UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-8226
DI INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2144774
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10370 RICHMOND AVENUE, SUITE 600
HOUSTON, TEXAS 77042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713)435-6100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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COMMON STOCK, PAR VALUE $0.10 AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 under the Securities Exchange Act of 1934) is not
contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
At March 24, 1997, 137,474,034 shares of the Registrant's common stock were
outstanding. The aggregate market value of the Registrant's voting stock held by
non-affiliates (based upon the closing price on the American Stock Exchange on
March 24, 1997 of $2.625) was approximately $131 million.
The following documents have been incorporated by reference into the Parts of
this Report indicated: Certain sections of the Registrant's definitive proxy
statement for the Company's 1997 Annual Meeting of shareholders and is to be
filed pursuant to Regulation 14A under the Securities Exchange Act of 1934
within 120 days of the Registrant's fiscal year ended December 31, 1996, are
incorporated by reference into Part III hereof.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
DI Industries, Inc. (the "Company"), a Texas corporation formed in 1980, is
engaged in the business of providing onshore contract drilling services to the
oil and gas industry. The Company and its subsidiaries conduct operations in
Texas, Arkansas, Louisiana, Ohio, Pennsylvania, New York, Michigan, and other
states; and currently have international operations in Venezuela. As used
herein, the term "Company" refers to DI Industries, Inc. and its subsidiaries,
unless the context otherwise indicates. The Company's principal office is
located at 10370 Richmond Avenue, Suite 600, Houston, Texas 77042, and its
telephone number is (281) 874-0202.
In 1996, the Company elected a substantially new board of directors,
installed new senior management and completed several transactions that
significantly improved its liquidity and added drilling rigs to its existing
fleet. As a result of the mergers, acquisitions and divestitures accomplished by
the Company, the Company's rig fleet is now comprised of 90 rigs, 65 which are
marketable and 25 which are held in inventory for refurbishment. In addition,
the Company supplies the labor and expertise to operate five additional rigs
owned by others. The combined effect of these changes materially changed the
Company's principal shareholders, management, capital structure, and business
strategy.
1996 AND RECENT DEVELOPMENTS
CHANGE IN MANAGEMENT. The Company began its management restructuring in April
1996, with the termination of its former President and Chief Executive Officer
on April 9, 1996. Since that date, the Company has hired a majority of its
current senior management team, including Thomas P. Richards, President and
Chief Executive Officer, Forrest M. Conley, Jr., Senior Vice President -
International, Donald J. Guedry, Treasurer, Ronnie E. McBride, Senior Vice
President - Operations, T. Scott O'Keefe, Senior Vice President and Chief
Financial Officer, and David W. Wehlmann, Vice President and Controller. Mr.
Wehlmann began his employment in July 1996 while Messers Conley, McBride,
O'Keefe and Richards began their employment in September 1996. Mr. Guedry joined
the Company in October 1996. In addition, on August 27, 1996, the shareholders
of the Company elected a Board of Directors comprised of five members, all but
one of which were elected to the Board for the first time. Returning to the
Board as Chairman was Ivar Siem. Directors Roy T. Oliver, Jr., Steven A.
Webster, William R. Ziegler and Peter M. Holt were newly elected to the Board of
Directors of the Company. In connection with the acquisition of Flournoy
Drilling Company ("Flournoy") on January 31, 1997, Mr. Lucien Flournoy, the
founder of Flournoy, joined the Company's Board of Directors.
CHANGE IN BUSINESS STRATEGY. The Company also began implementing in 1996 a
new business strategy intended to return the Company to profitability and to
enable it to keep pace with rapidly changing competitive conditions in the land
drilling business which, management believes, is undergoing a period of rapid
consolidation. This strategy involves:
o redeploying its drilling rigs and related assets where feasible to
geographic markets with greater potential for increased gross operating
margin;
o restoring certain of its stacked rigs to marketable condition through a
program of capital expenditures; and
o acquiring businesses and assets complementing its land drilling
operations.
To meet the increased capital resources and liquidity requirements of its new
business strategy, the Company will incur additional bank debt and may require
other forms of debt or equity financing.
REFURBISHMENT OF STACKED RIGS. The majority of the Company's existing
drilling rigs were built during 1979 to 1981, the industry's most recent rig
building cycle. As of the date of this Report, approximately one quarter of its
rig fleet is stacked. Over the years, the Company has deferred some maintenance
on its stacked rigs. Management believes that the market for land drilling rigs
in the Southern United States, particularly in Arkansas, Louisiana, Oklahoma and
Texas, has improved sufficiently to justify a program to restore certain of its
stacked rigs to marketable condition. Accordingly, as market conditions warrant
and the Company's finances permit, the Company plans to undertake capital
expenditures to refurbish and upgrade certain of its rig inventory. As noted
below, the Company recently placed in service one of the deep
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land drilling rigs acquired in the Mergers (hereinafter defined). In 1997, the
Company refurbished three of its rigs at an estimated total cost of
approximately $1.5 to $2.0 million and these rigs are now operating in the
Company's Ark-La-Tex and South Texas divisions.
SALE OF WESTERN DIVISION. On June 24, 1996, the Company completed the sale of
its Western Division to Pool Company, a Texas corporation ("Pool") for
$3,950,000 in cash pursuant to an agreement entered into on June 3, 1996. The
Western Division was headquartered in Glendive, Montana, with a district office
in Roosevelt, Utah, and provided well workover services in Montana, Utah and
North Dakota. The Western Division consisted of 23 carrier-mounted workover rigs
and certain real estate owned by the Company in Glendive, Montana and Roosevelt,
Utah. A workover is a repair, maintenance or modification of a producing well
designed to remedy mechanical problems in the well, productivity problems in the
formation or other difficulties in extracting oil and gas. Workover services are
vital to the oil and gas producing industry as most producing wells eventually
encounter these problems. Workover services include repairing and replacing
down-hole production equipment, opening additional productive intervals,
re-completion of wells to new producing zones, completing newly drilled wells,
drilling out of plugs and packers, and the converting producing wells to
injection wells during enhanced recovery operations. Pursuant to the purchase
agreement, Pool assumed the obligations of the Company under its real and
personal property leases relating to the division. The Company recognized a gain
of approximately $2.7 million on the sale of this division.
RTO/LRAC AND SOMERSET MERGERS. On August 27, 1996, the shareholders of the
Company approved two merger transactions (See Note 2 to "Notes to Consolidated
Financial Statements") which represented a significant step in accomplishing the
Company's new strategy in that the acquisition of 18 ultra deep drilling rigs
and the infusion of $25 million of capital enabled the Company to focus on
higher margin markets where drilling projects are of a longer duration than the
Company's previous markets.
Under the first agreement, R.T. Oliver, Inc. ("RTO") and Land Rig Acquisition
Corporation ("LRAC") merged with a new subsidiary of the Company with the
capital stock of RTO and LRAC being exchanged for 39,423,978 shares of the
Company's common stock. In addition, warrants were issued to acquire up to
1,720,000 additional shares of common stock, the exercise of which is contingent
upon the occurrence of certain events. These mergers resulted in the acquisition
of 18 inactive, deep capacity land drilling rigs which includes five 3,000
horsepower and nine 2,000 horsepower land rigs which are rated for depths of
25,000 feet or greater. The Company believes that these rigs can be brought up
to operating condition within a reasonable time on an economic basis and that
this group of rigs represents a significant concentration of the relatively
small number of such deep drilling land rigs currently available in the market.
Under the second agreement, a subsidiary of Somerset Drilling Associates,
L.L.C. ("Somerset"), a privately-held investment limited liability company, was
merged into the Company. The stock of the subsidiary was exchanged for
39,423,978 shares of the Company's common stock and warrants to acquire up to
1,720,000 additional shares of common stock, the exercise of which is contingent
upon the occurrence of certain events. This merger transaction resulted in a $25
million equity infusion into the Company.
MESA ACQUISITION. On October 3, 1996 the Company acquired all of the South
Texas operating assets of Mesa Drilling, Inc. ("Mesa") in exhange for 5,500,000
shares of the Company's common stock. The assets acquired consist of six diesel
electric SCR drilling rigs, three of which are currently operating in South
Texas. The other three rigs are currently stacked.
DIAMOND M ACQUISITION. On December 31, 1996 the Company completed the
acquistion of all of the South Texas operational assets of Diamond M Onshore,
Inc., a wholly owned subsidiary of Diamond Offshore Drilling, Inc. The assets
were acquired for $26 million in cash and consist of ten land based drilling
rigs, all of which are currently operating, 19 rig hauling trucks, a yard
facility in Alice, Texas and various other equipment. The purchase price was
funded through the closing of a new revolving credit facility.
FLOURNOY ACQUISITION. On January 31, 1997, the Company acquired all of the
South Texas operating assets of Flournoy Drilling Company ("Flournoy") which
makes DI the largest contractor in the South Texas Market. The Company acquired
13 drilling rigs, 17 rig hauling trucks, a yard and office facility in Alice,
Texas and various other equipment and drill pipe for 12.4 million shares of the
Company's common stock and $800,000 in cash.
NEW MARKET FOCUS. As a result of the Company's desire to redeploy assets to
more productive markets, during the fourth quarter of 1996, the Company decided
to withdraw from both the Argentina and Mexico markets. The Company's
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four drilling rigs have already been mobilized out of Mexico to the United
States where they will be refurbished and returned to service. The Company
recorded $987,000 in mobilization cost as well as other exit costs of $1.0
million which primarily consists of the forfeiture of a performance bond and
other costs to be incurred in closing the office and exiting Mexico. The Company
has tentatively 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. In addition the
Company recorded $761,000 in exit costs which primarily represent costs expected
to be incurred during the period necessary to close the office and exit
Argentina.
PENDING GREY WOLF ACQUISITION. On March 10, 1997, the Company entered into a
definitive agreement to acquire Grey Wolf Drilling Company ("Grey Wolf") for up
to $61.6 million in cash and approximately 14 million shares of the Company's
common stock. The terms of the agreement call for Grey Wolf to merge with and
into Drillers, Inc. a subsidiary of DI Industries, Inc. subject to obtaining
regulatory and Grey Wolf shareholders' approval and certain other conditions.
The number of shares of the Company's common stock to be issued in the merger is
subject to decrease or increase if the average trading price of the Company's
common stock in the ten trading days prior to the merger is greater than $4.00
or less than $3.00 per share. Additionally, the merger agreement calls for the
decrease of cash consideration and corresponding increase in the number of
shares issued so that at least 45% of the value of the merger consideration
consists of the Company's common stock. An escrow will be established for
certain post-closing contingencies with $5.0 million of the cash consideration.
NEW CREDIT FACILITY. As of December 31, 1996, the Company entered into a
$35.0 million reducing revolving credit facility (the "Facility") to fund the
Diamond M acquisition and for other general corporate purposes. The Facility
provides for an initial loan commitment of $35.0 million which reduces by $5.0
million each year until maturity on December 31, 1999. The Facility is secured
by substantially all of the Company's assets and calls for quarterly interest
payments on the outstanding balance at either LIBOR plus 3% or the lending
institution's prime rate plus 2%. In connection with entering into the Facility,
the Company utilized existing working capital to repay the $9.4 million balance
outstanding under its previous term loan agreement.
Each of the Company's completed or pending acquisitions have been or will be
accounted for using purchase accounting. As such all revenues and expenses have
been or will be recorded by the Company beginning at the date of acquisition.
DISCONTINUED OPERATIONS
On June 7, 1995, the Company entered into an agreement to sell its producing
oil and gas properties, effective April 1, 1995, for a cash sales price of $4.2
million, subject to certain adjustments. The sale was closed August 9, 1995.
Proceeds from this transaction were used to pay off the Company's production
term note which had an outstanding balance of approximately $1.5 million,
purchase two certificates of deposit totaling approximately $1.4 million as
collateral for two letters of credit that were then outstanding under the
Company's revolving line of credit, with the remainder of the proceeds,
approximately $1.3 million, used for working capital purposes.
The December 31, 1995 Consolidated Balance Sheet has been restated with all
assets and liabilities associated with the oil and gas properties identified as
Discontinued Operations. The Consolidated Statements of Operations for the 1995
and 1994 periods presented identifies the income (loss) from producing oil and
gas operations as discontinued operations. In 1995, as a result of the sale of
the oil and gas properties, the Company recorded a $768,000 non-cash loss.
INDUSTRY SEGMENTS
The Company has United States operations as well as foreign operations in
South America and Mexico. Reference is made to Note 6 of the Notes to
Consolidated Financial Statements for information regarding the Company's
industry segments.
INDUSTRY CONDITIONS AND COMPETITION
The Company experiences intense competition in its onshore drilling markets.
The contract drilling industry is cyclical and is characterized by high capital
and maintenance costs. During the early eighties, in response to a steep
increase in demand for drilling rigs, a significant number of drilling rigs were
added to the market. By 1985 demand for drilling rigs had dropped to a record
low resulting in a huge gap between the supply of drilling rigs and the demand.
During 1995 and
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1996, the spread between supply and demand has narrowed as the industry wide
fleet of drilling rigs ages. This has resulted in, higher utilization and higher
per day revenues in certain of the Company's geographic markets. The market,
however, continues to be highly competitive where no one competitor is dominant.
Companies generally compete on the basis of price, workforce experience,
equipment suitability and availability, reputation, expertise and financial
capability. While competition is primarily on a regional basis, rigs can be
moved from one region to another in response to changes in levels of drilling
activity, subject to crew availability and mobilization expenses. The Company's
ability to obtain drilling contracts is dependent primarily on the level of
domestic oil and gas exploration and development activity, as well as the
Company's ability to acquire and retain qualified personnel. The Company's
ability to continue to generate business in the future will depend, in part, on
its ability to adapt to new technology and drilling techniques as they become
available. Certain of the Company competitors have greater financial resources
than the Company.
The Company's operations are materially dependent upon the levels of activity
in the exploration, development and production of oil and gas in the United
States and worldwide. Such activity levels are affected both by short-term and
long-term trends in the prices of oil and natural gas. In recent years, oil and
natural gas prices, and therefore the level of drilling and exploration
activity, have been volatile. Worldwide military, political and economic events
have contributed to, and are likely to continue to contribute to, such price
volatility. Any prolonged reduction in oil and natural gas prices would depress
the level of exploration and development activity and would result in a
corresponding decline in the demand for the Company's services and therefore
have a material adverse effect on the Company's revenues and profitability. The
Company's future success will depend in large part upon a general economic
improvement in the domestic oil and gas and contract drilling industries, which
cannot be predicted with certainty.
In response to the depressed domestic drilling activity in the late 1980's,
the Company focused on foreign opportunities, especially the Central and
South American markets where the Company's foreign operations have, in recent
years, conducted drilling operations in Argentina, Guatemala, El Salvador,
Venezuela and Mexico. Currently, the Company has withdrawn or is withdrawing
from all international markets except Venezuela. Due to the recent upswings in
the Venezuelan market, the Company has renewed its focus on this market and
expects to spend additional capital in Venezuela in 1997. Due to declines in
Argentina and Mexico the Company has decided to exit those markets. The Company
will, from time to time, consider expansion into additional selected
international markets.
There is a general shortage in the industry of used drill pipe, and the cost
of obtaining new and used drill pipe is substantially higher than in prior
periods and is currently escalating. At present, the Company has an adequate,
but not a surplus, supply of drill pipe and drill collars and has began a
gradual replacement program in 1996. The Company has formed an alliance with a
drill pipe manufacturer to ensure a steady supply of new drill pipe to outfit
the 18 rigs that were acquired through the merger transaction and for its
existing fleet. Also, depending on rig utilization, the Company may need to
purchase additional drill pipe for rigs in service or placed in service.
CONTRACT DRILLING
DRILLING OPERATIONS. As of March 14, 1997, the Company has a total rig fleet
of 90 rigs with 65 rigs being actively marketed and 25 being held in inventory
for refurbishment. As part of the Company's new strategy, during 1997,
management plans on refurbishing several rigs out of its inventory to be placed
into service in the Ark-La-Tex and South Texas Divisions. In addition, the
Company supplies the labor and expertise to operate five additional rigs owned
by others. Of the marketable rigs, 59 are operated in seven states and six are
operated in Venezuela. Under a typical oil and gas drilling contract, the
Company provides its customers with drilling rigs and related equipment, as well
as field personnel. The Company considers a rig which is presently working to be
an "active" rig. Rigs which are not working but which are currently being
actively marketed are viewed as "idle." "Inventory" rigs are rigs which are not
working and are not currently being actively marketed. Inventory rigs will
require additional capital expenditures to reactivate them for service. The
Company estimates that the costs required to reactivate its inventory rigs may
range between $100,000 and several million dollars per rig. During 1996, the
Company's contract drilling operations were conducted through four operating
divisions in the United States organized by geographic area and their foreign
operations were conducted through three divisions located in Venezuela,
Argentina and Mexico.
ARK-LA-TEX DIVISION. The Ark-La-Tex Division's office is located in
Shreveport, Louisiana, and provides oil and gas contract drilling services
primarily in the states of Texas, Louisiana and Arkansas. The Ark-La-Tex
Division has a fleet of 15 marketable rigs with 13 having rated depth capacities
of over 10,000 feet and two at 20,000 feet or deeper. During 1996, the Company
had on average about ten rigs operating in this Division. The Company has moved
two rigs from the South Texas Division and refurbished three rigs out of
inventory to account for the increase.
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SOUTH TEXAS DIVISION. The South Texas Division is headquartered in Alice,
Texas. The South Texas Division operates 30 rigs, which includes one labor
contract. Thirteen of the rigs are trailer mounted mobile rigs having rated
depth capacities between 9,000 feet and 13,000 feet, nine are "SCR" rigs having
rated depth capacities of 15,000 feet to 25,000 feet and the balance are
conventional rigs which have rated depth capacities of 10,000 feet to 13,000
feet. This Division drills primarily in South Texas for major and independent
oil and gas companies. The Mesa, Diamond M and Flournoy acquisitions added 26
rigs of this Divisions total of 30 rigs. The Company is seeing increased demand
for rigs in both the Ark-La-Tex and South Texas Divisions.
EASTERN DIVISION. The Eastern Division's office is located in Midvale, Ohio,
and drills gas wells in Ohio, Pennsylvania and New York, principally at depths
of 7,000 feet or less. This Division currently markets five rigs and
historically, contracts to drill packages of several wells. The Eastern
Division's operations are limited during April and May of each year due to
"frost laws" in the jurisdictions in which it operates which restrict movement
of equipment on public roads during such period. Demand for the Company's
drilling services has remained relatively constant for the past several years.
INDRILLERS, L.L.C. DIVISION. On April 15, 1996, the Company completed the
formation of a joint venture, INDRILLERS, L.L.C., between its wholly-owned
subsidiary, Drillers, Inc., and Dart Energy Corp. to combine the Michigan
contract drilling operations of Drillers,Inc. with the Michigan contract
drilling operations of Indril, a subsidiary of Dart Energy Corp. Drillers, Inc.
and Dart Energy Corp. each contributed five drilling rigs to the joint venture
with Drillers, Inc. having a 65% interest and Dart Energy having a 35% interest
in the joint venture.
The office of INDRILLERS, L.L.C. is located in Mt. Pleasant, Michigan. The
Company drills oil and gas wells principally in Michigan, at depths of 1,000 to
16,000 feet. Of INDRILLERS, L.L.C. ten rigs, nine are rated 6,000 to 8,500 feet,
and one is rated at up to 16,000 feet. INDRILLERS' operations are also limited
during April and May of each year due to "frost laws" in the jurisdictions in
which it operates which restrict movement of equipment on public roads during
such periods. The Michigan market continues to experience weak demand.
VENEZUELA DIVISION. The Company owns four land-based drilling rigs and two
land-based workover rigs in Venezuela. In addition, the Company operates four
drilling rigs under a labor contract. The Venezuela Division provides oil and
gas contract drilling services under daywork contracts and workover services
under hourly contracts. The Venezuela drilling rigs have rated depths of 10,000
to 15,000 feet. The Company has been given notice that the contract for the four
labor contracts will not be renewed at the end of March, 1997. The Company's
revenue and operating profit will be negatively effected by the cessation of
these contracts, however, the Company is actively pursuing additional contracts
in the Venezuela market and hopes to replace the revenue and operating profit
previously generated by these contracts. The Company has seen an increase in
demand for drilling rigs with deeper capacity.
ARGENTINA AND MEXICO DIVISIONS. As part of the new strategic business plan,
the Company ceased operations in Mexico and Argentina in order to focus on more
profitable market areas. The drilling rigs which previously operated in Mexico
have been mobilized to the United States where they will be refurbished and
placed in service in Ark-La-Tex and South Texas Divisions. The Company currently
has 6 drilling rigs in Argentina; three of which are under letter of intent to
be sold for $1.5 million, the remaining rigs will be mobilized to the United
States or possibly Venezuela. The cost of this mobilization will be expensed as
incurred in 1997.
The Company will continue to evaluate foreign opportunities and may in the
future return to either Argentina or Mexico depending on contract opportunities.
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. The Company's oil and gas drilling contracts provide for compensation
on a "daywork," "footage" or "turnkey" basis. Under daywork contracts, the
Company receives a fixed amount per day for drilling the well, and the customer
bears a major portion of out-of-pocket costs of drilling. Under footage
contracts, the Company is paid a fixed amount for each foot drilled, regardless
of the time required or the problems encountered in drilling the well. The
Company pays more of the out-of-pocket costs associated with footage contracts
than with daywork contracts. Under turnkey contracts, the Company agrees to
drill a well to a specified depth for a fixed price, regardless of the time
required or the problems encountered in drilling the well. Footage and turnkey
contracts generally involve a higher degree of risk to the Company than daywork
contracts because the Company bears the cost of unanticipated down-hole problems
and cost escalation. "Hourly" contracts call for the Company to provide a rig
and crew, for which it is paid on an hourly basis. The work currently conducted
by the Ark-La-Tex Division is primarily daywork with some turnkey contracts.
Almost all of the
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wells drilled by the Eastern Division are drilled pursuant to footage contracts.
Operations in the South Texas Division are typically split between daywork and
turnkey/footage at a 60/40 ratio. INDRILLERS wells are drilled under footage and
daywork contracts. The Venezuela wells are drilled under daywork, and hourly
contracts. The Company believes that it is adequately insured against normal and
foreseeable risks in its operations in accordance with industry standards;
however, such insurance may not be adequate to protect the Company against
liability from all consequences of well disasters, extensive fire damage or
damage to the environment.
CUSTOMERS. The Company's oil and gas contract drilling customers include
large and small independent producers and major oil companies. A significant
portion of the Company's international drilling contracts are with national
utility or national petroleum companies in South America. No customer accounted
for more than 10% of the Company's consolidated revenues for the years ended
December 31, 1996 and 1995 or the nine months ended December 31, 1994.
The Company primarily markets its oil and gas drilling rigs on a regional
basis through employee salesmen located in Houston, Texas; Shreveport,
Louisiana; Mt. Pleasant, Michigan; Midvale, Ohio; and Barinas, Venezuela. These
salesmen utilize personal contacts and industry periodicals and publications to
determine which operators are planning to drill oil and gas wells or need
workover services in the immediate future. Once the Company has been placed on
the "bid list" for a particular operator, the Company will normally be given the
opportunity to bid on all future wells for that operator on an area basis.
Repeat business from previous customers accounts for a substantial portion of
the Company's business.
EMPLOYEES
At March 24, 1997, the Company had approximately 1,580 employees. The Company
believes that its relationship with its employees is satisfactory.
INSURANCE
The Company believes that it is adequately insured against normal and
foreseeable risks in its operations in accordance with industry standards;
however, such insurance may not be adequate to protect the Company against
liability from all consequences of well disasters, extensive fire damage or
damage to the environment. The Company maintains appropriate insurance with
respect to workers' compensation liability. The contract drilling industry's
level of workers' compensation costs has increased over the past few years and
constitutes a substantial portion of the Company's direct labor operating costs.
The Company does not carry business interruption insurance. No assurance can be
given that the Company will be able to maintain adequate insurance in the future
at rates which are commercially reasonable.
At March 31, 1994, American Premier Underwriters, Inc. ("American Premier"),
formerly named the Penn Central Corporation, was the owner of 20,690,105 (53.5%)
shares of the Company's outstanding common stock. In June 1994, Norex Drilling
Ltd. ("Norex Drilling"), a wholly-owned subsidiary of Norex Industries, Inc.
