operations by limiting future contract drilling
opportunities.
RISKS OF INTERNATIONAL OPERATIONS
The Company derives revenues from international operations. The Company's
current international operations are conducted only in Venezuela. Risks
associated with operating in international markets include foreign exchange
restrictions and currency fluctuations, foreign taxation, political instability,
foreign and domestic monetary and tax policies, expropriation, nationalization,
nullification, modification or renegotiation of contracts, war and civil
disturbances or other risks that may limit or disrupt markets. Additionally, the
ability of the Company to compete in the international drilling markets may be
adversely affected by foreign government 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. Furthermore, the Company's foreign subsidiaries may
face governmentally imposed restrictions from time to time on their ability to
transfer funds to the Company. No predictions can be made as to what foreign
governmental regulations may be applicable to the Company's operations in the
future. The Company is currently marketing six rigs in Venezuela, two of which
are under contract. In addition, the Company has expended $3.3 million for
capital improvements to these rigs in 1997. There can be no assurance that these
marketing efforts and capital improvements will improve the Company's operating
performance or generate contracts for the Company's rigs in Venezuela. See
"Business -- Foreign Operations -- Venezuela Division" for a discussion of
certain management, operating and financial reporting deficiencies relating to
the Company's operations in Venezuela prior to 1997.
SIGNIFICANT LEVERAGE AND DEBT SERVICE REQUIREMENTS
On June 27, 1997, the Company issued $175.0 million of 8 7/8% Senior Notes
due 2007 in an underwritten public offering (the "Senior Notes"). Additionally,
the Company has a $50.0 million amended and restated senior secured revolving
credit facility with a syndicate of commercial banks (the "Bank Credit
Facility") under which no indebtedness was outstanding at June 30, 1997, due to
the repayment of all amounts then outstanding from the net proceeds of the
Senior Notes offering. At June 30, 1997, the Company had approximately $176.8
million in total long-term indebtedness and $146.5 million in shareholders'
equity. The Company borrowed $28.0 million under the Bank Credit Facility in
October 1997 to close the purchase of the first nine rigs of a total of 12 rigs
to be acquired in the Justiss Acquisition. The Company may borrow up to an
additional $7.4 million to finance the purchase of the remaining three rigs
unless any of the three remaining rigs are purchased after the closing of the
Offering, in which event Offering proceeds will be used to purchase the rigs. It
is anticipated that the entire amount outstanding under the Bank Credit Facility
immediately following the closing of the Offering will be repaid from the net
proceeds of the Offering. The Company expects, however, to continue to borrow
under the Bank Credit Facility and possible future credit arrangements in order
to finance possible future acquisitions and for general corporate purposes.
The level of the Company's indebtedness could have several important
effects on its future operations, including, among others, (i) its ability to
obtain additional financing for working capital, acquisitions, capital
expenditures, general corporate and other purposes may be limited, (ii) a
substantial portion of the Company's cash flow from operations will be dedicated
to the payment of principal and interest on its indebtedness, thereby reducing
funds available for other purposes and (iii) the Company's significant leverage
could make it more vulnerable to economic downturns in the industry. The
Company's ability to meet its debt service obligations and reduce its total
indebtedness will be dependent upon the Company's future performance,
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which will be subject to the success of its business strategy, general economic
conditions, industry cycles, levels of interest rates, and financial, business
and other factors affecting the operations of the Company, many of which are
beyond its control. There can be no assurance that the Company's business will
generate sufficient cash flow from operations to meet debt service requirements
and payments of principal, and if the Company is unable to do so, it may be
required to sell assets, to refinance all or a portion of its indebtedness,
including the Senior Notes, or to obtain additional financing. There can be no
assurance that any such refinancing would be possible or that any additional
financing could be obtained.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The indenture under which the Senior Notes were issued (the "Indenture")
contains covenants restricting or limiting the ability of the Company and
certain of its subsidiaries to, among other things: (i) incur additional
indebtedness; (ii) pay dividends or make other restricted payments; (iii) make
asset dispositions; (iv) permit liens; (v) enter into sale and leaseback
transactions; (vi) enter into certain mergers, acquisitions and consolidations;
(vii) make certain investments; (viii) enter into transactions with related
persons and (ix) engage in unrelated lines of business.
In addition, the loan agreement setting forth the terms of the Bank Credit
Facility (the "Bank Credit Agreement") contains certain other and more
restrictive covenants than those contained in the Indenture. These covenants may
adversely affect the Company's ability to pursue its acquisition and rig
refurbishment strategies and limit its flexibility in responding to changing
market conditions. The Bank Credit Agreement also requires the Company to
maintain specific financial ratios and satisfy certain financial condition
tests. The Company's ability to meet those financial ratios and financial
condition tests can be affected by events beyond its control, and there can be
no assurance that the Company will meet those tests. The Bank Credit Agreement
contains default terms that effectively cross default with the Indenture.
Accordingly, the breach by the Company or its subsidiaries of the covenants
contained in the Indenture likely will result in a default under not only the
Indenture but also the Bank Credit Facility, and possibly certain other then
outstanding debt obligations of the Company or its subsidiaries. If the
indebtedness under the Bank Credit Facility or other indebtedness of the Company
or its subsidiaries is in excess of $10.0 million and is not paid when due or is
accelerated by the holders thereof, an event of default under the Indenture
would occur. In any such case there can be no assurance that the Company's
assets would be sufficient to repay in full all of the Company's and its
subsidiaries' indebtedness, including the Senior Notes.
QUALIFICATION OF THE GWDC ACQUISITION AS A REORGANIZATION FOR U.S. FEDERAL
INCOME TAX PURPOSES
The GWDC Acquisition is intended to qualify as a tax free reorganization
under Sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal Revenue Code of
1986, as amended (the "Code"), with respect to Common Stock received by GWDC
shareholders. A principal condition for such qualification is that the former
shareholders of GWDC will satisfy the continuity of proprietary interest
standard with respect to Common Stock received in the GWDC Acquisition. Thus,
under present Internal Revenue Service ("IRS") guidelines, dispositions of
Common Stock by GWDC shareholders during the five years following the GWDC
Acquisition could cause the IRS to assert that the GWDC Acquisition does not
qualify as a tax free reorganization. The Company has no contractual agreements
with GWDC shareholders preventing the disposition of their shares. If the GWDC
Acquisition fails to qualify as a tax free reorganization for failure to meet
the continuity of interest standard or for any other reason, the receipt of
Common Stock will be taxable to the GWDC shareholders at the time of the GWDC
Acquisition, and GWDC will be deemed to have sold all of its assets in a taxable
exchange triggering a corporate tax liability to GWDC estimated to be in excess
of $30.0 million. The Company's wholly-owned subsidiary, Grey Wolf Drilling
Company (formerly Drillers, Inc.), as the surviving corporation of the GWDC
Acquisition, would be liable for any such corporate tax which, if imposed, would
have a material adverse effect on the financial condition of the Company.
SHARES ELIGIBLE FOR FUTURE SALE
In addition to the shares of Common Stock to be sold by the Selling
Shareholders, approximately 44.4% of the outstanding Common Stock is available
for resale by selling shareholders under an effective shelf
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registration statement (the "Resale Shelf") under the Securities Act of 1933, as
amended (the "Securities Act"). Approximately 16.4% of the outstanding Common
Stock is not covered by the Resale Shelf, but is available for resale under
Rules 144 and 145 under the Securities Act and is covered, to a substantial
extent, by currently unexercised registration rights. An additional 5,557,400
shares are issuable upon exercise of options and 489,600 shares are issuable
upon the exercise of warrants. Future sales of substantial amounts of Common
Stock in the public market, or the perception that such sales may occur, could
adversely affect prevailing market prices of the Common Stock. See "Shares
Available for Future Sale."
SIGNIFICANT CUSTOMER
During the six months ended June 30, 1997, the largest customer for the
Company's contract drilling services accounted for approximately 17% of total
revenues. While the Company does not currently expect any material reduction in
the number of its rigs operating for such customer, and believes that it could
successfully remarket any rigs engaged in drilling operations on behalf of such
customer that might be discontinued, there can be no assurance that such
customer or any of the Company's other principal customers will continue to
employ the Company's services or that the loss of any of such customers or
adverse developments affecting any of such customers would not have a material
adverse effect on the Company's financial condition and results of operations.
FORWARD-LOOKING STATEMENTS
This Prospectus contains, or incorporates by reference, certain statements
that may be deemed "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). All statements, other than statements of
historical facts so included in this Prospectus that address activities, events
or developments that the Company intends, expects, projects, believes or
anticipates will or may occur in the future, including, without limitation:
statements regarding the Company's business strategy, plans and objectives;
statements expressing beliefs and expectations regarding future rig utilization
rates, day rates and other events and conditions that may influence the land rig
drilling market and the Company's performance in the future; statements
concerning future rig refurbishment plans, including the anticipated level of
capital expenditures for, and the nature and scheduling of, rig refurbishment;
statements regarding future redeployment of the Company's rigs to different
markets and trends in the land drilling business and other such matters are
forward-looking statements. Such statements are based on certain assumptions and
analyses made by management of the Company in light of its experience and its
perception of historical trends, current conditions, expected future
developments and other factors it believes to be appropriate. The
forward-looking statements included in this Prospectus are also subject to a
number of material risks and uncertainties. Important factors that could cause
actual results to differ materially from the Company's expectations are
discussed herein under the captions "Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." Prospective
investors are cautioned that such forward-looking statements are not guarantees
of future performance and that actual results, developments and business
decisions may differ from those envisaged by such forward-looking statements.
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USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be $94.4
million, after deducting underwriting discounts, commissions and fees and
expenses of the Offering payable by the Company. The Company intends to use the
net proceeds of the Offering as follows: (i) approximately $28.0 million to
repay indebtedness incurred under the Bank Credit Facility to finance
substantially all of the purchase price for nine rigs acquired at the initial
closing of the Justiss Acquisition in October 1997; (ii) approximately $7.5
million for the aggregate purchase price of the remaining three rigs expected to
be acquired in the Justiss Acquisition or, if any of the rigs are purchased
before the closing of the Offering, to repay additional indebtedness incurred
under the Bank Credit Facility for the purchases; (iii) approximately $43.0
million for planned refurbishment of rigs and (iv) the remainder for general
corporate purposes, which may include future acquisitions. As of September 30,
1997, the Company had no indebtedness outstanding under the Bank Credit
Facility. On October 21, 1997, the Company borrowed $28.0 million under the Bank
Credit Facility to pay substantially all the $28.6 million purchase price for
the first nine rigs acquired in the Justiss Acquisition. The Company may borrow
up to an additional $7.4 million under the Bank Credit Facility for the
aggregate purchase price of the three rigs yet to be purchased from Justiss in
the event that any of the rigs are acquired before the closing of the Offering.
All indebtedness outstanding under the Bank Credit Facility immediately
following the closing of the Offering will be repaid from the net proceeds of
the Offering. The Bank Credit Facility matures on April 30, 2000. Interest under
the Bank Credit Facility accrues at variable rates with respect to each advance
under the facility based on one of two interest rate options available to the
Company. The $28.0 million in principal amount of outstanding indebtedness under
the Bank Credit Facility currently bears interest at 8.125% per annum. The
actual amount to be expended for rig refurbishments will depend on a number of
factors, including market conditions, management's assessment of existing and
anticipated demand and day rates for land drilling rigs in the Company's
domestic and Venezuelan markets and the Company's success in bidding for
drilling contracts. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Credit Arrangements."
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CAPITALIZATION
The historical data presented below sets forth the cash and cash
equivalents, short-term debt and capitalization of the Company as of June 30,
1997. The pro forma data gives effect to acquisitions occurring subsequent to
June 30, 1997 and financing related thereto, and the pro forma as adjusted data
gives effect to the Offering and the application of the net proceeds therefrom
as described under "Use of Proceeds." This table should be read in conjunction
with the consolidated financial statements and the notes thereto incorporated by
reference herein and the pro forma consolidated financial data and the notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
---------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents............................. $ 54,294 $ 25,794 $ 96,669
======== ======== ========
Current maturities of long-term debt.................. $ 582 $ 582 $ 582
Long-term debt, net of current maturities:
Bank Credit Facility(1)............................. -- 35,400 --
8 7/8% Senior Notes due 2007(2)..................... 174,139 174,139 174,139
Other............................................... 2,072 2,072 2,072
-------- -------- --------
Total long-term debt, net of current
maturities(1)............................. 176,211 211,611 176,211
Series A preferred stock -- mandatory redeemable...... 305 305 305
Shareholders' equity:
Common stock, $.10 par value per share.............. 15,154 15,154 16,404
Additional paid-in capital.......................... 175,136 175,136 280,161
Cumulative translation adjustments.................. (404) (404) (404)
Accumulated deficit................................. (43,401) (43,401) (43,401)
-------- -------- --------
Total shareholders' equity.................. 146,485 146,485 252,760
-------- -------- --------
Total capitalization........................ $323,583 $358,983 $429,858
======== ======== ========
</TABLE>
- ------------------------------------
(1) On October 21, 1997, the Company borrowed $28.0 million under the Bank
Credit Facility to pay substantially all of the $28.6 million purchase price
for the first nine rigs acquired in the Justiss Acquisition. The Company may
to borrow up to an additional $7.4 million under the Bank Credit Facility
for the aggregate purchase price of the three rigs yet to be purchased from
Justiss in the event that any of the rigs are acquired before the closing of
the Offering. If any of the remaining rigs are purchased after the closing
of the Offering, net proceeds of the Offering will be used to pay the
purchase price for the rigs. All indebtedness outstanding under the Bank
Credit Facility immediately after the closing of the Offering will be repaid
from the net proceeds of the Offering.
(2) Issued to the public at approximately 99.5% of face value.
18
<PAGE> 20
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1997
(adjusted to reflect the Justiss Acquisition, the Kaiser-Francis Rig Purchase
and the Additional Rig Purchases as if they had occurred on June 30, 1997) was
$146.5 million or approximately $.96 per share of Common Stock. Net tangible
book value per share represents the amount of the Company's total assets, less
its total liabilities and intangible assets, divided by the number of shares of
Common Stock outstanding. After giving effect to the sale by the Company of 12.5
million shares of Common Stock in the Offering (at an assumed offering price of
$9.00 per share) and the application of the estimated net proceeds therefrom to
repay the Bank Credit Facility, the pro forma net tangible book value of the
Company at June 30, 1997 would have been $252.8 million or $1.54 per share. This
represents an immediate increase in the pro forma net tangible book value of
$.58 per share to the Company's existing shareholders and an immediate dilution
in the pro forma net tangible book value of $7.46 per share to new investors
purchasing Shares in the Offering. The following table illustrates the dilution
to new investors purchasing Shares in the Offering:
<TABLE>
<S> <C> <C>
Assumed offering price(1)................................... $9.00
Pro forma net tangible book value per share at June 30,
1997................................................... $.96
Increase per share attributable to sales of Shares by the
Company in the Offering................................ .58
----
Pro forma net tangible book value per share after the
Offering.................................................. $1.54
-----
Dilution in pro forma net tangible book value per share to
new investors............................................. $7.46
=====
</TABLE>
- ------------------------------------
(1) Assumes a per share offering price of $9.00, before deducting underwriting
commissions and discounts and estimated offering expenses payable by the
Company.
19
<PAGE> 21
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is listed and traded on the AMEX under the symbol "GW."
During the periods below prior to September 19, 1997, the Company's corporate
name was DI Industries, Inc. and the Common Stock was listed on the AMEX under
the Symbol "DRL." The following table sets forth the high and low closing prices
of the Common Stock on the AMEX for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1995
First Quarter............................................. $0.9375 $0.6250
Second Quarter............................................ 1.0000 0.6875
Third Quarter............................................. 0.8125 0.6250
Fourth Quarter............................................ 0.8750 0.6250
1996
First Quarter............................................. $0.6875 $0.4375
Second Quarter............................................ 1.8750 0.6875
Third Quarter............................................. 1.8750 1.1250
Fourth Quarter............................................ 3.0000 1.5000
1997
First Quarter............................................. $3.5000 $2.4375
Second Quarter............................................ 4.4375 2.4375
Third Quarter............................................. 7.9375 4.3125
Fourth Quarter (through October 24, 1997)................. 9.8750 8.0000
</TABLE>
On October 1, 1997, there were 745 holders of record of Common Stock. The
closing price of the Common Stock on the AMEX on October 24, 1997 was $8.9375.
The Company has never declared or paid cash dividends on its Common Stock
and does not expect to pay cash dividends in 1997 or for the foreseeable future.
The Company anticipates that all cash flow generated from operations in the
foreseeable future will be retained and used to develop or expand the Company's
business and reduce outstanding indebtedness. Any future payment of cash
dividends will depend upon the Company's results of operations, financial
condition, cash requirements and other factors deemed relevant by the Board of
Directors.
The terms of the Company's Bank Credit Facility prohibit the payment of
dividends without the prior written consent of the banks and the terms of the
Indenture under which the Senior Notes are issued also restrict the Company's
ability to pay dividends under certain conditions.
20
<PAGE> 22
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated balance sheet as of June 30,
1997 includes the historical consolidated balance sheet of the Company as of
June 30, 1997 and gives effect to the following as if they occurred as of June
30, 1997: (i) the Justiss Acquisition; (ii) the Kaiser-Francis Rig Purchase;
(iii) the Additional Rig Purchases and (iv) the application of the estimated net
proceeds from the Offering (after deducting underwriting discounts and
commissions and estimated expenses of the Offering) at an assumed offering price
of $9.00 per Share to repay amounts outstanding under the Bank Credit Facility
that are assumed to be borrowed to fund the cash purchase price of the Justiss
Acquisition. The following unaudited pro forma consolidated statements of
operations for the six months ended June 30, 1997 include the historical results
of the Company for the six months ended June 30, 1997 and give effect to the
Justiss Acquisition, the Flournoy Acquisition, the issuance of the Senior Notes,
the GWDC Acquisition and the Offering as if they occurred on January 1, 1996.
The following unaudited pro forma consolidated statements of operations for the
year ended December 31, 1996 include the historical results of the Company for
the year ended December 31, 1996 and give effect to each of the above
transactions and the sale of the Company's workover division (the "Western
Sale"), the RTO/LRAC Acquisition, the Mesa Acquisition, and the Diamond M
Acquisition (collectively the "Transactions") all which occurred before December
31, 1996, as if they occurred on January 1, 1996. The Kaiser-Francis Rig
Purchase and the Additional Rig Purchases had no material historical operations
or costs during the periods presented and have not been presented. The basis of
presentation and the pro forma adjustments are described in the accompanying
notes.
The following unaudited pro forma consolidated statements of operations are
not necessarily indicative of the actual results of operations that would have
been reported if the events described above had occurred on the dates noted
above nor do they purport to indicate the results of the Company's future
operations. Furthermore, the pro forma results do not give effect to all cost
savings or incremental costs that may occur as a result of the integration and
consolidation of the acquisitions, mergers and sale of assets. In the opinion of
management, all adjustments necessary to present fairly such pro forma financial
statements have been made.
The unaudited pro forma consolidated financial information should be read
in conjunction with "Capitalization," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and the notes thereto incorporated by reference herein.
21
<PAGE> 23
GREY WOLF, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 54,294 $(27,800)(a) $ 96,669
(700)(b)
106,275(c)
(35,400)(d)
Accounts receivable, net of allowance............... 42,813 42,813
Rig inventory and supplies.......................... 428 428
Assets held for sale................................ 542 542
Prepaids and other current assets................... 5,867 5,867
-------- -------- --------
Total current assets........................ 103,944 42,375 146,319
-------- -------- --------
Property and equipment:
Land, buildings and improvements.................... 5,844 5,844
Drilling and well service equipment................. 317,740 27,800(a) 381,640
36,100(b)
Furniture and fixtures.............................. 1,407 1,407
Accumulated depreciation and amortization........... (16,349) (16,349)
-------- -------- --------
Net property and equipment.................. 308,642 63,900 372,542
-------- -------- --------
Other noncurrent assets............................... 6,495 6,495
-------- -------- --------
$419,081 $106,275 $525,356
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt................ $ 582 $ $ 582
Accounts payable -- trade........................... 23,614 23,614
Accrued workers' compensation....................... 3,693 3,693
Payroll and related employee costs.................. 5,285 5,285
Customer advances................................... 935 935
Taxes payable....................................... 1,045 1,045
Other accrued liabilities........................... 11,973 11,973
-------- -------- --------
Total current liabilities................... 47,127 47,127
-------- -------- --------
8 7/8% Senior Notes................................... 174,139 174,139
Long-term debt net of current maturities.............. 2,072 35,400(b) 2,072
(35,400)(d)
Other long-term liabilities and minority interest..... 3,598 3,598
Deferred income taxes................................. 45,355 45,355
Series A preferred stock-mandatory redeemable......... 305 305
Shareholders' equity:
Common stock, $.10 par value per share.............. 15,154 1,250(c) 16,404
Additional paid-in capital.......................... 175,136 105,025(c) 280,161
Cumulative translation adjustments.................. (404) (404)
Accumulated deficit................................. (43,401) (43,401)
-------- -------- --------
Total shareholders' equity.................. 146,485 106,275 252,760
-------- -------- --------
$419,081 $106,275 $525,356
======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial data.
22
<PAGE> 24
GREY WOLF, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------------------
FLOURNOY GWDC JUSTISS PRO FORMA
COMPANY ACQUISITION ACQUISITION ACQUISITION ADJUSTMENTS PRO FORMA
------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Contract drilling......... $76,046 $3,871 $29,001 $10,283 $119,201
Costs and expenses:
Drilling operations....... 62,132 3,098 22,203 7,890 $ 1,312(e) 96,635
Depreciation and
amortization........... 5,180 138 1,321 903 5,834(f) 13,376
General and
administrative......... 3,369 250 2,121 573 (2,065)(e)(g) 4,248
------- ------ ------- ------- ------- --------
Total costs and
expenses........ 70,681 3,486 25,645 9,366 5,081 114,259
------- ------ ------- ------- ------- --------
Operating income (loss)..... 5,365 385 3,356 917 (5,081) 4,942
------- ------ ------- ------- ------- --------
Other income (expense):
Interest income........... 188 -- 20 -- 208
Gain on sale of assets.... 354 -- 576 -- 930
Interest expense.......... (1,535) (7) (65) -- (6,471)(h) (8,078)
Minority interest &
other.................. 338 -- 8 -- 346
------- ------ ------- ------- ------- --------
Other income
(expense),
net............. (655) (7) 539 -- (6,471) (6,594)
------- ------ ------- ------- ------- --------
Income (loss) before income
taxes..................... 4,710 378 3,895 917 (11,552) (1,652)
Income taxes................ 1,356 -- 1,574 -- (2,930)(i) --
------- ------ ------- ------- ------- --------
Net income (loss)........... 3,354 378 2,321 917 (8,622) (1,652)
Series A preferred stock
redemption premium........ (240) -- -- -- (240)
------- ------ ------- ------- ------- --------
Net income (loss) applicable
to common shares.......... $ 3,114 $ 378 $ 2,321 $ 917 $(8,622) $ (1,892)
======= ====== ======= ======= ======= ========
Net income (loss) per common
share..................... $ .02 $ (.01)
======= ========
Weighted average common and
common equivalent shares
outstanding............... 135,756 164,040
======= ========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial data.
23
<PAGE> 25
GREY WOLF, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS HISTORICAL
HISTORICAL ------------------------ -----------------------------------------------------
---------- WESTERN RTO/LRAC MESA DIAMOND M FLOURNOY GWDC
COMPANY SALE ACQUISITION ACQUISITION ACQUISITION ACQUISITION ACQUISITION
---------- -------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Contract drilling............. $ 81,767 $(3,206)(j) $ -- $4,693 $22,675 $42,850 $56,537
Costs and expenses:
Drilling operations........... 80,388 (3,029)(j) 84(k) 3,428 19,405 33,970 44,735
Depreciation and
amortization................ 4,689 (117)(j) -- -- 759 1,655 2,163
General and administrative.... 4,274 (254)(j) -- -- 476 2,994 4,036
Non-recurring charges......... 6,131 -- -- -- -- -- --
-------- ------- ---- ------ ------- ------- -------
Total costs and
expenses.............. 95,482 (3,400) 84 3,428 20,640 38,619 50,934
-------- ------- ---- ------ ------- ------- -------
Operating income (loss)......... (13,715) 194 (84) 1,265 2,035 4,231 5,603
-------- ------- ---- ------ ------- ------- -------
Other income (expense):
Interest income............... 505 -- -- -- -- -- 2
Interest expense.............. (1,220) 4(j) -- -- -- (87) (394)
Gain (loss) on sale of
assets...................... 3,078 (2,775)(j) -- -- -- -- 368
Minority interest and other... 475 -- -- -- -- -- 66
-------- ------- ---- ------ ------- ------- -------
Other income (expense),
net................... 2,838 (2,771) -- -- -- (87) 42
-------- ------- ---- ------ ------- ------- -------
Income (loss) before income
taxes......................... (10,877) (2,577) (84) 1,265 2,035 4,144 5,645
Income taxes.................... 845 -- -- -- -- -- 2,265
-------- ------- ---- ------ ------- ------- -------
Net income (loss)............... (11,722) (2,577) (84) 1,265 2,035 4,144 3,380
Series A preferred stock
redemption premium............ (13) -- -- -- -- -- --
Series B preferred stock
subscription dividend
requirement................... (402) -- 402(l) -- -- -- --
-------- ------- ---- ------ ------- ------- -------
Net income (loss) applicable to
common shares................. $(12,137) $(2,577) $318 $1,265 $ 2,035 $ 4,144 $ 3,380
======== ======= ==== ====== ======= ======= =======
Net income (loss) per common
share......................... $ (.18)
========
Weighted average common and
common equivalent shares
outstanding................... 67,495
========
<CAPTION>
HISTORICAL
-----------
JUSTISS PRO FORMA PRO
ACQUISITION ADJUSTMENTS FORMA
----------- ----------- --------
<S> <C> <C> <C>
Revenues:
Contract drilling............. $13,524 $218,840
Costs and expenses:
Drilling operations........... 11,280 $ 2,624(e) 192,885
Depreciation and
amortization................ 1,598 17,902(f) 28,649
General and administrative.... 700 (4,567)(e)(g) 7,659
Non-recurring charges......... -- 6,131
------- -------- --------
Total costs and
expenses.............. 13,578 15,959 235,324
------- -------- --------
Operating income (loss)......... (54) (15,959) (16,484)
------- -------- --------
Other income (expense):
Interest income............... -- 507
Interest expense.............. -- (14,462)(h) (16,159)
Gain (loss) on sale of
assets...................... -- 671
Minority interest and other... -- 541
------- -------- --------
Other income (expense),
net................... -- (14,462) (14,440)
------- -------- --------
Income (loss) before income
taxes......................... (54) (30,421) (30,924)
Income taxes.................... -- (2,265)(i) 845
------- -------- --------
Net income (loss)............... (54) (28,156) (31,769)
Series A preferred stock
redemption premium............ -- (13)
Series B preferred stock
subscription dividend
requirement................... -- --
------- -------- --------
Net income (loss) applicable to
common shares................. $ (54) $(28,156) $(31,782)
======= ======== ========
Net income (loss) per common
share......................... $ (.19)
========
Weighted average common and
common equivalent shares
outstanding................... 163,969
========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial data.
24
<PAGE> 26
GREY WOLF, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(1) Basis of Presentation
The following sets forth the assumptions used in preparing the Company's
unaudited pro forma consolidated balance sheet as of June 30, 1997 and unaudited
pro forma consolidated statements of operations for the six months ended June
30, 1997 and for the year ended December 31, 1996.
The unaudited pro forma consolidated financial data should be read in
conjunction with (i) the consolidated financial statements of the Company as of
and for the six months ended June 30, 1997 (unaudited) and for the year ended
December 31, 1996 and the notes thereto incorporated by reference herein and
(ii) the financial statements of GWDC as of and for the six months ended April
30, 1997 and for the year ended October 31, 1996 and the notes thereto,
incorporated by reference herein. Pro forma financial data are not necessarily
indicative of future operations of the Company due to numerous factors,
including changes in utilization rates for drilling rigs, changes in the rates
received for drilling services and future equipment sales and acquisitions.
(2) Adjustment to the Historical Financial Statements
The unaudited pro forma consolidated balance sheet data assume the Justiss
Acquisition, the Kaiser-Francis Rig Purchase and the Additional Rig Purchases
occurred on June 30, 1997. The remaining Transactions occurred prior to June 30,
1997, and are included in the Company's historical balance sheet as of June 30,
1997. The unaudited pro forma consolidated statement of operations data for the
six months ended June 30, 1997 assume the Justiss Acquisition, Flournoy
Acquisition and the GWDC Acquisition occurred on January 1, 1996 while all the
other Transactions are included in historical results for the period. The
unaudited pro forma consolidated statement of operations data for the year ended
December 31, 1996 assume all of the Transactions occurred on January 1, 1996.
The Kaiser-Francis Rig Purchase and the Additional Rig Purchases have no
historical operations as the rigs have been stacked and the impact on the pro
forma statement of operations is not material and has not been presented.
The following assumptions and pro forma adjustments have been made with
respect to the historical balance sheet of the Company:
(a) To reflect the Kaiser-Francis Rig Purchase and the July portion of
the Additional Rig Purchases for cash.
(b) To reflect the consummation of the Justiss Acquisition; assumes
that the cash purchase price would be funded by borrowings under the Bank
Credit Facility and available cash.
(c) To reflect the Offering and the related costs thereof at an
assumed offering price of $9.00 per Share.
(d) To reflect the payoff of the Bank Credit Facility with proceeds
from the Offering.
The following assumptions and pro forma adjustments have been made to the
historical statements of operations of the Company:
(e) To reclassify $1.3 million for the six months ended June 30, 1997
and approximately $2.6 million for the year ended December 31, 1996 of
GWDC's general and administrative expenses to operating costs to conform to
the Company's presentation of expenses.
25
<PAGE> 27
(f) To reflect the additional depreciation expense for the six months
ended June 30, 1997 for the assets acquired in the Flournoy Acquisition
($221,000), the GWDC Acquisition (approximately $4.9 million) and the
Justiss Acquisition ($701,000) and the additional depreciation expense for
the year ended December 31, 1996 associated with the assets acquired in the
Mesa Acquisition ($648,000), the Diamond M Acquisition (approximately $2.7
million), the Flournoy Acquisition (approximately $2.7 million), the GWDC
Acquisition (approximately $10.3 million) and the Justiss Acquisition ($1.6
million). Pro forma depreciation was calculated on a straight line basis
over twelve years, which is the estimated useful lives of the assets.
(g) To reflect, for the six months ended June 30, 1997, (i) the
elimination of $67,000 of general and administrative expenses of Flournoy
Drilling Company ("Flournoy") for the cost of the founder and president of
Flournoy and one other employee who did not join the Company, (ii) the
reclassification of $1.3 million of general and administrative expenses of
GWDC to drilling operations costs (see note (e) above) and the elimination
of general and administrative expenses for the cost of the president and
other employees of GWDC who did not join the Company ($114,000) and (iii)
$573,000 for the elimination of general and administrative expenses of
Justiss Drilling Company for the cost of employees and office expenses that
will not be absorbed by the Company. To reflect, for the year ended
December 31, 1996, (i) the elimination of $217,000 of general and
administrative expenses of Diamond M Onshore, Inc. ("Diamond M") allocated
by its parent, less the additional general and administrative expenses
estimated by the Company for an additional employee; (ii) the elimination
of $800,000 of general and administrative expenses of Flournoy for the cost
of the founder and president of Flournoy and one other employee who did not
join the Company; (iii) the reclassification of approximately $2.6 million
of general and administrative expenses of GWDC to drilling operations costs
(see note (e) above) and the elimination of general and administrative
expenses for the cost of the president and other employees of GWDC who did
not join the Company ($226,000) and (iv) $700,000 for the elimination of
general and administrative expenses of Justiss Drilling Company for the
cost of employees and office expenses that will not be absorbed by the
Company.
(h) To reflect, for the year ended December 31, 1996, (i) the
elimination of $87,000 of interest expense on the debt that was repaid by
the Company at the closing of the Flournoy Acquisition, (ii) the additional
interest expense for the Senior Notes and (iii) the reduction of interest
expense associated with the retirement of the Company's outstanding
long-term debt under the Bank Credit Facility.
(i) To eliminate the historical income tax expense of the Company and
the income tax expense of GWDC in order to conform to the Company's pro
forma income tax position.
(j) To reflect the sale of the operational assets of the Company's
Western Division on the revenues and expenses of the Company.
(k) To adjust operating expense for the estimated cost to store the
rigs acquired in the RTO/LRAC Acquisition.
(l) To provide for the liquidation of the Series B preferred stock
subscription and related dividend requirement in connection with the
RTO/LRAC Acquisition. See notes 5 and 7 of the Company's consolidated
financial statements incorporated by reference herein.
26
<PAGE> 28
SELECTED FINANCIAL DATA
The following selected financial data, except for the Other Financial Data
and the Drilling Rig Activity Data, for the years ended and as of December 31,
1996 and 1995 and for the nine-months ended December 31, 1994 have been derived
from the audited consolidated financial statements of the Company incorporated
by reference herein. This data should be read in conjunction with such
consolidated financial statements and the notes thereto. The selected financial
data for the six-month periods ended June 30, 1997 and 1996, as of June 30, 1997
and for the twelve-month period ended December 31, 1994 have been derived from
the unaudited consolidated financial statements of the Company which have been
incorporated by reference in this Prospectus, and which include all adjustments,
consisting of normal recurring adjustments, that the Company considers necessary
for a fair presentation of its financial position and results of operations for
these periods. Operating results for the six-month period ended June 30, 1997
are not necessarily indicative of the results that may be expected for the
entire year. The selected financial data as of December 31, 1994, and for the
years ended and as of June 30, 1994 and 1993 have been derived from audited
consolidated financial statements of the Company which are not incorporated by
reference herein. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED NINE MONTHS YEAR ENDED
JUNE 30, DECEMBER 31, ENDED MARCH 31,
------------------ -------------------------------- DECEMBER 31, -----------------
1997 1996 1996 1995 1994 1994(1) 1994(1) 1993
-------- ------- -------- -------- -------- ------------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND DRILLING RIG ACTIVITY DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................. $ 76,046 $39,285 $ 81,767 $ 94,709 $ 65,393 $ 50,987 $67,855 $62,242
Drilling operations costs............. 62,132 38,318 80,388 93,825 62,929 48,988 62,574 57,583
Depreciation and amortization......... 5,180 2,221 4,689 4,832 3,247 2,377 3,523 3,448
General and administrative............ 3,369 1,795 4,274 3,555 3,007 2,074 2,910 4,498
Provision for asset impairment(2)..... -- -- -- 5,290 -- -- -- --
Non-recurring charges(3).............. -- 602 6,131 -- -- -- -- --
-------- ------- -------- -------- -------- -------- ------- -------
Operating income (loss)............... 5,365 (3,651) (13,715)(6) (12,793) (3,790) (2,452) (1,152) (3,287)
Interest expense...................... 1,535 466 1,220 1,472 404 332 257 --
Other income (expense), net........... 880 3,150 4,058 1,590 637 524 25 (100)
-------- ------- -------- -------- -------- -------- ------- -------
Income (loss) from continuing
operations.......................... 4,710 (967) (10,877) (12,675) (3,557) (2,260) (1,384) (3,387)
Income (loss) from discontinued
operations(4)....................... -- -- -- (772) 55 51 (1,274) 60
-------- ------- -------- -------- -------- -------- ------- -------
Income (loss) before income taxes..... 4,710 (967) (10,877) (13,447) (3,502) (2,209) (2,658) (3,327)
Income taxes.......................... 1,356 -- 845 -- -- -- -- 168
-------- ------- -------- -------- -------- -------- ------- -------
Net income (loss)..................... 3,354 (967) (11,722) (13,447) (3,502) (2,209) (2,658) (3,495)
Series A preferred stock redemption
premium............................. 240 -- 13 -- -- -- -- --
Series B preferred stock subscription
dividend............................ -- 300 402 -- -- -- -- --
-------- ------- -------- -------- -------- -------- ------- -------
Net income (loss) applicable to common
shares.............................. $ 3,114 $(1,267) $(12,137) $(13,447) $ (3,502) $ (2,209) $(2,658) $(3,495)
======== ======= ======== ======== ======== ======== ======= =======
Income (loss) per share -- continuing
operations.......................... $ .02 $ (.03) $ (.18) $ (.33) $ (.09) $ (.06) $ (.04) $ (.09)
Loss per share -- discontinued
operations(4)....................... -- -- -- (.02) -- -- (.03) --
-------- ------- -------- -------- -------- -------- ------- -------
Net income (loss) per common share.... $ .02 $ (.03) $ (.18) $ (.35) $ (.09) $ (.06) $ (.07) $ (.09)
======== ======= ======== ======== ======== ======== ======= =======
Weighted average common and common
equivalent shares outstanding....... 135,756 38,682 67,495 38,669 38,607 38,641 38,416 38,416
OTHER FINANCIAL DATA (UNAUDITED):
EBITDA(5)............................. $ 10,545 $ (828) $ (2,895)(6) $ (2,671) $ (543) $ (75) $ 2,371 $ 161
DRILLING RIG ACTIVITY DATA
(UNAUDITED)(7):
Average utilization rate of drilling
rigs available for service.......... 74% 63% 63% 66% 51% 58% 51% 48%
Average revenues per day(8)........... $ 8,473 $ 7,459 $ 7,610 $ 7,739 $ 8,520 $ 9,609 $ 9,102 $ 7,746
Drilling rigs available for
service -- end of period............ 88 49 52 58 57 57 57 46
Inventoried drilling rigs -- end of
period.............................. 26 7 25 22 13 13 13 14
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
JUNE 30, ------------------------------ ------------------
1997 1996 1995 1994(1) 1994(1) 1993
------------- -------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(9):
Working capital................................ $ 56,817 $ 6,195 $ 7,503 $12,462 $ 9,053 $ 7,507
Property and equipment, net.................... 308,642 88,476 25,910 30,786 19,797 21,199
Total assets................................... 419,081 117,819 57,783 62,860 46,524 48,074
Long-term debt net of current maturities....... 176,211 26,846 11,146 10,224 198 223
Series A preferred stock -- mandatory
redeemable................................... 305 764 900 1,900 -- --
Shareholders' equity........................... 146,485 64,646 19,694 29,141 31,150 33,808
</TABLE>
(See notes on following page)
27
<PAGE> 29
- ------------------------------------
(1) During 1994, the Company changed its fiscal year end from March 31 to
December 31.
(2) Represents impairment to certain drilling rigs and equipment caused by
market indications that the carrying amounts were not recoverable. See note
1 to the Company's consolidated financial statements incorporated by
reference herein.
(3) For the six months ended June 30, 1996, represents employment severance
costs for the Company's former President and Chief Executive Officer. For
the year ended December 31, 1996, primarily represents such employment
severance costs and costs to exit the Argentine and Mexican markets. See
note 11 to the Company's consolidated financial statements incorporated by
reference herein.
(4) To account for the discontinued operations of DI Energy, Inc. effective
April 1, 1995.
(5) EBITDA (operating income (loss) before depreciation and amortization,
provision for asset impairment and non-recurring charges) is presented here
to provide additional information about the Company's operations. EBITDA
should not be considered as an alternative to net income, as determined in
accordance with GAAP, as an indicator of the Company's operating
performance or as an alternative to cash flows (as determined in accordance
with GAAP) as a better measure of liquidity.
(6) Includes $8.1 million of operating losses related to the Company's
operations in Argentina and Mexico which have since been discontinued.
(7) Excludes the Company's workover rigs.
(8) Represents total contract drilling revenues divided by the total number of
rig days worked by the Company's drilling rig fleet operated during the
period.
(9) Except for shareholders' equity, these items have been restated to account
for the discontinued operations of DI Energy, Inc. effective April 1, 1995.
28
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto of the Company incorporated
by reference herein.
