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As filed with the Securities and Exchange Commission on April 25, 1997
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------------
DI INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 1381 74-2144774
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or organization) Industrial Classification Identification No.)
Code Number)
10370 RICHMOND AVENUE, SUITE 600
HOUSTON, TEXAS 77042-4136
713-435-6100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
T. SCOTT O'KEEFE
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
DI INDUSTRIES, INC.
10370 RICHMOND AVENUE, SUITE 600
HOUSTON, TEXAS 77042-4136
713-435-6100
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
With copies to:
NICK D. NICHOLAS JOHN A. WATSON
PORTER & HEDGES, L.L.P. FULBRIGHT & JAWORSKI L.L.P.
700 LOUISIANA, 35TH FLOOR 1301 MCKINNEY, SUITE 5100
HOUSTON, TEXAS 77002-2370 HOUSTON, TEXAS 77010-3095
TELEPHONE: (713) 226-0637 TELEPHONE: (713) 651-5151
TELECOPIER: (713) 226-0237 TELECOPIER: (713) 651-5246
---------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective and the
conditions to the Merger described herein have been satisfied or waived.
---------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO OFFERING MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PRICE PER UNIT OFFERING PRICE REGISTRATION FEE
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Common Stock, $.10 par value................. 19,090,910 $ 2.5625 (1) $48,920,457(1) $100 (1)
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(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457. Rule 457(f) is applicable for purposes of
calculating the filing fee with respect to the Merger transaction
described in this Registration Statement in which the Registrant will
acquire a privately-held corporation for cash and shares of the
Registrant's Common Stock. However, the calculation of the filing fee
in accordance with the applicable provisions of Rule 457(f)(2) and (3)
results in no filing fee being due because of the payment by
Registrant of cash in the Merger in excess of the book value of the
securities of the privately-held company to be canceled in the Merger.
Nevertheless, in accordance with verbal advice received on April 21,
1997, from Mr. Michael Hyatte of the Office of Chief Counsel of the
Division of Corporation Finance, a minimum filing fee of $100 is being
paid herewith in compliance with the Staff's position that the removal
of the previously applicable $100 minimum filing fee from Section 6 of
the Securities Act of 1933, as most recently amended, was not intended
to take effect until the next fiscal year of the United States
Government.
---------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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[LETTERHEAD OF GREY WOLF DRILLING COMPANY]
May , 1997
Dear Shareholder:
You are cordially invited to attend a special meeting of shareholders
(the "Special Meeting") of Grey Wolf Drilling Company ("Grey Wolf") to be held
at the offices of Fulbright & Jaworski L.L.P., 1301 McKinney Street, Suite
5100, Houston, Texas 77010, at 10:00 a.m. Houston, Texas time on June , 1997.
At the Special Meeting, holders of shares of Grey Wolf common stock
will be asked to consider and vote upon a proposal to approve an Agreement and
Plan of Merger dated as of March 7, 1997 (the "Merger Agreement"), among DI
Industries, Inc. ("DI"), Drillers, Inc. and Grey Wolf. The Merger Agreement
provides for the merger (the "Merger") of Grey Wolf into Drillers, Inc. In the
Merger, each outstanding share of Grey Wolf will be converted into the right to
receive approximately $18.97 in cash, 4.692 shares of DI common stock, par
value $.10 per share ("DI Common Stock") and, subject to certain contingencies,
up to an additional $1.68 in cash. The amount of cash and the number of shares
of DI Common Stock to be received in the Merger will be adjusted under certain
circumstances, all as described in the accompanying Prospectus/Proxy Statement.
A summary of the basic terms and conditions of the Merger, certain
financial and other information relating to DI and Grey Wolf and a copy of the
Merger Agreement are set forth in the enclosed Prospectus/Proxy Statement.
Please review and consider the enclosed materials carefully. In connection with
the approval of the Merger on March 7, 1997, the Board of Directors received
and took into account the opinion of Jefferies & Company, Inc., an investment
banking firm retained by Grey Wolf, that, as of that date, and based on the
assumptions stated therein, the Merger consideration to be received by the
holders of Grey Wolf common stock pursuant to the Merger Agreement is fair,
from a financial point of view, to such holders.
The Board of Directors has approved the Merger Agreement and related
transactions. THE BOARD OF DIRECTORS AND MANAGEMENT BELIEVE THAT THE PROPOSED
MERGER IS IN THE BEST INTERESTS OF GREY WOLF AND THE SHAREHOLDERS OF GREY WOLF
AND UNANIMOUSLY RECOMMEND THAT YOU VOTE FOR ITS APPROVAL.
Your vote is important regardless of how many shares you own. Please
take a few minutes now to review the Prospectus/Proxy Statement and to sign and
date your proxy and return it in the envelope provided. You may attend the
meeting and vote in person even if you have previously returned your proxy.
Thank you for your continued interest and cooperation.
Very truly yours,
James K. B. Nelson
President and Chief Executive Officer
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GREY WOLF DRILLING COMPANY
1980 POST OAK BOULEVARD, SUITE 1150
HOUSTON, TEXAS 77056-3308
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE , 1997
Notice is hereby given that a Special Meeting of the Shareholders of
Grey Wolf Drilling Company, a Texas corporation ("Grey Wolf"), will be held on
June , 1997, at 10:00 a.m. Houston, Texas time, at the offices of Fulbright &
Jaworski L.L.P., 1301 McKinney Street, Suite 5100, Houston, Texas 77010 (the
"Meeting") for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger dated as of March 7, 1997, by and among
DI Industries, Inc. ("DI") and Drillers, Inc., a wholly-owned
subsidiary of DI (the "Purchaser") and Grey Wolf (the "Merger
Agreement") pursuant to which, among other things, (i) Grey Wolf will
merge with and into the Purchaser, which will survive the merger, and
Grey Wolf will cease to exist (the "Merger"), (ii) each outstanding
share of Grey Wolf's common stock, no par value, ("GW Common Stock")
other than Dissenting Shares (as defined in the Merger Agreement),
will be converted in the Merger into the right to receive
approximately $18.97 in cash, 4.692 shares of DI common stock, par
value $.10 per share ("DI Common Stock") and, subject to certain
contingencies, up to an additional $1.68 in cash and (iii) the amount
of cash and number of shares of DI Common Stock to be received in the
Merger will be adjusted under certain circumstances, all as described
in the accompanying Prospectus/Proxy Statement to which is attached a
copy of the Merger Agreement; and
2. to transact such other business as may properly come before the
Meeting or any adjournment or postponement thereof.
Holders of record of GW Common Stock at the close of business on May ,
1997, will be entitled to notice of and to vote at the Meeting and adjournment
or postponement thereof.
Shareholders are cordially invited and urged to attend the Meeting in
person. Whether or not you plan to attend, please complete, sign, date and
promptly return the enclosed Proxy in the self-addressed stamped envelope
provided, which requires no postage if mailed in the United States.
Shareholders who have given a proxy may revoke the proxy at any time before its
exercise at the Meeting, and shareholders that are present at the Special
Meeting may withdraw their proxy and vote in person.
THE BOARD OF DIRECTORS OF GREY WOLF HAS APPROVED AND ADOPTED THE
MERGER AGREEMENT AND RECOMMENDS THAT YOU VOTE FOR THE APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT. EVEN IF YOU PLAN TO BE PRESENT AT THE MEETING, PLEASE
COMPLETE, SIGN, DATE AND MAIL THE ENCLOSED PROXY, WHICH IS BEING SOLICITED BY
GREY WOLF'S BOARD OF DIRECTORS. YOUR COOPERATION IS APPRECIATED.
By Order of the Board of Directors
Secretary
Houston, Texas
May , 1997
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED APRIL 25, 1997
PROSPECTUS/PROXY STATEMENT
DI INDUSTRIES, INC.
PROSPECTUS
---------------------------
GREY WOLF DRILLING COMPANY
PROXY STATEMENT
---------------------------
This Prospectus/Proxy Statement is being furnished to shareholders of
Grey Wolf Drilling Company, a Texas corporation ("Grey Wolf"), in connection
with the solicitation of proxies by its Board of Directors for use at a Special
Meeting of Shareholders (the "Meeting") to be held on June , 1997, at 10:00
a.m. Houston, Texas time, at the offices of Fulbright & Jaworski L.L.P. 1301
McKinney, Suite 5100, Houston, Texas 77010 and any adjournment or postponement
thereof.
At the Meeting, shareholders of Grey Wolf will be asked to consider
and vote upon a proposal to approve and adopt the Agreement and Plan of Merger
dated as of March 7, 1997 by and among DI Industries, Inc. ("DI") and Drillers,
Inc., a wholly-owned subsidiary of DI (the "Purchaser") and Grey Wolf (the
"Merger Agreement") pursuant to which Grey Wolf will merge with and into the
Purchaser, which will survive the merger. The Merger Agreement provides that
each outstanding share of Grey Wolf's common stock, no par value ("GW Common
Stock"), other than shares held by shareholders that perfect and do not waive
dissenter's appraisal rights under Texas law, will be converted into the right
to receive (i) cash of approximately $18.97, (ii) 4.692 shares of DI common
stock, par value $.10 per share ("DI Common Stock") and (iii) subject to
certain contingencies, up to an additional $1.68 in cash. The amount of cash
and number of shares of DI Common Stock to be received by Grey Wolf
shareholders in the Merger are subject to material adjustment as set forth in
the Merger Agreement. Under Texas law, Grey Wolf shareholders will have certain
dissenter's rights of appraisal in connection with the Merger. See "The
Merger--Rights of Dissenting Shareholders."
This Prospectus/Proxy Statement also constitutes the prospectus of DI
pursuant to the Securities Act of 1933, as amended, (the "Securities Act"),
with respect to 14,000,000 shares of DI Common Stock issuable in the Merger,
such number of shares being subject to increase or decrease pursuant to the
terms of the Merger Agreement. DI Common Stock is traded on the American Stock
Exchange ( the "AMEX") under the symbol "DRL." On May , 1997, the closing sales
price of DI Common Stock as reported on the AMEX was $ per share.
SEE "RISK FACTORS," AT PAGE 16 FOR INFORMATION THAT SHOULD BE
CONSIDERED REGARDING THE SECURITIES OFFERED HEREBY.
This Prospectus/Proxy Statement and the accompanying proxy are first
being mailed to Grey Wolf shareholders on or about May , 1997.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
---------------------------
The date of this Prospectus/Proxy Statement is May , 1997.
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TABLE OF CONTENTS
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AVAILABLE INFORMATION.................................................................................2
FORWARD-LOOKING STATEMENTS............................................................................2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.......................................................3
SUMMARY...............................................................................................5
Parties to the Merger...........................................................................5
DI Industries, Inc...........................................................................5
Grey Wolf Drilling Company...................................................................5
Drillers, Inc. ..............................................................................5
The Meeting.....................................................................................5
Time, Date and Place.........................................................................5
Purposes of the Meeting......................................................................5
Vote Required................................................................................5
Voting of Proxies............................................................................5
Revocability of Proxies......................................................................5
Record Date; Shares Entitled to Vote.........................................................6
Quorum.......................................................................................6
The Merger......................................................................................6
General......................................................................................6
Effective Time...............................................................................6
Conversion of GW Common Stock. .............................................................6
Recommendation of the Board of Directors of Grey Wolf...........................................7
Opinion of Financial Advisor to Grey Wolf.......................................................7
Escrow Arrangements.............................................................................7
Amount and Purpose...........................................................................7
Distributions to Former Grey Wolf Shareholders...............................................7
Grey Wolf Employee Trust........................................................................7
Representations and Warranties..................................................................8
Certain Covenants and Agreements................................................................8
Treatment of Benefit Plans......................................................................8
Conduct of Business Pending the Merger; Non-Solicitation........................................8
Termination and Termination Payments............................................................8
Management Following the Merger.................................................................9
Voting Agreements of Controlling Shareholders of Grey Wolf......................................9
Interest of Certain Persons in the Merger; Possible Conflicts of Interest.......................9
Restrictions on Resales by Affiliates...........................................................9
Registration Rights............................................................................10
Rights of Dissenting Shareholders..............................................................10
Certain United States Federal Income Tax Consequences..........................................10
Regulatory Approvals...........................................................................10
Exchange of Certificates.......................................................................10
Accounting Treatment...........................................................................11
Source of DI Funds.............................................................................11
Comparison of Shareholders' Rights.............................................................11
Risk Factors...................................................................................11
Market and Dividend Data.......................................................................11
SELECTED HISTORICAL FINANCIAL DATA...................................................................13
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SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA..............................................15
RISK FACTORS.........................................................................................16
History of Losses from Operations..............................................................16
Significant Leverage and Debt Service Requirements.............................................16
Restrictions Imposed by Terms of Indebtedness..................................................16
Risk of Default Upon a Change of Control.......................................................17
Dependence on Oil and Gas Industry; Industry Conditions........................................17
Intense Competition............................................................................17
Risks Associated with Turnkey Drilling.........................................................17
Operating Hazards and Insurance................................................................18
New Management and Business Strategy...........................................................18
Risks of Acquisition Strategy..................................................................18
Governmental Regulations.......................................................................18
Risks of International Operations..............................................................19
Limitations on the Availability of DI's Net Operating Loss Carryforwards.......................19
Qualification as a Reorganization for U.S. Federal Income Tax Purposes.........................19
Shares Eligible for Future Sale................................................................20
THE MEETING..........................................................................................21
Date, Time and Place...........................................................................21
Purposes of the Meeting........................................................................21
Vote Required..................................................................................21
Voting of Proxies..............................................................................21
Revocability of Proxies........................................................................21
Record Date; Shares Entitled to Vote...........................................................21
Quorum.........................................................................................22
Solicitation of Proxies........................................................................23
THE MERGER...........................................................................................23
General........................................................................................23
Effective Time.................................................................................23
Background of the Merger.......................................................................23
Grey Wolf's Reasons for the Merger.............................................................25
Recommendation of the Board of Directors of Grey Wolf..........................................26
Opinion of Grey Wolf's Financial Advisor.......................................................27
Comparable Company Analysis.................................................................28
Discounted Cash Flow Analysis...............................................................28
Comparable Transaction Analysis.............................................................28
Comparable Rig Acquisitions.................................................................29
Pro Forma Analysis of the Merger............................................................29
DI's Reasons for the Merger....................................................................29
Management of DI Following the Merger..........................................................30
Voting Agreement of Controlling Shareholders of Grey Wolf......................................31
Interest of Certain Persons in the Merger; Possible Conflicts of Interest......................31
Restrictions on Resales by Affiliates..........................................................31
Rights of Dissenting Shareholders..............................................................31
Regulatory Approvals...........................................................................33
Certain Federal Income Tax Considerations......................................................34
Opinion of Arthur Andersen LLP; Material Federal Income Tax Issues..........................34
Dividend versus Capital Gain..............................................................35
Contingent Cash Consideration...............................................................35
Continuity of Interest by Grey Wolf Shareholders............................................35
Consequences of Not Qualifying as a Reorganization..........................................36
Effect of Tax Opinion and Assumptions.......................................................36
Backup Withholding..........................................................................36
Accounting Treatment...........................................................................37
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THE MERGER AGREEMENT AND RELATED CONTRACTS...........................................................38
Effect of the Merger...........................................................................38
Conversion of Shares of GW Common Stock........................................................38
Escrow Arrangements............................................................................39
Collar Adjustment..............................................................................40
Required Ratio Adjustment......................................................................40
Exchange Procedures............................................................................41
Registration Rights............................................................................42
Grey Wolf Employee Trust.......................................................................43
Appointment of DI Directors; Change of Name; Executive Offices.................................43
Representations and Warranties ................................................................43
Certain Covenants and Agreements...............................................................44
Agreements to Support the Merger...............................................................44
Conduct of Grey Wolf's Business Prior to the Merger............................................44
Non-Solicitation...............................................................................45
Best Efforts to Conclude the Merger............................................................45
Antitrust Matters..............................................................................45
Indemnification and Insurance..................................................................46
Employee Benefit Plans.........................................................................46
Conditions to Consummation of the Merger.......................................................47
Termination Rights.............................................................................47
Amendment; Waivers.............................................................................48
Dissenting Shares..............................................................................48
Sales Tax Obligations..........................................................................48
UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS...........................................................................49
DI Industries, Inc.
Notes to Unaudited Pro Forma Consolidated Financial Statements.................................54
(1) Basis of Presentation......................................................................54
(2) Adjustment to the Historical Financial Statements.........................................54
INFORMATION CONCERNING DI............................................................................56
General........................................................................................56
Recent Developments............................................................................56
Flournoy Acquisition........................................................................56
Bank Credit Facility........................................................................56
Source of DI Funds.............................................................................57
INFORMATION CONCERNING GREY WOLF.....................................................................58
Introduction...................................................................................58
Business Strategy..............................................................................58
Drilling Rig Fleet.............................................................................58
Business and Operations........................................................................59
Customers......................................................................................60
Competition....................................................................................60
Employees and Employee Relations...............................................................61
Legal Proceedings..............................................................................61
Management of Grey Wolf........................................................................62
Security Ownership of Management and Principal Stockholders of Grey Wolf.......................63
Directors and Management....................................................................63
Dividends and Market for Grey Wolf Stock.......................................................63
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GREY WOLF'S MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............................................64
Industry Overview..............................................................................64
Financial Condition and Liquidity..............................................................64
Results of Operations..........................................................................65
Comparison of the three month period ended January 31, 1997 and 1996...........................65
Comparison of fiscal year October 31, 1996 and 1995............................................65
Comparison of fiscal year October 31, 1995 and 1994............................................66
COMPARISON OF SHAREHOLDER RIGHTS.....................................................................68
Authorized Capital.............................................................................68
Grey Wolf...................................................................................68
DI..........................................................................................68
Voting Requirements and Quorums of Shareholder Meetings .......................................68
Grey Wolf...................................................................................68
DI..........................................................................................68
Election of Directors..........................................................................68
Grey Wolf...................................................................................68
DI..........................................................................................68
Vacancies on the Board of Directors............................................................68
Grey Wolf...................................................................................68
DI..........................................................................................68
Number of Directors............................................................................69
Approval of Certain Actions....................................................................69
Grey Wolf...................................................................................69
DI..........................................................................................69
Amendment of Bylaws............................................................................69
Grey Wolf...................................................................................69
DI..........................................................................................69
Action by Written Consent of Shareholders......................................................69
Grey Wolf...................................................................................69
DI..........................................................................................69
Indemnification of Directors and Officers......................................................69
Grey Wolf...................................................................................69
DI..........................................................................................70
LEGAL MATTERS........................................................................................70
EXPERTS..............................................................................................70
INDEX OF DEFINED TERMS...............................................................................71
INDEX TO GREY WOLF FINANCIAL STATEMENTS.............................................................F-1
APPENDIX A: MERGER AGREEMENT (including form of Escrow Agreement and Grey Wolf Employee Trust).....A-1
APPENDIX B: FORM OF VOTING AND SUPPORT AGREEMENT...................................................B-1
APPENDIX C: JEFFERIES & COMPANY, INC...............................................................C-1
APPENDIX D: EXCERPTS FROM THE TEXAS BUSINESS CORPORATION ACT.......................................D-1
APPENDIX E: FORM OF TAX OPINION....................................................................E-1
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AVAILABLE INFORMATION
DI is subject to the informational requirements of the Exchange Act,
and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). The
Registration Statement (defined below), as well as such reports, proxy
statements and other information filed by DI with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
its Regional Offices at Seven World Trade Center, Suite 1300, New York, New
York 10048 and at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can also be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. DI Common Stock is listed and
traded on the AMEX and certain of DI's reports, proxy statements and other
information can be inspected at the offices of the American Stock Exchange, 86
Trinity Place, New York, New York 10006. The Commission maintains an Internet
web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the Commission's web site is http://www.sec.gov.
DI has filed with the Commission a Registration Statement on Form S-4
(together with any amendments or supplements thereto, the "Registration
Statement") under the Securities Act with respect to the DI Common Stock to be
issued pursuant to the Merger Agreement. All information concerning DI
contained or incorporated by reference in this Prospectus/Proxy Statement has
been furnished by DI, and all information concerning Grey Wolf contained in
this Prospectus/Proxy Statement has been furnished by Grey Wolf. Neither DI nor
Grey Wolf assumes any responsibility for the accuracy or completeness of the
information relating to the other. This Prospectus/Proxy Statement does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto, certain parts of which are omitted in accordance with the
rules and regulations of the Commission. The Registration Statement and any
amendments thereto, are available for inspection and copying as set forth
above.