("Norex Industries"), completed the purchase of all shares of the Company's
common stock owned by American Premier.
Prior to June 2, 1994, certain of the Company's insurance coverage, including
workers' compensation and excess liability coverage, was arranged by American
Premier as part of a program which American Premier provided to its
subsidiaries. Subsequent to the sale of the Company's common shares by American
Premier to Norex Drilling, the Company obtained workers' compensation, excess
liability coverage and certain other insurance from other sources. The Company
and American Premier entered into an agreement pursuant to which the Company
agreed to reimburse American Premier for all amounts advanced by American
Premier from time to time on behalf of the Company in connection with American
Premier's administration of the Company's workers' compensation and certain
other insurance programs for the periods between July 20, 1989 and the closing
of the sale of Company common stock by American Premier to Norex Drilling. The
amounts reimbursable to American Premier at December 31, 1995 relating to this
program were $1,900,000. All amounts due to American Premier were paid in 1996.
CERTAIN RISKS
OPERATIONAL RISKS. The Company's operations are subject to the many hazards
inherent in the drilling business, including blowouts, cratering, fires and
collisions. These hazards could cause personal injury and loss of life, suspend
drilling operations or seriously damage or destroy the property and equipment
involved and, in addition to environmental damage, could cause damage to
producing formations and surrounding areas. Although the Company maintains
insurance against many of these hazards, the Company does not have casualty or
other insurance with respect to the rigs themselves,
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and such other insurance is subject to substantial deductibles and provides for
premium adjustments based on claims. Certain other matters may also be excluded
from coverage, such as loss of earnings on certain rigs.
INTERNATIONAL OPERATIONS AND RISKS. A significant portion of the Company's
revenues are attributable to international operations. Risks associated with
operating in international markets include foreign exchange restrictions and
currency fluctuations, foreign taxation, changing political conditions and
foreign and domestic monetary policies, expropriation, nationalization,
nullification, modification or renegotiation of contracts, war and civil
disturbances or other risks that may limit or disrupt markets. For example, the
Company has operated in countries in Latin America that have experienced major
currency fluctuations in the recent past. 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. No
predictions can be made as to what foreign government regulations may be enacted
in the future that could be applicable to the Company's operations.
The Company's primary international contract drilling operations are in South
America. These international contract drilling operations are primarily covered
by drilling contracts which, in the case of Venezuela, are structured where
payment is split between partial payment in United States currency and the
balance paid in local currency. A significant portion of costs and expenses
relating to the Company's international operations are comprised of goods and
services procured, in the respective foreign countries and paid for in the
respective countries' currencies.
The Company is subject to taxation in many jurisdictions, and the final
determination of its tax liabilities involves the interpretation of the statutes
and requirements of various domestic and foreign taxing authorities. Foreign
income tax returns of foreign subsidiaries are subject to examination by foreign
tax authorities. The Company has recorded its estimated tax liability in each of
the jurisdictions in which the Company operates.
To date, the Company has not entered into any currency hedges to protect it
from such losses, however the assets in the foreign countries are managed to
minimize the exposure from currency fluctuations. During the year ended December
31, 1995, the Company realized currency gains of $888,000. Unrealized gains or
losses are recorded as a separate component of shareholders' equity and in 1996,
$404,000 was recorded due to a devaluation in Venezuela.
CHANGE IN BUSINESS STRATEGY AND MANAGEMENT. In early 1996, the Company began
implementing a new business strategy which involves new management, focusing its
resources toward higher margin markets and recapitalizing the Company to provide
for growth capacity. Implementing the new strategy will involve redeploying its
rigs to more profitable markets, refurbishing certain of its rigs, and acquiring
businesses and assets complementing the Company's land drilling operations.
Inherent in such strategy are certain risks, such as increasing demand for
liquidity and capital resources, increasing debt service requirements, combining
disparate company cultures and facilities, and conducting operations in
geographically and competitively diverse markets.
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 material changes on the Company's financial condition and results of
operations. This is particularly so in light of the rapid consolidation and
competitive changes in the Company's most profitable markets. The success of the
Company's new business strategy and its ability to repay increased debt service
will depend in part on the Company's ability (i) to redeploy its rigs to higher
margin markets, (ii) to finance and timely complete the refurbishment of its rig
inventory on a cost effective basis and, (iii) to continue to contract for,
finance and integrate into its business future acquisitions. There can be no
assurance these material changes will result in the desired effect of improving
the Company's competitive position and its financial condition.
LEVERAGE AND LIQUIDITY. The Company currently has approximately $27 million
of debt obligations. Accordingly, the Company will require substantial cash flow
to meet its debt service requirements. Payment of principal and interest on
these obligations will depend on the Company's future performance, which is
subject to general economic and business factors beyond the Company's control.
The Company's programs of rig refurbishment will require increasing amounts of
capital and to the extent, if any, it is unable to continue such programs, the
Company will have fewer rigs available for service. Further debt may be needed
to finance any future acquisitions, including the pending Grey Wolf Acquisition.
It is likely therefore, that the Company's exposure to the risks associated with
leverage will increase as its new business strategy is continued. There can be
no assurance that debt or equity capital needed for the future will be available
or, if so, on acceptable terms.
-8-
<PAGE>
The Company's current credit facility (the "Facility") restricts, among other
things, the Company's ability to incur additional indebtedness in excess of
certain amounts, encumber certain of its properties and make certain asset
dispositions. Furthermore, the Facility prohibits the payment of dividends by
the Company and requires the Company to maintain a minimum working capital
balance of $5.0 million and minimum net worth of $60.0 million. In addition, the
Facility requires the Company to maintain certain financial ratios. These
restrictions could limit the Company's flexibility in responding to changing
market conditions.
NEW MANAGEMENT AND BOARD OF DIRECTORS; DEPENDENCE ON KEY PERSONNEL. 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 which were elected
for the first time. In connection with an acquisition, another new member was
added to the Company's Board of Directors effective January 31, 1997. The
Company believes that its operations are dependent upon the Company's small
group of relatively new management personnel, the loss of any of whom could have
a material adverse effect on the Company.
INTENSE COMPETITION; INDUSTRY CONDITIONS. The Company experiences intense
competition in its drilling markets. The contract drilling industry is cyclical
and is characterized by high capital and maintenance costs. Due to an oversupply
of rigs, the onshore drilling market is highly competitive and no one competitor
is dominant. While price is a primary factor in the selection of drilling
contractors, a contractor's safety record, crew quality, service record and
equipment capability are also important factors. Certain of the Company's
competitors have greater financial and other resources than the Company and may
commit more resources than the Company to these important factors.
The Company's operations are materially dependent upon the levels of activity
in the exploration, development and production of oil and natural gas in the
United States and worldwide. Such activity levels are affected both by
short-term and long-term trends in the prices of oil and natural gas. In recent
years, oil and natural gas prices, and therefore the level of drilling and
exploration activity, have been volatile. Worldwide military, political and
economic events have contributed to, and are likely to continue to contribute
to, such price volatility. Any prolonged reduction in oil and natural gas prices
would depress the level of exploration and development activity and would result
in a corresponding decline in the demand for the Company's services and
therefore have a material adverse effect on the Company's financial condition
and results of operations.
LOSS FROM OPERATIONS. The historical financial data for the Company reflects
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.
There can be no assurance that the Company will not continue to experience
losses.
SHARES ELIGIBLE FOR FUTURE SALE. There are approximately 95 million shares of
the Company's common stock that are available for resales by selling
shareholders under the Company's several Registration Statements under the
Securities Act of 1933, as amended, on forms S-3 and S-8 including 5.37 million
shares issuable upon exercise of warrants or options. There are an additional
360,000 shares issuable upon the exercise of options which have not been
registered. On a fully diluted basis, such shares represent approximately 67% of
the Company's outstanding common stock. Future sale of substantial amounts of
common stock in the public market could adversely affect prevailing market
prices. See "Item 5 Market for Registrant's Common Equity and Related
Shareholder Matters-Shares Available for Future Sale."
LIMITATIONS ON THE AVAILABILITY OF THE COMPANY'S NET OPERATING LOSS
CARRYFORWARDS. As a result of the RTO/LRAC and the Somerset Mergers, the Company
has undergone an "ownership change" within the meaning of Section 382 of the
Internal Revenue Code of 1986, as amended. Therefore, the right of the Company
to use its existing net operating loss carryforwards ("NOLs") and certain other
tax attributes for both regular tax and alternative minimum tax purposes during
each future year is limited to a percentage (currently approximately six
percent) of the fair market value of the Company's common stock immediately
before the ownership change (the "Section 382 Limitation"). To the extent that
taxable income exceeds the Section 382 Limitation in any year subsequent to the
ownership change, such excess income may not be offset by NOLs from years prior
to the ownership change. To the extent the amount of taxable income in any
subsequent year is less than the Section 382 Limitation for such year, the
Section 382 Limitation for future years is correspondingly increased. There is
generally no restriction on the use of NOLs arising after the ownership change,
although Section 382 applies anew each time there is an ownership change. The
actual effect, if any, of such utilization of NOLs will depend on the Company's
profitability in future years. As of December 31, 1996, the Company had
approximately $23
-9-
<PAGE>
million of NOLs, a significant portion of which are already subject to a Section
382 Limitation resulting from ownership changes in years prior to 1996.
GOVERNMENTAL REGULATIONS. Many aspects of the Company's operations are
affected by political developments and by federal, state, foreign and local laws
and regulations relating to the energy industry. The adoption of laws and
regulations curtailing exploration and development oil and gas drilling for
economic and other policy related reasons would adversely affect the Company's
operations by limiting demand for its contract drilling services. The Company
cannot determine to what extent future operations and earnings of the Company
may be affected by new legislation, new regulations or changes in existing
regulations.
The Company's activities are also subject to laws and regulations relating to
environmental protection and pollution control, including certain regulations
that control the discharge of materials into the environment or require
remediation of contaminations. Usually, these environmental laws and regulations
impose "strict liability", rendering a person liable without regard to
negligence or fault. Although the Company's cost of compliance with such
legislation and regulations has not been material to date, such laws and
regulations may substantially increase the cost of the Company's activities and
may prevent or delay the commencement or continuance of a given operation. The
Company believes that such legislation and regulations have not had a materially
adverse effect on its present method of operations. In the future, federal,
state and local government environmental controls may require the Company to
make significant expenditures, although the magnitude of such expenditures
cannot be predicted.
The Company is subject to the requirements of the Occupational Safety and
Health Act ("OSHA") and comparable state statutes. The OSHA hazard communication
standard, the Environmental Protection Agency "community right-to-know"
regulations under Title III of the Federal Superfund Amendment and
Reauthorization Act and comparable state statutes require the Company to
organize information about the hazardous materials used in its operations. The
Company will likely be required to increase its expenditures during the next
several years to comply with higher industry and regulatory safety standards
such as those described above. Such expenditures cannot be accurately estimated
at this time.
ITEM 2. PROPERTIES
DRILLING AND WORKOVER EQUIPMENT
The Company considers a rig which is presently working to be an "active" rig.
Rigs which are not working but which are currently being actively marketed are
viewed as "idle." "Inventory" rigs are rigs which are not working and are not
currently being actively marketed. Inventory rigs will require additional
capital expenditures to reactivate them for service. The following table
describes the oil and gas drilling rigs owned and operated by the Company at
March 24, 1996, and the status of each rig during the preceding 45 days:
Rig Year Built/ Rated
No. Rebuilt Drawworks Depth Location Status
- --- ----------- ------------------- -------- -------------- ----------
ARK-LA-TEX DIVISION
- --------------------
1 1957/1980 Brewster N-85 15,000' N. Louisiana Active
2 1957/1981 Brewster N-85 15,000' N. Louisiana Active
3 1960/1982 Cont-Emsco A-550 13,500' E. Texas Active
6 1957/1980 Brewster N-85 15,000' N. Louisiana Active
7 1978 National 55 12,500' N. Louisiana Active
10 1964/1989 Gard-Denver 800 14,000' N. Louisiana Active
12 1980 Gard-Denver 700 12,500' N. Louisiana Active
13 1981 Brewster N-75B 13,000' N. Louisiana Active
15 1965/1989 National 610 14,000' N. Louisiana Active
19 1981/1997 National 80-B 15,000' N. Louisiana Active
39 1980/1989 Gard-Denver 800 16,000' E. Texas Active
40 1979 Gard-Denver 1100E 20,000' E. Texas Active
44 1982 Gard-Denver 1500E 25,000' E. Texas Active
48 1981 Ideco 3000-UE 30,000' Oklahoma Active
75 1982/1996 Cont-Emsco D-3E 16,000' N. Louisiana Active
-10-
<PAGE>
Rig Year Built/ Rated
No. Rebuilt Drawworks Depth Location Status
- --- ----------- ------------------- -------- -------------- ----------
SOUTH TEXAS DIVISION
- --------------------
31 1980/1994 Cabot 750 10,000' S. Texas Active
33 1981/1992 National 80 UE 16,000' S. Texas Active
34 1981/1992 Superior 700 UE 12,000' S. Texas Active
37 1981/1992 Cont-Emsco Elec. II 25,000' S. Texas Active
42 1981 Cont-Emsco Elec. II 25,000' S. Texas Active
43 1981 Ideco E-1200 17,000' S. Texas Active
93(a) 1981 Mid-Continent 712-UE 16,000' S. Texas Active
301 1990/ Mid-Continent U-36A 12,000' S. Texas Active
302 1964/1988 RMI 750 10,500' S. Texas Active
303 1966/1995 Brewster N-75 14,000' S. Texas Active
304 1969/1975 Cabot 750 9,500' S. Texas Active
305 1973/1990 Cabot 1000 13,000' S. Texas Active
306 1990/1997 RMI 1000 13,500' S. Texas Active
307 1993/1995 Ideco 1200E 17,000' S. Texas Active
308 1975/1992 Ideco BIR-800 10,000' S. Texas Active
309 1976/1990 Gard Denver 500 10,000' S. Texas Active
310 1980/1995 Brester N-46 12,000' S. Texas Active
311 1981/1996 Ideco BIR-800 10,000' S. Texas Active
312 1982 Gard Denver 1100E 17,000' S. Texas Active
314 1996 Cabot 750 9,500' S. Texas Active
840 1981/1994 Oilwell 840E 18,000' S. Texas Active
851 1982/1994 National 80B 14,000' S. Texas Active
859 1978/1991 Brewster N -75 14,000' S. Texas Active
860 1976/1995 Cabot 750 9,500' S. Texas Active
861 1978/1993 Cabot 900 11,000' S. Texas Active
862 1976 Cabot 900 13,000' S. Texas Active
863 1978/1988 Cabot 1000 13,000' S. Texas Active
864 1975/1994 Cabot 1000 13,000' S. Texas Active
865 1979/1993 Cabot 1200 14,000' S. Texas Active
866 1982/1993 Cabot 1200 14,000' S. Texas Active
EASTERN DIVISION
- ----------------
202 1981 Wilson Mogul 42 8,000' N.W. Penn. Active
203 1980 Wilson Mogul 42 8,000' N.E. Ohio Active
204 1979 Wilson Mogul 42 6,500' N.E. Ohio Active
208 1980 Wilson Mogul 42 6,500' N.W. Penn. Active
215 1980 Wilson Mogul 42 6,500' N.W. Penn. Active
INDRILLERS DIVISION
- -------------------
1 1980 Challenger 320 5,500' Michigan Idle
2 1979 Ideco H-37 7,000' Michigan Idle
3 1980 Challenger 320 5,500' Michigan Idle
4 1980 Challenger 320 5,500' Michigan Idle
5 1980 Ideco H-1000 10,500' Michigan Active
41 1981 Ideco E-1200 20,000' Michigan Idle
53 1976 Cabot 550 6,500' Michigan Active
56 1980 Ideco DIR 700 8,500' Michigan Idle
57 1977 Ideco BIR 550 6,500' Michigan Active
58 1977 Ideco DIR 700 8,500' Michigan Active
-11-
<PAGE>
Rig Year Built/ Rated
No. Rebuilt Drawworks Depth Location Status
- --- ----------- ------------------- -------- -------------- ----------
VENEZUELA DIVISION
- ------------------
407 1980 Cooper LT0 350 14,000' Venezuela Idle
408(a) 1980 Cabot 1,000 12,000' Venezuela Active
412(a) 1980 National 610-E 12,000' Venezuela Active
417(a) 1981 Cont.-Emsco D-3 14,000' Venezuela Active
421(a) 1978 Cont.-Emsco C-1 15,000' Venezuela Active
423 1981/1996 Mid-Continent 712-U 15,000' Venezuela Active
441 1980 Wilson Mogul 42 12,000' Venezuela Idle
451 1981 Cabot 900 10,000' Venezuela Idle
452 1975/1994 Cabot 900 10,000' Venezuela Idle
453 1982/1994 Ideco-Hydrair H-35 10,500' Venezuela Idle
RIGS HELD IN INVENTORY
- ----------------------
38 1981 Oilwell 840B 16,000' S. Texas Inventory
47 1982 Ideco E-1200 20,000' Michigan Inventory
49 1982 Ideco E-1200 20,000' Michigan Inventory
70 1981 Ideco BIR 800 12,000' N. Louisiana Inventory
76 1982 Cont.Emsco D-3E 16,000' Oklahoma Inventory
77 1981 Mid-Cont. 914EC 20,000' Oklahoma Inventory
78 1981 Cont. Emsco C-2E 25,000' Oklahoma Inventory
79 1981 National 110 UE 18,000' Oklahoma Inventory
80 1981/1982 Oilwell E-2000 25,000' Oklahoma Inventory
81 1981 Oilwell E-2000 25,000' Oklahoma Inventory
82 1981 Oilwell E-2000 25,000' Houston Inventory
83 1981 Oilwell E-2000 25,000' Oklahoma Inventory
84 1982 Oilwell E-2000 25,000' Oklahoma Inventory
85 1981 National 1320 UE 25,000' Oklahoma Inventory
86 1981 National 1320 UE 25,000' Houston Inventory
87 1979 National 1320 UE 25,000' Lysite, WY Inventory
88 1981 Cont. Emsco C-3 30,000' Oklahoma Inventory
89 1981 Oilwell E-3000 30,000' Oklahoma Inventory
90 1980/1981 National 1625 DE 30,000' Ft. Stockton,TX Inventory
91 1980/1981 National 1625 DE 30,000' Oklahoma Inventory
92 1980/1981 National 1625 DE 30,000' Oklahoma Inventory
454 1981 Ideco BIR H-1000 12,000' Argentina Inventory
455 1981 Ideco BIR H-1000 12,000' Argentina Inventory
472 1981/1994 Cabot 750 10,000' Argentina Inventory
473 1981/1994 Cabot 900 10,000' Argentina Inventory
- -----------
(a) Rig operated by the Company under a labor contract with the owner of the
rig
FACILITIES
The Company leases its principal executive office in Houston, Texas, for
approximately $9,000 per month pursuant to a lease which extended through
November 1996 and month to month for approximately $13,000 thereafter. The
Company has leased approximately 17,200 square feet of new office space for its
principal executive offices effective April 1, 1997, at a cost of approximately
$22,000 per month. In addition, the Company owns field locations in: Fillmore,
Louisiana; Mt. Pleasant, Michigan; Midvale, Ohio; Woodward and Oklahoma City,
Oklahoma; Alice, Houston and Midland, Texas.
-12-
<PAGE>
ITEM 3. 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 consolidated financial condition or results
of operations.
The Company was proceeding against Charlestown Industries, Inc. (a 50%
"Partner"), who was a co-defendant, along with the Company, in the joint venture
to recover their respective portion ($1,800,000) of the OFS 1987, Mid-Year et.
al. v DI Exploration lawsuit. In 1994, a judgment was rendered in favor of the
Company against the Partner in the state of Oklahoma. The Partner, subsequent to
the judgement, filed for protection under the US Bankruptcy Act and the
Company's claim was ruled on by the bankruptcy court in October of 1996. The
bankruptcy court ruled against the Company. The Company has determined not to
pursue other appeals. Since the future recovery of the amount and term of
recovery was uncertain no amount had been recorded by the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET DATA
The Company's common stock is listed on the American Stock Exchange under
the symbol "DRL." At March 24, 1997, there were approximately 647 shareholders
of record of the common stock.
The following table sets forth the high and low sale prices of the common
stock reported by the American Stock Exchange for the periods indicated:
HIGH LOW
-------- --------
Period from January 1, 1997 to March 24, 1997 .. 3.6250 2.5000
Year Ended December 31, 1996:
Quarter ended March 31, 1996 ................ 0.6875 0.5000
Quarter ended June 30, 1996 ................. 1.8750 0.6875
Quarter ended September 30, 1996 ............ 1.8125 1.2500
Quarter ended December 31, 1996 ............. 2.9375 1.5000
Year Ended December 31, 1995:
Quarter ended March 31, 1995 ................ 1.0000 0.6250
Quarter ended June 30, 1995 ................. 1.0625 0.6875
Quarter ended September 30, 1995 ............ 0.8750 0.6250
Quarter ended December 31, 1995 ............. 0.8750 0.6250
SHARES ELIGIBLE FOR FUTURE SALE
There are approximately 95 million shares of the Company's common stock
that are available for resale by selling shareholders under the Company's
several Registration Statements under the Securities Act of 1933, as amended, on
Forms S-3 or S-8, including 5.37 million shares issuable upon exercise of
warrants or options. There are an additional 360,000 shares issuable upon the
exercise of options which have not been registered. On a fully diluted basis,
such shares represent approximately 67% of the Company's outstanding common
stock. The contractual registration periods for such shares terminate at various
times during the period ending on the later of August 29, 1999, and three years
after exercise of any warrants. The Company also may be required to issue
additional shares of common under certain repricing provisions of a private
placement of the Company's common stock to affiliates of Wexford Management,
L.L.C. and a recently completed
-13-
<PAGE>
acquisition of the operating assets of Flournoy Drilling Company. Any additional
shares issued under these obligations would also be subject to similar shelf
registration rights. There can be no assurance that additional shares will not
be issued under these provisions or that the Company may not agree to similar
provisions or that the Company may not agree to similar provisions in connection
with future acquisitions.
On March 24, 1997, the last reported sales price of the company's common
stock on the American Stock Exchange was $2.625 per share. The Company has never
paid dividends on its common stock and is currently restricted under certain
debt agreements from paying dividends.
RECENT SALES OF UNREGISTERED SECURITIES
On October 3, 1996, the Company issued 5.5 million shares of common stock
in exchange for all the South Texas operating assets of Mesa Drilling, Inc. The
shares were issued to Mesa Drilling, Inc. and affiliates in a negotiated
transaction exempt from registration under the Securities Act of 1933 pursuant
to Section 4(2) thereof. These shares were subsequently registered for resale
under a self registration statement on Form S-3 that became effective November
12, 1996.
On December 30, 1996, the Company issued of 1.75 million shares of the
Company's common stock for approximately $4.12 million to four funds managed by
Wexford Management LLC in a negotiated transaction exempt from registration
under the Securities Act of 1933 pursuant to Section 4(2) thereof. A shelf
registration statement was filed by the Company registering these shares for
resale on Form S-3 that became effective February 12, 1997. DI will have to
issue more shares to the extent the Wexford funds hold less than $4.12 million
in value on the one year-anniversary date of the issuance.
ITEM 6. SELECTED FINANCIAL DATA
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
NINE
YEARS ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, YEAR ENDED MARCH 31,
1996 1995 1994(1) 1994(1) 1993
--------- -------- -------- -------- --------
CONTINUING OPERATIONS:
<S> <C> <C> <C> <C> <C>
Revenues ................................ $ 81,767 $ 94,709 $ 50,987 $ 67,855 $ 62,242
Loss from continuing operations ......... (10,877) (12,675) (2,260) (1,384) (3,555)
DISCONTINUED OPERATIONS (2):
Income (loss) from oil and gas operations -- (4) 51 (1,274) 60
Loss from sale of oil and gas properties -- (768) -- -- --
NET LOSS ................................... (11,722) (13,447) (2,209) (2,658) (3,495)
LOSS PER COMMON SHARE:
From continuing operations .............. (.18) (.33) (.06) (.04) (.09)
From discontinued operations ............ -- (.02) -- (.03) --
Net loss ................................ (.18) (.35) (.06) (.07) (.09)
TOTAL ASSETS (3) ........................... 117,819 57,783 62,860 40,325 41,937
LONG-TERM DEBT (3) ......................... 26,846 11,146 10,224 198 223
SERIES A PREFERRED STOCK - MANDATORY
REDEEMABLE .............................. 764 900 1,900 -- --
</TABLE>
- --------------
(1) During 1994 the Company changed its fiscal year end from March 31 to
December 31.