GENERAL
The Company's operations have been and will continue to be significantly
affected by the new management team installed in 1996, the implementation of a
new business strategy in April 1996 and the major transactions that have been
consummated by the Company since August 1996. The Company believes it has the
largest fleet of drilling rigs in its Gulf Coast and South Texas markets and the
second largest fleet in its Ark-La-Tex market. Since the implementation of its
new business strategy, the Company has acquired 90 drilling rigs and now has the
largest or second largest active rig fleet in each of its three core domestic
markets, the Ark-La-Tex, South Texas and Gulf Coast markets. The Company's rig
fleet now consists of 133 rigs (including the Justiss Acquisition), of which 110
are currently marketed by the Company. Refurbishment and reactivation of the
Company's inventory rigs is also a key element of the Company's business
strategy. Since the beginning of the fourth quarter of 1996, the Company has
refurbished 17 rigs at a cost of $26.3 million. Of the Company's current
inventory of 23 rigs, eight rigs are undergoing refurbishment and the Company
presently intends to begin refurbishment of an additional rig during the
remainder of 1997 and 14 rigs in 1998. The Company estimates total costs for
pending and planned refurbishments will total $38.0 million during 1997, of
which $21.0 million had been expended at August 31, 1997. The Company estimates
that $25.4 million will be expended during 1998 for rig refurbishment. By
increasing the size of its rig fleet through acquisitions and refurbishments,
the Company has increased its market share in its three core domestic markets
during a period of rapidly rising demand and day rates for land drilling rigs in
those key markets. The combined effect of the Company's larger fleet of
marketable rigs, higher rig utilization rates and increasing day rates has
significantly improved the Company's financial performance since the third
quarter of 1996 despite increased drilling operations costs, including wages and
benefits, and debt service over the same period. Although the Company has not
had a profitable full year since 1991, during the first nine months of 1997 the
Company had net income of $6.1 million compared to a $159,000 loss during the
first nine months of 1996.
FINANCIAL CONDITION AND LIQUIDITY
During the first six months of 1997, the Company funded its activities
through a combination of cash generated from operations, borrowings under the
Bank Credit Facility, the issuance of Common Stock and the issuance of $175.0
million aggregate principal amount of Senior Notes. On April 30, 1997, the Bank
Credit Facility was amended and restated to increase the line of credit to $50.0
million and reduce the interest rate by approximately 0.5% per annum.
The following table summarizes the Company's financial position as of June
30, 1997 and as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1996 1995
-------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Working capital..................................... $ 56,817 $ 6,195 $ 7,503
Property and equipment, net......................... 308,642 88,476 25,910
Other noncurrent assets............................. 6,495 1,132 277
-------- ------- -------
Total..................................... $371,954 $95,803 $33,690
======== ======= =======
Long-term debt net of current maturities............ $176,211 $26,846 $11,146
Other long-term liabilities......................... 49,258 4,311 2,850
Shareholders' equity................................ 146,485 64,646 19,694
-------- ------- -------
Total..................................... $371,954 $95,803 $33,690
======== ======= =======
</TABLE>
29
<PAGE> 31
The significant changes in the Company's financial position from December
31, 1996 to June 30, 1997, are primarily due to the acquisition of Flournoy, the
merger with GWDC and the closing of the $175.0 million Senior Notes offering.
See "-- Certain Credit Arrangements -- Senior Notes" and "Business -- Recent and
Pending Transactions."
The Company's cash and cash equivalents increased by $4.3 million for the
year ended December 31, 1996 from $1.9 million as of December 31, 1995 to $6.2
million as of December 31, 1996. This increase was primarily the result of $39.4
million provided by financing activities partially offset by $1.4 million used
by operating activities and $33.5 million used in investing activities.
Operating Activities
During the year ended December 31, 1996, the Company used a net of $1.4
million of cash to fund operating activities. This was the result of $7.3
million of cash used in operations, partially offset by changes in working
capital items that provided $5.9 million of cash. Operating cash losses of $8.4
million were generated from the Company's Argentine and Mexican divisions. Cash
provided from working capital items primarily included (i) collections of
accounts receivable of $3.3 million, (ii) monetization of inventory and assets
held for sale totaling $3.0 million and (iii) the receipt of customer advances
at the end of 1996 of $2.4 million, which were partially offset by payments of
$1.9 million for workers' compensation and $1.2 million of other current
liabilities.
During the first six months of 1997, the Company used a net of $0.9 million
of cash to fund operating activities. While the Company generated cash from
operations of $8.9 million, working capital requirements increased by $9.8
million due to recent acquisitions. In certain of these acquisitions, the
Company purchased drilling rigs and certain other related equipment which
required working capital to operate.
Investing Activities
During 1996, the Company invested $33.5 million in fixed assets net of
asset sales. The major components of these additions were the Diamond M
Acquisition for $26.0 million, $2.4 million for rig refurbishments and $5.1
million for other asset additions. Non-cash transactions accounted for an
additional $32.8 million in property and equipment additions. The Company
completed the RTO/LRAC Acquisition in exchange for approximately 39.4 million
shares of Common Stock valued at $25.0 million. In addition, the Company
completed the Mesa Acquisition in exchange for approximately 5.5 million shares
of Common Stock valued at $7.5 million.
During the six months ended June 30, 1997, the Company invested $98.6
million in fixed assets, net of asset sales. The cash portion of the price for
the GWDC Acquisition, including transaction costs, accounted for $62.0 million
and the acquisition of six additional stacked rigs in May and June accounted for
$15.8 million. Additionally, $9.4 million was spent on rig refurbishments and
$5.5 million was spent to acquire drill pipe and other drilling related
equipment. In addition, the acquisition of Flournoy and the merger with GWDC
resulted in $40.5 million and $85.8 million, respectively, in non-cash additions
to property and equipment.
Financing Activities
During 1996, the Company raised $39.4 million from financing activities.
The Company borrowed $31.5 million during the year, including $24.0 million
borrowed under the Bank Credit Facility for the Diamond M Acquisition. The
Company also completed private placements of a total of approximately 41.2
million shares of Common Stock for $29.1 million in cash. The Company made
repayments of debt totaling $16.5 million during the year.
During the first six months of 1997, the Company obtained a net of $147.7
million from financing activities, consisting principally of net proceeds of
$169.1 million from the issuance of Senior Notes and borrowings and repayments
under the Bank Credit Facility. These borrowings were used to fund the cash
30
<PAGE> 32
portion of the GWDC Acquisition, working capital requirements and capital
expenditures discussed above. The Company had cash and cash equivalents of $54.3
million at June 30, 1997.
Future Activities
The Company anticipates substantial funding requirements in connection with
its rig refurbishment program during the fourth quarter of 1997 and in 1998. The
Company currently has eight rigs under refurbishment and will begin
refurbishment of an additional rig during the remainder of 1997 and 14 rigs in
1998. The Company estimates total costs for pending and planned refurbishment
will total $38.0 million during 1997, of which $21.0 million had been expended
at August 31, 1997. The Company estimates that $25.4 million will be expended
during 1998 for rig refurbishments. These estimates are based on deployment of
all rigs undergoing or planned for refurbishment to the Company's three core
domestic markets at an estimated average refurbishment cost of $1.7 million per
rig, including the cost of a new drill string. If the Company instead chooses to
refurbish rigs for service in the Venezuelan or other international markets, it
is estimated that the average refurbishment cost of such rigs will be $12.0
million per rig, including the cost of a new drill string. Overall estimated
capital expenditures for rig refurbishments would be correspondingly increased
by the incremental refurbishment cost of rigs destined for international
markets.
The Company believes that the balance of the net proceeds from the Offering
remaining after the repayment of the Bank Credit Facility, the cash flow from
operations, and to the extent required, further borrowings under the Bank Credit
Facility, will be sufficient to fund the Company's refurbishment program and
meet its other anticipated capital expenditures for 1997.
The Company continues to actively review possible acquisition
opportunities. While the Company has no agreements to acquire additional
businesses or equipment, other than the Justiss Acquisition, suitable
opportunities may arise in the future. The timing or success of any acquisition
effort and the size of the associated potential capital commitments cannot be
predicted at this time. The ability of the Company to consummate any such
transaction will be dependent in large part on its ability to fund such
transaction. There can be no assurance that adequate funding will be available
on terms satisfactory to the Company.
RESULTS OF OPERATIONS
Comparison of Six Months Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
--------------------------------- ---------------------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
OPERATIONS OPERATIONS TOTAL OPERATIONS OPERATIONS TOTAL
---------- ---------- ------- ---------- ---------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER DAY AVERAGES)
<S> <C> <C> <C> <C> <C> <C>
Rig days worked....................... 8,405 570 8,975 2,927 2,340 5,267
Drilling revenues..................... $71,564 $4,482 $76,046 $22,312 $16,973 $39,285
Operating expenses(1)................. 57,690 4,442 62,132 21,869 16,449 38,318
------- ------ ------- ------- ------- -------
Gross profit (loss)................... $13,874 $ 40 $13,914 $ 443 $ 524 $ 967
======= ====== ======= ======= ======= =======
Average per rig day worked:
Drilling revenue.................... $ 8,514 $7,863 $ 8,473 $ 7,623 $ 7,253 $ 7,459
Operating expenses(1)............... 6,864 7,793 6,923 7,471 7,029 7,275
------- ------ ------- ------- ------- -------
Gross profit (loss)................. $ 1,650 $ 70 $ 1,550 $ 152 $ 224 $ 184
======= ====== ======= ======= ======= =======
</TABLE>
- ------------------------------------
(1) Operating expenses exclude depreciation and amortization and general and
administrative expenses.
Revenues increased approximately $36.7 million, or 94%, to $76.0 million
for the six months ended June 30, 1997, from $39.3 million for the six months
ended June 30, 1996. The increase was due to an increase in revenue from
domestic operations of $49.2 million partially offset by a decrease in revenue
from foreign operations of $12.5 million. Revenues from domestic operations
increased due to an increase in rig days
31
<PAGE> 33
worked of 5,478, and an increase in the average revenue per day of $891. The
increase in domestic days worked was a result of an increase in the number of
rigs owned and available for service to 64 at June 30, 1997, as compared to 31
at June 30, 1996. The increase in rigs available for service was principally the
result of the acquisitions completed in 1996 and the first quarter of 1997 in
which the Company added 26 working rigs. In addition, eight rigs refurbished
from inventory were placed in service during the fourth quarter of 1996 and the
first half of 1997. Rig days worked in domestic operations consisted of 4,902
days worked in the Company's South Texas Division, 2,545 days worked in the
Company's Ark-La-Tex Division and 958 days worked in all other domestic
divisions of the Company. The Company's Gulf Coast Division was formed upon
closing of the GWDC Acquisition on June 27, 1997 and, accordingly, no
significant rig days were worked during either period. Revenue from foreign
operations decreased due to a decrease in rig days worked of 1,770 partially
offset by an increase in average revenue per day of $610. The decrease in days
worked was primarily a result of the Company withdrawing from Mexico and
Argentina during the fourth quarter of 1996, the decrease in activity in
Venezuela due to the expiration of four labor contracts and the relocation of
the division office within Venezuela. Increases in domestic and foreign average
revenue per day are a result of the overall increase in demand for land drilling
rigs.
Drilling operating expenses increased by approximately $23.8 million, or
62%, to $62.1 million for the six months ended June 30, 1997, as compared to
$38.3 million for the six months ended June 30, 1996. The increase was due to a
$35.8 million increase in drilling operating expenses from domestic operations
partially offset by a decrease of $12.0 million in drilling operating expenses
from foreign operations. The increase in domestic drilling operating expenses
was a direct result of the number of rigs owned and available for service and
the corresponding 5,478 increase in the days worked. In addition, the 1997
period included a non-recurring charge of $0.9 million to transport three rigs
from Argentina to the United States. The decrease in drilling operating expenses
from foreign operations was due to fewer rigs operating as a result of the
Company's withdrawal from Mexico and Argentina and decreased activity in
Venezuela as discussed above.
Depreciation and amortization expenses increased by $3.0 million, or 133%,
to $5.2 million for the six months ended June 30, 1997, as compared to $2.2
million for the six months ended June 30, 1996. The increase was primarily due
to additional depreciation associated with the acquisition in late 1996 of 13
additional operating rigs, the acquisition of 13 operating rigs in January 1997
and eight rigs refurbished from inventory and placed in service during the
fourth quarter of 1996 and the first half of 1997.
General and administrative expenses increased by $1.6 million, or 88%, to
$3.4 million for the six months ended June 30, 1997, from $1.8 million for the
same period of 1996 due primarily to (i) higher payroll costs associated with
new management and increased corporate staff, (ii) higher professional fees due
to the Company's increased activity and (iii) higher insurance expense due to an
increase in the number of rigs as well as an increase in employee related
insurance coverage.
During the first half of 1996, the Company incurred $602,000 in
non-recurring charges relating to the contractual severance to be paid over a
two-year period to the Company's former president and chief executive officer.
Interest expense increased by $1.1 million, or 229%, to $1.5 million for
the six months ended June 30, 1997, as compared to $466,000 for the six months
ended June 30, 1996. The increase was due to a $24.7 million increase in the
average outstanding debt balance to $37.1 million for the six months ended June
30, 1997 from $12.4 million for the six months ended June 30, 1996.
Other income net decreased by $2.3 million to $880,000 for the six months
ended June 30, 1997, as compared to $3.2 million for the six months ended June
30, 1996. The decrease was primarily due to the gain recognized on the sale of
the Company's well servicing division during the second quarter of 1996.
For the six months ended June 30, 1997, income tax expense was $1.4 million
as a result of the Company's profitable operations and the resulting taxable
income. The Company had no taxable income for the first half of 1996.
The Company had net income of $3.4 million for the six months ended June
30, 1997 as compared to a net loss of $1.0 million for the six months ended June
30, 1996.
32
<PAGE> 34
Comparison of Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------------- ----------------------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
OPERATIONS OPERATIONS TOTAL OPERATIONS OPERATIONS TOTAL
---------- ---------- -------- ---------- ---------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER DAY AVERAGES)
<S> <C> <C> <C> <C> <C> <C>
Rig days worked..................... 7,050 3,694 10,744 6,289 5,405 11,694
Drilling revenues................... $ 52,495 $ 29,272 $ 81,767 $ 44,797 $ 45,698 $ 90,495
Export sales........................ -- -- -- -- 4,214 4,214
Operating expenses(1)............... 49,431 30,957 80,388 40,867 48,277 89,144
Export sales expenses............... -- -- -- -- 4,681 4,681
-------- -------- -------- -------- -------- --------
Gross profit (loss)................. $ 3,064 $ (1,685) $ 1,379 $ 3,930 $ (3,046) $ 884
======== ======== ======== ======== ======== ========
Average per rig day worked:
Drilling revenue.................. $ 7,446 $ 7,924 $ 7,610 $ 7,123 $ 8,455 $ 7,739
Operating expenses(1)............. 7,011 8,380 7,482 6,498 8,932 7,623
-------- -------- -------- -------- -------- --------
Gross profit (loss)............... $ 435 $ (456) $ 128 $ 625 $ (477) $ 116
======== ======== ======== ======== ======== ========
</TABLE>
- ------------------------------------
(1) Operating expenses exclude depreciation and amortization and general and
administrative expenses.
Revenues decreased approximately $12.9 million, or 13.6%, to $81.8 million
for the year ended December 31, 1996 from $94.7 million for the year ended
December 31, 1995. This decrease was primarily due to a decrease in revenues
from foreign operations of $20.6 million where rig utilization decreased by
1,711 days. Revenues generated in the Mexican and Argentine markets decreased by
$17.3 million to $11.3 million for the year ended December 31, 1996, compared to
$28.6 million for the year ended December 31, 1995, due to a decline in average
revenues per day, lower rig utilization and the Company's ultimate withdrawal
from these markets. Revenues generated in Venezuela increased slightly to $18.0
million for the year ended December 31, 1996 from $17.1 million for the year
ended December 31, 1995. The increase was due to increases in day rates received
because the number of rig days worked decreased by 360 days caused by the
non-renewal of several drilling contracts for which the Company was unable to
obtain replacement contracts from the same or other customers. The remainder of
the decrease in revenues from foreign operations was due to $4.2 million in
non-recurring export sales during the year ended December 31, 1995. The decrease
in revenues from foreign operations was partially offset by a $7.7 million
increase in revenues from domestic operations to $52.5 million for the year
ended December 31, 1996, as compared to $44.8 million for the year ended
December 31, 1995. Domestic rig utilization improved by 7.0% in 1996, and
average revenues per day increased by 5.0%, due to an overall improvement in the
domestic contract drilling market.
Drilling operating expenses decreased by $13.4 million, or 14.3%, to $80.4
million for the year ended December 31, 1996, from $93.8 million for the year
ended December 31, 1995. The decrease was due to a $22.0 million decrease in
foreign drilling expenses, which was partially offset by a $8.6 million increase
in drilling expenses from domestic operations. Drilling expenses associated with
the Company's Mexican and Argentine operations decreased by $16.0 million to
$15.3 million for the year ended December 31, 1996 from $31.3 million for the
year ended December 31, 1995. This decrease was due to the lower utilization in,
and the Company's ultimate withdrawal from, those markets. Drilling operating
expenses included $1.0 million in mobilization costs to transport the Company's
drilling rigs from Mexico to the United States. Drilling expenses in Venezuela
decreased by $1.3 million to $15.7 million for the year ended December 31, 1996
from $17.0 million for the year ended December 31, 1995 primarily because of
lower rig utilization in 1996. Also contributing to the decrease in operating
expenses from foreign operations was $4.7 million in costs related to
non-recurring export sales for the year ended December 31, 1995. Drilling
expenses from domestic operations increased $8.6 million to $49.4 million for
the year ended December 31, 1996, from $40.9 million for the year ended December
31, 1995. This increase was primarily due to increased utilization and, to a
lesser extent, increased direct labor costs.
33
<PAGE> 35
Depreciation and amortization expenses decreased by $143,000, or 3%, to
$4.7 million for the year ended December 31, 1996 from $4.8 million for the year
ended December 31, 1995. The decrease in depreciation expense was primarily
attributable to the decrease in the depreciable asset base resulting from the
$5.3 million impairment provision recorded in the fourth quarter of 1995 as a
result of the Company's adoption of SFAS 121, as described below. While the
RTO/LRAC Acquisition, which occurred in August 1996, increased the Company's
asset base, no depreciation expense will be recorded until the acquired rigs are
placed in service. Only one of these rigs was placed in service in late 1996.
During the year ended December 31, 1996, the Company recorded non-recurring
charges of $6.1 million which included $1.1 million in employment severance
costs, $4.6 million in costs to exit the Argentine and Mexican markets and
approximately $400,000 of other non-recurring charges. The employment severance
costs includes $602,000 in contractual severance pay to be paid over a two-year
period to the Company's former President and Chief Executive Officer and the
transfer to him of certain drilling equipment with a net book value of $535,000
in settlement of a dispute over options to purchase Common Stock. As a result of
the Company's desire to redeploy assets to more productive markets, the Company
decided in late 1996 to withdraw from both the Argentine and Mexican markets and
has recorded estimated exit costs of $1.3 million for Mexico, which primarily
consist of the forfeiture of a performance bond and other costs to be incurred
to close the office, and exit costs of $800,000 for Argentina, which primarily
consist of costs expected to be incurred during the period necessary to exit the
market and close the office. Additionally, in 1996, the Company agreed to sell
three of the six drilling rigs and certain other assets located in Argentina for
$1.5 million. As a result, the Company recorded a write down of rig equipment
and other assets of $2.5 million. The remaining Argentine drilling rigs have
been returned to the United States where they are expected to be refurbished and
returned to service. Mobilization costs will be expensed as incurred in 1997.
General and administrative expenses increased by $719,000 to $4.3 million
for the year ended December 31, 1996, from $3.6 million for the year ended
December 31, 1995, due to increased payroll cost associated with the new
management members and the increased corporate staff, legal fees associated with
unsuccessful litigation to recover amounts the Company believed it was owed and
other professional fees.
Interest expense decreased by $252,000 for the year ended December 31,
1996, primarily as a result of lower average outstanding debt levels during 1996
in the United States and lower outstanding levels on an overdraft facility in
Argentina. The consolidated average debt balances during 1996 and 1995 were
$13.7 million and $15.0 million, respectively. Interest rates during these
periods remained relatively unchanged.
Other income, net increased $2.5 million to $4.1 million in 1996 from $1.6
million in 1995 primarily as a result of a $2.8 million gain recorded in
connection with the sale of its Western Division in the second quarter of 1996.
The Company's income tax expense of $845,000 in 1996 was solely
attributable to Venezuelan income taxes.
The Company had a net loss of $11.7 million in 1996 as compared to a net
loss of $13.4 million in 1995. The Company's net loss in 1995 includes net
losses from discontinued operations of $772,000 incurred in connection with the
sale of oil and gas properties, for which there was no similar transaction in
1996.
34
<PAGE> 36
Comparison of Year Ended December 31, 1995 to Twelve Months Ended December 31,
1994
<TABLE>
<CAPTION>
YEAR ENDED TWELVE-MONTH PERIOD ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994(1)
----------------------------------- -----------------------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
OPERATIONS OPERATIONS TOTAL OPERATIONS OPERATIONS TOTAL
---------- ---------- ------- ---------- ---------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER DAY AVERAGES)
<S> <C> <C> <C> <C> <C> <C>
Rig days worked............ 6,289 5,405 11,694 6,246 1,209 7,455
Drilling revenues.......... $44,797 $45,698 $90,495 $49,530 $13,983 $63,513
Export sales............... -- 4,214 4,214 -- 1,880 1,880
Operating expenses(2)...... 40,867 48,277 89,144 47,722 13,204 60,926
Export sales expenses...... -- 4,681 4,681 -- 2,147 2,147
------- ------- ------- ------- ------- -------
Gross profit (loss)........ $ 3,930 $(3,046) $ 884 $ 1,808 $ 512 $ 2,320
======= ======= ======= ======= ======= =======
Average per rig day worked:
Drilling revenue......... $ 7,123 $ 8,455 $ 7,739 $ 7,930 $11,566 $ 8,520
Operating expenses(2).... 6,498 8,932 7,623 7,640 10,921 8,173
------- ------- ------- ------- ------- -------
Gross profit (loss)...... $ 625 $ (477) $ 116 $ 290 $ 645 $ 347
======= ======= ======= ======= ======= =======
</TABLE>
- ------------------------------------
(1) Effective December 31, 1994, the Company changed its fiscal year end from
March 31 to December 31.
(2) Operating expenses exclude depreciation and amortization and general and
administrative expenses.
Revenues increased $29.3 million, or 44.8%, to $94.7 million for the fiscal
year ended December 31, 1995 from $65.4 million for the twelve months ended
December 31, 1994. This increase was primarily due to the expansion of the
Company's operations in Argentina, Mexico and Venezuela. Revenues from the
Company's foreign operations increased by $34.0 million to $49.9 million for the
year ended December 31, 1995 from $15.9 million for the twelve months ended
December 31, 1994. This increase was due to an increase in rig days worked from
1,209 during 1994 to 5,405 during 1995, partially offset by a decrease in
average revenues per day from $11,566 to $8,455. The increase in rig days worked
was primarily due to the inclusion of Venezuelan operations for a full twelve
months in 1995 as compared to only four months in 1994 as the Venezuelan
operating company was acquired effective September 1, 1994. The addition of four
rigs to the Argentine market and three rigs to the Mexican market also
contributed to the increase in rig days worked. International export revenues
for the year ended December 31, 1995 were $4.2 million and resulted from
materials sold for export to Costa Rica. The increase in revenue from foreign
operations was partially offset by a decrease in revenue from domestic
operations of $4.7 million to $44.8 million for the year ended December 31, 1995
from $49.5 million for the twelve months ended December 31, 1994. This decrease
was due to an $807 decrease in average revenues per day from $7,930 during 1994
to $7,123 during 1995.
Drilling operating expenses and export sales expenses increased $30.7
million, or 48.8%, to $93.8 million for the year ended December 31, 1995, from
$63.1 million for the twelve months ended December 31, 1994. Operating expenses
for the Company's foreign operations increased $37.6 million for the year ended
December 31, 1995, as compared to the 1994 twelve month period as a result of
the expansion of the Company's Argentine drilling rig fleet and acquisition of
the Venezuelan operating company discussed above, the start-up costs on the four
rigs added to the Company's Argentine operations and higher than expected
repairs, maintenance and rig move costs experienced on all Argentine rigs during
1995. 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. This decrease in costs from domestic operations of
approximately $500,000 was due to a change in the mix of the Company's rig
utilization from higher cost markets to lower cost markets and a change in the
type of work from a greater percentage of turnkey projects in 1994 to a greater
percentage of daywork in 1995.
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
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Long-Lived Assets to Be Disposed Of," effective for years beginning after
December 15, 1995. As the FASB encouraged 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 has provided a non-cash impairment provision of $5.3
million 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 sales data and management estimates.
Depreciation and amortization expenses increased $1.7 million, or 54.8%, to
$4.8 million for the year ended December 31, 1995, from $3.1 million for the
twelve months ended December 31, 1994. This increase was due to the acquisition
of drilling equipment for foreign operations.
General and administrative expenses increased approximately $500,000 to
$2.9 million for the year ended December 31, 1995 from $2.4 million for the
twelve months ended December 31, 1994 primarily due to the expanded scope of the
Company's foreign operations.
Interest expense increased $1.0 million to $1.4 million for the year ended
December 31, 1995 from $425,000 for the twelve months ended December 31, 1994.
The increase was due to an increase in borrowings for expansion in foreign
markets. The consolidated average debt balances during the year ended December
31, 1995, and the twelve months ended December 31, 1994 were $15.0 million and
$7.5 million, respectively. Interest rates during these periods remained
relatively unchanged.
Other income, net increased $1.0 million from $637,000 in 1994 to $1.6
million in 1995, primarily due to a foreign currency gain of $888,000 for the
year ended December 31, 1995 attributable to currency exchange transactions
associated with the Company's Venezuelan 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 consisted primarily of a non-cash
provision resulting from the disposal of the Company's oil and gas properties.
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 on 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 and to
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 Company had a net loss of $13.4 million in 1995 as compared to a loss
of $3.5 million for the twelve months ended December 31, 1994.
CERTAIN CREDIT ARRANGEMENTS
The Company's principal credit arrangements (other than customary trade
credit and capital leases) consist of the Bank Credit Facility and its
recently-issued Senior Notes.
Bank Credit Facility
The Bank Credit Facility is a senior secured revolving credit facility from
three commercial banks under which the Company and its principal domestic
subsidiary, Grey Wolf Drilling Company (formerly Drillers, Inc.) are
co-borrowers. The Bank Credit Facility provides the borrowers with the ability
to borrow up to $50.0 million from time to time prior to April 30, 2000, subject
to the reductions described below, with up to $5.0 million of such amount
available for letters of credit. Interest under the Bank Credit Facility accrues
at a variable rate, using (at the borrowers' election) either the agent bank's
base rate plus a margin ranging from 0.75% to 1.50%, depending upon the
Company's debt to EBITDA ratio for the trailing 12 month period, or a rate based
on the interbank Eurodollar market plus a margin ranging from 1.75% to 2.50%,
depending upon the Company's debt to EBITDA ratio for the trailing 12 month
period. Letters of credit accrue a fee of 0.25% per annum. The borrowers pay a
commitment fee of 0.5% per annum on the average unused portion of the
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<PAGE> 38
lenders' commitments. Indebtedness under the Bank Credit Facility is secured by
a security interest in substantially all of the Company's and its domestic
subsidiaries' assets and by guarantees of certain of its wholly-owned
subsidiaries.
The lenders' commitments will be reduced by the amount of net cash proceeds
received by the Company or its subsidiaries from sales of collateral in excess
of $1.0 million individually or $2.0 million in the aggregate in any twelve
month period. In addition, mandatory prepayments would be required upon (i) the
receipt of net proceeds received by the Company or its subsidiaries from the
incurrence of certain other debt or sales of debt or equity securities in a
public offering or private placement, or (ii) the receipt of net cash proceeds
received by the Company or its subsidiaries from asset sales (including proceeds
from sales of rigs identified in the credit agreement as equipment held for
sales but excluding proceeds from dispositions of inventory in the ordinary
course of business, certain licenses of intellectual property and certain
inter-company transfers) or the receipt of insurance proceeds on assets of the
borrowers, in each case in this clause (ii) to the extent that such proceeds are
in excess of $500,000 individually or $1.0 million in the aggregate in any
twelve month period. The final maturity date of the Bank Credit Facility is
April 30, 2000.
Among the various covenants that must be satisfied by the Company under the
Bank Credit Agreement are the following five financial covenants pursuant to
which the Company may not permit: (i) working capital (as defined in the Bank
Credit Agreement) to be less than $5.0 million on the last day of any fiscal
quarter; (ii) consolidated net worth to be less than the sum of $60.0 million
plus (a) 50% of the Company's consolidated net income, if positive, for the
period from January 1, 1997, to the final day of the most recent period for
which consolidated financial information of the Company is available and (b) 50%
of the increase to shareholders' equity of the Company attributable to the
issuance of Common Stock; (iii) the ratio of (a) the appraised fair market value
of domestic rigs and related equipment to (b) the lenders' commitments to be
less than 2 to 1; (iv) the ratio of consolidated debt to total capitalization to
exceed 0.6 to 1 and (v) the ratio of consolidated EBITDA to consolidated
interest expense for the most recent quarter to be less than 2.5 to 1 through
December 31, 1997 and less than 3 to 1 thereafter.
The Bank Credit Agreement also contains provisions restricting the ability
of the Company and its subsidiaries to, among other things, (i) engage in new
lines of business unrelated to their current activities, (ii) enter into mergers
or consolidations or asset sales or purchases (with specified exceptions), (iii)
incur liens or debts or make advances, investments or loans (in each case, with
specified exceptions), (iv) pay dividends or redeem stock (except for certain
inter-company transfers), (v) prepay or materially amend any other indebtedness
and (vi) issue any stock (other than Common Stock).
Events of default under the Bank Credit Facility include, in addition to
non-payment of amounts due, misrepresentation and breach of loan covenants and
certain other events of default, (i) default with respect to other indebtedness
in excess of $350,000, (ii) judgments in excess of $350,000 and (iii) a change
of control (meaning that (a) the Company ceases to own 100% of its two principal
subsidiaries, (b) some person or group (other than persons named in clause (d)
below) has either acquired beneficial ownership of 30% or more of the Company or
obtained the power to elect a majority of the Company's board of directors, (c)
the Company's board of directors ceases to consist of a majority of "continuing
directors" (as defined in the Bank Credit Agreement) or (d) Norex Drilling Ltd.,
Somerset Drilling Associates, L.L.C. ("SDA")and Somerset Capital Partners
("SCP") cease to own or control at least 25% of the Company).
Senior Notes
Concurrently with the closing of the GWDC Acquisition, the Company
concluded a public offering of $175.0 million in principal amount of the Senior
Notes. The net proceeds from the sale of the Senior Notes were used (i) to pay
the cash portion of the GWDC Acquisition price, (ii) to repay the Company's then
outstanding balance under its revolving line of credit from its commercial
banks, (iii) to pay the purchase price for the Kaiser-Francis Rig Purchase and
the Additional Rig Purchases and (iv) for capital expenditures to refurbish
certain of the Company's rigs and for other general corporate purposes. The
Senior Notes are general unsecured senior obligations of the Company and are
guaranteed, on a joint and several basis, by all domestic wholly-owned
subsidiaries of the Company.
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<PAGE> 39
The Senior Notes will be redeemable, at the Company's option, in whole or
in part from time to time on or after July 1, 2002, at redemption prices
decreasing from 104.4375% in 2002 to 100% in 2005 and thereafter, plus accrued
and unpaid interest to the redemption date. In the event the Company consummates
one or more Qualified Equity Offerings (as defined in the Indenture) on or prior
to July 1, 2000, the Company at its option may use all or a portion of the net
cash proceeds from such Qualified Equity Offerings to redeem up to 30% of the
aggregate principal amount of the Senior Notes at a redemption price equal to
108.875% of the aggregate principal amount thereof, together with accrued and
unpaid interest to the date of redemption, provided that at least $120.0 million
aggregate principal amount of Senior Notes remains outstanding immediately after
such redemption. Although the Offering qualifies as a Qualified Equity Offering,
the Company does not intend to use proceeds of the Offering to repay any portion
of the Senior Notes. Upon a Change of Control, as defined in the Indenture, each
holder of Senior Notes will have the right to require the Company to repurchase
all or any part of such holder's Senior Notes at a purchase price equal to 101%
of the aggregate principal amount thereof, plus accrued and unpaid interest to
the date of purchase.
The Indenture permits the Company and its subsidiaries to incur additional
indebtedness, including senior indebtedness of up to $100.0 million aggregate
principal amount which may be secured by liens on all of the assets of the
Company and its subsidiaries, subject to certain limitations. The Indenture
contains other covenants limiting the ability of the Company and its
subsidiaries to, among other things, pay dividends or make certain other
restricted payments, make certain investments, incur additional indebtedness,
permit liens, incur dividend and other payment restrictions affecting
subsidiaries, enter into consolidation, merger, conveyance, lease or transfer
transactions, make asset sales, enter into transactions with affiliates and
engage in unrelated lines of business. These covenants are subject to certain
exceptions and qualifications.
INFLATION AND CHANGING PRICES
Contract drilling revenues do not necessarily track the changes in general
inflation as they tend to respond to the level of activity on the part of the
oil and gas industry in combination with the supply of equipment and the number
of competing companies. Capital and operating costs are influenced to a larger
extent by specific price changes in the oil and gas industry and to a lesser
extent by changes in general inflation.
FOREIGN EXCHANGE
Venezuelan operations are often performed by the Company pursuant to
drilling contracts under which payments to the Company are denominated in United
States Dollars but are payable in Venezuelan currency at a floating exchange
rate. Although the Company's Venezuelan contracts usually allow the Company to
exchange up to 35% of payments made to it in Venezuelan currency for United
States Dollars for a limited period of time following the payment and at the
official Venezuelan exchange rate in effect at the time the payment was made to
the Company (thus offering limited protection against adverse currency
fluctuation), the Company is typically subject to the risk of adverse currency
fluctuations with respect to the balance of such payments. Additionally, 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. Accordingly, management expects that the Company's subsidiaries
operating in Venezuela will be required to maintain significant cash balances in
Venezuelan currency. The Company is not a party to any currency hedging
arrangements and has not during the three-year period ended December 31, 1996 or
during the six month period ended June 30, 1997 entered into any currency hedges
to protect it from foreign currency losses. Instead, the Company attempts to
manage assets in foreign countries to minimize its exposure to currency
fluctuations. Despite these efforts, however, the Company remains subject to the
risk of foreign currency losses. During the year ended December 31, 1995,
however, the Company realized currency gains of $888,000 and, in 1996, $404,000
was recorded as a decrease to shareholders' equity due to a devaluation of the
Venezuelan Bolivar.
FORWARD-LOOKING INFORMATION
The Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act
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<PAGE> 40
and Section 21E of the Exchange Act. All statements other than statements of
historical facts included in the MD&A including, without limitation, statements
regarding the Company's operating strategy, plans, objectives and beliefs of
management for future operations, planned rig refurbishments and the anticipated
closing and methods of financing the Justiss Acquisition are forward-looking
statements. Although the Company believes the expectations and beliefs reflected
in such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. See "Risk Factors" for a
discussion of important factors that could cause actual results to differ
materially from the Company's expectations. Also, see "Forward-Looking
Statements."
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share." SFAS
No. 128 specifies the compilation, presentation and disclosure requirements for
earnings per share for entities with publicly held common stock or potential
common stock. The requirements of this statement will be effective for fiscal
years ending after December 15, 1997. Management does not believe that the
implementation of SFAS No. 128 will have a material effect on the Company's
financial statements.
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<PAGE> 41
BUSINESS
GENERAL
The Company is a leading provider of contract land drilling services in the
U.S. with a domestic fleet of 127 rigs. In addition to its domestic operations,
the Company operates a fleet of six rigs in Venezuela, giving the Company a
total of 133 rigs, 110 of which are currently marketed. The Company believes it
has the largest fleet of drilling rigs in its Gulf Coast and South Texas markets
and the second largest fleet in its Ark-La-Tex market. The Company has an
inventory of 23 non-marketed rigs that it intends to refurbish and reactivate
during the remainder of 1997 and 1998 to meet demand for quality drilling assets
in its core domestic markets or internationally.
The Company focuses on its three core domestic drilling markets as it
believes these markets have historically maintained higher utilization rates and
day rates than other domestic markets. Internationally, the Company concentrates
its efforts in Venezuela, where the Company intends to increase its market
presence and is currently bidding on a number of potential drilling projects.
BUSINESS STRATEGY
In April 1996, the Company initiated a reorganization of its operations
that consisted of replacing substantially all of the senior management and the
members of the Board of Directors of the Company and implementing a new business
strategy. This business strategy seeks to achieve increased cash flow and
earnings through:
(1) focusing on core markets and establishing leading positions in
these markets;
(2) refurbishing and reactivating inventoried rigs to satisfy
increases in demand;
(3) acquiring land drilling businesses and assets to capitalize on
anticipated improvements in the industry and
(4) attracting and retaining qualified personnel to support the
Company's increased level of operations.
Focus on Core Markets. The Company believes it currently has the leading
market position in its Gulf Coast and South Texas markets, and the second
leading market position in its Ark-La-Tex market. By focusing on its core
markets and establishing leading positions in these markets, the Company is able
to achieve economies of scale and provide an infrastructure to acquire,
refurbish and reactivate rigs in these markets in a cost-effective manner.
Refurbishment and Reactivation of Inventoried Rigs. Since the beginning of
the fourth quarter of 1996, the Company has refurbished and reactivated 17 rigs
and an additional nine rigs are planned for refurbishment and reactivation
during the remainder of 1997, eight of which are currently being refurbished.
The Company estimates that the nine rigs it plans to refurbish during the
remainder of 1997 can be reactivated for service at an average cost of
approximately $1.7 million per rig, including the cost of new drill pipe, which
is well below the current cost of construction for new drilling rigs with
comparable capabilities. The remaining 14 rigs in the Company's inventory are
planned for refurbishment and reactivation during 1998.
Acquisitions. The Company has aggressively implemented its new operating
strategy by acquiring 90 land drilling rigs in 12 transactions since August
1996. Five of these acquisitions were of companies with long operating histories
in the Company's Ark-La-Tex, Gulf Coast and South Texas markets. The other
acquisitions have provided the Company with additional inventory of drilling
rigs suited for refurbishment and reactivation in the Company's core domestic
markets or Venezuela.
Attracting and Retaining Qualified Personnel. The Company believes that its
executive management and operating personnel are among the most experienced and
highly skilled professionals in the contract drilling industry. Thomas P.
Richards, the Company's President and CEO, has 31 years of contract drilling
industry experience and the Company's four Senior Vice Presidents have an
average of 23 years of related
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<PAGE> 42
experience. Many of the Company's operating personnel joined the Company in
connection with acquisitions completed since August 1996, bringing to the
Company additional customer relationships and operating experience in their
markets. The Company's ability to retain these employees and to attract
additional quality employees has allowed the Company to expand its operations
and customer base significantly while ensuring quality service to its customers.
INDUSTRY OVERVIEW
The domestic land drilling industry is undergoing a period of rapid
consolidation. The Company believes that from January 1, 1996 through September
30, 1997 there have been at least 34 completed or pending transactions involving
the acquisition of a combined total of approximately 466 rigs, the majority of
which were acquired by six land rig companies including the Company. Recent and
pending transactions by the Company accounted for 12 of these transactions
involving the acquisition of 90 rigs, of which 57 were actively marketed at the
time of acquisition and 33 were inventoried for later refurbishment.
Industry sources estimate that the supply of domestic land drilling rigs
available for work in the U.S. has declined from over 5,000 rigs in 1982 to
1,400 rigs currently. The Company believes the demand for land drilling rigs in
the Company's core markets has increased over the past twelve months principally
due to improved oil and gas drilling and production economics resulting from
increased use of 3-D seismic, directional drilling and enhanced recovery
techniques. For the first six months of 1997, industry sources estimate that the
average active domestic land rig count was 750 as compared to 652 for the full
year 1996, and 626 for the first six months of 1996. The Company's utilization
rates in its three core domestic markets averaged over 97% for the first nine
months of 1997. By increasing the size of its rig fleet through acquisitions and
refurbishments, the Company has increased its market share in its three core
domestic markets during a period of rapidly rising demand and day rates for land
drilling rigs in those key markets. The Company's larger fleet of marketable
rigs, higher rig utilization rates and increasing day rates have significantly
improved the Company's financial performance since the third quarter of 1996.