Statements contained in this Prospectus/Proxy Statement (or in any
document incorporated into this Prospectus/Proxy Statement by reference) as to
the contents of any contract or other document referred to herein (or therein)
are not necessarily complete, and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
FORWARD-LOOKING STATEMENTS
This Prospectus contains, or incorporates by reference, certain
statements that may be deemed "forward-looking statements" within the meaning of
Section 27A of the Securities Act, and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). All statements, other than
statements of historical facts, so included in this Prospectus that address
activities, events or developments that DI expects, projects, believes or
anticipates will or may occur in the future, including, without limitation,
statements regarding DI's business strategy, plans and objectives; statements
expressing beliefs and expectations regarding future rig utilization rates, day
rates and competitive and other events and conditions that may influence the
land rig drilling market and DI's performance in the future; statements
concerning future rig refurbishment plans, including the anticipated level of
capital expenditure for, and the nature and scheduling of, rig refurbishment;
statements regarding future redeployment of DI's rigs to different markets;
trends in the land drilling business and other such matters are forward-looking
statements. Such statements are based on certain assumptions and analyses made
by management of DI in light of its experience and its perception of historical
trends, current conditions, expected future developments and other factors it
believes to be appropriate. The forward-looking statements included in this
Prospectus are also subject to a number of material risks and uncertainties.
Important factors that could cause actual results to differ materially from DI's
expectations are discussed herein under the captions "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Prospective investors are cautioned that such forward-looking
statements are not guarantees of future performance and that actual results,
developments and business decisions may differ from those envisaged by such
forward-looking statements.
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<PAGE> 10
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS PROSPECTUS/PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THE DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SPECIFICALLY INCORPORATED BY REFERENCE) ARE
AVAILABLE UPON WRITTEN OR ORAL REQUEST DIRECTED TO SECRETARY, DI INDUSTRIES,
INC. AT DI'S PRINCIPAL EXECUTIVE OFFICES LOCATED AT 10370 RICHMOND AVENUE,
SUITE 600, HOUSTON, TEXAS 77042; TELEPHONE (713) 435-6100. IN ORDER TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY [FIVE BUSINESS
DAYS PRIOR TO DATE OF MEETING].
DI undertakes to provide, without charge, to each person, including
any beneficial owner of GW Common Stock, to whom a copy of this
Prospectus/Proxy Statement is delivered, upon the written or oral request of
such person, a copy of any and all of the documents or information referred to
below that has been or may be incorporated by reference in this Prospectus/
Proxy Statement, other than exhibits to such documents unless such exhibits are
specifically incorporated by reference. Requests should be directed to the
person indicated in the immediately preceding paragraph.
The following documents, which have been filed with the Commission
pursuant to the Exchange Act (File No. 1-8826), are incorporated herein by
reference and made a part of this Prospectus/ Proxy Statement:
1. DI's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
2. DI's definitive Proxy Statement for its 1997 annual meeting of
shareholders to be held on May 14, 1997.
3. The description of DI Common Stock contained under the caption
"Description of Capital Stock of the Company," contained in DI's
definitive proxy statement for its 1996 annual meeting of
shareholders held August 27, 1996.
4. DI's Current Report on Form 8-K filed January 31, 1997, as
amended by Form 8-K/A dated April 11, 1997.
5. DI's Current Report on Form 8-K filed March 10, 1997.
Also incorporated herein by reference are DI's historical consolidated
financial statements and pro forma consolidated financial statements in the most
recent prospectus filed by DI under Rule 424(b) of the Securities Act in
connection with DI's registration on Form S-3 under the Securities Act
(Registration Statement No. 333- ) or, if no such prospectus is required to be
filed pursuant to Rule 424(b), the prospectus included in such registration
statement at the date of its effectiveness (the "Senior Notes Prospectus").
All documents filed by DI pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus/Proxy
Statement and prior to the Meeting shall be deemed to be incorporated by
reference into this Prospectus/Proxy Statement and to be a part hereof from the
respective dates of filing of such documents or reports. All information
appearing in this Prospectus/Proxy Statement or in a document or information
incorporated herein by reference is not necessarily complete and is qualified
in its entirety by the information and financial statements (including notes
thereto) appearing in the documents and reports incorporated herein by
reference and should be read together with such information and documents.
Any statement contained in a document incorporated or deemed
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus/Proxy Statement to the extent that a statement
contained herein or in any subsequently filed document that also is, or is
deemed to be, incorporated herein by reference, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
expect as so modified or superseded, to constitute a part of this
Prospectus/Proxy Statement.
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SUMMARY
The following summary is intended only to highlight certain information
contained in this Prospectus/Proxy Statement. This summary is not intended to
be a complete statement of all material features of the Merger and is qualified
in its entirety by reference to the more detailed information contained
elsewhere in this Prospectus/Proxy statement and the Appendices hereto. You are
urged to read this Prospectus/Proxy Statement, the Merger Agreement (which is
attached hereto as Appendix A and incorporated herein by reference) and the
other Appendices attached hereto in their entirety. References in this
Prospectus/Proxy Statement to "DI" refer to DI Industries, Inc. and its
subsidiaries, unless the context otherwise requires. An index of certain
additional defined terms used herein is set forth under the caption "Index of
Defined Terms."
PARTIES TO THE MERGER
DI Industries, Inc. DI is engaged primarily in the business of providing
onshore contract drilling services to the oil and gas industry. DI's current
rig fleet consists of 89 drilling rigs, 23 of which are held in inventory for
refurbishment. DI conducts domestic operations in Texas, Louisiana, Arkansas,
Oklahoma, Ohio, Pennsylvania, New York, Michigan and other states, and
currently has international operations in Venezuela. DI is a Texas corporation
that was formed in 1980.
Grey Wolf Drilling Company. Grey Wolf is an onshore oil and gas drilling
contractor operating primarily in South Louisiana and along the Texas Gulf
Coast. Grey Wolf's principal operating assets are its fleet of 18 deep
capacity, land drilling rigs, related equipment and vehicles. Grey Wolf's
predecessor was founded in 1919 for the purposes of drilling and exploring for
oil and gas in East Texas. The principal executive offices of Grey Wolf are
located at 1980 Post Oak Boulevard, Suite 1150, Houston, Texas 77056-3308 and
its telephone number is (713) 626-1373.
Drillers, Inc. The Purchaser is a wholly-owned subsidiary of DI.
Substantially all of DI's domestic drilling operations are conducted through
the Purchaser, which is a Texas corporation that was formed in 1978. The
principal executive offices of DI and the Purchaser are located at 10370
Richmond Avenue, Suite 600, Houston Texas 77042 and their telephone number is
(713) 435-6100.
THE MEETING
Time, Date and Place. The Meeting is scheduled to be held on June , 1997,
at 10:00 a.m., Houston, Texas time at the offices of Fulbright & Jaworski
L.L.P., 1301 McKinney, Suite 5100, Houston Texas 77010-3095.
Purposes of the Meeting. The purposes of the Meeting are to (i) consider
and vote upon a proposal to approve and adopt the Merger Agreement and (ii)
transact such other business as may properly be brought before the Meeting or
any adjournment or postponement thereof.
Vote Required. The affirmative vote of the holders of at least two-thirds
of all outstanding shares of GW Common Stock is required to approve and adopt
the Merger Agreement. As a result, abstentions and failures to vote will have
the same effect as votes against the Merger Agreement because they are not
votes for approval. Pursuant to the Voting and Support Agreements (defined
below) the holders of 2,136,539 shares of GW Common Stock (representing
approximately 72% of the outstanding shares of GW Common Stock) have agreed to
be present in person or by proxy at the Meeting and to vote their respective
shares at the Meeting in favor of the Merger Agreement. Therefore, no
additional votes from the shareholders of Grey Wolf will be necessary to
approve the Merger Agreement if such shares are so voted. See "The Merger
Agreement and Related Contracts--Agreements to Support the Merger."
Voting of Proxies. Shares of GW Common Stock represented by executed,
written proxies received at or prior to the Meeting, and which have not
thereafter been properly revoked as described below, will be voted in
accordance with the instructions indicated thereon. Under Texas law, a
telegram, telex, cablegram, or facsimile is treated as a proxy executed in
writing by a Grey Wolf shareholder. If no instructions are indicated, such
proxies will be voted FOR approval and adoption of the Merger Agreement and in
the discretion of the proxy holder as to any other matter that may properly
come before the Meeting.
Revocability of Proxies. A Grey Wolf shareholder who has given a proxy may
revoke such proxy at any time prior to its exercise at the Meeting by any
manner permitted by law including (i) giving notice of revocation by mail or
facsimile to Grey Wolf prior to the Meeting or (ii) properly submitting to Grey
Wolf by mail or facsimile a duly executed proxy bearing a later date. Any such
submission to Grey Wolf should be made to Grey Wolf Drilling Company, 1980 Post
Oak Boulevard, Suite 1150, Houston, Texas 77056-3808.
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Record Date; Shares Entitled to Vote. The close of business on May ,
1997, has been fixed as the record date (the "Record Date") for determining
holders of shares of GW Common Stock entitled to notice of and to vote at the
Meeting. As of the Record Date, 2,983,579 shares of GW Common Stock were
outstanding and held of record by 55 holders. Of such shares, 2,574,274 shares
are beneficially owned by the directors and executive officers of Grey Wolf.
Grey Wolf believes that there are approximately 83 beneficial owners of GW
Common Stock. The GW Common Stock is the only class of capital stock of Grey
Wolf issued and outstanding. Each shareholder of record as of the close of
business on the Record Date is entitled at the Meeting to one vote for each
share of GW Common Stock held.
Quorum. The presence, in person or by proxy, of the holders of a majority
of the outstanding shares of GW Common Stock entitled to vote at the Meeting is
necessary to constitute a quorum for the transaction of business at the
Meeting. Pursuant to the Voting and Support Agreements, a sufficient number of
shares of GW Common Stock is expected to be present to constitute a quorum. See
"The Merger Agreement and Related Contracts--Agreements to Support the Merger."
THE MERGER
General. If Grey Wolf shareholder approval is obtained and all other
conditions to the Merger are satisfied (or waived, if permissible), then at the
Effective Time, Grey Wolf will be merged with and into the Purchaser, with the
Purchaser to be the surviving corporation. The Purchaser will be automatically
renamed in the Merger "Grey Wolf Drilling Company."
Effective Time. The Effective Time will occur as soon as practicable
after the requisite approval of Grey Wolf shareholders has been obtained and
all other conditions to the Merger have been satisfied or waived, and in no
event later than ten days after all conditions to the Merger have been
satisfied or waived, unless the parties agree otherwise. The "Effective Time"
is the time at which a Certificate of Merger with respect to the Merger is
issued by the Texas Secretary of State.
Conversion of GW Common Stock. The Merger Agreement provides that each
outstanding share of GW Common Stock, other than shares held by shareholders
that perfect and do not waive dissenter's appraisal rights under Texas law,
will be converted into the right to receive (i) cash of approximately $18.97,
(ii) 4.692 shares of DI Common Stock and (iii) subject to certain
contingencies, up to an additional $1.68 in cash. Both the amount of cash and
the number of shares of DI Common Stock to be received by Grey Wolf
shareholders in the Merger are subject to material adjustments as set forth in
the Merger Agreement.
The aggregate number of shares of DI Common Stock to be received by Grey
Wolf shareholders in the Merger (14.0 million shares) will be increased or
decreased if the average of the closing sales price of DI Common Stock on the
American Stock Exchange Consolidated Tape as reported by the Wall Street
Journal (Southwest Edition) on each of the ten consecutive trading days
immediately preceding the third trading day before the Effective Time of the
Merger (the "DI Common Stock Price") is less than $3.00 per share or more than
$4.00 per share. If the DI Common Stock Price is less than $3.00, the number of
shares of DI Common Stock will be increased to a number of shares equal to
$42.0 million divided by the DI Common Stock Price. If the DI Common Stock
Price is more than $4.00, the number of shares of DI Common Stock included in
the Aggregate Stock Consideration will be decreased to the greater of (i)
11,666,667 shares, or (ii) a number of shares equal to $56.0 million divided by
the DI Common Stock Price. This adjustment under the Merger Agreement is
referred to herein as the "Collar Adjustment." See "The Merger Agreement and
Related Contracts--Collar Adjustment."
A second adjustment of the Merger consideration is required under the
terms of the Merger Agreement if, and to the extent, necessary to assure that
the value of DI Common Stock issued in the Merger meets the "Required Ratio."
In general, the Required Ratio means that the aggregate value of DI Common
Stock to be issued in the Merger (after any adjustments made pursuant to the
Collar Adjustment and the Required Ratio adjustment) is equal to 45% of the
total value of the Merger consideration. For purposes of determining the
Required Ratio, the DI Common Stock will be valued at the DI Common Stock
Price, and the cash component of the total Merger consideration will be deemed
to include a $5.0 million escrow fund (described below), if the escrow fund is
established. In the event that the number of shares of DI Common Stock is
increased to achieve the Required Ratio, the cash component of the total Merger
consideration will be correspondingly reduced by an amount equal to the product
of (i) the number of additional shares of DI Common Stock required to be issued
in order to achieve the Required Ratio multiplied by (ii) the DI Common Stock
Price. The purpose of this second adjustment (the "Required Ratio Adjustment")
is to aid in qualifying the Merger as a "reorganization" under United States
federal income tax laws. See "The Merger Agreement and Related
Contracts--Required Ratio Adjustment," "The Merger--Certain Federal Income Tax
Considerations" and "Risk Factors--Qualification as a Reorganization for
U.S. Federal Income Tax Purposes."
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RECOMMENDATION OF THE BOARD OF DIRECTORS OF GREY WOLF
GREY WOLF'S BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE TERMS
OF THE MERGER AGREEMENT AND THE MERGER OFFER THE BEST VALUE REASONABLY
AVAILABLE TO, AND ARE IN THE BEST INTEREST OF, GREY WOLF'S SHAREHOLDERS.
ACCORDINGLY, THE BOARD OF DIRECTORS OF GREY WOLF HAS UNANIMOUSLY APPROVED THE
MERGER AGREEMENT AND RECOMMENDS THAT THE SHAREHOLDERS OF GREY WOLF VOTE FOR
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. The recommendation of the Grey
Wolf Board of Directors is based on a number of factors described in "The
Merger--Background of the Merger" and "The Merger--Grey Wolf's Reasons for the
Merger."
OPINION OF FINANCIAL ADVISOR TO GREY WOLF
On March 6, 1997, Jefferies & Company, Inc. ("Jefferies"), financial
advisor to Grey Wolf's Board of Directors, delivered a written opinion to the
Board of Directors of Grey Wolf that, as of that date, the consideration to be
provided to Grey Wolf shareholders pursuant to the Merger Agreement is fair to
the holders of GW Common Stock from a financial point of view. The Board of
Directors of Grey Wolf has not requested that Jefferies update its opinion. The
full text of the written opinion of Jefferies is attached to this
Prospectus/Proxy Statement as Appendix C. For a summary of the analysis
performed by Jefferies in connection with rendering its opinion, see "The
Merger--Opinion of Grey Wolf's Financial Advisor."
ESCROW ARRANGEMENTS
Amount and Purpose. The Merger Agreement provides that $5.0 million of
the cash consideration otherwise payable to Grey Wolf shareholders at the
Effective Time will be placed in an escrow account with BankOne Texas, N.A.
(the "Escrow Agent"). The purpose of the escrow arrangement is generally to
provide a source of payment for the net costs to the Purchaser, if any, for any
eventual settlement by, or the payment of a monetary court judgment against,
the Purchaser in certain litigation matters to which Grey Wolf (or the
Purchaser as the surviving corporation of the Merger) is a party. The Purchaser
will be entitled from time to time to disbursements from the escrow account of
amounts necessary to reimburse the Purchaser for federal income taxes to be
paid by the Purchaser or DI with respect to the net taxable income generated by
the escrow account, and for one-half of the legal fees and expenses incurred by
the Purchaser in connection with the litigation. Also to be paid from the
escrow fund, are the fees and reasonable expenses of the Escrow Agent and the
reasonably incurred expenses of James K. B. Nelson and Sheldon B. Lubar, who
will serve as representatives of the former shareholders of Grey Wolf and will
control the defense of the litigation following the Merger. See "Information
Concerning Grey Wolf--Management of Grey Wolf."
Distributions to Former Grey Wolf Shareholders. Upon conclusion of the
litigation matters for which the escrow arrangement has been established, the
remaining balance of the escrow amount, if any, will be distributed to the
former shareholders of Grey Wolf (other than "Dissenting Shareholders") by the
Escrow Agent in proportion to their ownership of GW Common Stock at the
Effective Time as additional, contingent cash consideration for the Merger. The
escrow fund will not be established if the litigation is settled or otherwise
disposed of prior to the Effective Time and, in that event, the aggregate cash
consideration payable to the holders of GW Common Stock in the Merger (other
than Dissenting Shareholders) will be increased by $5.0 million, which would
represent approximately $1.68 per share of GW Common Stock, less the amount, if
any, of any "Settlement Payment" (as defined in the Merger Agreement) paid or
agreed to be paid by Grey Wolf to settle the litigation. See "The Merger
Agreement and Related Contracts--Escrow Arrangements."
GREY WOLF EMPLOYEE TRUST
The Merger Agreement provides that shortly before the Effective Time,
Grey Wolf will establish an irrevocable trust for the benefit of certain of its
employees (the "Employee Trust") having as its trustee BankOne Texas, N.A. (in
its capacity as the trustee of the Employee Trust, BankOne Texas, N.A. is
referred to as the "Trustee"). If the Merger occurs, Grey Wolf has agreed to
contribute $2.4 million in cash to the Employee Trust, and James K. B. Nelson
(President and a principal shareholder of Grey Wolf) has agreed to contribute
to the Employee Trust, from his personal funds, an additional $1.65 million in
cash, which will result in the Employee Trust having an initial principal
balance of $4.05 million. Those certain employees of Grey Wolf who
are named beneficiaries of the Employee Trust will be entitled to cash
distributions from the Employee Trust in proportion to their respective
interests therein, provided their interest in the Employee Trust is not
forfeited under the terms of the Employee Trust. Benefits under the Employee
Trust will be forfeited if the beneficiary/Employee resigns from his employment
with the Purchaser, other than by reason of a Good Cause Event (as defined in
the Employee Trust) or if the Employee is discharged by the Purchaser for Cause
(as defined in the Employee Trust), in either case prior to the day preceding
the first anniversary date of the creation of the Employee Trust. See "The
Merger Agreement and Related Contracts--Grey Wolf Employee Trust."
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REPRESENTATIONS AND WARRANTIES
DI and Grey Wolf have each made various representations and warranties in
the Merger Agreement. All such representations and warranties expire at the
Effective Time. See "The Merger Agreement and Related Contracts--Certain
Representations and Warranties."
CERTAIN COVENANTS AND AGREEMENTS
DI and Grey Wolf have made certain covenants and agreements in the Merger
Agreement, including those summarized in this Prospectus/Proxy Statement. All
such covenants and agreements terminate at the Effective Time, except for those
covenants and agreements that by their terms contemplate performance after the
Effective Time, which will survive the Effective Date. See "The Merger Agreement
and Related Contracts--Certain Covenants and Agreements."
TREATMENT OF BENEFIT PLANS
The Merger Agreement requires the Purchaser to replace Grey Wolf's
existing 401(k) and profit sharing plan with another plan or plans providing,
in the aggregate, for a substantially equivalent or greater level of
compensation, funding, and benefits for employees of Grey Wolf who remain
employed by the Purchaser after the Effective Time. DI believes that its
existing 401(k) plan meets the requirements of the Merger Agreement.
CONDUCT OF BUSINESS PENDING THE MERGER; NON-SOLICITATION
The Merger Agreement contains certain restrictions on the ability of Grey
Wolf to take certain actions and enter into certain transactions pending the
Merger. Among these is a prohibition on the solicitation by Grey Wolf and
certain of its affiliates of competing transactions to the Merger. The Merger
Agreement also limits, but does not completely prohibit, the ability of Grey
Wolf to respond to unsolicited offers for competing transactions. DI is
entitled under the Merger Agreement to be notified of any such unsolicited
offers, and subject to the fiduciary duties of Grey Wolf's Board of Directors,
to be informed of the status of any such unsolicited offers. See "The Merger
Agreement and Related Contracts--Conduct of Grey Wolf's Business Prior to the
Merger" and "The Merger Agreement and Related Contracts--Non-Solicitation."