(2) To account for the discontinued operation of DI Energy, effective
April 1, 1995.
(3)Total assets and long term debt have been restated to account for the
discontinued operations of DI Energy, effective April 1, 1995.
-14-
<PAGE>
ITEM 7. 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 of DI Industries, Inc. ("DI" or the "Company")
included elsewhere herein. All significant intercompany transactions have been
eliminated.
INDUSTRY OVERVIEW
The gap between the supply of workable rigs and demand for their services
has decreased in recent months. There are less rigs that are operational due to
age of the fleet in the U.S. and demand has increased for rigs in recent months.
The stabilization of working rig count that began in 1995 has continued into
1996 and 1997 and in fact an increase is now being seen . The weekly national
count of working land rigs in the United States as reported by Hughes
Christensen Incorporated on March 7, 1997 was 882 compared to 719 on March 8,
1996.
The significant decline in oil and gas prices in the mid-1980's severely
depressed oil and gas exploration activities and reduced demand for the
Company's oil and gas drilling services. Although industry conditions have
improved during 1995 and 1996, a reversal of this trend could have an ongoing
negative effect on the company's future operating results. The decline in
drilling activity in the mid 1980's resulted in an oversupply of drilling
equipment and created intense competition, particularly in the price received
for contract drilling services by drilling contractors. Demand for oil and gas
drilling services will continue to be dependent upon the present and anticipated
sales price for oil and gas, which is subject to conditions such as consumer
demand, events in the Middle East, and other factors that are not controlled by
the Company.
There has been an increase in the demand for oil and gas drilling services
in Venezuela. In response to this, the Company expanded into Venezuela during
1994. The Company has also completed projects in South America and Mexico;
however, the Company's only current operations are in Venezuela. The Company
will continue to market its services into selected international markets.
There is a general shortage in the industry of used drill pipe, and the
cost of obtaining new and used drill pipe is substantially higher than in prior
periods and is currently escalating. At present, the Company does not have a
critical shortage of drill pipe or other equipment but, depending on rig
utilization, will need to purchase additional drill pipe for rigs in service. In
response to this shortage, the Company has formed an alliance with a drill pipe
manufacturer to ensure a steady supply of new drill pipe to outfit the 18 rigs
that were acquired through the merger transactions mentioned above and for its
existing rig fleet.
CHANGE IN BUSINESS STRATEGY AND MANAGEMENT
In early 1996, the Company began implementing a new business strategy
which involved new management, a recapitalization of the Company to provide for
growth capacity and redeployment of the Company's assets into higher margin
markets.
On April 9, 1996, the employment of the Company's chief executive officer
was terminated, signaling the beginning of significant management changes. Since
that date, the Company has hired the majority of its current senior management
team. Joining the Company in September of 1996 were Thomas P. Richards,
President and Chief Executive Officer, T. Scott O'Keefe, Senior Vice President
and Chief Financial Officer, Ronnie E. McBride, Senior Vice President-Domestic
Operations, and Forrest M. Conley, Jr., Senior Vice President-International.
David W. Wehlmann, Vice President and Controller, joined the Company in July
1996, while Donald J. Guedry, Treasurer, began his employment in October of
1996.
On August 27, 1996, the shareholders of the Company elected a Board of
Directors comprised of five members, all but one of which were elected to the
Board for the first time. Returning to the Board as Chairman was Ivar Siem.
Directors Roy T. Oliver, Steven A. Webster, William R. Ziegler and Peter M. Holt
were newly elected to the Board of Directors of the Company. The shareholders
also approved the merger transactions (See Note 2 to "Notes to Consolidated
Financial Statements") which represented a significant step in accomplishing the
Company's new strategy in that the 18 ultra deep drilling rigs and the $25
million of capital to refurbish them has enabled the Company to focus on higher
margin markets where drilling projects are of a longer duration than the
Company's current markets. The merger transactions closed on August 29, 1996.
-15-
<PAGE>
FINANCIAL CONDITION AND LIQUIDITY
The Company funded its activities (other than the purchase price of
acquisitions) through a combination of cash generated from operations, cash
sales of non-strategic assets, short-term loans from affiliates, a deferral of
monthly payments otherwise due on debt, and issuances of its common stock and
preferred stock in exchange for cash and operating assets. With the exception of
the Diamond M acquisition, substantially all of the purchase price of the
several acquisitions accomplished by the Company during 1996 (other than
transaction costs) was paid by the issuance of the Company's common stock and
common stock purchase warrants. The merger transactions that occurred in August
1996, described further below, significantly improved the Company's financial
position. In the merger transactions, the Company obtained net cash of
approximately $25.0 million and 18 inactive, deep capacity drilling rigs in
exchange for the issuance of common stock thus increasing working capital and
net property and equipment.
The following table summarizes the Company's financial position at
December 31, 1996 and 1995.
DECEMBER 31, 1996 DECEMBER 31, 1995
AMOUNT % AMOUNT %
Working capital $ 6,195 7 7,503 22
Property and equipment, net 88,476 92 25,910 77
Other noncurrent assets 1,132 1 277 1
------- ---- ------ -----
Total $ 95,803 100 $ 33,690 100
======== ===== ========= ======
Long-term debt $ 26,846 28 $ 11,146 33
Other long-term liabilities 4,311 4 2,850 8
Shareholders' equity 64,646 68 19,694 59
-------- ---- -----------------
Total $ 95,803 100 $ 33,690 100
======== ===== ========= ======
The most significant changes in the Company's financial position are the
increases in property and equipment of $62.6 million, long-term debt of $15.7
million, and shareholders' equity of $45.0 million. These changes are a direct
result of the Company's rebuilding process which began in the first quarter of
1996.
On August 27, 1996, the shareholders of the Company approved two merger
transactions whereby the Company exchanged a total of 78,847,956 shares of
common stock for 18 inactive, deep capacity land drilling rigs valued at
approximately $25 million and an equity infusion of $25 million. These merger
transactions increased shareholders' equity by $49.6 million and property and
equipment by $25.2 million.
On October 3, 1996, the Company acquired all the South Texas operating
assets of Mesa Drilling, Inc. in exchange for 5,500,000 shares of the Company's
common stock. This transaction added six diesel electric SCR drilling rigs to
the Company's rig fleet; three which are currently operating in South Texas and
three which are stacked. This transaction increased both shareholders' equity
and property and equipment by approximately $7.5 million.
On December 31, 1996, the Company completed the acquisition of the South
Texas operating assets of Diamond M Onshore, Inc. ("Diamond M") for
approximately $26.0 million in cash. The assets consist of ten land drilling
rigs, all of which are currently operating, 19 rig hauling trucks, a yard
facility in Alice, Texas and various other equipment and drill pipe. This
resulted in an increase in property and equipment of approximately $26.0 million
and long-term debt of $25.0 million.
Concurrent with the Diamond M asset acquisition the Company entered into a
loan facility (the "Facility") dated as of December 31, 1996, with Bankers Trust
Company, ING (US) Capital Corporation and NordlandsBanken AS which provided the
funds for the acquisition. The Facility provides for an initial $35.0 million
reducing revolving line of credit which reduces by $5.0 million each year until
maturity on December 31, 1999. The Facility is secured by substantially all of
the Company's assets, calls for quarterly interest payments on the outstanding
balance at either LIBOR plus 3% or the prime rate plus 2%, and contains
customary affirmative and negative covenants. In connection with the Company
entering into the Facility, the Company utilized existing working capital to
repay the $9.4 million balance outstanding under its previous term loan
agreement.
-16-
<PAGE>
On December 30, 1996, also in connection with closing the Facility, the
Company completed a private placement of 1,750,000 shares of the Company's
common stock for approximately $4,120,000 to four funds managed by Wexford
Management LLC. The proceeds were utilized to repay a $4.0 million note payable.
(See Note 2 to the Notes to the Consolidated Financial Statements).
On January 31, 1997, the Company acquired the operating assets of Flournoy
Drilling Company for 12,426,000 shares of the Company's common stock and
$800,000 in cash. The assets acquired include 13 drilling rigs, 17 rigs hauling
trucks, a yard and office facility in Alice, Texas and various other equipment
and drill pipe.
On March 10, 1997, the Company entered into a definitive agreement to
acquire Grey Wolf Drilling Company ("Grey Wolf") for up to $61.6 million in cash
and approximately 14 million shares of the Company's common stock. The terms of
the agreement call for Grey Wolf to merge with and into Drillers, Inc. a
subsidiary of DI Industries, Inc. subject to obtaining regulatory and Grey Wolf
shareholders' approval and certain other conditions. Grey Wolf was founded in
1919 and is a premier Gulf Coast onshore drilling contractor with a high quality
fleet of 18 large drilling rigs currently working in South Louisiana and the
upper Texas Gulf Coast. The number of shares of the Company's common stock to be
issued in the merger is subject to decrease or increase if the average trading
price of the Company's common stock in the ten trading days prior to the merger
is greater than $4.00 or less than $3.00 per share. Additionally, the merger
agreement calls for the decrease of cash consideration and a corresponding
increase in the number of shares issued so that at least 45% of the value of the
merger consideration consists of the Company's common stock. An escrow will be
established for certain post-closing contingencies with $5.0 million of the cash
consideration. Management anticipates the issuance of some form of debt or
possibly equity financing to fund the cash portion of the acquisition price for
Grey Wolf.
Each of the Company's completed or pending acquisitions have been or will
be accounted for using purchase accounting. As such all revenues and expenses
have been or will be recorded by the Company beginning at the date of
acquisition.
The Company will require substantial funding to complete the acquisition
of Grey Wolf, complete its rig refurbishment program and continue operations.
The Company does not currently have the borrowing capacity under the Facility
and does not anticipate cash flow from operations will fund its needs. The
Company anticipates making up the shortfall with borrowing under new facilities
or other debt agreements or possibly equity financing.
The Company's liquidity at any time and the amount of cash available for
operations, and reinvestment is affected by a number of factors including (1)
demand for and utilization of the Company's operating drilling rigs (2) prices
received for daywork, footage and turnkey contracts, (3) the demand for and
refurbishment of rigs out of inventory, and (4) the amount of bank borrowings
and the extent of repayment of existing indebtedness.
During 1996, the Company made the decision to exit the Argentina and
Mexico markets. The drilling rigs previously operating in Mexico have already
been mobilized back to the United States, at a cost of approximately $1 million,
where they will be refurbished and returned to service. The Company has a signed
letter of intent to sell three of the Argentina drilling rigs and certain other
assets for $1.5 million which resulted in the Company recording a non-cash
impairment of $2.5 million. Additionally, the Company recorded $1.5 million in
estimated costs to withdraw from the Argentina and Mexico markets.
The Company is still actively reviewing possible expansion and acquisition
opportunities. While the Company has no definitive agreements to acquire
additional equipment, other than as disclosed above, suitable opportunities may
arise in the future. The timing, size or success of any acquisition effort and
the associated potential capital commitments are unpredictable. From time to
time, the Company may have one or more bids outstanding for contracts that could
require significant capital expenditures and mobilization costs. The Company
currently has several bids outstanding in Venezuela that would require the
refurbishment of a merger rig and the mobilization of that rig to Venezuela. The
Company's ability to consummate additional expansion or acquisition transactions
will in part be effected by the Company's ability to fund such transactions.
The Company has no derivative contracts related to its foreign currency
exposure in the countries that it operates. However, the Company generally
structures its foreign operations and related drilling contracts in such a
manner as to minimize any potential foreign currency exchange restrictions and
any exposure for foreign currency fluctuations. At December 31, 1996, the
Company believes that foreign currency exposure, if any, is not significant. See
further discussion in certain Business Risks - "International Operations and
Risks" within Item 1. Business.
-17-
<PAGE>
The Company has not paid any cash dividends on the Company's common stock
and does not anticipate paying dividends on the Company's common stock at any
time in the foreseeable future. Furthermore, the Facility prohibits the payment
of dividends without the consent of the participating banks.
RESULTS OF OPERATIONS
Effective December 31, 1994, the Company changed it's fiscal year end from
March 31 to December 31 to enhance the comparability of the Company's results of
operations with other drilling companies. The following tables highlight rig
days worked, revenues and operating expenses, for the Company's domestic and
foreign operations for the years ended December 31, 1996 and 1995 and the twelve
months ended December 31, 1994 (unaudited).
FOR THE YEAR ENDED DECEMBER 31, 1996
DOMESTIC FOREIGN
OPERATIONS OPERATIONS TOTAL
($ in thousands, except average revenue per day)
Rig days worked 7,050 3,694 10,744
Average revenue per day $ 7,446 $ 7,924 $ 7,610
Drilling revenue $ 52,495 $ 29,272 $ 81,767
Operating expenses(1) 49,431 30,957 80,388
---------- ---------- ----------
Gross profit (loss) $ 3,064 $ (1,685) $ 1,379
========= ========== =========
FOR THE YEAR ENDED DECEMBER 31, 1995
DOMESTIC FOREIGN
OPERATIONS OPERATIONS TOTAL
Rig days worked 6,289 5,405 11,694
Average revenue per day $ 7,123 $ 8,455 $ 7,739
Drilling revenue $ 44,797 $ 45,698 $ 90,495
Export Sales - 4,214 4,214
Operating expenses(1) 40,867 48,277 89,144
Export sales expenses - 4,681 4,681
-------- --------- ---------
Gross profit (loss) $ 3,930 $ (3,046) $ 884
========= ========== ========
FOR THE TWELVE MONTH PERIOD ENDED DECEMBER 31, 1994
DOMESTIC FOREIGN
OPERATIONS OPERATIONS TOTAL
Rig days worked 6,246 1,209 7,455
Average revenue per day $ 7,930 $ 11,566 $ 8,520
Drilling revenue $ 49,530 $ 13,983 $ 63,513
Export Sales - 1,880 1,880
Operating expense(1) 47,722 13,204 60,926
Export Sales expenses - 2,147 2,147
-------- --------- ---------
Gross profit $ 1,808 $ 512 $ 2,320
========= ======== =========
- ---------------
(1)Operating Expense exclude expenses for depreciation and amortization and
general and administrative.
-18-
<PAGE>
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1996 AND 1995
Contract drilling revenues decreased approximately $12.9 million to $81.8
million for the year ended December 31, 1996 compared to $94.7 million for the
year ended December 31, 1995. This decrease was primarily due to a decrease in
revenue from foreign operations of $20.6 million where rig utilization decreased
by 1,711 days. During 1996 operations were curtailed in the Mexico and Argentina
markets due to a decline in revenue per day and low rig utilization. Revenue
generated in the Mexico and Argentina 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. Revenue generated in Venezuela increased
slightly to $18.0 million for the year ended December 31, 1996 compared to $17.1
million for the year ended December 31, 1995. The increase is due entirely to
increases in day rates received as the number of rig days worked actually
decreased by 360 days. The remainder of the decrease in revenue from foreign
operations is 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 revenue from domestic operations
to $52.5 million for the year ended December 31, 1996 compared to $44.8 million
for the year ended December 31, 1995. Domestic rig utilization improved by 7% in
1996 and average revenue per day increased by 5% due to an overall improvement
in the domestic contract drilling market.
Drilling expenses decreased by $13.4 million to $80.4 million for the year
ended December 31, 1996 compared to $93.8 million for the year ended December
31, 1995. The decrease is due to a decrease in foreign drilling expenses of
$22.0 million partially offset by an increase in drilling expenses from domestic
operations of $8.5 million. Drilling expenses from Mexico and Argentina
decreased by $16.0 million to $15.3 million for the year ended December 31,
1996, compared to $31.3 million for the year ended December 31, 1996. This
decrease is due to the lower utilization and ultimate withdrawal from those
markets. Drilling expenses for Mexico and Argentina included $1 million in
mobilization cost 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 compared to $17.0 million for the
year ended December 31, 1995. Also contributing to the decrease in operating
expenses from foreign operations is $4.7 million in cost related to
non-recurring export sales for the year ended December 31, 1995. Drilling
expenses from domestic operations increased $8.5 million to $49.4 million for
the year ended December 31, 1996 compared to $40.9 million for the year ended
December 31, 1995. This increase is primarily due to increased utilization but
is also partially due to increasing direct labor costs.
Depreciation expense decreased by less than $200,000 for the year ended
December 31, 1996 compared to 1995. The decrease in depreciation expense is
primarily attributed to the decrease in depreciable asset base resulting from
the $5.3 million impairment provision recorded in the fourth quarter of 1995.
While the RTO/LRAC merger transactions increased the Company's asset base, the
rigs will not be depreciated until they are placed in service. Only one of the
merger rigs was placed in service late in 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 dollars in cost to exit the Argentina and Mexico markets and
$.4 million of other non-recurring charges. The employment severance cost
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 stock options to purchase Company common stock. As
a result of the Company's desire to redeploy assets to more productive markets
the Company had decided to withdraw from both the Argentina and Mexico markets.
As a result the Company has recorded estimated exit costs of $1.3 million for
Mexico which primarily consists of the forfeiture of a performance bond and
other costs to be incurred to close the office and exit cost of $.8 million for
Argentina which primarily consist of costs expected to be incurred during the
period necessary to exit the market and close the office. In addition, the
Company has tentatively 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 Argentina drilling rigs will be mobilized out of Argentina to the
United States or possibly Venezuela where they will be refurbished and returned
to service. Mobilization costs will be expensed as incurred in 1997.
General and Administrative Expenses increased by $.7 million to $4.3
million for the year ended December 31, 1996 due to increased payroll cost of
new management members and increased staff size, legal fees due to the
resolution of the Charleston Industries lawsuit 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.
-19-
<PAGE>
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1995 TO TWELVE MONTHS ENDED
DECEMBER 31, 1994
Consolidated revenues increased 44.8% to $94.7 million for the fiscal year
ended December 31, 1995 compared to $65.4 million for the twelve months ended
December 31, 1994. This increase was primarily due to the expansion in South
America, Mexico and Central America. Revenues from the Company's foreign
operations increased by $34.0 million to $49.9 million for the year ended
December 31, 1995 compared to $15.9 million for the twelve months ended December
31, 1994. This increase is due to an increase in rig days from 1,209 during 1994
to 5,405 during 1995, which is partially offset by a decrease in average revenue
per day from $11,566 to $8,455. The increase in rig days is primarily due to the
inclusion of Venezuelan operations for a full twelve months in 1995 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 Argentina market
and three rigs to the Mexico market also contributed to the increase in rig
days. 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 compared to $49.5 million for the twelve months
ended December 31, 1994. This decrease was due entirely to a decrease in revenue
per day of $807 per day from $7,930 during 1994 compared to $7,123 during 1995.
Consolidated operating expenses increased 48.8% to $93.8 million for the
year ended December 31, 1995 compared to $63.1 million for the twelve months
ended December 31, 1994. Operating expenses for the Company's foreign operations
increased $37.6 million for the year ended December 31, 1995 compared to the
1994 twelve month period as a result of the expansion of the Argentina drilling
rig fleet and acquisition of the Venezuela operating company discussed above,
and also due to start-up costs on the four rigs added to Argentina and higher
than expected repairs, maintenance and rig move costs experienced on all
Argentina rigs during 1995. 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. U.S. 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 cost from domestic
operations is 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 in 1994 to a greater percentage of day work 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 Long-Lived Assets to Be Disposed Of,"
effective for years beginning after December 15, 1995. As the FASB encourages
earlier application, the Company adopted the provisions of SFAS No. 121 during
the fourth quarter, 1995. This new accounting standard requires certain assets
to be reviewed for impairment whenever events or circumstances indicate the
carrying amount may not be recoverable. The Company has provided a non-cash
impairment provision of $5.3 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 sale data and
management estimates.
Depreciation and amortization increased 54.8% to $4.8 million for the year
ended December 31, 1995 compared to $3.1 million for the twelve months ended
December 31, 1994. This increase was due to the acquisition of drilling
equipment for foreign operations.
General and administrative expenses increased to $2.9 million for the year
ended December 31, 1995 compared to $2.4 million for the twelve months ended
December 31, 1994, primarily due to the expanded scope of foreign operations.
Gain from foreign currency of $888,000 for the year ended December 31,
1995 is the result of currency exchange transactions derived from the Venezuelan
operations.
Interest expense increased to $1.4 million for the year ended December 31,
1995 compared to $425,000 for the twelve months ended December 31, 1994. The
increase was due to an increase in borrowings for expansion in foreign markets.
The net loss from discontinued operations was $772,000 for the year ended
December 31, 1995 as compared to net income of $55,000 for the twelve months
ended December 31, 1994. The net loss in 1995 includes a $768,000 non-cash
provision resulting from the disposal of the Company's oil and gas properties in
August 1995.
-20-
<PAGE>
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.
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
other than statements of historical facts included in this report including,
without limitation, statements regarding the Company's business strategy, plans,
objectives and beliefs of management for future operations, and the anticipated
closing and methods of financing the merger with Grey Wolf Drilling Company 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. Important
factors that could cause actual results to differ materially from the Company's
expectations ("Cautionary Statements") are discussed in Item 1 "Business" and
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations".
ACCOUNTING MATTERS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", which is effective for financial statements for fiscal years
beginning after December 15, 1995. The statements defines a fair value based
method of accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to continue
to measure compensation cost for those plans using the intrinsic value based
method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees". The statement requires certain financial statement
disclosures about stock-based employee compensation arrangements regardless of
the method used to account for them. The Company has decided not to adopt this
new fair value- based method of accounting for its stock-based incentive plans,
however, the Company will comply with all disclosure requirements.
-21-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report................................................23
Independent Auditors' Report................................................24
Consolidated Balance Sheets as of December 31, 1996 and 1995................25
Consolidated Statements of Operations for the Years
Ended December 31, 1996 and 1995, and the Nine Months Ended
December 31, 1994 ....................................................26
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1996 and 1995, and the Nine Months Ended
December 31, 1994.....................................................27
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996 and 1995, and the Nine Months Ended
December 31, 1994.....................................................28
Notes to Consolidated Financial Statements..................................30
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts......................41
Schedules other than those listed above are omitted because they are either not
applicable or not required or the information required is included in the
consolidated financial statements or notes thereto.
-22-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
of DI Industries, Inc.:
We have audited the accompanying 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. In connection with our audit of the consolidated
financial statements, we have also audited the financial statement schedule
for the year ended December 31, 1996. These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DI
Industries, Inc. and Subsidiaries as of December 31, 1996, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects the information set forth therein.