RECENT AND PENDING ACQUISITIONS
The Justiss Acquisition. On September 15, 1997, the Company entered into a
definitive agreement to acquire substantially all of the operating assets of
Justiss. The assets include a fleet of 12 operating drilling rigs and related
equipment which are currently operating in the Company's Ark-La-Tex and Gulf
Coast markets. The total purchase price for the Justiss Acquisition is $36.1
million in cash of which $28.6 million was paid on October 21, 1997 upon
delivery of nine of the 12 rigs to be acquired. The remaining three rigs are
expected to be purchased and the balance of the purchase price paid ($7.5
million) by the end of November 1997 as each rig completes a turnkey drilling
contract for a well in progress. Approximately 180 former rig-based employees of
Justiss have been hired by the Company and the Company expects that it will
offer employment to approximately 60 additional rig-based Justiss employees as
the remaining three rigs are purchased. The closing of the Justiss Acquisition
with respect to the remaining three rigs is subject to the satisfaction of
certain conditions to closing. Accordingly, there can be no assurance that the
purchase of the remaining rigs will be completed.
Kaiser-Francis Rig Purchase. On August 21, 1997, the Company acquired six
drilling rigs and related drilling equipment from Kaiser-Francis Oil Company for
a cash purchase price of $25.4 million. The rigs consisted of four 2,000
horsepower SCR rigs, one 1,000 horsepower SCR rig and one 1,000 horsepower
mechanical rig. The 2,000 horsepower rigs are rated for drilling to 25,000 feet
while the 1,000 horsepower rigs are rated for drilling to 15,000 feet. Five of
the six rigs are currently held in inventory for refurbishment and one is
currently being refurbished. The purchase price for the Kaiser-Francis Rig
Purchase was paid from the net proceeds of the Senior Notes offering.
GWDC Acquisition. On June 27, 1997, the Company acquired GWDC which owned a
fleet of 18 operating drilling rigs and related assets located in the Company's
Gulf Coast market. Sixteen of the rigs acquired in the GWDC Acquisition are
rated to drill to depths of 20,000 feet or greater. The consideration for the
GWDC Acquisition consisted of $61.6 million in cash and 14.0 million shares of
Common Stock valued by the Company at $47.6 million under the purchase method of
accounting. The GWDC Acquisition established
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the Company's presence in its Gulf Coast market and provided the Company with
additional infrastructure to facilitate reactivation of its rigs held in
inventory.
Flournoy Acquisition. On January 31, 1997, the Company acquired the
operating assets of Flournoy for approximately 12.4 million shares of Common
Stock and cash of approximately $800,000, which was utilized to repay certain
indebtedness of Flournoy. The assets acquired included 13 operating land
drilling rigs, 17 rig hauling trucks, a yard and office facility in Alice, Texas
and various other equipment and drill pipe. Under the purchase method of
accounting, the Company valued the Common Stock issued in the Flournoy
Acquisition at $31.1 million. The Company agreed to issue additional shares of
Common Stock to Flournoy's shareholders if, and to the extent that, on January
31, 1998 the aggregate market value of one-half of the shares received by the
Flournoy shareholders, plus the gross proceeds from certain sales of Common
Stock received in the transaction by the Flournoy shareholders prior to January
31, 1998, is, in total, less than $12.4 million.
Diamond M Acquisition. On December 31, 1996, the Company acquired the
assets of Diamond M for $26.0 million in cash. The assets acquired consisted of
ten operating land drilling rigs, all of which are currently operating in South
Texas, 19 rig hauling trucks, a yard and office facility in Alice, Texas and
various other drill pipe and equipment.
Mesa Acquisition. On October 3, 1996, the Company acquired six diesel
electric SCR rigs, three of which were operating, from Mesa in exchange for 5.5
million shares of Common Stock. The Mesa Acquisition established the Company's
presence in South Texas. Under the purchase method of accounting, the Company
valued the Common Stock issued in the Mesa Acquisition transaction at $7.5
million.
RTO/LRAC and Somerset Acquisitions. On August 29, 1996, the Company
completed the RTO/LRAC Acquisition in which approximately 39.4 million shares of
Common Stock were exchanged for 18 deep drilling land rigs which were added to
the Company's rigs held for refurbishment and reactivation. The rigs acquired in
the RTO/LRAC Acquisition include five 3,000 horsepower and nine 2,000 horsepower
land rigs rated for depths of 25,000 feet or greater. Contemporaneously with the
closing of the RTO/LRAC Acquisition, the Company completed a transaction in
which it issued approximately 39.4 million shares of Common Stock for $25.0
million in cash (the "Somerset Acquisition"). Under the purchase method of
accounting, the Company valued the Common Stock issued in the RTO/LRAC
Acquisition and the Somerset Acquisition at $25.0 million and $24.6 million,
respectively. The recipients of the shares issued in the RTO/LRAC and Somerset
Acquisitions were also issued warrants to acquire up to an aggregate of 3.4
million shares of Common Stock (the "Shadow Warrants"), exercisable upon the
occurrence of certain events. As of May 30, 1997, approximately 2.9 million of
the Shadow Warrants had been terminated unexercised. The $25.0 million capital
infusion from the Somerset Acquisition was used for rig fleet refurbishment,
debt repayment and general corporate purposes.
Additional Rig Purchases. In addition to the acquisitions described above,
the Company completed five additional acquisitions during the second and third
quarter of 1997 that added a total of seven drilling rigs to the Company's
fleet, one of which was operating and six of which were added to the Company's
rigs held for refurbishment.
DOMESTIC OPERATIONS
Giving effect to the Justiss Acquisition, the Company has a total domestic
rig fleet of 127 rigs, 104 of which are being actively marketed and 23 of which
are held in inventory for refurbishment and reactivation. See "-- Rig Inventory
and Refurbishments." The following table summarizes the Company's domestic rig
fleet, by horsepower rating and drive system:
<TABLE>
<CAPTION>
HORSEPOWER RATING DIESEL ELECTRIC MECHANICAL TOTAL
----------------- --------------- ---------- -----
<S> <C> <C> <C>
300-999...................................... 1 44 45
1,000-1,999................................... 24 25 49
2,000-4,000................................... 33 -- 33
-- -- ---
Total............................... 58 69 127
== == ===
</TABLE>
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The Company's domestic drilling operations are conducted through five
operating divisions in the United States organized by geographic area. The
market area covered by each of the Company's divisions is depicted on the map
located in the inside front cover of this Prospectus.
Ark-La-Tex Division. The Ark-La-Tex Division provides drilling services
primarily in Northeast Texas, Northern Louisiana and Southern Arkansas, and
currently markets a fleet of 26 rigs. The majority of drilling in the Ark-La-Tex
market is directed to three of the five principal target geologic formations in
the region, generally located at depths ranging from 8,900 to 13,000 feet. For
these target formations, 450 to 1,000 horsepower mechanical rigs are typically
utilized in the Ark-La-Tex market. Nineteen of the division's rigs are suited
for drilling to these depths, 17 of which are mechanical, one of which is a
diesel electric and one is an SCR rig. The other two principal geologic targets
in the market, the Austin Chalk and Pinnacle Reef formations, are located at
substantially greater depths, typically from 15,500 to 22,000 feet. The Company
has seven marketable rigs suitable for these drilling targets. Two of these deep
drilling rigs are 1,500 horsepower diesel electric rigs capable of drilling to
20,000 feet. Four of these deep drilling rigs are 2,000 horsepower diesel
electric rigs having a depth rating of 25,000 feet. The seventh rig is a 3,000
horsepower diesel electric SCR rig with a depth rating of 30,000 feet.
During 1996 (and excluding any pro forma effect of the Justiss
Acquisition), approximately 42% of the division's revenues were generated from
daywork contracts, 3% from footage contracts and 55% from turnkey contracts. For
the first half of 1997, the percentage of its contract revenues provided by
daywork, footage and turnkey contracts was 59%, 6% and 35%, respectively. The
average revenues per rig day worked for the division during 1996 and the first
half of 1997 were $7,707 and $8,527, respectively, and for the same periods its
average rig utilization rates were 86% and 93%, respectively.
South Texas Division. The South Texas Division markets a fleet of 33 rigs
consisting of 15 trailer mounted rigs with rated depth capacities ranging from
9,500 to 14,000 feet, ten diesel electric SCR rigs with rated depth capacities
from 12,000 to 25,000 feet and eight conventional mechanical rigs with rated
depth capacities ranging from 10,000 to 14,000 feet. The Company believes that
trailer mounted rigs and 1,500 to 2,000 horsepower diesel electric SCR rigs are
in highest demand in this market. Trailer mounted rigs are relatively more
mobile than conventional rigs, thus decreasing the time and expense to the
customer of moving the rig to and from the drillsite. Under ordinary conditions,
the Company's trailer mounted rigs are capable of drilling an average of two
10,000 foot wells per month. The Company believes it operates the largest
trailer mounted rig fleet in this market. The South Texas Division also operates
a fleet of 35 trucks, which are used exclusively to move the Company's rigs.
Most drilling in this market is for natural gas at depths ranging from 10,000 to
15,000 feet.
During 1996, approximately 75% of the division's revenues were generated
from daywork contracts, 14% from footage contracts and 11% from turnkey
contracts. For the first half of 1997, the percentage of its contract revenues
provided by daywork, footage and turnkey contracts was 51%, 19% and 30%,
respectively. The average revenues per rig day worked for the division during
1996 and the first half of 1997 were $5,668 and $8,941, respectively, and for
the same periods its average rig utilization rates were 85% and 97%,
respectively.
Gulf Coast Division. The Gulf Coast Division's drilling services are
provided to operators in South Louisiana and along the upper Texas Gulf Coast.
The Gulf Coast Division's rig fleet consists of 29 drilling rigs, including ten
diesel electric rigs with rated depth capacities of 20,000 to 25,000 feet, nine
diesel electric SCR rigs with rated depth capacities of 15,000 to 30,000 feet
and ten mechanical rigs with rated depth capacities of 10,000 to 20,000 feet.
This division's rig fleet is comprised primarily of rigs acquired in the
GWDC Acquisition. During GWDC's fiscal year ended October 31, 1996,
approximately 48% of its revenues were generated from daywork contracts, 10%
from footage contracts and 42% from turnkey contracts. For the first six months
of fiscal 1997, the percentage of its contract revenues provided by daywork,
footage and turnkey contracts was 65%, 3% and 32%, respectively. The average
revenues per rig day worked for GWDC during fiscal 1996 and the first six months
of fiscal 1997 were $9,558 and $9,587, respectively, and for the same periods
its average rig utilization rates were 95% and 98%, respectively.
43
<PAGE> 45
Eastern Division. The Eastern Division markets a fleet of six rigs,
primarily in Ohio. The Eastern Division principally drills gas wells at depths
of 7,000 feet or less using air drilling techniques. This division typically
contracts to drill packages of several wells.
During 1996, approximately 30% of the division's revenues were generated
from daywork contracts and 70% from footage contracts. For the first half of
1997, the percentage of its contract revenues provided by daywork and footage
contracts was 12% and 88%, respectively. The average revenues per rig day worked
for the division during 1996 and the first half of 1997 were $4,976 and $5,005,
respectively, and for the same periods its average rig utilization rates were
72% and 66%, respectively.
INDRILLERS Division. In 1996, the Company and Dart Energy Corp. ("Dart")
formed INDRILLERS in which the Company has a 65% economic interest and Dart has
a 35% economic interest. Rights to manage the company are shared equally. This
division drills oil and gas wells principally in Michigan, at depths of 1,000 to
16,000 feet. Nine of the ten rigs in this division have depth ratings ranging
from 5,000 to 10,000 feet, and one is rated to 17,000 feet.
During 1996, approximately 62% of the division's revenues were generated
from daywork contracts, 22% from footage contracts and 16% from turnkey
contracts. For the first half of 1997, the percentage of its contract revenues
provided by daywork, footage and turnkey contracts was 63%, 18% and 19%,
respectively. The average revenues per rig day worked for the division during
1996 and the first quarter of 1997, were $5,981 and $5,538, respectively, and
for the same periods its average rig utilization rates were 31% and 20%,
respectively.
FOREIGN OPERATIONS
Venezuela Division. The Company began operating in Venezuela in 1994, and
has upgraded the performance capabilities of its rig fleet in Venezuela and is
intensifying its marketing efforts there in response to increased demand for
land rig drilling services. The Company currently has two rigs working in
Venezuela and is actively marketing its four remaining rigs. The Company
believes this demand has resulted principally from changes in Venezuelan
government policies and legislation encouraging private sector participation in
oil and gas exploration and production. In recent years, the Venezuelan national
oil company, Petroleos de Venezuela, S.A. ("PDVSA"), has permitted international
oil companies to enter into operating agreements with one of PDVSA's three main
operating subsidiaries to rehabilitate, reactivate and develop certain of its
older fields. Additionally, the Venezuelan government has enacted legislation
enabling multinational oil companies to conduct exploration and development
operations in Venezuela through production sharing arrangements with PDVSA and
its subsidiaries. Through August 1997, eight large undeveloped properties have
been awarded to multinational oil companies for development through production
sharing arrangements. In June 1997, PDVSA awarded operating agreements to
private companies for the rehabilitation, reactivation and development of 18
additional areas. The new operating agreements (referred to by PDVSA as the
"Third Operating Round") cover 12 areas described by PDVSA as "onshore"
locations covering a combined area of approximately 2,600 square kilometers
(approximately 1,000 square miles). The Company believes that the Third
Operating Round operations will require drilling and workover rigs with depth
ratings ranging from 4,000 to 18,000 feet.
Drilling contractors operating in Venezuela generally obtain contracts
through a bidding process open only to drilling contractors previously approved
for inclusion on the "bid list" of the customer and PDVSA. Drilling contracts
are sometimes awarded on a long-term basis, for periods of up to 24 months. In
the Company's experience, bid specifications for Venezuelan drilling contracts
typically require premium quality, intermediate and deep drilling rigs with
1,500 to 3,000 horsepower ratings equipped with top drive mechanisms. The
Company believes that 3,000 horsepower rigs are currently in highest demand, but
it anticipates that demand for intermediate capacity 1,500 to 2,000 horsepower
rigs may improve in response to the Third Operating Round.
In 1996, the Company identified certain management and operating
deficiencies that contributed to reduced operations and profits, and the removal
of the Company from PDVSA's bid list due to the failure of the Company's
Venezuelan subsidiary to file statutorily required financial reports with the
Venezuelan
44
<PAGE> 46
government. To address these problems, the Company recently replaced its local
management with new management having substantial experience with competing
drilling contractors in Venezuela. The Company has since been restored to
PDVSA's bid list.
The Venezuela Division is currently marketing four land drilling rigs with
rated depths of 10,000 to 15,000 feet and two workover rigs, of which two
drilling rigs are under contract and the remainder are idle. To improve the
marketability of its existing Venezuela rig fleet, the Company recently
completed $3.3 million of capital improvements to its rigs. The Venezuela
Division generally provides its drilling services under daywork contracts and
workover services under hourly contracts. Hourly contracts call for the Company
to provide a rig and crew, for which it is paid on an hourly basis.
Historically, the Venezuela Division has contracted to provide crews to man rigs
owned by the customer, and may do so in the future.
Further expansion of the Company's drilling fleet in Venezuela will depend
primarily on whether the Company is successful in obtaining long-term drilling
contracts in that market, and on a variety of other factors including market
conditions, and management's assessment of existing and future demand and day
rates. Should the Company be awarded long-term drilling contracts requiring
additional drilling rigs, management expects that inventory rigs or active rigs
from its domestic fleet will be refurbished and upgraded to meet the premium
quality rig specifications typically required by such long-term international
drilling contracts.
Other Foreign Operations. Foreign operations contributed approximately 36%,
53% and 21% of the Company's operating revenues for the years ended December 31,
1996 and 1995 and for the nine month period ended December 31, 1994,
respectively, but accounted for approximately 71%, 68% and 15%, respectively, of
the Company's total losses from continuing operations for the same three
periods. For each of the same periods, the Company's foreign operations were
conducted principally in Mexico and South America.
Consistent with the Company's decision to redeploy its rigs to more
productive markets, the Company has withdrawn from both the Argentine and
Mexican markets. All four of the Company's drilling rigs previously located in
Mexico have been returned to the United States. Of the four repatriated rigs,
three have been refurbished and placed in service in the Company's Ark-La-Tex or
South Texas Divisions and one is held for sale. In April 1997, the Company sold
three of its six drilling rigs and certain other assets located in Argentina for
$1.5 million. The remaining three rigs have been returned to the United States
for refurbishment and reactivation.
Although management has determined to concentrate its foreign operations in
Venezuela, the Company will, from time to time, consider expansion into
additional selected international markets as bidding opportunities arise.
RIG INVENTORY AND REFURBISHMENTS
The Company currently has an inventory of 23 rigs, or approximately 17% of
its rig fleet, which are suitable for refurbishment and reactivation to meet
future demand. The Company considers "inventory rigs" to be rigs that are not
working, are not actively marketed and that require capital expenditures to
return them to service. Management believes that the demand for land drilling
rigs in the Company's Ark-La-Tex, Gulf Coast, South Texas and Venezuelan markets
has improved sufficiently to justify a program to restore certain of its
inventory rigs to marketable condition.
Since the beginning of the fourth quarter of 1996, the Company completed
the refurbishment of 17 rigs at an aggregate cost of approximately $26.3
million. Of these 17 recently refurbished rigs, 13 were diesel electric SCR
inventory rigs rated at 1,000, 2,000 and 3,000 horsepower with depth ratings of
15,000 to 30,000 feet. The other four refurbished rigs were previously marketed
rigs that were returned to the U.S. following the Company's withdrawal from the
Argentine and Mexican markets. These four rigs are mechanical rigs, rated at 750
to 1,000 horsepower with rated drilling capacities of 9,500 to 15,000 feet,
respectively. All 17 recently refurbished rigs are now assigned to the Company's
Ark-La-Tex, Gulf Coast, and South Texas Divisions.
45
<PAGE> 47
The Company is currently refurbishing eight rigs from its inventory, of
which seven are diesel electric SCR rigs and one is a mechanical rig. The
mechanical rig is rated at 900 horsepower with a depth rating of 10,000 feet.
The diesel electric SCR rigs undergoing refurbishment are rated at 1,000 to
4,000 horsepower with depth ratings of 15,000 to 40,000 feet. The Company
presently anticipates that the refurbished rigs will be deployed to the
Company's Ark-La-Tex, South Texas and Gulf Coast markets.
The Company plans to commence refurbishment of an additional inventory rig
during the fourth quarter of 1997 and its remaining 14 inventory rigs during
1998. The actual number of rig refurbishments completed by the Company will
depend on many factors, including management's assessment of existing and
anticipated demand and day rates, the Company's success in bidding for foreign
and domestic drilling contracts and possible future acquisitions of rigs. All
rigs currently proposed to be refurbished during the fourth quarter of 1997 and
1998 are expected to be reactivated for service in the Company's three core
domestic markets. If, however, the Company is successful in obtaining long-term
drilling contracts in Venezuela or other South American countries, certain of
the Company's inventory rigs or active rigs may be refurbished and mobilized for
service in those foreign markets. Refurbishment costs for rigs to be deployed by
the Company in its core domestic markets are estimated to average approximately
$1.6 million per rig for rigs refurbished in 1997 through August 31, 1997 and
$1.7 million per rig for those refurbished in the remainder of 1997 and in 1998.
Refurbishment costs for 2,000 to 3,000 horsepower rigs for the Venezuelan market
are estimated to average approximately $12.0 million per rig, in each case
including the cost of a new drill string.
RIG FLEET
A land drilling rig consists of engines, drawworks, a mast, substructure,
pumps to circulate drilling fluid, blowout preventers, drill string and related
equipment. The actual drilling capacity of a rig may be less than its rated
drilling capacity due to numerous factors, including the length of its drill
string. The intended well depth and the drill site conditions determine the
drill string length and other equipment needed to drill a well. Generally, land
rigs operate domestically with crews of five to six persons and in Venezuela
with crews of ten to 12 persons.
The Company's rig fleet consists of several rig types to meet the demands
of its customers in each of the markets it serves. The Company's rig fleet
consists of two basic types of drilling rigs, the mechanical and the diesel
electric. Mechanical rigs transmit power generated by a diesel engine directly
to an operation (for example the drawworks or mud pumps on a rig) through a
compound consisting of chains, gears and hydraulic clutches. Diesel electric
rigs are further broken down into two subcategories, direct current rigs and SCR
rigs. Direct current rigs transmit the power generated by a diesel engine to a
direct current generator. This direct current electrical system then distributes
the electricity generated to direct current motors on the drawworks and mud
pumps. An SCR rig's diesel engines drive alternating current generators and this
alternating current can be transmitted to use for rig lighting and rig quarters
or converted to direct current to drive the direct current motors on the rig.
46
<PAGE> 48
The following table further sets forth certain information regarding the
rigs owned and operated by the Company as of October 22, 1997, and includes data
for the rigs to be acquired in the Justiss Acquisition which will be assigned to
the Ark-La-Tex and Gulf Coast Divisions:
<TABLE>
<CAPTION>
MAXIMUM
RATED
YEAR BUILT/ HORSEPOWER DRILLING
RIG NO. REBUILT DRAWWORKS DRIVE SYSTEM(1) RATING DEPTH STATUS(2)
- ------- ----------- --------- --------------- ---------- --------- ---------
(IN FEET)
<S> <C> <C> <C> <C> <C> <C>
Ark-La-Tex Division (26 rigs)
1 1957/1980 Brewster N-85 Mechanical 1,000 15,000 Active
2 1957/1981 Brewster N-85 Mechanical 1,000 15,000 Active
3 1960/1982 Continental-Emsco A-550 Mechanical 700 12,500 Active
6 1957/1980 Brewster N-85 Mechanical 1,000 15,000 Active
7 1978 National 55 Mechanical 700 12,500 Active
10 1964/1989 Gardner-Denver 800 Mechanical 1,000 15,000 Active
11 1980 Gardner-Denver 800 Mechanical 1,000 15,000 Active
12 1980 Gardner-Denver 700 Mechanical 800 12,500 Active
13 1981 Brewster N-75B Mechanical 1,000 12,500 Active
15 1965/1989 National 610 Mechanical 750 12,500 Active
19 1981/1997 National 80-B Mechanical 1,000 15,000 Active
39 1980/1989 Gardner-Denver 800 Diesel Electric 1,000 15,000 Active
40 1979 Gardner-Denver 1100E Diesel Electric 1,500 20,000 Active
42 1981 Continental-Emsco Elec. II Diesel Electric SCR 2,000 25,000 Active
44 1982 Gardner-Denver 1500E Diesel Electric 2,000 25,000 Active
48 1981/1997 Ideco E-3000 Diesel Electric SCR 3,000 30,000 Active
75 1982/1996 Continental-Emsco D-3E Diesel Electric SCR 1,000 15,000 Active
79 1981/1997 National 110 UE Diesel Electric SCR 1,500 20,000 Active
80 1982/1997 Oilwell E-2000 Diesel Electric SCR 2,000 25,000 Active
82 1981/1997 Oilwell E-2000 Diesel Electric SCR 2,000 25,000 Active
610(3) 1979/1990 Gardner-Denver 500 Mechanical 800 10,000 Active
634 1979/1996 Continental-Emsco D-2 Mechanical 800 12,500 Active
642 1955/1992 Brewster N-45 Mechanical 450 8,000 Active
643(3) 1960/1996 Brewster N-45 Mechanical 450 8,000 Active
646 1983/1996 Continental-Emsco D-2 Mechanical 800 12,500 Active
648 1981/1997 Wilson 75 Mechanical 900 11,000 Active
South Texas Division (33 rigs)
16 1981/1997 Oilwell 760E Diesel Electric SCR 1,000 15,000 Active
31 1980/1997 Cabot 750 Mechanical 750 9,500 Active
33 1981/1992 National 80 UE Diesel Electric SCR 1,000 14,000 Active
34 1981/1992 Superior 700 UE Diesel Electric SCR 700 12,000 Active
37 1981/1992 Continental-Emsco Elec. II Diesel Electric SCR 2,000 25,000 Active
38 1981 Oilwell 840E Diesel Electric SCR 1,500 20,000 Active
43 1981 Ideco E-1200 Diesel Electric SCR 1,200 17,000 Active
70 1981/1997 Ideco BIR 800 Mechanical 900 10,000 Active
86 1981/1997 National 1320 UE Diesel Electric SCR 2,000 25,000 Active
301 1990 Mid-Continent U-36A Mechanical 900 12,000 Active
302 1964/1988 RMI 750 Mechanical 900 10,500 Active
303 1966/1995 Brewster N-75 Mechanical 1,000 14,000 Active
304 1969/1975 Cabot 750 Mechanical 750 9,500 Active
305 1973/1990 Cabot 1000 Mechanical 1,000 13,000 Active
306 1990/1997 RMI 1000 Mechanical 1,000 13,500 Active
307 1993/1995 Ideco E-1200 Diesel Electric SCR 1,200 17,000 Active
308 1975/1992 Ideco BIR 800 Mechanical 900 10,000 Active
309 1976/1990 Gardner-Denver 500 Mechanical 800 10,000 Active
310 1980/1995 Brewster N-46 Mechanical 850 12,000 Active
311 1981/1996 Ideco BIR 800 Mechanical 900 10,000 Active
312 1982 Gardner-Denver 1100E Diesel Electric SCR 1,500 20,000 Active
314 1996 Cabot 750 Mechanical 750 9,500 Active
454 1981/1997 Ideco BIR 800 Mechanical 900 10,000 Active
840 1981/1994 Oilwell 840E Diesel Electric SCR 1,500 20,000 Active
851 1982/1994 National 80-B Mechanical 1,000 14,000 Active
859 1978/1991 Brewster N-75 Mechanical 1,000 14,000 Active
860 1976/1995 Cabot 750 Mechanical 750 9,500 Active
861 1978/1993 Cabot 900 Mechanical 900 11,000 Active
862 1976 Cabot 900 Mechanical 900 11,000 Active
863 1978/1988 Cabot 1000 Mechanical 1,000 13,000 Active
864 1975/1994 Cabot 1000 Mechanical 1,000 13,000 Active
865 1979/1993 Cabot 1200 Mechanical 1,200 14,000 Active
866 1982/1993 Cabot 1200 Mechanical 1,200 14,000 Active
</TABLE>
47
<PAGE> 49
<TABLE>
<CAPTION>
MAXIMUM
RATED
YEAR BUILT/ HORSEPOWER DRILLING
RIG NO. REBUILT DRAWWORKS DRIVE SYSTEM(1) RATING DEPTH STATUS(2)
- ------- ----------- --------- --------------- ---------- --------- ---------
(IN FEET)
<C> <S> <C> <C> <C> <C> <C>
Gulf Coast Division (29 rigs)
77 1981/1997 Gardner-Denver 1100E Diesel Electric SCR 1,500 20,000 Active
83 1981/1997 Continental Emsco C-2-E Diesel Electric SCR 2,000 25,000 Active
85 1981/1997 National 1320 UE Diesel Electric SCR 2,000 25,000 Active
90 1980/1997 National 1625 DE Diesel Electric SCR 3,000 30,000 Active
91 1980/1997 National 1625 UE Diesel Electric SCR 3,000 30,000 Active
502 1987 Continental-Emsco C-II Diesel Electric 2,000 25,000 Active
503 1991 National 1320 UE Diesel Electric 2,000 25,000 Active
504 1990 National 110 M Mechanical 1,500 20,000 Active
505 1995 National 1320 UE Diesel Electric 2,000 25,000 Active
506 1977 Continental-Emsco C-II Diesel Electric 2,000 25,000 Active
507 1979 Continental-Emsco C-II Diesel Electric 2,000 25,000 Active
508 1981 Continental-Emsco C-II Diesel Electric 2,000 25,000 Active
509 1982 Continental-Emsco C-II Diesel Electric 2,000 25,000 Active
510 1983 Continental-Emsco C-I Mechanical 1,500 20,000 Active
511 1984 National 110 M Mechanical 1,500 20,000 Active
514 1990 National 110 UE Diesel Electric SCR 1,500 20,000 Active
515 1990 Oilwell 760 E Diesel Electric SCR 1,000 15,000 Active
516 1990 Oilwell 760 E Diesel Electric SCR 1,000 15,000 Active
517 1990 Oilwell 860 M Mechanical 1,500 20,000 Active
518 1991 Continental-Emsco C-I-II Diesel Electric 1,500 20,000 Active
519 1991 Continental-Emsco C-I-II Diesel Electric 1,500 20,000 Active
520 1995 Oilwell 840 E Diesel Electric SCR 1,500 20,000 Active
521 1997 National 1320 UE Diesel Electric 2,000 25,000 Active
609 1981/1994 Continental-Emsco D-2 Mechanical 800 12,500 Active
611(3) 1965/1993 National 80-B Mechanical 1,000 15,000 Active
627 1967/1994 National 80-B Mechanical 1,000 15,000 Active
641 1983/1992 Continental-Emsco D-2 Mechanical 800 12,500 Active
644 1984 National 80-B Mechanical 1,000 15,000 Active
1981/1997 Continental-Emsco D-1 Mechanical 550 10,000 Active
Eastern Division (6 rigs)
202 1981 Wilson Mogul 42 Mechanical-Air 450 8,000 Active
203 1980 Wilson Mogul 42 Mechanical-Air 450 8,000 Active
204 1979 Wilson Mogul 42 Mechanical-Air 450 6,500 Active
208 1980 Wilson Mogul 42 Mechanical-Air 450 6,500 Active
211 1971/1985 Wilson Mogul 42 Mechanical 450 6,500 Active
215 1980 Wilson Mogul 42 Mechanical-Air 450 6,500 Active
INDRILLERS Division (10 rigs)
1 1980 Challenger 320 Mechanical 350 5,000 Active
2 1979 Ideco H-47 Mechanical 300 7,000 Idle
3 1980 Challenger 320 Mechanical 350 5,000 Active
4 1980 Challenger 320 Mechanical 350 5,000 Idle
5 1980 Ideco BIR 800 Mechanical 900 10,000 Idle
41 1981 Ideco E-1200 Diesel Electric SCR 1,200 17,000 Active
53 1976 Cabot 550 Mechanical 450 6,500 Idle
56 1980 Ideco DIR 700 Mechanical 700 8,500 Idle
57 1977 Ideco BIR 550 Mechanical 450 6,500 Idle
58 1977 Ideco DIR 700 Mechanical 700 8,500 Active
Venezuelan Division (6 rigs)
407 1980 Cooper LTO 350 Mechanical-WO 350 14,000 Idle
423 1981/1996 Mid-Continent 712-U Mechanical 1,500 15,000 Idle
441 1980 Wilson Mogul 42 Mechanical-WO 350 12,000 Idle
451 1981 Cabot 900 Mechanical 900 10,000 Active
452 1975/1994 Cabot 900 Mechanical 900 10,000 Active
453 1982/1994 Ideco H-35 Mechanical 450 10,000 Idle
Rigs held in inventory (23 rigs)
14 1981 Superior 1000 UE Diesel Electric SCR 1,000 15,000 Inventory
17 1981 Superior 1000 UE Diesel Electric SCR 1,000 15,000 Inventory
18 1981 National 80B Mechanical 1,000 15,000 Inventory
45 1981 Ideco E-2100 Diesel Electric SCR 2,000 25,000 Inventory
47 1982 Ideco E-1200 Diesel Electric SCR 1,200 17,000 Inventory
49 1982 Ideco E-1200 Diesel Electric SCR 1,200 17,000 Inventory
76 1982 Continental-Emsco D-3-E Diesel Electric SCR 1,000 15,000 Inventory
78 1981 Oilwell E-2000 Diesel Electric SCR 2,000 25,000 Inventory
81 1981 Oilwell E-2000 Diesel Electric SCR 2,000 25,000 Inventory
84 1982 Oilwell E-2000 Diesel Electric SCR 2,000 25,000 Inventory
87 1979 National 1320 UE Diesel Electric SCR 2,000 25,000 Inventory
88 1981 Continental-Emsco C-3-E Diesel Electric SCR 3,000 30,000 Inventory
89 1981 Oilwell E-3000 Diesel Electric SCR 3,000 30,000 Inventory
92 1980/1981 National 1625 DE Diesel Electric SCR 3,000 30,000 Inventory
</TABLE>
48
<PAGE> 50
<TABLE>
<CAPTION>
MAXIMUM
RATED
YEAR BUILT/ HORSEPOWER DRILLING
RIG NO. REBUILT DRAWWORKS DRIVE SYSTEM(1) RATING DEPTH STATUS(2)
- ------- ----------- --------- --------------- ---------- --------- ---------
(IN FEET)
<C> <S> <C> <C> <C> <C> <C>
97 1981 National 1320 UE Diesel Electric SCR 2,000 25,000 Inventory
98 1981 Gardner-Denver 1500E Diesel Electric SCR 2,000 25,000 Inventory
99 1981 Gardner-Denver 1500E Diesel Electric SCR 2,000 25,000 Inventory
455 1981 Ideco BIR 800 Mechanical 900 10,000 Inventory
473 1981/1994 Cabot 900 Mechanical 900 10,000 Inventory
558 1982 Dreco 4000-E Diesel Electric SCR 4,000 40,000 Inventory
95 1981 Gardner-Denver 3000E Diesel Electric SCR 3,000 30,000 Inventory
94 1981 Oilwell E-2000 Diesel Electric SCR 2,000 25,000 Inventory
96 1981 National 110 M Mechanical 1,500 20,000 Inventory
</TABLE>
- ------------------------------------
(1) "SCR" means a power transmission system which rectifies alternating current
power to direct current power" and "WO" means a workover rig.
(2) The Company considers a rig that is presently working to be an "active" rig.
Rigs that are not working but which are currently being actively marketed
are viewed as "idle." "Inventory" rigs are rigs that are not working, are
not currently being actively marketed and will require additional capital
expenditures to reactivate them for service.
(3) Rigs remaining to be acquired in the Justiss Acquisition.
CONTRACTS
The Company's contracts for drilling oil and gas wells are obtained either
through competitive bidding or as a result of negotiations with customers.
Contract terms offered by the Company are generally dependent on the complexity
and risk of operations, on-site drilling conditions, type of equipment used and
the anticipated duration of the work to be performed. Generally, domestic
drilling contracts are for a single well, while foreign drilling contracts are
for multiple wells. The contracts typically obligate the Company to pay certain
operating expenses, including wages of drilling personnel, maintenance expenses,
incidental rig supplies, equipment and local office facilities. Domestic
drilling contracts are typically subject to termination by the customer on short
notice, usually upon payment of a fee. Foreign drilling contracts generally
require longer notice periods for termination and also may require that the
customer pay for the mobilization and demobilization costs.
The Company's drilling contracts generally provide for compensation on
either a daywork, turnkey or footage basis. See "-- Domestic Operations" for the
percentage of revenues by contract type for each domestic division.
Daywork Contracts. Under daywork drilling contracts, the Company provides a
drilling rig with required personnel to the operator, who supervises the
drilling of the well. The Company is paid based on a negotiated fixed rate per
day while the rig is utilized. Daywork drilling contracts generally specify the
type of equipment to be used, the size of the hole and the depth of the well.
Under a daywork drilling contract, the customer bears a large portion of
out-of-pocket costs of drilling and the Company generally bears no part of the
usual capital risks associated with oil and gas exploration (such as time delays
for various reasons, including stuck drill pipe and blowout).
Turnkey Contracts. Under a turnkey contract, the Company contracts to drill
a well to an agreed-upon depth under specified conditions for a fixed price,
regardless of the time required or the problems encountered in drilling the
well. The Company provides technical expertise and engineering services, as well
as most of the equipment required for the well, and is compensated when the
contract terms have been satisfied. Turnkey contracts afford an opportunity to
earn a higher return than would normally be available on daywork or footage
contracts if the contract can be completed successfully without complications.
The risks to the Company under a turnkey contract are substantially greater
than on a well drilled on a daywork basis because the Company assumes most of
the risks associated with drilling operations generally assumed by the operator
in a daywork contract, including the risk of blowout, loss of hole, stuck drill
pipe, machinery breakdowns, abnormal drilling conditions and risks associated
with subcontractors' services, supplies, cost escalation and personnel. The
Company employs or contracts for engineering expertise to
49
<PAGE> 51
analyze seismic, geologic and drilling data to identify and reduce many of the
drilling risks assumed by the Company. Management uses the results of this
analysis to evaluate the risks of a proposed contract and seeks to account for
such risks in its bid preparation. The Company believes that its operating
experience, qualified drilling personnel, risk management program, internal
engineering expertise and access to proficient third party engineering
contractors have allowed it to reduce the risks inherent in turnkey drilling
operations. The Company also maintains insurance coverage against some but not
all drilling hazards.
Footage Contracts. 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 compared with daywork contracts. Similar
to a turnkey contract, the risks to the Company on a footage contract are
greater because it assumes most of the risks associated with drilling operations
generally assumed by the operator in a daywork contract, including the risk of
blowout, loss of hole, stuck drill pipe, machinery breakdowns, abnormal drilling
conditions and risks associated with subcontractors' services, supplies, cost
escalation and personnel. As with turnkey contracts, the Company manages this
additional risk through the use of engineering expertise and bids the footage
contracts accordingly. The Company also maintains insurance coverage against
certain drilling hazards.
CUSTOMERS AND MARKETING
The Company's contract drilling customers include independent producers,
major oil companies and national petroleum companies. One unaffiliated customer
accounted for 17% of the Company's revenues for the six months ended June 30,
1997.
The Company primarily markets its drilling rigs on a regional basis through
employee salesmen. These salesmen utilize personal contacts and industry
periodicals and publications to determine which operators are planning to drill
oil and gas wells in the immediate future. Once the Company has been placed on
the "bid list" for an operator, the Company will typically be given the
opportunity to bid on all future wells for that operator in the area.
The Company from time to time enters into informal, nonbinding commitments
with its customers to provide drilling rigs for future periods at agreed upon
rates plus fuel and mobilization charges, if applicable, and escalation
provisions. This practice is customary in the land drilling business during
times of tightening rig supply. Although neither the Company nor the customer is
legally required to honor these commitments, the Company strives to satisfy such
commitments in order to maintain good customer relations.
COMPETITION
The land drilling industry has recently experienced a period of
consolidation. All of the Company's markets, however, continue to be highly
competitive and fragmented among several drilling contractors. Competition is
generally based on price, workforce experience, equipment suitability and
availability, reputation, expertise and financial capability. The Company
believes that in each of its markets, it has a significant presence in terms of
equipment and workforce experience. However, even though the Company has the
largest or second largest rig fleet in its three core domestic markets, the
Company estimates that its market share represents only 15% to 30% of the
overall market share in each of these three core markets. In addition, several
of the Company's competitors have greater financial and other resources than the
Company and may commit more capital and human resources than the Company to
these important factors. If demand for drilling rigs increases in the future,
rig and crew availability may become more critical competitive factors. A number
of the Company's competitors have also announced plans to refurbish and
reactivate rigs from their inventory of stacked rigs. The deployment of these
additional rigs to the Company's core markets could further intensify
competition based on pricing and rig availability. Although 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, mobilization expenses and the suitability of the rigs for drilling
under conditions in another region.
50
<PAGE> 52
EQUIPMENT AND SUPPLIES
Although equipment and supplies used in the Company's business are
generally available from multiple sources, there is a general shortage of
drilling equipment and supplies. The Company believes these shortages may
intensify. The costs and delivery times of equipment and supplies are
substantially greater than in prior periods and are currently escalating. In
response to this trend, the Company in 1996 formed an alliance with a major
drill pipe manufacturer. The alliance enables the Company to take delivery
through 1998 of 29,300 joints of drill pipe in commonly used diameters at fixed
prices plus possible escalations for increases in the manufacturer's cost of raw
materials. As is common in the industry, the drill pipe supply alliance is not a
formal contractual agreement but represents an informal arrangement in which
both parties undertake to satisfy the supply objectives of the alliance. Due in
part to its alliance arrangement, the Company is not currently experiencing any
material shortages of, or material price increases in, drill pipe. The Company
and its supplier under the drill pipe supply alliance have entered into a formal
contractual arrangement for the purchase and supply of an average quarterly
quantity of 3,750 joints of drill pipe (a total of 15,000 joints) during 1999 at
prices based on the supplier's price list as of February 1997 less 5%. The
Company has formed similar informal supply alliances with manufacturers and
suppliers of other equipment and supplies, and is attempting to establish
arrangements to assure adequate availability of certain other necessary drilling
equipment and supplies on satisfactory terms, but there can be no assurance that
it will be able to do so. Accordingly, there can be no assurance that the
Company will not experience shortages of, or material price increases in,
drilling equipment and supplies, including drill pipe, in the future. Any such
shortages could delay and adversely affect the Company's ability to refurbish
its rigs held in inventory and obtain contracts for its marketable rigs.