TERMINATION AND TERMINATION PAYMENTS
The Merger Agreement may be terminated and the transactions contemplated
thereby may be abandoned at any time prior to the Effective Time,
notwithstanding approval and adoption of the Merger Agreement by the
shareholders of Grey Wolf under the following circumstances: (i) by mutual
written consent duly authorized by the Boards of Directors of Grey Wolf, DI and
the Purchaser; (ii) by the Purchaser and DI or Grey Wolf if any court or
governmental authority of competent jurisdiction permanently enjoins or
otherwise prohibits the Merger and such injunction has become final and
nonappealable; (iii) by Grey Wolf if, prior to the Effective Time, Grey Wolf is
not in breach of its obligations not to solicit competing transactions and a
person other than the Purchaser has made an unsolicited bona fide proposal for
a transaction, which Grey Wolf's Board of Directors believes, in good faith,
after consultation with Grey Wolf's financial advisors, is more favorable to
Grey Wolf's shareholders than the transactions contemplated by the Merger; (iv)
by DI if neither DI nor the Purchaser is in material breach of the Merger
Agreement and Grey Wolf's Board of Directors has (A) withdrawn its
recommendation that the shareholders of Grey Wolf vote in favor of approval and
adoption of the Merger Agreement, or (B) recommended or approved the acceptance
or approval by shareholders of Grey Wolf of any offer for an alternate or
competing transaction to the Merger; (v) by Grey Wolf if Grey Wolf is not in
material breach of the Merger Agreement and the Effective Time has not occurred
on or prior to July 1, 1997 or such later date as the parties may agree; (vi)
by DI if neither DI nor the Purchaser is in material breach of the Merger
Agreement and the Effective Time has not occurred on or before July 1, 1997, or
such later date as the parties may agree; (vii) by DI or Grey Wolf, if DI and
the Purchaser have not obtained sufficient funds, or binding written
commitments from responsible and reputable financial institutions reasonably
satisfactory to Grey Wolf to provide sufficient funds to pay the cash merger
consideration and fund the $5.0 million escrow fund if so required (in either
event without breach of certain of DI's representations and warranties); or
(viii) by DI or Grey Wolf if the DI Common Stock Price is less than $2.20 or
more than $4.80.
If the Merger Agreement is terminated by Grey Wolf because Grey Wolf's
Board of Directors receives an unsolicited proposal for a competing
transaction, which the Grey Wolf Board of Directors believes is more favorable
to Grey Wolf shareholders than the Merger, or if the Merger Agreement is
terminated by DI because Grey Wolf's Board of Directors has withdrawn its
recommendation of the Merger to Grey Wolf Shareholders or has recommended or
approved another acquisition
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proposal, then Grey Wolf is obligated to pay to DI, on demand, as the sole
remedy of DI and the Purchaser under the Merger Agreement, a fee of $2.0
million.
DI will be obligated to pay damages to Grey Wolf if closing of the Merger
does not occur because DI and the Purchaser have not obtained sufficient funds,
or binding written commitments from responsible and reputable financial
institutions reasonably satisfactory to Grey Wolf to provide sufficient funds
to pay the cash merger consideration and fund the $5.0 million escrow fund if
so required (in either event without breach of certain of DI's representations
and warranties). In that circumstance DI is obligated to pay to Grey Wolf on
demand, as Grey Wolf's sole remedy under the Merger Agreement, $2.0 million as
liquidated damages.
MANAGEMENT FOLLOWING THE MERGER
Following the Merger, the Board of Directors of DI will increase the
number of directors constituting its Board of Directors from six to eight and
will elect James K. B. Nelson and William T. Donovan to DI's Board of
Directors. See "Information Concerning Grey Wolf--Management of Grey Wolf."
VOTING AGREEMENTS OF CONTROLLING SHAREHOLDERS OF GREY WOLF
Each of three principal shareholders of Grey Wolf has entered into a
separate agreement with DI pursuant to which, among other things, the principal
shareholder agrees to vote for and generally support the Merger (the "Voting
and Support Agreements"). The principal shareholders and the number of shares
of GW Common Stock that each has represented in the Voting and Support
Agreement that they own beneficially or of record are as follows: Sheldon B.
Lubar, individually and on behalf of certain nominees, 1,136,168 shares; James
K. B. Nelson, 333,371 shares; and Felicity Ventures, Ltd. (of which James K. B.
Nelson is a general partner), 667,000 shares. The aggregate number of shares of
GW Common Stock that such principal shareholders have agreed to vote in favor
of the Merger, totals 2,136,539 shares or approximately 72% of the 2,983,579
shares of GW Common Stock which Grey Wolf has represented in the Merger
Agreement to be issued and outstanding. The form of Voting and Support
Agreements executed by the three Grey Wolf shareholders is attached to this
Prospectus/Proxy Statement as Appendix B.
INTEREST OF CERTAIN PERSONS IN THE MERGER; POSSIBLE CONFLICTS OF INTEREST
In considering the recommendation of the Board of Directors of Grey Wolf
with respect to the Merger Agreement and the other transactions contemplated
thereby, shareholders of Grey Wolf should be aware that certain members of the
management of Grey Wolf and of its Board of Directors have certain interests in
the Merger that are in addition to the interests of shareholders of Grey Wolf
generally. These additional interests include, without limitation, the right of
certain non-director employees to receive potential cash distributions from the
$4.05 million Employee Trust, which will be established shortly prior to the
Merger. Of the initial funding of the Employee Trust, $2.4 million will be
provided from the corporate funds of Grey Wolf and, if the Merger occurs, $1.65
million will be funded personally by Grey Wolf's President, James K. B. Nelson.
Certain of such persons will also be employed by the Purchaser, will receive
Employee benefits, will be eligible for DI stock options and will be
indemnified and provided officers' and directors' insurance by DI and the
Purchaser. As summarized under "--Voting Agreements of Controlling Shareholders
of Grey Wolf," the principal shareholders of Grey Wolf have agreed in their
capacities as shareholders to vote for and support the Merger. These additional
benefits and interests may create a conflict of interest between such persons
and the other shareholders of Grey Wolf. See "The Merger--Interests of Certain
Persons; Possible Conflicts of Interest."
RESTRICTIONS ON RESALES BY AFFILIATES
DI Common Stock that will be issued in the Merger will have been
registered under the Securities Act and will be freely transferrable, except
for shares received by persons who may be deemed under the Securities Act and
the rules thereunder to be "affiliates" of Grey Wolf at the time of voting on
the Merger, or persons who become "affiliates" of DI following the Merger.
Affiliates may not resell their DI Common Stock except pursuant to an effective
registration statement under the Securities Act, or an applicable exemption
from the registration provisions of the Securities Act, such as Rule 145(d) for
Grey Wolf affiliates or Rule 144 for DI affiliates. Affiliates may not use this
Prospectus/Proxy Statement to effect resales of DI Common Stock they receive in
the Merger. See "The Merger--Restrictions on Resales by Affiliates."
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REGISTRATION RIGHTS
DI has agreed to use reasonable efforts to effect the registration under
the Securities Act of DI Common Stock received in the Merger pursuant to demand
registration rights and incidental or "piggy-back" registration rights afforded
to certain former Grey Wolf shareholders and their transferees who receive DI
Common Stock in transactions that do not constitute "sale" transactions as that
term is defined in the Securities Act. See "The Merger Agreement and Related
Contracts--Registration Rights."
RIGHTS OF DISSENTING SHAREHOLDERS
Holders of GW Common Stock who object to the Merger and who follow
precisely the procedures prescribed by Articles 5.11 through 5.13 of the Texas
Business Corporation Act (the "TBCA") may be entitled, in lieu of receiving
cash and shares of DI Common Stock in accordance with the terms of the Merger
Agreement, to receive cash equal to the fair value of their shares of GW Common
Stock. Under the TBCA, the fair value of the shares of a dissenting shareholder
is to be determined by agreement of the surviving corporation of a merger and
the dissenting shareholder, or if no such agreement is reached, by
court-appointed appraisers. ANY GREY WOLF SHAREHOLDER WHO DESIRES TO EXERCISE
DISSENTER'S RIGHTS MUST NOT VOTE IN FAVOR OF THE MERGER. See "The
Merger--Rights of Dissenting Shareholders."
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
It is intended that the Merger will be treated as a tax-free
reorganization within the meaning of sections 368(a)(1)(A) and 368(a)(2)(D) of
the Internal Revenue Code of 1986, as amended (the "Code"). Grey Wolf, DI and
the Purchaser will each be a "party to the reorganization" within the meaning
of section 368(b) of the Code. No gain or loss will be recognized by the
shareholders of Grey Wolf upon their receipt of DI Common Stock in exchange for
their GW Common Stock, except gain will be recognized by Grey Wolf shareholders
to the extent closing cash and contingent cash consideration is received by
each such Grey Wolf shareholder, but not in excess of the gain realized on the
transaction. As to each shareholder, the character of the resulting gain will
be either capital gain or ordinary income, depending on the nature of such
shareholder's investment in the GW Common Stock. If the Merger fails to qualify
as a tax free reorganization for this or any other reason, the receipt of DI
Common Stock will be taxable to the Grey Wolf shareholders at the time of the
Merger, and Grey Wolf will be deemed to have sold all of its assets in a
taxable exchange triggering a corporate tax liability to Grey Wolf estimated to
be in excess of $30.0 million. The Purchaser, as the survivor of the Merger,
would be liable for any such corporate tax. See "The Merger--Certain Federal
Income Tax Considerations" and "Risk Factors--Qualification as a Reorganization
for U.S. Federal Income Tax Purposes."
REGULATORY APPROVALS
DI and Grey Wolf are aware of no governmental regulatory approvals
remaining to be obtained for consummation of the Merger, other than compliance
with federal securities laws and state securities or "Blue Sky" laws. The Merger
was subject to the premerger notification provisions of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"). Filings under
the HSR Act were made by DI, Grey Wolf and James K. B. Nelson with the Federal
Trade Commission and the Department of Justice Antitrust Division. On 1997,
early termination of the waiting period under the HSR Act was granted, thus
permitting the Merger to proceed, subject to shareholder approval and other
conditions to the Merger contained in the Merger Agreement.
EXCHANGE OF CERTIFICATES
As soon as reasonably practicable after the Effective Time, a letter of
transmittal and instructions for surrendering certificates for GW Common Stock
will be mailed to each holder of GW Common Stock by BankOne Texas, N.A. (the
"Exchange Agent") for use in exchanging such holder's GW Common Stock for DI
Common Stock and the cash merger consideration then due to the holder. Until
the certificate or certificates representing a Grey Wolf shareholder's GW
Common Stock have been properly surrendered to the Exchange Agent, such persons
will not be entitled to any of the rights of holders of DI Common Stock,
including the right to vote and to receive distributions made with respect to
the DI Common Stock. No interest will be paid on the cash portion of the Merger
Consideration due to former Grey Wolf shareholders.
GREY WOLF SHAREHOLDERS SHOULD NOT SEND ANY CERTIFICATES FOR GW COMMON
STOCK WITH THEIR PROXY CARD. CERTIFICATES SHOULD BE SUBMITTED FOR EXCHANGE ONLY
AFTER RECEIPT OF THE LETTER OF TRANSMITTAL. See "The Merger Agreement and
Related Contracts--Exchange Procedures."
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ACCOUNTING TREATMENT
DI intends to account for the Merger under the purchase method of
accounting in accordance with generally accepted accounting principles.
SOURCE OF DI FUNDS
DI intends to finance the cash portion of the Merger consideration,
refinance indebtedness outstanding under its credit agreement with its
commercial banks, and obtain additional working capital for its expanded
operations following the Merger from the proceeds of a proposed underwritten
public offering by DI of "high-yield," unsecured debt securities, which are
referred to herein as the "Senior Notes." Additional information concerning the
proposed terms of the Senior Notes is contained in the most recent preliminary
or final prospectus relating to DI's offering of the Senior Notes (referred to
herein as the "Senior Notes Prospectus"), which is incorporated herein by
reference. See "Information Concerning DI--Source of DI Funds," "Risk Factors"
and "Available Information."
COMPARISON OF SHAREHOLDERS' RIGHTS
Upon consummation of the Merger, shareholders of Grey Wolf will become
shareholders of DI. Various differences exist between their rights as
shareholders of Grey Wolf and as shareholders of DI. See "Comparison of
Shareholder Rights."
RISK FACTORS
Grey Wolf shareholders are urged to consider the matters set forth under
"Risk Factors," in deciding whether to approve and adopt the Merger Agreement.
MARKET AND DIVIDEND DATA
DI Common Stock is listed and traded on the American Stock Exchange (the
"AMEX") under the symbol "DRL." At April 3, 1997, there were approximately 656
holders of record of the DI Common Stock. On March 7, 1997, the last trading
day prior to the announcement of the Merger, the last reported sale price of
the DI Common Stock on the AMEX was $2.875. The last reported sale price of the
DI Common Stock on the AMEX on the last trading day prior to the date of this
Prospectus/Proxy Statement is set forth on the cover of this Prospectus/Proxy
Statement. The following table sets forth the high and low closing price of the
DI Common Stock on the AMEX for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
--------- --------
<S> <C> <C>
CALENDAR YEAR 1995
First Quarter ............................................. $1.0000 $0.6250
Second Quarter............................................. 1.0625 0.6875
Third Quarter.............................................. 0.8750 0.6250
Fourth Quarter............................................. 0.8750 0.6250
CALENDAR YEAR 1996
First Quarter.............................................. 0.6875 0.5000
Second Quarter............................................. 1.8750 0.6875
Third Quarter.............................................. 1.8125 1.2500
Fourth Quarter............................................. 2.9375 1.5000
CALENDAR YEAR 1997
First Quarter.............................................. 3.6250 2.4375
Second Quarter (through May , 1997)....................
</TABLE>
GREY WOLF SHAREHOLDERS ARE URGED TO OBTAIN CURRENT QUOTATIONS FOR SHARES
OF DI COMMON STOCK.
11
<PAGE> 19
DI has never declared or paid dividends on DI Common Stock and does not
expect to pay dividends in the foreseeable future. DI instead intends to retain
it earnings to support the operations and growth of its business. In addition,
the terms of DI's existing credit agreement currently prohibit the payment of
dividends by DI without the prior written consent of the bank, and it is likely
that financing arrangements expected to be entered into by DI to finance the
cash portion of the Merger consideration will contain similar dividend
restrictions.
No market information is available for GW Common Stock because there is
no established trading market for the GW Common Stock. At May , 1997, there
were approximately 55 shareholders of record of the GW Common Stock. No
dividends have been declared or paid by Grey Wolf during the preceding five
years.
12
<PAGE> 20
SELECTED HISTORICAL FINANCIAL DATA
The following tables set forth selected historical financial data of DI
and Grey Wolf. The selected consolidated financial data for DI for the periods
indicated, has been obtained from the consolidated financial statements of DI,
which were audited by Deloitte & Touche LLP for the periods 1993-1995 and by
KPMG Peat Marwick LLP for 1996. The selected financial data for DI as of and
for the three months ended March 31, 1996, and March 31, 1997, have been
presented without audit pursuant to the rules of the Commission. The selected
consolidated financial data for DI should be read in conjunction with the
separate Consolidated Financial Statements and Notes thereto of DI included in
its Annual Report on Form 10-K for 1996, which are incorporated by reference in
this Prospectus/Proxy Statement. The selected financial data of Grey Wolf as of
and for each of the five years in the period ended October 31, 1996, have been
obtained from the financial statements of Grey Wolf, which have been audited by
Arthur Andersen LLP. The selected financial data of Grey Wolf as of January 31,
1997, and for the three-month periods ended January 31, 1997, and 1996 have
been presented without audit pursuant to the rules of the Commission. The
selected financial data for Grey Wolf should be read in conjunction with the
Financial Statements of Grey Wolf included elsewhere in this Prospectus/Proxy
Statement.
DI INDUSTRIES, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
THREE MONTHS ENDED DECEMBER
MARCH 31, YEARS ENDED DECEMBER 31, 31, YEARS ENDED MARCH 31,
-------------------- ----------------------- --------- -----------------------
1997 1996 1996 1995 1994(1) 1994(1) 1993
-------- --------- -------- --------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Continuing operations:
Revenues........................... $ 20,102 $ 81,767 $ 94,709 $ 50,987 $ 67,855 $ 62,242
Income (loss) from continuing
operations...................... (1,491) (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) -- -- --
Income taxes....................... -- 845 -- -- -- --
Net income (loss)..................... (1,491) (11,722) (13,447) (2,209) (2,658) (3,495)
Net income (loss) per common share:
From continuing operations......... (.04) (0.18) (.33) (.06) (.04) (.09)
From discontinued operations....... -- -- (.02) -- (.03) --
Net income (loss).................. $ (.04) $ (0.18) $ (.35) $ (.06) $ (.07) $ (.09)
Weighted average common shares
outstanding..................... 38,669 67,495 38,669 38,641 38,416 38,416
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
AS OF MARCH 31, -------------------------------------- -----------------------
1997 1996 1995 1994(1) 1994(1) 1993
--------------- ---------- ---------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
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 -- --
Total shareholders' equity............... 64,646 19,694 29,141 31,150 33,808
</TABLE>
- --------------
(1) During 1994, DI changed its fiscal year end from March 31 to December 31.
(2) To account for the discontinued operations of DI Energy, Inc., effective
April 1, 1995.
(3) Total assets and long-term debt have been restated to account for the
discontinued operations of DI Energy, Inc., effective April 1, 1995.
13
<PAGE> 21
GREY WOLF DRILLING COMPANY
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31, YEAR ENDED OCTOBER 31,
------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues ..................... $ 15,863 $ 13,761 $ 56,537 $ 46,463 $ 50,740 $ 39,541 $ 45,704
Operating income (loss) ...... 2,044 1,371 5,820 3,851 4,265 (35) 2,281
Net income (1) ............... 1,362 861 3,380 2,886 3,192 381 1,118
<CAPTION>
AS OF OCTOBER 31,
----------------------------------------------------
AS OF
JANUARY 31,
1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets ................... $29,046 $29,629 $23,904 $22,291 $19,897 $19,740
Long-term debt ................. 1,484 1,971 4,815 3,544 5,158 3,357
Total shareholders' investment.. 15,757 14,386 10,972 8,052 4,834 4,420
- --------------
</TABLE>
(1) Grey Wolf Drilling Company is a closely held private company, thus
earnings per share amounts are not meaningful and, accordingly, not
presented.
14
<PAGE> 22
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following summary unaudited pro forma consolidated financial data is
presented for illustrative purposes only and is not necessarily indicative of
the financial position or results of operations that would have actually been
reported had the Merger and the other transactions reflected in such data been
in effect as of the dates and for the periods presented. Furthermore, the
summary unaudited pro forma consolidated financial data does not reflect changes
that may occur as the result of post-Merger operations and events. The summary
unaudited pro forma consolidated financial data should be read in conjunction
with the Unaudited Pro Forma Consolidated Financial Statements, including the
Notes thereto, appearing elsewhere in this Prospectus/Proxy Statement, and the
Unaudited Pro Forma Consolidated Financial Data included the Senior Notes
Prospectus, which is incorporated herein by reference.
<TABLE>
<CAPTION>
DI
DI PRO GREY WOLF PRO
HISTORICAL FORMA(1) HISTORICAL FORMA(2)
------------ ------------- ------------ --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
FIRST QUARTER 1997 (UNAUDITED) (3)
Statement of Operations Data:
Revenues................................................ $ $ $ 15,863 $
Operating income (loss)................................. 2,044
Net income (loss)....................................... 1,362
Balance Sheet Data (at end of period):
Total assets............................................ 29,046
Long term debt.......................................... 1,484
Series A Preferred Stock-mandatory redeemable........... --
Shareholders' equity.................................... $ $ $ 15,757 $
Weighted average common shares outstanding................. 2,984
Comparative per share data:
Book value per common share at end of period............ $ $ $ 5.28 $
Net income (loss) per common share...................... .46
Grey Wolf equivalent per share data (4):
Book value per common share at end of period.............................................................
Net income (loss) per common share.......................................................................
YEAR ENDED 1996 (5)
Statement of Operations Data:
Revenues................................................ $ 81,767 $ 148,779 $ 56,537 $ 205,316
Operating income (loss)................................. (13,715) (11,046) 5,820 (14,590)
Net income (loss)....................................... (11,722) (13,006) 3,380 (26,298)
Balance Sheet Data (at end of period):
Total assets............................................ 117,819 160,959 29,629 346,086
Long term debt.......................................... 26,846 26,846 1,971 125,546
Series A Preferred Stock-mandatory redeemable........... 764 764 -- 764
Shareholders' equity.................................... $ 64,646 $ 95,712 $ 14,386 $ 137,712
Weighted average common shares outstanding................. 67,495 137,469 2,984 151,469
Comparative per share data:
Book value per common share at end of period............ $ .52 $ .77 $ 4.82 $ .91
Net income (loss) per common share...................... (.18) (.09) 1.13 (.17)
Grey Wolf equivalent per share data (4):
Book value per common share at end of period............................................................. 4.27
Net income (loss) per common share....................................................................... (.80)
</TABLE>
- ----------
(1) Gives effect to the following transactions as if each had occurred at the
beginning of the period with respect to statement of operations data and
at the end of the period with respect to balance sheet data: the Western
sale; the August Mergers; the Mesa acquisition; the Diamond M
acquisition; and the Flournoy acquisition.