KPMG Peat Marwick LLP
Houston, Texas
March 14, 1997
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<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
of DI Industries, Inc.:
We have audited the accompanying consolidated balance sheet of DI
Industries, Inc. and its Subsidiaries (the "Company") as of December 31, 1995
and the related consolidated statements of operations, cash flows and
shareholders' equity for the year ended December 31, 1995 and the nine months
ended December 31, 1994. Our audits also included the financial statement
schedule listed in the Index. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1995 and the results of its operations and its cash flows for the year then
ended and the nine months ended December 31, 1994 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Deloitte & Touche LLP
Houston, Texas
March 28, 1996
-24-
<PAGE>
DI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands,except share data)
DECEMBER 31,
1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 6,162 $ 1,859
Restricted cash - insurance deposits 1,000 1,612
Accounts receivable, net of allowance
of $1,333 and $1,951, respectively 15,866 19,423
Rig inventory and supplies 936 2,498
Assets held for sale 557 2,398
Prepaids and other current assets 3,690 3,806
--------- ---------
Total current assets 28,211 31,596
---------- ----------
Property and equipment:
Land, buildings and improvements 4,312 3,523
Drilling and well service equipment 95,059 39,039
Furniture and fixtures 1,088 1,136
Less: accumulated depreciation and amortization (11,983) (17,788)
----------- -----------
Net property and equipment 88,476 25,910
---------- ----------
Other noncurrent assets 1,132 277
--------- -------
$ 117,819 $ 57,783
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 613 $ 1,315
Accounts payable - trade 11,826 12,529
Accrued workers' compensation 1,502 3,357
Payroll and related employee costs 3,340 3,172
Customer advances 2,466 116
Foreign taxes payables 845 -
Other accrued liabilities 1,424 3,604
--------- ---------
Total current liabilities 22,016 24,093
---------- ----------
Long-term debt net of current maturities 26,846 11,146
Other long-term liabilities and minority interest 3,547 1,950
Series A preferred stock - mandatory redeemable 764 900
Commitments and contingent liabilities - -
Shareholders' equity:
Series B Preferred stock, $1 par value; 10,000 shares
authorized, 4,000 shares subscribed - 4,000
Common stock, $.10 par value; 300,000,000 and 75,000,000
shares authorized; 125,043,234 and 38,669,378 issued
and outstanding, respectively 12,504 3,867
Additional paid-in capital 99,301 46,458
Cumulative translation adjustments (404) -
Accumulated deficit (46,755) (34,631)
----------- -----------
Total shareholders' equity 64,646 19,694
---------- ----------
$ 117,819 $ 57,783
=========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-25-
<PAGE>
DI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
Nine
Year Ended Year Ended Months Ended
December 31, December 31, December 31,
1996 1995 1994
------- -------- ------
Revenues:
Contract drilling $ 81,767 $ 94,709 $ 50,987
Costs and expenses:
Drilling operations 80,388 93,825 48,988
Depreciation and amortization 4,689 4,832 2,377
General and administrative 4,274 3,555 2,074
Provision for asset impairment - 5,290 -
Non-recurring charges 6,131 - -
--------- -------- ------
Total costs and expenses 95,482 107,502 53,439
---------- ------------- ------
Operating loss (13,715) (12,793) (2,452)
Other income (expense):
Interest income 505 292 353
Gain on sale of assets 3,078 466 277
Interest expense (1,220) (1,472) (332)
Minority interest 475 (56) 17
Foreign currency gains - 888 -
Other, net - - (123)
-------- -------- ---------
Other income (expense), net 2,838 118 192
--------- -------- ---------
Loss from continuing operations (10,877) (12,675) (2,260)
Discontinued operations:
Income (loss) from oil and gas
operations - (4) 51
Loss from sale of oil and gas
properties - (768) -
-------- -------- -------
Income (loss) from discontinued
operations - (772) 51
-------- -------- ---------
Loss before income taxes (10,877) (13,447) (2,209)
Income taxes 845 - -
-------- --------- ------
Net loss (11,722) (13,447) (2,209)
Series B preferred stock subscription
dividend requirement (402) - -
-------- -------- ------
Net loss applicable to common
stock $ (12,124) $ (13,447) $ (2,209)
=========== =========== ==========
Loss per common share from
continuing operations $ (.18) $ (.33) $ (.06)
Loss per common share from
discontinued operations - (.02) -
Net loss per common share $ (.18) $ (.35) $ (.06)
Weighted average common and common
equivalent shares outstanding 67,495 38,669 38,641
========== ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-26-
<PAGE>
DI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands)
<TABLE>
<CAPTION>
Series B
Preferred Common
Stock Stock Additional Cumulative
$1 par $.10 par Paid-in Translation
VALUE VALUE CAPITAL DEFICIT ADJUSTMENTS TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1994 $ - $ 3,842 $ 46,283 $ (18,975) $ - $ 31,150
Issuance of Common Stock - 25 175 - - 200
Net loss - - - (2,209) - (2,209)
------ ------- ------ ---------- ------ ---------
Balance, December 31, 1994 - 3,867 46,458 (21,184) - 29,141
Series B Preferred Stock
Subscribed 4,000 - - - - 4,000
Net loss - - - (13,447) - (13,447)
------ ------- ------ ----------- ----- ----------
Balance, December 31, 1995 4,000 3,867 46,458 (34,631) - 19,694
Issuance of shares in Merger
Transactions - 7,885 41,673 - - 49,558
Issuance of shares in Mesa
transaction - 550 6,985 - - 7,535
Issuance of stock in
Wexford transaction - 175 3,945 - - 4,120
Exercise of stock options - 27 253 - - 280
Redemption of Series A
Preferred Stock - - (13) - - (13)
Series B Preferred Stock
dividend requirement 402 - - (402) - -
Recision of Series B
Preferred Stock
Subscription (4,402) - - - - (4,402)
Unrealized translation loss - - - - (404) (404)
Net loss - - - (11,722) - (11,722)
------ ------- ------ ----------- ----- ----------
Balance, December 31, 1996 $ - $ 12,504 $ 99,301 $(46,755) $(404) $ 64,646
====== ========= ========= ====================== =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-27-
<PAGE>
DI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Nine Months
Year Ended Year Ended Ended
December 31, December 31, December 31,
1996 1995 1994
-------- -------- ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($11,722) ($13,447) ($2,209)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 4,689 4,832 2,377
Provision for asset impairment - 5,290 -
Non-recurring charges 2,497 - -
Gain on sale of assets (3,078) (466) (277)
Discontinued operations - Loss from
sale of oil and gas properties - 768 -
Provision for doubtful accounts 302 291 122
(Increase) Decrease in restricted
cash 612 (1,612) -
(Increase) Decrease in accounts and
notes receivable 3,255 (3,558) (5,334)
(Increase) Decrease in inventory 1,190 1,152 (1,214)
(Increase) Decrease in assets held
for sale 1,841 118 -
(Increase) Decrease in other current
assets 116 274 (2,222)
Increase (Decrease) in accounts payable (703) 5,289 3,244
Increase (Decrease) in accrued workers'
compensation (1,855) 394 (800)
Increase (Decrease) in customer
advances 2,350 (1,233) 985
Increase (Decrease) in other current
liabilities (1,167) 4,288 503
Increase (Decrease) in minority
interest 1,047 (131) (17)
Increase (Decrease) in other (813) (179) 1,799
(Increase) Decrease in discontinued
operations - 419 1,134
-------- -------- -------
Cash provided by (used in) operating
activities (1,439) 2,489 (1,909)
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions (38,436) (5,657) (9,250)
Proceeds from sales of equipment 4,917 737 323
Proceeds from sale of discontinued
operations - 4,200 -
-------- -------- -------
Cash used in investing activities (33,519) (720) (8,927)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 31,542 2,066 18,703
Repayments of long-term debt (16,544) (5,490) (8,576)
Repayments of long-term debt-
discontinued operations - (2,114) (321)
Proceeds from issuance of common
stock 28,678 - -
Proceeds from exercise of stock
options 280 - -
Redemption of Series A Preferred Stock (149) - -
Sale (recession) of preferred stock
subscriptions (4,402) 4,000 -
-------- -------- -------
Cash provided by (used in) financing
activities 39,405 (1,538) 9,806
-------- -------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (144) - -
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 4,303 231 (1,030)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 1,859 1,628 2,658
-------- -------- -------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 6,162 $ 1,859 $ 1,628
========== ========== =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-28-
<PAGE>
DI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Nine Months
Year Ended Year Ended Ended
December 31, December 31, December 31,
1996 1995 1994
--------- --------- ------
SUPPLEMENTAL CASH FLOW DISCLOSURE
CASH PAID FOR INTEREST: $ 1,220 $ 1,472 $ 332
========== ========== ========
CASH PAID FOR TAXES: - - -
========= ========= ======
NON CASH TRANSACTIONS:
Issuance of common stock for
Oliver/Mullen rigs
Change in property and equipment
additions 25,000 - -
Change in issuance of common
stock 25,000 - -
Issuance of common stock for Mesa rigs
Change in property and equipment
additions 7,783 - -
Change in issuance of common
stock 7,535 - -
Change in deferred tax liability 248 - -
An-Son rig acquisition
Change in property and equipment
additions - - 3,800
Change in acquisition note payable - - 1,900
Change in Series A Preferred Stock - - 1,900
McRae Energy rig acquisition
Change in property and equipment
additions - - 1,300
Change in notes payable - - 1,300
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-29-
<PAGE>
DI INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION. The consolidated
financial statements include the accounts of DI Industries, Inc. and its
majority-owned subsidiaries ("the Company" or "DI"). All significant
intercompany accounts and transactions are eliminated in consolidation.
Accumulated earnings of the minority interest owners are shown as a separate
item in the consolidated financial statements. Prior to June 1994, American
Premier Underwriters, Inc. ("American Premier"), owned 20,690,105 shares
(approximately 54%) of common stock of DI Industries, Inc. In June 1994, Norex
Drilling Ltd. ("Norex Drilling"), a wholly-owned subsidiary of Norex Industries,
Inc. ("Norex Industries"), completed the purchase of all shares of the Company's
common stock owned by American Premier. Shortly thereafter and in accordance
with regulatory filings made at the time of the purchase transaction, Norex
Drilling reduced its ownership to 18,730,105 shares, or less than 50%, of the
outstanding shares of the Company's common stock. As a result of the merger
transactions, effected in 1996 (discussed further in Footnote 2) Norex
Drilling's shares now represent 13.6% of the outstanding ownership of the
Company's common stock and Somerset Drilling Associates owns 29,962,223 shares
or approximately 21.8% of the outstanding ownership of the Company's common
stock.
Effective December 31, 1994, the Company changed its fiscal year end from
March 31 to December 31 to enhance the comparability of the Company's results of
operations with other drilling companies. Accordingly, the accompanying
financial statements include the results of the Company's operations for the
years ended December 31, 1996 and 1995, and the nine months ended December 31,
1994.
INVENTORY. Inventory consists primarily of drilling and support equipment
and is stated at the lower of specifically identified cost or market.
ASSETS HELD FOR SALE. Assets held for sale are primarily comprised of
drilling rigs and equipment and is stated at the Company's net book value.
Management believes the carrying value is less than net realizable value on the
basis of purchase offers received in 1995 and 1996 and recent appraisals.
PROPERTY AND EQUIPMENT. Property and equipment is stated at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets between three and twelve years. The Company's
producing oil and gas properties were sold on August 9, 1995. Such properties
were recorded using the full-cost method of accounting. Under this method, all
costs incurred in connection with the exploration for and development of oil and
gas were capitalized. Depreciation, depletion and amortization of oil and gas
properties was computed on the basis of physical units, with oil and gas
converted to a common unit of measure based on the approximate relative energy
content. Unamortized costs were compared to the present value of estimated
future net revenues and any excess was charged to expense during the period in
which the excess occurred.
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
effective for years beginning after December 15, 1995. As the FASB encouraged
earlier application, the Company adopted the provisions of SFAS No. 121 during
the fourth quarter of 1995. This accounting standard requires certain assets be
reviewed for impairment whenever events or circumstances indicate the carrying
amount may not be recoverable. During 1995, the Company provided a 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 sale data and management estimates.
REVENUE RECOGNITION. Revenue from turnkey drilling contracts is recognized
using the percentage-of-completion method based upon costs incurred to date and
estimated total contract costs. Revenue from daywork, footage and hourly
drilling contracts is recognized based upon the provisions of the contract.
Provision is made currently for anticipated losses, if any, on uncompleted
contracts.
FOREIGN CURRENCY TRANSLATION. Assets and liabilities of foreign
subsidiaries have been translated into United States dollars at the applicable
rate of exchange in effect at the end of the period reported. Revenues and
expenses have been
-30-
<PAGE>
DI INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
translated at the applicable weighted average rates of exchange in effect during
the period reported. Translation adjustments are reflected as a separate
component of stockholders' equity. Any transaction gains and losses are included
in net income. During 1996, the Company recorded an unrealized translation loss
of $404,000 as a reduction of stockholders' equity.
LOSS PER SHARE. Loss per share of common stock is based upon the weighted
average number of shares of common stock outstanding. The Company's outstanding
stock options and warrants are considered common stock equivalents but are not
included in the computation since their inclusion would be either insignificant
or antidilutive during the periods presented in the accompanying financial
statements.
INCOME TAXES. The Company accounts for income taxes based upon Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109") which requires recognition of deferred income tax liabilities and assets
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. Under this method, deferred
income tax liabilities and assets are determined based on the temporary
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities and available tax credit carryforwards.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amount of the Company's
cash and short-term investments approximates fair value because of the short
maturity of those instruments. The carrying amount of the Company's long-term
debt approximates fair value as the interest is indexed to the prime rate or
LIBOR.
CASH FLOW INFORMATION. Cash flow statements are prepared using the
indirect method. The Company considers all unrestricted highly liquid
investments with a maturity of three months or less at the time of purchase to
be cash equivalents.
RESTRICTED CASH. Restricted cash consists of investments in interest
bearing certificates of deposit totaling $1.0 million and $1.6 million at
December 31, 1996 and 1995, respectively as collateral for a letter of credit
securing insurance deposits. The carrying value of the investments approximates
the current market value.
USE OF ESTIMATES. Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(2) SIGNIFICANT PROPERTY TRANSACTIONS
Effective September 1, 1994 as part of the Company's expansion into the
international markets, the Company purchased the Venezuelan drilling operations
of An-Son Drilling Company of Colombia S.A. ("An-Son"). This acquisition
included two oil and gas drilling rigs, two workover rigs, certain other oil
field equipment, operating contracts for each of the rigs and a labor contract
to operate one drilling rig. The purchase price for this transaction was
$4,100,000 consisting of $300,000 in cash, an acquisition note payable of
$1,900,000, of which $1,700,000 was paid during 1995, and the remainder by
issuance during 1995 of the Company's Series A redeemable preferred stock (the
"Series A Preferred") valued at $1,900,000. Pursuant to the Acquisition
Agreement, the Company conducted a post-closing audit of the acquired companies
in 1995 and settled claims for purchase price credit from An-Son in March, 1996
with the Company receiving credits of $1,213,000. During March 1996, 100,000
shares of Series A Preferred, totaling $1,000,000, were returned to the Company
in settlement of asserted claims. At December 31, 1995, $200,000 of the
Acquisition Note that remained unpaid which was offset against the settlement
with the remaining credit of $1,013,000 recorded as reductions in the
appropriate accounts in the accompanying financial statements.
In September 1994, the Company purchased three drilling rigs from McRae
Energy Corporation for a total purchase price of $1,500,000. The Company paid a
cash down payment of $200,000 with the remaining $1,300,000 to be paid from cash
flow as defined in the purchase agreement. The three rigs were refurbished by
the Company in 1994 with two of the drilling rigs being added to the Company's
drilling fleet in Argentina and one drilling rig being added to the Company's
drilling fleet in Venezuela.
On May 7, 1996 the Company entered into two separate definitive merger
agreements (the "Mergers") to effect a $25 million equity infusion and the
acquisition of deep drilling equipment. These Mergers were closed on August 29,
1996.
-31-
<PAGE>
DI INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the first agreement, R.T. Oliver, Inc. ("RTO") and Land Rig
Acquisition Corporation ("LRAC") merged with a new subsidiary of the Company
with the capital stock of RTO and LRAC being exchanged for 39,423,978 shares of
the Company's common stock. In addition, warrants were issued to acquire up to
1,720,000 additional shares of DI common stock, the exercise of which is
contingent upon the occurrence of certain events. As result of certain events
which occurred prior to year end, at December 31, 1996, 612,000 warrants
remained outstanding, and the remainder have been canceled. These Mergers
resulted in the acquisition of 18 inactive, deep capacity land drilling rigs
which included five 3,000 horsepower and nine 2,000 horsepower land rigs which
are rated for depths of 25,000 feet or greater. The Company believes that these
rigs can be brought up to operating condition within a reasonable time on an
economic basis and that this group of rigs represents a significant
concentration of the relatively small number of such deep drilling land rigs
currently available in the market. The Company placed one of these rigs in
operation during 1996.
Under the second agreement, a subsidiary of Somerset Drilling Associates,
L.L.C. ("Somerset"), a privately-held investment limited liability company, was
merged into the Company. The stock of the subsidiary was exchanged for
39,423,978 shares of DI common stock and warrants to acquire up to 1,720,000
shares of DI common stock, the exercise of which is contingent upon the
occurrence of certain events. As a result of certain events which occurred prior
to year end, at December 31, 1996, 612,000 warrants remained outstanding, and
the remainder were canceled. This merger transaction resulted in a $25 million
equity infusion into the Company.
A definitive proxy statement was mailed to shareholders of record as of
July 15, 1996, and the Mergers were approved by the shareholders at a meeting on
August 27, 1996. These Mergers resulted in an ownership change in the Company as
defined by Section 382 of the Internal Revenue Code which limits the ultimate
utilization of the Company's net operating loss carryforward (see footnote 3).
As part of the Merger agreements, the 1995 subscription by Norex Drilling
for 4,000 shares of Series B Preferred Stock and related Series B Warrants was
rescinded. The $4.0 million subscription plus accrued dividends were repaid to
Norex Drilling by the Company with the proceeds from a term loan that was made
by Norex Drilling to the Company. The Norex Drilling $4.0 million term loan was
paid in full on December 30, 1996 from the proceeds of a private placement of
the Company's common stock (see below). Interest was at 12% and was payable on
the last business day of each calendar quarter.
On June 24, 1996, the Company closed a transaction whereby it sold all of
the operational assets of Western Oil Well Service Co. ("Western"), a
wholly-owned subsidiary of the Company, for $3.95 million in cash. Western
provided oil and gas well workover services principally in Montana, Utah and
North Dakota. Pursuant to the sale, the buyer assumed all of Western's existing
leases, primarily for vehicles, which totaled $251,000 at closing. The Company
recorded a gain of $2.8 million in the second quarter of 1996 as a result of
this sale.
On October 3, 1996 the Company acquired all of the South Texas operating
assets of Mesa Drilling, Inc. ("Mesa") in exchange for 5,500,000 shares of the
Company's common stock. The assets acquired consist of six diesel electric SCR
drilling rigs, three of which are currently operating in South Texas. The other
three rigs are currently stacked.
On December 31, 1996, the Company completed the acquisition of all the
South Texas operating assets of Diamond M Onshore, Inc., a wholly owned
subsidiary of Diamond Offshore Drilling, Inc. The assets were acquired for
approximately $26 million in cash and consist of ten land drilling rigs, all of
which are currently operating, 19 hauling trucks, a yard facility in Alice,
Texas and various other equipment and drill pipe. DI hired the majority of the
personnel operating the assets.
Also on December 31, 1996, the Company closed a loan facility (the
"Facility") with Bankers Trust Company, ING (US) Capital Corporation and
NordlandsBanken AS which provided the funds to acquire the assets of Diamond M
Onshore, Inc. The Facility provides for an initial $35 million revolving line of
credit which reduces by $5 million each year until the December 31, 1999
maturity date. The Facility is secured by substantially all of the Company's
assets and calls for quarterly interest payments on the outstanding balance at
either LIBOR plus 3% or prime plus 2%. The Facility contains customary
affirmative and negative covenants.
In connection with closing the Facility, DI also completed a private
placement of 1,750,000 shares of DI common stock for approximately $4,120,000 to
four funds managed by Wexford Management LLC. The proceeds generated from this
private placement were utilized to repay a $4,000,000 Norex Drilling term note.
DI also agreed to issue more shares to the
-32-
<PAGE>
DI INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
extent the Wexford funds hold value less than $4,120,000 on the one-year
anniversary date of the issuance. Immediate shelf registration rights were also
granted by DI in connection with the share issuance. These shares were
subsequently registered.
Each of the Company's acquisitions have been accounted for using purchase
accounting. As such all revenues and expenses have been recorded by the Company
beginning at the date of acquisition.
(3) INCOME TAXES
The Company and its domestic subsidiaries file a consolidated U.S. federal
income tax return. The Company's foreign owned subsidiaries file tax returns in
the country where they are domiciled. The Company records current income taxes
based upon its estimated tax liability in the United States and foreign
countries for the year. In 1996, the Company recorded $845,000 of current tax
expense based its estimate of taxes payable in Venezuela.
The Company follows Statement of Financial Accounting Standard No. 109
("SFAS No. 109") which requires the balance sheet approach of income tax
accounting whereby deferred income taxes are provided at the balance sheet date
for the (a) differences existing in the tax basis of assets and liabilities and
their financial statement carrying amounts plus (b) operating loss and tax
credit carryforwards.
At December 31, 1996, the Company had U.S. net operating loss ("NOL")
carryforwards of approximately $23.0 million and investment tax credit (ITC)
carryforwards of approximately $2.4 million which expire at various times
through 2010 and 2000, respectively. The NOL and ITC carryforwards are subject
to annual limitations because of the changes in ownership of the Company in
1989, 1994 and 1996.
For financial accounting purposes, approximately $21.0 million of the NOL
carryforwards was utilized to offset the book versus tax basis differential in
the recording of the assets acquired in the Mergers and the Mesa acquisition.
Deferred tax liabilities of approximately $5.5 million exist at December
31, 1996 and are comprised of temporary differences between federal income tax
and financial accounting practices for the Company's property and equipment.
Deferred tax benefits of $3.7 million exist at December 31, 1996, attributable
to costs that were expended for financial reporting purposes that will be
deducted in future years for income tax purposes. These items are comprised of
workmans compensation and bad debt reserves as well as the current year net
operating loss. These items are augmented by the $2.4 million of investment tax
credit carryforwards. A net deferred tax benefit of $.6 million was not
recognized in 1996 as a valuation allowance was provided against it, as the
recognition criteria set forth in SFAS No. 109 for a deferred tax asset, had not
been met. At December 31, 1995, deferred tax assets and deferred tax liabilities
were $14.6 million and $5.3 million respectively and were primarily attributable
to the same items noted above.
In the Company's Venezuelan subsidiary, no temporary differences exist as
of December 31, 1996. In the Company's other foreign subsidiaries, the Company's
net operating loss carryforwards and other timing differences will not be
recoverable since the Company is exiting these markets.
The following summarizes the differences between the statutory tax rates
applicable in each year and the Company's effective tax rate (amounts in
thousands):
Nine
Year Ended Year Ended Months Ended
December 31, December 31, December 31,
1996 1995 1994
--------- --------- -------
Tax at statutory rate $ (3,986) $ (4,572) $ (751)
Increase (decrease) in taxes
resulting from:
Change in valuation allowance 1,169 4,572 751
Loss of foreign deductions 3,662 - -
---------- --------- -------
Provision for income taxes $ 845 $ - $ -
========= ========= =======
-33-
<PAGE>
DI INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) LONG-TERM DEBT
Long-Term debt consists of the following (amounts in thousands):
DECEMBER 31,
1996 1995
$35,000 reducing revolving line of credit between
the Company and Bankers Trust Company, ING(US)
Capital Corporation and NordlandBanken AS, secured
by substantially all of the Company's assets;
bearing interest at either LIBOR plus 3% or prime
plus 2% due quarterly $ 25,000 $ -
$10,000 term loan agreement between the Company and
NordlandsBanken AS, secured by most of the
Company's U.S. domestic oil and gas drilling
equipment; bearing interest at prime plus 21/8%
(fixed at 8% through June 12, 1996), with 36 equal
monthly principal installments beginning June 12,
1995 (Amended October 1, 1995, bearing interest
at LIBOR plus 21/8% with 36 equal monthly
installments beginning January 1997). The Company
had the option to pay interest quarterly and/or
semi-annually. - 9,444
Note to McRae Energy Corporation, payable from
available cash flow, as defined, matures
September 1998 1,300 1,300
$2,500 revolving line of credit, which converted to
a term loan in 1995, with a bank, secured by
the Company's accounts receivable, bearing
interest at the bank's prime rate plus 1%
(9.75% at December 31, 1995) - 575
Capital leases, secured by transportation and other
equipment, bearing interest at 10% to 14% 858 733
Insurance premium financed over 12 months with
certain insurance agencies due in equal monthly
installments 264 270
Promissory note payable secured by trust deed to
certain land and building, bearing interest at
4%, due in monthly installments - 47
Promissory note payable secured by trust deed to
certain land and building, bearing interest at
9.75%, due in equal monthly installments through
September 1, 1997 37 92
--------- --------
27,459 12,461
Less current maturities 613 1,315
--------- --------
Long-term debt $ 26,846 $ 11,146
========= =========
DISCONTINUED OPERATIONS:
$3,000 term note with a bank, secured by all the
Company's oil and gas producing properties,
bearing interest at the bank's prime rate plus
1.25% (10% at December 31, 1995) payable in
monthly installments equal to 75% of the net
proceeds from production subject to minimum
semi-annual payments through March 10, 1997.