REGULATION
Many aspects of the Company's operations are affected by domestic and
foreign political developments and are subject to numerous laws and regulations
that may relate directly or indirectly to the contract drilling industry. For
example, drilling operations are subject to extensive and evolving laws and
regulations governing environmental quality, pollution control, remediation of
contamination and preservation of natural resources. Such laws and regulations
pertain, among other things, to air emissions, waste management, spills and
other discharges, wetlands and endangered species protection and cleanup of
contamination. The Company's operations are often conducted in or near
ecologically sensitive areas such as wetlands which are subject to protective
measures. The handling of waste materials, some of which are classified as
hazardous substances, is a routine part of the Company's operations.
Consequently, the regulations applicable to the Company's operations include
those with respect to containment, disposal and control of the discharge of
hazardous oilfield waste and other nonhazardous waste material into the
environment, requiring removal and cleanup under certain circumstances, or
otherwise relating to the protection of the environment. Laws and regulations
protecting the environment have become more stringent in recent years and may in
certain circumstances impose strict liability, rendering a party liable for
environmental damage without regard to negligence or fault on the part of such
party. Such laws and regulations may expose the Company to liability for the
conduct of, or conditions caused by, others or for acts of the Company which
were in compliance with all applicable laws at the time such acts were
performed. The Company may also be exposed to environmental or other liabilities
originating from businesses and assets subsequently acquired by the Company.
Compliance with such laws and regulations may require significant capital
expenditures. Although such compliance costs to date have not had a material
effect on the Company, application of these requirements or the adoption of new
requirements could have a material adverse effect on the Company. In addition,
the modification or judicial interpretation of existing laws or regulations or
the adoption of new laws or regulations curtailing exploratory or development
drilling for oil and gas for economic, environmental or other reasons could have
a material adverse effect on the Company's operations by limiting future
contract drilling opportunities.
Environmental regulation has led to higher drilling costs, a more difficult
and lengthy well permitting process and, in general, has adversely affected many
oil companies' drilling decisions. The primary environmental statutory and
regulatory programs that affect the Company's operations include those
summarized below.
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<PAGE> 53
Oil Pollution Act and Clean Water Act. The Oil Pollution Act of 1990
("OPA") amends certain provisions of the Federal Water Pollution Control Act of
1972, commonly referred to as the Clean Water Act ("CWA"), and other statutes as
they pertain to the prevention of and response to hazardous substances and oil
spills into navigable waters. OPA requires responsible parties to maintain proof
of financial responsibility to cover some portion of the cost of a potential
spill and to prepare an oil spill contingency plan. Under OPA, a person owning
or operating a facility or equipment from which there is a discharge or threat
of a discharge of oil into or upon navigable waters or adjoining shorelines is
liable as a "responsible party" for removal costs and damages. Many of the
Company's activities are conducted in or near ecologically sensitive areas, such
as wetlands, coastal environment and inland waterways. An oil spill in a wetland
or inland waterway could produce substantial damage to the environment,
including wildlife and natural resources, and result in material liability.
Federal law imposes strict, joint and several liability on facility owners for
containment and clean-up costs and certain other damages, including natural
resource damages, arising from a spill as well as civil and criminal penalties
for violation of regulatory requirements.
The CWA also regulates the discharge of pollutants to surface water and the
discharge of dredged or fill material to wetlands areas.
Superfund. The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), commonly referred to as the "Superfund" law, imposes
strict, joint and several liability on certain classes of persons with respect
to the release or threatened release of a hazardous substance to the
environment. These persons include: (i) the current owner and operator of a
facility from which hazardous substances are released; (ii) owners and operators
of a facility at the time any hazardous substances were disposed; (iii)
generators of hazardous substances who arranged for treatment or disposal at or
transport to such facility and (iv) transporters who selected the facility for
treatment or disposal of hazardous substances. The Company may be responsible
under CERCLA for all or part of the costs to clean up sites at which hazardous
substances have been released. To date, however, the Company has not been named
a potentially responsible party under CERCLA or any similar state Superfund
laws.
Hazardous Waste Disposal. The Company's operations involve the generation
or handling of materials that are classified as hazardous waste, and that are
subject to the Federal Resource Conservation and Recovery Act ("RCRA") and
comparable state statutes. The Environmental Protection Agency and various state
agencies have imposed strict requirements regulating the treatment, storage,
transport and disposal of hazardous wastes.
NORM. Oil and gas exploration and production activities have been
identified as generators of naturally-occurring radioactive materials ("NORM").
The generation, handling and disposal of NORM waste due to oil and gas
exploration and production activities is currently regulated in various states
including Louisiana and Texas. The Company does not believe that its compliance
with such regulations will have a material effect on its operations or financial
condition, but there can be no assurance in this regard.
Occupational Safety and Health. The Occupational Safety and Health Act of
1970, as amended, ("OSHA") establishes employer responsibilities including
maintenance of a workplace free of recognized hazards likely to cause death or
serious injury, compliance with standards promulgated by the Occupational Safety
and Health Administration, and various recordkeeping, disclosure and procedural
requirements. Such requirements include, for example, the Hazard Communication
Standard which applies to all private-sector employers including those in the
oil and gas exploration and production industry, and requires such employers to
assess chemical hazards, obtain and maintain certain written descriptions of
these hazards, develop a hazard communication program and train employees to
work safely with chemicals on site. Failure to comply with the requirements of
OSHA may result in administrative, civil and criminal penalties. The Company
believes it is in substantial compliance with OSHA requirements and does not
believe it will be required to expend material amounts by reason of such
requirements. However, the Company is unable to predict the ultimate cost of
compliance with these changing requirements.
Frost Laws. The operations of the Company's Eastern Division and INDRILLERS
Division are limited during April and May of each year due to the "frost laws"
of the states in which they operate. These frost laws restrict the movement of
equipment on public roads during these months.
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<PAGE> 54
LEGAL PROCEEDINGS
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 financial condition or results of
operations.
In connection with the GWDC Acquisition, a $5.0 million escrow fund was
established to provide a source of payment for the net costs to the Company, if
any, for any eventual settlement by, or the payment of a monetary court judgment
against, the Company arising out of a case pending against GWDC at the time of
the GWDC Acquisition. The source of the escrow fund was the cash consideration
that would have otherwise been payable by the Company to GWDC's shareholders.
The litigation, which was styled TEPCO, Inc. v. Grey Wolf Drilling (Cause No.
96-49194) in the 164th Judicial District Court of Harris County, Texas, was
settled in August 1997 for $2.5 million which will be paid from the escrow fund.
INSURANCE
The Company's operations are subject to the many hazards inherent in the
drilling business, including, for example, blowouts, cratering, fires,
explosions and adverse weather. These hazards could cause personal injury,
suspend drilling operations or seriously damage or destroy the equipment
involved and could cause substantial damage to producing formations and
surrounding areas. Damage to the environment could also result from the
Company's operations, particularly through oil spillage and extensive,
uncontrolled fires. As a protection against operating hazards, the Company
maintains insurance coverage, including property casualty insurance on its rigs
and drilling equipment, comprehensive general liability and commercial contract
indemnity (including a separate policy for foreign liability), commercial
umbrella and workers' compensation insurance and "control of well" insurance.
The Company's insurance coverage for property damage to its rigs and
drilling equipment is based on the Company's estimate, as of June 1997, of the
cost of comparable used equipment to replace the insured property. There is an
annual aggregate deductible on rigs of $500,000 to be comprised of losses
otherwise recoverable thereafter in excess of a $50,000 maintenance deductible.
There is a $10,000 deductible per occurrence on equipment.
The Company's third party liability insurance coverage under each of the
general and foreign policies is $1.0 million per occurrence, with a deductible
of $50,000 per occurrence and annual maximum coverage of $2.0 million. The
commercial umbrella limit is $50.0 million per occurrence. The Company believes
that it is adequately insured for public liability and property damage to others
with respect to its operations. However, such insurance may not be sufficient to
protect the Company against liability for all consequences of well disasters,
extensive fire damage or damage to the environment.
The Company also maintains insurance coverage to protect against certain
hazards inherent in its turnkey contract drilling operations. This insurance
covers "control of well" (including blowouts above and below the surface),
cratering, seepage and pollution and care, custody and control. The Company's
current insurance provides $500,000 coverage per occurrence for care, custody
and control, and coverage per occurrence for control of well, cratering, seepage
and pollution associated with drilling operations of either $10.0 million or
$20.0 million, depending upon the area in which the well is drilled and its
target depth. Each form of coverage provides for a deductible for the account of
the Company, as well as a maximum limit of liability. Each casualty is an
occurrence, and there may be more than one such occurrence on a well, each of
which would be subject to a separate deductible.
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<PAGE> 55
FACILITIES
The following table summarizes the Company's significant owned and leased
properties:
<TABLE>
<CAPTION>
LOCATION INTEREST USES
-------- -------- ----
<S> <C> <C>
Houston, Texas........................... Leased Executive Offices
Houston, Texas........................... Owned Rig Yard
Alice, Texas............................. Owned Field Office, Rig Yard, Truck Yard
Duson, Louisiana......................... Owned Rig Yard
Eunice, Louisiana........................ Owned Field Office
Fillmore, Louisiana...................... Owned Field Office
Oklahoma City, Oklahoma.................. Owned Rig Yard
Mt. Pleasant, Michigan................... Owned Field Office, Rig Yard
Midvale, Ohio............................ Owned Field Office, Rig Yard
</TABLE>
The Company leases approximately 19,400 square feet of office space for its
principal executive offices at a cost of approximately $25,000 per month. The
Company considers all of its facilities to be in good operating condition and
adequate for their present uses.
EMPLOYEES
At September 15, 1997, the Company had approximately 2,400 employees and
Justiss had approximately 250 rig-based employees, substantially all of whom the
Company presently expects to employ following the Justiss Acquisition. None of
the Company's employees are subject to collective bargaining agreements, and
management believes its employee relations are satisfactory.
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<PAGE> 56
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The table and descriptions below set forth certain information regarding
the Company's executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
---- --- ----------------------------
<S> <C> <C>
Thomas P. Richards..................... 54 President and Chief Executive Officer
T. Scott O'Keefe....................... 41 Senior Vice President, Chief Financial Officer
and Secretary
Terrell L. Sadler...................... 48 Senior Vice President -- Domestic Operations
Ronnie E. McBride...................... 47 Senior Vice President -- Domestic Operations
Forrest M. Conley, Jr.................. 50 Senior Vice President -- International
Operations
David W. Wehlmann...................... 38 Vice President and Controller
Gary D. Lee............................ 51 Vice President -- Human Resources
John D. Peterson, Jr................... 43 Vice President
Donald J. Guedry, Jr................... 41 Treasurer
Ivar Siem.............................. 51 Chairman of the Board and Director
William R. Ziegler..................... 55 Vice Chairman of the Board and Director
William T. Donovan..................... 45 Director
Lucien Flournoy........................ 78 Director
Peter M. Holt.......................... 49 Director
James K. B. Nelson..................... 69 Director
Roy T. Oliver, Jr...................... 45 Director
Steven A. Webster...................... 46 Director
</TABLE>
Thomas P. Richards joined the Company in September 1996 as President and
Chief Executive Officer. Mr. Richards was with Diamond Offshore Drilling, Inc.
("Diamond Offshore") from September 1990 until September 1996. He started as
Senior Vice President of Diamond M, a subsidiary of Diamond Offshore, in 1990
and was serving as Senior Vice President of Worldwide Operations when he left
Diamond Offshore in 1996. Mr. Richards served as Vice President -- Land for
Penrod Drilling Corporation from January 1989 until September 1990 when Diamond
M Corporation purchased substantially all of Penrod's land drilling assets. From
February 1974 until December 1988, Mr. Richards owned and served as President
and Chief Executive Officer of Richards Drilling Company, a land drilling
contractor based in Bay City, Texas.
T. Scott O'Keefe was appointed Senior Vice President and Chief Financial
Officer of the Company in September 1996. During the period beginning in April
1996 and ending with such appointment, Mr. O'Keefe provided consulting services
to the Company. Prior to joining the Company, he was Vice President and Chief
Financial Officer of Convest Energy Corporation ("Convest") for six years.
Convest is a publicly held oil and gas exploration and production company. From
1985 to 1989, Mr. O'Keefe was employed in various financial management
capacities with Convest or its affiliates. Mr. O'Keefe is a certified public
accountant.
Terrell L. Sadler joined the Company in 1989 as the Ark-La-Tex District
Manager. He was promoted to Vice President -- Mid Continent Division in November
1994, and became Vice President -- Domestic Drilling in April 1996. Mr. Sadler
was promoted to Senior Vice President -- Domestic Operations in September 1996.
Ronnie E. McBride joined the Company in September 1996 as Senior Vice
President -- Domestic Operations. Mr. McBride was the Vice President of Turnkey
Services at Diamond Offshore from December 1995 until September 1996. He served
as Operational Manager of Diamond M from October 1991 until March 1993, at which
time he was promoted to Vice President -- Onshore Operations and served in this
position until December 1995. Prior to October 1991, Mr. McBride was Vice
President -- Operations for Harkins & Company for four years until it was
acquired by Diamond M.
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<PAGE> 57
Forrest M. Conley, Jr. joined the Company in September 1996 as Senior Vice
President -- International Operations. Mr. Conley has twenty-six years of
drilling industry experience. From May 1993 until joining the Company, he was
with Noble Drilling Corporation -- Triton Engineering where he served as
Manager -- Sales and Marketing, Manager -- International Marketing and most
recently as the Vice President and General Manager of Triton International.
Previously, he was General Manager of ENSCO Tool & Supply's West Africa division
from December 1991 until May 1993.
David W. Wehlmann joined the Company in July 1996 as Vice President and
Controller. From November 1994 until he joined the Company, Mr. Wehlmann was
Vice President and Chief Accounting Officer of EnerVest Management Company,
L.C., a privately-held oil and gas property acquisition and management company.
Mr. Wehlmann was Controller of Convest from April 1991 to November 1994. Mr.
Wehlmann is a certified public accountant.
Gary D. Lee joined the Company in March 1997 as Vice President -- Human
Resources. For the past 15 years, he was with Diamond Offshore where from 1990
until March 1997, he served as Vice President -- Human Resources.
John D. Peterson, Jr. became Vice President of the Company upon the closing
of the GWDC Acquisition. Mr. Peterson was Secretary-Treasurer of GWDC from April
1990 until closing. Mr. Peterson held various positions with GWDC from March
1982 to March 1990. Mr. Peterson is a certified public accountant.
Donald J. Guedry, Jr. has been the Company's Treasurer since October 1996.
During the seven years prior to joining the Company, Mr. Guedry served in
various treasury management positions for Weatherford Enterra, Inc. and a
predecessor company.
Ivar Siem has been Chairman of the Board since August 1995 and was
President and Chief Executive Officer from April 1996 through August 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 the Board of Blue Dolphin
Energy Company, an oil and gas pipeline and exploration company, since 1989;
Chairman of the Board of Directors of Seateam Technology ASA, a provider of
subsea surveys and support for the offshore oil and gas industry, since January
1997; director of Norex Industries, Inc., a company with investments in the oil
and gas, cruise and shipping industries ("Norex"), since 1992; and director of
DSND ASA, a Norwegian service company that operates specialty vessels and
provides subsea engineering services, since 1993.
William R. Ziegler has been a director of the Company since August 1996 and
is currently Vice Chairman of the Board of Directors. He has been a partner of
the law firm of Parson & Brown LLP since June 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.,
a general partner of Somerset Capital Partners, the managing member of Somerset
Drilling Associates, L.L.C., and a director of Geokinetics, Inc., which provides
3-D seismic acquisition and geophysical services to the oil and gas industry.
William T. Donovan became a director of the Company following closing of
the GWDC Acquisition. Since 1980, Mr. Donovan has been a Principal and Managing
Director of Lubar & Co., a private investment and venture capital firm. Mr.
Donovan also serves as President and Chief Financial Officer of Christiana
Companies, Inc. and as a director of various private industrial companies. Prior
to joining Lubar & Co., Mr. Donovan was an officer with Manufacturers Hanover
Trust Company from 1976 to 1980, where he specialized in merger acquisition
financing.
Lucien Flournoy became a director of the Company in January 1997 in
connection with the Company's purchase of the operating assets of Flournoy. Mr.
Flournoy has over 50 years of experience in the land drilling business. He
founded Flournoy in 1950 and had served as its President and a Director from
that time until Flournoy was acquired by the Company on January 31, 1997.
Peter M. Holt has been a director of the Company since August 1996. He has
been the President, Chief Executive Officer and principal owner of Holt
Companies for over 13 years. Holt Companies is comprised of two Caterpillar
dealerships in central/south Texas and western Ohio and various other business
interests.
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<PAGE> 58
James K. B. Nelson became a director of the Company upon closing of the
GWDC Acquisition. He joined GWDC in 1960 and has served as President and Chief
Executive Officer of GWDC since 1978. He began his career in the oil field
drilling industry as a roughneck in 1946.
Roy T. Oliver, Jr. has been a director of the Company since August 1996. He
has been the Chairman of the Board and Chief Executive Officer of U.S. Rig &
Equipment, Inc., an Oklahoma corporation, a worldwide supplier of drilling
equipment, since its organization in 1982.
Steven A. Webster has been a director of the Company since August 1996. He
has been the Chairman of the Board and Chief Executive Officer of Falcon
Drilling Company, Inc., a marine oil and gas drilling contractor, since 1988. He
serves as a director of Crown Resources Corporation, (a mining company), Trust
Manager of Camden Property Trust, a general partner of Somerset Capital
Partners, the managing member of Somerset Drilling Associates, L.L.C., Chairman
of the Board of Carrizo Oil & Gas, Inc., an independent oil and gas exploration
company, and a director of Geokinetics, Inc., which provides 3-D seismic
acquisition and geophysical services to the oil and gas industry.
CERTAIN TRANSACTIONS
The Company has in the past, and may in the future, purchase rigs and
related equipment from its affiliates. The Company believes that the prices paid
in such transactions have been and will be no less favorable than in comparable
transactions with unaffiliated third parties in arms' length transactions.
Included among the Additional Rig Purchases were two transactions in which the
Company purchased four rigs for addition to its inventory of rigs held for
refurbishment and reactivation from R.T. Oliver, Inc., a company controlled by
director Roy T. Oliver, Jr. The aggregate purchase price for rigs purchased from
R.T. Oliver, Inc. was $10.6 million.
For the year ended December 31, 1996 and the six months ended June 30,
1997, the Company has made purchases of rig equipment from a company controlled
by one of its directors, Peter M. Holt, totaling $36,259 and $209,193,
respectively.
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<PAGE> 59
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of September 30, 1997 and as adjusted
to reflect the sale by the Company and the Selling Shareholders of the Shares
offered hereby (assuming no exercise of the Underwriters' over-allotment
option), by: (i) each person who is known by the Company to own beneficially
more than 5% of the Company's Common Stock, (ii) each of the Company's
directors, (iii) each of the Company's executive officers and (iv) all directors
and executive officers of the Company as a group:
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
BENEFICIALLY
OWNED(1)
SHARES BENEFICIALLY ------------------------
OWNED PRIOR NUMBER OF PRIOR TO AFTER THE
TO THE OFFERING(1) SHARES OFFERED(2) THE OFFERING OFFERING
------------------- ----------------- ------------ ---------
<S> <C> <C> <C> <C>
Somerset Capital Partners(3).............. 35,423,978(4) 5,527,000 23.3% 18.2%
Somerset Drilling Associates, L.L.C....... 29,962,223(4) 5,527,000 19.7% 14.9%
254 Franklin Street
Buffalo, New York 14202
U.S. Rig & Equipment, Inc. ............... 2,660,002(4) 633,000 1.8% 1.2%
6601 SW 29th Street
Oklahoma City, Oklahoma 73179
Norex Industries, Inc.(5)................. 17,685,605 2,759,000 11.7% 9.1%
Norex Drilling, Ltd. ..................... 17,685,605 2,759,000 11.7% 9.1%
Post Office Box HM 429
Hamilton, HM, BX, Bermuda
Flournoy Family Properties, Ltd.(6) ...... 4,500,000 801,000 3.0% 2.3%
Officers and Directors(7)
Thomas P. Richards(8)................... 700,000 * *
T. Scott O'Keefe........................ 57,500 * *
Terrell L. Sadler....................... 123,400 * *
Ronnie E. McBride....................... 130,000 * *
Forrest M. Conley, Jr................... 30,000 * *
David W. Wehlmann....................... 4,000 * *
Gary D. Lee............................. 1,000 * *
Donald J. Guedry........................ 4,000 * *
John D. Peterson, Jr.................... -- -- --
Ivar Siem(9)............................ 18,251,605 2,759,000 12.0% 9.4%
William R. Ziegler(10).................. 35,503,978(4) 5,527,000 23.4% 18.2%
William T. Donovan...................... 585,938 * *
Lucien Flournoy(11)..................... 5,132,055 801,000 3.4% 2.6%
Peter M. Holt........................... 175,000 * *
James K. B. Nelson...................... 4,694,091 3.1% 2.9%
Roy T. Oliver, Jr.(12).................. 14,890,614(4) 3,413,000 9.8% 7.0%
Steven A. Webster(10)................... 35,499,978(4) 5,527,000 23.4% 18.2%
Directors and Executive Officers as a
group (17 persons named
above)(7)-(12)....................... 80,359,181 12,500,000 52.3% 40.8%
</TABLE>
- ---------------
* Less than 1%.
(1) To the Company's knowledge, the persons named in the table have sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where
applicable and the information contained in the footnotes to this table.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power
with respect to securities. Shares of Common Stock issuable upon
58
<PAGE> 60
exercise of stock options exercisable within 60 days of September 30, 1997
are deemed outstanding and to be beneficially owned by the person holding
such option for purposes of computing such person's percentage ownership,
but are not deemed outstanding for the purpose of computing the percentage
ownership of any other person.
(2) The following Selling Shareholders are offering the number of shares
indicated in the Offering: Somerset Drilling Associates, L.L.C., 5,527,000;
U.S. Rig & Equipment, Inc., 633,000; Norex Drilling, Ltd., 2,759,000;
Flournoy Family Properties, Ltd., 801,000; and Roy T. Oliver, Jr.,
2,780,000.
(3) Shares beneficially owned prior to the Offering includes 29,962,223 shares
that are held by Somerset Drilling Associates, L.L.C., an affiliate of
Somerset Capital Partners. Number of shares offered includes 5,527,000
shares that are offered by Somerset Drilling Associates, L.L.C. Certain
affiliates and employees of Donaldson, Lufkin & Jenrette Securities
Corporation, one of the underwriters of the Offering, own indirectly
4,890,326 shares of Common Stock, including 892,857 shares anticipated to
be offered in the Offering, through their interests in Somerset Drilling
Associates, L.L.C. See "Underwriting."
(4) Does not include shares of Common Stock that may be acquired upon the
exercise of warrants to purchase Common Stock. The right to exercise such
warrants are contingent upon the occurrence of events not within the
control of the holder of such warrants.
(5) Shares beneficially owned prior to the Offering includes 17,685,605 shares
owned by Norex Drilling, Ltd., an affiliate of Norex. Number of shares
offered includes 2,759,000 shares that are offered by Norex Drilling, Ltd.
(6) Shares beneficially owned are held of record by Lucien Flournoy and Maxine
Flournoy, as general partners of Flournoy Family Properties, Ltd. ("FFP"),
for the account of FFP.
(7) Shares beneficially owned prior to the Offering for certain officers and
directors include the following options to purchase Common Stock: Mr.
Richards, 700,000; Mr. O'Keefe, 37,500; Mr. Sadler, 123,400; Mr. McBride,
130,000; Mr. Conley, 30,000; Mr. Wehlmann, 4,000; Mr. Guedry, 4,000; Mr.
Siem, 566,000; Mr. Ziegler, 75,000; Mr. Holt, 75,000; Mr. Oliver, 75,000;
Mr. Webster, 75,000.
(8) Shares beneficially owned prior to the Offering includes 400,000 shares
which a limited partnership affiliated with Mr. Richards has the right to
acquire upon exercise of stock options. Mr. Richards disclaims beneficial
ownership of these shares.
(9) Shares beneficially owned prior to the Offering includes 17,685,605 shares
beneficially owned by Norex, an affiliate of Mr. Siem. Number of shares
offered includes 2,759,000 shares offered by Norex Drilling, Ltd., an
affiliate of Mr. Siem. Mr. Siem disclaims beneficial ownership of all such
shares.
(10) Shares beneficially owned prior to the Offering includes 35,423,978 shares
beneficially owned by Somerset Capital Partners, an affiliate of Mr.
Ziegler and Mr. Webster. Number of shares offered includes 5,527,000 shares
offered by Somerset Drilling Associates, L.L.C., an affiliate of Mr.
Ziegler and Mr. Webster. Mr. Ziegler and Mr. Webster disclaim beneficial
ownership of all such shares.
(11) Shares beneficially owned prior to the Offering includes 4,500,000 shares
owned by Flournoy Family Properties, Ltd. and 75,594 shares owned by Maxine
Flournoy, affiliates of Mr. Flournoy. Number of shares offered includes
801,000 shares offered by Flournoy Family Properties, Ltd. Mr. Flournoy
disclaims beneficial ownership of all such shares.
(12) Shares beneficially owned prior to the Offering includes 2,660,002 shares
owned by U.S. Rig & Equipment, Inc., an affiliate of Mr. Oliver and 27,876
shares owned by Mr. Oliver's minor children. Number of shares offered
includes 633,000 shares that are offered by U.S. Rig & Equipment, Inc. Mr.
Oliver disclaims beneficial ownership of all such shares.
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<PAGE> 61
SHARES AVAILABLE FOR FUTURE SALE
As of September 30, 1997, the Company had 151,835,391 shares of Common
Stock outstanding, 244,800 shares of Common Stock issuable upon conversion of
the Company's Series A Convertible Redeemable Preferred Stock, par value $1.00
per share (the "Series A Preferred"), and 6,047,000 shares issuable upon the
exercise of outstanding warrants and options. Certain shares of outstanding
Common Stock (the "Restricted Shares") may only be sold subject to certain
restrictions imposed by Rules 144 and 145 under the Securities Act. However,
certain of the Restricted Shares may currently be sold by shareholders of the
Company pursuant to the Resale Shelf. The Restricted Shares may also become
eligible for sale pursuant to Rules 144 and 145 under the Securities Act.
Substantially all the Restricted Shares that are not covered by the Resale Shelf
benefit from currently unexercised registration rights, although the Company
may, pursuant to certain of its registration rights agreements, limit the
timing, volume or manner of sale of such shares or halt selling of such shares
altogether for a limited period of time. In connection with the Offering, the
Company, the Selling Shareholders and certain other shareholders of the Company
have agreed with the representatives of the Underwriters, subject to certain
exceptions, not to offer to sell, sell, contract to sell, announce their
intention to sell, pledge, grant any option for the sale of or otherwise dispose
of, directly or indirectly, or file with the Commission a registration statement
under the Securities Act relating to any Common Stock or any securities
convertible or exercisable into or exchangeable for any Common Stock, without
the prior written consent of Credit Suisse First Boston Corporation, for a
period of 120 days from the date of this Prospectus. The following table sets
forth certain information regarding the shares of Common Stock currently
outstanding:
<TABLE>
<CAPTION>
RESTRICTED SHARES(1)
--------------------------------------------
OFFERED COVERED BY NOT COVERED BY UNRESTRICTED
HELD BY HEREBY(2) RESALE SHELF RESALE SHELF(3) SHARES(4) TOTAL
------- ---------- ------------ ---------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Selling Shareholders.............. 12,500,000 40,168,892 14,926,605 -- 67,595,497
All other shareholders............ -- 27,311,026 10,025,376 46,903,492 84,239,894
---------- ---------- ---------- ---------- -----------
Total................... 12,500,000 67,479,918 24,951,981 46,903,492 151,835,391
========== ========== ========== ========== ===========
</TABLE>
- ---------------
(1) Excludes shares issuable upon conversion of the Series A Preferred or the
exercise of warrants or options.
(2) Excludes 1,875,000 shares that may be sold upon exercise of the
Underwriters' option to cover over-allotments.
(3) Substantially all the shares benefit from currently unexercised registration
rights.
(4) Currently tradeable without restriction.
The Company also has outstanding three registration statements on Form S-8
to register the issuance of up to an aggregate of 9,750,000 shares of Common
Stock upon the exercise of options outstanding under the Company's 1982 Stock
Option and Long-Term Incentive Plan for Key Employees, 1987 Stock Option Plan
for Non-Employee Directors and 1996 Employee Stock Option Plan (collectively,
the "Option Plans"). At present, there are outstanding under the Option Plans or
otherwise options to purchase a total of 5,557,400 shares of Common Stock, of
which options to purchase 1,922,200 shares are currently exercisable. Shares
issued upon the exercise of such options will generally be available for
immediate resale, subject to the restrictions of Rule 144 as to sales by
affiliates of the Company. The shares of Common Stock issuable upon conversion
of the Series A Preferred will be subject to the applicable restrictions of Rule
144. In connection with the Flournoy Acquisition, the company is contingently
obligated to issue additional shares of Common Stock to the shareholders of
Flournoy in the event of a significant decline in the price of the Company's
Common Stock. The Company estimates that no additional shares would be issuable
to the Flournoy shareholders unless the price of the Company's Common Stock
declines below $0.50 per share before January 31, 1998.
60
<PAGE> 62
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated , 1997 (the "Underwriting Agreement"), the
Underwriters named below (the "Underwriters"), for whom Credit Suisse First
Boston Corporation, BT Alex. Brown Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation, Howard, Weil, Labouisse, Friedrichs Incorporated, and
Johnson Rice & Company L.L.C. are acting as representatives (the
"Representatives"), have severally but not jointly agreed to purchase from the
Company and the Selling Shareholders the following respective numbers of shares
of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ----------
<S> <C>
Credit Suisse First Boston Corporation......................
BT Alex. Brown Incorporated.................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Howard, Weil, Labouisse, Friedrichs Incorporated............
Johnson Rice & Company L.L.C. ..............................
----------
Total............................................. 25,000,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the shares of Common Stock
offered hereby (other than those shares covered by the over-allotment option
described below), if any are purchased. The Underwriting Agreement provides
that, in the event of a default by an Underwriter, in certain circumstances the
purchase commitments of the non-defaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
The Company and the Selling Shareholders have granted to the Underwriters
options, expiring at the close of business on the 30th day after the date of
this Prospectus, to purchase up to 1,875,000 additional shares from the Company
and an aggregate of up to 1,875,000 additional shares from the Selling
Shareholders at the initial public offering price less the underwriting
discounts and commissions, all as set forth on the cover page of this
Prospectus. Such options may be exercised only to cover over-allotments in the
sale of the Shares. To the extent such option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of the additional shares of Common Stock as it was obligated
to purchase pursuant to the Underwriting Agreement.
The Company and the Selling Shareholders have been advised by the
Representatives that the Underwriters propose to offer the Shares offered hereby
to the public initially at the public offering price set forth on the cover page
of this Prospectus and to certain dealers at such price less a concession of
$ per share, and the Underwriters and such dealers may allow a discount
of $ per share on sales to certain other dealers. After the initial
public offering, the public offering price and concession and discount to
dealers may be changed by the Representatives.
Bankers Trust Company, an affiliate of BT Alex. Brown Incorporated, will
receive greater than 10% of the net proceeds of the Offering as repayment of
indebtedness owed to it by the Company. Accordingly, the Offering is being
conducted pursuant to the provisions of Rule 2710(c)(8) of the Conduct Rules of
the National Association of Securities Dealers, Inc. (the "NASD").
As of September 25, 1997, certain affiliates and employees of Donaldson,
Lufkin & Jenrette Securities Corporation owned indirectly through Somerset
Drilling Associates, L.L.C. 4,890,326 shares of Common Stock in the aggregate,
which represented 3.22% of the outstanding shares of Common Stock of the Company
on such date, of which 892,857 shares are anticipated to be sold in the
Offering. See "Principal and Selling Shareholders."
The Company and the Selling Shareholders have agreed that they will not
offer, sell, contract to sell, announce their intention to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Commission a
registration statement under the Securities Act relating to any additional
shares of Common
61
<PAGE> 63
Stock of securities convertible into or exchangeable or exercisable for any
shares of Common Stock without the prior written consent of Credit Suisse First
Boston Corporation for a period of 120 days from the date of this Prospectus,
except (i) sales of Shares offered in the Offering, (ii) issuances of Common
Stock by the Company pursuant to the exercise of employee stock options
outstanding on the date of this Prospectus or (iii) issuances of Common Stock in
specified acquisitions.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or contribute to payments which the Underwriters may be required
to make in respect thereof.
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
Common Stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the
Representatives to reclaim a selling concession from a syndicate member when the
Common Stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the Common Stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the AMEX
or otherwise and, if commenced, may be discontinued at any time.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Shares in Canada is being made only on a private
placement basis exempt from the requirement that the Company prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of Shares are effected. Accordingly, any resale of the Shares in Canada
must be made in accordance with applicable securities laws, which will vary
depending on the relevant jurisdiction, and which may require resales to be made
in accordance with available statutory exemptions or pursuant to a discretionary
exemption granted by the applicable Canadian securities regulatory authority.
Purchasers are advised to seek legal advice prior to any resale of the Shares.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Shares in Canada who receive a purchase confirmation will
be deemed to represent to the Company, the Selling Shareholders and the dealer
from whom such purchase confirmation is received that (i) such purchaser is
entitled under applicable provincial securities laws to purchase such Shares
without the benefit of a prospectus qualified under such securities laws, (ii)
where required by law, that such purchaser is purchasing as principal and not as
agent and (iii) such purchaser has reviewed the text above under "-- Resale
Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
62
<PAGE> 64
ENFORCEMENT OF LEGAL RIGHTS
All of the Company's directors and officers, the experts named herein and
the Selling Shareholders may be located outside of Canada and, as a result, it
may not be possible for Canadian purchasers to effect service of process within
Canada upon the issuer or such persons. All or a substantial portion of the
assets of the Company and such persons may be located outside of Canada and, as
a result, it may not be possible to satisfy a judgment against the issuer or
such persons in Canada or to enforce a judgment obtained in Canadian courts
against such issuer or persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Shares to whom the Securities Act (British Columbia) applies
is advised that such purchaser is required to file with the British Columbia
Securities Commission a report within ten days of the sale of any Shares
acquired by such purchaser pursuant to this Offering. Such report must be in the
form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from the Company. Only one such report
must be filed in respect of Shares acquired on the same date and under the same
prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Shares should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the Shares in
the particular circumstances and with respect to the eligibility of the Shares
for investment by the purchaser under the relevant Canadian legislation.
LEGAL MATTERS
The legality of the Shares being offered hereby will be passed upon for the
Company by Porter & Hedges, L.L.P., Houston, Texas. Certain legal matters in
connection with the Offering will be passed upon for the Underwriters by Akin,
Gump, Strauss, Hauer & Feld, L.L.P.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996, and for the year then ended have been incorporated by reference herein and
in the Registration Statement in reliance on the report of KPMG Peat Marwick
LLP, independent certified public accountants, incorporated by reference herein,
and upon the authority of said firm as experts in accounting and auditing.
The financial statements incorporated in this Prospectus by reference as of
and for the year ended December 31, 1995, and the nine month period ended
December 31, 1994, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports, which are incorporated herein by
reference, and have been so incorporated in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
The audited financial statements of Grey Wolf Drilling Company incorporated
by reference in this Prospectus and elsewhere in the Registration Statement to
the extent and for the periods indicated in their report have been audited by
Arthur Andersen LLP, independent public accountants, and are incorporated by
reference herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said report.
63
<PAGE> 65
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). The
Registration Statement (defined herein), as well as such 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 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at
its regional offices located at Seven World Trade Center, 13th Floor New York,
New York 10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. 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 Commission maintains a site on the World Wide Web
that contains certain documents filed with the Commission electronically. The
address of such site is http://www.sec.gov and the Registration Statement may be
inspected at such site. The Common Stock is listed and traded on the AMEX and
certain of the Company's reports, proxy statements and other information can be
inspected at the offices of the AMEX, 86 Trinity Place, New York, New York
10006.
The Company has filed with the Commission a Registration Statement on Form
S-3 (together with any amendments or supplements thereto, the "Registration
Statement") under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus 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. For
further information with respect to the Company and the Common Stock, reference
is made to the Registration Statement and the exhibits thereto. Statements
contained in this Prospectus (or in any document incorporated into this
Prospectus 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 is qualified in
its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents or portions of documents, which have been filed by
the Company with the Commission pursuant to the Exchange Act (Commission File
No. 1-8226) or the Securities Act, are incorporated herein by reference and made
a part of this Prospectus:
1. Annual Report on Form 10-K for the fiscal year ended December 31,
1996.
2. Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997
and June 30, 1997.
3. Definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders held May 14, 1997.
4. The description of Common Stock contained in the Current Report on
Form 8-K filed October 6, 1997.
5. Definitive Information Statement pursuant to Section 14(c) of the
Exchange Act filed August 22, 1997.
6. Current Reports on Form 8-K filed: January 13, 1997, February 3, 1997
(as amended by Form 8-K/A filed April 15, 1997); March 10, 1997; May
16, 1997; August 22, 1997; and September 19, 1997; September 30,
1997, October 6, 1997, and October 22, 1997.
7. The historical financial statements of Grey Wolf Drilling Company
contained in the prospectus dated June 23, 1997 relating to the
Company's registration statement on Form S-3 (Registration
Statement No. 333-26519).
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the Offering shall be deemed to be incorporated by reference
into this Prospectus and to be a part hereof from the respective dates of filing
of such documents.
64
<PAGE> 66
Any statement contained in a document or information incorporated or deemed
to be incorporated herein by reference shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document that also is, or is
deemed to be, incorporated herein by reference, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company undertakes to provide, without charge, to each person,
including any beneficial owner, to whom a copy of this Prospectus is delivered,
upon the written or oral request of such person, a copy of any and all of the
documents or information referred to above that have been or may be incorporated
by reference in this Prospectus (excluding exhibits to such documents unless
such exhibits are specifically incorporated by reference). Requests should be
directed to the corporate secretary, Grey Wolf, Inc., 10370 Richmond Avenue,
Suite 600, Houston, Texas 77042-4136, telephone (713) 435-6100.
65
<PAGE> 67
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDERS OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 11
Forward-Looking Statements............ 16
Use of Proceeds....................... 17
Capitalization........................ 18
Dilution.............................. 19
Price Range of Common Stock and
Dividend Policy..................... 20
Unaudited Pro Forma Consolidated
Financial Data...................... 21
Selected Financial Data............... 27
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 29
Business.............................. 40
Management............................ 55
Principal and Selling Shareholders.... 58
Shares Available for Future Sale...... 60
Underwriting.......................... 61
Notice to Canadian Residents.......... 62
Legal Matters......................... 63
Experts............................... 63
Available Information................. 64
Incorporation of Certain Documents by
Reference........................... 64
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[GREY WOLF, INC. LOGO]
GREY WOLF, INC.
25,000,000 Shares
Common Stock
($.10 par value)
PROSPECTUS
CREDIT SUISSE FIRST BOSTON
BT ALEX. BROWN
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
HOWARD, WEIL,
LABOUISSE, FRIEDRICHS
INCORPORATED
JOHNSON RICE & COMPANY L.L.C.
- --------------------------------------------------------------------------------
<PAGE> 68
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by the Company in connection with the
offering of the Shares to be registered and offered hereby are as follows:
<TABLE>
<S> <C>
Commission Registration Fee................................. $ 63,163
NASD Fee.................................................... 21,344
Printing Expenses........................................... 130,000
Legal Fees and Expenses..................................... 220,000
Blue Sky Fees and Expenses.................................. 10,000
Accounting Fees and Expenses................................ 90,000
Miscellaneous............................................... 65,493
--------
Total..................................................... $600,000
========
</TABLE>
All such expenses are estimated except for the Commission registration fee
and the NASD fee.