(2) Gives effect to (i) the transactions identified in Note 1 above, (ii) the
Merger and (iii) the sale of the Senior Notes, in each case as if each
had occurred at the beginning of the period with respect to statement of
operations data and at the end of the period with respect to balance
sheet data.
(3) Ending on March 31, 1997, in the case of DI and January 31, 1997, in the
case of Grey Wolf.
(4) Based on the conversion of GW Common Stock into 4.692 shares of DI Common
Stock.
(5) Ending on December 31, 1996, in the case of DI and October 31, 1996, in
the case of Grey Wolf.
15
<PAGE> 23
RISK FACTORS
Grey Wolf shareholders should carefully evaluate all of the
information contained and incorporated by reference in this Prospectus/Proxy
Statement and, in particular, the following:
HISTORY OF LOSSES FROM OPERATIONS
DI has a history of losses and has not had a profitable year since
1991. DI incurred net losses of $11.7 million and $13.4 million for the years
ended December 31, 1996 and 1995, respectively, and $2.2 million for nine
months ended December 31, 1994. The calendar year 1996 loss includes
non-recurring charges of $6.1 million while the 1995 loss includes a provision
for asset impairment of $5.3 million. Profitability in the future will depend
largely upon utilization rates and day rates for DI's drilling rigs. There is
no assurance that current utilization rates and day rates will not decline or
that DI will not continue to experience losses.
SIGNIFICANT LEVERAGE AND DEBT SERVICE REQUIREMENTS
After the Merger and after giving effect to the Senior Notes Offering,
DI will have significant debt service requirements due to the substantial
indebtedness it has incurred primarily to finance acquisitions (including the
Merger) and expand its operations. Additionally, DI has a $50.0 million
revolving credit facility with a syndicate of commercial banks (the "Bank
Credit Facility"), which is expected to be substantially undrawn immediately
following the Merger.
DI expects to continue to borrow under the Bank Credit Facility and
possible future credit arrangements in order to finance possible future
acquisitions, rig refurbishments and for general corporate purposes. As of
March 31, 1997 on a pro forma basis, after giving effect to the Merger and the
repayment of all indebtedness then outstanding under the Bank Credit Facility
from the proceeds of the Senior Notes Offering, DI would have had $126.3
million in total indebtedness and $140.7 million in shareholders' equity.
The level of DI's indebtedness following the Merger could have several
important effects on its future operations, including, among others, (i) DI's
ability to obtain additional financing for working capital acquisitions,
capital expenditures, general corporate and other purposes may be limited, (ii)
a substantial portion of DI's cash flow from operations will be dedicated to
the payment of principal and interest on its indebtedness, thereby reducing
funds available for other purposes and (iii) DI's significant leverage could
make it more vulnerable to economic downturns in the industry. DI's ability to
meet its debt service obligations and to reduce its total indebtedness will be
dependent upon DI's future performance, which will be subject to the success of
its business strategy, general economic conditions, industry cycles, levels of
interest rates, and financial, business and other factors affecting the
financial condition and results of operations of DI, many of which are beyond
its control. There can be no assurance that DI's business will generate
sufficient cash flow from operations to meet debt service requirements and
payments of principal, and if it is unable to do so, it may be required to sell
assets, to refinance all or a portion of its indebtedness, including the Senior
Notes, or to obtain additional financing. There can be no assurance that any
such refinancing would be possible or that any additional financing could be
obtained.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
It is expected that the indenture under which the Senior Notes will be
issued (the "Indenture") will contain covenants restricting or limiting the
ability of DI and certain of its subsidiaries to, among other things: (i) incur
additional indebtedness, including indebtedness ranking senior to the Senior
Notes and junior to any other senior debt; (ii) pay dividends or make other
restricted payments; (iii) make asset dispositions; (iv) permit liens; (v)
enter into sale and leaseback transactions; (vi) enter into certain mergers and
acquisitions; (vii) make certain investments; and (viii) enter into
transactions with related persons.
In addition, the loan agreement setting forth the terms of the Bank
Credit Facility (the "Bank Credit Agreement") contains certain other and more
restrictive covenants than those contained in the Indenture. This may adversely
affect DI's ability to pursue its acquisition and rig refurbishment strategies,
and limit its flexibility in responding to changing market conditions. The Bank
Credit Agreement also requires DI to maintain specific financial ratios and to
satisfy certain financial condition tests. DI's ability to meet those financial
ratios and financial condition tests can be affected by events beyond its
control, and there can be no assurance that DI will meet those tests. The
Indenture and Bank Credit Agreement contain covenants and default terms that
effectively "cross default" the two credit
16
<PAGE> 24
arrangements by providing that a default under one arrangement
will constitute a default under the other. Accordingly, the breach of any of
the debt covenants applicable to DI could result in a default under both the
Bank Credit Agreement and the Indenture, and possibly other then outstanding
debt obligations of DI, if any. If the indebtedness under the Bank Credit
Facility or other indebtedness were to be accelerated, there can be no
assurance that DI's assets would be sufficient to repay in full all of DI's
indebtedness and any such acceleration would likely have a material adverse
effect on DI's financial condition and results of operations. See "Description
of Bank Credit Facility."
RISK OF DEFAULT UPON A CHANGE OF CONTROL
DI anticipates that the Indenture will provide that upon the
occurrence of a Change of Control (as defined in the Indenture), DI will be
required to offer to purchase all Senior Notes then outstanding at a purchase
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest to the date of purchase. The occurrence of a Change of Control (as
defined in the Bank Credit Agreement) may result in lenders under the Bank
Credit Facility having the right to require DI to repay all indebtedness
outstanding thereunder. There can be no assurance that DI will have available
funds sufficient to repay all indebtedness owing under the Bank Credit Facility
or to fund the purchase of the Senior Notes upon a Change of Control. Also, the
requirement that DI offer to purchase all Senior Notes then outstanding in the
event of a Change of Control and the Change of Control provisions of the Bank
Credit Agreement may each have the effect of deterring a third party from
initiating a tender offer or otherwise effecting a transaction that would
constitute a Change of Control under the Indenture or Bank Credit Agreement.
See "Description of Bank Credit Facility."
DEPENDENCE ON OIL AND GAS INDUSTRY; INDUSTRY CONDITIONS
DI's business and operations are substantially dependent upon
conditions in the oil and gas industry and, specifically, the exploration and
production expenditures of oil and gas companies. The demand for contract
drilling and related services is directly influenced by oil and gas prices,
expectations about future prices, the cost of producing and delivering oil and
gas, government regulations, local and international political and economic
conditions, including the ability of the Organization of Petroleum Exporting
Countries ("OPEC") to set and maintain production levels and prices, the level
of production by non-OPEC countries and the policies of the various governments
regarding exploration and development of their oil and gas reserves. There can
be no assurance that current levels of oil and gas exploration expenditures
will be maintained or that demand for DI's services will reflect the level of
such expenditures.
INTENSE COMPETITION
The land drilling industry is a highly competitive and cyclical
business characterized by high capital and maintenance costs. In periods of low
rig utilization, drilling contracts are usually awarded on a competitive bid
basis and, while an operator may consider factors such as quality of service
and type and location of equipment as well as the ability to provide ancillary
services, price is generally the primary factor in determining which contractor
is awarded a job. An increasingly important competitive factor in the land
drilling industry is the ability to provide drilling equipment adaptable to,
and personnel familiar with, new technologies and drilling techniques as they
become available. Certain of DI's competitors have greater financial and human
resources than DI, which may enable them to better withstand periods of low rig
utilization, to compete more effectively on the basis of price and technology,
to build new rigs or acquire existing rigs and to provide customers rigs more
quickly than DI in periods of high rig utilization. There can be no assurance
that DI will be able to compete successfully against its competitors in the
future.
RISKS ASSOCIATED WITH TURNKEY DRILLING
Under a turnkey drilling contract, DI contracts to drill a well to a
contract depth under specified conditions for a fixed price. In addition, DI
provides technical expertise and engineering services, as well as most of the
equipment required for the well, and is compensated when the contract terms
have been satisfied. Under turnkey drilling arrangements, DI also often
subcontracts for related services and manages the drilling process. The risks
to DI on a turnkey drilling contract are substantially greater than on a well
drilled on a daywork basis because DI assumes most of the risks associated with
drilling operations generally assumed by the operator in a daywork contract,
including risk of blowout, loss of hole, stuck drill string, machinery
breakdowns, abnormal drilling conditions and risks associated with
subcontractors' services, supplies and personnel.
17
<PAGE> 25
OPERATING HAZARDS AND INSURANCE
DI's operations are subject to the many hazards inherent in the land
drilling business, including blowouts, cratering, fires, explosions, loss of
hole and lost or stuck drill strings, and damage or loss from adverse weather.
These hazards could also cause personal injury and loss of life, cause
substantial damage to the environment, suspend drilling operations or seriously
damage or destroy the property and equipment involved and could cause damage to
producing formations and surrounding areas.
DI maintains insurance coverage against some, but not all, operating
hazards. DI believes that it is adequately insured for public liability and
property damage to others with respect to its operations. However, such
insurance may not be sufficient to protect DI against liability for all
consequences of well disasters, personal injury, extensive fire damage or
damage to producing formations or the environment. In addition, DI does not
have casualty insurance with respect to its rigs or drill strings, and other
insurance maintained by DI is subject to substantial deductibles and provides
for premium adjustments based on claims. In view of difficulties that may be
encountered in renewing such insurance at reasonable rates, no assurance can be
given that DI will be able to maintain the type and amount of coverage that it
considers adequate. The occurrence of a significant event for which DI is not
fully insured could have a material adverse effect on DI's financial position
and results of operations.
DEPENDENCE ON KEY PERSONNEL AND NEW BUSINESS STRATEGY
A majority of DI's current senior management team has been hired since
April 1996. In addition, in August 1996, the shareholders of DI 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 DI's Board of Directors effective January 31, 1997. DI believes that its
operations are dependent upon a small group of relatively new management
personnel, the loss of any one of whom could have a material adverse effect on
DI's financial condition and results of operations. Material changes in DI's
management and business strategy have only recently occurred. DI is therefore
unable to predict the effect of these changes on DI's financial condition and
results of operations. DI's ability to meet substantially increased debt
service and principal payments will depend, in part, on the success of DI's new
business strategy. There can be no assurance these material changes in DI's
management and business strategy will result in the improvement of DI's
financial condition and results of operations.
RISKS OF ACQUISITION STRATEGY
As a key component of its new business strategy, DI has pursued and
intends to continue to pursue acquisitions of complementary assets and drilling
businesses. Since mid-1996, a number of significant acquisitions have been
completed by DI, and the Merger is pending. Possible future acquisitions may be
for purchase prices significantly higher than those paid for recent and pending
acquisitions. Certain risks are inherent in an acquisition strategy, such as
increasing leverage and debt service requirements and combining disparate
company cultures and facilities, which could adversely affect DI's operating
results. The success of any completed acquisition will depend in part on DI's
ability to integrate effectively the acquired business into DI. The process of
integrating such acquired businesses may involve unforeseen difficulties and
may require a disproportionate amount of management's attention and DI's
financial and other resources. No assurance can be given that DI will be able
to continue to identify additional suitable acquisition opportunities,
negotiate acceptable terms, obtain financing for acquisitions on satisfactory
terms or successfully acquire identified targets. DI's failure to achieve
consolidation savings, to incorporate the acquired businesses and assets into
its existing operations successfully or to minimize any unforeseen operational
difficulties could have a material adverse effect on DI.
GOVERNMENTAL REGULATIONS
Many aspects of DI's operations are affected by domestic and foreign
political developments and are subject to numerous governmental regulations
that may relate directly or indirectly to the contract drilling and well
servicing industries. DI's operations routinely involve the handling of waste
materials, some of which are classified as hazardous substances. Consequently,
the regulations applicable to DI's operations include those with respect to
containment, disposal and controlling the discharge of hazardous oilfield waste
and other nonhazardous waste material into the environment, requiring removal
and cleanup under certain circumstances, or otherwise relating to the
protection of the environment. Laws and regulations protecting the environment
have become more stringent in recent years and may in certain circumstances
impose strict liability, rendering a party liable for environmental damage
without regard to
18
<PAGE> 26
negligence or fault on the part of such party. Such laws and regulations may
expose DI to liability for the conduct of, or conditions caused by, others or
for acts of DI which were in compliance with all applicable laws at the time
such acts were performed. The application of these requirements or the adoption
of new requirements could have a material adverse effect on DI. In addition,
the modification of existing laws or regulations or the adoption of new laws or
regulations curtailing exploratory or development drilling for oil and gas for
economic, environmental or other reasons could have a material adverse effect
on DI's operations by limiting future contract drilling opportunities.
RISKS OF INTERNATIONAL OPERATIONS
A significant portion of DI's revenues are derived from international
operations. For the fiscal year ended December 31, 1996, 36% of DI's
consolidated revenues were derived from international operations. DI's current
international operations are conducted primarily in Venezuela. Risks associated
with operating in international markets include foreign exchange restrictions
and currency fluctuations, foreign taxation, political instability, foreign and
domestic monetary and tax policies, expropriation, nationalization,
nullification, modification or renegotiation of contracts, war and civil
disturbances or other risks that may limit or disrupt markets. Additionally,
the ability of DI to compete in the international drilling markets may be
adversely affected by foreign government regulations that favor or require the
awarding of such contracts to local contractors, or by regulations requiring
foreign contractors to employ citizens of, or purchase supplies from, a
particular jurisdiction. Furthermore, DI's foreign subsidiaries may face
governmentally imposed restrictions from time to time on their ability to
transfer funds to DI. No predictions can be made as to what foreign
governmental regulations may be applicable to DI's operations in the future.
LIMITATIONS ON THE AVAILABILITY OF DI'S NET OPERATING LOSS CARRYFORWARDS
As a result of a recapitalization transaction in August 1996, DI has
undergone an "ownership change" within the meaning of Section 382 of the
Internal Revenue Code of 1986, as amended. Therefore, the right of DI 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 DI'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 DI's
profitability in future years. As of December 31, 1996, DI had approximately
$23.0 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.
QUALIFICATION AS A REORGANIZATION FOR U.S. FEDERAL INCOME TAX PURPOSES
The Merger is intended to qualify as a tax free reorganization under
Sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal Revenue Code of 1986, as
amended with respect to the DI Common Stock received in the Merger. Arthur
Andersen LLP has rendered an opinion for the benefit of the parties to the
Merger, including Grey Wolf and its shareholders, that the Merger qualifies as
such a reorganization. The opinion is based on a number of assumptions of fact,
which are supported by certificates from DI, Grey Wolf and certain Grey Wolf
shareholders. A principal assumption is that the shareholders of Grey Wolf will
satisfy the continuity of proprietary interest standard with respect to the DI
Common Stock received in the Merger. Thus, under present Internal Revenue
Service ("IRS") guidelines, dispositions of DI Common Stock by Grey Wolf
shareholders during the five years following the Merger could cause the IRS to
assert that the Merger does not qualify as a tax free reorganization. If the
Merger fails to qualify as a tax free reorganization for this or any other
reason, the receipt of DI Common Stock will be taxable to the Grey Wolf
shareholders at the time of the Merger, and Grey Wolf will be deemed to have
sold all of its assets in a taxable exchange triggering a corporate tax
liability to Grey Wolf estimated to be in excess of $30.0 million. The
Purchaser, as the survivor of the Merger, would be liable for any such
corporate tax. See "The Merger--Certain Federal Income Tax Considerations."
19
<PAGE> 27
SHARES ELIGIBLE FOR FUTURE SALE
There are approximately 95.0 million shares of DI Common Stock that
are available for resale by selling shareholders under several currently
effective registration statements under the Securities Act on Forms S-3 and S-8
including 5.3 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 70% of the outstanding DI Common Stock. Future sale of
substantial amounts of DI Common Stock in the public market could adversely
affect prevailing market prices.
20
<PAGE> 28
THE MEETING
DATE, TIME AND PLACE
The Meeting is scheduled to be held on June , 1997, at 10:00 a.m.,
Houston, Texas time at the offices of Fulbright & Jaworski L.L.P., 1301
McKinney, Suite 5100, Houston Texas 77010-3095.
PURPOSES OF THE MEETING
The purposes of the Meeting are to (i) consider and vote upon a
proposal to approve and adopt the Merger Agreement and (ii) transact such other
business as may properly be brought before the Meeting or any adjournment or
postponement thereof.
THE BOARD OF DIRECTORS OF GREY WOLF HAS UNANIMOUSLY APPROVED THE
MERGER AGREEMENT AND RECOMMENDS A VOTE FOR ITS APPROVAL BY SHAREHOLDERS OF GREY
WOLF.
VOTE REQUIRED
The affirmative vote of the holders of at least two-thirds of all
outstanding shares of GW Common Stock is required to approve and adopt the
Merger Agreement. As a result, abstentions and failures to vote will have the
same effect as votes against the Merger Agreement because they are not votes
for approval.
The holders of 2,136,539 shares of GW Common Stock (representing
approximately 72% of the outstanding shares of GW Common Stock) have agreed to
be present in person or by proxy at the Meeting and to vote their respective
shares at the Meeting in favor of the Merger Agreement. Therefore, no
additional votes from the shareholders of Grey Wolf will be necessary to
approve the Merger Agreement if such shares are voted. See "The Merger
Agreement and Related Contracts--Agreements to Support the Merger."
VOTING OF PROXIES
Shares of GW Common Stock represented by executed, written proxies
received at or prior to the Meeting, and which have not thereafter been
properly revoked as described below, will be voted in accordance with the
instructions indicated thereon. Under Texas law, a telegram, telex, cablegram,
or facsimile is treated as a proxy executed in writing by a Grey Wolf
shareholder. If no instructions are indicated, such proxies will be voted FOR
approval and adoption of the Merger Agreement and in the discretion of the
proxy holder as to any other matter that may properly come before the Meeting.
REVOCABILITY OF PROXIES
A Grey Wolf shareholder who has given a proxy may revoke such proxy at
any time prior to its exercise at the Meeting by any manner permitted by law
including (i) giving notice of revocation by mail or facsimile to Grey Wolf
prior to the Meeting or (ii) properly submitting to Grey Wolf by mail or
facsimile a duly executed proxy bearing a later date. Any such submission to
Grey Wolf should be made to Grey Wolf Drilling Company, 1980 Post Oak
Boulevard, Suite 1150, Houston, Texas 77056-3808.
RECORD DATE; SHARES ENTITLED TO VOTE
The close of business on May , 1997, has been fixed as the record date
(the "Record Date") for determining holders of shares of GW Common Stock
entitled to notice of and to vote at the Meeting. As of the Record Date,
2,983,579 shares of GW Common Stock were outstanding and held of record by 55
holders. Of such shares 2,574,274 shares are beneficially owned by the
directors and executive officers of Grey Wolf. Grey Wolf believes that there
are approximately 83 beneficial owners of GW Common Stock. The GW Common Stock
is the only class of capital stock of Grey Wolf issued and outstanding. Each
shareholder of record as of the close of business on the Record Date is
entitled at the Meeting to one vote for each share of GW Common Stock held.
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QUORUM
The presence, in person or by proxy, of the holders of a majority of
the outstanding shares of GW Common Stock entitled to vote at the Meeting is
necessary to constitute a quorum for the transaction of business at the
Meeting. Pursuant to the Voting and Support Agreements, a sufficient number of
shares of GW Common Stock is expected to be present to constitute a quorum. See
"The Merger Agreement and Related Contracts--Agreements to Support the Merger."
SOLICITATION OF PROXIES
The solicitation of proxies for the Meeting may be made in person or
by mail, telephone, telecopy or telegram. In addition, directors, officers and
employees of Grey Wolf may solicit proxies from shareholders by any of the
foregoing methods. The costs of soliciting proxies for the Meeting will be
borne by Grey Wolf.
This Prospectus/Proxy Statement and accompanying proxy card are first
being mailed to shareholders of Grey Wolf on or about May , 1997.
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THE MERGER
GENERAL
The Merger Agreement provides for a business combination in which Grey
Wolf will be merged with and into Drillers, Inc., a wholly-owned subsidiary of
DI Industries, Inc. Grey Wolf's corporate existence will thus cease at the
Effective Time of the Merger. As a result of the Merger, each share of
outstanding GW Common Stock (other than shares of GW Common Stock as to which
dissenter's appraisal rights have been perfected and not waived) will be
converted into the right to receive a proportionate share of approximately 14.0
million shares of DI Common Stock and cash of up to $61.6 million. Both the
stock and cash Merger consideration are subject to substantial adjustments
under the terms of the Merger Agreement. Assuming, however, that no such
adjustments are made, and assuming further that a cash escrow fund called for
by the Merger Agreement under certain circumstances is established at the
Effective Time, each share of GW Common Stock will be converted into the right
to receive (i) cash of approximately $18.97, (ii) 4.692 shares of DI Common
Stock and (iii) up to an additional $1.68 in cash, depending on the amount of
cash, if any, ultimately distributed to Grey Wolf shareholders from the escrow
arrangement. See "The Merger Agreement and Related Contracts--Conversion of
Shares of GW Common Stock" and "The Merger Agreement and Related
Contracts--Escrow Arrangements."