This loan was paid in full during 1995 $ - $ 2,114
-------- ---------
-34-
<PAGE>
DI INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 31, 1996, the Company closed a $35 million reducing revolving
line of credit with Bankers Trust Company, ING (US) Capital Corporation and
NordlandsBanken AS. The Facility reduces by $5.0 million each year until the
December 31, 1999 maturity date. The facility is secured by substantially all
the Company's assets and calls for quarterly interest payments on the
outstanding balance at either LIBOR plus 3% or prime plus 2% (8.625% at December
31, 1996). The Facility also contains customary affirmative and negative
covenants with which the Company was in compliance.
In connection with entering into the new Facility, the $10.0 million term
loan agreement between the Company and NordlandsBanken was paid in full out of
existing working capital on December 31, 1996.
On August 28, 1996, the Company entered into a $4 million term loan with
Norex Drilling. The term loan was due on August 29, 1997 and bore interest at
12%. The loan was paid in full from the proceeds of a private placement of the
Company's common stock on December 31, 1996.
The revolving $2,500,000 bank line of credit was converted to a term loan
in 1995 with the balance of $575,000 at December 31, 1995 being paid in monthly
installments through June 1996. The weighted average outstanding balance for the
year ended December 31, 1995 was $867,000 bearing weighted average interest of
10%.
During 1995, the Company issued 190,000 shares, out of 200,000 authorized,
of Series A Preferred stock valued at $1,900,000. The Series A Preferred is
redeemable in cash at a redemption price payable from available cumulative
Venezuelan positive net cash flows, as defined, commencing the first fiscal
quarter following the original issuance date. The Company may redeem, at any
time, the Series A Preferred upon consent of the holders or upon written notice
commencing five years from the original issuance date. At the election of the
Company, dividends may be declared and payable in common stock equivalent to the
value of the dividends. Each Series A Preferred holder of record has no voting
right on any matters voted on by stockholders of the Company. As referred to in
Note 2, during March 1996, 100,000 shares of Series A Preferred, totaling
$1,000,000, were returned to the Company in settlement of asserted claims
against An-Son. At December 31, 1995, the balance of the Series A Preferred had
been adjusted to reflect this settlement. During 1996, the Company voluntarily
redeemed 13,500 shares of Series A Preferred leaving 76,500 shares outstanding
at December 31, 1996.
Annual maturities of the debt outstanding at December 31, 1996 are as
follows: 1997 - $613,000; 1998 - $1,583,000; 1999 - $25,202,000; 2000 - $60,000;
and 2001 - $1,000.
(5) CAPITAL STOCK AND STOCK OPTION PLANS
During the fourth quarter of 1995, Norex Drilling subscribed to and paid
$4,000,000 for a new Company issue of Series B Preferred Stock (the "Series B
Preferred"), to be issued subsequent to December 31, 1995. This subscription was
in the form of 4,000 shares (10,000 authorized) of Series B 15% Senior
Cumulative Redeemable Preferred, par value $1. This stock had annual dividends
of 15% per annum, payable through the issuance of additional preferred shares
for the first three years. On August 28, 1996 $4,000,000 subscription plus
accrued dividends was repaid to Norex Drilling by the Company with the proceeds
from a term loan that was made by Norex Drilling to the Company.
The Company's 1982 Stock Option and Long-Term Incentive Plan for Key
Employees (the "1982 Plan") reserves 2,500,000 shares of the Company's common
stock for issuance upon the exercise of options. At December 31, 1996 options to
purchase 1,871,800 shares of common stock were available for grant under the
1982 Plan. The Company's 1987 Stock Option Plan for Non-Employee Directors (the
"1987 Director Plan") reserves 250,000 shares of common stock for issuance upon
the exercise of options and provides for the automatic grant of options to
purchase shares of common stock to any non-employee who becomes a director of
the Company. At December 31, 1996, options under the 1987 Director Plan to
purchase 212,800 shares of common stock were available for grant until June 30,
1997. The Company's 1996 Employee Stock Option Plan (the "1996 Plan") reserves
7,000,000 shares of the Company's common stock for issuance upon the exercise of
options. At December 31, 1996 options under the 1996 Plan to purchase 5,205,000
shares of common stock were available for grant until July 29, 2006. The
exercise price of stock options under the 1982 Plan, the 1987 Director Plan and
the 1996 Plan approximates the fair market value of the stock at the time the
option is granted. The Company has 2,410,000 shares reserved for other Incentive
Stock Option Agreements between the Company and its' executive officers and
directors. Two million of the shares are reserved for the Company's President,
50,000 are reserved for the Company's Chief Financial Officer and the remaining
shares are reserved for non-employee directors. Options become exercisable in
varying increments over four- to
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<PAGE>
DI INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
five-year periods and the majority of the options expire on the tenth
anniversary of the inception of the plans. Stock option activity for all plans
was as follows (number of shares in thousands):
Number Option
OF SHARES PRICE RANGE
Outstanding March 31, 1994: 2,035 $ 0.88- $ 2.38
Granted 103 $ 0.88- $ 0.94
Exercised (2) $ 0.88
Canceled (148) $ 0.88- $ 1.63
Outstanding December 31, 1994: 1,988 $ 0.88- $ 2.38
Granted 253 $ 0.69- $ 0.88
Canceled (267) $ 0.94- $ 2.38
Outstanding December 31, 1995: 1,974 $ 0.69- $ 1.63
Granted 50 $ 0.69- $ 1.00
3,700 $ 1.13- $ 1.75
475 $ 2.56- $ 2.88
Exercised (232) $ 0.69- $ 1.00
(44) $ 1.25- $ 1.75
Canceled (1,282) $ 0.69- $ 1.00
(132) $ 1.25- $ 1.75
Outstanding December 31, 1996: 276 $ 0.69- $ 1.00
3,758 $ 1.13- $ 1.63
475 $ 2.56- $ 2.88
Exercisable at December 31,1996: 809 $ 0.69- $ 1.75
At December 31, 1996, the Company has three stock-based compensation
plans, which were described above. The Company applies APB Opinion 25 and
related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized. Had compensation cost for the Company's
three stock-based compensation plans been determined on the fair value at the
grant dates for awards under those plans consistent with the method of Statement
of Financial Accounting Standards No. 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below
(amounts in thousands, except per share amounts):
1996 1995
--------- ------
Net loss
As reported $ (12,124) $ (13,447)
Pro forma $ (13,723) $ (13,447)
Earnings per share
As reported $ (.18) $ (.35)
Pro forma $ (.20) $ (.35)
For purposes of determining compensation costs using the provisions of
SFAS #123, the fair value of option grants were determined using the
Black-Scholes option-valuation model. The key input variables used in valuing
the options were: risk-free interest rate based on the five year Treasury strips
of 7.8%; dividend yield of zero; stock price volatility of 60%; expected option
lives of five years.
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<PAGE>
DI INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) GEOGRAPHIC AREA INFORMATION
The following table sets forth the Company's operations based on the
geographic areas in which it operates (amounts in thousands).
Nine Months
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1996 1995 1994
-------- -------- ------
Revenues:
Domestic $ 52,495 $ 44,797 $ 40,515
Mexico 3,504 12,617 1,706
South America 25,768 37,295 8,766
---------- ---------- ---------
$ 81,767 $ 94,709 $ 50,987
========== ========== ==========
Loss from continuing operations:
Domestic $ (4,002) $ (4,093) $ (2,095)
Mexico (3,818) 238 (77)
South America (5,895) (8,938) (280)
---------- ---------- ---------
$ (13,715) $ (12,793) $ (2,452)
========== ========== ==========
Identifiable assets:
Domestic $ 103,608 $ 39,069 $ 47,524
Mexico 1,500 4,008 3,470
South America 12,711 14,706 11,866
---------- --------- ----------
$ 117,819 $ 57,783 $ 62,860
=========== ========== ==========
During the years ended December 31, 1996 and 1995 and the nine months
ended December 31, 1994, no customer accounted for more than 10% of the
Company's consolidated revenues.
(7) RELATED-PARTY TRANSACTIONS
Prior to June 2, 1994, certain of the Company's insurance coverage,
including workers' compensation and excess liability coverage, was arranged by
American Premier as part of a program which American Premier provided to its
subsidiaries. Subsequent to the sale of the Company's common shares by American
Premier, the Company obtained workers' compensation, excess liability coverage
and certain other insurance from other sources. The Company and American Premier
entered into an agreement pursuant to which the Company agreed to reimburse
American Premier for all amounts advanced by American Premier from time to time
on behalf of the Company in connection with American Premier's administration of
the Company's workers' compensation and certain other insurance programs for the
periods between July 20, 1989 and the closing of the common stock transaction.
The amount reimbursable to American Premier at December 31, 1995 relating to
this program was $1,900,000. All amounts outstanding under the program were paid
in full during 1996.
During the year ended March 31,1994, Thermal Drilling, Inc. ("Thermal"),
the minority interest owner of the Company's majority-owned subsidiary,
DI/Perfensa Inc. ("DI/Perfensa"), borrowed and repaid with interest certain sums
from DI/Perfensa. At December 31, 1996 and 1995, $60,000 was due to DI/Perfensa
from the President of Thermal.
As part of the Merger agreements, the 1995 subscription by Norex Drilling
for 4,000 shares of Series B preferred Stock and related Series B Warrants was
rescinded. The $4,000,000 subscription plus accrued dividends was repaid to
Norex Drilling by the Company with the proceeds from a term loan that was made
by Norex Drilling to the Company. Interest was at 12% and was payable on the
last business day of each calendar quarter. The note payable was paid in full
December 31,1996 using the proceeds from a private placement of the Company's
common stock.
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<PAGE>
DI INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 10, 1996, Norex Drilling advanced $1,000,000 to the Company
pursuant to a Promissory Note (the "Note") and Commercial Security Agreement.
The Note provided for interest at 12% per annum, and matured on the Closing Date
of the Merger transactions. The Company's domestic accounts receivable were
pledged under the security agreement. The Company repaid this loan, plus accrued
interest, in early July 1996 with the proceeds from the sale of the assets
discussed in footnote 2.
A consulting fee of $10,000 per month has been paid by the Company under a
consulting arrangement with the Company's Chairman of the Board.
One of the Company's directors is a partner in a law firm that performed
legal services for the Company. During 1996 the Company paid the firm $200,000.
(8) LEASE COMMITMENTS
The Company leases certain office space under noncancellable lease
agreements accounted for as operating leases. At December 31, 1996, lease
commitments under noncancellable operating leases with an initial term of more
than one year are $96,000 for the year ended December 31, 1996. Rental expense
under operating leases was $109,000 and $101,000 for the years ended December
31, 1996 and 1995, and $77,000 for the nine months ended December 31, 1994. The
Company's future lease commitments are approximately $264,000 per year through
2002.
Capital leases for the Company's field trucks and automobiles are included
in long-term debt.
(9) CONTINGENCIES
The Company was proceeding against Charlestown Industries, Inc. (a 50%
"Partner"), who was a co-defendant, along with the Company, in the joint venture
to recover their respective portion ($1,800,000) of the OFS 1987, Mid-Year et.
al. v DI Exploration lawsuit. In 1994, a judgment was rendered in favor of the
Company against the Partner in the state of Oklahoma. The Partner, subsequent to
the judgement, filed for protection under the US Bankruptcy Act and the
Company's claim was ruled on by the bankruptcy court in October of 1996. The
bankruptcy court ruled against the Company. The Company has determined not to
pursue other appeals. Since the future recovery of the amount and term of
recovery was uncertain no amount had been recorded by the Company.
The Company is involved in litigation incidental to the conduct of its
business, none of which management believes is, individually or in the
aggregate, material to the Company's consolidated financial condition or results
of operations.
Substantially all of the Company's contract drilling activities are
conducted with independent oil and gas companies in the United States or with
national utility or national petroleum companies in Mexico, Central America and
South America. Historically, the Company has not required collateral or other
security for the related receivables from such customers. However, the Company
has required certain customers to deposit funds in escrow prior to the
commencement of drilling. Actions typically taken by the Company in the event of
nonpayment include filing a lien on the customer's producing properties and
filing suit against the customer.
(10) EMPLOYEE BENEFIT PLAN
The Company has a defined contribution employee benefit plan covering
substantially all of its employees. The Company matches individual employee
contributions up to 2% of the employee's compensation. Employer matching
contributions under the plan totaled $104,000 and $144,000 for the years ended
December 31, 1996 and 1995, and $55,000 for the nine months ended December 31,
1994. Employer matching contributions vest over a five year period. Effective
January 1, 1997, the Company increased the matching provisions to include
matching 100% of the first 3% of individual employee contributions and 50% of
the next 3% of individual employee contributions. Other provisions of plans were
also amended.
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DI INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) NON-RECURRING CHARGES
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 cost to exit the Argentina and Mexico markets
and $.4 million of other non-recurring charges. The employment severance cost
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 stock options to purchase the Company's common
stock. As a result of the Company's desire to redeploy assets to more profitable
markets, the Company decided to withdraw from both the Argentina and Mexico
markets. As a result, the Company has recorded estimated exit costs of $1.3
million for Mexico which primarily consists of the forfeiture of a performance
bond and other costs to be incurred to close the office and exit the market and
exit costs of $.8 million for Argentina which primarily consists of costs
expected to be incurred during the period necessary to close the office and exit
the market. In addition, the Company has tentatively 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 Argentina rigs will be mobilized to
the United States or possibly Venezuela where they will be refurbished and
returned to service. Mobilization costs will be expensed as they are incurred
during 1997.
(12) SUBSEQUENT EVENTS
On January 31, 1997, the Company acquired the operating assets of Flournoy
Drilling Company for 12,426,000 shares of DI common stock and $800,000 in cash.
The assets acquired include 13 drilling rigs, 17 rig hauling trucks, a yard and
office facility in Alice, Texas and various other equipment and drill pipe. With
respect to one-half of the shares to be issued in the transaction, DI agreed to
issue additional shares if the shareholders of Flournoy hold value less than $2
per share one year from closing.
The December 31, 1996 consolidated balance sheet includes the effect of
the Mergers, the Diamond M acquisition, the Mesa acquisition, the private
placement and the new credit facility. The unaudited proforma balance sheet
assumes the Flournoy acquisition and related common stock issuance occurred on
December 31, 1996. The rigs acquired in the Mergers had no historical operations
as they were stacked while owned by RTO and LRAC. The following unaudited
consolidated proforma results of operations assume the Mergers, the Diamond M
acquisition, the Mesa acquisition, the Flournoy acquisition, the private
placement and the new credit facility had occurred at January 1, 1996 and do not
purport to be indicative of what would have occurred had the transactions
occurred at those dates or of results which may occur in the future. The
unaudited proforma results of operations shown below include the operations of
Diamond M and Flournoy and additional expenses for storing the rigs acquired in
the Mergers (in thousands, except per share amounts):
As of
DECEMBER 31, 1996
Working capital $ 5,995
Total assets 158,322
Shareholders' equity 95,712
For the year ended
DECEMBER 31, 1996
Total revenue $ 148,779
Net income (loss)applicable to common stock (13,006)
Net income (loss) per share (.09)
On March 10, 1997, the Company entered into an agreement to acquire by
merger Grey Wolf Drilling Company ("Grey Wolf") for up to $61.6 million in cash
and approximately 14.0 million shares of the Company's common stock. The number
of shares to be issued in the merger is subject to decrease or increase if the
average trading price of DI's common stock ten days prior to the merger is
greater than $4.00 or less than $3.00 per share. Additionally, the merger
agreement calls for the decrease of the cash consideration and a corresponding
increase in the number of shares issued so that at least 45% of the value of the
merger consideration consists of the Company's common stock. An escrow will be
established for certain post-
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<PAGE>
closing contingencies with $5 million of the cash consideration. The Merger is
subject to obtaining regulatory and Grey Wolf shareholder's approval and certain
other conditions. The Company expects this merger to close by the end of the
second quarter of 1997.
(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for years ended December 31, 1996 and
1995, and the nine months ended December 31, 1994 are set forth below (amounts
in thousands, except per share amounts).
QUARTER ENDED
March June September December
1996 1996 1996 1996
Revenues $ 20,102 $ 19,183 $ 22,031 $ 20,451
Gross profit (loss) (1) 1,166 (199) 3,144 (2,732)
Operating loss (1,253) (2,398) 1,108 (11,172)
Loss-continuing operations (1,491) 524 808 (10,718)
Discontinued operations - - - -
Net loss (1,491) 524 808 (11,563)
Net loss per common share (.04) .01 .01 (.09)
QUARTER ENDED
March June September December
1995 1995 1995 1995
Revenues $ 22,344 $ 23,151 $ 27,106 $ 22,108
Gross profit(1) (180) 1,075 448 (459)
Operating loss (1,946) (814) (1,565) (8,468)
Loss-continuing operations (2,219) (1,122) (1,234) (8,100)
Discontinued operations (11) (543) (116) (102)
Net loss (2,230) (1,665) (1,350) (8,202)
Net loss per common share (.06) (.04) (.03) (.22)
QUARTER ENDED
June September December
1994 1994 1994
Revenues $ 14,331 $17,215 $19,441
Gross profit (1) 29 545 1,425
Operating income (loss) (1,292) (837) (323)
Income (loss)-continuing
operations (935) (872) (453)
Discontinued operations 14 49 (12)
Net income (loss) (921) (823) (465)
Net loss per common share (.03) (.02) (.01)
(1) Gross Profit is computed as consolidated revenues less operating expenses
(which excludes expenses for Depreciation and Amortization, General and
Administrative and Non-Recurring Charges).
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<PAGE>
SCHEDULE II
DI INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Additions Collections Balance at
Beginning Charged to and End
OF PERIOD ALLOWANCE WRITE-OFFS OF PERIOD
Nine Months Ended December 31, 1994:
Allowance for doubtful accounts
receivable $ 2,171 $ 122 $ (227) $ 2,066
========= ====== ========= ========
Year Ended December 31, 1995:
Allowance for doubtful accounts
receivable $ 2,066 $ 291 $ (406) $ 1,951
============= ======= ======== =======
Year Ended December 31, 1996:
Allowance for doubtful accounts
receivable $ 1,951 $ 302 $ (920) $ 1,333
============= ======== ======== ========
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ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Deloitte & Touche LLP was previously the principal accountants for DI
Industries, Inc. On October 2, 1996, that firm's appointment as principal
accountants was terminated and KPMG Peat Marwick LLP was engaged as principal
accountants. The decision to change accountants was approved by the Board of
Directors upon recommendation of the Audit Committee of the Board of Directors.
In connection with the audits of the two fiscal years ended December 31,
1995, and the subsequent interim period through June 30, 1996, there were no
disagreements with Deloitte & Touche LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedures,
which disagreements if not resolved to their satisfaction would have caused them
to make reference in connection with their opinion to the subject matter of the
disagreement.
The audit reports of Deloitte & Touche LLP on the consolidated financial
statements of DI Industries, Inc. and subsidiaries as of and for the years ended
December 31, 1995 and 1994, did not contain any adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item as to the directors and executive
officers of the Company is hereby incorporated by reference to such information
appearing under the captions "Election of Directors" and "Executive Officers" in
the Company's definitive proxy statement for the Company's 1997 Annual Meeting
of shareholders and is to be filed with the Securities and Exchange Commission
("Commission") pursuant to the Securities Exchange Act of 1934 within 120 days
of the end of the Company's fiscal year on December 31, 1996.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item as to the management of the Company is
hereby incorporated by reference to such information appearing under the caption
"Executive Compensation" in the Company's definitive proxy statement for the
Company's 1997 Annual Meeting of shareholders and is to be filed with the
Commission pursuant to the Securities Exchange Act of 1934 within 120 days of
the end of the Company's fiscal year on December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item as to the ownership by management and
others of securities of the Company is hereby incorporated by reference to such
information appearing under the caption "Nominees for Director" and "Certain
Shareholders" in the Company's definitive proxy statement for the Company's 1997
Annual Meeting of shareholders and to be filed with the Commission pursuant to
the Securities Exchange Act of 1934 within 120 days of the end of the Company's
fiscal year on December 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item as to certain business relationships
and transactions with management and other related parties of the Company is
hereby incorporated by reference to such information appearing under the caption
"Certain Transactions" in the Company's definitive proxy statement for the
Company's 1997 Annual Meeting of shareholders and is to filed with the
Commission pursuant to the Securities Exchange Act of 1934 within 120 days of
the end of the Company's fiscal year on December 31, 1996.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)The following documents are filed as part of this report:
1. AND 2. FINANCIAL STATEMENTS AND SCHEDULE.
The consolidated financial statements and supplemental schedule of DI
Industries, Inc. and Subsidiaries are included in Part II, Item 8 and are
listed in the Index to Consolidated Financial Statements and Financial
Statement Schedule therein.
3.EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENTS
----------- ---------
<S> <C>
2.1 --Agreement and Plan of Merger dated May 7, 1996, among DI Industries, Inc. DI Merger
Sub, Inc., Roy 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 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 an 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 the Company 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 by reference to Exhibit 2.1 to
Registration no. 333-14783).
2.4.1 --Asset Purchase Agreement dated November 12, 1996, between Diamond M Onshore, Inc.
and Drillers, Inc. (the Asset purchase Agreement") (Incorporated herein by reference to
Exhibit 2.1 to Form 8-K dated December 30, 1996).
2.4.2 --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, between Flournoy Drilling Company
and Drillers, Inc. (Incorporated herein by reference to Exhibit 2.1 to Form 8-K filed January
31, 1997).
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 filed March 10, 1997).
2.7 --Voting and Support Agreement dated March 7, 1997, of Sheldon B. Lubar. (Incorporated
herein by reference to Exhibit 10.2 to Form 8-K dated March 10, 1997).
2.8 --Voting and Support Agreement dated March 7, 1997, of Felicity Ventures, Ltd.
(Incorporated herein by reference to Exhibit 10.3 to Form 8-K dated March 10, 1997).
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2.9 --Voting and Support Agreement dated March 7, 1997, of James K.B. Nelson. (Incorporated
herein by reference to Exhibit 10.4 to Form 8-K dated March 10, 1997).
2.10 --Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf Drilling
Company and James K.B. Nelson. (Incorporated herein by reference to Exhibit 10.5 to Form
8-K dated March 10, 1997).
2.11 --Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf Drilling
Company and Billy G. Emanis. (Incorporated herein by reference to Exhibit 10.6 to Form 8-
K dated March 10, 1997).
2.12 --Indemnification Agreement dated as of March 6, 1997,
by and between Grey Wolf Drilling Company and Bill
Brannon. (Incorporated herein by reference to Exhibit
10.7 to Form 8-K dated March 10, 1997).
2.13 --Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf Drilling
Company and Tom L. Ferguson. (Incorporated herein by reference to Exhibit 10.8 to
Form 8-K dated March 10, 1997).
2.14 --Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf Drilling
Company and John D. Peterson. (Incorporated herein by reference to Exhibit 10.9 to
Form 8-K dated March 10, 1997).
2.15 --Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf Drilling
Company and Janet V. Campbell. (Incorporated herein by reference to Exhibit 10.10 to
Form 8-K dated March 10, 1997).
2.16 --Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf Drilling
Company and Sheldon B. Lubar. (Incorporated herein by reference to Exhibit 10.11 to Form
8-K dated March 10, 1997).
2.17 --Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf Drilling
Company and Robert P. Probst. (Incorporated herein by reference to Exhibit 10.12 to
Form 8-K dated March 10, 1997).
2.18 --Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf Drilling
Company and Uriel E. Dutton. (Incorporated herein by reference to Exhibit 10.13 to
Form 8-K dated March 10, 1997).
3.1 --Articles of Incorporation of DI Industries, Inc., as amended.
3.2 --By-Laws of DI Industries, Inc., as amended.
3.3 --Statement of Resolutions Establishing the Series A Convertible Redeemable Preferred
Stock.
10.1 --Shareholders' Agreement dated May 7, 1996, among Somerset Drilling Associates, L.L.C.,
Roy T. Oliver, Jr., U.S. Rig and Equipment, Inc., Mike Mullen Energy Equipment Resource,
Inc., GCT Investments, Inc., Mike L. Mullen, Norex Drilling Ltd., and Pronor Holdings, Ltd.
(Incorporated herein by reference to Exhibit 10.9 to Registration Statement No. 333-6077).
10.1.1 --Amendment to Shareholders' Agreement dated May 7, 1996, among Somerset Drilling
Associates, L.L.C., Somerset Capital Partners, Roy T. Oliver, Jr., U.S. Rig and Equipment,
Inc., Mike Mullen Energy Equipment Resource, Inc., GCT Investments, Inc., Mike L.