ITEM 15. 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 constitute 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 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 Registrant's Articles of
Incorporation, as amended, states that a director of the Registrant shall not be
liable to the Registrant 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 Texas Business Corporation Act (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 TBCA provides that unless a court of competent jurisdiction
determines otherwise, 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 of the TBCA 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 shall 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 of the TBCA 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 of the TBCA a corporation may
II-1
<PAGE> 69
(i) indemnify and advance expenses to an officer, employee, agent or other
persons 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 its directors, (ii) indemnify and advance expenses to
directors and such other persons identified in (i) 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 identified in (i)
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 Registrant 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 of the TBCA
described above.
The Registrant maintains directors' and officers' insurance. The Company
has entered into agreements to indemnify certain of its executive officers
regarding liabilities that may result from such officer's service as an officer
or director of the Company.
ITEM 21. EXHIBITS
The exhibits listed in the Exhibit Index below are filed as part of the
Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* -- Form of Underwriting Agreement.
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. (incorporated herein by reference to
Exhibit 2.1 to Registration Statement No. 333-6077).
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. (incorporated herein by
reference to Exhibit 2.1.1 to Registration Statement No.
333-6077).
2.1.2 -- Second Amendment to Agreement and Plan of Merger dated
July 26, 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. (incorporated herein
by reference to Exhibit 2.1.2 to Amendment No. 1 to
Registration Statement No. 333-6077).
2.2 -- Agreement and Plan of Merger dated May 7, 1996, among DI
Industries, Inc. and Somerset Investment Corp.
(incorporated herein by reference to Exhibit 2.2 to
Registration Statement No. 333-6077).
2.2.1 -- Amendment to Agreement and Plan of Merger dated May 7,
1996, among DI Industries, Inc. and Somerset Investment
Corp. (incorporated herein by reference to Exhibit 2.2.1
to Registration Statement No. 333-6077).
2.2.2 -- Second Amendment to Agreement and Plan of Merger dated
July 26, 1996, among DI Industries, Inc. and Somerset
Investment Corp. (incorporated herein by reference to
Exhibit 2.2.2 to Amendment No. 1 to Registration
Statement No. 333-6077).
2.3 -- Asset Purchase Agreement dated October 3, 1996, by and
between DI Industries, Inc. and Meritus, Inc., a Texas
corporation, Mesa Rig 4 L.L.C., a Texas limited liability
company, Mesa Venture, a Texas general partnership, and
Mesa Drilling, Inc., a Texas corporation (incorporated
herein by reference to Exhibit 2.1 to Registration
Statement No. 333-14783).
</TABLE>
II-2
<PAGE> 70
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.4 -- Asset Purchase Agreement dated November 12, 1996, between
Diamond M Onshore, Inc. and Drillers, Inc. (incorporated
herein by reference to Exhibit 2.1 to Form 8-K dated
December 30, 1996).
2.4.1 -- Letter Agreement dated December 31, 1996, between Diamond
M Onshore and Drillers, Inc. amending the Asset Purchase
Agreement (incorporated herein by reference to Exhibit
2.2 to Form 8-K dated December 30, 1996).
2.5 -- Asset Purchase Agreement dated December 31, 1996, by and
between Flournoy Drilling Company and Drillers, Inc.
(incorporated herein by reference to Exhibit 2.1 to Form
8-K dated January 31, 1996).
2.6 -- Agreement and Plan of Merger dated March 7, 1997, by and
among DI Industries, Inc., Drillers Inc., and Grey Wolf
Drilling Company including form of Escrow Agreement, form
of Trust Under Grey Wolf Drilling Company Deferred
Corporation Plan, and form of Grey Wolf Drilling Company
Deferred Compensation Plan (incorporated herein by
reference to Exhibit 10.1 to Form 8-K dated March 10,
1997).
2.6.1 -- Amendment No. 1 to Agreement and Plan of Merger by and
among DI Industries, Inc., Drillers Inc. and Grey Wolf
Drilling Company (incorporated by reference from Appendix
A to the Prospectus included in Form S-4 Registration
Statement of DI Industries, Inc., Registration No.
333-26519).
2.7 -- Asset Purchase Agreement dated September 15, 1997 by and
between Justiss Oil Company, Inc. and Grey Wolf Drilling
Company (incorporated by reference from Exhibit 99.1 to
Form 8-K filed September 19, 1997).
3.1* -- Articles of Incorporation, as amended.
3.2++ -- Bylaws
4.1++ -- Specimen certificate for Common Stock.
5.1* -- Opinion of Porter & Hedges, L.L.P.
23.1* -- Consent of KPMG Peat Marwick LLP.
23.2* -- Consent of Deloitte & Touche LLP.
23.3* -- Consent of Arthur Andersen LLP.
23.4* -- Consent of Porter & Hedges, L.L.P. (included in their
opinion filed as Exhibit 5.1 hereto).
24.1++ -- Power of Attorney.
</TABLE>
- ---------------
* Filed herewith.
++ Previously filed
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement 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.
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
II-3
<PAGE> 71
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that (1) for purposes of
determining any liability under the Securities Act, the information omitted from
the form of prospectus filed as part of a registration statement in reliance
upon Rule 430A and contained in the form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of the registration statement as of the time it was declared
effective, and (2) for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 72
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 2 to
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Houston, State of Texas, on October
27, 1997.
GREY WOLF, INC.
By: /s/ DAVID W. WEHLMANN
----------------------------------
David W. Wehlmann,
Vice President and Controller
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities indicated
on October 27, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <C>
* /s/ THOMAS P. RICHARDS President and Chief Executive Officer
- -----------------------------------------------------
Thomas P. Richards
* /s/ T. SCOTT O'KEEFE Senior Vice President and Chief Financial
- ----------------------------------------------------- Officer
T. Scott O'Keefe
/s/ DAVID W. WEHLMANN Vice President and Controller
- -----------------------------------------------------
David W. Wehlmann
* /s/ IVAR SIEM Chairman of the Board and Director
- -----------------------------------------------------
Ivar Siem
* /s/ WILLIAM R. ZIEGLER Vice Chairman of the Board and Director
- -----------------------------------------------------
William R. Ziegler
* /s/ WILLIAM T. DONOVAN Director
- -----------------------------------------------------
William T. Donovan
* /s/ LUCIEN FLOURNOY Director
- -----------------------------------------------------
Lucien Flournoy
* /s/ PETER M. HOLT Director
- -----------------------------------------------------
Peter M. Holt
* /s/ JAMES K. B. NELSON Director
- -----------------------------------------------------
James K. B. Nelson
* /s/ ROY T. OLIVER, JR. Director
- -----------------------------------------------------
Roy T. Oliver, Jr.
* /s/ STEVEN A. WEBSTER Director
- -----------------------------------------------------
Steven A. Webster
*By /s/ DAVID W. WEHLMANN
-------------------------------------------------
David W. Wehlmann
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 73
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* -- Form of Underwriting Agreement.
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. (incorporated herein by reference to
Exhibit 2.1 to Registration Statement No. 333-6077).
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. (incorporated herein by
reference to Exhibit 2.1.1 to Registration Statement No.
333-6077).
2.1.2 -- Second Amendment to Agreement and Plan of Merger dated
July 26, 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. (incorporated herein
by reference to Exhibit 2.1.2 to Amendment No. 1 to
Registration Statement No. 333-6077).
2.2 -- Agreement and Plan of Merger dated May 7, 1996, among DI
Industries, Inc. and Somerset Investment Corp.
(incorporated herein by reference to Exhibit 2.2 to
Registration Statement No. 333-6077).
2.2.1 -- Amendment to Agreement and Plan of Merger dated May 7,
1996, among DI Industries, Inc. and Somerset Investment
Corp. (incorporated herein by reference to Exhibit 2.2.1
to Registration Statement No. 333-6077).
2.2.2 -- Second Amendment to Agreement and Plan of Merger dated
July 26, 1996, among DI Industries, Inc. and Somerset
Investment Corp. (incorporated herein by reference to
Exhibit 2.2.2 to Amendment No. 1 to Registration
Statement No. 333-6077).
2.3 -- Asset Purchase Agreement dated October 3, 1996, by and
between DI Industries, Inc. and Meritus, Inc., a Texas
corporation, Mesa Rig 4 L.L.C., a Texas limited liability
company, Mesa Venture, a Texas general partnership, and
Mesa Drilling, Inc., a Texas corporation (incorporated
herein by reference to Exhibit 2.1 to Registration
Statement No. 333-14783).
2.4 -- Asset Purchase Agreement dated November 12, 1996, between
Diamond M Onshore, Inc. and Drillers, Inc. (incorporated
herein by reference to Exhibit 2.1 to Form 8-K dated
December 30, 1996).
2.4.1 -- Letter Agreement dated December 31, 1996, between Diamond
M Onshore and Drillers, Inc. amending the Asset Purchase
Agreement (incorporated herein by reference to Exhibit
2.2 to Form 8-K dated December 30, 1996).
2.5 -- Asset Purchase Agreement dated December 31, 1996, by and
between Flournoy Drilling Company and Drillers, Inc.
(incorporated herein by reference to Exhibit 2.1 to Form
8-K dated January 31, 1996).
2.6 -- Agreement and Plan of Merger dated March 7, 1997, by and
among DI Industries, Inc., Drillers Inc., and Grey Wolf
Drilling Company including form of Escrow Agreement, form
of Trust Under Grey Wolf Drilling Company Deferred
Corporation Plan, and form of Grey Wolf Drilling Company
Deferred Compensation Plan (incorporated herein by
reference to Exhibit 10.1 to Form 8-K dated March 10,
1997).
</TABLE>
<PAGE> 74
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.6.1 -- Amendment No. 1 to Agreement and Plan of Merger by and
among DI Industries, Inc., Drillers Inc. and Grey Wolf
Drilling Company (incorporated by reference from Appendix
A to the Prospectus included in Form S-4 Registration
Statement of DI Industries, Inc., Registration No.
333-26519).
2.7 -- Asset Purchase Agreement dated September 15, 1997 by and
between Justiss Oil Company, Inc. and Grey Wolf Drilling
Company (incorporated by reference from Exhibit 99.1 to
Form 8-K filed September 19, 1997).
3.1* -- Articles of Incorporation, as amended.
3.2++ -- Bylaws
4.1++ -- Specimen certificate for Common Stock.
5.1* -- Opinion of Porter & Hedges, L.L.P.
23.1* -- Consent of KPMG Peat Marwick LLP.
23.2* -- Consent of Deloitte & Touche LLP.
23.3* -- Consent of Arthur Andersen LLP.
23.4* -- Consent of Porter & Hedges, L.L.P. (included in their
opinion filed as Exhibit 5.1 hereto).
24.1++ -- Power of Attorney.
</TABLE>
- ---------------
* Filed herewith.
++ Previously filed
<PAGE> 1
25,000,000 SHARES
GREY WOLF, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
October ____, 1997
CREDIT SUISSE FIRST BOSTON CORPORATION
BT ALEX. BROWN INCORPORATED
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
HOWARD, WEIL, LABOUISSE, FRIEDRICHS INCORPORATED
JOHNSON RICE & COMPANY L.L.C.
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. Introductory. Grey Wolf, Inc., a Texas corporation ("Company")
proposes to issue and sell 12,500,000 shares of its Common Stock, par value
$0.10 per share ("Securities"), and the shareholders listed in Schedule A hereto
("Selling Shareholders") propose severally to sell an aggregate of 12,500,000
outstanding shares of the Securities (such 25,000,000 shares of Securities being
hereinafter referred to as the "Firm Securities"). The Company also proposes to
sell to the Underwriters, at the option of the Underwriters, an aggregate of not
more than 1,875,000 additional shares of its Securities, and certain of the
Selling Shareholders also propose to sell to the Underwriters, at the option of
the Underwriters, an aggregate of not more than 1,875,000 additional outstanding
shares of the Company's Securities, as set forth below (such 3,750,000
additional shares being hereinafter referred to as the "Optional Securities").
The Firm Securities and the Optional Securities are herein collectively called
the "Offered Securities." The Company and the Selling Shareholders hereby agree
with the several Underwriters named in Schedule B hereto ("Underwriters") as
follows:
2. Representations and Warranties of the Company and the Selling
Shareholders. (a) The Company represents and warrants to, and agrees with, the
several Underwriters that:
(i) A registration statement on form S-3 (No. 333-36593) relating
to the Offered Securities, including a form of prospectus, has been
filed with the Securities and Exchange Commission ("Commission") and
either (A) has been declared effective under the Securities Act of
1933, as amended ("Act"), and is not proposed to be amended or (B) is
proposed to be amended by amendment or post-effective amendment. If
such registration statement (the "initial registration statement") has
been declared effective, either (A) an additional registration
statement (the "additional registration statement") relating to the
Offered Securities has been filed with the Commission pursuant to Rule
462(b) ("Rule 462(b)") under the Act and, if so filed, has become
effective upon filing pursuant to such rule and the Offered Securities
all have been duly registered under the Act pursuant to the initial
1
<PAGE> 2
registration statement and, if applicable, the additional registration
statement or (B) such an additional registration statement is proposed
to be filed with the Commission pursuant to Rule 462(b) and will become
effective upon filing pursuant to such rule and upon such filing the
Offered Securities will all have been duly registered under the Act
pursuant to the initial registration statement and such additional
registration statement. If the Company does not propose to amend the
initial registration statement or if an additional registration
statement has been filed and the Company does not propose to amend it,
and if any post-effective amendment to either such registration
statement has been filed with the Commission prior to the execution and
delivery of this Agreement, the most recent amendment (if any) to each
such registration statement has been declared effective by the
Commission or has become effective upon filing pursuant to Rule 462(c)
("Rule 462(c)") under the Act or, in the case of the additional
registration statement, Rule 462(b). For purposes of this Agreement,
"Effective Time" with respect to the initial registration statement or,
if filed prior to the execution and delivery of this Agreement, the
additional registration statement means (A) if the Company has advised
the Representative that it does not propose to amend such registration
statement, the date and time as of which such registration statement,
or the most recent post-effective amendment thereto (if any) filed
prior to the execution and delivery of this Agreement, was declared
effective by the Commission or has become effective upon filing
pursuant to Rule 462(c), or (B) if the Company has advised the
Representative that it proposes to file an amendment or post-effective
amendment to such registration statement, the date and time as of which
such registration statement, as amended by such amendment or
post-effective amendment, as the case may be, is declared effective by
the Commission. If an additional registration statement has not been
filed prior to the execution and delivery of this Agreement but the
Company has advised the Representative that it proposes to file one,
"Effective Time" with respect to such additional registration statement
means the date and time as of which such registration statement is
filed and becomes effective pursuant to Rule 462(b). "Effective Date"
with respect to the initial registration statement or the additional
registration statement (if any) means the date of the Effective Time
thereof. The initial registration statement, as amended at its
Effective Time including all material incorporated by reference
therein, including all information contained in the additional
registration statement (if any) and deemed to be a part of the initial
registration statement as of the Effective Time of the additional
registration statement pursuant to the General Instructions of the Form
on which it is filed and including all information (if any) deemed to
be a part of the initial registration statement as of its Effective
Time pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is
hereinafter referred to as the "Initial Registration Statement." The
additional registration statement, as amended at its Effective Time,
including the contents of the initial registration statement
incorporated by reference therein and including all information (if
any) deemed to be a part of the additional registration statement as of
its Effective Time pursuant to Rule 430A(b), is hereinafter referred to
as the "Additional Registration Statement." The Initial Registration
Statement and the Additional Registration are hereinafter referred to
collectively as the "Registration Statements" and individually as a
"Registration Statement." The form of prospectus relating to the
Offered Securities, as first filed with the Commission pursuant to and
in accordance with Rule 424(b) ("Rule 424(b)") under the Act or (if no
such filing is required) as included in a Registration Statement,
including all material incorporated by reference in such prospectus, is
hereinafter referred to as the "Prospectus." No document has been or
will be prepared or distributed in reliance on Rule 434 under the Act.
(ii) If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement: (A) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
("Rules and Regulations") and did not include 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, (B)
on the Effective Date of the Additional Registration Statement (if
any), each Registration Statement conformed or will conform, in all
material respects to the requirements of the Act and the Rules and
Regulations and did not include, or will not include, any untrue
statement of a material fact and did not omit, or will not omit, to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading, and (C) on the date of this
Agreement, the Initial Registration Statement and, if the Effective
Time of the Additional Registration Statement is prior to the execution
and delivery of this Agreement, the Additional Registration Statement,
each conforms, and at the time of filing of the Prospectus pursuant to
Rule 424(b) or (if no such filing is required) at the Effective Date of
the Additional Registration Statement in which the Prospectus is
included, each Registration Statement and the Prospectus will conform
in all material respects to the requirements of the Act and the Rules
and Regulations, and neither of such documents includes, or will
include, any untrue statement of a material fact or omits, or will
omit, to state any material fact required to be stated therein or
necessary to make the statements therein (in the case of the
Prospectus, in light of the circumstances under which they were made)
not misleading. If the Effective Time of the Initial Registration
Statement is subsequent to the execution and delivery of this
2
<PAGE> 3
Agreement: on the Effective Date of the Initial Registration Statement,
the Initial Registration Statement and the Prospectus will conform in
all material respects to the requirements of the Act and the Rules and
Regulations, neither of such documents will include any untrue
statement of a material fact or will omit to state any material fact
required to be stated therein or necessary to make the statements
therein (in the case of the Prospectus, in light of the circumstances
under which they are made) not misleading, and no Additional
Registration Statement has been or will be filed. The two preceding
sentences do not apply to statements in or omissions from a
Registration Statement or the Prospectus based upon written information
furnished to the Company by any Underwriter through the Representative
specifically for use therein, it being understood and agreed that the
only such information is that described as such in Section 7(c) hereof.
(iii) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Texas, with
power and authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus; and the Company is
duly qualified to do business as a foreign corporation in good standing
in all other jurisdictions in which its ownership or lease of property
or the conduct of its business requires such qualification, except
where the failure to be so qualified would not have a material adverse
effect on the financial condition, results of operations or prospects
of the Company and its subsidiaries, taken as a whole (a "Material
Adverse Effect").
(iv) Each subsidiary of the Company has been duly incorporated and
is an existing corporation in good standing under the laws of the
jurisdiction of its incorporation, with power and authority (corporate
and other) to own its properties and conduct its business as described
in the Prospectus, and each subsidiary of the Company is duly qualified
to do business as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification, except where the
failure to be so qualified or be in good standing would not have a
Material Adverse Effect.
All of the issued and outstanding capital stock of each subsidiary
of the Company has been duly authorized and validly issued and is fully
paid and nonassessable; and the capital stock of each subsidiary owned
by the Company, directly or through subsidiaries, is owned free from
liens, encumbrances and defects except as may exist or arise under the
Company's Bank Credit Facility (defined in the Prospectus).
(v) The Offered Securities and all other outstanding shares of
capital stock of the Company have been duly authorized and validly
issued, are fully paid and nonassessable and conform in all material
respects to the description thereof contained in the Prospectus; and
the shareholders of the Company have no preemptive rights with respect
to the Offered Securities.
(vi) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person that would give rise to a valid claim against the Company or any
Underwriter for a brokerage commission, finder's fee or other like
payment in connection with the offer and sale of the Offered Securities
(vii) There are no contracts, agreements or understandings between
the Company and any person granting such person the right to require
the Company to include such securities in the securities registered
pursuant to a registration statement filed by the Company under the
Act, except where the failure to so include such securities in the
registration statement would not have a Material Adverse Effect or
adversely affect the consummation of the transactions contemplated by
this Agreement.
(viii) The Company's outstanding common stock is listed on the
American Stock Exchange and the Offered Securities have been approved
for listing on the AMEX, subject to official notice of issuance.
(ix) No consent, approval, authorization, or order of, or filing
with, any governmental agency or body or any court is required to be
obtained or made by the Company for the consummation of the
transactions contemplated by this Agreement in connection with the sale
of the Offered Securities, except such as have been obtained and made
under the Act and such as may be required under state securities laws.
3
<PAGE> 4
(x) The execution, delivery and performance of this Agreement, and
the consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms and provisions of,
or constitute a default under, any statute, any rule, regulation or
order of any governmental agency or body or any court, domestic or
foreign, having jurisdiction over the Company or any subsidiary of the
Company or any of their properties, or any agreement or instrument to
which the Company or any such subsidiary is a party or by which the
Company or any such subsidiary is bound or to which any of the
properties of the Company or any such subsidiary is subject, or the
charter or by-laws of the Company or any such subsidiary, except, in
each such case, for such breaches, violations or defaults as would not
have a Material Adverse Effect.
(xi) This Agreement has been duly authorized, executed and
delivered by the Company.
(xii) Except as disclosed in the Prospectus or as would not have a
Material Adverse Effect, the Company and its subsidiaries have good and
indefeasible title to all real properties and good and marketable title
to all other properties and assets owned by them, in each case free
from liens, encumbrances and defects; and except as disclosed in the
Prospectus, the Company and its subsidiaries hold any leased real or
personal property under valid and enforceable leases with no exceptions
other than those that would not have a Material Adverse Effect.
(xiii) The Company and its subsidiaries possess adequate
certificates, authorities or permits issued by appropriate governmental
agencies or bodies necessary to conduct the business now operated by
them except where the failure to have obtained the same would not have
a Material Adverse Effect, and have not received any notice of
proceedings relating to the revocation or modification of any such
certificate, authority or permit that, if determined adversely to the
Company or any of its subsidiaries, would individually or in the
aggregate have a Material Adverse Effect.
(xiv) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that
might have a Material Adverse Effect.
(xv) The Company and its subsidiaries own, possess or can acquire
on reasonable terms, adequate trademarks, trade names and other rights
to inventions, know-how, patents, copyrights, confidential information
and other intellectual property (collectively, "intellectual property
rights") necessary to conduct the business now operated by them, or
presently employed by them with only such exception as would not have a
Material Adverse Effect, and have not received any notice of
infringement of or conflict with asserted rights of others with respect
to any intellectual property rights that, if determined adversely to
the Company or any of its subsidiaries, would individually or in the
aggregate have a Material Adverse Effect.
(xvi) Except as disclosed in the Prospectus, neither the Company
nor any of its subsidiaries is in violation of any statute, any rule,
regulation, decision or order of any governmental agency or body or any
court, domestic or foreign, relating to the use, disposal or release of
hazardous or toxic substances or relating to the protection or
restoration of the environment or human exposure to hazardous or toxic
substances (collectively, "environmental laws"), owns or operates any
real property contaminated with any substance that is subject to any
environmental laws, is liable for any off-site disposal or
contamination pursuant to any environmental laws, or is subject to any
claim relating to any environmental laws, which violation,
contamination, liability or claim would individually or in the
aggregate have a Material Adverse Effect; and the Company is not aware
of any pending investigation which might lead to such a claim.
(xvii) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against or affecting the Company, any of
its subsidiaries or any of their respective properties that, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a Material Adverse Effect, or
would materially and adversely affect the ability of the Company to
perform its obligations under this Agreement, or which are otherwise
material in the context of the sale of the Offered Securities; and no
such actions, suits or proceedings are, to the Company's knowledge,
threatened or contemplated.
(xviii ) The financial statements included in each Registration
Statement and the Prospectus present fairly the financial position of
the Company and its consolidated subsidiaries as of the dates shown and
their results of operations and cash flows for the periods shown, and
such financial statements have been prepared in conformity with the
4
<PAGE> 5
generally accepted accounting principles in the United States applied
on a consistent basis and the schedules included in each Registration
Statement present fairly the information required to be stated therein;
and the assumptions used in preparing the pro forma financial
statements included in each Registration Statement and the Prospectus
provide a reasonable basis for presenting the significant effects
directly attributable to the transactions or events described therein,
the related pro forma adjustments give appropriate effect to those
assumptions, and the pro forma columns therein reflect the proper
application of those adjustments to the corresponding historical
financial statement amounts.
(xix) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there
has been no material adverse change, nor any development or event
involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of
the Company and its subsidiaries taken as a whole, and, except as
disclosed in or contemplated by the Prospectus, there has been no
dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(xx) The Company is not and, after giving effect to the offering
and sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940.
(xxi) Grey Wolf Drilling Company, DI International, Inc. and
INDRILLERS, L.L.C. are the Company's only subsidiaries with domestic
operations. Drillers International, C.A. and Drillers Inc., DI de
Venezuela, C.A. are the Company's only subsidiaries with foreign
operations.
(b) Each Selling Shareholder severally represents and warrants to, and
agrees with, the several Underwriters that:
(i) Such Selling Shareholder has and on each Closing Date
hereinafter mentioned will have valid and unencumbered title to the
Offered Securities to be delivered by such Selling Shareholder on such
Closing Date, except for such encumbrances as exist under this
Agreement and the Custody Agreement and Power of Attorney (defined
below) and full right, power and authority to enter into this Agreement
and to sell, assign, transfer and deliver the Offered Securities to be
delivered by such Selling Shareholder on such Closing Date hereunder;
and upon the delivery of and payment for the Offered Securities on each
Closing Date hereunder the several Underwriters will acquire valid and
unencumbered title to the Offered Securities to be delivered by such
Selling Shareholder on such Closing Date.
(ii) If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement: (A) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement conformed in all respects to the requirements of
the Act and the Rules and Regulations and did not include 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, (B) on the Effective Date of the Additional
Registration Statement (if any), each Registration Statement conformed,
or will conform, in all respects to the requirements of the Act and the
Rules and Regulations did not include, or will not include, any untrue
statement of a material fact and did not omit, or will not omit, to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading, and (C) on the date of this
Agreement, the Initial Registration Statement and, if the Effective
Time of the Additional Registration Statement is prior to the execution
and delivery of this Agreement, the Additional Registration Statement
each conforms, and at the time of filing of the Prospectus pursuant to
Rule 424(b) or (if no such filing is required) at the Effective Date of
the Additional Registration Statement in which the Prospectus is
included, each Registration Statement and the Prospectus will conform,
in all respects to the requirements of the Act and the Rules and
Regulations, and neither of such documents includes, or will include,
5
<PAGE> 6
any untrue statement of a material fact or omits, or will omit, to
state any material fact required to be stated therein or necessary to
make the statements therein (in the case of the Prospectus, in light of
the circumstances under which they were made) not misleading. If the
Effective Time of the Initial Registration Statement is subsequent to
the execution and delivery of this Agreement: on the Effective Date of
the Initial Registration Statement, the Initial Registration Statement
and the Prospectus will conform in all respects to the requirements of
the Act and the Rules and Regulations, neither of such documents will
include any untrue statement of a material fact or will omit to state
any material fact required to be stated therein or necessary to make
the statements therein (in the case of the Prospectus, in light of the
circumstances under which they were made) not misleading. The two
preceding sentences apply only to statements in or omissions from a
Registration Statement or the Prospectus based upon written information
furnished to the Company by such Selling Shareholder specifically for
use therein.
(iii) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between such Selling
Shareholder and any person that would give rise to a valid claim
against such Selling Shareholder or any Underwriter for a brokerage
commission, finder's fee or other like payment in connection with this
offering.
(iv)Except for such as may be required under the Act and state
securities or Blue Sky laws, all consents, approvals, authorizations
and orders necessary for the execution and delivery by such Selling
Shareholder of this Agreement, the Power of Attorney, the Custody
Agreement and the Lock-Up Agreement for the sale and delivery by such
Selling Shareholder of the Offered Securities to be sold by such
Selling Shareholder hereunder have been obtained; and such Selling
Shareholder has full corporate power and authority (if Selling
Shareholder is a corporation) or full right, power and capacity (if
such Selling Shareholder is a partnership) to execute and deliver this
Agreement, the Power of Attorney, the Custody Agreement and the Lock-Up
Agreement and perform such Selling Shareholder's obligations hereunder.
This Agreement, the Power of Attorney, the Custody Agreement and the
Lock-Up Agreement have been duly authorized (if such Selling
Shareholder is a corporation or a partnership), executed and delivered
by such Selling Shareholder and this Agreement, the Custody Agreement
and the Lock-Up Agreement constitute the valid and binding agreements
of such Selling Shareholder enforceable against such Selling
Shareholder in accordance with their terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency,
reorganization or similar laws relating to or affecting creditors'
rights generally and by general equitable principles (regardless of
whether such enforceability is considered in a proceeding in equity or
at law).
(v) Such Selling Shareholder has duly and irrevocably executed and
delivered a Power of Attorney appointing Thomas P. Richards, T. Scott
O'Keefe and David W. Wehlmann as such Selling Shareholder's
Attorneys-in-Fact upon the terms and subject to the conditions set
forth therein to execute and deliver this Agreement and to take certain
other action on behalf of such Selling Shareholder as may be necessary
or desirable in connection with the transactions contemplated by this
Agreement and the Custody Agreement.
(vi)Each Selling Shareholder agrees to deliver to the
Attorneys-in-Fact such documentation as any Attorney-in-Fact, the
Company or any Underwriter or any of their respective counsel may
reasonably request to effectuate any of the provisions hereof, the
Custody Agreement or the Power of Attorney, all of the foregoing to be
in form and substance reasonably satisfactory to the Attorneys-in-Fact
and the Underwriters.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company and each Selling
Shareholder agree, severally and not jointly, to sell to each Underwriter, and
each Underwriter agrees, severally and not jointly, to purchase from the Company
and each Selling Shareholder, at a purchase price of $ per share, that number of
Firm Securities (rounded up or down, as determined by Credit Suisse First Boston
Corporation ("CSFBC") in its discretion, in order to avoid fractions) obtained
by multiplying Firm Securities in the case of the Company, and the number of
Firm Securities set forth opposite the name of such Selling Shareholder in
Schedule A hereto in the case of a Selling Shareholder, in each case by a
fraction the numerator of which is the number of Firm Securities set forth
opposite the name of such Underwriter in Schedule B hereto and the denominator
of which is the total number of Firm Securities.
Certificates in negotiable form for the Offered Securities to be sold
by the Selling Shareholders hereunder have been placed in custody, for delivery
under this Agreement, under Custody Agreements made with the Company, as
custodian ("Custodian"). Each Selling Shareholder agrees that the shares
represented by the certificates held in custody for the Selling Shareholders
under such Custody Agreements are subject to the interests of the Underwriters
hereunder, that the arrangements made by the Selling Shareholders for such
custody are to that extent irrevocable, and that the obligations of the Selling
Shareholders hereunder shall not be terminated by operation of law, whether by
the death of any individual Selling Shareholder or the occurrence of any other
event, or in the case of a trust, by the death of any trustee or trustees or the
termination of such trust. If any individual Selling Shareholder or any such
trustee or trustees should die, or if any other such event should occur, or if
any of such trusts should terminate, before the delivery of the Offered
Securities hereunder, certificates for such Offered Securities shall be
delivered by the Custodian in accordance with the terms and conditions of this
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<PAGE> 7
Agreement as if such death or other event or termination had not occurred,
regardless of whether or not the Custodian shall have received notice of such
death or other event or termination.
The Company and the Custodian will deliver the Firm Securities against
payment of the purchase price in Federal (same day) funds by official bank check
or checks or wire transfer to an account or accounts at a bank or banks
acceptable to CSFBC, at the office of Porter & Hedges, L.L.P., Houston, Texas,
at 9:00 A.M., Houston time, on [October ___ , 1997] or at such other time not
later than seven full business days thereafter as CSFBC and the Company
determine, such time being herein referred to as the "First Closing Date." The
Firm Securities shall be issued in book-entry form through the facilities of the
Depository Trust Company ("DTC"). The Company shall deposit the global
certificate representing the Firm Securities to be delivered by it with DTC or
its designated custodian at the Closing Date, and the Company will deliver such
global certificate to the several Underwriters by causing DTC to credit the Firm
Securities to the respective accounts of the Underwriters with DTC. The
certificates for the Firm Securities to be delivered by the Selling Shareholders
will be in definitive form, in such denominations and registered in such names
as CSFBC requests and will be made available for checking and packaging at the
office of CSFBC at least 24 hours prior to the First Closing Date.
In addition, upon written notice from CSFBC given to the Company and
the Selling Shareholders from time to time not more than 30 days subsequent to
the date of the Prospectus, the Underwriters may purchase all or less than all
of the Optional Securities at the purchase price per Security to be paid for the
Firm Securities. The Company and the Selling Shareholders agree, severally and
not jointly, to sell to the Underwriters the respective numbers of Optional
Securities obtained by multiplying the number of Optional Securities specified
in such notice by a fraction the numerator of which is ______ in the case of the
Company, and in the case of the Selling Shareholders, the number of shares set
forth opposite the names of such Selling Shareholders in Schedule A hereto under
the caption "Number of Optional Securities to be Sold" and the denominator of
which is the total number of Optional Securities (subject to adjustment by CSFBC
to eliminate fractions). Such Optional Securities shall be purchased from the
Company and each Selling Shareholder for the account of each Underwriter in the
same proportion as the number of Firm Securities set forth opposite such
Underwriter's name bears to the total number of Firm Securities (subject to
adjustment by CSFBC to eliminate fractions) and may be purchased by the
Underwriters only for the purpose of covering over-allotments made in connection
with the sale of the Firm Securities. No Optional Securities shall be sold or
delivered unless the Firm Securities previously have been, or simultaneously
are, sold and delivered. The right to purchase the Optional Securities or any
portion thereof may be exercised from time to time and to the extent not
previously exercised may be surrendered and terminated at any time upon notice
by CSFBC to the Company and the Selling Shareholders.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Custodian will deliver
the Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters, against payment of
the purchase price therefor in Federal (same day) funds by official bank check
or checks or wire transfer to an account or accounts at a bank acceptable to
CSFBC at the office of Porter & Hedges, L.L.P., Houston, Texas. The Optional
Securities shall be issued in book-entry form through the facilities of the DTC.
The Company shall deposit the global certificate representing the Optional
Securities with DTC or its designated custodian at the Closing Date, and the
Company will deliver such global certificate to the several Underwriters by
causing DTC to credit the Optional Securities to the respective accounts of the
Underwriters with DTC. The certificates for the Optional Securities being
purchased on each Optional Closing Date will be in definitive form, in such
denominations and registered in such names as CSFBC requests upon reasonable
notice prior to such Optional Closing Date and will be made available for
checking and packaging at the office of CSFBC at a reasonable time in advance of
such Optional Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company and the Selling Shareholders. The
Company agrees with the several Underwriters and the Selling Shareholders that:
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<PAGE> 8
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will
file the Prospectus with the Commission pursuant to and in accordance
with subparagraph (1) or (2) (as consented to by CSFBC) of Rule 424(b)
not later than the second business day following the execution and
delivery of this Agreement (or, if applicable and if consented to by
CSFBC, subparagraph (4) or (5)).
The Company will advise CSFBC promptly of any such filing pursuant to
Rule 424(b). If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement and
an additional registration statement is necessary to register a portion
of the Offered Securities under the Act but the Effective Time thereof
has not occurred as of such execution and delivery, the Company will
file the additional registration statement or, if filed, will file a
post-effective amendment thereto with the Commission pursuant to and in
accordance with Rule 462(b) on or prior to 10:00 P.M., New York time,
on the date of this Agreement or, if earlier, on or prior to the time
the Prospectus is printed and distributed to any Underwriter, or will
make such filing at such later date as shall have been consented to by
CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to
amend or supplement the initial or any additional registration
statement as filed or the related prospectus or the Initial
Registration Statement, the Additional Registration Statement (if any)
or the Prospectus and will not effect such amendment or supplementation
without CSFBC's consent which shall not be unreasonably withheld; and
the Company will also advise CSFBC promptly of the effectiveness of
each Registration Statement (if its Effective Time is subsequent to the
execution and delivery of this Agreement) and of any amendment or
supplementation of a Registration Statement or the Prospectus and of
the institution by the Commission of any stop order proceedings in
respect of a Registration Statement and will use its best efforts to
prevent the issuance of any such stop order and to obtain as soon as
possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of
which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act,
the Company will promptly notify CSFBC of such event and will promptly
prepare and file with the Commission, at its own expense, an amendment
or supplement which will correct such statement or omission or an
amendment which will effect such compliance. Neither CSFBC's consent
to, nor the Underwriters' delivery of, any such amendment or supplement
shall constitute a waiver of any of the conditions set forth in Section
6.
(d) As soon as practicable, but not later than the Availability
Date (as defined below), the Company will make generally available to
its securityholders an earnings statement covering a period of at least
12 months beginning after the Effective Date of the Initial
Registration Statement (or, if later, the Effective Date of the
Additional Registration Statement) which will satisfy the provisions of
Section 11(a) of the Act. For the purpose of the preceding sentence,
"Availability Date" means the 45th day after the end of the fourth
fiscal quarter following the fiscal quarter that includes such
Effective Date, except that, if such fourth fiscal quarter is the last
quarter of the Company's fiscal year, "Availability Date" means the
90th day after the end of such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement (five of which will be signed and will include
all exhibits), each related preliminary prospectus, and, so long as a
prospectus relating to the Offered Securities is required to be
delivered under the Act in connection with sales by any Underwriter or
dealer, the Prospectus and all amendments and supplements to such
documents, in each case in such quantities as CSFBC requests. The
Prospectus shall be so furnished on or prior to 3:00 P.M., New York
time, on the business day following the later of the execution and
delivery of this Agreement or the Effective Time of the Initial
Registration Statement. All other such documents shall be so furnished
as soon as available. The Company and the Selling Shareholders will pay
the expenses of printing and distributing to the Underwriters all such
documents.
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC
designates and will continue such qualifications in effect so long as
required for the distribution.
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<PAGE> 9
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year,
a copy of its annual report to shareholders for such year; and the
Company will furnish to the Representatives (i) as soon as available, a
copy of each report and any definitive proxy statement of the Company
filed with the Commission under the Securities Exchange Act of 1934 or
mailed to shareholders, and (ii) from time to time, such other
information concerning the Company as CSFBC may reasonably request;
provided, however, that the Company shall not be obligated to disclose
material, non-public information in response to any such request.
(h) For a period of 120 days after the date of the initial public
offering of the Offered Securities, the Company will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Commission a registration statement under
the Act relating to, any additional shares of its Securities or
securities convertible into or exchangeable or exercisable for any
shares of its Securities, or publicly disclose the intention to make
any such offer, sale, pledge, disposition or filing, without the prior
written consent of CSFBC, except (1) issuances of Securities pursuant
to the conversion or exchange of convertible or exchangeable securities
or the exercise of warrants or options, in each case outstanding on the
date hereof, (2) grants of employee stock options pursuant to the terms
of a plan in effect on the date hereof and issuances of Securities
pursuant to the exercise of such options or issuances of Securities
pursuant to the Company's dividend reinvestment plan, or (3) pursuant
to registration statements filed with the Commission for the purpose of
registering the issuance and resale of Securities described in the
preceding clauses (1) and (2) or the secondary offering by selling
shareholders of additional shares of Securities.
(i) The Company and each Selling Shareholder agree with the
several Underwriters that the Company and such Selling Shareholder will
pay all expenses incident to the performance of the obligations of the
Company and such Selling Shareholder, as the case may be, under this
Agreement, for any filing fees and other expenses (including fees and
disbursements of counsel) in connection with qualification of the
Offered Securities for sale under the laws of such jurisdictions as
CSFBC designates and the printing of memoranda relating thereto, for
the filing fee incident to, and the reasonable fees and disbursements
of counsel to the Underwriters in connection with, the review by the
National Association of Securities Dealers, Inc. of the Offered
Securities, for any travel expenses of the Company's officers and
employees and any other expenses of the Company in connection with
attending or hosting meetings with prospective purchasers of the
Offered Securities, for any transfer taxes on the sale by the Selling
Shareholders of the Offered Securities to the Underwriters and for
expenses incurred in distributing preliminary prospectuses and the
Prospectus (including any amendments and supplements thereto) to the
Underwriters.
(ii) each Selling Shareholder agrees to deliver to CSFBC,
attention: Transactions Advisory Group, on or prior to the First
Closing Date a properly completed and executed United States Treasury
Department Form W-9 (or other applicable form or statement specified by
Treasury Department regulations in lieu thereof).
(iii ) each Selling Shareholder agrees, for a period of 120 days
after the date of the initial public offering of the Offered
Securities, not to offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, any additional shares of the
Securities of the Company or securities convertible into or
exchangeable or exercisable for any shares of Securities, or publicly
disclose the intention to make any such offer, sale, pledge or
disposal, without the prior written consent of CSFBC.