EFFECTIVE TIME
If the Merger Agreement is approved and adopted by the requisite vote
of the stockholders of Grey Wolf and the other conditions of the Merger are
satisfied or waived (if permissible), the Merger will be consummated and
effected at the time a Certificate of Merger is issued by the Secretary of
State of the state of Texas. The Merger Agreement provides that DI and Grey
Wolf will cause the Effective Time to occur as promptly as practicable, but in
no event later than ten business days (unless such other date is agreed to in
writing by the parties to the Merger Agreement) following the satisfaction or,
if permissible, waiver of all the conditions set forth in the Merger Agreement.
The Merger Agreement may be terminated prior to the Effective Time by either DI
or Grey Wolf in certain circumstances, whether before or after approval and
adoption of the Merger Agreement by the stockholders of Grey Wolf. See "The
Merger Agreement and Related Contracts--Termination."
BACKGROUND OF THE MERGER
In 1996, a majority of DI's senior management and all members of its
Board of Directors except its Chairman were replaced. DI's new management
immediately adopted new business strategies intended to return DI to
profitability and keep pace with rapidly changing competitive conditions. One
of the principal changes in the land drilling business, DI's management
believes, is a trend toward the acquisition of smaller land drilling businesses
by larger companies in the industry. DI's management has, therefore, adopted as
a significant part of its new business strategy the acquisition of land
drilling rig assets and businesses, particularly those operating in the Texas
and Louisiana Gulf Coast markets. Implementing this strategy, DI completed
several significant acquisitions of land drilling rig assets and business
during the last half of 1996 and the first quarter of 1997. Certain financial
effects of this series of acquisitions are reflected on a pro forma basis in
the Unaudited Consolidated Pro Forma Financial Statements included elsewhere in
this Prospectus/Proxy Statement.
In furtherance of its acquisition oriented business strategy, DI's
management advised personal contacts, industry and investment banking circles
that DI was seeking suitable acquisitions. Accordingly, DI has routinely had
discussions with other drilling companies and investment banking firms,
including Jefferies & Company, Inc., regarding potential acquisition
transactions.
For the past few years, the principal shareholders and directors of
Grey Wolf have engaged in discussions concerning possible opportunities
available to Grey Wolf to improve the liquidity and enhance the value of its
shareholders' investments and to increase Grey Wolf's market share of the
domestic land drilling business. These shareholders and directors recognized
that, by reason of the normal high utilization of Grey Wolf's drilling rigs,
Grey Wolf's ability to increase its market share of the drilling business was
dependent on its ability to acquire additional drilling rigs at reasonable
cost; but Grey Wolf's access to funds to make such acquisitions was basically
limited to funds generated from its operations unless it obtained funds from an
offering of its equity securities.
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From time to time, Grey Wolf had received unsolicited expressions of
interest from other drilling companies in effecting a merger with Grey Wolf or
acquiring of its drilling rigs and business; and in February, 1996, Jefferies &
Company, Inc. provided a written presentation to Grey Wolf's board of directors
of various strategic alternatives which might be available to Grey Wolf to
enhance shareholder value and better position Grey Wolf to respond to changing
conditions in the drilling industry. Thereafter, at the annual meeting of Grey
Wolf's directors on June 20, 1996, Jefferies was requested to make a
presentation of its analysis of the various strategic alternatives available to
Grey Wolf to maximize long-term shareholder value and liquidity. This
presentation included the preliminary analysis of Jefferies of various possible
strategic options in a variety of scenarios including an initial public
offering, a merger and exchange or a cash sale. Following the presentation, the
board of directors authorized engaging Jefferies to assist Grey Wolf in
exploring possible opportunities for a merger and exchange or cash sale
transaction by Grey Wolf.
Jefferies prepared and distributed an Information Memorandum with
respect to Grey Wolf to DI and other qualified parties known to Jefferies who
might potentially be interested in such a transaction; and Grey Wolf
established and maintained a data room in which additional information
concerning Grey Wolf was made available for examination by qualified parties
identified by Jefferies who had expressed an interest in acquiring or effecting
a merger or combination with Grey Wolf. Each of such companies also executed a
confidentiality agreement with Grey Wolf. Six different companies identified by
Jefferies reviewed the information in Grey Wolf's data room. All six of these
companies made informal proposals for acquiring or effecting a merger or
combination with Grey Wolf, and Grey Wolf ultimately received preliminary
specific written proposals for a merger or combination or cash sale transaction
from the three of those companies whose informal proposals were deemed worthy
of further consideration.
On October 30 and 31, 1996, DI and its advisors conducted preliminary
due diligence reviews of Grey Wolf's operations, assets and finances in a data
room established at Jefferies' office in Houston, Texas. Over the next several
weeks, DI's personnel and advisors discussed with Grey Wolf's personnel and
advisors the matters disclosed in the data room and conducted a more detailed
due diligence review.
On November 14, 1996, Jefferies on behalf of Grey Wolf submitted a
substantially identical letter to DI and five other companies inviting each to
submit by December 2, 1996, a proposal to acquire all of Grey Wolf's stock by
merger (the "Bid Invitation"). The Bid Invitation stated that Grey Wolf's
objectives were to provide its current shareholders with an enhanced liquidity
position, while at the same time allowing for a smooth integration of many of
Grey Wolf's current employees into DI's operations. DI was requested to state
its intentions with respect to the employment of Grey Wolf's management and
employees.
The attractiveness of the price offered and the certainty of
completing the transaction proposed were identified in the Bid Invitation as
the most important considerations to Grey Wolf. The Bid Invitation requested
that DI's offer specify whether the proposed merger consideration was comprised
of cash, stock or both. It further specified that DI's proposal should not
contain a range for the proposed merger consideration or provisions for an
automatic increase in the consideration proposed based upon the merger
consideration proposed by other bidders. A copy of Grey Wolf's unaudited
balance sheet as of September 30, 1996 was enclosed and the Bid Invitation
further instructed DI to assume that the proposed purchase price would involve
an adjustment to reflect any changes in Grey Wolf's relevant working capital
items between September 30, 1996 and the closing date of the merger.
Information concerning DI's proposed sources of financing for the acquisition
were also requested and, if DI's proposal was contingent on external financing,
references to persons at the applicable lending or other institution were
requested so that Grey Wolf could confirm the status of the proposed financing.
The Bid Invitation stated that Grey Wolf would most seriously consider
proposals that contained written evidence of financing sources.
Also disclosed in the Bid Invitation was Grey Wolf's intent to
establish an Employee bonus pool to be paid to Grey Wolf employees who remained
employed by the purchaser of Grey Wolf for one year. Because of the benefit of
the bonus pool to DI, it was suggested that DI's bid be structured so that the
cost of the bonus pool would be shared by Grey Wolf shareholders and DI. The
Grey Wolf Employee Trust was the end product of negotiations pertaining to the
Employee bonus pool referred to in the Bid Invitation. See "The Merger
Agreement and Related Contracts--Grey Wolf Employee Trust."
The Bid Invitation also included a draft merger agreement, requesting
that DI's proposal include a copy of Grey Wolf's draft marked to indicate DI's
proposed changes thereto and stated that DI should not submit a different form
of merger plan. Grey Wolf and Jefferies also agreed to treat any proposal
received from DI in the strictest confidence.
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On December 3, 1996, DI submitted its offer to acquire Grey Wolf for a
total cash purchase price of approximately $80.5 million. Attached to the offer
was a draft merger agreement generally in the form originally proposed by Grey
Wolf but significantly revised to render it acceptable to DI. DI's offer was
subject to, among other things, satisfactory completion of due diligence
reviews to confirm the accuracy of the information in the data room and the
execution and delivery of voting and support agreements by each of James K. B.
Nelson and Sheldon Lubar.
Grey Wolf's board of directors concluded, after consultation with
Jefferies and further investigation of the respective offerors, to conduct
negotiations with DI Industries, Inc. and one other company from whom a written
proposal had been received, in order to determine whether a definitive
agreement could be negotiated with either such party on a basis which would be
acceptable to the board of directors of Grey Wolf for recommendation to the
shareholders of Grey Wolf.
In December 1996, DI's officers were contacted by Jefferies and were
requested to extend the expiration date of DI's bid. Upon learning that DI's
offer was not the highest, DI declined to extend the period, and DI's initial
bid expired in accordance with its terms on December 11, 1996. Negotiations
between Grey Wolf and DI were thereafter suspended until discussions were
resumed in February 1997. During the intervening period, Grey Wolf continued to
pursue negotiations with the other interested party.
Once merger talks between DI and Grey Wolf were reestablished,
negotiations concerning material terms of the Merger continued between Grey
Wolf and DI until the signing of the Merger Agreement on March 7, 1997. The
principal issues that were the subject of such negotiations were: the amount of
the Merger consideration and the relative portion thereof to be paid in DI
Common Stock and cash; the nature and terms of possible adjustments to the
number of shares of DI Common Stock and the amount of cash to be paid by DI in
the Merger based upon post-signing changes in the price of DI Common Stock;
whether there would be an adjustment to the Merger consideration for working
capital changes in Grey Wolf's balance sheet prior to closing; the amount and
funding of the Grey Wolf Employee Trust; whether a post-closing escrow
arrangement would be established for post closing liabilities of Grey Wolf,
including the TEPCO litigation and the amount and terms of any such escrow; and
possible contractual agreements and indemnities relating to the position of the
parties if the parties expectations with respect to the federal income tax
consequences of the Merger proved to be incorrect.
At a meeting held on March 6, 1997, in which all directors
participated, the Grey Wolf Board of Directors unanimously determined that the
terms of the Merger Agreement and the Merger offer the best value reasonably
available to, and are in the best interest of, Grey Wolf's shareholders, and
that the terms of the Merger Agreement are fair and in the best interest of the
shareholders of Grey Wolf. Grey Wolf's Board of Directors therefore unanimously
approved and adopted the Merger Agreement, authorized management to execute and
deliver the Merger Agreement and recommended its approval and adoption by Grey
Wolf shareholders.
In a telephonic meeting held on March 5, 1997, in which all directors
of DI participated, the Board of Directors of DI determined that it was
advisable and in the best interest of DI's shareholders for DI to enter into
the Merger Agreement. Accordingly, management of DI was authorized by the Board
of Directors to execute and deliver the Merger Agreement.
GREY WOLF'S REASONS FOR THE MERGER
The Board of Directors of Grey Wolf has unanimously determined that
the terms of the Merger Agreement are fair and in the best interest of the
shareholders of Grey Wolf. Grey Wolf's Board of Directors therefore unanimously
approved and adopted the Merger Agreement and recommended its approval and
adoption by Grey Wolf shareholders. In reaching its conclusions, the Board of
Directors of Grey Wolf consulted with Grey Wolf management, as well as its
legal counsel and its financial advisors, and considered a number of factors,
including those summarized below:
(i) the process of (A) soliciting indications of interest for the
acquisition of Grey Wolf, (B) comparing offers by interested
parties (including further negotiations with certain of those
parties other than DI) and (C) determining that the Merger
was the best available alternative;
(ii) the exchange ratio between DI Common Stock and GW Common
Stock which the Board believed would result in enhanced value
for Grey Wolf shareholders;
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(iii) the substantial amount of cash per share of GW Common Stock
to be received by the Grey Wolf shareholders incident to the
merger in addition to shares of DI Common Stock;
(iv) the expected favorable treatment of the Merger under U.S.
federal income tax laws;
(v) the analysis and opinion of Jefferies concerning the fairness
of the Merger to Grey Wolf shareholders from a financial
point of view, as described further below;
(vi) the recommendation of James K. B. Nelson, Grey Wolf's
President, that the Merger Agreement be approved;
(vii) DI's assent to the creation of the Grey Wolf Employee Trust
and its partial funding from cash that would have otherwise
been available to the combined company following the Merger;
(viii) DI's willingness to offer employment to substantially all
Grey Wolf employees, including management of Grey Wolf, and
board positions to two Grey Wolf nominees;
(ix) its belief that the onshore drilling industry is rapidly
consolidating and that in such an environment the future
business prospects of the combined company were anticipated
to be stronger than those of Grey Wolf alone due to the
better competitive position of the combined company resulting
from the larger size of the combined company's rig fleet and
the greater geographic diversity of its operations;
(x) DI's recognition of the name identification and goodwill
associated with Grey Wolf's business as evidenced by its
agreement to recommend to DI's shareholders at the next
annual meeting of DI's shareholders following the Merger that
DI's articles of incorporation be amended to include the
words "Grey Wolf" in its name;
(xi) the expected financial condition and results of operations of
Grey Wolf if it continued to be privately-owned, including
the need for additional capital to facilitate the growth of
its business and the uncertain prospects of obtaining
additional capital in amounts, and on terms, that would be
satisfactory;
(xii) the financial condition and results of operations of Grey
Wolf and DI both historically and after giving pro forma
effect to the Merger and to the anticipated issuance by DI of
high yield debt securities, a portion of the proceeds of
which would be used by DI to pay the cash Merger
consideration;
(xiii) the historical market prices of the DI Common Stock and the
generally favorable trend of such prices during 1996 and the
first two months of 1997; and
(xiv) the relative illiquidity of the GW Common Stock and the
opportunity afforded Grey Wolf shareholders to hold a
publicly-traded equity investment in the combined company and
to participate in potential growth and appreciation of its
business.
The foregoing discussion of the information and matters considered by
Grey Wolf's Board of Directors is not intended to be exhaustive, but is
believed to include the material factors considered by the Board of Directors.
In view of the wide variety of factors considered in connection with its
evaluation of the Merger Agreement, Grey Wolf's Board of Directors did not find
it practicable to, and did not, quantify or otherwise attempt to assign
relative or specific weights to the foregoing factors, and individual directors
may have given different weights to different factors. Rather, the Board of
Directors of Grey Wolf viewed its conclusions as being based on the totality of
the information presented to and considered by it.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF GREY WOLF
Based on the opinion of Jefferies to the effect that, from a financial
point of view, the consideration to be received by Grey Wolf's stockholders
upon consummation of the Merger is fair to such stockholders, and on the
matters summarized under "--Background of the Merger" and "--Grey Wolf's
Reasons for the Merger," and such other matters
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as were deemed relevant, the Board of Directors of Grey Wolf unanimously
approved the Merger Agreement as being in the best interest of Grey Wolf's
shareholders.
THE BOARD OF DIRECTORS OF GREY WOLF UNANIMOUSLY RECOMMENDS THAT GREY
WOLF'S SHAREHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
OPINION OF GREY WOLF'S FINANCIAL ADVISOR
Jefferies acted as financial advisor to Grey Wolf's Board of Directors
in connection with the transactions contemplated by the Merger Agreement. The
Board of Directors instructed Jefferies, in its role as financial advisor, to
evaluate the fairness of the Merger to Grey Wolf's shareholders from a
financial point of view and, in such regard, to conduct such investigations as
Jefferies deemed appropriate for such purpose. No limitations were imposed upon
Jefferies with respect to the investigations made or procedures followed by it
in rendering its opinion.
On March 6, 1997, Jefferies delivered its opinion (the "Jefferies
Opinion") to the Grey Wolf Board of Directors to the effect that, as of that
date, and based on the assumptions stated therein, the Merger consideration to
be received by the holders of GW Common Stock pursuant to the Merger Agreement
is fair, from a financial point of view, to such holders. The Merger
consideration was based on negotiations between DI Industries and Grey Wolf to
which Jefferies provided certain assistance. The Jefferies Opinion is directed
only to the fairness of the Merger consideration from a financial point of view
and does not address any other terms of the Merger or the underlying business
decision of the Grey Wolf Board of Directors to effect the Merger. The
Jefferies opinion was delivered for the information of Grey Wolf's Board of
Directors and does not constitute a recommendation to any shareholder as to how
such person should vote with respect to the Merger. A copy of the Jefferies
Opinion, dated March 6, 1997, is attached hereto as Appendix C. Shareholders of
Grey Wolf are urged to read the Jefferies Opinion in its entirety for an
explanation of the assumptions made, matters considered and limits of the
review undertaken by Jefferies.
The Jefferies Opinion was necessarily based upon information available
to it, and on economic, financial, market and other conditions as they existed
and could be evaluated on the date of the opinion. Although subsequent
developments may affect its opinion, Jefferies does not have any obligation to
update, revise or reaffirm the Jefferies Opinion. In its review and analysis
and in rendering its opinion, Jefferies has assumed and relied upon the
accuracy and completeness of the representations and warranties made by DI and
Grey Wolf in the Merger Agreement, as well as all the financial and other
information provided to it by Grey Wolf's and DI's management or publicly
available, including without limitations, information with respect to tax
positions, contingent liabilities, condition of assets and material contract
terms, and Jefferies did not assume any responsibility for the independent
verification of such information. Jefferies did not conduct a physical
inspection of any of the properties or facilities of Grey Wolf and DI, nor did
Jefferies make or consider any independent evaluations or appraisals of any of
such properties or facilities. Pursuant to the terms of the Merger Agreement,
Jefferies also assumed that the Merger will be accounted for as a purchase
transaction in accordance with generally accepted accounting principles.
In rendering its opinion as described herein, Jefferies reviewed such
information and considered such financial data and other factors as Jefferies
deemed relevant under the circumstances, including among others, the following:
(i) the terms and conditions of the Merger Agreement; (ii) the historical and
current financial condition and results of operations of Grey Wolf and DI;
(iii) certain non-public financial and non-financial information prepared by
the management's of Grey Wolf and DI, which data was made available to
Jefferies in its role as financial advisor to Grey Wolf; (iv) published
information regarding the financial performance and operating characteristics
of a selected group of companies which Jefferies deemed comparable; (v)
business prospects of Grey Wolf and DI when taking into consideration the
impact of the Merger; (vi) the historical and current market price for DI
Common Stock and for the equity securities of certain other companies with
businesses that Jefferies considered relevant to its inquiry; (vii) publicly
available information, including research reports on companies Jefferies
considered relevant to its inquiry; and (viii) the nature and terms of other
recent acquisition transactions in the onshore drilling industry. Jefferies
also met with certain officers and employees of Grey Wolf and DI to discuss the
foregoing as well as other matters believed relevant to its opinion.
In evaluating the Merger Consideration to be paid in the Merger by DI,
Jefferies performed a variety of financial and comparative analyses with
respect to DI and Grey Wolf, including those described below:
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Comparable Company Analysis. Comparable company analysis examines a
company's trading characteristics relative to a group of publicly traded peers.
Jefferies analyzed the trading characteristics of companies in the onshore
drilling industry. Companies in the onshore drilling industry that were
examined include: Nabors Industries, Inc.; Parker Drilling Company; Patterson
Energy, Inc.; Precision Drilling Corp. and UTI Energy Corp. (the "Comparable
Companies").
Balance sheet information used in connection with the ratios provided
below with respect to the Comparable Companies and DI was as of the most recent
financial statements publicly available for each company. Market information
used in calculating the ratios was as of February 19, 1997, approximately two
weeks prior to the initial public announcement of the Merger. Earnings per
share ("EPS"), cash flow per share ("CFPS") and earnings before interest, taxes
and depreciation and amortization ("EBITDA") estimates for Grey Wolf and DI
were obtained from management of Grey Wolf and DI and the Comparable Companies'
estimates were obtained from Jefferies' energy research group.
Jefferies analyzed the relative stock price performance and value for
DI, on a standalone basis and pro forma for its combination with Grey Wolf,
compared to the Comparable Companies. Among the market trading information
considered in the evaluation were the stock price movement of DI and the
Comparable Companies in 1996 and the ratios of market price to EPS estimates,
market price to CFPS estimates and total enterprise value (defined as market
capitalization plus the book value of total financial debt less cash) to EBITDA
estimates for 1998. This analysis indicated that (i) the ratio of market price
to 1998 EPS estimate was 12.5x for DI standalone and 12.3x for DI combined;
(ii) the average ratio of market price to 1998 EPS estimates was 18.4x for the
Comparable Companies; (iii) the ratio of market price to 1998 CFPS estimates
was 6.6x for DI standalone and 6.1x for DI combined; (iv) the average ratio of
market price to 1998 CFPS estimates was 8.0x for the Comparable Companies; (v)
the ratio of total enterprise value to EBITDA for 1998 was 5.2x for DI
standalone and 5.3x for DI combined and (vi) the average ratio of total
enterprise value to EBITDA was 6.8x for the Comparable Companies.