Mullen, Norex Drilling Ltd., and Pronor Holdings, Ltd. (Incorporated herein by reference
to Exhibit 10.9.1 to Registration Statement No. 333-6077).
10.2 --Form of Shadow Warrant to be issued to the shareholders of Somerset Investment
Corporation. (Incorporated herein by reference to Exhibit 10.10 to Registration Statement
No. 333-6077).
10.3 --Form of Shadow Warrant to be issued to the shareholders of R.T. Oliver, Inc. And Land Rig
Acquisition Corporation (Incorporated herein by reference to Exhibit 10.11 to Registration
Statement No. 333-6077).
10.4 --Registration Rights Agreement dated May 7, 1996, among Somerset Drilling Associates,
L.L.C., Roy T. Oliver, Jr., U.S. Rig and Equipment, Inc., Mike Mullen Energy Equipment
Resource, Inc., GCT Investments, Inc., Norex Drilling Ltd., and Pronor Holdings, Ltd.
(Incorporated herein by reference to Exhibit 10.12 to Registration Statement No. 333-6077)
10.4.1 --Amendment to Registration Rights Agreement dated May 7, 1996, among Somerset Drilling
Associates, L.L.C., Somerset Capital Partners, Roy T. Oliver, Jr., U.S. Rig and Equipment,
Inc., Mike Mullen Energy Equipment Resource, Inc., GCT Investments, Inc., Norex Drilling
Ltd., and Pronor Holdings, Ltd. (Incorporated herein by reference to Exhibit 10.12.1 to
Registration Statement No. 333-6077).
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10.4.2 --Second Amendment to Registration Rights Agreement dated July 26, 1996, among Somerset
Drilling Associates, L.L.C., Somerset Capital partners, Roy T. Oliver, Jr., U.S. Rig and
Equipment, Inc., Mike Mullen Energy Equipment Resource, Inc., GCT Investments, Inc.,
Norex Drilling Ltd., and Pronor Holdings, Ltd. (Incorporated herein by reference to Exhibit
10.4.2 to Amendment No. 1 to Registration Statement No. 333-6077).
10.5 --Investment Monitoring Agreement dated May 7, 1996, among DI Industries, Inc., Somerset
Capital Partners and Somerset Drilling Associates, L.L.C. (Incorporated herein by reference
to Exhibit 10.13 to Registration Statement No. 333-6077).
10.6 --Form of Non-Competition Agreement to be executed among DI Industries, Inc., Roy T.
Oliver, Jr., U.S. Rig and Equipment, Inc., Mike L. Mullen and mike Mullen Energy
Equipment Resource, Inc. (Incorporated herein by reference to Exhibit 10.14 to Registration
Statement No. 333-6077).
10.7 --Employment Agreement dated September 3, 1996, by and between the Company and
Thomas P. Richards (incorporated herein by reference to Exhibit 10.1 to Registration
Statement No. 333-14783).
10.8 --Non-Qualified Stock Option Agreement dated September 3, 1996, by and between the
Company and Thomas P. Richards. (Incorporated herein by reference to Exhibit 10.2 to
Registration Statement No. 333-14783).
10.9 --Letter Agreement dated April 2, 1996, by and between the Company and T. Scott O'Keefe,
regarding consulting arrangement and stock options. (Incorporated herein by reference to
Exhibit 10.9 to Post Effective Amendment No. 1 to Registration Statement No. 333-14783).
10.10 --Letter Agreement dated August 31, 1996, by and between the Company and T. Scott
O'Keefe, regarding employment and stock options. (Incorporated herein by reference to
Exhibit 10.10 to Post Effective Amendment No. 1 to Registration Statement No. 333-
14783).
10.11 --Employment Agreement dated September 17, 1996, by and between the Company and
Forrest M. Conley, Jr. (Incorporated herein by reference to Exhibit 10.11 to Post Effective
Amendment No. 1 to Registration Statement No. 333-14783).
10.12 --Incentive Stock Option Agreement dated September 17, 1996, by and between the Company
and Forrest M. Conley, Jr. (Incorporated herein by reference to Exhibit 10.12 to Post
Effective Amendment No. 1 to Registration Statement No. 333-14783).
10.13 --Employment Agreement dated September 3, 1996, by and between the Company and
Ronnie E. McBride. (Incorporated herein by reference to Exhibit 10.13 to Post Effective
Amendment No. 1 to Registration Statement No. 333-14783).
10.14 --Incentive Stock Option Agreement dated September 3, 1996, by and between the Company
and Ronnie E. McBride. (Incorporated herein by reference to Exhibit 10.14 to Post Effective
Amendment No. 1 to Registration Statement No. 333-14783).
10.15 --Non-Qualified Stock Option Agreement dated September 3, 1996, by and between the
Company and Ronnie E. McBride. (Incorporated herein by reference to Exhibit 10.15 to
Post Effective Amendment No. 1 to Registration Statement No. 333-14783).
10.16 --Employment Agreement dated October 1, 1996, by and between the Company and Terrell
L. Sadler. (Incorporated herein by reference to Exhibit 10.16 to Post Effective Amendment
No. 1 to Registration Statement No. 333-14783).
10.17 --Non-Qualified Stock Option Agreement dated October 1, 1996, by and between the
Company and Terrell L. Sadler. (Incorporated herein by reference to Exhibit 10.17 to Post
Effective Amendment No. 1 to Registration Statement No. 333-14783).
10.18 --Incentive Stock Option Agreement dated October 1, 1996, by and between the Company and
Terrell L. Sadler. (Incorporated herein by reference to Exhibit 10.17 to Post Effective
Amendment No. 1 to Registration Statement No. 333-14783).
10.19 --DI Industries, Inc. 1996 Employee Stock Option Plan. (Incorporated herein by reference
to DI Industries, Inc. 1996 Annual Meeting of Shareholders definitive proxy materials
10.20 --Stock Purchase Agreement dated as of December 28,
1996, between DI Industries, and Wexford Special
Situations 1996, L.P., Wexford-Euris Special Situations
1996, L.P., Wexford Special Situations 1996
Institutional, L.P. and Wexford Special Situations 1996
Limited (Incorporated herein by reference to Exhibit
10.1 to Form 8-K dated December 30, 1996).
-45-
<PAGE>
10.21 --Senior Secured Reducing Revolving Credit Agreement dated as of December 31, 1996,
among DI Industries, Inc. and Drillers, Inc. (as borrowers), DI International, Inc. (as
guarantor), Bankers Trust Company (as agent and administrative agent), ING (US) Capital
Corporation (as co-agent) and Nordlandsbanken AS (as lender). (Incorporated herein by
reference to Exhibit 99.1 to Form 8-K dated December 30, 1996).
10.22 --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).
10.23 --Form of Shareholder Agreement entered into January 31, 1997, by DI Industries, Inc.,
Drillers, Inc., and Lucien Flournoy, Maxine E. Flournoy, Betty Louise Flournoy Fields,
Helen Ruth Flournoy Pope, Mary Anne Flournoy Guthrie, F.C. West, Gregory M. Guthrie,
Byron W. Fields, John B. Pope, the Flournoy First, Second and Third Fields Grandchild
Trusts, the Flournoy First, Second and Third Pope Grandchild Trusts, and the Flournoy First,
Second, Third, Fourth and Fifth Guthrie Grandchild Trusts. (Incorporated herein by
reference to Exhibit 10.22 to Amendment No. 2 to Registration Statement No. 333-20423).
10.27 --Drillers Inc. 1982 Stock Option and Long-Term Incentive Plan for Key Employees.
(Incorporated by reference to Drillers Inc. 1982 Annual Meeting definitive proxy solicitation
materials.)
10.28 --Drillers Inc. Stock Option Plan for Non-Employee Directors. (Incorporated by reference
to Drillers Inc. 1982 Annual Meeting definitive proxy solicitation materials.)
10.29 --DI Industries, Inc. 1987 Stock Option Plan for Non-Employee Directors. (Incorporated by
reference to DI Industries, Inc. 1987 Annual Meeting definitive proxy solicitation
materials.)
*10.30 --Non-Qualified Stock Option Agreement dated December 16, 1996, by and between the
Company and Forrest M. Conley, Jr.
*10.31 --Employment Agreement dated March 17, 1997, by and between the Company and Gary
D. Lee.
*10.32 --Incentive Stock Option Agreement dated March 17, 1997, by and between the Company
and Gary D. Lee.
*11.1 --Statement regarding computation of per share earnings.
16.1 --Change in Certifying Accountant. (Incorporated by reference to Exhibit 16.1 to 8-K filed
on October 2, 1996.)
*21.1 --List of Subsidiaries of DI Industries, Inc.
*24.1 --Consent of KPMG Peat Marwick LLP
*24.2 --Consent of Deloitte & Touche LLP
*27. --Financial Data Schedule
</TABLE>
- ------
* Filed herewith.
(b)Reports on Form 8-K
A current report on form 8-K was filed with the Securities and Exchange
Commission on December 30, 1996 announcing the Company's acquisition of the
South Texas operating assets of Diamond M Onshore, Inc. and the Company's new
$35.0 million loan facility dated December 31, 1996, with Bankers Trust Company,
ING (US) Capital Corporation and NordlandsBanken AS (Item 2). Also, announced
was the Company's private placement of 1.75 million shares of the Company's
common stock and the signing of a definitive asset purchase agreement to acquire
the operating assets of Flournoy Drilling Company (Item 5). The current report
set forth Diamond M Onshore, Inc.'s statement of net assets of certain
properties as of September 30, 1996 (Unaudited) and December 31, 1995 and of
Revenues and Certain Expenses of Certain Properties for the nine months ended
September 30, 1996 (Unaudited) and the year ended December 31, 1995 (Item 7). A
current report on Form 8-K (Item 2) was filed with the Securities and Exchange
Commission on January 31, 1997. This Current Report reported the acquisition of
the operating assets of Flournoy Drilling Company and the election of Mr. Lucien
Flournoy, the founder of Flournoy Drilling Company to the Company's Board of
Directors. A current report on Form 8-K (Item 5) was filed with the Securities
and Exchange Commission on March 10, 1997 announcing the signing of an agreement
to acquire by merger Grey Wolf Drilling Company.
-46-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, this twenty-eighth
(24th) day of March, 1997.
DI Industries, Inc.
By: /S/ THOMAS P. RICHARDS
Thomas P. Richards, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES AND CAPACITIES DATE
By: /S/ THOMAS P. RICHARDS March 24, 1997
----------------------------------------------------
Thomas P. Richards, President and Chief Executive
Officer (Principal Executive Officer)
By: /S/ T. SCOTT O'KEEFE March 24, 1997
----------------------------------------------------
T. Scott O'Keefe, Senior Vice President and Chief
Financial Officer
By: /S/ DAVID W. WEHLMANN March 24, 1997
----------------------------------------------------
David W. Wehlmann, Vice President and Controller
By: /S/ IVAR SIEM March 24, 1997
----------------------------------------------------
Ivar Siem, Chairman of the Board and Director
By: /S/ ROY T. OLIVER March 24, 1997
----------------------------------------------------
Roy T. Oliver, Director
By: /S/ STEVEN A. WEBSTER March 24, 1997
----------------------------------------------------
Steven A. Webster, Director
By: /S/ WILLIAM R. ZIEGLER March 24, 1997
----------------------------------------------------
William R. Ziegler, Director
By: /S/ PETER M. HOLT March 24, 1997
----------------------------------------------------
Peter M. Holt, Director
-47-
DI INDUSTRIES, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS NON-QUALIFIED STOCK OPTION AGREEMENT (this "Agreement") made as of 16
December, 1996, by and between DI INDUSTRIES, INC., a corporation organized
under the laws of the State of Texas (the "Corporation"), and FORREST M. CONLEY,
JR, an individual (the "Optionee");
W I T N E S S E T H:
WHEREAS, the Corporation is desirous of providing incentive to the
Optionee to further the business of the Corporation and the Corporation has
agreed to grant the Optionee options to purchase shares of common stock, $0.10
par value ("Common Stock"), of the Corporation; and
WHEREAS, by granting the Optionee options to purchase shares of Common
Stock pursuant to the terms of this Agreement, the Corporation intends to carry
out the purposes set forth in the 1996 Employee Stock Option Plan of the
Corporation (the "Plan") adopted by the Board of Directors of the Corporation
(the "Board of Directors") effective July 29, 1996 and the shareholders of the
Corporation effective as of August 27, 1996; and
WHEREAS, the Corporation and the Optionee desire to set forth the terms
and conditions of such options to purchase Common Stock;
NOW, THEREFORE, in consideration of the mutual promises contained herein,
and other good and valuable consideration, the receipt, adequacy and sufficiency
of which are hereby acknowledged, the parties hereto do hereby agree as follows:
1. GRANT OF OPTION. Subject to the terms and conditions hereinafter set
forth, the Corporation hereby grants to the Optionee a non-qualified option (the
"Option") to purchase all or any part of an aggregate number of 200,000 shares
of Common Stock (such shares, as increased or decreased in accordance with
Section 9 hereof, being referred to hereinafter as the "Option Shares") at an
exercise price of $2.5625 per share (hereinafter the "Exercise Price").
2. EXERCISE PERIOD. The Option shall be exercisable by Optionee as to
twenty percent (20%) of the Option Shares one (1) year after the date of this
Agreement, as to an additional twenty percent (20%) of the Option Shares two (2)
years after the date of this Agreement, as to an additional twenty percent (20%)
of the Option Shares three (3) years after the date of this Agreement, as to an
additional twenty percent (20%) of the Option Shares four (4) years after the
date of this Agreement, until the fifth anniversary of the date of this
Agreement, after which time the Option shall be exercisable in full. The Option
shall expire and terminate as to any Option Shares not purchased by the Optionee
on or before the tenth anniversary of the date of this Agreement (the
"Expiration Date"), subject to earlier termination as set forth herein.
<PAGE>
3. METHOD OF EXERCISING THE OPTION. The Option shall be exercised by the
Optionee delivering to the Corporation (i) written notice from the Optionee
stating that the Optionee is exercising the Option and specifying the number of
Option Shares that the Optionee is entitled to purchase (the "Notice"), which
shall be in form and content identical to ANNEX I hereto and (ii) the aggregate
Exercise Price (the "Payment") for the number of Option Shares that the Optionee
is entitled to purchase, which Exercise Price must be in the form of (a) cash or
a cashier's or certified check payable to the order of the Corporation, or (b)
the tender to the Corporation of such number of shares of Common Stock owned by
the Optionee having an aggregate fair market value as of the date of exercise
that is not greater than the total Exercise Price for the shares of Common Stock
with respect to which the Option is being exercised and by paying in cash or
cashiers check payable to the Corporation the remaining amount of the Exercise
Price.
4. TRANSFERABILITY OF OPTION. The Option shall not be transferable or
assignable, in whole or in part, and except as otherwise provided in Section 11
of this Agreement or by will or the laws of descent or distribution. The Option
shall be exercisable (i) only by the Optionee during his lifetime, or (ii) in
the event of his death, by his heirs, representatives, distributees, or legatees
in accordance with his will or the laws of descent and distribution (but only to
the extent that the Option would be exercisable by the Optionee under this
Agreement).
5. PAYMENT OF TAXES UPON EXERCISE. The Optionee understands and
acknowledges that under currently applicable law, the Optionee may be required
to include in the Optionee's taxable income, at the time of exercise of the
Option, the amount by which the value of the Option Shares purchased (the
"Exercise Shares") exceeds the Exercise Price paid. The Optionee hereby
authorizes the Corporation to withhold Exercise Shares of a value equivalent to
the amount of tax required to be withheld by the Corporation out of any taxable
income derived by the Optionee upon exercise of the Option; provided, however,
that the Optionee may, in the alternative, in order to satisfy such withholding
requirement, deliver to the Corporation cash or other shares of Common Stock
owned by the Optionee.
6. INVESTMENT REPRESENTATION. The Optionee represents that the
Option Shares available for purchase by the Optionee under this Agreement
will be acquired only for investment and not with a view toward resale or
distribution.
7. SECURITIES LAW REQUIREMENTS; LEGENDS. The Optionee agrees and
understands that the Option Shares may be restricted securities as defined in
Rule 144 promulgated under the Securities Act of 1933, as amended (the
"Securities Act"), and may not be sold, assigned or transferred, unless the
sale, assignment or transfer of such shares is registered under the Securities
Act and applicable blue sky laws, as now in effect or hereafter amended, or
there is furnished an opinion of counsel in form and substance satisfactory to
the Corporation from counsel acceptable to the Corporation that such
registrations are not required. The Optionee further understands and agrees
that, unless issued pursuant to an effective registration statement under the
Securities Act, the following legend shall be set forth on each certificate
representing Option Shares:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 OR UNDER THE BLUE SKY LAWS OF ANY STATE, AND
MAY NOT BE SOLD, ASSIGNED
<PAGE>
OR TRANSFERRED EXCEPT UPON SUCH REGISTRATION OR UPON RECEIPT BY THE
CORPORATION OF AN OPINION OF COUNSEL FOR THE CORPORATION THAT SUCH
REGISTRATION IS NOT REQUIRED FOR SUCH SALE, ASSIGNMENT OR TRANSFER."
In addition, the following legend shall be placed on each certificate
representing Option Shares:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE GOVERNED BY THE TERMS OF
THE 1996 EMPLOYEE STOCK OPTION PLAN OF THE CORPORATION, DATED JULY 29,
1996, WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION AND A
COPY OF WHICH WILL BE PROVIDED FOR INSPECTION UPON WRITTEN REQUEST."
8. NO RIGHTS AS SHAREHOLDER. The Optionee shall not have any rights as a
shareholder with respect to any of the Option Shares until the date of issuance
by the Corporation to the Optionee of a stock certificate representing such
Option Shares. Except as otherwise provided in Section 9 hereof, the Optionee
shall not be entitled to any dividends, cash or otherwise, or any adjustment of
the Option Shares for such dividends, if the record date therefor is prior to
the date of issuance of such stock certificate. Upon valid exercise of the
Option by the Optionee, the Corporation agrees to cause a valid stock
certificate for the number of Option Shares then purchased to be issued and
delivered to the Optionee within seven (7) business days thereafter.
9. CORPORATE PROCEEDINGS OF THE CORPORATION.
(a) The existence of the Option shall not affect in any way the
right or power of the Corporation or its officers, directors and
shareholders, as the case may be, to (i) make or authorize any
adjustments, recapitalizations, reorganizations or other changes in the
capital structure or business of the Corporation, (ii) participate in any
merger or consolidation of the Corporation, (iii) issue any Common Stock,
bonds, debentures, preferred or prior preference stock or any other
securities affecting the Common Stock or the rights of holders thereof,
(iv) dissolve or liquidate the Corporation, (v) sell or transfer all or
any part of the assets or business of the Corporation, or (vi) perform any
other corporate act or proceedings, whether of a similar character or
otherwise.
(b) If the Corporation merges into or with or consolidates with
(such events collectively referred herein as a "Merger") any corporation
or corporations and is not the surviving corporation, then the surviving
corporation may assume the Option or substitute a new option of the
surviving corporation for the Option; provided, however, that the excess
of the aggregate fair market value of the securities subject to the Option
immediately after such assumption, or the new option immediately after
such substitution, over the aggregate Exercise Price of such shares must
be, based upon a good faith determination by the Board of Directors of the
Corporation, not less than the excess of the aggregate fair market value
of the Common Stock subject to the Option immediately before such
substitution or assumption over the aggregate Exercise Price of such
Common Stock.
<PAGE>
(c) In the event that the surviving corporation does not utilize the
provisions of (b) above, or in the event of a dissolution or liquidation
of the Corporation, the Corporation shall cause written notice of such
Merger or dissolution or liquidation (and the material terms and
conditions thereof) to be delivered to the Optionee at least ten (10) days
prior to the proposed effective date (the "Effective Date") of such event.
The Optionee shall be entitled to exercise the Option until the Effective
Date, or until the Expiration Date if earlier. To the extent that the
Merger or liquidation is consummated after the Effective Date, the Option
shall terminate and the Corporation shall have no further obligations of
any type hereunder. The provisions of this paragraph shall not apply to
any merger or reorganization, the principal purpose of which is to change
the jurisdiction of the domicile of the Corporation.
(d) If, while the Option is outstanding, the Corporation shall
effect a subdivision or consolidation of the shares of Common Stock or
other capital readjustment, the payment of a common stock dividend, or
other increase or reduction of the number of shares of Common Stock
outstanding, without receiving compensation therefor in money, services or
property, then (i) in the event of an increase in the number of shares of
Common Stock outstanding, the number of Option Shares shall be
proportionately increased, and the per share Exercise Price shall be
proportionately reduced, and (ii) in the event of a reduction in the
number of shares of Common Stock outstanding, the number of Option Shares
shall be proportionately reduced, and the per share Exercise Price shall
be proportionately increased. No fractional share of Common Stock shall be
issued upon any such exercise and the Exercise Price shall be
appropriately reduced on account of any fractional share not issued.
(e) The issuance by the Corporation of shares of stock of any class
of securities convertible into shares of stock of any class, including
Common Stock, for cash, property, labor or services rendered, either upon
direct sale or upon the exercise of rights, options, or warrants to
subscribe therefor, or upon conversion of shares or obligations of the
Corporation convertible into such shares or other securities, shall not
affect, and no adjustment by reason thereof shall be made with respect to,
the number of Option Shares or the Exercise Price.
10. REGISTRATION RIGHTS. The Optionee shall have no registration
rights with respect to the Option Shares.
11. TERMINATION.
(a) Except as otherwise provided in this Section 11, if the Optionee
for any reason whatsoever, other than death or permanent and total
disability, as defined in (b) below, ceases to be employed by the
Corporation, or a parent or subsidiary corporation of the Corporation, and
prior to such cessation, the Optionee was employed at all times from the
date of the granting of the Option until the date of such cessation, the
Option must be exercised by the Optionee (to the extent that the Optionee
is entitled to do so at the date of cessation) within three (3) months
following the date of cessation of employment,
<PAGE>
subject to the Expiration Date; provided, however, that if the Optionee is
terminated for cause (as defined in the Employment Agreement), the Option
will immediately terminate. Notwithstanding the foregoing, the Corporation
may, in its sole discretion, extend for a reasonable period the time in
which the Optionee may exercise the Option after the date of cessation of
employment, subject to the Expiration Date.
(b) If the Optionee becomes permanently and totally disabled, as
hereinafter defined, while employed by the Corporation or a parent or
subsidiary corporation of the Corporation, and prior to such disability
the Optionee was employed at all times from the date of the granting of
the Option until the date of disability, the Option must be exercised by
the Optionee (to the extent that the Optionee is entitled to do so at the
date of disability) at any time within one (1) year after the date of
disability or the Expiration Date, whichever is earlier, and if not so
exercised, the option shall thereupon terminate.
"Permanently and totally disabled" means being unable to engage in
any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or
which has lasted or can be expected to last for a continuous period of not
less than twelve (12) months. In the absence of any specific requirements
for this determination, the decision of the Corporation, as aided by any
physicians designated by the Corporation shall be conclusive and the
Corporation shall send written notice to the Optionee of the determination
that the Optionee has become permanently and totally disabled.
(c) In the event that the Optionee dies while employed by the
Corporation or a parent or subsidiary corporation of the Corporation, and
prior to death the Optionee was employed at all times from the date of the
granting of the Option until the date of death, the Option must be
exercised (to the extent that the Optionee is entitled to do so at the
date of death) by a legatee or legatees of the Optionee under the
Optionee's will, or by the Optionee's personal representatives or
distributes, at any time within one (1) year after the date of death or
the Expiration Date, whichever is earlier, and if not so exercised, the
Option shall thereupon terminate.
Nothing in (a), (b) or (c) shall extend the time for exercising the
Option granted pursuant to this Agreement beyond the Expiration Date.
12. DISPOSITION OF STOCK AFTER EXERCISE OF OPTION. Notwithstanding any
other provision of this Agreement to the contrary, in consideration of the
granting of the Option, the Optionee agrees not to dispose of any Option Shares
without the prior approval of the Corporation unless such shares have been
registered under the Securities Act.