6. Conditions of the Obligations of the Underwriters. The obligations
of the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Shareholders herein, to
the accuracy of the statements of Company officers made pursuant to the
provisions hereof, to the performance by the Company and the Selling
Shareholders of their obligations hereunder and to the following additional
conditions precedent:
(a) The Representatives shall have received a letter, dated the
date of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be on or prior to the date of this Agreement or, if
the Effective Time of the Initial Registration Statement is subsequent
to the execution and delivery of this Agreement, shall be prior to the
filing of the amendment or post-effective amendment to the registration
statement to be filed shortly prior to such Effective Time), of KPMG
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<PAGE> 10
Peat Marwick LLP for the year ended December 31, 1996 and of Deloitte &
Touche LLP for the years ended December 31, 1994 and 1995 confirming
that they are independent public accountants within the meaning of the
Act and the applicable published Rules and Regulations thereunder and
stating to the effect that:
(i) in their opinion the financial statements and
schedules and summary of earnings examined by them and
included in the Registration Statements comply as to form in
all material respects with the applicable accounting
requirements of the Act and the related published Rules and
Regulations;
(ii) they have performed the procedures specified by
the American Institute of Certified Public Accountants for a
review of interim financial information as described in
Statement of Auditing Standards No. 71, Interim Financial
Information, on the unaudited financial statements included in
the Registration Statements;
(iii) on the basis of the review referred to in
clause (ii) above, a reading of the latest available interim
financial statements of the Company, inquiries of officials of
the Company who have responsibility for financial and
accounting matters and other specified procedures, nothing
came to their attention that caused them to believe that:
(A) the unaudited financial statements and
summary of earnings included in the Registration
Statements do not comply as to form in all material
respects with the applicable accounting requirements
of the Act and the related published Rules and
Regulations or any material modifications should be
made to such unaudited financial statements and
summary of earnings for them to be in conformity with
generally accepted accounting principles;
(B) at the date of the latest available
balance sheet read by such accountants, or at a
subsequent specified date not more than three
business days prior to the date of this Agreement,
there was any change in the capital stock or any
increase in short-term indebtedness or long-term debt
of the Company and its consolidated subsidiaries or,
at the date of the latest available balance sheet
read by such accountants, there was any decrease in
consolidated net assets, any increase in consolidated
net current liability or any decrease in consolidated
net assets, as compared with amounts shown on the
latest balance sheet included in the Prospectus; or
(C) for the period from the closing date of
the latest income statement included in the
Prospectus to the closing date of the latest
available income statement read by such accountants
there were any decreases, as compared with the
corresponding period of the previous year and with
the period of corresponding length ended the date of
the latest income statement gross income included in
the Prospectus, in consolidated operating revenues or
operating income in the total or per share amounts of
consolidated net income;
except in all cases set forth in clauses (iii)(B) and (C)
above for changes, increases or decreases which the Prospectus
discloses have occurred or may occur or which are described in
such letter; and
(iv) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other
financial information contained in the Registration Statements
(in each case to the extent that such dollar amounts,
percentages and other financial information are derived from
the general accounting records of the Company and its
subsidiaries subject to the internal controls of the Company's
accounting system or are derived directly from such records by
analysis or computation) with the results obtained from
inquiries, a reading of such general accounting records and
other procedures specified in such letter and have found such
dollar amounts, percentages and other financial information to
be in agreement with such results, except as otherwise
specified in such letter.
For purposes of this subsection, (i) if the Effective Time of the
Initial Registration Statements is subsequent to the execution and
delivery of this Agreement, "Registration Statements" shall mean the
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<PAGE> 11
initial registration statement as proposed to be amended by the
amendment or post-effective amendment to be filed shortly prior to its
Effective Time, (ii) if the Effective Time of the Initial Registration
Statements is prior to the execution and delivery of this Agreement but
the Effective Time of the Additional Registration Statement is
subsequent to such execution and delivery, "Registration Statements"
shall mean the Initial Registration Statement and the additional
registration statement as proposed to be filed or as proposed to be
amended by the post-effective amendment to be filed shortly prior to
its Effective Time, and (iii) "Prospectus" shall mean the prospectus
included in the Registration Statements. All financial statements and
schedules included in material incorporated by reference into the
Prospectus shall be deemed included in the Registration Statements for
purposes of this subsection.
(b) If the Effective Time of the Initial Registration
Statement is not prior to the execution and delivery of this Agreement,
such Effective Time shall have occurred not later than 10:00 P.M., New
York time, on the date of this Agreement or such later date as shall
have been consented to by CSFBC. If the Effective Time of the
Additional Registration Statement (if any) is not prior to the
execution and delivery of this Agreement, such Effective Time shall
have occurred not later than 10:00 P.M., New York time, on the date of
this Agreement or, if earlier, the time the Prospectus is printed and
distributed to any Underwriter, or shall have occurred at such later
date as shall have been consented to by CSFBC. If the Effective Time of
the Initial Registration Statement is prior to the execution and
delivery of this Agreement, the Prospectus shall have been filed with
the Commission in accordance with the Rules and Regulations and Section
5(a) of this Agreement. Prior to such Closing Date, no stop order
suspending the effectiveness of a Registration Statement shall have
been issued and no proceedings for that purpose shall have been
instituted or, to the knowledge of any Selling Shareholder, the Company
or the Representatives, shall be contemplated by the Commission.
(c) Subsequent to the execution and delivery of this
Agreement, there shall not have occurred (i) any change, or any
development or event involving a prospective change, in the condition
(financial or other), business, properties or results of operations of
the Company or its subsidiaries which, in the judgment of a majority in
interest of the Representatives, is material and adverse and makes it
impractical or inadvisable to proceed with completion of the public
offering or the sale of and payment for the Offered Securities; (ii)
any downgrading in the rating of any debt securities of the Company by
any "nationally recognized statistical rating organization" (as defined
for purposes of Rule 436(g) under the Act), or any public announcement
that any such organization has under surveillance or review its rating
of any debt securities of the Company (other than an announcement with
positive implications of a possible upgrading, and no implication of a
possible downgrading, of such rating); (iii) any suspension or
limitation of trading in securities generally on the New York Stock
Exchange, or any setting of minimum prices for trading on such
exchange, or any suspension of trading of any securities of the Company
on any exchange or in the over-the-counter market; (iv) any banking
moratorium declared by U.S. Federal or New York authorities; or (v) any
outbreak or escalation of major hostilities in which the United States
or is involved, any declaration of war by Congress or any other
substantial national or international calamity or emergency if, in the
judgment of a majority in interest of the Representative, the effect of
any such outbreak, escalation, declaration, calamity or emergency makes
it impractical or inadvisable to proceed with completion of the public
offering or the sale of and payment for the Offered Securities.
(d) The Representatives shall have received an opinion, dated
such Closing Date ,of Porter & Hedges, L.L.P., counsel for the Company,
to the effect set forth in Exhibit I.
(e) The Representatives shall have received the opinion
contemplated in the Power of Attorney executed and delivered by each
Selling Shareholder and an opinion, dated such Closing Date, from
counsel for each of the Selling Shareholders, to the effect that:
(i) Each Selling Shareholder had valid and
unencumbered title to the Offered Securities delivered by such
Selling Shareholder on such Closing Date and had full right,
power and authority to sell, assign, transfer and deliver the
Offered Securities delivered by such Selling Shareholder on
such Closing Date hereunder; and the several Underwriters have
acquired valid and unencumbered title to the Offered
Securities purchased by them from the Selling Shareholders on
such Closing Date hereunder;
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<PAGE> 12
(ii) No consent, approval, authorization or order of,
or filing with, any governmental agency or body or any court
is required to be obtained or made by any Selling Shareholder
for the consummation of the transactions contemplated by the
Custody Agreement or this Agreement in connection with the
sale of the Offered Securities sold by the Selling
Shareholders, except such as have been obtained and made under
the Act and such as may be required under state securities
laws;
(iii) The execution, delivery and performance of the
Custody Agreement and this Agreement and the consummation of
the transactions therein and herein contemplated will not
result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any statute, any
rule, regulation or order of any governmental agency or body
or any court having jurisdiction over any Selling Shareholder
or any of their properties or any agreement or instrument to
which any Selling Shareholder is a party or by which any
Selling Shareholder is bound or to which any of the properties
of any Selling Shareholder is subject, or the charter or
by-laws any Selling Shareholder which is a corporation;
(iv) The Power of Attorney and related Custody
Agreement with respect to each Selling Shareholder has been
duly authorized, executed and delivered by such Selling
Shareholder and constitute valid and legally binding
obligations of each such Selling Shareholder enforceable in
accordance with their terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium
and similar laws of general applicability relating to or
affecting creditors' rights and to general equity principles;
and
(v) This Agreement has been duly authorized, executed
and delivered by each Selling Shareholder.
(f) The Representatives shall have received from Akin, Gump,
Strauss, Hauer & Feld, L.L.P., counsel for the Underwriters, such
opinion or opinions, dated such Closing Date, with respect to the
incorporation of the Company, the validity of the Offered Securities
delivered on such Closing Date, the Registration Statements, the
Prospectus and other related matters as the Representatives may
require, and the Selling Shareholders and the Company shall have
furnished to such counsel such documents as they request for the
purpose of enabling them to pass upon such matters. In rendering such
opinion, Akin, Gump, Strauss, Hauer & Feld, L.L.P. may rely as to the
incorporation of the Company and all other matters governed by Texas
law upon the opinion of Porter & Hedges, L.L.P. referred to above.
(g) The Representatives shall have received a certificate,
dated such Closing Date, of the President or any Vice President and a
principal financial or accounting officer of the Company in which such
officers, to the best of their knowledge after reasonable
investigation, shall state that: (i) the representations and warranties
of the Company in this Agreement are true and correct; (ii) the Company
has complied with all agreements and satisfied all conditions on its
part to be performed or satisfied hereunder at or prior to such Closing
Date; (iii) no stop order suspending the effectiveness of any
Registration Statement has been issued and no proceedings for that
purpose have been instituted or are contemplated by the Commission;
(iv) the Additional Registration Statement (if any) satisfying the
requirements of subparagraphs (1) and (3) of Rule 462(b) was filed
pursuant to Rule 462(b), including payment of the applicable filing fee
in accordance with Rule 111(a) or (b) under the Act, prior to the time
the Prospectus was printed and distributed to any Underwriter; and (v)
subsequent to the date of the most recent financial statements in the
Prospectus, there has been no material adverse change, nor any
development or event involving a prospective material adverse change,
in the condition (financial or other), business, properties or results
of operations of the Company and its subsidiaries taken as a whole
except as set forth in or contemplated by the Prospectus or as
described in such certificate.
(h) The Representatives shall have received a letter, dated
such Closing Date, of KPMG Peat Marwick LLP and Deloitte & Touche LLP
which meets the requirements of subsection (a) of this Section, except
that the specified date referred to in such subsection will be a date
not more than three business days prior to such Closing Date for the
purposes of this subsection.
(i) The Representatives shall have received an opinion, dated
such Closing Date, of Venezuelan counsel to the Company substantially
in the form set forth in Exhibit II.
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<PAGE> 13
The Selling Shareholders and the Company will furnish the Representatives with
such conformed copies of such opinions, certificates, letters and documents as
the Representatives reasonably requests. CSFBC may in its sole discretion waive
on behalf of the Underwriters compliance with any conditions to the obligations
of the Underwriters hereunder, whether in respect of an Optional Closing Date or
otherwise.
7. Indemnification and Contribution. (a) The Company will
indemnify and hold harmless each Underwriter against any losses, claims, damages
or liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions 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, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein (in the case of
the Prospectus, any amendment or supplement thereto, or any related preliminary
prospectus in light of the circumstances under which such statements were made)
not misleading, and will reimburse each Underwriter for any legal or other
expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such loss, claim, damage, liability or action as
such expenses are incurred; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement in or omission or alleged omission from any of such documents in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such information furnished
by any Underwriter consists of the information described as such in subsection
(c) below; provided, however, that with respect to any untrue statement or
alleged untrue statement in or omission or alleged omission from any preliminary
prospectus that is corrected in the Prospectus, the foregoing indemnity
agreement shall not inure to the benefit of any Underwriter from whom the person
asserting any such loss, claim, damage or liability purchased the Offered
Securities to the extent that the fact that there was not sent or given to such
person, if required by law to have been sent or given, at or prior to written
confirmation of the sale of such Offered Securities to such person, a copy of
the Prospectus if the Company previously had furnished such quantities thereof
to such Underwriter as reasonably requested on behalf of such Underwriter.
(b) Each Selling Shareholder will severally, but not joint and
severally, indemnify and hold harmless each Underwriter against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions 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, the Prospectus, or any amendment or
supplement thereto, or any related preliminary prospectus, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter for any legal or other expenses
reasonably incurred by such Underwriter in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses are
incurred; provided, however, that a Selling Shareholder will be liable in any
such case only to the extent that any such loss, claim, damage, or liability
arises out of or is based upon an untrue statement or alleged untrue statement
in or omission or alleged omission from any of such documents in reliance upon
and in conformity with written information furnished to the Company by the
Selling Shareholder specifically for use therein; and provided, further, that
with respect to any untrue statement or alleged untrue statement in or omission
or alleged omission from any preliminary prospectus the indemnity agreement
contained in this subsection (b) shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages or
liabilities purchased the Offered Securities, to the extent that a Prospectus
relating to such Offered Securities was required to be delivered by such
Underwriter under the Act in connection with such purchase and any such loss,
claim, damage or liability of such Underwriter results from the fact that there
was not sent or given to such person, at or prior to the written confirmation of
the sale of such Offered Securities to such person, a copy of the Prospectus
correcting such untrue statement or alleged untrue statement in or omission or
alleged omission from such preliminary Prospectus if the Company previously had
furnished such quantities thereof to such Underwriter as reasonably requested on
behalf of such Underwriter. Notwithstanding anything herein to the contrary, the
total liability of any Selling Shareholder under this Section 7 shall be limited
to an amount equal to the aggregate net sale price received by such Selling
Shareholder from the sale of such Selling Shareholder's Offered Securities
hereunder.
(c) Each Underwriter will severally and not jointly indemnify and hold
harmless the Company and each Selling Shareholder against any losses, claims,
damages or liabilities to which the Company or such Selling Shareholder may
13
<PAGE> 14
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions 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, the Prospectus, or any amendment or
supplement thereto, or any related preliminary prospectus, or arise out of or
are based upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company by such Underwriter through the Representatives specifically for use
therein, and will reimburse any legal or other expenses reasonably incurred by
the Company and each Selling Shareholder in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses are
incurred, it being understood and agreed that the only such information
furnished by any Underwriter consists of the following information in the
Prospectus furnished on behalf of each Underwriter: the last paragraph at the
bottom of the cover page concerning the terms of the offering by the
Underwriters, the legend concerning over-allotments and stabilizing on the
inside front cover page following under the caption "Underwriting": (i) the
table contained in the first paragraph, (ii) concession and reallowance figures
in the fourth paragraph and (iii) the fifth, sixth and last paragraphs.
(d) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under
subsection (a), (b) or (c) above, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under subsection (a), (b) or (c) above. In case any such action
is brought against any indemnified party and it notifies an indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation. An indemnifying
party shall be liable for a settlement of any action only if such settlement is
(i) effected with its written consent or (ii) effected in good faith without its
written consent if the settlement is entered into more than 30 days after the
indemnifying party shall have received a request from the indemnified party for
reimbursement for the fees and expenses of counsel (in any case where such fees
and expenses are at the expense of the indemnifying party) and, prior to the
date of such settlement, the indemnifying party shall have failed to comply with
such reimbursement request unless within 30 days after such reimbursement
request is received, the indemnifying party shall have made a good faith written
challenge to the reasonableness of the amount or nature of the reimbursement
requested or the sufficiency of the documentation supporting the reimbursement
requested (which challenge shall set forth the amount or nature of the requested
reimbursement which the indemnifying party in good faith believes to be
reasonable or the basis for the good faith claim as to the insufficiency of any
supporting documentation), in which event this clause (ii) shall apply only if,
and to the extent that, such indemnifying party shall not have reimbursed the
indemnified party for the amount which is not being so challenged. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened action in respect of
which any indemnified party is or could have been a party and indemnity could
have been sought hereunder by such indemnified party unless such settlement
includes an unconditional release of such indemnified party from all liability
on any claims that are the subject matter of such action.
(e) If the indemnification provided for in this Section is unavailable
or insufficient to hold harmless an indemnified party under subsection (a), (b)
or (c) above, then each indemnifying party shall contribute to the amount paid
or payable by such indemnified party as a result of the losses, claims, damages
or liabilities referred to in subsection (a), (b) or (c) above (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Shareholders on the one hand and the Underwriters on the
other from the offering of the Securities or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and the Selling Shareholders on
the one hand and the Underwriters on the other in connection with the statements
or omissions which resulted in such losses, claims, damages or liabilities as
well as any other relevant equitable considerations. The relative benefits
received by the Company and the Selling Shareholders on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by the
Company and the Selling Shareholders bear to the total underwriting discounts
14
<PAGE> 15
and commissions received by the Underwriters. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company, the Selling
Shareholders or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The amount paid by an indemnified party as a result of
the losses, claims, damages or liabilities referred to in the first sentence of
this subsection (e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any action or claim which is the subject of this subsection (e).
Notwithstanding the provisions of this subsection (e), (i) no Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission (ii) no Selling
Shareholder shall be required to contribute any amount in excess of the amount
by which the aggregate net sale price received by such Selling Shareholder from
the sale of the Offered Securities hereunder exceeds the amount of any damages
or indemnification which such Selling Shareholder has otherwise been required to
pay by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (e) to contribute are several in proportion to
their respective underwriting obligations and not joint. The Selling
Shareholders' obligations under this subsection (e) to contribute are several
and not joint.
(f) The obligations of the Company and the Selling Shareholders under
this section shall be in addition to any liability which the Company and the
Selling Shareholders may otherwise have and shall extend, upon the same terms
and conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section
shall be in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
director of the Company, to each officer of the Company who has signed a
Registration Statement and to each person, if any, who controls the Company
within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters default
in their obligations to purchase Offered Securities hereunder on either the
First or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, CSFBC may
make arrangements satisfactory to the Company and the Selling Shareholders for
the purchase of such Offered Securities by other persons, including any of the
Underwriters, but if no such arrangements are made by such Closing Date, the
non-defaulting Underwriters shall be obligated severally, in proportion to their
respective commitments hereunder, to purchase the Offered Securities that such
defaulting Underwriters agreed but failed to purchase on such Closing Date. If
any Underwriter or Underwriters so default and the aggregate number of shares of
Offered Securities with respect to which such default or defaults occur exceeds
10% of the total number of shares of Offered Securities that the Underwriters
are obligated to purchase on such Closing Date and arrangements satisfactory to
CSFBC, the Company and the Selling Shareholders for the purchase of such Offered
Securities by other persons are not made within 36 hours after such default,
this Agreement will terminate without liability on the part of any
non-defaulting Underwriter, the Company or the Selling Shareholders, except as
provided in Section 9 (provided that if such default occurs with respect to
Optional Securities after the First Closing Date, this Agreement will not
terminate as to the Firm Securities or any Optional Securities purchased prior
to such termination). As used in this Agreement, the term "Underwriter" includes
any person substituted for an Underwriter under this Section. Nothing herein
will relieve a defaulting Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Selling Shareholders, of the Company or its officers and of the several
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation, or statement as to the
results thereof, made by or on behalf of any Underwriter, any Selling
Shareholder, the Company or any of their respective representatives, officers or
directors or any controlling person, and will survive delivery of and payment
for the Offered Securities. If this Agreement is terminated pursuant to Section
8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company and the Selling Shareholders shall
remain responsible for the expenses to be paid or reimbursed by them pursuant to
Section 5, and if any Offered Securities have been purchased hereunder the
15
<PAGE> 16
representations and warranties in Section 2 and all obligations under Sections 5
and 7 shall also remain in effect. If the purchase of the Offered Securities by
the Underwriters is not consummated for any reason other than solely because of
the termination of this Agreement pursuant to Section 8 or the occurrence of any
event specified in clause (iii), (iv) or (v) of Section 6(c), the Company and
the Selling Shareholders will, jointly and severally, reimburse the Underwriters
for all out-of-pocket expenses (including fees and disbursements of counsel)
reasonably incurred by them in connection with the offering of the Offered
Securities.
10. Notices. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed
to the Representative, c/o Credit Suisse First Boston Corporation, Eleven
Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking
Department - Transactions Advisory Group, or, if sent to the Company or the
Selling Shareholders, will be mailed, delivered or telegraphed and confirmed to
it at 10370 Richmond Avenue, Suite 600, Houston, Texas 77042, Attention: T.
Scott O'Keefe; provided, however, that any notice to an Underwriter pursuant to
Section 7 will be mailed, delivered or telegraphed and confirmed to such
Underwriter.
11. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective personal representatives
and successors and the officers and directors and controlling persons referred
to in Section 7, and no other person will have any right or obligation
hereunder.
12. Representation. The Representatives will act for the several
Underwriters in connection with the transactions contemplated by this Agreement,
and any action under this Agreement taken by the Representatives jointly or by
CSFBC will be binding upon all the Underwriters. Thomas P. Richards, T. Scott
O'Keefe and David W. Wehlmann, as attorneys-in-fact, will act for the Selling
Shareholders in connection with such transactions, and any action under or in
respect of this Agreement taken by such persons will be binding upon all the
Selling Shareholders.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.
15. Submission to Jurisdiction. The Company and each Selling
Shareholder hereby submits to the non-exclusive jurisdiction of the Federal and
state courts in the Borough of Manhattan in The City of New York in any suit or
proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby.
16
<PAGE> 17
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of the
counterparts hereof, whereupon it will become a binding agreement among the
Selling Shareholders, the Company and the several Underwriters in accordance
with its terms.
Very truly yours,
GREY WOLF, INC.
By:_________________________________
Title:______________________________
THE SELLING SHAREHOLDERS
NAMED IN SCHEDULE A HERETO
By:_________________________________
Title: Attorney-in-Fact
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
BT ALEX. BROWN INCORPORATED
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
HOWARD, WEIL, LABOUISSE , FRIEDRICHS INCORPORATED
JOHNSON RICE & COMPANY L.L.C.
Acting on behalf of themselves and as the Representatives of the
several Underwriters.
By CREDIT SUISSE FIRST BOSTON CORPORATION
By:______________________________________
Title:___________________________________
17
<PAGE> 18
SCHEDULE A
NUMBER OF
NUMBER OF OPTIONAL
FIRM SECURITIES SECURITIES TO
SELLING SHAREHOLDER TO BE SOLD BE SOLD
------------------- --------------- -------------
Somerset Drilling Associates, L.L.C. 5,527,000 829,050
Norex Drilling Ltd. 2,759,000 413,850
U.S. Rig & Equipment, Inc. 633,000 94,950
Flournoy Family Properties, Ltd. 801,000 120,150
Roy T. Oliver 2,780,000 417,000
--------- -------
Total...................................... 12,500,000 1,875,000
========== =========
18
<PAGE> 19
SCHEDULE B
NUMBER OF
FIRM SECURITIES
TO BE PURCHASED
---------------
Credit Suisse First Boston Corporation.....................
BT Alex. Brown Incorporated................................
Donaldson, Lufkin & Jenrette Securities Corporation........
Howard, Weil, Labouisse, Friedrichs Incorporated...........
Johnson Rice & Company L.L.C............................... ___________
Total 25,000,000
===========
<PAGE> 20
SCHEDULE C
SHAREHOLDERS SIGNING
LOCK-UP AGREEMENTS
Norex Industries, Inc.
Norex Drilling, Ltd.
Ivar Siem
Somerset Drilling Associates, L.L.C.
Somerset Capital Partners
William Ziegler
Steven Webster
Mike Mullen Energy Equipment Resources, Inc.
GCT Investments, Inc.
Roy T. Oliver, Jr.
U.S. Rig & Equipment, Inc.
Lucien Flournoy
Maxine Flournoy
Flournoy Family Properties
James Nelson
Felicity Ventures
William Donovan
Peter Holt
Thomas Richards
Scott O'Keefe
Terrell Sadler
Ronnie McBride
Gary Lee
David Wehlmann
Donald Guedry
<PAGE> 21
EXHIBIT I TO UNDERWRITING AGREEMENT
October ___, 1997
Credit Suisse First Boston Corporation
BT Alex. Brown Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
Howard, Weil, Labouisse, Friedrichs Incorporated
Johnson Rice & Company L.L.C.
as Representatives of the Several Underwriters
c/o Credit Suisse First Boston Corporation
Eleven Madison Avenue
New York, New York 10010
Gentlemen:
We have acted as counsel for Grey Wolf, Inc., a Texas corporation (the
"Company"), in connection with the Registration Statement of the Company on Form
S-3 under the Securities Act of 1933, as amended (the "Act"), filed with the
Securities and Exchange Commission (the "Commission") relating to a public
offering of the Company's common stock, par value $.10 per share (the
"Securities"). This opinion is being delivered to you at the request of the
Company pursuant to Section 6(d) of the Underwriting Agreement dated October
____, 1997 (the "Underwriting Agreement") by and among the Company, the Selling
Shareholders, Credit Suisse First Boston Corporation, BT Alex. Brown
Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, Howard, Weil,
Labouisse, Friedrichs Incorporated and Johnson Rice & Company L.L.C., as
representatives of the several underwriters (the "Underwriters"). Capitalized
terms used but not defined herein have the meanings assigned to them in the
Underwriting Agreement.
<PAGE> 22
In this capacity, we have examined signed copies of (i) the
Registration Statement on Form S-3 filed by the Company with the Commission
under the Act on September 26, 1997 (File No. 333-36593); (ii) Amendment Number
1 to the Registration Statement filed with the Commission on October 6, 1997;
(iii) Amendment Number 2 to the Registration Statement filed with the Commission
on October ___, 1997; and (iv) the related prospectuses. The Registration
Statement as amended at the time it became effective is herein referred to as
the "Registration Statement," and the prospectus dated ______________1997, in
the form filed with the Commission pursuant to Rule 424(b) of the published
rules and regulations of the Commission under the Act is herein referred to as
the "Prospectus." We have also examined: the Underwriting Agreement; the
articles of incorporation and bylaws of the Company and each Domestic Subsidiary
(as defined herein); corporate minutes and resolutions of the Company as
presented to us; and such other agreements and instruments of the Company and
certificates of officers of the Company and each Domestic Subsidiary with
respect to factual matters and of public officials as we believe necessary or
appropriate in order to render the opinions expressed herein. In making our
examination, we have assumed the genuineness of all signatures, the authenticity
of all documents presented to us as originals, the conformity to original
documents of all documents presented to us as copies thereof, and the
authenticity of the original documents from which any such copies were made,
which assumptions we have not independently verified.
Based upon all of the foregoing, and subject to the qualifications and
assumptions noted below, we are of the opinion that:
(1) The Company and each Domestic Subsidiary has been duly
incorporated and is validly existing as a corporation and in
good standing under the laws of its state of incorporation and
has the corporate power and authority to carry on its business
as described in the Prospectus. The Company and each Domestic
Subsidiary is duly qualified and is in good standing as a
foreign corporation authorized to do business in each
jurisdiction in which the nature of its business or its
ownership or leasing of property requires such qualification,
except where the failure to be so qualified or in good
standing would not have a Material Adverse Effect.
(2) The Offered Securities and all other outstanding shares of
capital stock of the Company and each Domestic Subsidiary have
been duly authorized and validly issued and are fully paid,
and non-assessable. The Offered Securities conform in all
material respects to the description thereof incorporated by
reference into the Prospectus. The shareholders of the Company
have no preemptive rights under Texas law or, to the best of
our knowledge, similar rights with respect to the Offered
Securities. All of the capital stock of each Domestic
Subsidiary is owned of record (and to the best of our
knowledge, beneficially) by the Company, directly or through
wholly-owned subsidiaries. The issued and outstanding capital
stock of each Domestic Subsidiary is, to the best of our
knowledge, free and clear of any liens, encumbrances and
defects, except as may exist or arise under the Company's Bank
Credit Facility. INDRILLERS, L.L.C., a Michigan limited
liability company which is a partially-owned subsidiary in
<PAGE> 23
which Grey Wolf Drilling Company (formerly named Drillers,
Inc.), has the relative management rights, member rights and
economic rights set forth in that certain INDRILLERS L.L.C.
Operating Agreement, a copy of which has been provided to your
counsel.
(3) The Company is not and, after giving effect to the offering
and sale of the Offered Securities and the application of the
proceeds thereof as described in the Prospectus, will not be
an "investment company" as defined in the Investment Company
Act of 1940, as amended.
(4) No consent, approval, authorization or order of or filing with
any United States federal or state court or governmental
agency or body is required in connection with the purchase and
distribution of the Offered Securities by the Underwriters,
except as (i) have been obtained under the Act, (ii) may be
required by the NASD, or (iii) may be required under the state
securities or Blue Sky laws of any jurisdiction in the United
States.
(5) The execution, delivery and performance of the Underwriting
Agreement and the Custody Agreement and the consummation of
the transactions contemplated therein by the Company do not
and will not conflict with or constitute a breach or violation
of any of the terms or provisions of, or a default under, the
articles of incorporation or bylaws of the Company or any
Domestic Subsidiary or, to the best of our knowledge, any
agreement, or instrument known to us that is material to the
Company and its respective subsidiaries, taken as a whole, to
which the Company or any Domestic Subsidiary is a party or by
which the Company, or any Domestic Subsidiary or their
respective property is bound, or violate or conflict with any
applicable judgment, order or decree of any United States
federal or state court, or any other domestic governmental
body or agency known to us to be applicable to the Company or
its subsidiaries.
(6) The Registration Statement has become effective under the Act,
and to the best of our knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued
and no proceedings for that purpose are pending before or
contemplated by the Commission.
(7) The Registration Statement and the Prospectus and any
supplement or amendment thereto comply as to form in all
material respects with the Act, except for financial
statements and schedules and other financial or statistical
data contained or incorporated by reference therein as to
which we express no opinion.
(8) To the best of our knowledge, there are no legal or
governmental proceedings before any United States federal or
state court, or any other governmental body or agency that are
pending or threatened against the Company or any of its
subsidiaries that are required to be described in the
Registration Statement or the Prospectus and are not so
described. To the best of our knowledge, there are no
contracts or other documents that are required to be described
in the Registration Statement or Prospectus, to be filed as
<PAGE> 24
exhibits to or incorporated by reference in the Registration
Statement that are not so described, filed or incorporated by
reference.
(9) The statements under the captions "Business--Regulation,"
"Management's Discussion and Analysis of Financial Condition
and Results of Operations--Certain Credit Arrangements,"
insofar as such statements constitute a summary of the legal
matters or documents referred to therein, fairly present the
information called for with respect to such legal matters and
documents in all material respects.
(10) The Underwriting Agreement has been duly authorized by all
necessary corporate action, executed and delivered by the
Company.
We note that, although certain portions of the Registration Statement
and the Prospectus (including financial statements and schedules, and related
data) have been included therein on the authority of "experts" within the
meaning of the Act, we are not "experts" within the meaning of the Act with
respect to any portion of the Registration Statement. However, we have
participated in conferences with officers and other representatives of the
Company, representatives of the independent public accountants of the Company
and representatives of the Underwriters at which the contents of the
Registration Statement and the Prospectus were discussed and, although we are
not passing upon and do not assume responsibility for the accuracy, completeness
or fairness of the statements contained in the Registration Statement or
Prospectus (except to the extent stated in paragraph (9)) on the basis of the
foregoing (relying as to materiality to a large extent upon statements of
officers and other representatives of the Company), nothing has come to our
attention that has led us to believe that the Registration Statement at the time
it became effective contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus, as amended or
supplemented, if applicable, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
It is specifically understood that we express no opinion or belief
herein with respect to the financial statements and schedules and other
financial, or statistical data included in the Registration Statement and
Prospectus or any amendments or supplements thereto.
As used in this opinion, the words "to our knowledge", "known to us",
or words of similar import mean that, during the course of our representation of
the Company, no information has come to the attention of the attorneys of this
firm who have devoted substantive attention to the transactions described herein
which would give such attorneys actual knowledge that the opinions expressed are
factually incorrect. The term "Domestic Subsidiary" as used herein includes each
of Grey Wolf Drilling Company and DI International, Inc. Except as described
herein, we have not undertaken any independent factual investigation for the
purpose of rendering an opinion which is expressed to be to our knowledge.
<PAGE> 25
Our opinions expressed herein are limited in all respects to the laws
of the state of Texas and the United States federal law insofar as it is
applicable. This opinion is being delivered to you for your sole use and benefit
in connection with the transaction above, and may not be relied upon by any
other person, except with our prior written consent.
Very truly yours,
PORTER & HEDGES, L.L.P.
<PAGE> 26
EXHIBIT II TO UNDERWRITING AGREEMENT
Credit Suisse First Boston Corporation
BT Alex. Brown Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
Howard, Weil, Labouisse, Friedrichs Incorporated
Johnson Rice & Company L.L.C.
as Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation
Eleven Madison Avenue
New York, New York 10010
Ladies and Gentlemen:
We have been retained as special counsel to Grey Wolf, Inc. (the
"Company") and its subsidiaries in connection with the public offering of the
Company's common stock, par value $0.10 per share (the "Securities"), as
described in that certain Underwriting Agreement dated October___, 1997 (the
"Underwriting Agreement") among the Company, the Selling Shareholders, Credit
Suisse First Boston Corporation, BT Alex. Brown Incorporated, Donaldson, Lufkin
& Jenrette Securities Corporation, Howard, Weil, Labouisse, Friedrichs
Incorporated and Johnson Rice & Company L.L.C. Capitalized terms used herein
that are not otherwise defined herein shall have the meaning set forth in the
Underwriting Agreement.
For purposes of this opinion, we have made an examination of matters
of law as we have considered necessary in connection with the opinions
expressed herein. In rendering this opinion, we have reviewed and examined the
charters of Drillers International, C.A. and Drillers Inc., DI de Venezuela,
C.A. (together, the "Venezuelan Subsidiaries") and such other documents,
affidavits, corporate records or certificates or other statements of
government officials and officers of the Company and the Venezuelan
Subsidiaries and such other instruments as we have considered necessary or
appropriate.
<PAGE> 27
Based upon and subject to the foregoing, we are the opinion that:
(i) each of the Venezuelan Subsidiaries has been duly incorporated, is
validly existing as a corporation in good standing under the laws of Venezuela
and has the corporate power and authority to carry on its business and to own,
lease and operate its properties;
(ii) each of the Venezuelan Subsidiaries is duly qualified and is in
good standing as a foreign corporation authorized to do business in each
jurisdiction in which the nature of its ownership or leasing of property
requires such qualification;
(iii) all the outstanding shares of capital stock of the Venezuelan
Subsidiaries have been duly authorized and validly issued and are fully paid,
non-assessable and not subject to any preemptive or similar rights;
(iv) neither of the Venezuelan Subsidiaries is in violation of its
respective charter or bylaws and, to the best of such counsel's knowledge after
due inquiry, neither of the Venezuelan Subsidiaries is in default in the
performance of any obligations, agreement, covenant or condition contained in
any indenture, loan agreement, mortgage, lease or other agreement or instrument
to which the Venezuelan Subsidiaries are a party or by which the Venezuelan
Subsidiaries or their respective property are bound;
(v) after due inquiry, we do not know of any legal or governmental
proceedings pending or threatened to which the Venezuelan Subsidiaries is or
could be party or to which any of their respective property is or could be
subject;
(vi) each of the Venezuelan Subsidiaries has such permits, licenses,
franchises and authorizations of governmental or regulatory authorities
("permits"), including, without limitation, under any applicable Environmental
Laws, as are necessary to own, lease and operate its respective properties and
to conduct its business and is in compliance with all terms and conditions
thereof; and no event has occurred which allows or, after notice or lapse of
time or both, would allow, revocation or termination of such permits or results
or, after notice or lapse of time or both, would result in any other impairment
of the rights of the holder of any such permit; and such permits contain no
restrictions that are burdensome to either of the Venezuelan Subsidiaries;
except where such failure to have, or comply with the terms or conditions of,
such permits, the occurrence of any such event or the presence of any such
restrictions would not, singly or in the aggregate, have a material adverse
effect on the business, prospects, financial condition or results of operations
of either of the Venezuelan Subsidiaries.
<PAGE> 28
Subject to the same conditions qualifications, assumptions and other
limitations set forth herein, Porter & Hedges, L.L.P. may rely on this opinion
with the same effect as if it had been addressed to them.
Sincerely,
ESCRITORIO SISO
Luis A. Siso
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
DRILLERS INC.
The undersigned, a natural person eighteen years of age or more, acting
as incorporator of a corporation under the Texas Business Corporation Act, does
hereby adopt the following Articles of Incorporation for such corporation.
ARTICLE ONE
The name of the corporation is Drillers Inc.
ARTICLE TWO
The period of the corporation's duration is perpetual.
ARTICLE THREE
The purpose for which the corporation is organized is to engage in any
lawful business for which corporations may be organized under the laws of the
State of Texas.
ARTICLE FOUR
The corporation shall have the authority to issue an aggregate of
11,000,000 shares, consisting of 1,000,000 shares of Preferred Stock, par value
$1.00 per share ("Preferred Stock") and 10,000,000 shares of Common Stock, par
value $0.10 per share ("Common Stock").
The following is a statement of the voting powers, designations,
preferences, and relative, participating, optional or other special rights and
qualifications, limitations or restrictions thereof, of the shares of stock of
the corporation and of the authority with respect thereto expressly vested in
the Board of Directors of the corporation.
<PAGE> 2
A. PREFERRED STOCK
(a) The Preferred Stock may be issued from time to time in one or more
series and in such amounts as may be determined by the Board of Directors. The
voting powers, designations, preferences and relative, participating, optional
or other special rights, if any, or the qualifications, limitations or
restrictions thereof, if any, of the Preferred Stock of each series shall be
such as are fixed by the Board of Directors, authority so to do being hereby
expressly granted, and as are stated and expressed in a resolution or
resolutions adopted by the Board of Directors providing for the issue of such
series of Preferred Stock (herein called "Directors' Resolution"). The
Directors' Resolution as to any series shall (i) designate the series, (ii) fix
the dividend rate, if any of such series, the payment dates for dividends on
shares of such series and the date or dates, or the method of determining the
dates or dates, if any, from which dividends on shares of such series shall be
cumulative, (iii) fix the amount or amounts payable on shares of such series
upon voluntary or involuntary liquidation, dissolution or winding up and (iv)
state the price or prices or rate or rates, and adjustments, if any, at which,
the time or times, and the terms and conditions on which, the shares of such
series may be redeemed at the option of the corporations; and such Directors'
Resolution may (i) limit the number of shares of such series that may be issued,
(ii) provide for a sinking fund for the purchase or redemption of shares of such
series and determine the terms and conditions governing the operations of any
such fund, (iii) grant voting rights to the holders of shares of such series,
(iv) impose conditions or restrictions upon the creation of indebtedness of the
corporation or upon the issuance of additional Preferred Stock or other capital
stock ranking on a parity therewith, or prior thereto, with respect to dividends
or distribution of assets upon liquidation, (v) impose conditions or
restrictions upon the payment of dividends upon, or the making of other
2
<PAGE> 3
distributions to, or the acquisition of, shares ranking junior to the Preferred
Stock or to any series thereof with respect to dividends or distributions of
assets upon liquidation, (vi) state the price or prices or the rate or rates of
exchange and other terms, conditions and adjustments upon which shares of any
such series may be made convertible into, or exchangeable for shares of any
other class or classes or of any other series of Preferred Stock or any other
class or classes of stock and (vii) grant such other special rights and impose
such qualifications, limitations or restrictions thereon as shall be fixed by
the Board of Directors.
(b) Except as by law expressly provided, or except as may be provided
in any Directors' Resolution, the Preferred Stock shall have no right or power
to vote on any question or in any proceeding or to be represented at, or to
receive notice of, any meeting of shareholders.
(c) Preferred Stock redeemed, purchased or retired by the corporation
assumes the status of authorized but unissued Preferred Stock and may
thereafter, subject to the provisions of any Directors' Resolution providing
for the issue of any particular series of Preferred Stock, be reissued
in the same manner as authorized but unissued Preferred Stock.
B. COMMON STOCK
(a) The Common Stock is junior to the Preferred Stock and is subject to
all the powers, rights, privileges, preferences and priorities of the Preferred
Stock as herein set forth and as may be stated in any Directors' Resolution or
Resolutions.