No company included in the comparable company analysis as a comparison
is identical to DI or Grey Wolf. In evaluating the Comparable Companies,
Jefferies made judgments and assumptions with regard to industry performance,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of DI or Grey Wolf, such as the impact of
competition on the business of DI or Grey Wolf and the industry generally,
industry growth and the absence of any adverse material change in the financial
condition and prospects of DI and Grey Wolf or the industry or in the financial
markets in general. Due to the inherent differences between the operations of
DI or Grey Wolf and the Comparable Companies, a purely quantitative
mathematical analysis (such as determining the average) is not in itself a
meaningful method of using comparable company data.
Discounted Cash Flow Analysis. Employing certain data provided by Grey
Wolf, Jefferies performed a discounted cash flow analysis of Grey Wolf in order
to estimate the present value of the future unlevered free cash flows that Grey
Wolf could be expected to generate during the period from November 1, 1996, to
December 31, 2000.
Grey Wolf's projected earnings and cash flows for fiscal 1997 were
provided by Grey Wolf's management to DI and to Jefferies. These projections
provided the basis for Jefferies' analysis and Jefferies assumed that the
information provided by Grey Wolf was reasonably prepared based upon the best
available estimates and judgments of the management of Grey Wolf. Estimates for
earnings and cash flows for fiscal 1998 through fiscal 2000 were based on
fiscal 1997 projected results, increased by 5% per annum. The estimated future
free cash flows for the four-year period from November 1, 1996, through October
31, 2000, were discounted at a range of after-tax discount rates from
13% to 17%. In addition, Jefferies calculated a range of terminal values by
multiplying the estimated free cash flow on October 31, 2000, by a range of
terminal multiples from 9.0x to 11.0x. These terminal values were then
discounted to present value using the range of discount rates described above.
Jefferies' discounted cash flow analysis yielded equity valuation ranges for
Grey Wolf of $65.3 million to $85.3 million.
Comparable Transaction Analysis. Using publicly available information,
Jefferies performed an analysis of several recent acquisition transactions
("Comparable Transactions") in the onshore drilling industry with total
transaction values (defined as the value of cash and securities paid plus the
book value of total financial debt assumed less the amount of cash assumed) of
less than or equal to $150.0 million. In the comparable transaction analysis,
Jefferies considered the one-year projected EBITDA of the targets in the
Comparable Transactions, based on research analyst projections at the date of
the Transaction. This analysis indicated an average acquisition multiple of
5.0x the one-year projected EBITDA of the targets in the Comparable
Transactions. Jefferies observed that the implied equity
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value of Grey Wolf is $88.7 million based on the acquisition multiple of 5.0x
and the 1997 projected EBITDA of Grey Wolf as provided by management estimates.
Comparable Rig Acquisitions. Jefferies performed an analysis of
several recent land rig fleet acquisition transactions ("Comparable Rig
Acquisitions") with total transaction values (defined as the value of cash and
securities paid plus the book value of total financial debt assumed less the
amount of cash assumed) ranging from $5.0 million to approximately $260.0
million. In the Comparable Rig Acquisition analysis, Jefferies evaluated the
amount of consideration paid in each transaction divided by the number of rigs
acquired. This analysis indicated an average acquisition price of approximately
$2.0 million per rig in the Comparable Rig Acquisitions. Jefferies observed
that the implied equity value of Grey Wolf is $35.1 million based on an 18 rig
fleet. Jefferies does not, however, believe that this analysis adequately
reflects Grey Wolf's per rig profitability as compared to many of its peers.
Pro Forma Analysis of the Merger. Jefferies analyzed certain pro forma
financial effects of the Merger assuming that the Merger was treated as a
purchase transaction. The operating and financial data used by Jefferies in
this analysis were provided by the managements of DI and Grey Wolf. Jefferies
observed that the Merger would have an accretive effect on earnings and cash
flow per share to DI Industries of approximately 1.9% and 8.7%, respectively,
for the calendar year 1998.
The foregoing summary does not purport to be a complete description of
the analyses performed by Jefferies. The preparation of a fairness opinion is a
complex process that involves various determinations as to the most appropriate
and relevant methods of financial analysis and the application of these methods
to the particular circumstances. Accordingly, such an opinion is not
necessarily susceptive to partial analysis or summary description. In arriving
at its opinion, Jefferies did not attribute any particular weight to any
analysis or factors considered by it, but rather, made qualitative judgments as
to the significance and relevance of each analysis and factor. Jefferies
believes that its analyses must be considered as a whole, and that selecting
portions of such analyses and of the factors considered by Jefferies, without
considering all of such analysis and factors, could create an incomplete view
of the process underlying its opinion. Additionally, estimates of the values of
businesses and securities do not purport to be appraisals or necessarily
reflect the prices at which businesses or securities may be sold. Accordingly,
such analyses and estimates are inherently subject to substantial uncertainty.
Jefferies made numerous assumptions with respect to industry performance,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of Grey Wolf or DI. Any estimates
considered in Jefferies' analysis are not necessarily indicative of actual
values or actual future results, which may be significantly more or less
favorable than suggested by such analyses.
Jefferies is an investment banking firm with substantial experience in
transactions similar to the Merger and is familiar with Grey Wolf and its
business. As part of its investment banking business, Jefferies is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes.
Jefferies will be paid a fee of $25,000 by Grey Wolf for its services
in connection with the preparation of Jefferies' opinion to Grey Wolf's Board
of Directors. In addition, Jefferies will receive a fee of 1% of the total
Merger consideration received by Grey Wolf shareholders in the Merger, less the
$25,000 fee received by Jefferies in connection with preparing its opinion to
the Board of Directors of Grey Wolf. Jefferies has not previously rendered any
investment banking or financial advising services to Grey Wolf or DI. In the
normal course of its business, Jefferies may trade DI Common Stock for its own
account and for the account of its customers, and, accordingly, may at any time
hold a long or short position therein.
DI'S REASONS FOR THE MERGER
The Board of Directors of DI determined that it was advisable and in
the best interest of DI's shareholders for DI to enter into the Merger
Agreement. DI's Board of Directors considered a number of factors in reaching
its conclusion, including those summarized below:
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(i) the terms of the Merger Agreement which were the product of
arms'-length negotiations, including the willingness of Grey
Wolf to accept DI Common Stock as a substantial portion of
the total Merger consideration;
(ii) the recent and historical market prices of DI Common Stock;
(iii) the anticipated accounting and U.S. federal income tax
treatment of the Merger;
(iv) information concerning the historical financial condition,
results of operations and cash flow of Grey Wolf;
(v) the expected effect on DI's financial condition, results of
operations and cash flow of the Merger and the related
incurrence of substantial additional indebtedness to finance
the cash portion of the Merger consideration and to provide
working capital for DI's expanded operations following the
Merger;
(vi) the outlook of the onshore drilling industry in general and
in the geographic markets expected to be serviced by the
larger combined rig fleet of DI and Grey Wolf, including
market trends and possibilities for greater utilization rates
and day rates in certain markets for onshore deep drilling
capacity rigs, including those owned by Grey Wolf;
(vii) the geographic concentration of Grey Wolf's rig fleet and
operations in South Louisiana and the Texas Gulf Coast, thus
furthering DI's objective of increasing its drilling rig
fleet in more profitable markets;
(viii) the anticipated employment by DI following the Merger of
substantially all of Grey Wolf's personnel who, the DI's
Board of Directors believes, will substantially enhance DI's
operations expertise and marketing capabilities;
(ix) the expectation that the terms of the Grey Wolf Employee
Trust will encourage Grey Wolf personnel to remain employed
by DI following the Merger, thus bettering the prospect that
DI will continue to benefit, as intended, from the increased
personnel resources offered by the Merger;
(x) the expectation that the larger rig fleet and increased
personnel resources following the Merger will better enable
DI to compete in what the Board of Directors believes to be a
rapidly consolidating market for providers of onshore
drilling services;
(xi) the belief that the increased size of DI following the Merger
will enhance its ability to pursue other acquisitions; and
(xii) the recommendation by Thomas P. Richards, DI's President and
Chief Executive Officer, that the Merger Agreement be
approved.
The above-listed factors considered by DI's Board of Directors are not
intended to include all matters considered but are believed to include the
material factors considered by the Board of Directors. In determining that the
Merger was in the best interest of shareholders of DI, the Board Directors of
DI considered the factors above, and all other information available to it, as a
whole. No specific or relative weights were assigned by the DI Board of
Directors to such factors, it being generally impractical to do so because the
decision to approve the Merger Agreement was the product of the collective and
largely subjective judgment of the members of Board of Directors of DI.
Accordingly, individual directors may have given different weights to the
factors considered.
MANAGEMENT OF DI FOLLOWING THE MERGER
DI has agreed that it will increase the number of directors
constituting its Board of Directors from six to eight following the Merger and
that its Board of Directors will elect two Grey Wolf nominees, James K. B.
Nelson and William T. Donovan, to fill the newly-created directorships. See
"Information Concerning Grey Wolf--Management of Grey Wolf."
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VOTING AGREEMENT OF CONTROLLING SHAREHOLDERS OF GREY WOLF
Each of Sheldon B. Lubar, individually and on behalf of the Lubar
Nominees, James K. B. Nelson and Felicity Ventures, Ltd. (of which James K. B.
Nelson is a general partner) who collectively own or have the right to vote at
the Meeting approximately 72% of the outstanding shares of GW Common Stock have
agreed to vote all such shares over which they have voting control for the
approval of the Merger Agreement. The form of Voting and Support Agreements
between the three principal shareholders and DI are attached hereto as Appendix
B. See "The Merger Agreement and Related Contracts--Agreements to Support the
Merger."
INTEREST OF CERTAIN PERSONS IN THE MERGER; POSSIBLE CONFLICTS OF INTEREST
In considering the recommendation of the Board of Directors of Grey
Wolf with respect to the Merger Agreement and the other transactions
contemplated thereby, shareholders of Grey Wolf should be aware that certain
members of the management of Grey Wolf and of its Board of Directors have
certain interests in the Merger that are in addition to the interests of
shareholders of Grey Wolf generally. These additional benefits and interests
may create a conflict of interest between such persons and the other
shareholders of Grey Wolf. Those interests are summarized below.
Among the material additional interests is the right of certain
employees of Grey Wolf (including members of Grey Wolf's management) to receive
potential cash distributions from the $4.05 million Employee Trust, which will
be established immediately prior to the Merger. Of the initial funding of the
Employee Trust, $2.4 million will be provided from the corporate funds of Grey
Wolf and $1.65 million will be funded personally by Grey Wolf's President,
James K. B. Nelson. The individual employees of Grey Wolf who will be eligible
for benefits under the Employee Trust and their respective initial
participation in the Employee Trust are set forth in Exhibit A to Appendix A of
the Merger Agreement which may be found at page A-54 of this Prospectus/Proxy
Statement.
Certain members of Grey Wolf's management will also be employed by the
Purchaser following the Merger, will receive employee benefits, will be
eligible for DI stock options and will be indemnified and provided officers'
and directors' insurance by DI and the Purchaser. See "The Merger Agreement and
Related Contracts--Indemnification and Insurance."
The three largest shareholders of Grey Wolf, each of whom is either a
member of or affiliated with Grey Wolf's management, have agreed in their
capacities as shareholders to vote for and support the Merger. See "The Merger
Agreement and Related Contracts--Agreements to Support the Merger."
RESTRICTIONS ON RESALES BY AFFILIATES
DI Common Stock that will be issued in the Merger will have been
registered under the Securities Act and will be freely transferrable, except
for shares received by persons, including officers and directors of Grey Wolf,
who may be deemed "affiliates" of Grey Wolf at the time of voting on the Merger
or who become affiliates of DI following the Merger. Affiliates may not resell
their DI Common Stock except pursuant to (i) an effective registration
statement under the Securities Act, (ii) Rule 145(d) under the Securities Act
in the case of affiliates of Grey Wolf, (iii) the applicable provisions of Rule
144 under the Securities Act (other than the one year holding period, which
will not apply to shares of DI Common Stock acquired in the Merger) with
respect to persons who become affiliates of DI following the Merger
and (iv) any other exemption from the registration provisions of the Securities
Act that is available in the opinion of legal counsel reasonably satisfactory
to DI.
RIGHTS OF DISSENTING SHAREHOLDERS
The Texas Business Corporation Act (the "TBCA") entitles any Grey Wolf
shareholder who objects to the Merger, and who exactly follows the procedures
prescribed by the TBCA, to receive cash equal to the "fair value" of such
shareholder's GW Common Stock in lieu of the consideration proposed under the
Merger. Set forth below is a summary of the procedures relating to the exercise
of such dissenter's rights. This summary is qualified in its entirety by the
applicable provisions of the TBCA concerning rights of dissenting shareholders,
which are reproduced in Appendix D hereto.
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ANY GREY WOLF SHAREHOLDER CONTEMPLATING THE POSSIBILITY OF DISSENTING
FROM THE MERGER SHOULD CAREFULLY REVIEW THE TEXT OF APPENDIX D (PARTICULARLY
THE PROCEDURAL STEPS REQUIRED TO PERFECT DISSENTER'S RIGHTS) AND SHOULD CONSULT
WITH SUCH SHAREHOLDER'S LEGAL COUNSEL. SUCH DISSENTER'S RIGHTS WILL BE LOST IF
THE REQUIREMENTS OF THE TBCA ARE NOT FULLY AND PRECISELY SATISFIED.
Under the TBCA, a Grey Wolf shareholder may exercise the right to
dissent from the Merger only by complying with the procedures set forth in the
TBCA. A Grey Wolf shareholder choosing to dissent from the Merger must file
with Grey Wolf prior to the Meeting, a written objection to the Merger, setting
out that the shareholder's right to dissent will be exercised if the Merger is
effective. The notice must also give the shareholder's address to which notice
of the Merger can be mailed or delivered. If the Merger is effected and the
shareholder did not vote in favor of the Merger, the surviving corporation
(i.e., the Purchaser) is required to deliver or mail to the shareholder written
notice that the Merger has been effected within ten days after the Effective
Time. The shareholder may, within ten days from delivery or mailing of the
notice, make written demand on the Purchaser for payment of the "fair value" of
the shareholder's shares. The TBCA provides that the fair value of the GW
Common Stock is the value of such shares as of the day immediately preceding
the Meeting, excluding any appreciation or depreciation in anticipation of the
proposed Merger. The shareholder's demand must further state the number and
class of the shares owned by the shareholder and the fair value of the shares
as estimated by the shareholder. Any shareholder failing to make proper demand
within the ten day period will be bound by the Merger.
Within 20 days after receipt by the Purchaser of a demand for payment
made by a dissenting shareholder in accordance with the TBCA, the Purchaser is
required to deliver or mail to the shareholder a written notice that must
either (i) set out that the Purchaser accepts the amount claimed in the
shareholder's demand and agrees to pay that amount within 90 days after the
Effective Time upon the surrender of the shareholders' certificates for GW
Common Stock duly endorsed, or (ii) contain an estimate by the Purchaser of the
fair value of the shares together with an offer to pay the amount of that
estimate within 90 days after the date on which the Merger was effected, upon
receipt of notice within 60 days after that date from the shareholder that the
shareholder agrees to accept that amount and upon the surrender of the
certificates for the shareholder's GW Common Stock duly endorsed. If, within 60
days after the date on which the Merger was effected, the value of the GW
Common Stock shares is agreed upon between the shareholder and the Purchaser,
payment for the shares must be made within 90 days after the date on which the
Merger was effected and upon surrender of the GW Common Stock certificates duly
endorsed. The TBCA provides that upon payment of the agreed value, the
shareholder will cease to have any interest in the shares or in Grey Wolf.
If the shareholder and the Purchaser do not agree on a fair value for
the shareholder's GW Common Stock within the 60 day period after the date on
which the Merger was effected, then the shareholder or the Purchaser may,
within 60 days after the expiration of the 60 day period, file suit in any
court of competent jurisdiction in Harris County, Texas (the location of Grey
Wolf's principal office), asking for a finding and determination of the fair
value of the shareholder's shares. Within ten days after service of the
shareholder's lawsuit, the Purchaser is required to file in the office of the
clerk of the court in which the lawsuit was filed a list containing the names
and addresses of all shareholders of Grey Wolf who have demanded payment for
their shares and with whom agreements as to the value of their shares have not
been reached by the Purchaser. If the lawsuit is filed by the Purchaser, the
petition must be accompanied by such a list. The clerk of the court is required
by the TBCA to give notice of the time and place fixed for the hearing of the
lawsuit by registered mail to the Purchaser and to the shareholders named on
the list at the addresses therein stated. The forms of the notices by mail must
be approved by the court. All shareholders thus notified and the Purchaser will
thereafter be bound by the final judgment of the court.
After the hearing of the lawsuit, the court is required by the TBCA to
determine the shareholders who have complied with the provisions of the TBCA
and have become entitled to the valuation of and payment for their shares, and
is required to appoint one or more qualified appraisers to determine that
value. The appraisers have power to examine any of the books and records of
Grey Wolf, and they are required to make a determination of the fair value of
the shares upon such investigation as to them may seem proper. The appraisers
must also afford a reasonable opportunity to the parties interested to submit
to them pertinent evidence as to the value of the shares. The appraisers also
have certain other powers and authority arising under the Texas Rules of Civil
Procedure or which may be granted by the court order appointing them.
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The appraisers are required to determine the fair value of the shares
of those Grey Wolf shareholders adjudged by the court to be entitled to payment
for their shares. The appraisers are required to file their report of that
value in the office of the clerk of the court. The appraiser's report is
subject to exceptions to be heard before the court both upon the law and the
facts. The court is required to render its judgment determining the fair value
of the shares of the shareholders entitled to payment for their shares. Once
the fair value of such shares has been determined, the court is required to
direct the payment of that value by the Purchaser, together with interest
thereon, beginning 91 days after the date on which the Merger was effected to
the date of the court's judgment, to the shareholders entitled to payment. The
judgment will be payable only upon, and simultaneously with, the surrender to
the Purchaser of duly endorsed certificates for those shares. Upon payment of
the judgment, the dissenting shareholders will cease to have any interest in
those shares or in Grey Wolf. The court must allow the appraisers a reasonable
fee as court costs, and all court costs may be allotted between the parties in
the manner that the court determines to be fair and equitable.
In the absence of fraud in the transaction, the dissenter's rights
provided by TBCA to a shareholder objecting to the Merger is the exclusive
remedy for the recovery of the value of his shares or money damages to the
shareholder with respect to the action. If the Purchaser complies with the
procedural requirements of the TBCA, any Grey Wolf shareholder who fails to
comply with the procedural requirements of the TBCA will not be entitled to
bring suit for the recovery of the value of his shares or money damages to the
shareholder with respect to the action.
Any shareholder who has demanded payment of the fair value for his
shares in accordance with the applicable provisions of the TBCA, will not
thereafter be entitled to vote or exercise any other rights of a shareholder
except the right to receive payment for his shares pursuant to the provisions
of the TBCA and the right to maintain an appropriate action to obtain relief on
the ground that the Merger would be or was fraudulent, and the respective
shares for which payment has been demanded shall not thereafter be considered
outstanding for the purposes of any subsequent vote of shareholders.
Upon receiving a demand for payment from any dissenting shareholder,
Grey Wolf must make an appropriate notation thereof in its shareholder records.
Within 20 days after demanding payment for GW Common Stock in accordance with
the TBCA, each holder of certificates representing shares so demanding payment
is required to submit such certificates to Grey Wolf for notation thereon that
such demand has been made. The failure of such holders of GW Common Stock to do
so will, at the corporation's option, terminate such shareholder's dissenter's
rights under the TBCA unless a court of competent jurisdiction for good and
sufficient cause shown otherwise directs. If shares represented by a
certificate on which notation has been so made are transferred, any new
certificate issued therefor must bear a similar notation together with the name
of the original dissenting holder of such shares and a transferee of such
shares will acquire by such transfer no rights in Grey Wolf other than those
which the original dissenting shareholder had after making demand for payment
of the fair value thereof.
Any shareholder who has demanded payment for his shares may withdraw
such demand at any time before payment for his shares or before any lawsuit has
been filed pursuant to the TBCA asking for a finding and determination of the
fair value of such shares. Thereafter, however, no such demand may be withdrawn
after such payment has been made or, unless the corporation consents thereto,
after any such lawsuit has been filed.