13. NOTICES. All notices, demands, requests and other communications
required or permitted hereunder shall be in writing and shall be deemed to be
delivered when actually received through U.S. Express Mail or any private
express service (as evidenced by a written receipt), or, if earlier, and
regardless of whether actually received (except where receipt is specified in
this Agreement), four (4) days following deposit in a regularly maintained
receptacle for the United States mail, registered or certified, return receipt
requested, postage fully prepaid, addressed to
<PAGE>
the addressee at its address setforth below or at such other address as such
party may have specified theretofore by notice delivered in accordance with this
Section:
If to the Corporation: DI Industries, Inc.
450 Gears Road, Suite 625
Houston, Texas 77067
Attn: President
If to Optionee: Forrest M. Conley, Jr.
2212 Amberly
Houston, Texas 77063
14. TRANSFERABILITY; BINDING EFFECT. The Option shall be transferable only
as set forth in Section 4. Subject to the foregoing, all covenants, terms,
agreements and conditions of this Agreement shall be binding upon, inure to the
benefit of, and be enforceable by, the Corporation and the Optionee and their
respective successors and assigns.
15. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
and understanding between the Corporation and the Optionee relating to the
subject matter hereof.
16. GOVERNING LAW. This Agreement shall be governed by the laws of
the State of Texas.
17. CAPTIONS. The section and paragraph headings in this Agreement
are for reference purposes only and shall not affect in any way the meaning
or interpretation of this Agreement.
19. COUNTERPARTS. This Agreement may be executed in multiple
original counterparts, each of which shall be deemed an original, but all of
which together shall constitute but one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed and delivered as of
the date first written above.
CORPORATION:
DI INDUSTRIES, INC.
By: /S/ THOMAS P. RICHARDS
Thomas P. Richards
President and Chief Executive
Officer
OPTIONEE:
FORREST M. CONLEY, JR.
/S/ FORREST M. CONLEY, JR.
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of March 17, 1996, between DI
INDUSTRIES, INC., a Texas corporation (the "Company"), and GARY D. LEE (the
"Executive").
The Company desires to employ the Executive and the Executive
desires to accept employment with the Company, on the terms and conditions of
this Agreement.
Accordingly, the parties agree as follows:
1. EMPLOYMENT, DUTIES AND ACCEPTANCE.
1.1 EMPLOYMENT BY THE COMPANY; DUTIES. The Company hereby
agrees to employ the Executive for a term commencing on March 17, 1997, and
expiring at the end of the day on March 16, 1998 (such date, or later date to
which this Agreement is extended in accordance with the terms hereof, the
"Termination Date"), unless earlier terminated as provided in Article 4 or
unless extended as provided herein (the "Term"). The Term shall automatically be
extended on the Termination Date and each anniversary thereof for successive
one-year periods unless either party notifies the other on or before the date 90
days prior to the Termination Date that he or it desires to terminate the
Agreement. During the Term, the Executive shall initially serve in the capacity
of Vice President - Human Resources of the Company and shall also serve in those
offices and directorships of subsidiary corporations or entities of the Company
to which he may from time to time be appointed or elected. During the Term, the
Executive shall devote all reasonable efforts and all of his business time and
services to the Company, subject to the direction of the Board. The Executive
shall not engage in any other business activities except for passive investments
in corporations or partnerships not engaged in the oil or gas drilling or well
servicing business.
1.2 ACCEPTANCE OF EMPLOYMENT BY THE EXECUTIVE. The Executive
hereby accepts such employment and shall render the services and perform the
duties described above.
2. COMPENSATION AND OTHER BENEFITS.
2.1 ANNUAL SALARY. The Company shall pay to the Executive an
annual salary at a rate of not less than one hundred thirty thousand dollars
($130,000) per year (the "Annual Salary"), subject to increase at the sole
discretion of the Board of Directors of the Company (the "Board"). The Annual
Salary shall be payable in accordance with the payroll policies of the Company
as from time to time in effect, but in no event less frequently than once each
month, less such deductions as shall be required to be withheld by applicable
law and regulations.
2.2 BONUSES. The Executive may receive, at the sole discretion
of the Board, an incentive bonus with respect to the fiscal years ending during
the term hereof (the "Incentive Bonus"), provided that an Incentive Bonus,
payable in respect of a fiscal year, shall not exceed one-half of the Annual
Salary for such fiscal year.
<PAGE>
2.3 GRANT OF OPTION. The Company agrees to grant the
Executive, pursuant to the terms of its existing stock option plan or new or
amended stock option plans, options to acquire one hundred fifty thousand
(150,000) shares of the Company's common stock, at an exercise price equal to
the fair market value of such stock on the date of grant. The Company agrees to
use all reasonable efforts, consistent with the foregoing, to ensure that a
portion of such stock options meets all requirements for treatment as Incentive
Stock Options under the Internal Revenue Code of 1986, as amended, and that such
stock option plan meets the requirements of Rule 16b-3, promulgated under
Section 16 of the Securities Exchange Act of 1934, as amended. Any such stock
options shall vest in five equal increments over a five-year period commencing
on the date of grant, and shall expire ten years after the date of grant. One
fifth of the ISOs shall vest on March 16, 1998, and then again on each
subsequent anniversary of the date of grant until the fifth anniversary, at
which time the options shall be vested in full.
2.4 VACATION POLICY. The Executive shall be entitled to
a paid vacation of three weeks during each year of the Term.
2.5 PARTICIPATION IN EMPLOYEE BENEFIT PLANS. The Company
agrees to permit the Executive during the Term, if and to the extent eligible,
to participate in any group life, hospitalization or disability insurance plan,
health program, pension plan, similar benefit plan or other so-called "fringe
benefits" of the Company (collectively, "Benefits") which may be available to
other senior executives of the Company on terms no less favorable to the
Executive than the terms offered to such other executives. The Company agrees to
use its best efforts to obtain immediate coverage for the Executive upon the
commencement of the Term under its existing or newly adopted medical expense and
hospitalization plan for employees without premium surcharge and without
exclusions for disclosed preexisting conditions. The Executive shall cooperate
with the Company in applying for such coverage, including submitting to a
physical exam and providing all relevant health and personal data.
2.6 GENERAL BUSINESS EXPENSES. The Company shall pay or
reimburse the Executive for all expenses reasonably and necessarily incurred by
the Executive during the Term in the performance of the Executive's services
under this Agreement. Such payment shall be made upon presentation of such
documentation as the Company customarily requires of its senior executive
employees prior to making such payments or reimbursements.
2.7 COMPANY CAR, CELLULAR TELEPHONE. The Company shall provide
an automobile, of the Executive's choice, to be used by the Executive during the
Term hereof or until his employment hereunder is terminated. The purchase price
of the automobile shall not exceed $35,000 unless increased by the Board. If
requested by the Executive, the Company will replace the automobile with a new
automobile no less frequently than every three years during the Term hereof. The
Company shall, at its expense, pay any and all expenses associated with the
operation of such company car, including but not limited to, collision and
liability insurance, maintenance and repair costs, replacement parts, tires,
fuel and oil. The Executive may use the automobile for personal purposes and, to
the extent of the value of such personal usage, the value thereof shall be
deemed to be additional compensation.
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The Company shall also furnish the Executive with a cellular
telephone of his choice and the Company shall pay all charges in connection with
the use thereof, other than charges for calls not related to Executive's duties
hereunder.
3. NON-COMPETITION.
3.1 COVENANTS AGAINST COMPETITION. The Executive acknowledges
that (i) the Company is currently engaged in the business of owning, managing
and operating onshore drilling and workover rigs for its own account or for
others which are contracted or hired for the purpose of drilling and/or workover
of oil or natural gas wells and from time to time acquiring working or carried
interests in oil and gas wells in connection with, or incident to, such drilling
or workover activities (the "Company Business"); (ii) his work for the Company
will give him access to trade secrets of and confidential information concerning
the Company; and (iii) the agreements and covenants contained in this Agreement
are essential to protect the business and goodwill of the Company. Accordingly,
the Executive covenants and agrees as follows:
3.1.1 NON-COMPETE. The Executive shall not during
the Restricted Period (as defined below) in the United States or any other place
where the Company and its affiliates conduct operations related to the Company
Business, directly or indirectly (except in the Executive's capacity as an
officer of the Company), (i) engage or participate in the Company Business; (ii)
enter the employ of, or render any other services to, any person engaged in the
Company Business except as permitted hereunder; or (iii) become interested in
any such person in any capacity, including, without limitation, as an
individual, partner, shareholder, lender, officer, director, principal, agent or
trustee except as permitted hereunder; provided, HOWEVER, that the Executive may
own, directly or indirectly, solely as an investment, securities of any person
traded on any national securities exchange or listed on the National Association
of Securities Dealers Automated Quotation System if the Executive is not a
controlling person of, or a member of a group which controls, such person and
the Executive does not, directly or indirectly, own 1% or more of any class of
equity securities, or securities convertible into or exercisable or exchangeable
for 1% or more of any class of equity securities, of such person. As used
herein, the "Restricted Period" shall mean a period commencing on the date
hereof and terminating upon the first to occur of (a) the date on which the
Company terminates or is deemed to terminate the Executive's employment without
Cause, (b) the date the Executive terminates or is deemed to terminate his
employment pursuant to Section 4.6 hereof, or (c) the date of termination of
this Agreement; PROVIDED, HOWEVER, that if the Company shall have terminated the
Executive's employment for Cause and such Cause in fact exists or if the
Executive shall have terminated his employment with the Company in breach of the
terms of this Agreement, the Restricted Period shall end twelve months following
the termination of the Executive's employment hereunder.
3.1.2 CONFIDENTIAL INFORMATION; PERSONAL
Relationships. The Executive acknowledges that the Company has a legitimate and
continuing proprietary interest in the protection of its confidential
information and that it has invested substantial sums and will continue to
invest substantial sums to develop, maintain and protect confidential
information. The Executive agrees that, during and after the Restricted Period,
the Executive shall keep secret and retain in strictest confidence, and shall
not use for the benefit of himself or others all confidential matters directly
relating
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to the Company Business including, without limitation, financial information,
trade secrets, customer lists, details of client or consultant contracts,
pricing policies, operational methods, marketing plans or strategies, product
development techniques or plans, business acquisition plans, new personnel
acquisition plans, technical processes, designs and design projects, inventions
and research projects of the Company, its affiliates, or any other entity which
may hereafter become an affiliate thereof, learned by the Executive heretofore
or hereafter unless otherwise in the public domain other than as a result of
disclosure by the Executive or unless independently obtained from third parties
not under disclosure restrictions in favor of the Company.
3.1.3 PROPERTY OF THE COMPANY. All memoranda, notes,
lists, records, engineering drawings, technical specifications and related
documents and other documents or papers (and all copies thereof) relating to the
Company, including such items stored in computer memories, microfiche or by any
other means, made or compiled by or on behalf of the Executive after the date
hereof, or made available to the Executive after the date hereof relating to the
Company, its affiliates or any entity which may hereafter become an affiliate
thereof, shall be the property of the Company, and shall be delivered to the
Company promptly upon the termination of the Executive's employment with the
Company or at any other time upon request; PROVIDED, HOWEVER, that Executive's
address books, diaries, chronological correspondence files and rolodex files
shall be deemed to be property of the Executive.
3.1.4 ORIGINAL MATERIAL. The Executive agrees that
any inventions, discoveries, improvements, ideas, concepts or original works of
authorship relating directly to the Company Business, including without
limitation computer systems, programs and manufacturing techniques, whether or
not protectable by patent or copyright, that have been originated, developed or
reduced to practice by the Executive alone or jointly with others during the
Executive's employment with the Company shall be the property of and belong
exclusively to the Company. The Executive shall promptly and fully disclose to
the Company the origination or development by the Executive of any such material
and shall provide the Company with any information that it may reasonably
request about such material.
3.1.5 EMPLOYEES OF THE COMPANY AND ITS AFFILIATES.
During the Restricted Period, the Executive shall not, directly or indirectly,
hire or solicit, or cause others to hire or solicit, for employment by any
person other than the Company or any affiliate or successor thereof, any
employee of the Company and its affiliates or successors or encourage any such
employee to leave his employment.
3.1.6 CUSTOMERS OF THE COMPANY. During the
Restricted Period, the Executive shall not, except by reason of and in his
capacity as an officer of the Company, directly or indirectly, request or advise
a customer of the Company or its subsidiaries to curtail or cancel such
customer's business relationship with the Company.
3.2 RIGHTS AND REMEDIES UPON BREACH. If the Executive
breaches, or threatens to commit a breach of, any of the provisions
contained in Section 3.1 of this Agreement (the "Restrictive Covenants"), the
Company shall have the following rights and remedies, each of
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which rights and remedies shall be independent of the others and severally
enforceable, and each of which is in addition to, and not in lieu of, any other
rights and remedies available to the Company under law or in equity:
3.2.1 SPECIFIC PERFORMANCE. The right and remedy to
have the Restrictive Covenants specifically enforced by any court of competent
jurisdiction, it being agreed that any breach or threatened breach of the
Restrictive Covenants would cause irreparable injury to the Company and that
money damages would not provide an adequate remedy to the Company.
3.2.2 ACCOUNTING. The right and remedy to require
the Executive to account for and pay over to the Company all compensation,
profits, monies, accruals, increments or other benefits derived or received by
the Executive as the result of any action constituting a breach of the
Restrictive Covenants.
3.3 SEVERABILITY OF COVENANTS. The Executive acknowledges and
agrees that the Restrictive Covenants are reasonable and valid in duration and
geographical scope and in all other respects. If any court determines that any
of the Restrictive Covenants, or any part thereof, is invalid or unenforceable,
the remainder of the Restrictive Covenants shall not thereby be affected and
shall be given full effect without regard to the invalid portions.
3.4 BLUE-PENCILLING. If any court determines that any of the
Restrictive Covenants, or any part thereof, is unenforceable because of the
duration or geographical scope of such provision, such court shall have the
power to reduce the duration or scope of such provision, as the case may be,
and, in its reduced form, such provision shall then be enforceable.
3.5 ENFORCEABILITY IN JURISDICTIONS. The Company and the
Executive intend to and hereby confer jurisdiction to enforce the Restrictive
Covenants upon the courts of any jurisdiction within the geographical scope of
such Restrictive Covenants. If the courts of any one or more of such
jurisdictions hold the Restrictive Covenants unenforceable by reason of the
breadth of such scope or otherwise, it is the intention of the Company that such
determination not bar or in any way affect the right of the Company to the
relief provided above in the courts of any other jurisdiction within the
geographical scope of such Restrictive Covenants, as to breaches of such
Restrictive Covenants in such other respective jurisdictions, such Restrictive
Covenants as they relate to each jurisdiction being, for this purpose, severable
into diverse and independent covenants.
4. TERMINATION.
4.1 TERMINATION UPON DEATH. If the Executive dies during the
Term, this Employment Agreement shall terminate, provided, however, that in any
such event, the Company shall pay to the Executive, or to his estate, any
portion of the Annual Salary that shall have been earned by the Executive prior
to the termination but not yet paid, any Benefits that have vested in the
Executive at the time of such termination as a result of his participation in
any of the Company's benefit plans shall be paid to the Executive, or to his
estate or designated beneficiary, in accordance with the provisions of such
plan; and the Company shall reimburse the Executive, or his estate, for any
expenses with respect to which the Executive is entitled to reimbursement
pursuant to Section 2.6 of this Agreement, and the Executive's right to
indemnification, payment or reimbursement pursuant to Section 6 of this
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Agreement shall not be affected by such termination and shall continue in full
force and effect, both with respect to proceedings that are threatened, pending
or completed at the date of such termination and with respect to proceedings
that are threatened, pending or completed after that date.
4.2 TERMINATION WITH CAUSE. The Company has the right, at any
time during the Term, subject to all of the provisions hereof, exercisable by
serving notice, effective on or after the date of service of such notice as
specified therein, to terminate the Executive's employment under this Agreement
and discharge the Executive with Cause. If such right is exercised, the
Company's obligation to the Executive shall be limited solely to the payment of
unpaid Annual Salary accrued, together with unpaid Incentive Bonus, if any, and
Benefits vested up to the effective date specified in the Company's notice of
termination. As used in this Agreement, the term "Cause" shall mean and include
(i) chronic alcoholism or controlled substance abuse as determined by a doctor
mutually acceptable to the Company and the Executive, (ii) an act of proven
fraud or dishonesty on the part of the Executive with respect to the Company or
its subsidiaries; (iii) knowing and material failure by the Executive to comply
with material applicable laws and regulations relating to the business of the
Company or its subsidiaries; (iv) the Executive's material and continuing
failure to perform (as opposed to unsatisfactory performance) his duties
hereunder or a material breach by the Executive of this Agreement except, in
each case, where such failure or breach is caused by the illness or other
similar incapacity or disability of the Executive; or (v) conviction of a
misdemeanor involving moral turpitude or a felony. Prior to the effectiveness of
termination for Cause under subclause (i), (ii), (iii) or (iv) above, the
Executive shall be given 30 days' prior notice from the Board specifically
identifying the reasons which are alleged to constitute cause for any
termination hereunder and an opportunity to be heard by the Board in the event
Executive disputes such allegations.
4.3 TERMINATION WITHOUT CAUSE. The Company has the right, at
any time during the Term, subject to all of the provisions hereof, exercisable
by serving notice, effective on or after the date of service of such notice as
specified therein, to terminate the Executive's employment under this Agreement
and discharge the Executive without Cause. If the Executive is terminated during
the Term without Cause (including any termination which is deemed to be a
constructive termination without Cause under Section 4.6 hereof), the Company's
obligation to the Executive shall be limited solely to the payment, at the times
and upon the terms provided for herein, of the greater of (i) the Executive's
Annual Salary and Incentive Bonus for the number of full months remaining in the
Term of this Agreement (assuming no automatic extension of the Term) had the
Executive not been so terminated and (ii) the Executive's Annual Salary for a
period of twelve months, in each case based on the Annual Salary of the
Executive in effect on the date of termination (or, if the Company has reduced
the Executive's Annual Salary in breach of this Agreement, the Executive's
Annual Salary before such reduction) and, in the case of clause (i), the average
Incentive Bonus received by the Executive for the immediately preceding two
fiscal years, together with all unpaid Incentive Bonus and Benefits awarded or
accrued up to the date of termination. If the Executive is terminated after he
has received one Incentive Bonus but before he has received two, the Incentive
Bonus in clause (i) shall be based on the amount of that one Incentive Bonus; if
he has not yet received an Incentive Bonus, it shall be based on the maximum
Incentive Bonus (i.e., one half of the Annual Salary). In the event of a
termination by the Company without Cause within 180 days after a Change of
Control (as hereinafter defined), including a constructive termination without
Cause pursuant to Section 4.6, the amounts due to the Executive pursuant to this
Section 4.3 shall be due and payable in one lump-sum payment within 60 days
after such termination. In all other cases, any amounts due to the Executive
pursuant to this Section 4.3
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shall be due and payable as and when they would have become due and payable
absent such termination.
4.4 TERMINATION BY THE EXECUTIVE. Any termination of this
Agreement by the Executive during the Term, except such termination as is deemed
to be a constructive termination without Cause by the Company under Section 4.6
of this Agreement, shall be deemed to be a breach of the terms of this Agreement
for the purposes of Section 3.1.1 hereof and shall entitle the Company to
discontinue payment of all Annual Salary, Incentive Bonuses and Benefits
accruing from and after the date of such termination.
4.5 TERMINATION UPON DISABILITY. If during the Term the
Executive becomes physically or mentally disabled, whether totally or partially,
as evidenced by the written statement of a competent physician licensed to
practice medicine in the United States who is mutually acceptable to the Company
and the Executive or his closest relative if he is not then able to make such a
choice, so that the Executive is unable substantially to perform his services
hereunder for (i) a period of four consecutive months, or (ii) for shorter
periods aggregating six months during any twelve-month period, the Company may
at any time after the last day of the four consecutive months of disability or
the day on which the shorter periods of disability equal an aggregate of six
months, by written notice to the Executive, terminate the Executive's employment
hereunder and discontinue payments of the Annual Salary, Incentive Bonuses and
Benefits accruing from and after the date of such termination. The Executive
shall be entitled to the full compensation payable to him hereunder for periods
of disability shorter than the periods specified in clauses (i) and (ii) of the
previous sentence.
4.6 CONSTRUCTIVE TERMINATION WITHOUT CAUSE. Notwithstanding
any other provision of this Agreement, the Executive's employment under this
Agreement may be terminated during the Term by the Executive, which shall be
deemed to be constructive termination by the Company without Cause, if one of
the following events shall occur without the consent of the Executive: (i) a
failure to elect or reelect or to appoint or reappoint the Executive to the
office of Vice President - Human Resources of the Company or other material
change by the Company of the Executive's functions, duties or responsibilities
which change would reduce the ranking or level, dignity, responsibility,
importance or scope of the Executive's position with the Company from the
position and attributes thereof described in Section 1 above; (ii) the
assignment or reassignment by the Company of the Executive to another place of
employment more than 50 miles from the Executive's principal place of residence
in the Houston, Texas, metropolitan area; (iii) the liquidation, dissolution,
consolidation or merger of the Company, or transfer of all or substantially all
of its assets, other than a transaction in which a successor corporation with a
net worth at least equal to that of the Company assumes this Agreement and all
obligations and undertakings of the Company hereunder; (iv) a reduction in the
Executive's fixed salary; (v) a Change of Control as hereinafter defined; (vi)
the failure of the Company to continue to provide the Executive with office
space, related facilities and secretarial assistance that are commensurate with
the Executive's responsibilities to and position with the Company; (vii) the
notification by the Company of the Company's intention not to observe or perform
one or more of the obligations of the Company under this Agreement; (viii) the
failure by the Company to indemnify, pay or reimburse the Executive at the time
and under the circumstances required by Section 6 of this Agreement; (ix) the
occurrence of any other material breach of this Agreement by the Company or any
of its subsidiaries; or (x) the delivery of notice by the Company in accordance
with Section 1.1 hereof that it desires to terminate the Agreement, but only if
such notice is
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given before the Term has been automatically extended three times. Any such
termination shall be made by written notice to the Company, specifying the event
relied upon for such termination and given within 60 days after such event. Any
constructive termination shall be effective 60 days after the date the Company
has been given such written notice setting forth the grounds for such
termination with specificity; PROVIDED, HOWEVER, that Executive shall not be
entitled to terminate this Agreement in respect of any of the grounds set forth
above if within 60 days after such notice the action constituting such ground
for termination is no longer continuing. A constructive termination by the
Company without Cause shall terminate the Restrictive Period hereunder.
4.7 For the purposes hereof, a "Change of Control of the
Company" shall be deemed to have occurred if after the effective date (i) any
"person" (as such term is used in Sections 13(d) and 14(d) of the Act) is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934 (the "Act")), directly or indirectly, of securities of the
Company representing 50% or more of the combined voting power of the Company's
then outstanding securities without the prior approval of at least a majority of
the members of the Board in office immediately prior to such person attaining
such percentage interest; (ii) there occurs a proxy contest or a consent
solicitation, or the Company is a party to a merger, consolidation, sale of
assets, plan of liquidation or other reorganization not approved by at least a
majority of the members of the Board in office, as a consequence of which
members of the Board in office immediately prior to such transaction or event
constitute less than a majority of the Board thereafter; or (iii) during any
period of two consecutive years, other than as a result of an event described in
clause (ii) of this Section 4.7, individuals who at the beginning of such period
constituted the Board (including for this purpose any new director whose
election or nomination for election by the Company's stockholders was approved
by a vote of at least a majority of the directors then still in office who were
directors at the beginning of such period) cease for any reason to constitute at
least a majority of the Board.
5. INSURANCE. The Company may, from time to time, apply for and take
out, in its own name and at its own expense, naming itself or one or more of its
affiliates as the designated beneficiary (which it may change from time to
time), policies for life, health, accident, disability or other insurance upon
the Executive in any amount or amounts that it may deem necessary or appropriate
to protect its interest. The Executive agrees to aid the Company in procuring
such insurance by submitting to medical examinations and by filling out,
executing and delivering such applications and other instruments in writing as
may reasonably be required by an insurance company or companies to which any
application or applications for insurance may be made by or for the Company.
6. INDEMNIFICATION.
6.1 The Company shall, to the extent not prohibited by law,
indemnify the Executive if he is made, or threatened to be made, a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, including an action by or in the
right of the Company to procure a judgment in its favor (hereinafter a
"Proceeding"), by reason of the fact that the Executive is or was a director or
officer of the Company, or is or was serving in any capacity at the request of
the Company for any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against judgments, fines, penalties,
excise taxes, amounts paid in settlement and costs, charges and expenses
(including attorneys' fees and disbursements) paid or incurred in connection
with any such Proceeding.