(b) Subject to all rights of the Preferred Stock, dividends may be paid
on the Common Stock as and when declared by the Board of Directors of the
corporation out of any funds of the corporation legally available for the
payment thereof.
3
<PAGE> 4
(c) After payment shall have been made in full to the holders of the
Preferred Stock in the event of any liquidation, dissolution or winding up of
the affairs of the corporation, the remaining assets and funds of the
corporation shall be distributed to the holders of Common Stock according to
their respective shares.
(d) Except as otherwise provided by law and subject to the voting
rights conferred on the Preferred Stock or any series thereof by any Directors'
Resolution, the holders of shares of Common Stock shall posses exclusive voting
rights for the election of directors and for all other purposes, each holder of
Common Stock on the date fixed for determining the shareholders entitled to vote
being entitled to one vote for each share of Common Stock held of record by such
holder.
ARTICLE FIVE
The corporation will not commence business until it has received for
the issuance of its shares consideration of the value of One Thousand Dollars
($1,000.00), consisting of money, labor done or property actually received.
ARTICLE SIX
No shareholder shall be entitled as a matter of right to subscribe for,
purchase, or receive additional unissued or treasury shares of any class of the
corporation, whether now or later authorized, or any bonds, debentures,
warrants, options or other securities convertible into or entitling the holder
to purchase shares. Such additional shares, bonds, debentures, warrants, options
or other securities convertible into or entitling the holder to purchase shares
may be issued or disposed of as the Board of Directors in its absolute
discretion deems advisable.
4
<PAGE> 5
ARTICLE SEVEN
At each election for directors of the corporation, each shareholder
entitled to vote at such election shall have the right to vote, in person or by
proxy, only the number of shares owned by him for as many persons as there are
directors to be elected, and no shareholder shall ever have the right or be
permitted to cumulate his votes on any basis, any and all rights of cumulative
voting being hereby expressly denied.
ARTICLE EIGHT
The address of the initial registered office of the corporation is 5429
FM 1960 W., Suite 202, Houston Texas 77069 and the name of its initial
registered agent at such address is Max Dillard.
ARTICLE NINE
The number of directors contributing the initial Board of Directors is
one (1), and the name and address of the person who is to serve as director
until the first annual meeting of the shareholders or until his successor is
elected and qualified is:
NAME ADDRESS
---- -------
Max Dillard 5429 FM 1960 W.
Suite, 202
Houston, Texas 77069
The Bylaws of the corporation shall provide for the number,
classification and election of directors and other matters pertaining to the
Board of Directors.
ARTICLE TEN
Upon resolution adopted by the Board of Directors, the corporation
shall be entitled to purchase shares of its own capital stock to the extent of
the aggregate of the available unrestricted capital surplus and available
unrestricted reduction surplus.
5
<PAGE> 6
ARTICLE ELEVEN
The name and address of the incorporator is:
NAME ADDRESS
---- -------
Hunter Nelson 2500 Exxon Bldg.
Houston, Texas 77002
IN WITNESS WHEREOF, the undersigned incorporator has hereunto set his
hand this 29th day of September, 1980.
/s/ Hunter Nelson
----------------------------------
THE STATE OF TEXAS ss.
ss.
COUNTY OF HARRIS ss.
BEFORE ME, the undersigned authority, on this day personally appeared
Hunter Nelson, who being by me first duly sworn, declared that he is the person
who signed the foregoing document as incorporator, and that the statements
therein contained are true.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this 29th day of September,
1980.
/s/ Marian Anne Nelson
----------------------------------
Notary Public in and For
Harris County, T E X A S
6
<PAGE> 7
DRILLERS INC.
STATEMENT OF RESOLUTION ESTABLISHING SERIES OF SHARES
Pursuant to the provisions of Article 2.13 of the Texas Business
Corporation Act, Drillers Inc., a Texas corporation (the "Corporation"), submits
the following statement for the purpose of establishing and designating a series
of shares and fixing and determining the relative rights and preferences
thereof:
C. The name of the Corporation is Drillers Inc.
D. The resolutions, establishing and designating one series of
Series A Preferred Stock of the Corporation and fixing and determining
the relative rights and preferences thereof, which are attached hereto
as Appendix I and incorporated herein for all purposes were duly
adopted by the Board of Directors of the Corporation on June 22, 1984.
WITNESS THE EXECUTION HEREOF, effective as of the 22nd day of June,
1984.
DRILLERS, INC.
By: /s/ G. Nelson Van Fleet
----------------------------------
Vice President - Finance
By: /s/ Barbara G. Cannon
----------------------------------
Secretary
STATE OF TEXAS ss.
ss.
COUNTY OF HARRIS ss.
Before me, a notary public, on this day personally appeared G. Nelson
Van Fleet, known to me to be the person whose name is subscribed to the
foregoing document and, being by me first duly sworn, declared that the
statements therein contained are true and correct.
Given under my hand and seal of office this 22nd day of June, 1984.
/s/ Barbara G. Cannon
----------------------------------
Notary Public
State of T E X A S
7
<PAGE> 8
APPENDIX I
BE IT RESOLVED, that a series of Preferred Stock of the corporation be
established, with such series being designated "Series A Preferred Stock" and
constituting of 955,556 shares, which may be issued for such lawful
consideration and pursuant to such terms and conditions as the Board of
Directors may determine; and
RESOLVED FURTHER, and that Series A Preferred Stock shall have the
relative rights and preferences and such other qualifications, limitations and
restrictions provided in the Certificate of Authorization of 5% Cumulative
Preferred Stock, $1.00 Par Value, designated "Series A Preferred Stock", which
certificate is attached to these resolutions as Exhibit A and incorporated
herein for all purposes; and
RESOLVED FURTHER, that the President (or any Vice President) and the
Secretary (or any Assistant Secretary) be, and they hereby are, authorized and
empowered for and on behalf of the corporation, and in its name, to prepare or
have prepared, execute, file and deliver any and all such certificates,
opinions, schedules, applications, agreements, documents and other instruments,
and to take or cause to be taken any and all such other and further actions as,
in the judgment of said officers, may be necessary, proper or convenient in
order to consummate, carry out and complete in all respects the designation of
the rights and preferences of the Series A Preferred Stock, the sale of the
Common Stock, Series A Preferred Stock and Warrants and all other actions
contemplated by these resolutions, and otherwise fully perform and satisfy the
obligations and duties of the corporation under the Purchase Agreements and any
registration agreements.
<PAGE> 9
DRILLERS INC.
AUTHORIZATION OF 5% CUMULATIVE CONVERTIBLE PREFERRED STOCK
WHEREAS, the Corporation is authorized by its Articles of
Incorporation, as amended, to issue 1,000,000 shares of Preferred Stock, $1.00
par value (herein called "Preferred Stock"); and
WHEREAS, the Articles of Incorporation do not otherwise state or fix
the designations, preferences, voting rights and relative, participating,
optional or other special rights, qualifications, limitations and restrictions
of the Preferred Stock, but instead authorize the issuance thereof in series
from time to time with such designations, preferences, voting rights, rights of
conversion into Common Stock and relative, participating, optional or other
rights, qualifications, limitations and restrictions thereof as shall be stated
and expressed in the resolution or resolutions providing for the creation and
issuance of such series adopted by the Board of Directors of the Corporation;
and
WHEREAS, the Board of Directors of the Corporation has not heretofore
established any series of shares of the Corporation's Preferred Stock; and
WHEREAS, the Board of Directors deems it advisable to create and
establish and authorize the issuance of a series of the Corporation's Preferred
Stock with the designations, preferences, voting and other rights hereinafter
specified;
NOW, THEREFORE, BE IT RESOLVED, that pursuant to authority expressly
vested in it by the provisions of the Articles of Incorporation of the
Corporation, as amended, the Board of Directors does hereby create, establish
and authorize the issuance of a series of the Corporation's Preferred Stock to
be known as "5% Cumulative Convertible Preferred Stock," such series to consist
of 955,556 shares of the Corporation's authorized and unissued Preferred Stock,
and subject to the provisions of the Articles of Incorporation of the
Corporation, as amended from time to time (which provisions, in the event of a
conflict with any of the provisions of this resolution, shall control), does
hereby state and fix the designations, preferences, voting rights, conversion
rights and relative, participating, optional and other rights of the shares of
such series and the qualifications, limitations and restrictions thereof as
follows:
A. Designation of Series. This series of Preferred Stock shall consist
of 955,556 shares and is designated and shall be issued as "5% Cumulative
Convertible Preferred Stock" (hereinafter referred to as the "Series A
Preferred").
B. Cumulative Dividends. The holders of the Series A Preferred shall be
entitled to receive, as and when declared by the Board of Directors of the
Corporation, out of any funds legally available for the declaration of
dividends, cumulative dividends in cash in the following amounts: (a) on June
30, 1984 all outstanding shares of Series A Preferred shall be entitled to
receive dividends of $.125 per share and (b) beginning July 1, 1984 outstanding
Series A Preferred shall be
<PAGE> 10
entitled to receive dividends at the annual rate of $.50 per share, and no more,
payable quarterly on the 30th day of March, June, September and December of each
year, commencing on September 30, 1984. Such dividends shall commence to accrue
on the shares of Series A Preferred and be cumulative from and after the date of
issuance of such shares of Series A Preferred and shall be deemed to accumulate
and accrue from day to day thereafter regardless of whether or not the
Corporation shall have funds legally available for the payment of such
dividends. As long as the Series A Preferred shall be outstanding: (a) no
dividend (other than dividends of capital stock) shall be paid upon or set apart
for any other shares of capital stock or series thereof of the Corporation
("Capital Stock"); and (b) the Corporation shall not designate any series of
preferred stock superior to the Series A Preferred in terms of dividends,
redemptions or on liquidation.
C. Liquidation. In the event of dissolution, liquidation or winding up
of the Corporation the holders of the Series A Preferred shares shall be
entitled, after the debts of the Corporation shall have been paid, to receive
out of the assets remaining an amount equal to $10 per share, together, in
either case, with all dividends thereon accrued or in arrears, whether or not
earned or declared, before any payment is made or assets set apart for payment
to the holders of any other Capital Stock and shall be entitled to no further
payments or distributions. If, upon dissolution, liquidation or winding up of
the Corporation, the assets remaining after the payment of all debts of the
Corporation shall be insufficient to pay the full amount due to holders of the
Series A Preferred the assets so remaining shall be divided ratably among the
holders of the Series A Preferred then outstanding. Merger or consolidation with
one or more corporations shall not constitute dissolution, liquidation or
winding up of the Corporation for purposes hereof.
D. Redemption.
(a) Mandatory. As a mandatory redemption for the retirement of
the Series A Preferred, the Corporation, on December 30, 1988 and on
the 30th day of each March, June, September and December thereafter, so
long as any shares of the Series A Preferred are outstanding, will
redeem 79,630 shares of the Series A Preferred (or all such shares
outstanding on any such date, if less than 79,630) in each case at $10
per share (hereinafter called the "Mandatory Redemption Price") plus,
to the extent permitted by applicable law, an amount equal to accrued
and unpaid dividends on all outstanding shares of Series A Preferred.
The redemption obligations hereinafter shall be cumulative. If and so
long as the Corporation shall be in arrears on the redemption of shares
of the Series A Preferred pursuant to this subparagraph (a), the
Corporation may not pay any dividends on, make any distributions on, or
purchase or redeem any shares of Capital Stock. Any optional redemption
of shares of Series A Preferred pursuant to subparagraph (b) of this
Paragraph 4 hereof, or any purchase or other acquisition of any such
shares by the Corporation, shall constitute a retirement of such shares
in lieu of or as a credit against any mandatory redemption required by
this subparagraph (a) in the inverse order in which such redemption
requirements fall due.
2
<PAGE> 11
(b) Optional. At any time from and after the date of issuance,
the Corporation, at the option of the Board of Directors, may redeem
all or, from time to time, part of the Series A Preferred at the
Mandatory Redemption Price per share plus, in each case, (i) payment of
an amount equal to accrued and unpaid dividends thereon and (ii)
delivery to the holder thereof on such redemption of a Common Stock
Purchase Warrant in the form of the warrant attached hereto as Exhibit
A to purchase the number of shares of Common Stock determined by
dividing (i) the product of (a) the number of shares of Series A
Preferred to be redeemed hereunder, times (b) the Mandatory Redemption
Price per share, by (ii) $50. The foregoing notwithstanding no Warrants
shall be issuable upon redemptions made pursuant to subparagraph (a)
hereof.
(c) Notice; Partial Redemption. Notice of every such mandatory
or optional redemption shall be given at least 30 days but not more
than 50 days prior to the date designated for such redemption (herein
called the "Redemption Date") to the holders of record of the shares of
Series A Preferred so to be redeemed at their respective addresses as
they appear upon the books of the Corporation. If less than all shares
of the Series A Preferred are called for mandatory or optional
redemption, shares to be redeemed shall be made pro rata, as nearly as
practicable, according to the number of shares held by the respective
holders, with adjustments to the extent practicable to equalize for any
prior redemptions, and otherwise in such manner as the Board of
Directors may determine, provided that only full shares shall be
selected for redemption. In order to facilitate the redemption of
shares of Series A Preferred the Board of Directors may cause the
transfer books of the Corporation to be closed as to such shares not
more than 50 days prior to the Redemption Date thereof.
(d) Non Surrender of Redeemed Shares. If, on or before the
Redemption Date, the Corporation shall deposit in trust, with a bank or
trust company in the City of Houston, Texas having a capital and
surplus of at least $25,000,000, the funds necessary for the redemption
of shares of Series A Preferred called for redemption, accompanied by
irrevocable instructions to apply such funds to the redemption of such
shares, and if on or before the date of such deposit the Corporation
shall have given notice of redemption as aforesaid or made provision
satisfactory to such bank or trust company for the timely giving
thereof, then from and after the date of such deposit all shares of
Series A Preferred so called for redemption shall not be deemed to be
outstanding, and all rights of holders of such shares of Series A
Preferred so called for redemption shall cease and terminate, excepting
only the right to receive the redemption price therefor, but without
interest, and the right to exercise on or before the Redemption Date
all rights of conversion. Any interest accrued on funds so deposited
shall be paid to the Corporation from time to time.
E. Status of Redeemed or Converted Shares. Shares of Series A Preferred
which have been redeemed or acquired by the Corporation or which have been
converted into shares of Common Stock shall not be reissued.
3
<PAGE> 12
F. Conversion Rights.
(a) General. The holder of any share of Series A Preferred
shall have the right at any time on or after March 31, 1988 (subject to
the further provisions hereof, and except that upon any liquidation of
the Corporation or upon any redemption pursuant to paragraph 4 made
after March 31, 1988, such right shall terminate at the close of
business on the second business day before either the date fixed for
liquidation or redemption, respectively) to convert all or a portion of
the holder's shares into such number of shares of Common Stock as is
determined by dividing (i) the product of (x) the aggregate par value
of the shares to be converted multiplied by (y) 10, by (ii) the
Conversion Price (as defined in subparagraph (b) hereof). To exercise
such right, the holder shall give written notice to the Corporation
that the holder elects to convert a stated number of shares of the
Series A Preferred into shares of Common Stock on the date specified in
such notice (the "Conversion Date"), and by surrender of the
certificate or certificates for the shares to be converted to the
Corporation, at the principal office of the Corporation or of any
transfer agent of the Corporation at any time during its usual business
hours on or before the Conversion Date, together with a statement of
the name or names (with addresses) of the person or persons in which
the certificate or certificates for Common Stock shall be issued.
Promptly after the receipt of the above written notice an
surrendered certificate, the Corporation shall issue and deliver to
such holder, registered in such name or names as such holder may
direct, the requested certificate or certificates for the number of
shares of Common Stock issuable upon the conversion, together with
payment in cash for all dividends accrued on the shares surrendered for
conversion and due and payable pursuant to paragraph 2. Except as
aforesaid, dividends on shares of Series A Preferred shall cease to
accrue on the Conversion Date and no payment or adjustment for
dividends which have accrued from and after the last quarterly dividend
date specified in paragraph 2 and prior to the Conversion Date shall be
made, such accrued dividends being eliminated on conversion. No
fractional shares shall be issued upon conversion. In lieu of any
fractional share, the Corporation shall pay in cash its full value, as
determined in good faith by the Board of Directors. To the extent
permitted by law, such conversion shall be deemed to have been effected
as of the close of business on the Conversion Date, and at such time
the holders of the certificates for the shares of Common Stock issued
upon the conversion shall be deemed to have become the holders of such
shares.
The foregoing notwithstanding, the holder of any share of
Series A Preferred shall have the right to any time on or prior to July
25, 1984 to convert all or a portion of the holder's shares of Series A
Preferred into Common Stock on the same terms and conditions as
otherwise set forth in this Section 6, except that prior to July 25 the
Conversion Price shall be $6.00 per share of Common Stock, subject to
all adjustments herein contained.
(b) Conversion Price. The term "Conversion Price" shall mean
an amount equal to $10.00 per share of Common Stock or, if an
adjustment of such amount has been made
4
<PAGE> 13
pursuant to the provisions of this paragraph 6, such amount as last
adjusted. No adjustment of the Conversion Price shall be made unless
such adjustment would require an increase or decrease of at least 1% in
such rate, but such adjustment shall be carried forward and made when
all such adjustments plus subsequent adjustments equal 1% or more.
(c) Issuance of Common Stock. If at any time subsequent to the
date hereof the Corporation shall issue or sell any shares of Common
Stock for a consideration per share less than the fair market value, as
reasonably determined by the Board, or in any event less than 90% of
the Market Value (as hereinafter defined) at the time of such issue or
sale, then, forthwith upon such issue or sale, the Conversion Price
shall be reduced to a lower Conversion Price (calculated to the nearest
cent) determined by dividing (i) an amount equal to the sum of (a) the
number of shares of Common Stock outstanding immediately prior to such
issue or sale multiplied by the then existing Conversion Price, and (b)
the consideration, if any, received by the Corporation upon such issue
or sale, by (ii) the total number of shares of Common Stock outstanding
immediately after such issue or sale, provided however, that there
shall be excepted and excluded from any adjustment pursuant to this
paragraph 6, (x) the issuance of any shares of Common Stock to The
Royal Bank of Canada, The First National Bank and Trust Company of
Oklahoma City and The Monhegan Company pursuant to warrants or the
Series A Preferred and (y) any shares reserved for issuance and
subsequently issued pursuant to any existing or future stock option
plans up to a maximum of 500,000 shares or otherwise pursuant to
commitments or options to issue shares outstanding on the date hereof.
As used herein, Market Value means, on the date of sale or issuance of
Common Stock the last reported sale price on any national securities
exchange on which the Common Stock is listed or admitted to unlisted
trading privileges on the date of sale or issuance, or (if such Common
Stock is not then listed or admitted to unlisted trading privileges on
such an exchange), the closing bid quotation in the over-the-counter
market as reported on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), as of the close of business on
the date of sale or issuance, or (if the closing bid quotation on such
Common Stock is not being reported on NASDAQ) the closing bid quotation
for one share of Common Stock in the over-the-counter market as
determined by averaging such bid quotations furnished by any three
reputable members of the National Association of Securities Dealers
selected from time to time by the Company for that purpose or in the
event none of the foregoing is available, the average of the market
values determined by two reputable investment banking firms, one
selected by the Company and the other selected by the Determining
Holders.
(d) Consideration for Stock. If any shares of Common Stock
shall be issued or sold by the Corporation for cash, the consideration
received shall be deemed to be the amount received by the Corporation
therefor. If any shares of Common Stock shall be issued or sold by the
Corporation for a consideration other than cash, the amount of
consideration other than cash shall be deemed to be the fair value of
such consideration received, as determined by the Board of Directors of
the Corporation, without deducting any expenses or any underwriting
commissions or concessions paid or allowed by the Corporation. If the
5
<PAGE> 14
Corporation shall declare a dividend or make any other distribution
upon any stock of the Corporation payable in shares of Common Stock,
rights or options to subscribe for or purchase shares of Common Stock
("Options") or any stock or securities convertible into or exchangeable
for shares of Common Stock ("Convertible Securities"), any shares of
Common Stock issuable in payment of such dividend or distribution, or
in connection with the exercise of the Options or conversion of the
Convertible Securities shall be deemed to have been issued or sold
without consideration.
(e) Record Date. If the Corporation shall set a record date
for the purpose of entitling the holders of its Common Stock (i) to
receive a dividend or other distribution payable in shares of Common
Stock or (ii) to subscribe for or purchase shares of Common Stock then
such record date shall be deemed to be the date of the issue or sale of
the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution
or the date of the granting of such right of subscription or purchase,
as the case may be.
(f) Treasury Shares. The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by
or for the account of the Corporation, and the disposition of any such
shares shall be considered an issue or sale of shares of Common Stock
for the purposes of this paragraph 6.
(g) Subdivision or Combination of Common Stock. If the
Corporation shall at any time subdivide its outstanding shares of
Common Stock into a greater number of shares, the Conversion Price in
effect immediately prior to such subdivision shall be proportionately
reduced, and conversely, if the outstanding shares of Common Stock of
the Corporation shall be combined into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination shall
be proportionately increased.
(h) Reorganization, Reclassification, Consolidation, Merger or
Sale. For purposes of this subparagraph, the term "reorganization"
shall mean any one or more of the following events: (i) any
reclassification of outstanding shares of Common Stock issuable upon
conversion of the Series A Preferred (other than a change in par value,
or from par value to no par value, or from no par value to par value or
as a result of a subdivision or combination); (ii) any consolidation or
merger of the Corporation with or into another corporation or party
(other than a merger with a subsidiary of the Corporation in which
merger the Corporation is the continuing corporation and which does not
result in any reclassification of the then outstanding shares of Common
Stock or other capital stock issuable upon conversion of the Series A
Preferred (other than a change in par value, or from par value to no
par value, or from no par value to par value or as a result of a
subdivision or combination)); or (iii) any sale or conveyance to
another corporation or party of the property of the Corporation, as an
entirety or substantially as an entirety. If any reorganization of the
Corporation shall be effected in such a way that holders of shares of
Common Stock shall be entitled to receive stock, securities or assets
with respect to or in exchange for shares of
6
<PAGE> 15
Common Stock, then, as a condition of any such reorganization,
equitable provisions determined by the Board of Directors shall be made
whereby each holder of a share of Series A Preferred shall have the
right to receive, after the effectiveness of such reorganization, and
substantially upon the basis and the terms and conditions specified
herein, and in lieu of that number of shares of Common Stock into which
such shares of Series A Preferred was convertible immediately prior to
the effectiveness of such reorganization, such shares of stock,
securities or assets as would have been issued or payable with respect
to or in exchange for such number of shares of Common Stock pursuant to
such reorganization; and in any such case appropriate provision shall
be made with respect to the right and interests of such holder to the
end that the provisions hereof (including, without limitation,
provisions for adjustments of the Conversion Price) shall thereafter be
applicable, as nearly as may be, in relation to any shares of stock,
securities or assets thereafter deliverable upon the exercise of such
conversion rights (including an immediate adjustment, by reason of a
consolidation, merger or sale, of the Conversion Price to the value for
shares of Common Stock reflected by the terms of such consolidation,
merger or sale if the value so reflected is less than the Conversion
Price in effect immediately prior to such consolidation or merger). In
the event of a merger or consolidation of the Corporation with or into
another corporation as a result of which a greater or lesser number of
shares of common stock of the surviving corporation is issuable to
holders of shares of Common Stock of the Corporation than are
outstanding immediately prior to such merger or consolidation, then the
Conversion Price in effect immediately prior to such merger or
consolidation shall be adjusted in the same manner as though there were
a subdivision or combination of the outstanding shares of Common Stock
of the Corporation. The Corporation will not effect any such
reorganization unless prior to the consummation thereof the successor
corporation (if other than the Corporation) resulting from such
consolidation or merger or the corporation purchasing such assets shall
assume by written instrument executed and mailed or delivered to each
registered holder of shares of Series A Preferred at the last address
of such holder appearing on the books of the Corporation, the
obligation to deliver to such holder such shares of stock, securities
or assets as, in accordance with the foregoing provisions, such holder
may be entitled to receive. The provisions of this subparagraph shall
not be applicable to any reorganization in connection with which the
Corporation is required to, or exercises its option to, redeem under an
in accordance with paragraph 4.
(i) Tender Offers. In the event of a Tender Offer by any
person, partnership, corporation or other entity or group, then the
shares of Series A Preferred shall become immediately convertible,
pursuant to the other terms and conditions set forth in Section 6.
For purposes hereof, "Tender Offer" means any purchase in one
transaction or a series of transactions of ten percent or more of the
outstanding equity securities of the Corporation, or any offer to
purchase or invitation to tender equity securities for purchase made by
an offeror to more than 30 of the holders of equity securities of the
Corporation, if after the consummation thereof, the purchaser or
offeror, as the case may be, and any associate of the offeror would own
beneficially, directly or indirectly, more than ten percent of any
class of the outstanding equity securities of the Corporation.
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<PAGE> 16
(j) Notice of Adjustment. Upon any adjustment of the
Conversion Price, the Corporation shall give written notice thereof, by
first class certified mail, postage prepaid, addressed to each holder
of shares of Series A Preferred at the address of such holder as shown
on the books of the Corporation. The notice shall state the Conversion
Price resulting from such adjustment and set forth in reasonable detail
the method of calculation and facts upon which such calculation is
based.
(k) Other Notices. If at any time:
i. the Corporation shall offer for subscription pro
rata to the holders of its Common Stock any additional shares
of stock of any class or other rights;
ii. there shall be any capital reorganization, or
reclassification of the capital stock of the Corporation, or
consolidation or merger of the Corporation with, or sale or
exchange of all or substantially all of its assets to, another
person, group or entity;
iii. there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Corporation; or
iv. the Corporation shall purchase or redeem any
shares of Capital Stock, other than Series A Preferred;
then, the Corporation shall give, and each holder thereof shall have
actually received, at least ten days prior notice of the date on which
the books of the Corporation shall close or a record shall be taken for
such dividend, distribution or subscription rights or for determining
rights to vote in respect of any such reorganization, reclassification,
consolidation, merger, sale, exchange, dissolution, liquidation or
winding up, which notice shall specify, in the case of any such
dividend, distribution or subscription rights, the date on which the
holders of its Common Stock shall be entitled thereto, and the date on
which the holders of its Common Stock shall be entitled to exchange
their shares of Common Stock for securities or other property
deliverable upon such reorganization, liquidation or winding up, as the
case may be.
(l) Reservation. The Corporation will at all times reserve and
keep available out of its authorized but unissued shares of Common
Stock or its treasury shares, solely for the purpose of issue upon the
conversion of the shares of the Series A Preferred as herein provided,
such number of shares of Common Stock as shall then be issuable upon
conversion of all outstanding shares of its Series A Preferred. The
Corporation covenants that all shares of the Common Stock which shall
be so issuable shall, when issued, be duly and validly issued and fully
paid and nonassessable.
8
<PAGE> 17
The issuance of certificates for Common Stock upon such
conversion as hereinabove set forth shall be made without charge to the
holders of such Common Stock for any issuance tax in respect thereof,
provided that the Corporation shall not be required to pay any 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 holder of shares converted.
G. No Pre-Emptive Right. No holder of Series A Preferred shall, as such
holder, have any preemptive, preferential or other right to subscribe for or
purchase or receive any stock of any class now or hereafter issued by the
Corporation or any obligations or other securities now or hereafter issued by
the Corporation which are convertible into or evidence the right to subscribe
for or purchase or receive any stock of any class now or hereafter issued by the
Corporation.
H. Voting. The holders of the Series A Preferred shall not, except as
otherwise required by applicable law or as herein set forth have any right or
power to vote on any question or in any proceeding, or to be represented at or
to receive notice of any meeting of stockholders. On any matters on which the
holders of the Series A Preferred shall be entitled to vote, they shall be
entitled to one vote for each share held.
I. Nonassessability. The shares of Series A Preferred, when issued,
shall be fully paid and nonassessable.
J. Restrictions on Issuance of Warrants and Options, etc. for Less Than
Market Value. At all times while any of the Series A Preferred Stock shall be
outstanding, any warrants, options or other rights hereafter issued by the
Company to acquire Common Stock of the Company, shall be issued only if the
exercise price of such warrant, option or right is at least equal to the fair
market value, as reasonably determined by the Board, but in any event not less
than 90% of the Market Value of the Common Stock, on the date that such warrant,
option or right is issued.
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<PAGE> 18
THIS WARRANT AND THE COMMON STOCK ISSUABLE WITH RESPECT HERETO MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR OTHERWISE DISPOSED OF WITHOUT REGISTRATION UNDER THE
SECURITIES ACT OF 1933, OR ANY APPLICABLE BLUE SKY ACTS, UNLESS AND UNTIL THE
HOLDER HEREOF PROVIDES (i) INFORMATION SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED OR (ii) AN OPINION OF COUNSEL ACCEPTABLE TO THE
COMPANY TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED.
TRANSFER OF THESE SECURITIES IS RESTRICTED, AS FOLLOWS: THE SECURITIES EVIDENCE
HEREBY (INCLUDING THE COMMON STOCK ISSUABLE WITH RESPECT HERETO) ARE SUBJECT TO
AND RESTRICTED BY, AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED,
ENCUMBERED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH THE TERMS AND
CONDITIONS SET FORTH IN THAT CERTAIN PURCHASE AGREEMENT BETWEEN THE COMPANY AND
THE HOLDER HEREOF, A COPY OF WHICH WILL BE FURNISHED BY THE COMPANY TO THE
RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON WRITTEN REQUEST TO THE
COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE.
DRILLERS INC.
NO. W-___________ For the Purchase of __________________ Shares
COMMON STOCK PURCHASE WARRANT
This certifies that, for value received,_____________________________
or registered assigns, is entitled, subject to the terms and conditions
hereinafter set forth, at any time to and including March 31, 1994, to purchase
up to shares _________ of Common Stock, $.10 par value ("Common Stock"),
of Drillers Inc., a Texas corporation (the "Company"), at a price of $6.00 per
share, in lawful funds of the United States of America payable in cash or by
certified or official bank check, such price and the number of shares
purchasable pursuant hereto being subject to adjustment upon the contingencies
set forth in this Warrant (such price, as adjusted from time to time, is called
the "Purchase Price"). Upon presentation and surrender of this Warrant, together
with payment of the Purchase Price of the shares of Common Stock thereby
purchased, at the office of the Transfer Agent of the Company for the transfer
of such stock in Houston, Texas, or, if at any time there is no such Transfer
Agent, at the principal office of the Company, the registered holder of this
Warrant shall be entitled to receive a certificate or certificates for the
shares of Common Stock so purchased. All shares which may be issued upon the
exercise of this Warrant will, upon issuance, be fully paid and non-assessable
and free from all taxes, liens and charges with respect thereto.
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<PAGE> 19
This Warrant is issued pursuant to the provisions of that certain
Purchase Agreement (the "Agreement") executed June 25, 1984, effective as of
March 31, 1984, by and between the Company and the holder hereof, and the
provisions of the Agreement which pertain hereto shall be fully applicable to
this Warrant for all purposes, and shall control over the terms hereof to the
extent of any conflict. Without limiting the generality of the foregoing, this
Warrant is subject to certain rights of repurchase of the Company, as set forth
in the Purchase Agreement.
This Warrant is issued subject to the following further terms and
conditions:
(i) Exercise of Warrant. The purchase rights represented by this
Warrant are exercisable at the option of the holder hereof in whole at any time,
or in part from time to time. In the case of the purchase of less than all the
shares purchasable under this Warrant, the Company shall cancel this Warrant
upon the surrender hereof and shall execute and deliver a new Warrant of like
tenor for the balance of the shares purchasable hereunder.
(ii) Registration. This Warrant and the Common Stock issuable with
respect hereto shall be subject to the restrictions on transfer set forth in the
Agreement.
(iii) Adjustments.
1) Adjustment to Purchase Price. The Purchase Price pursuant
to which Common Stock may be acquired hereunder shall be subject to the
adjustments herein set forth. No adjustment of the Purchase Price shall
be made unless such adjustment would require an increase or decrease of
at least 1% in such price, but such adjustment plus subsequent
adjustments equal 1% or more.
a) Issuance of Common Stock. If at any time
subsequent to the date hereof the Company shall issue or sell
any shares of Common Stock for a consideration per share less
than the fair market value, as reasonably determined by the
Board, or in any event less than 90% of the Market Value (as
hereinafter defined) at the time of such issue or sale, then,
forthwith upon such issue or sale, the Purchase Price shall be
reduced to a lower Purchase Price (calculated to the nearest
cent) determined by dividing (i) an amount equal to the sum of
(a) the number of shares of Common Stock outstanding
immediately prior to such issue or sale multiplied by the then
existing Purchase Price, and (b) the consideration, if any,
received by the Corporation upon such issue or sale, by (ii)
the total number of shares of Common Stock outstanding
immediately after such issue or sale, provided however, that
there shall be excepted and excluded from any adjustment
pursuant to this paragraph 3, (x) the issuance of any shares
of Common Stock to the Royal Canadian Bank, The First National
Bank and Trust Company of Oklahoma City and The Monhegan
Company pursuant to warrants or convertible securities
(including without limitation the Series A Preferred) or
commitments so to issue made subsequent to or on the date
hereof and (y) any shares reserved for issuance and
subsequently issued pursuant to any
2
<PAGE> 20
existing stock option plans. As used herein, Market Value
means, on the date of sale or issuance of Common Stock, the
last reported sale price on any national securities exchange
on which the Common Stock is listed or admitted to unlisted
trading privileges on the date of sale or issuance, or (if
such Common Stock is not then listed or admitted to unlisted
trading privileges on such an exchange) the closing bid
quotation in the over-the-counter market as reported on the
National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), as of the close of business on the date of
sale or issuance, or (if the closing bid quotation on such
Common Stock is not being reported on NASDAQ) the closing bid
quotation for one share of Common Stock in the
over-the-counter market as furnished by any member of the
National Association of Securities Dealers selected from time
to time by the Company for that purpose.
b) Consideration for Stock. If any shares of Common
Stock shall be issued or sold by the Company for cash, the
consideration received shall be deemed to be the amount
received and to be received by the Company therefor. If any
shares of Common Stock shall be issued or sold by the Company
for a consideration other than cash, the amount of
consideration other than cash shall be deemed to be the fair
value of such consideration received and to be received, as
determined by the Board of Directors of the Company, without
deducting any expenses or any underwriting commissions or
concessions paid or allowed by the Company. If the Company
shall declare a dividend or make any other distribution upon
any stock of the Company payable in shares of Common Stock,
rights or options to subscribe for or purchase shares of
Common Stock ("Options") or any stock of securities
convertible into or exchangeable for shares of Common Stock
("Convertible Securities"), any shares of Common Stock
issuable in payment of such dividend or distribution, or in
connection with the exercise of the Options or conversion of
the convertible Securities shall be deemed to have been issued
or sold without consideration.
c) Record Date. If the Company shall set a record
date for the purpose of entitling the holders of its Common
Stock (i) to receive a dividend or other distribution payable
in shares of Common Stock or (ii) to subscribe for or purchase
shares of Common Stock then such record date shall be deemed
to be the date of the issue or sale of the shares of Common
Stock deemed to have been issued or sold upon the declarations
of such dividend or the making of such other distribution or
the date of the granting of such right of subscription or
purchase, as the case may be.
d) Treasury Shares. The number of shares of Common
Stock outstanding at any given times shall not include shares
owned or held by or for the account of the Company, and the
disposition of any such shares shall be considered an issue or
sale of shares of Common Stock for the purposes of this
paragraph 3.
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<PAGE> 21
e) Subdivision or Combination of Common Stock. If the
Company shall at any time subdivide its outstanding shares of
Common Stock into a greater number of shares, the Purchase
Price in effect immediately prior to such subdivision shall be
proportionately reduced, and conversely, if the outstanding
shares of Common Stock of the Company shall be combined into a
smaller number of shares, the Purchase Price in effect
immediately prior to such combination shall be proportionately
increased.
2) Adjustment of Shares Purchasable. Upon a adjustment
pursuant to Section 3.1 of the Purchase Price, the holder of this
Warrant shall thereafter (until another such adjustment) be entitled
(instead of being entitled to purchase the number of shares specified
herein at the Purchase Price in effect immediately prior to such
adjustment) to purchase at the adjusted Purchase Price the number of
shares of Common Stock calculated to the nearest full share obtained by
multiplying the number of shares of Common Stock purchasable
immediately prior to such adjustment by the Purchase Price in effect
immediately prior to such adjustment and dividing the product so
obtained by the applicable adjusted Purchase Price.
3) Warrants Need Not be Changed to Reflect Adjustments.
Irrespective of any adjustment or change in the Purchase Price or the
number of shares of Common Stock actually purchasable hereunder, the
Warrant after issuance may continue to express the Purchase Price per
share and the number of shares purchasable hereunder as the Purchase
Price per share and the number of shares purchasable were expressed in
the Warrant when initially issued.
4) Reorganization, Merger, etc. If any capital reorganization
or reclassification of the capital stock of the Company, or
consolidation, merger of the Company with another corporation, or the
sale or conveyance of all or substantially all of its assets to another
corporation shall be effected, then, as a condition of such
reorganization, reclassification, consolidation, merger, sale or
conveyance, lawful and adequate provision shall be made whereby the
holder hereof shall thereafter have the right to purchase and receive
upon the basis and upon the terms and conditions specified in this
Warrant and in lieu of the shares of the Common Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of
the rights represented hereby, such shares of stock, securities or
assets as may be issued or payable with respect to or in exchange for a
number of outstanding shares of such Common Stock equal to the number
of shares of such Common Stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby had such
reorganization, reclassification, consolidation, merger, sale or
conveyance not taken place, and in any such case appropriate provision
shall be made with respect to the rights and interests of the holder of
this Warrant to the end that the provisions hereof (including without
limitation provisions for adjustment of the Purchase Price and of the
number of shares purchasable upon the execution of this Warrant) shall
thereafter be
4
<PAGE> 22
applicable, as nearly as may be in relation to any stock, securities or
assets thereafter deliverable upon the exercise hereof.
The Company shall not effect any consolidation,
merger or sale of substantially all of its property to any other
corporation, unless prior to or simultaneously with the consummation
thereof the successor corporation (if other than the Company) resulting
from such consolidation or merger or the corporation purchasing such
assets shall assume by written instrument executed and mailed or
delivered to the registered holder hereof at the address indicated in
Section 7, the obligation of such corporation to deliver to such holder
shares of stock, securities or assets as, in accordance with the
provisions of this Warrant, such holder may be entitled to purchase and
to perform and to observe each and every covenant and condition of this
Warrant to be performed and observed by the Company.
5) Notice to Warrantholders.
(a) Upon any adjustment of the Purchase Price or an
increase or decrease in the number of shares of Common Stock
purchasable upon the exercise of this Warrant then, and in
each such case, the Company within thirty (30) days thereafter
shall give written notice thereof, pursuant to Section 7,
which notice shall state the adjusted Purchase Price and the
increased or decreased number of shares purchasable upon the
exercise of this Warrant, setting forth in reasonable detail
the method of calculation and the facts (including a statement
of the consideration received or deemed to have been received
by the Company) upon which such calculations are based. Where
appropriate, such notice maybe given in advance and included
as a part of the notice required to be made under the
provisions of paragraph (b) of this subsection 3.5.
(b) In case at any time:
a) The Company shall declare any dividend
upon its Common Stock payable in stock or make any
special dividend or other distribution (other than
dividends in cash) to the holders of its Common
Stock; or
b) The Company shall offer for subscription
to the holders of its Common Stock any additional
shares of stock of any class or other rights; or
c) There shall be any capital reorganization
or reclassification of the capital stock of the
Company, or a sale or conveyance of all or
substantially all of the assets of the Company, or a
consolidation or merger of the Company with another
corporation; or
5
<PAGE> 23
d) There shall be a voluntary or involuntary
dissolution, liquidation or winding up of the
Company;
then, in any one or more of said cases, the Company shall give
written notice, pursuant to Section 7, at the earliest time
legally practicable (and, unless otherwise impossible for a
legal reason, not less than thirty (30) days before any record
date or other date set for definitive action) of the date as
of which (A) the books of the Company shall close or a record
shall be taken for such dividend, distribution or subscription
rights or options or (B) such reorganization,
reclassification, sale, conveyance, consolidation, merger,
dissolution, liquidation or winding up shall take place, as
the case may be. Such notice shall also specify the date as of
which the holders of the Common Stock of record shall
participate in said dividend, distribution, subscription
rights or options or shall be entitled to exchange their
Common Stock for securities or other property deliverable upon
such reorganization, reclassification, sale, conveyance,
consolidation, merger, dissolution, liquidation, or winding
up, as the case may be (on which date, in the event of
voluntary or involuntary dissolution, liquidation or winding
up of the Company, right to exercise this Warrant shall cease
and terminate).