A dissenting shareholder and all persons claiming under him will be
conclusively presumed to have approved and ratified the Merger and will be
bound thereby, the right of such shareholder to be paid the fair value of his
shares will cease, and his status as a shareholder will be restored (without
prejudice to any corporate proceedings which may have been taken during the
interim) and such shareholder shall be entitled to receive any dividends or
other distributions made to shareholders in the interim in the following
circumstances: (i) a shareholder's demand is properly withdrawn; (ii) the
corporation terminates the shareholder's rights to dissent under any right to
do so under the TBCA; (iii) no lawsuit asking for a finding and determination
of fair value of such shares by a court is filed within the time provided in
the TBCA; or (iv) the court determines, after its hearing of the lawsuit filed
pursuant to the dissenter's rights provisions of the TBCA, that such
shareholder is not entitled to the relief provided by the TBCA.
REGULATORY APPROVALS
DI and Grey Wolf are aware of no governmental regulatory approvals
remaining to be obtained for consummation of the Merger, other than compliance
with federal securities laws and state securities or "blue sky" laws. The
Merger was subject to the premerger notification provisions of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"). Filings under the HSR Act were made by DI and Grey Wolf with the Federal
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Trade Commission and the Department of Justice Antitrust Division. On
1997, early termination of the waiting period under the HSR Act was granted,
thus permitting the Merger to proceed under the HSR Act, subject to shareholder
approval and other conditions to the Merger contained in the Merger Agreement.
See "The Merger Agreement and Related Contracts--Antitrust Matters."
[If early termination under H-S-R is not obtained prior to
effectiveness, the following paragraph will be substituted for the preceding
paragraph and the Summary will be revised. accordingly]
DI and Grey Wolf are aware of no governmental regulatory approvals
remaining to be obtained for consummation of the Merger, other than compliance
with federal securities laws, state securities or "Blue Sky" laws and the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"). The Merger is subject to the premerger notification provisions of the
HSR Act. The filings required under the HSR Act have been made by DI and Grey
Wolf with the Federal Trade Commission and the Department of Justice Antitrust
Division and are awaiting further action, if any, by those regulatory bodies.
See "The Merger Agreement and Related Contracts--Antitrust Matters."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain federal income tax consequences
associated with participation in the Merger, particularly with respect to the
holders of GW Common Stock. This summary does not discuss all of the aspects of
federal income taxation that may be relevant to a participant in light of his
or her particular circumstances, or to certain types of participants which are
subject to special treatment under federal income tax laws (including persons
who hold GW Common Stock as part of a straddle or hedge, dealers in securities,
insurance companies, tax exempt organizations, financial institutions,
broker-dealers, S-corporations, foreign corporations, and persons who are not
citizens or residents of the United States). In addition, this summary does not
describe any tax consequences under state, local or foreign tax laws.
This discussion is based on the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations, Internal Revenue Service ("IRS")
rulings and pronouncements, and judicial decisions now in effect, all of which
are subject to change at any time by legislative, judicial or administrative
action. Any such changes may be applied retroactively in a manner that could
adversely affect a Grey Wolf shareholder.
THE DISCUSSION SET FORTH BELOW ADDRESSES THE MATERIAL FEDERAL INCOME
TAX CONSEQUENCES OF GENERAL APPLICATION WHICH ARE EXPECTED TO RESULT FROM THE
MERGER. EACH GREY WOLF SHAREHOLDER SHOULD CONSULT HIS OWN TAX ADVISER WITH
RESPECT TO THE FEDERAL INCOME TAX CONSEQUENCES THAT MAY BE SPECIFIC TO HIM IN
CONNECTION WITH PARTICIPATING IN THE MERGER, AS WELL AS THE APPLICATION TO HIM
OF PENDING LEGISLATION, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
Opinion of Arthur Andersen LLP; Material Federal Income Tax Issues
Arthur Andersen LLP ("Tax Counsel") has rendered the following
opinions for the benefit DI, the Purchaser, Grey Wolf and the shareholders of
Grey Wolf as to the material federal income tax consequences of the Merger:
(i) The Merger will be treated for federal income tax
purposes as a reorganization within the meaning of Sections
368(a)(1)(A) and 368(a)(2)(D) of the Code, and DI, the Purchaser, and
Grey Wolf will each be a party to the reorganization within the
meaning of Section 368(b) of the Code.
(ii) No gain or loss will be recognized by DI, the
Purchaser or Grey Wolf in the Merger.
(iii) The tax basis of Grey Wolf's assets in the hands of
Drillers will be the same as the basis of those assets in the hands of
Grey Wolf immediately prior to the transaction. The tax basis of Grey
Wolf's assets in the hands of Drillers will not be increased by any
boot paid to shareholders, cash paid to dissenters or cash paid in
lieu of fractional shares.
(iv) The holding period of the assets of Grey Wolf in the
hands of Drillers will include the period during which such assets
were held by Grey Wolf.
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(v) Each Grey Wolf shareholder will recognize income in an
amount equal to the lesser of the sum of the Cash Consideration and
Contingent Cash Consideration received by him (collectively the
"boot"), or his total gain realized on the exchange of his GW Common
Stock. The total income realized by a Grey Wolf shareholder is equal
to the excess, if any, of the fair market value of the boot and DI
Common Stock received over such shareholder's adjusted tax basis in
his GW Common Stock. As discussed below, such income will be taxed as
a dividend or capital gain depending on certain factors unique to each
Grey Wolf shareholder. Any loss realized by a Grey Wolf shareholder on
the exchange of GW Common Stock pursuant to the Merger will not be
recognized. However, holders of GW Common Stock who receive cash
proceeds in lieu of fractional shares in DI Common Stock will
recognize gain or loss equal to the difference between such proceeds
and the tax basis allocated to such fractional shares. Any gain or
loss so recognized should qualify as capital gain or loss, assuming
the holder holds the GW Common Stock as a capital asset at the
Effective Time of the Merger.
(vi) The aggregate tax basis of the shares of DI Common Stock
received by the Grey Wolf shareholders will equal the tax basis of
their GW Common Stock exchanged therefor increased by any gain
recognized and reduced by the amount of any boot received (other than
payments in lieu of fractional shares).
(vii) The holding period of the DI Common Stock in the hands
of Grey Wolf shareholders will include the holding period of their GW
Common Stock exchanged therefor, assuming that the Grey Wolf
shareholder holds the GW Common Stock as a capital asset at the
Effective Time of the Merger.
Included as Appendix E to this Prospectus/Proxy Statement is the form
of the opinion of Arthur Andersen LLP.
Dividend versus Capital Gain
Income recognized by a Grey Wolf shareholder on the exchange of his GW
Common Stock pursuant to the Merger will be taxed as a capital gain if such
shareholder's GW Common Stock is held as a capital asset at the Effective Time
of the Merger, and such income is not characterized as a dividend under Section
302 of the Code. Income recognized will constitute a dividend if it is
essentially equivalent to a dividend or not substantially disproportionate as
defined under Section 302 of the Code. If each Grey Wolf shareholder receives
the same proportion of cash and DI Common Stock in the Merger, the income
should be eligible for capital gain treatment, and taxed as long term capital
gain if the GW Common Stock has been held by the Grey Wolf shareholder as a
capital asset more than one year at the Effective Time of the Merger. Any
dividend treatment is limited to the Grey Wolf earnings and profits allocable
to a Grey Wolf shareholder's GW Common Stock.
Contingent Cash Consideration
The Contingent Cash Consideration is held pursuant to the terms of the
Escrow Agreement. In relation to the Contingent Cash Consideration, a Grey Wolf
shareholder may not be able to use the installment method. If the Grey Wolf
shareholder is not permitted to use the installment method, or if the Grey Wolf
shareholder elects out of installment sale treatment, the Grey Wolf shareholder
may be able to treat the transfer as an open transaction and defer recognition
of any gain related to the Contingent Cash Consideration until received. In
addition, the escrow arrangement does not include a stated interest rate. If a
deferred payment has a below market interest rate, the IRS requires interest to
be imputed. Therefore, each payment from the escrow account will have an
interest component.
Continuity of Interest by Grey Wolf shareholders
In order for the Merger to qualify as a reorganization, the historic
shareholders of Grey Wolf must have a definite and substantial interest in DI
after the Merger (the "continuity of interest requirement"). This requirement
has been construed by the IRS and the courts to mean that the shareholders of
Grey Wolf must receive at least some amount of DI Common Stock as consideration
for the GW Common Stock surrendered in the Merger. There is no clear guidance
regarding the minimum percentage of stock consideration required for the
continuity of interest requirement to be met. It is clear that a merger in
which 50% of the consideration consists of stock of the acquiring corporation,
and the shareholders of the target corporation have no plan or intention to
dispose of the stock received in the merger, will satisfy the continuity of
interest requirement. There is judicial authority to support the conclusion
that 40% stock consideration is sufficient to provide the requisite continuity
of interest. However, there can be no assurance that the IRS will not assert
that the Merger ( in which approximately 45% of the total consideration is DI
stock) does not qualify
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as a tax free reorganization on the ground that the continuity of interest
percentage requirement has not been met since less than 50% of the total
consideration consists of DI stock.
In addition to having continuity of interest immediately after the
Merger, the Grey Wolf shareholders must also have an unrestricted right to
maintain ownership of the continuity amount for some period after the Merger
and either actually maintain ownership for such period after the Merger or, if
the stock is disposed early, demonstrate that the early disposition was not
pursuant to a plan or arrangement in place at the time of the reorganization.
The IRS' official position is that the continuity of interest amount
should remain for at least five years after the reorganization. The
determination of whether the Grey Wolf shareholders intended at the time of the
Merger to dispose of the DI Common Stock received in the Merger is based on all
of the facts and circumstances. Thus, under present IRS guidelines, if the Grey
Wolf shareholders dispose of more than a nominal number of shares of DI Common
Stock received in the Merger within five years, the IRS might assert that the
Merger is not a tax free reorganization.
The IRS has issued proposed regulations that provide that dispositions
of DI Stock by a Grey Wolf shareholder to a party other than DI and its
affiliates will not cause a failure of the continuity test, even if such
dispositions are pursuant to a plan in place before the Merger. However, these
proposed regulations are subject to review, revision and possible withdrawal,
and in any event are expressly not applicable to the Merger based on the date
of the Agreement and Plan of Merger.
Consequences of Not Qualifying as a Reorganization
If the Merger fails to qualify as a reorganization under Section
368(a) of the Code for any reason, the total gain realized by a Grey Wolf
shareholder will be taxable as of the Effective Time. The total gain realized
is equal to the excess, if any, of the fair market value of the cash and DI
Common Stock received over the Grey Wolf shareholders' adjusted tax basis in
his GW Common Stock. Such gain or loss will qualify as capital gain or loss,
assuming the Grey Wolf shareholder holds the GW Common Stock as a capital asset
at the Effective Time of the Merger. Also in such event, Grey Wolf will
recognize gain equal to the excess of (i) the fair market value of the sum of
the liabilities of Grey Wolf assumed by the Purchaser, together with the DI
Common Stock and additional cash consideration distributed to the Grey Wolf
shareholders over (ii) Grey Wolf's basis in the assets transferred to the
Purchaser pursuant to the Merger. Any resulting corporate income tax on such
gain would be payable by the Purchaser as successor to Grey Wolf, and
constitute an assumed liability for computing Grey Wolf's gains.
Effect of Tax Opinion and Assumptions
While Arthur Andersen LLP has delivered its opinion with respect to
certain federal income tax consequences relating to the Merger, the parties to
the Merger, including the Grey Wolf shareholders, should be aware that such an
opinion is neither binding on the IRS or the courts, nor are the IRS or the
courts precluded from adopting a contrary position. No ruling has been
requested from the IRS with respect to any of the opinions and statements set
forth herein. Accordingly, there can be no assurance that such opinions and
statements will not be challenged by the IRS or would be sustained by a court
if so challenged.
This discussion and the opinion of Arthur Andersen LLP reflect a
number of significant assumptions, including that (i) the Merger is consummated
in accordance with the terms of the Merger Agreement; (ii) certain additional
representations received from officers of DI, the Purchaser and Grey Wolf are
true, particularly as detailed in the opinion of Arthur Andersen LLP; and (iii)
the representations of the Grey Wolf shareholders with respect to the
continuity of interest requirements set forth above are true.
Backup Withholding
Under the backup withholding rules, a holder of GW Common Stock may be
subject to backup withholding at the rate of 31% with respect to dividends and
proceeds of redemption unless such Stockholder (a) is a corporation or comes
within certain other exempt categories and, when required, demonstrates this
fact, or (b) provides a correct taxpayer identification number, certifies as to
no loss of exemption from backup withholding and otherwise complies with
applicable requirements of the backup withholding rules. Any amount withheld
under these rules will be credited against the Grey Wolf shareholder's federal
income tax liability. DI may require holders of GW Common Stock to establish an
exemption from backup withholding or to make arrangements satisfactory to DI
with respect to the payment
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of backup withholding. A Grey Wolf shareholder who does not provide DI with
his, her or its current taxpayer identification number may be subject to
penalties imposed by the IRS.
ACCOUNTING TREATMENT
It is intended that the Merger will be accounted for under the
purchase method of accounting pursuant to generally accepted accounting
principles. The effect of purchase accounting treatment is that the assets and
liabilities accounts of Grey Wolf will be recorded at their fair values at the
Effective Time. Any excess consideration paid by DI over the fair value of Grey
Wolf's assets less liabilities recorded will be recorded as goodwill. See
"Unaudited Pro Forma Consolidated Financial Statements."
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THE MERGER AGREEMENT AND RELATED CONTRACTS
The terms and conditions of the Merger are contained in the Merger
Agreement and other related contracts. The following is a summary of the
material terms of such agreements. This summary is qualified in its entirety by
reference to the complete text of the Merger Agreement and related contracts.
EFFECT OF THE MERGER
Grey Wolf will be merged with and into the Purchaser upon the terms
and subject to the conditions of the Merger Agreement, and in accordance with
the relevant provisions of the Texas Business Corporation Act (the "TBCA").
Following the Merger, the Purchaser will continue as the surviving corporation
under the name "Grey Wolf Drilling Company" and will continue its existence
under the laws of the State of Texas, and the separate corporate existence of
Grey Wolf will cease.
The Merger will be consummated by filing with the Texas Secretary of
State articles of merger executed in accordance with the relevant provisions of
the TBCA and will become effective upon the issuance of a certificate of merger
by the Texas Secretary of State. The Merger is expected to become effective as
soon as practicable following the satisfaction or waiver, if permissible, of
the conditions precedent set forth in the Merger Agreement, and in any event
within ten days thereafter. The time the Merger becomes effective is herein
referred to as the "Effective Time."
The Articles of Incorporation and Bylaws of the Purchaser (amended to
specify the name "Grey Wolf Drilling Company") will continue to be the Articles
of Incorporation and Bylaws of the Purchaser following the Merger. The
directors and the officers of the Purchaser immediately before the Effective
Time will continue to be the directors and officers of the Purchaser following
the Merger until their respective successors are duly elected or appointed and
qualified.
CONVERSION OF SHARES OF GW COMMON STOCK
Except as otherwise described below, at the Effective Time each issued
and outstanding share of common stock without par value of Grey Wolf will be
converted into the right to receive the "Share Fraction" (defined below) of:
(i) an amount in cash (the "Cash Consideration") equal to the
"Closing Cash Consideration" (defined below), plus
(ii) a number of shares of DI Common Stock (the "Stock
Consideration") equal to the "Aggregate Stock Consideration"
(defined below), plus (if applicable)
(iii) an amount, if any, in cash (the "Contingent Cash
Consideration") equal to the "Aggregate Contingent Cash
Consideration" (defined below).
The Cash Consideration, the Stock Consideration, and, if applicable, the
Contingent Cash Consideration are collectively referred to below as the "Merger
Consideration."
The "Closing Cash Consideration" means $56.6 million, less such
amount, if any, as may be deducted from the Closing Cash Consideration pursuant
to the provisions of the Merger Agreement summarized under "--Required Ratio
Adjustment," below, and plus the amount, if any, of the "Additional Closing
Cash Consideration" which is added to that amount pursuant to the provisions of
the Merger Agreement summarized under "--Escrow Arrangements," below.
The "Aggregate Stock Consideration" means 14.0 million shares of DI
Common Stock, plus or minus such number, if any, of shares of DI Common Stock
by which the Aggregate Stock Consideration will be increased or decreased
pursuant to the provisions of the Merger Agreement summarized under "--Collar
Adjustment," below, and plus such number, if any, of shares of DI Common Stock
as may be added to the Aggregate Stock Consideration pursuant to the provisions
of the Merger Agreement summarized under "--Required Ratio Adjustment," below.
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The "Aggregate Contingent Cash Consideration" means an amount, if any,
equal to the sum of the Contingent Cash Consideration (defined below) payable
to the former shareholders of Grey Wolf from the funds, if any, placed in
escrow pursuant to the arrangements described under "--Escrow Arrangements,"
below.
The "Share Fraction" means a fraction having "1" as its numerator and
having as its denominator the number of shares of the GW Common Stock
outstanding at the Effective Time (except and excluding any shares of GW Common
Stock issued and held in Grey Wolf's treasury immediately before the Effective
Time).
ESCROW ARRANGEMENTS
The Merger Agreement contemplates that at or immediately after the
Effective Date, an escrow account will be established with a bank escrow agent
into which DI and the Purchaser will deposit $5.0 million of cash that would
otherwise be payable to the shareholders of Grey Wolf as Closing Cash
Consideration at the Effective Time. The purpose of the escrow arrangement is
generally to provide a source of payment for the net costs to the Purchaser, if
any, for any eventual settlement by, or the payment of a monetary court
judgment against, the Purchaser in certain litigation pending against Grey Wolf
styled TEPCO, Inc. v. Grey Wolf Drilling Company (Cause No. 96-49194) presently
pending in the 164th Judicial District Court of Harris County, Texas, and any
other lawsuits arising during the term of the escrow arrangement in which TEPCO
asserts claims against Grey Wolf or the Purchaser which are the same as those
made in the plaintiff's original petition filed in the case, or which are based
on facts and circumstances alleged in that original petition (the "TEPCO
Lawsuit").
An escrow agreement will be entered into by and among DI, Grey Wolf,
the Purchaser, Messrs. James K. B. Nelson and Sheldon B. Lubar, as "Stockholder
Representatives," of the shareholders of Grey Wolf and BankOne Texas, N.A. as
escrow agent (the "Escrow Agent"). The escrow agreement is in substantially the
form attached to the Merger Agreement as Schedule 1.6 thereto (the "Escrow
Agreement"). Grey Wolf has stated in the Escrow Agreement its belief that the
claims asserted by TEPCO in the TEPCO Lawsuit are entirely without merit and
that it believes that if the TEPCO Lawsuit is tried TEPCO will be denied any
recovery and Grey Wolf will recover a judgment against TEPCO on Grey Wolf's
counterclaim which has been asserted in the case. Grey Wolf has also stated in
the Escrow Agreement that it agreed to enter into the Escrow Agreement incident
to execution of the Merger Agreement solely to avoid potential delay in or
interference with closing of the Merger which might otherwise result from the
pendency of what it believes are nebulous and unquantified claims for alleged
"damages" asserted by TEPCO in its petition filed in the TEPCO Lawsuit. From
and after the Effective Time, the Stockholder Representatives will control and
direct the handling of the TEPCO Lawsuit, and DI and the Purchaser will provide
such assistance and cooperation as is reasonably requested by the attorneys
representing the Purchaser in the case.
The Escrow Agreement generally provides that if a settlement approved
by the Stockholder Representatives has been reached in the TEPCO Lawsuit or if
a final judgment requiring a net payment by the Purchaser to TEPCO is rendered
in the case, the Escrow Agent will pay to the Purchaser such funds remaining in
escrow as are required to effect such settlement or pay such judgment as
specified in joint, written instructions from the Purchaser and the Stockholder
Representatives. Upon final disposition of the TEPCO claims, the balance of the
escrow account, if any, that is not required to be paid to the Purchaser, to
the Escrow Agent or the Stockholder Representatives for reimbursement of
expenses is to be paid by the Escrow Agent to the Exchange Agent under the
Merger Agreement and allocated and distributed by the Exchange Agent to the
former shareholders of Grey Wolf in proportion to their ownership of GW Common
Stock at the Effective Time. The amount distributed to each former Grey Wolf
shareholder is referred to as his or her "Contingent Cash Consideration," and
the total Contingent Cash Consideration distributable to all former Grey Wolf
Shareholders is referred to as the "Aggregate Contingent Cash Consideration."
DI and the Purchaser are jointly and severally liable under the terms of the
Merger Agreement to pay or cause to be paid the Contingent Cash Consideration
to each former Grey Wolf shareholder entitled to such payment. The agreement of
DI and the Purchaser to pay or cause to be paid the Contingent Cash
Consideration, if any, to each Stockholder will be secured by a security
interest and common law pledge, assignment and lien on the escrow fund.