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6.2 The Company shall, from time to time, reimburse or advance
to the Executive the funds necessary for payment of expenses, including
attorneys' fees and disbursements, incurred in connection with any Proceeding in
advance of the final disposition of such Proceeding; PROVIDED, HOWEVER, that, if
required by the Texas Business Corporation Act, such expenses incurred by or on
behalf of the Executive may be paid in advance of the final disposition of a
Proceeding only upon receipt by the Company of an undertaking, by or on behalf
of the Executive, to repay any such amount so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right of
appeal that the Executive is not entitled to be indemnified for such expenses.
6.3 The right to indemnification and reimbursement or
advancement of expenses provided by, or granted pursuant to, this Article 6
shall not be deemed exclusive of any other rights which the Executive may now or
hereafter have under any law, by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office.
6.4 The right to indemnification and reimbursement or
advancement of expenses provided by, or granted pursuant to, this Article 6
shall continue as to the Executive after he has ceased to be a director or
officer and shall inure to the benefit of the heirs, executors and
administrators of the Executive.
6.5 The Company shall purchase and maintain director and
officer liability insurance on such terms and providing such coverage as the
Board determines is appropriate, and the Executive shall be covered by such
insurance on the same basis as the other directors and executive officers of the
Company.
6.6 The right to indemnification and reimbursement or
advancement of expenses provided by, or granted pursuant to, this Article 6
shall be enforceable by the Executive in any court of competent jurisdiction.
The burden of proving that such indemnification or reimbursement or advancement
of expenses is not appropriate shall be on the Company. Neither the failure of
the Company (including its board of directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that such indemnification or reimbursement or advancement of expenses is
proper in the circumstances nor an actual determination by the Company
(including its board of directors, independent legal counsel, or its
stockholders) that the Executive is not entitled to such indemnification or
reimbursement or advancement of expenses shall constitute a defense to the
action or create a presumption that the Executive is not so entitled. The
Executive shall also be indemnified for any expenses incurred in connection with
successfully establishing his right to such indemnification or reimbursement or
advancement of expenses, in whole or in part, in any such proceeding.
6.7 If the Executive serves (1) another corporation of which a
majority of the shares entitled to vote in the election of its directors is held
by the Company, or (2) any employee benefit plan of the Company or any
corporation referred to in clause (1), in any capacity, then he shall be deemed
to be doing so at the request of the Company.
6.8 The right to indemnification or reimbursement or
advancement of expenses shall be interpreted on the basis of the applicable law
in effect at the time of the occurrence of the event or events giving rise to
the applicable Proceeding.
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7. OTHER PROVISIONS.
7.1 CERTAIN DEFINITIONS. As used in this Agreement, the
following terms have the following meanings unless the context otherwise
requires:
(i)"affiliate" with respect to the Company means any
other person controlled by or under common control
with the Company but shall not include any
stockholder or director of the Company, as such.
(ii) "person" means any individual, corporation,
partnership, firm, joint Company, association,
joint-stock company, trust, unincorporated
organization, governmental or regulatory body or
other entity.
(iii) "subsidiary" means any corporation 50% or more
of the voting securities of which are owned
directly or indirectly by the Company.
7.2 NOTICES. Any notice or other communication required or
permitted hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed, sent by facsimile transmission or sent by certified,
registered or express mail, postage prepaid. Any such notice shall be deemed
given when so delivered personally, telegraphed, telexed or sent by facsimile
transmission or, if mailed, on the date of actual receipt thereof, as follows:
(i) if to the Company, to:
DI Industries, Inc.
450 Gears Road, Suite 625
Houston, Texas 77067
Attention: President
with a copy to:
Parson & Brown
666 Third Avenue
New York, New York 10017
Attention: William R. Ziegler, Esq.
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(ii) if to the Executive, to:
Gary D. Lee
16223 Lutheran School Road
Tomball, Texas 77375
Any party may change its address for notice hereunder by notice to the other
party hereto.
7.3 ENTIRE AGREEMENT. This Agreement contains the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior agreements, written or oral, with respect thereto.
7.4 WAIVERS AND AMENDMENTS. This Agreement may be amended,
superseded, canceled, renewed or extended, and the terms and conditions hereof
may be waived, only by a written instrument signed by the parties or, in the
case of a waiver, by the party waiving compliance. No delay on the part of any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof. Nor shall any waiver on the part of any party of any such right,
power or privilege hereunder, nor any single or partial exercise of any right,
power or privilege hereunder, preclude any other or further exercise thereof or
the exercise of any other right, power or privilege hereunder.
7.5 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas (without giving
effect to the choice of law provisions thereof) where the employment of the
Executive shall be deemed, in part, to be performed and enforcement of this
Agreement or any action taken or held with respect to this Agreement shall be
taken in the courts of appropriate jurisdiction in Houston, Texas.
7.6 ASSIGNMENT. This Agreement, and any rights and obligations
hereunder, may not be assigned by the Executive and may be assigned by the
Company (subject to Section 4.6 (iii) hereof) only to a successor by merger or
purchasers of substantially all of the assets of the Company.
7.7 COUNTERPARTS. This Agreement may be executed in separate
counterparts, each of which when so executed and delivered shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
7.8 HEADINGS. The headings in this Agreement are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
7.9 NO PRESUMPTION AGAINST INTEREST. This Agreement has
been negotiated. drafted, edited and reviewed by the respective parties, and
therefore, no provision arising directly or indirectly herefrom shall be
construed against any party as being drafted by said party.
7.10 VALIDITY CONTEST. The Company shall promptly pay any and
all legal fees and expenses incurred by the Executive from time to time as a
direct result of the Company's contesting the due execution, authorization,
validity or enforceability of this Agreement.
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7.11 BINDING AGREEMENT. This Agreement shall inure to the
benefit of and be binding upon the Company and its respective successors and
assigns and the Executive and his legal representatives.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
DI INDUSTRIES, INC.
By /S/ T. P. RICHARDS
Name: T. P. Richards
Title: President and CEO
EXECUTIVE
/S/ GARY D. LEE
Gary D. Lee
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DI INDUSTRIES, INC.
INCENTIVE STOCK OPTION AGREEMENT
THIS INCENTIVE STOCK OPTION AGREEMENT (this "Agreement") made as of March
17, 1997 by and between DI INDUSTRIES, INC., a corporation organized under the
laws of the State of Texas (the "Corporation"), and GARY D. LEE, an individual
residing in the State of Texas (the "Optionee");
W I T N E S S E T H:
WHEREAS, as an inducement to the Optionee to enter into a contract of
employment with the Corporation under the terms of an Employment Agreement dated
of even date herewith by and between the Optionee and the Corporation (the
"Employment Agreement") and to provide Optionee with additional incentive to
further the business of the Corporation, the Corporation has agreed to grant the
Optionee options to purchase shares of common stock, $0.10 par value ("Common
Stock"), of the Corporation; and
WHEREAS, by granting the Optionee options to purchase shares of Common
Stock pursuant to the terms of this Agreement, the Corporation intends to carry
out the purposes set forth in the 1996 Employee Stock Option Plan of the
Corporation (the "Plan") adopted by the Board of Directors of the Corporation
(the "Board of Directors") effective as of July 29, 1996 and the shareholders of
the Corporation effective as of August 27, 1996; and
WHEREAS, it is intended that the options granted to Optionee pursuant to
this Agreement constitute incentive stock options under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the Corporation and the Optionee desire to set forth the terms
and conditions of such options to purchase Common Stock;
NOW, THEREFORE, in consideration of the mutual promises contained herein,
and other good and valuable consideration, the receipt, adequacy and sufficiency
of which are hereby acknowledged, the parties hereto do hereby agree as follows:
1. GRANT OF OPTION. Subject to the terms and conditions hereinafter set
forth, the Corporation hereby grants to the Optionee an option (the "Option") to
purchase all or any part of an aggregate number of 150,000 shares of Common
Stock (such shares, as increased or decreased in accordance with Section 8
hereof, being referred to hereinafter as the "Option Shares") at an exercise
price of $2.8750 per share (hereinafter the "Exercise Price").
2. EXERCISE PERIOD. The Option shall be exercisable by Optionee as to
twenty percent (20%) of the Option Shares one (1) year after the date of this
Agreement, as to an additional twenty percent (20%) of the Option Shares, two
(2) year after the date of this Agreement, as to an additional twenty percent
(20%) of the Option Shares, three (3) years after the date of this
<PAGE>
Agreement, as to an additional twenty percent (20%) of the Option Shares, four
(4) years after the date of this Agreement, until the fifth anniversary of the
date of this Agreement, after which time the Option shall be exercisable in
full. The Option shall expire and terminate as to any Option Shares not
purchased by the Optionee on or before the tenth anniversary of the date of this
Agreement (the "Expiration Date"), subject to earlier termination as set forth
herein.
Except as provided in Section 10 hereof, the Option may not be exercised
at any time unless the Optionee shall have been in the continuous employ of the
Corporation, or a parent or a subsidiary corporation, from the date hereof to
the date of the exercise of the Option.
3. METHOD OF EXERCISING THE OPTION. The Option shall be exercised by the
Optionee delivering to the Corporation (i) written notice from the Optionee
stating that the Optionee is exercising the Option and specifying the number of
Option Shares that the Optionee is entitled to purchase (the "Notice"), which
shall be in form and content identical to ANNEX I hereto and (ii) the aggregate
Exercise Price (the "Payment") for the number of Option Shares that the Optionee
is entitled to purchase, which Exercise Price must be in the form of (a) cash or
a cashier's or certified check payable to the order of the Corporation, or (b)
the tender to the Corporation of such number of shares of Common Stock owned by
the Optionee having an aggregate fair market value as of the date of exercise
that is not greater than the total Exercise Price for the shares of Common Stock
with respect to which the Option is being exercised and by paying the remaining
amount of the Exercise Price.
4. TRANSFERABILITY OF OPTION. The Option shall not be transferable or
assignable, in whole or in part, and except as otherwise provided in Section 10
of this Agreement, the Option shall be exercisable (i) only by the Optionee
during his lifetime, or (ii) in the event of his death, by his heirs,
representatives, distributees, or legatees in accordance with his will or the
laws of descent and distribution (but only to the extent that the Option would
be exercisable by the Optionee under Section 2).
5. INVESTMENT REPRESENTATION. The Optionee represents that the Option
Shares available for purchase by the Optionee under this Agreement will be
acquired only for investment and not with a view toward resale or distribution.
6. SECURITIES LAW REQUIREMENTS; LEGENDS. The Optionee agrees and
understands that the Option Shares may be restricted securities as defined in
Rule 144 promulgated under the Securities Act of 1933, as amended (the
"Securities Act"), and may not be sold, assigned or transferred, unless the
sale, assignment or transfer of such shares is registered under the Securities
Act and applicable blue sky laws, as now in effect or hereafter amended, or
there is furnished an opinion of counsel in form and substance satisfactory to
the Corporation from counsel acceptable to the Corporation that such
registrations are not required. The Optionee further understands and agrees
that, unless issued pursuant to an effective registration statement under the
Securities Act, the following legend shall be set forth on each certificate
representing Option Shares:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 OR UNDER THE
-2-
<PAGE>
BLUE SKY LAWS OF ANY STATE, AND MAY NOT BE SOLD, ASSIGNED OR TRANSFERRED
EXCEPT UPON SUCH REGISTRATION OR UPON RECEIPT BY THE CORPORATION OF AN
OPINION OF COUNSEL FOR THE CORPORATION THAT SUCH REGISTRATION IS NOT
REQUIRED FOR SUCH SALE, ASSIGNMENT OR TRANSFER."
In addition, the following legend shall be placed on each certificate
representing Option Shares:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE GOVERNED BY THE TERMS OF
THE 1996 EMPLOYEE STOCK OPTION PLAN OF THE CORPORATION, DATED JULY 29,
1996, WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION AND A
COPY OF WHICH WILL BE PROVIDED FOR INSPECTION UPON WRITTEN REQUEST."
7. NO RIGHTS AS SHAREHOLDER. The Optionee shall not have any rights as a
shareholder with respect to any of the Option Shares until the date of issuance
by the Corporation to the Optionee of a stock certificate representing such
Option Shares. Except as otherwise provided in Section 8 hereof, the Optionee
shall not be entitled to any dividends, cash or otherwise, or any adjustment of
the Option Shares for such dividends, if the record date therefor is prior to
the date of issuance of such stock certificate. Upon valid exercise of the
Option by the Optionee, the Corporation agrees to cause a valid stock
certificate for the number of Option Shares then purchased to be issued and
delivered to the Optionee within seven (7) business days thereafter.
8. CORPORATE PROCEEDINGS OF THE CORPORATION.
(a) The existence of the Option shall not affect in any way the
right or power of the Corporation or its officers, directors and
shareholders, as the case may be, to (i) make or authorize any
adjustments, recapitalizations, reorganizations or other changes in the
capital structure or business of the Corporation, (ii) participate in any
merger or consolidation of the Corporation, (iii) issue any Common Stock,
bonds, debentures, preferred or prior preference stock or any other
securities affecting the Common Stock or the rights of holders thereof,
(iv) dissolve or liquidate the Corporation, (v) sell or transfer all or
any part of the assets or business of the Corporation, or (vi) perform any
other corporate act or proceedings, whether of a similar character or
otherwise.
(b) If the Corporation merges into or with or consolidates with
(such events collectively referred herein as a "Merger") any corporation
or corporations and is not the surviving corporation, then the surviving
corporation may assume the Option or substitute a new option of the
surviving corporation for the Option; provided, however, that the excess
of the aggregate fair market value of the securities subject to the Option
immediately after such assumption, or the new option immediately after
such substitution, over the aggregate Exercise Price of such shares must
be, based upon a good faith determination by the Board of Directors of the
Corporation, not less than the excess of the aggregate fair market value
of the Common Stock subject to the Option immediately
-3-
<PAGE>
before such substitution or assumption over the aggregate Exercise Price
of such Common Stock.
(c) In the event that the surviving corporation does not utilize the
provisions of (b) above, or in the event of a dissolution or liquidation
of the Corporation, the Corporation shall cause written notice of such
Merger or dissolution or liquidation (and the material terms and
conditions thereof) to be delivered to the Optionee at least ten (10) days
prior to the proposed effective date (the "Effective Date") of such event.
The Optionee shall be entitled to exercise the Option until the Effective
Date, or until the Expiration Date if earlier. To the extent that the
Merger or liquidation is consummated after the Effective Date, the Option
shall terminate and the Corporation shall have no further obligations of
any type hereunder. The provisions of this paragraph shall not apply to
any merger or reorganization, the principal purpose of which is to change
the jurisdiction of the domicile of the Corporation.
(d) If, while the Option is outstanding, the Corporation shall
effect a subdivision or consolidation of the shares of Common Stock or
other capital readjustment, the payment of a common stock dividend, or
other increase or reduction of the number of shares of Common Stock
outstanding, without receiving compensation therefor in money, services or
property, then (i) in the event of an increase in the number of shares of
Common Stock outstanding, the number of Option Shares shall be
proportionately increased, and the per share Exercise Price shall be
proportionately reduced, and (ii) in the event of a reduction in the
number of shares of Common Stock outstanding, the number of Option Shares
shall be proportionately reduced, and the per share Exercise Price shall
be proportionately increased. No fractional share of Common Stock shall be
issued upon any such exercise and the Exercise Price shall be
appropriately reduced on account of any fractional share not issued.
(e) The issuance by the Corporation of shares of stock of any class
of securities convertible into shares of stock of any class, including
Common Stock, for cash, property, labor or services rendered, either upon
direct sale or upon the exercise of rights, options, or warrants to
subscribe therefor, or upon conversion of shares or obligations of the
Corporation convertible into such shares or other securities, shall not
affect, and no adjustment by reason thereof shall be made with respect to,
the number of Option Shares or the Exercise Price.
9. REGISTRATION RIGHTS. The Optionee shall have no registration
rights with respect to the Option Shares.
10. TERMINATION.
(a) If the Optionee for any reason whatsoever, other than death or
permanent and total disability, as defined in (b) below, ceases to be
employed by the Corporation, or a parent or subsidiary corporation of the
Corporation, and prior to such cessation, the
-4-
<PAGE>
Optionee was employed at all times from the date of the granting of the
Option until the date of such cessation, the Option must be exercised by
the Optionee (to the extent that the Optionee is entitled to do so at the
date of cessation) within three (3) months following the date of cessation
of employment, subject to the Expiration Date; provided, however, that if
the Optionee is terminated for cause (as defined in the Employment
Agreement), the Option will immediately terminate.
(b) If the Optionee becomes permanently and totally disabled, as
hereinafter defined, while employed by the Corporation or a parent or
subsidiary corporation of the Corporation, and prior to such disability
the Optionee was employed at all times from the date of the granting of
the Option until the date of disability, the Option must be exercised by
the Optionee (to the extent that the Optionee is entitled to do so at the
date of disability) at any time within one (1) year after the date of
disability or the Expiration Date, whichever is earlier.
"Permanently and totally disabled" means being unable to engage in
any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or
which has lasted or can be expected to last for a continuous period of not
less than twelve (12) months. Such determination of permanent and total
disability must be made in accordance with the requirements of Section
22(e)(3), and applicable regulations, of the Code, or any other applicable
method necessary for the continued qualification of this Plan under
Section 422 of the Code, or any equivalent successor provision, if
applicable. In the absence of any specific requirements for this
determination, the decision of the Corporation, as aided by any physicians
designated by the Corporation shall be conclusive and the Corporation
shall send written notice to the Optionee of the determination that the
Optionee has become permanently and totally disabled.
(c) In the event that the Optionee dies while employed by the
Corporation or a parent or subsidiary corporation of the Corporation, and
prior to death the Optionee was employed at all times from the date of the
granting of the Option until the date of death, the Option must be
exercised (to the extent that the Optionee is entitled to do so at the
date of death) by a legatee or legatees of the Optionee under the
Optionee's will, or by the Optionee's personal representatives or
distributes, at any time within one (1) year after the date of death or
the Expiration Date, whichever is earlier, and if not so exercised, the
Option shall thereupon terminate.
Nothing in (a), (b) or (c) shall extend the time for exercising the
Option granted pursuant to this Agreement beyond the Expiration Date.
11. DISPOSITION OF STOCK AFTER EXERCISE OF OPTION. Notwithstanding any
other provision of this Agreement to the contrary, in consideration of the
granting of the Option, the Optionee agrees (i) not to dispose of any Option
Shares within two (2) years after the date of this Agreement nor within one (1)
year after the date of exercise of the Option and (ii) not to dispose of any
Option Shares thereafter without the prior approval of the Corporation unless
such shares
-5-
<PAGE>
have been registered under the Securities Act.
12. NOTICES. All notices, demands, requests and other communications
required or permitted hereunder shall be in writing and shall be deemed to be
delivered when actually received through U.S. Express Mail or any private
express service (as evidenced by a written receipt), or, if earlier, and
regardless of whether actually received (except where receipt is specified in
this Agreement), four (4) days following deposit in a regularly maintained
receptacle for the United States mail, registered or certified, return receipt
requested, postage fully prepaid, addressed to the addressee at its address set
forth below or at such other address as such party may have specified
theretofore by notice delivered in accordance with this Section:
If to the Corporation: DI Industries, Inc.
450 Gears Road, Suite 625
Houston, Texas 77067
Attn: President
If to Optionee: Gary D. Lee
16223 Lutheran School Road
Tomball, Texas 77375
13. TRANSFERABILITY; BINDING EFFECT. The Option shall be transferable only
as set forth in Section 4. Subject to the foregoing, all covenants, terms,
agreements and conditions of this Agreement shall be binding upon, inure to the
benefit of, and be enforceable by, the Corporation and the Optionee and their
respective successors and assigns.
14. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
and understanding between the Corporation and the Optionee relating to the
subject matter hereof.
15. PARENT AND SUBSIDIARY. As used herein, the terms "parent" and
"subsidiary" shall mean any present or future corporation which would be a
"parent corporation" or a "subsidiary corporation" of the Corporation, as such
term is defined in Section 425 of the Internal Revenue Code.
16. GOVERNING LAW. This Agreement shall be governed by the laws of
the State of Texas.
17. CAPTIONS. The section and paragraph headings in this Agreement
are for reference purposes only and shall not affect in any way the meaning
or interpretation of this Agreement.
18. COUNTERPARTS. This Agreement may be executed in multiple
original counterparts, each of which shall be deemed an original, but all of
which together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, this Agreement has been executed and delivered as of
the date first written above.
-6-
<PAGE>
CORPORATION:
DI INDUSTRIES, INC.
By: /S/T.P. Richards_______________
Name: T. P. Richards
Title: President and CEO
OPTIONEE:
/S/ GARY D. Lee_____________________
Gary D. Lee
-7-
EXHIBIT 11.1
DI INDUSTRIES, INC. AND SUBSIDIARIES
COMPUTATION OF PRIMARY AND FULLY DILUTED LOSS PER SHARE
(Amounts in thousands, except per share amounts)
Nine
Year Ended Year Ended Months Ended
December 31, December 31, December 31,
1996 1995 1994
-------- -------- -----
Weighted average shares of common
stock outstanding 67,495 38,669 38,641
Stock options (treasury stock method) - - -
--------- -------- -----
Weighted average shares for primary
loss per share calculation 67,495 38,669 38,641
Stock options (treasury stock method) - - -
---------- ----------- -----
Weighted average shares for fully
diluted loss per share
calculation 67,495 38,669 38,641
========== ========== =========
Net loss applicable to common
stock $ (12,124) $(13,447) $ (2,209)
========== =========== ==========
Loss per share:
Primary $ (.18) $ (.35) $ (.06)
========== ========= ========
Fully diluted $ (.18) $ (.35) $ (.06)
========== ========= ========
Note:Reference is made to Note 1 to Consolidated Financial Statements regarding
computation of per share amounts.
EXHIBIT 22.1
DI INDUSTRIES, INC.
LIST OF SUBSIDIARIES
State/Country of
SUBSIDIARY INCORPORATION
Drillers, Inc. Texas
DI Energy, Inc. Texas
DI International, Inc. Texas
DI/Perfensa Inc. (89%-Owned) Texas
Prymapozos S.A. de C.V. Mexico
Drillers International, S.A. Argentina
Perforaciones Andinas S.A. Panama
DI International C.A. Venezuela
Drillers Inc. DI de Venezuela, C. A. Venezuela
INDRILLERS, L.L.C. (65% owned) Michigan
EXHIBIT 24.1
INDEPENDENT AUDITORS' CONSENT
We consent to incorporation by reference in the Registration Statements
Nos. 33-34590, 33-75338 and 333-19027 of DI Industries, Inc. on Form S-8 and
Registration Statements Nos. 333-14783, 333-6077 and 333-2043 of 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.
KPMG Peat Marwick LLP
Houston, Texas
March 25, 1997
EXHIBIT 24.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration
Statements Nos. 33-34590, 33-75338 and 33-19027 of DI Industries, Inc. on Form
S-8 and Registration Statements Nos. 333-14783, 333-6077 and 333-2043 of DI
Industries, Inc. on Form S-3, of our report dated March 28, 1996, appearing in
this Annual Report on Form 10-K of DI Industries, Inc. for the year ended
December 31, 1996.
Deloitte & Touche LLP
Houston, Texas
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 FOR DI
INDUSTRIES, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,162
<SECURITIES> 0
<RECEIVABLES> 17,199
<ALLOWANCES> (1,333)
<INVENTORY> 936
<CURRENT-ASSETS> 28,211
<PP&E> 100,459
<DEPRECIATION> (11,983)
<TOTAL-ASSETS> 117,819
<CURRENT-LIABILITIES> 22,016
<BONDS> 0
764
0
<COMMON> 12,504
<OTHER-SE> 52,142
<TOTAL-LIABILITY-AND-EQUITY> 117,819
<SALES> 81,767
<TOTAL-REVENUES> 81,767
<CGS> 80,388
<TOTAL-COSTS> 95,482
<OTHER-EXPENSES> (2,838)
<LOSS-PROVISION> 302
<INTEREST-EXPENSE> 1,220
<INCOME-PRETAX> (10,877)
<INCOME-TAX> 845
<INCOME-CONTINUING> (11,722)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,722)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