D. Status of Warrantholder. Warrant does not entitle the
holder hereof to any voting or other rights as a shareholder of the
Company.
E. No Fractional Shares. The Company shall not be required to
issue stock certificates representing fractions of shares of Common
Stock, but may at its option in respect of any final fraction of a
share make a payment in cash based on the Purchase Price.
F. Reservation of Shares. The Company will reserve and keep
available a sufficient number of shares of Common Stock to satisfy the
requirements of all outstanding Warrants. Before taking any action
which would cause an adjustment reducing the Purchase Price below the
then par value of the shares of Common Stock issuable upon exercise of
outstanding Warrants, the Company will take any corporate action which
may, in the opinion of its counsel, be necessary in order that the
Company may validly and legally issue fully paid and nonassessable
shares of such Common Stock at such adjusted Purchase Price.
G. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to
have been made when delivered or mailed first class postage prepaid or
delivered to the telegraph office:
a) if to the registered holder of a Warrant, at the
address of such holder as shown on the books of the Company;
or
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<PAGE> 24
b) if to the Company at 5629 F.M. 1960 W., Suite 202,
Houston, Texas 77069, Attention of the Secretary, or at such
other address as may have been furnished to the holders of
Warrants in writing by the Company.
H. Headings. The headings of the Sections and subsections of
this Warrant are inserted for convenience only and shall not be deemed
to constitute a part of this Warrant.
I. Governing Law. This Warrant is being delivered and is
intended to be performed in the State of Texas and shall be construed
and enforced in accordance with, and the rights of the parties shall
be governed by, the law of such state.
J. Restrictions on Issuance of Warrants and Options, etc., for
Less Than Market Value. At all times while any of these warrants shall
be outstanding, any warrants, option or other rights issued by the
Company to acquire Common Stock of the Company, shall be issued only if
the exercise price of such warrant, option or right is at least equal
to the fair market value as reasonably determined by the Board, but in
no event less than 90% of the Market Value of the Common Stock on the
date that such warrant, option or right is issued.
WITNESS the seal of the Company and the signatures of its duly
authorized officers.
Dated: ____________________, 1997.
DRILLERS INC.
By:___________________________
President
Attest:
____________________________________
Secretary
7
<PAGE> 25
ARTICLES OF CORRECTION
Pursuant to the provisions of Article 1302-7.01 of the Texas
Miscellaneous Corporation Laws Act, the undersigned so hereby file on behalf of
Drillers Inc., a Texas corporation these Articles of Correction, and in
connection herewith do state as follows:
A. The name of the Company is Drillers Inc.
B. The instrument to be corrected is a Statement of Resolution
Establishing Series of Shares (the "Statement") filed with the
Secretary of State on June 25, 1984.
C. The erroneous Statement is contained in the attachment to the
Statement entitled "Authorization of 5% Cumulative Convertible
Preferred Stock"; Subsection (a) of Section 2 ("Cumulative
Dividends") erroneously reads as follows:
"(a) on June 30, 1984, all outstanding shares of
Series A Preferred shall be entitled to receive
dividends of $1.25 per share and ..."
D. These Articles of Correction correct the aforesaid clause, properly
to read as follows:
"(a) on June 30, 1984 all outstanding shares of
Series A Preferred shall be entitled to receive
dividends of $.125 per share and ..."
WITNESS THE EXECUTION HEREOF, effective as of the 25th day of June,
1984.
DRILLERS, INC.
By: /s/ G. Nelson Van Fleet
----------------------------
G. Nelson Van Fleet
Vice President - Finance
By: /s/ Barbara G. Cannon
----------------------------
Secretary
1
<PAGE> 26
STATE OF TEXAS ss.
ss.
COUNTY OF HARRIS ss.
Before me, a notary public, on this day personally appeared G. Nelson
Van Fleet, known to me to be the person whose name is subscribed to the
foregoing document and, being by me first duly sworn, declared that the
statements therein contained are true and correct.
Given under my hand and seal of office this 25th day of June, 1984.
/s/ Phyllis D. Norris
---------------------
Notary Public
State of Texas
2
<PAGE> 27
ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION OF
DRILLERS INC.
Pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act, as amended (the "Act"), the undersigned Corporation adopts the
following Articles of Amendment to its Articles of Incorporation to reflect a
change of its corporate name:
ARTICLE ONE
The name of the corporation is Drillers Inc.
ARTICLE TWO
Article One of the Articles of Incorporation shall be amended to read
in its entirety as follows:
"ARTICLE ONE
The name of the corporation is DI Industries, Inc."
ARTICLE THREE
The amendment to the Articles of Incorporation amending Article One as
set forth above was adopted by the shareholders of the Corporation on September
4, 1986.
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<PAGE> 28
ARTICLE FOUR
The number of shares of the Corporation outstanding at the time of the
adoption of the resolution was five million one hundred ninety-two thousand
sixty-five (5,192,065) shares of Common Stock and nine hundred fifty-five
thousand five hundred and fifty-five (955,555) shares of Series A Preferred
Stock, and the number of shares entitled to vote thereon was five million one
hundred ninety-two thousand sixty-five (5,192,065) shares of Common Stock.
ARTICLE FIVE
The number of shares voted for such amendment was 4,178,681, the number
of shares voted against such amendment was 1,415 and the number of shares
entitled to vote that were not voted was 1,001,969.
ARTICLE SIX
This amendment will not result in any change in the amount of stated
capital of the Corporation.
2
<PAGE> 29
IN WITNESS WHEREOF, the undersigned officer of the Corporation has
hereunto set his hand this 23rd day of April, 1987.
DRILLERS INC.
By: /s/ Max M. Dillard
---------------------------
Max M. Dillard, President
THE STATE OF TEXAS SS.
SS.
COUNTY OF HARRIS SS.
BEFORE ME, the undersigned authority, on this day personally appeared
MAX M. DILLARD, who being by me first duly sworn, declared that he is the person
who signed the foregoing document as President of Drillers Inc., and that the
statements contained therein are true.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this 23rd day of April, 1987.
/s/ Barbara G. Cannon
------------------------
Notary Public In and For
The State of T E X A S
3
<PAGE> 30
ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
OF DI INDUSTRIES, INC.
Pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act, as amended (the "Act"), the undersigned Corporation adopts the
following Articles of Amendment to its Articles of Incorporation:
ARTICLE ONE
The name of the corporation is DI Industries, Inc.
ARTICLE TWO
The following amendment to the Articles of Incorporation
adding Article Twelve as set forth in full below was adopted by the
shareholders of the Corporation on September 10, 1987:
"ARTICLE TWELVE
A director of the Corporation shall not be personally liable
to the Corporation or its shareholders for monetary damages
for any act or omission in his capacity as a director, except
to the extent otherwise expressly provided by a statute of the
State of Texas. Any repeal or modification of this Article
shall be prospective only, and shall not adversely affect any
limitation of the personal liability of a director of the
Corporation existing at the time of the repeal or
modification."
ARTICLE THREE
The number of shares of the Corporation outstanding at the
time of the adoption of the resolution was six million seven hundred
eighty-seven thousand one hundred eighty-eight (6,787,188) shares of
Common Stock and the number of shares entitled to vote thereon was six
million seven hundred eighty-seven thousand one hundred eighty-eight
(6,787,188) shares of Common Stock.
ARTICLE FOUR
The number of shares voted for such amendment was five million
four hundred ninety-nine thousand eight hundred ninety-three
(5,499,893); and the number of shares voted
1
<PAGE> 31
against such amendment was one hundred forty-three thousand six
hundred and five (143,605).
The undersigned officer of the Corporation has hereunto set his hand
this 21st day of October, 1987.
DI INDUSTRIES, INC.
By: /s/ Max M. Dillard
---------------------------
Max M. Dillard, President
2
<PAGE> 32
ARTICLES OF AMENDMENT
OF
DI INDUSTRIES, INC.
The undersigned corporation does hereby adopt the following Articles of
Amendment, pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act:
ARTICLE ONE
NAME
The name of the corporation is DI Industries, Inc.
ARTICLE TWO
AMENDMENTS
The following new Article Twelve is added to the Articles of
Incorporation of the corporation to read in its entirety as follows:
ARTICLE TWELVE
A director of the Corporation shall not be personally liable
to the Corporation or its shareholders for monetary damages
for any act or omission in his capacity as a director, except
to the extent otherwise expressly provided by a statute of the
State of Texas. Any repeal or modification of this Article
shall be prospective only, and shall not adversely affect any
limitation of the personal liability of a director of the
Corporation existing at the time of the repeal or
modification.
1
<PAGE> 33
ARTICLE THREE
DATE AND PROCEDURE OF ADOPTION OF AMENDMENT
The amendment to the Articles of Incorporation was adopted by the
shareholders of the corporation on September 10,1987. The number of shares of
the corporation outstanding at the time of such adoption was 6,787,188 and the
number of shares entitled to vote thereon was 6,787,188. 5,499,893 shares of the
corporation voted for the amendment and 143,605 shares of the corporation voted
against the amendment.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment of the corporation this 29th day of June, 1989.
DI INDUSTRIES, INC.
/s/ Barbara G. Cannon
----------------------
Barbara G. Cannon
Secretary
2
<PAGE> 34
ARTICLES OF AMENDMENT
OF
DI INDUSTRIES, INC.
The undersigned corporation does hereby adopt the following Articles of
Amendment, pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act:
ARTICLE ONE
NAME
The name of the corporation is Dl Industries, Inc.
ARTICLE TWO
AMENDMENT
The first sentence of Article Four of the Articles of Incorporation of
the Corporation is hereby deleted and replaced in its entirety with the
following:
"The corporation shall have the authority to issue an
aggregate of 41,000,000 shares, consisting of 1,000,000 shares
of Preferred Stock, par value $1.00 per share ("Preferred
Stock") and 40,000,000 shares of Common Stock, par value $0.10
per share ("Common Stock")."
<PAGE> 35
ARTICLE THREE
DATE AND PROCEDURE OF ADOPTION OF AMENDMENT
The amendment to the Articles of Incorporation was adopted by the
shareholders of the corporation on July 20, 1989. The number of shares of the
corporation outstanding at the time of such adoption was 6,817,188 and the
number of share entitled to vote thereon was 6,817,188. 5,123,787 shares of the
corporation voted for the amendment and 24,833 shares of the corporation voted
against the amendment.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment of the corporation this 20th day of July, 1989.
DI INDUSTRIES, INC.
/s/ Barbara G. Cannon
----------------------
Barbara G. Cannon
Secretary
2
<PAGE> 36
ARTICLES OF AMENDMENT
OF
DI INDUSTRIES, INC.
Pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act, as amended (the "Act"), the undersigned corporation hereby
adopts the following Articles of Amendment to its Articles of Incorporation:
ARTICLE ONE
The name of the corporation is DI Industries, Inc.
ARTICLE TWO
The corporation's Articles of Incorporation are hereby amended by
adding an Article Thirteen to such Articles of Incorporation, the text of which
is set forth in full below:
"ARTICLE THIRTEEN
Any action required to be taken at any annual or special
meeting of shareholders, or any action which may be taken at any annual
or special meeting of shareholders, may be taken without a meeting,
without prior notice, and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be signed by the
holder or holders of shares having not less than the minimum number of
votes that would be necessary to take such action at a meeting at which
the holders of all shares entitled to vote on the action were present
and voted."
ARTICLE THREE
The amendment to the Articles of Incorporation was adopted by the
shareholders of the corporation on February 28, 1990. The number of shares of
the corporation outstanding at the time of such adoption was 29,557,293 shares
of Common Stock, all of which were entitled to vote.
ARTICLE FOUR
The number of shares voted for such amendment was 28,111,254 and the
number of shares voted against such amendment was 141,965.
1
<PAGE> 37
IN WITNESS WHEREOF, the undersigned officer of the corporation has
hereunto set his hand this 14th day of March, 1990.
DI INDUSTRIES, INC.
/s/ Bill R. Merchant
----------------------
Bill R. Merchant
Treasurer
THE STATE OF TEXAS ss.
ss.
COUNTY OF HARRIS ss.
BEFORE ME, the undersigned authority, on this day personally appeared
Bill R. Merchant, the Treasurer of DI Industries, Inc., a Texas corporation,
known to me to be the person whose name is subscribed to the foregoing
instrument, and who acknowledged to me that he executed the same for the
purposes and consideration expressed, in the capacities therein stated, as the
act and deed of said corporation, and who also upon oath swore that the
statements therein contained are true and correct.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this 14th day of March, 1990.
/s/ Janet L. Fath
--------------------------
Notary Public in and for
the State of Texas
2
<PAGE> 38
ARTICLES OF AMENDMENT
OF
DI INDUSTRIES, INC.
Pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act, as amended (the "Act"), the undersigned corporation hereby
adopts the following Articles of Amendment to its Articles of Incorporation:
ARTICLE ONE
The name of the corporation is Dl Industries, Inc.
ARTICLE TWO
The first sentence of Article Four of the corporation's Articles of
Incorporation is hereby deleted and replaced in its entirety with the following:
"The corporation shall have the authority to issue an
aggregate of 76,000,000 shares, consisting of 1,000,000 shares of
Preferred Stock, par value $1.00 per share ("Preferred Stock") and
75,000,000 shares of Common Stock, par value $0.10 per share ("Common
Stock")."
ARTICLE THREE
The amendment to the Articles of Incorporation was adopted by the
shareholders of the corporation on September 13,1990. The number of shares of
the corporation outstanding at the time of such adoption was 36,657,293 shares
of Common Stock, all of which were entitled to vote.
ARTICLE FOUR
The number of shares voted for such amendment was 31,622,395 and the
number of shares voted against such amendment was 72,182.
<PAGE> 39
IN WITNESS WHEREOF, the undersigned officer of the corporation has
hereunto set his hand this 9th day of October, 1990.
DI INDUSTRIES, INC.
/s/ Bill R. Merchant
----------------------
Bill R. Merchant
Treasurer
THE STATE OF TEXAS ss.
ss.
COUNTY OF HARRIS ss.
BEFORE ME, the undersigned authority, on this day personally appeared
Bill R. Merchant, the Treasurer of Dl Industries, Inc., a Texas corporation,
known to me to be the person whose name is subscribed to the foregoing
instrument, and who acknowledged to me that he executed the same for the
purposes and consideration expressed, in the capacities therein stated, as the
act and deed of said corporation, and who also upon oath swore that the
statements contained therein are true and correct.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this 9th day of October, 1990.
/s/ Janet L. Fath
------------------------
Notary Public in and for
the State of Texas
2
<PAGE> 40
DI INDUSTRIES, INC.
STATEMENT OF RESOLUTIONS ESTABLISHING SERIES OF SHARES
Pursuant to the provisions of Article 2.13 of the Texas Business
Corporation Act, DI Industries, Inc., a Texas corporation (the "Company),
submits the following statement to establish and designate a series of shares
and fixing and determining the relative rights and preferences thereof.
1. The Company's name is DI Industries, Inc.
2. The resolutions establishing and designating one
series of the Company's Series A Preferred Stock and
fixing and determining the relative rights and
preferences thereof, which are attached hereto as
Appendix I and incorporated herein for all purpose
were duly adopted by the Company's Board of Directors
on October 28, 1994.
WITNESS THE EXECUTION HEREOF, effective as of November 14, 1994.
DI INDUSTRIES, INC.
By: /s/ Max M. Dillard
-----------------------
Name: Max M. Dillard
Title: President
By: /s/ Bill R. Merchant
-------------------------
Name: Bill R. Merchant
Title: Secretary
<PAGE> 41
STATE OF TEXAS )
)
COUNTY OF HARRIS )
Before me, a notary public, on this day personally appeared Max M.
Dillard and Bill R. Merchant known to me and be the persons whose names are
subscribed to the foregoing document and, being by me first duly sworn, declared
that the statements therein contained are true and correct.
Given under my hand and my seal of office on November 14, 1994.
By: /s/ Jo Rene Botts
-------------------------
Name: Jo Rene Botts
Title: Notary Public of the
State of Texas
2
<PAGE> 42
APPENDIX I
RESOLVED, that pursuant to the authority vested in the Board of Directors (the
"Board") by the Articles, the Board does hereby create, establish, designate and
authorize the issuance of a series of the Preferred Stuck to be known as
"Convertible Redeemable Preferred Stock," such series to consist of 200,000
shares of authorized but unissued Preferred Stock, and subject to the Articles,
as amended from time to time (which provisions, if there is a conflict between
them and any provision hereof, shall control), does hereby state and fix the
designations, preferences, voting rights, conversion rights and relative,
participating, option and other rights of the shares of such series and the
qualifications, limitations and restrictions thereof as follows:
(1) DESIGNATION. This series of Preferred Stock shall consist of 200,000
shares and is designated and shall be issued as "Convertible Redeemable
Preferred Stock" (the "SERIES A PREFERRED")
(2) REDEMPTION.
(A) MANDATORY REDEMPTION.
(I) QUARTERLY REDEMPTION. Commencing with the date
which is the 75th day after the end of the first
full fiscal quarter of the Company after the issuance
of the Series A Preferred (and on the 75th day after
the end of each fiscal quarter of the Company
thereafter) and ending on the date which is the 75th
day after the end of the tenth full fiscal quarter
of the Company, the Company shall redeem in cash at
the Redemption Price the number of Series A
Preferred shares determined by dividing (x) by (y),
where (x) is equal to 50% of the Available Cumulative
Venezuelan Net Cash Flow for such fiscal quarter, and
where (y) is the Redemption Price; provided, that in
no event shall the amount of shares of Series A
Preferred redeemed pursuant to this II.A.1 exceed
the amount of the Unredeemed Shares).
(II) PUT RIGHT. The Company shall redeem the number of
shares of Series A Preferred specified in a written
notice given by the holder thereof, provided that
such notice is given during the period commencing on
the date which is five years after the original
issuance of the Series A Preferred and ending ten
days thereafter.
(B) OPTION REDEMPTION.
(i) GENERAL. Subject to III.A.2 below, the Company, at
the option of the Board of Directors, may, at any
time, redeem up to 50% of the Series A Preferred or,
with the consent of the holders of the Series A
Preferred up to 100% of the Series A Preferred,
outstanding by paying in cash therefor the sum of the
Redemption Price per share.
<PAGE> 43
(II) UPON ELECTION TO CONVERT. If a holder of Series A
Preferred has given written notice pursuant to III.A
hereof of its election to convert all or a portion of
such Series A Preferred into Common Stock, the
Company, at the option of the Board of Directors may
redeem up to 50% of the Series A Preferred
outstanding by paying in cash therefor the sum of the
Redemption Price.
(C) NOTICE OF REDEMPTION. Notice of each redemption of Series A
Preferred pursuant to II.A or II.B above, specifying the date
and place of redemption and the number of shares and the
certificate numbers thereof which arc to be redeemed, shall
be mailed to each holder of record of shares to be redeemed
at its address as shown by the records of the Company not
more than 60 days nor less than 20 days prior to the date on
which such redemption is to be made (and, in the instance of
a redemption pursuant to II.B.2, within ten days after
receipt by the Company of written notice of a holder of
Series A Preferred of its election to convert). Should only
a part of the outstanding Series A Preferred be redeemed,
such redemption shall be affected pro rata. On or after
the date fixed for redemption, each holder of shares called
for redemption shall, subject to III.A.2 below, surrender its
certificate for such shares to the Company at the place
designated in the redemption notice ant shall thereupon
be entitled to receive payment of the redemptive price.
Should less than all of the shares represented by any
surrendered certificate be redeemed, a new certificate for
the unredeemed shares shall be issued. If the redemption
notice is duly given and if sufficient funds are available
therefor on the date fixed for redemption, then, whether or
not the certificates evidencing the shares to be redeemed
arc surrendered, all right with respect to such shares shall
terminate on the date fixed for redemption, except for the
right of the holders to receive the redemptive price, without
interest, on surrender of their certificates therefor. If, on
or prior to any date fixed for redemption of the Series A
Preferred, the Company deposits with any bank or trust
company in the United States duly appointed and acting as
transfer agent for the Company, as a trust fund, a sum
sufficient to redeem, on the date fixed for redemption, the
shares called for redemption, with irrevocable instructions
and authority to the bank or trust company to publish the
notice of redemption, or to complete such publication if
already commenced, and to pay, on and after the date fixed for
redemption or prior to such date, the redemption price of the
shares to their respective holders on surrender of their
share certificates, then from and after the date of the
deposit, even though such date may be prior to the date fixed
for redemption, the shares so called shall be deemed to be
redeemed. The deposit shall be deemed to constitute full
payment of the shares to their holders and from and after the
date of the deposit the shares shall be deemed to be no
longer outstanding, ant the holders of the shares shall cease
to be shareholders with respect to such shares and shall have
no rights with respect to such shares, except the right to
receive from the bank or trust company payment of the
redemptive price of the shares, without interest, on
surrender of the certificates, or the right to convert such
shares to Common Stock as provided in
2
<PAGE> 44
III.A.2 below. Any money so deposited on account of the
redemptive price of Series A Preferred converted after the
making of the deposit shall be repaid immediately to the
Company on the conversion of such shares. All shares of the
Series A Preferred redeemed by the Company shall be cancelled
and none of such shares shall thereafter be reissued.
(3) CONVERSION.
(A) CONVERSION RIGHTS AND RATE.
(I) GENERAL. At any time after the expiration of the
period commencing on the date on which the Series A
Preferred is originally issued and ending 12 months
thereafter, the holder of any Series A Preferred
shall, at its option on delivery to the Company of
its written notice electing to convert all or, with
the consent of the Company, a portion of such shares
into shares of Common Stock and therein stating the
name or names in which he wishes the certificate of
certificates for the Common Stock to be issued and
the address and social security or tax identification
number for such person, and on surrender at the
office of the Company or office of the transfer
agent for such shares of the certificate or
certificates for such shares of Series A Preferred,
duly endorsed to the Company, he entitled to convert
its shares of Series A Preferred into fully
paid and nonassessable shares of Common Stock, at the
rate of eight shares of Common Stock for each share
of Series A Preferred so surrendered for conversion.
(II) UPON OPTIONAL ELECTION TO REDEEM. If the Company
gives a notices redemption pursuant to II.B.1 above,
the recipient of such notice shall have the right,
exercisable within 10 days after receipt of such
redemption notice, to give written notice to the
Company of its election to convert up to 50% of
the Series A Preferred outstanding held by such
recipient into shares of Common Stock, which notice
shall therein state the name or names in which
it wishes the certificate or certificates for the
Common Stock to be issued and the address and social
security or tax identification number for such
person. On surrender at the office of the Company or
office of the transfer agent for such shares of the
certificate or certificates for such shares of
Series A Preferred, duly endorsed to the Company,
the holder shall be entitled to convert its shares of
Series A Preferred into fully paid and non-assessable
shares of Common Stock, at the rate of eight shares
of Common Stock for each share of Series A Preferred
so surrendered for conversion. Notwithstanding the
foregoing, or anything else herein to the contrary,
the conversion rights described in this III.A.2
shall be null and void during the period of time in
which an Indemnification Claim is outstanding.
3
<PAGE> 45
(III) EFFECTIVE DATE OF CONVERSION. A conversion affected
pursuant hereto shall be deemed to have been made as
of the date the shares of Series A Preferred are
surrendered for conversion, and the person or persons
entitled to receive the shares of Common Stock
issuable on such conversion shall be deemed to be
record holder or holders of such shares of Common
Stock from and after such date.
(B) ADJUSTMENT OF CONVERSION RATE. The number of shares of Common
stock to which shares of Series A Preferred may be converted
shall be subject to adjustment from time to time as follows:
(I) RECAPITALIZATION. On any recapitalization of the
Company through the subdivision or combination of its
outstanding shares of Common Stock into a greater or
smaller number of shares, the number of shares of
Common stock into which the shares of Series A
Preferred may be converted shall be increased or
reduced in the same proportion.
(II) DIVIDENDS OR DISTRIBUTIONS PAYABLE WITH COMMON STOCK.
If the Company takes a record of the holders of its
shares of Common Stock for the purpose of entitling
them to receive a dividend or other distribution
payable in shares of Common Stock, or in securities
convertible into or exchangeable for shares of Common
Stock, the maximum number of shares of Common Stock
issuable in payment of such dividend or distribution,
or on conversion of or in exchange for the securities
convertible into or exchangeable for shares of Common
Stock, shall be deemed to have been issued and to be
outstanding as of such record date, and the number of
shares of Common Stock into which the shares of
Series A Preferred may be converted shall be
increased in proportion to the increase of the number
of outstandingshares of Common Stock resulting
therefrom.
(III) REORGANIZATION. On any capital reorganization,
reclassification of the capital stock, consolidation,
merger, or sale or conveyance of all or
substantially all of the assets of the Company to
another corporation or other entity, each share of
Series A Preferred shall be convertible into the
same kind and amounts of securities, including shares
or other assets, or both, to which the number of
shares of Common Stock of the Company which would
have been deliverable on conversion of such shares
of Series A Preferred immediately prior to such
reorganization, reclassification, consolidation,
merger, sale or conveyance would have been entitled.
Appropriate adjustments, as determined by the Board
of Directors of the Company, shall be made in the
application of the provisions herein set forth with
respect to the rights and interests thereafter of
holders of the Series A Preferred so that such
provisions, including the provisions with respect to
changes in, and other
4
<PAGE> 46
adjustments of, the conversion rate, shall thereafter
be applicable, as nearly as reasonably may be, in
relation to any securities or other assets thereafter
deliverable on conversion of the Series A Preferred.
(C) STATEMENT OF ADJUSTED AMOUNT. Whenever the amount of shares
of Common Stock deliverable on the conversion of Series A
Preferred shall be adjusted pursuant to the provisions hereof,
the Company shall maintain at its office and file with the
transfer agent or agents for the Series A Preferred and for
the shares of Common Stock, a statement signed by the
President or a Vice President of the Company and by its
Treasurer or an Assistant Treasurer, stating the adjusted
amount of the shares of Common Stock, calculated to the
nearest 1/100 share, and setting forth in reasonable
detail the method of calculation and the facts requiring such
adjustment and on which the calculation is based. Each
adjustment shall remain in effect until a subsequent
adjustment hereunder is required.
(D) RESERVATION OF SHARES OF COMMON STOCK. The Company shall at
all times shall reserve and keep available out of its
authorized but unissued shares of Common Stock solely for the
purposes of effecting conversion of its shares of Series A
Preferred a full number of shares of Common Stock deliverable
on conversion of all shares of Series A Preferred from time to
time outstanding.
(E) FRACTIONAL SHARES. No fractional shares shall be issued upon
conversion of any Series A Preferred, and the number of shares
of Common Stock to issued upon such conversion shall be only
the whole shares resulting from application of the then
applicable conversion rate. The Company shall remit to the
holder of Series A Preferred converted the fair market value
on the conversion date of the fractional shares not issued.
(4) VOTING RIGHTS. Except as otherwise required by law and the Articles,
the holders of the Series A Preferred shall have no right to vote on
any matter to be voted on by the stockholders of the Company.
(5) LIQUIDATION. On any voluntary or involuntary liquidation, dissolution
or winding up of the Company, each holder of the Series A Preferred
shall be entitled to receive an amount equal to the product of (x) and
(y) where (x) is the number of Unredeemed Shares owned by such holder
and where (y) is the Redemption Price, before any payment to the
holders of the Common Stock. A consolidation or merger of the Company
with or into any other corporation or other entity, or a sale of all or
substantially all of the assets of the Company shall not be deemed a
liquidation, dissolution or winding up of the Company within the
meaning of this Paragraph.
5
<PAGE> 47
(6) CERTAIN DEFINITIONS. As used herein, the following terms shall have
the respective meanings assigned to them below:
"Acquisition Agreement" shall mean that certain Acquisition
Agreement dated as of September, 1994, among (i) DI Industries, Inc.,
(ii) An-Son Drilling Co. of Columbia S.A., (iii) Perforasciones Andinas
S.A., and (iv) P.A.P. Tratamiento Y Perforaciones De Pozos S.A.
"Available Cumulative Venezuelan Net Cash Flow" for any fiscal
quarter shall mean (a) the net income of the Company for the period
commencing on September 1, 1994 and ending on the last day of such
fiscal quarter attributable to the Contract Drilling Operations
calculated in accordance with GAAP plus, the Company's expenses
attributable to the Contract Drilling Operations for such period that
were taken into account in determining such net income but which did
not involve the current expenditure of funds (e.g., depreciation), plus
up to $300,000 of the Company's exchange losses attributable to the
Contract Drilling Operations for such period that were taken into
account in determining such net income, minus the Company's capital
expenditures for such period attributable to the Contract Drilling
Operations, minus all revenues of the Company attributable to the
Contract Drilling Operations for such period that were taken into
account in determining such net income which did not involve the
current receipt of cash minus (b) the sum of all amounts theretofore
paid to redeem any shares of the Series A Preferred.
"Buyer" shall have the meaning assigned to it in the
Acquisition Agreement.
"Contract Drilling Operations" shall mean the operations of
P.A.P. Tratamiento Y Perforaciones De Pozos S.A. in existence on
September 1, 1994.
"GAAP" shall mean generally accepted accounting principles as
in effect from time to time in the United States of America.
"Indemnification Claim" shall mean a claim made by the Buyer
pursuant to the Acquisition Agreement for matters for which Buyer is
entitled to be indemnified under Section 10.1 of the Acquisition
Agreement.
"Redemption Price" shall mean $10.00 per share; provided,
however, that if an Indemnification Claim is made and outstanding, the
Redemption Price for such number of outstanding shares of Series A
Preferred shall be reduced to $0.01 per share as shall be necessary so
that the amount of reduction of the Redemption Price is equal to the
Indemnification Claim. For purposes of the foregoing, an
Indemnification Claim shall be deemed satisfied at that point in time
when either (a) the Company has received a cash payment or payments
pursuant to the Acquisition Agreement in the amount of such
Indemnification Claim, (b) the Company has redeemed Series A Preferred
in an amount such that the difference (a "Redemption Difference")
between what the holder of such Series A
6
<PAGE> 48
Preferred would have received upon redemption at the original
Redemption Price (i.e., $10 per share) and the amount the holder of
such Series A Preferred actually receives upon redemption at the
reduced Redemption Price (i.e. $0.01 per share) is equal to the amount
of such Indemnification Claim, (c) upon voluntary or involuntary
liquidation, dissolution or winding up of the Company, the difference
(a "Liquidation Difference") between what the holder of such Series A
Preferred would have received upon redemption at the original
Redemption Price (i.e., $10 per share) and the amount the holder of
such Series A Preferred actually receives upon such liquidation,
dissolution or winding up at the reduced Redemption Price (i.e., $0.01
per share) is equal to the amount of such Indemnification Claim, or (d)
cash payments as contemplated under clause (a) above, Redemption
Differences as contemplated under clause (b) above and/or Liquidation
Differences as contemplated under clause (c) above equal the amount of
such Indemnification Claim.
"Unredeemed Shares" shall mean the shares of Series A
Preferred issued and outstanding that have not otherwise been
previously redeemed or converted into shares of Common Stock.
RESOLVED FURTHER, that any of the Company's officers be, and each of
them severally is, authorized to execute and deliver all such further
certificates, instruments, documents and papers in the name and on behalf of the
Company and under its seal or otherwise, and perform all acts and to do all
things that the officer executing the same may deem necessary or desirable to
consummate the transactions contemplated by the Acquisition Agreement with such
modifications, amendments, or further agreements that he, in his sole
discretion, may deem necessary or desirable and in the Company's best interests,
his execution and delivery in the name and on behalf of the Company of any such
agreement, certificate, instrument, document or prepare or the taking of any
such to be conclusive evidence that he did so deem the same to be necessary or
desirable and in the Company's best interests; and
RESOLVED FURTHER, that all actions of the Company's officers in
furtherance of the foregoing resolutions be and hereby are ratified, confirmed
and approved in all respects.
7
<PAGE> 49
ARTICLES OF MERGER OF
SOMERSET INVESTMENT CORP.,
A TEXAS CORPORATION, INTO
DI INDUSTRIES, INC., A TEXAS CORPORATION
Pursuant to the provisions of Article 5.04 of the Texas Business
Corporation Act (the "Act"), Somerset Investment Corp., a Texas corporation
("Somerset"), and DI Industries, Inc., a Texas corporation ("DI") (herein
collectively called the "Constituent Corporations"), hereby adopt the following
Articles of Merger for the purpose of effecting a merger in accordance with the
provisions of Article 5.01 of the Act.
A. A plan of merger adopted in accordance with the provisions of
Article 5.03 of the Act providing for the combination of DI and Somerset and
resulting in DI being the surviving corporation in the merger is attached hereto
as Exhibit "A" and is hereby incorporated herein by reference (the "Plan").
B. The names of the Constituent Corporations and the states under the
laws of which they are respectively organized are:
Name of Corporation State of Incorporation
------------------- ----------------------
Somerset Investment Corp. Texas
DI Industries, Inc. Texas
C. As to each of the Constituent Corporations, the number of shares of
their respective stock issued and outstanding is as follows:
Number of Shares
Corporation Outstanding
----------- ----------------
Somerset Investment Corp. 1,000
DI Industries, Inc. 38,872,778
None of the issued and outstanding shares of the stock of either Constituent
Corporations are entitled to vote as a class with respect to the merger of
Somerset with and into DI pursuant to the Plan (the "Merger").
8
<PAGE> 50
D. As to each of the Constituent Corporations, the total number of
shares of their stock voted for and against the Plan, respectively, are as
follows:
Voted Voted
Corporation For Against Abstained
- ----------- --- ------- ---------
Somerset Investment Corp. 1,000 -0- -0-
DI Industries, Inc. 26,901,630 409,845 44,250
E. The Merger will become effective upon the date of the issuance of
the Certificate of Merger by the Secretary of State in accordance with Article
5.05 of the Act.
EFFECTIVE the 29th day of August, 1996.
SOMERSET INVESTMENT CORP.,
a Texas corporation
/s/ William R. Ziegler
------------------------------------
William R. Ziegler, President
DI INDUSTRIES, INC.,
a Texas corporation
/s/ Ivar Siem
------------------------------------
Ivar Siem, President and
Chief Executive Officer
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EXHIBIT A
PLAN OF MERGER of Somerset Investment Corp., a Texas corporation
("Somerset"), with and into DI Industries, Inc., a Texas corporation ("DI").
A. THE MERGER. In accordance with the Texas Business Corporation act
(the "TBCA"), at the Effective Time (as defined below) Somerset shall be merged
with and into DI the ("Merger"). As a result of the Merger, the separate
corporate existence of Somerset 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 shall vest in the Surviving Corporation, without any transfer or
assignment having occured, and all debts, liabilities, obligations and duties of
Somerset shall attach to the Surviving Corporation, all in accordance with the
TBCA. The "Effective Time" of the Merger as that term is used herein 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.
B. EFFECTS OF THE MERGER. The Merger shall have the effects set forth
in the applicable provisions of the TBCA.
C. 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:
a) 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
b) a new Article Fourteen 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 voted entitled to be cast thereon, or of any class or
series thereof, shall be required with respect to any such
action."
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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.
D. DIRECTORS AND OFFICERS. The directors of DI as of 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 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.
E. CONVERSION OF SECURITIES. At the Effective Time, by virtue of the
Merger and without any action on the part of DI, Somerset or their respective
stockholders:
(a) Each share of common stock, par value $.01 per share, of
Somerset ("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 5(b) (the "Somerset Shares"),
shall be converted into 39,423.978 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 6(b) hereof.
(b) Each Somerset Share held in the treasury of Somerset and
each Somerset Share owned by DI or any direct or indirect wholly owned
subsidiary of DI or of Somerset 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 common stock, par value $.10 per share, of
DI ("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) Each option and warrant of DI exercisable for DI Common
Stock outstanding immediately prior to the Effective Time shall remain
outstanding after the Merger.
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F. EXCHANGE OF CERTIFICATES; FRACTIONAL SHARES.
(a) As soon as practicable after the Effective Time, the
Surviving Corporation shall deliver to the shareholders of Somerset
certificates representing the Surviving Corporation Common Stock
issuable pursuant to the terms of Section 5(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 e 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 hereto and cash in lieu of fractional shares
payable hereunder.
(c) None of DI, Somerset 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.
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EXHIBIT 3.1
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
DI INDUSTRIES, INC.
ARTICLE ONE
Pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act (the "TBCA"), hereby adopts the following Articles of Amendment
to its Articles of Incorporation:
ARTICLE ONE
The name of the corporation is DI Industries, Inc. (the "Corporation").
ARTICLE TWO
The Articles of Incorporation of the Corporation are hereby amended as
set forth below:
Article One is deleted in its entirety and the following:
"ARTICLE ONE
The name of the corporation is Grey Wolf, Inc. (the "Corporation")."
ARTICLE THREE
The amendment made by these Articles of Amendment to the Articles of
Incorporation (the "Amendment") was effected in conformity with the provisions
of the TBCA and such Amendment was duly adopted by the shareholders of the
Corporation on July 14, 1997.
ARTICLE FOUR
The number of shares of the Corporation's common stock outstanding at
the time of such adoption was 151,540,991; the number of shares entitled to
consent thereto was 151,540,991. The Amendment was adopted by the written
consent of the holders of 79,097,980 shares (52.2% of the then outstanding
shares) in accordance with Articles 9.10A and 2.28D of the TBCA and the
provisions of the Corporation's Articles of Incorporation and Bylaws. The
Corporation has complied with the notice requirements of Article 9.10A(4) with
regard to non-consenting shareholders.
Dated September 17, 1997 DI INDUSTRIES, INC.
By: /s/ T. Scott O'Keefe
-----------------------------------
T. Scott O'Keefe,
Chief Financial Officer and Secretary
<PAGE> 1
EXHIBIT 5.1
PORTER & HEDGES, L.L.P.
Attorneys at Law
700 Louisiana, 35th Floor
Houston, Texas 77002-2764
Telecopier (713) 228-1331
Telephone (713) 226-0600
October 24, 1997
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Grey Wolf, Inc. - Registration Statement on Form S-3 (the
"Registration Statement")
Ladies and Gentlemen:
We have acted as counsel to Grey Wolf, Inc., a Texas corporation (the
"Company"), in connection with the registration on Form S-3 under the Securities
Act of 1933, as amended, of 28,750,000 shares (including 3,750,000 shares which
may be sold if the underwriters' overallotment option is exercised) of the
Company's common stock, par value $.10 per share (the "Common Stock"). In such
capacity we have examined the articles of incorporation, bylaws and corporate
proceedings of the Company, and based upon such examination and having regard
for applicable legal principles, it is our opinion that such 28,750,000 shares
will, when sold as contemplated in the Registration Statement, be validly
issued, fully paid and non-assessable, outstanding shares of Common Stock.
We consent to the use of this opinion as an exhibit to the Registration
Statement and in the reference to our firm under the heading "Legal Matters" in
the Prospectus included as part of the Registration Statement.
Very truly yours,
/s/ PORTER & HEDGES, L.L.P.
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement
of Grey Wolf, Inc. (formerly DI Industries, Inc.), on Form S-3 of our report
dated March 14, 1997, relating to the consolidated balance sheet of DI
Industries, Inc. and Subsidiaries as of December 31, 1996 and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for the year then ended, and the related financial statement schedule,
which report appears in the December 31, 1996 Annual Report on Form 10-K of DI
Industries, Inc. and to the reference to our firm under the heading "Experts" in
the Prospectus.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Houston, Texas
October 24, 1997
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EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 2 to
Registration Statement No. 333-36593 of Grey Wolf, Inc. (formerly DI Industries,
Inc.) on Form S-3 of our report dated March 28, 1996, appearing in the Annual
Report on Form 10-K of DI Industries, Inc. for the year ended December 31, 1996
and to the reference to us under the heading "Experts" in the Prospectus, which
is part of such Registration Statement.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Houston, Texas
October 24, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this Registration Statement of our report on the financial
statements of Grey Wolf Drilling Company dated January 13, 1997, included in DI
Industries, Inc.'s Registration Statement File No. 333-26519 on Form S-3 and to
all references to our Firm included in this Registration Statement.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Houston, Texas
October 24, 1997