The Purchaser also will be entitled from time to time to disbursements
from the escrow account of amounts necessary to reimburse the Purchaser for
federal income taxes to be paid by the Purchaser or DI with respect to the net
taxable income generated by the escrow account and for one-half of the legal
fees and expenses incurred by Purchaser in connection with the TEPCO lawsuit.
The fees and reasonable expenses of the Escrow Agent and the reasonably
incurred expenses of the Stockholder Representatives are also to be paid from
the escrow fund.
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The Escrow Agreement provides that it will terminate prior to the
Effective Time in the event of the settlement of the TEPCO Lawsuit prior to the
Effective Time, or the entry of a final judgment denying the plaintiff's claims
in the TEPCO Lawsuit prior to the Effective Time. In such cases, no amount of
Contingent Cash Consideration will be payable to the holders of GW Common Stock
or included in the Merger Consideration. Instead, the Closing Cash
Consideration payable to holders of GW Common Stock will be increased by adding
thereto an amount (the "Additional Closing Cash Consideration") equal to $5.0
million, less the amount, if any, of any "Settlement Payment" (defined below).
If Grey Wolf decides, in its discretion, to settle the TEPCO Lawsuit
and obtain an agreement for a full release of the underlying claims by TEPCO
prior to the Effective Time, the amount, if any, of money paid or payable by
Grey Wolf to TEPCO to obtain the release is herein referred to the "Settlement
Payment." The Merger Agreement permits Grey Wolf, in its discretion, to settle
the TEPCO Lawsuit and the underlying claims at any time prior to the Effective
Time; provided that Grey Wolf may not, without the consent of DI (which consent
may not be unreasonably withheld or delayed), make or agree to make a
Settlement Payment in excess of $5.0 million to affect such a settlement (which
Grey Wolf has advised DI that it has no intention whatsoever of doing) or
undertake any affirmative obligation to TEPCO or any other person in
consideration for such a release other than to make a Settlement Payment (if
any) in money and, if and to the extent Grey Wolf should so elect, to release
(in whole or in part) claims of Grey Wolf against TEPCO and indemnify TEPCO
against such claims (to the extent thus released) and to dismiss the TEPCO
Lawsuit. The Merger Agreement provides that by approving the Merger Agreement,
the shareholders of Grey Wolf are deemed to (i) adopt and approve, and consent
to and join in the terms of, the Escrow Agreement, (ii) agree to the
appointment of the Stockholder Representatives and (iii) confirm the authority
of the Stockholder Representatives to enter into the Escrow Agreement, to
exercise their rights and authority and discretion as the representatives of
the shareholders of Grey Wolf and to have and be entitled to the benefit of the
rights and releases therein granted to them.
COLLAR ADJUSTMENT
The number of shares of DI Common Stock included in the Aggregate
Stock Consideration has initially been agreed to be 14.0 million shares. The
Merger Agreement provides, however, that if the "DI Common Stock Price" (as
defined below) is less than $3.00 or more than $4.00, the number of shares of
DI Common Stock included in the Aggregate Stock Consideration will be increased
or decreased above or below 14.0 million shares (before giving effect to any
increase in the number of shares of DI Common Stock included in the Aggregate
Stock Consideration pursuant to the terms of the Merger Agreement described
under "--Required Ratio Adjustment," if applicable). If the DI Common Stock
Price is less than $3.00, the number of shares of DI Common Stock included in
the Aggregate Stock Consideration will be increased to a number of shares equal
to $42.0 million divided by the DI Common Stock Price. If the DI Common Stock
Price is more than $4.00, the number of shares of DI Common Stock included in
the Aggregate Stock Consideration will be decreased to the greater of (i)
11,666,667 shares, or (ii) a number of shares equal to $56.0 million divided by
the DI Common Stock Price.
The "DI Common Stock Price" means an amount equal to the average of
the closing sales price of DI Common Stock on the American Stock Exchange
Consolidated Tape as reported by the Wall Street Journal (Southwest Edition) on
each of the ten consecutive trading days immediately preceding the third
trading day before the Effective Time of the Merger. Grey Wolf has agreed that
it will not, and has agreed that it will request each of its officers and
directors to agree that they will not, engage in trading in DI Common Stock
during the twenty consecutive days immediately preceding the Effective Time of
the Merger.
REQUIRED RATIO ADJUSTMENT
If the number of shares of DI Common Stock included in the Aggregate
Stock Consideration (after giving effect to any increase or decrease in such
number of shares pursuant to the adjustments described above under "--Collar
Adjustment," if applicable) is not sufficient to achieve the "Required Ratio"
(hereinafter defined), then the number of shares of DI Common Stock included in
the Aggregate Stock Consideration (after giving effect to any increase or
decrease in such number of shares pursuant to the adjustments described above
under "--Collar Adjustment," if applicable) will be increased by such
additional number of shares of DI Common Stock as is necessary to achieve the
"Required Ratio." If the number of shares of DI Common Stock included in the
Aggregate Stock Consideration is increased to achieve the Required Ratio, then
the amount of the Closing Cash Consideration will be reduced by deducting from
the Closing Cash Consideration an amount equal to the product of (i) the number
of additional shares
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of DI Common Stock by which the Aggregate Stock Consideration has been
increased pursuant to Required Ratio adjustment multiplied by (ii) the DI
Common Stock Price.
The "Required Ratio" means that the number of shares of DI Common
Stock included in the Aggregate Stock Consideration, after the adjustments
thereof, if any, made pursuant to the Collar Adjustments and Required Ratio
Adjustments, multiplied by the DI Common Stock Price (the product being called
the "Stock Value"), is equal to 45% of the sum of the Stock Value and an amount
(the "Additional Amount") determined as follows:
(i) If the Escrow Agreement is terminated prior to the
Effective Time in accordance with its terms, the "Additional Amount"
will be equal to the Closing Cash Consideration, as adjusted pursuant
to the provisions described above under "--Escrow Arrangements," and
as necessary to achieve the Required Ratio; or
(ii) If the Escrow Agreement is not terminated prior to the
Effective Time in accordance with its terms, the "Additional Amount"
will be equal to the sum of the Closing Cash Consideration, adjusted
to achieve the Required Ratio, and $5.0 million.
EXCHANGE PROCEDURES
Promptly after the Effective Time, the Merger Agreement requires DI or
the Purchaser to deposit with BankOne Texas, N.A., a national bank doing
business in Houston, Texas, as exchange agent (the "Exchange Agent"), for
exchange in accordance with the Merger Agreement, cash in the amount of the
Closing Cash Consideration, stock certificates representing the Aggregate Stock
Consideration issued in the names of the former Grey Wolf shareholders for the
respective number of shares of DI Common Stock to be received by them, and cash
in the amount required to be paid to former Grey Wolf shareholders in lieu of
fractional shares of DI Common Stock.
The Merger Agreement provides that as soon as reasonably practicable
after the Effective Time, the Exchange Agent will mail to each holder of record
of GW Common Stock immediately before the Effective Time, other than any
Dissenting Shares, a letter of transmittal (the "GW Letter of Transmittal"),
which will specify that delivery will be effected, and risk of loss and title
to stock certificates for GW Common Stock will pass, only upon delivery of such
certificates to the Exchange Agent. The GW Letter of Transmittal must be in
such form and have such other provisions as the Purchaser may reasonably
specify, including, without limitation, provisions designed to comply with any
necessary tax withholding obligations required by applicable law. Also to
accompany the GW Letter of Transmittal are instructions for use in effecting
the surrender of certificates for GW Common Stock in exchange for the Merger
Consideration.
Upon surrender of a certificate for GW Common Stock to the Exchange
Agent for cancellation, together with the Grey Wolf Letter of Transmittal, duly
executed, and such other documents as the Purchaser or the Exchange Agent may
reasonably request, with signatures thereon guaranteed, the holder of such GW
Certificate will be entitled to receive in exchange therefor (i) a bank check
in the amount equal to the Cash Consideration that such holder has the right to
receive (plus any cash in lieu of fractional shares of DI Common Stock and less
any required tax withholding) and (ii) a DI Certificate representing that whole
number of shares of DI Common Stock that such holder has the right to receive
as the Stock Consideration, and the Grey Wolf Certificate so surrendered will
be canceled. Certificates representing shares of DI Common Stock issued to
affiliates of Grey Wolf (as defined for purposes of Rule 145 under the
Securities Act) will bear a restrictive legend in a form reasonably required by
DI. Until surrendered for exchange, each GW Certificate will be deemed after
the Effective Time to represent only the right to receive the Merger
Consideration with respect to the shares of GW Common Stock formerly
represented thereby.
No fractional shares of DI Common Stock will be issued pursuant to the
Merger. In lieu thereof, cash adjustments for fractional shares will be paid
equal to the product of such fractional amount and the DI Common Stock Price.
Any DI Common Stock or portion of the cash (including the proceeds of
any investments thereof) that remains unclaimed by the holders of GW Common
Stock six months after the Effective Time will be returned to the Purchaser.
Any holders of GW Certificates who have not theretofore surrendered such GW
Certificates may thereafter look only to the Purchaser for payment of their
claims for the Merger Consideration, without any interest thereon, or for
payment of the fair value of their Dissenting Shares. If any GW Certificates
have not been surrendered within seven years after
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the Effective Time (or immediately before such earlier date on which any
payment in respect thereof would otherwise escheat or become the property of a
governmental authority pursuant to applicable law), the Merger Consideration in
respect of such GW Certificates will, to the extent permitted by applicable
law, become the property of the Purchaser, free and clear of all claims or
interests of any person previously entitled to any such Merger Consideration.
If the Escrow Agreement is not terminated prior to the Effective Time
in accordance with the terms of the Escrow Agreement, and if funds remaining in
escrow are due the former holders of GW Common Stock pursuant to the Escrow
Agreement, the Aggregate Contingent Cash Consideration will be paid and
distributed from the Escrow Fund by the Escrow Agent to itself in its capacity
as the Exchange Agent. Upon payment of the Aggregate Contingent Cash
Consideration to the Exchange Agent, the Aggregate Contingent Cash
Consideration will be the property of the Stockholders in proportion to the
respective amounts of the Contingent Cash Consideration payable to the former
Grey Wolf shareholders pursuant to the Merger Agreement. As promptly as
practicable after the date that distribution is required, the Exchange Agent
will distribute and pay the applicable Contingent Cash Consideration to each
Grey Wolf shareholder by bank check issued and mailed to such Stockholder at
the Stockholder's address provided in or pursuant to the GW Letter of
Transmittal.
REGISTRATION RIGHTS
Grey Wolf and DI have agreed to prepare and file with the Commission
under the Securities Act as promptly as practicable, and to use all reasonable
efforts to have declared effective by the Commission, a prospectus/proxy
statement with respect to the approval of the Merger, including a registration
statement on Form S-4 (the "Registration Statement") for the purpose of
registering the DI Common Stock to be issued to the holders of the GW Common
Stock as the Stock Consideration. As promptly as practicable after the
Registration Statement has been declared effective by the Commission, Grey Wolf
is obligated to mail the prospectus/proxy statement contained therein to its
stockholders.
Under the Merger Agreement, DI has agreed that as promptly as
practicable after the receipt of a written demand therefor DI will, on one
occasion only, prepare and file with the Commission under the Securities Act a
registration statement on Form S-3 for the purpose of registering the resale in
the market from time to time of the DI Common Stock issued in the Merger (the
"Shelf Registration Statement") by the holders thereof, or by potential
assignees of such holders to which all or a portion of such DI Common Stock may
be transferred in transactions that do not constitute "sales" as that term is
defined under the Securities Act. A demand for the filing of the Shelf
Registration Statement may be made by the holder or holders of in excess of 1%
of the DI Common Stock then outstanding.
DI is required to use its best efforts to maintain the effectiveness
of the Shelf Registration Statement until the second anniversary of the
effective date of the Shelf Registration Statement, subject to further
extension for additional periods of time if, and to the extent that, the Shelf
Registration Statement is not declared effective within 45 days after the
demand therefor, and for all periods of time during which holders are unable to
use the Shelf Registration Statement because it is not then current under the
Securities Act and regulations thereunder or because the registration statement
or its availability for resales has been suspended pursuant to DI's right to do
so under certain circumstances. Such suspensions by DI may not be for a period
of more than (i) 60 consecutive days, or (ii) 180 days within any twelve month
period.
DI has also extended incidental or "piggy-back" registration rights to
Holders (as defined in the Merger Agreement) to participate in certain
underwritten public offerings conducted by DI during the period of time from
the date a demand for a Shelf Registration Statement is made through the last
date that the resale Shelf Registration Statement is required to be maintained
effective by DI. DI is required to use its reasonable best efforts to cause the
managing underwriter or underwriters of a proposed underwritten offering to
permit persons entitled to piggy-back registration rights to be included in the
registration statement for such offering on the same terms and conditions as
any similar securities of DI included therein. If the managing underwriter or
underwriters of such offering indicates in writing to DI its reasonable belief
that the inclusion of the shares requested to be so included might reasonably
be expected to jeopardize the success of the offering of the securities of DI
to be offered and sold by DI for its own account, then the amount of securities
to be offered for the account of the Holders may be reduced to the extent
necessary to reduce the total amount of securities to be included in such
offering to the amount recommended by such managing underwriter or underwriters
(which recommendation may be that no securities to be sold by Holders be
included in such registration statement). The shares to be included in such
registration statement will be selected in the following order of priority: (i)
first, all of the securities that DI proposes to sell for its own account, if
any; (ii) second, any securities
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held by persons who, as of the date of the Merger Agreement, are contractually
entitled to priority over Holders in the inclusion of their securities in such
registration; (iii) third, the securities requested to be included in such
registration by Holders that have requested their eligible securities be
included therein and any securities proposed to be included by other persons
who, as of the date of the Merger Agreement, are contractually entitled to
include a portion of their securities in such registration on a pro rata basis
with Holders (i.e., such shares to be allocated between Holders and non-
Holders based on the amount of securities that each proposes to offer in
relation to the total amount of securities proposed to be offered by all such
selling shareholders); and (iv) fourth, any other securities to be offered and
sold by other holders of DI's securities.
All expenses incident to DI's performance of its demand or piggy-back
registration obligations under the Merger Agreement will be borne by DI, except
for discounts, commissions, fees or expenses payable to underwriters that are
attributable to the sale of securities sold by selling Holders and the fees and
expenses of counsel for any selling Holders. The Merger Agreement provides
customary indemnities by and for the benefit of DI and the selling shareholders
in connection with demand or piggy-back registrations effected pursuant to the
Merger Agreement.
GREY WOLF EMPLOYEE TRUST
The Merger Agreement provides that shortly before the Effective Time
Grey Wolf will establish an irrevocable trust (the "Employee Trust") by
execution of a Trust Agreement (the "Trust Agreement") having a bank as trustee
(the "Trustee") in the form attached to the Merger Agreement as Schedule 1.13.
Grey Wolf will contribute and pay to the Trustee for inclusion in the principal
of the Employee Trust the sum of $2.4 million in cash. Additionally, if the
Merger occurs, then promptly after the Effective Time, James K. B. Nelson (the
President of Grey Wolf and one of the principal holders of GW Common Stock) has
agreed in the Merger Agreement that he will contribute to the Trustee the sum
of $1.65 million in cash from his personal funds to be added to the principal
of the Employee Trust which will result in the Employee Trust having an initial
principal balance of $4.05 million.
The Employee Trust will be established for the benefit of those
employees of Grey Wolf identified in Exhibit A to the Grey Wolf Drilling
Company Deferred Compensation Plan (the "Plan") attached to the Trust Agreement
who remain employed by Grey Wolf on the date of establishment of the Employee
Trust (the "Grey Wolf Employees"). Under the Employee Trust, the Trustee is
obligated to make payments to the Plan participants and their beneficiaries in
accordance with and subject to the terms of the Plan.
The amount of benefits payable under the Plan to a Grey Wolf Employee
is generally a function of the "Allocation Factor" assigned to the Employee as
set forth in Exhibit A to the Plan. Except for certain events of forfeiture
specified in the Plan, benefits are generally fully vested and payable under
the Plan on the first to occur of (i) the first anniversary of the
establishment of the Plan, (ii) the Employee's death, (iii) termination of the
Employee's employment by the Purchaser due to the Employee's disability, (iv)
termination of the Employee's employment by the Employee due to the occurrence
of a Good Cause Event (as defined in the Plan) or (v) termination of the
Employee's employment by the Purchaser without Cause (as defined in the Plan).
An Employee's benefits under the Plan will be forfeited if the Employee resigns
other than by reason of a Good Cause Event or if the Employee is discharged for
Cause, in either case prior to the first anniversary of the Plan.
APPOINTMENT OF DI DIRECTORS; CHANGE OF NAME; EXECUTIVE OFFICES
The Merger Agreement provides that the Board of Directors of DI will
elect James K. B. Nelson, President of Grey Wolf, and William T. Donovan to
serve as members of the Board of Directors of DI until the next regularly
scheduled election of members of the Board of Directors of DI. The Merger
Agreement also requires that DI will circulate a proxy statement to its
shareholders for the next annual meeting of shareholders following the Merger
soliciting their approval for a change of DI's name so that it includes the
words "Grey Wolf." The executive headquarters of the Purchaser are required by
the Merger Agreement to remain in the Houston area for a period of not less
than one year after the Effective Time.
REPRESENTATIONS AND WARRANTIES
In the Merger Agreement, Grey Wolf has made various representations
and warranties relating to, among other things, its capitalization, financial
statements, environmental matters, Employee benefit and employment matters, the
satisfaction of certain legal requirements for the Merger and the absence of
certain litigation. DI has also made certain
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representations and warranties in the Merger Agreement concerning its financial
statements, the accuracy of its filings with the Commission, the satisfaction
of certain legal requirements for the Merger, the availability prior to July 1,
1997, or such later date as agreed to by DI, Purchaser, and Grey Wolf, of funds
or financing commitments from reputable financial institutions for funds
sufficient to consummate the Merger and the availability of such funds at the
Effective Time. All such representations and warranties expire at the Effective
Time.
CERTAIN COVENANTS AND AGREEMENTS
DI and Grey Wolf have made certain covenants and agreements in the
Merger Agreement, including those summarized in this Prospectus/Proxy
Statement. All such covenants and agreements terminate at the Effective Time,
except for those covenants and agreements which by their terms contemplate
performance after the Effective Time which will survive the Effective Time.
AGREEMENTS TO SUPPORT THE MERGER
The Merger Agreement contains the agreement of Grey Wolf that its
Board of Directors will, subject to the fiduciary duties of Grey Wolf's Board
of Directors under applicable law (as advised by its counsel), recommend that
the shareholders of Grey Wolf vote in favor of approval and adoption of the
Merger Agreement.
Each of three principal shareholders of Grey Wolf has entered into an
agreement with DI pursuant to which, among other things, such principal
shareholder agrees to vote for and generally support the Merger (the "Voting
and Support Agreements"). The names of the principal shareholders and the
number of shares of GW Common Stock which such principal shareholders have
represented in their Voting and Support Agreements that they own beneficially
or of record are as follows: Sheldon B. Lubar, individually and on behalf of
Lubar Nominees, 1,136,168 shares; James K. B. Nelson, 333,371 shares; and
Felicity Ventures, Ltd. (of which James K. B. Nelson is a general partner),
667,000 shares. The aggregate number of shares of GW Common Stock that such
principal shareholders have agreed to vote in favor of the Merger, totals
2,136,539 shares or approximately 72% of the 2,983,579 shares of GW Common
Stock which Grey Wolf has represented in the Merger Agreement to be issued and
outstanding. The form of Voting and Support Agreements executed by the Grey
Wolf shareholders is attached as Appendix B to this Prospectus/Proxy Statement.
CONDUCT OF GREY WOLF'S BUSINESS PRIOR TO THE MERGER
Except as contemplated by the Merger Agreement, unless otherwise
agreed to in writing by DI, the Merger Agreement requires that Grey Wolf
conduct its business prior to the Effective Time in the ordinary course
consistent with past practice, use its best efforts to preserve intact the
business organization of Grey Wolf, keep available as a group the services of
its current officers and key employees, and preserve the good will of its
material customers. For example, except as otherwise contemplated by the Merger
Agreement or as otherwise agreed to in writing by DI, prior to the Effective
Time, Grey Wolf will not (i) issue, sell or pledge, or authorize or propose the
issuance, sale or pledge of (A) any shares of capital stock of Grey Wolf or any
securities or rights convertible into, exchangeable for, or evidencing the
right to subscribe for, any shares of capital stock of Grey Wolf, or any
options, warrants, calls, rights, commitments or any other agreements of any
character to purchase or acquire any shares of capital stock of Grey Wolf or
any securities or rights convertible into, exchangeable for, or evidencing the
right to subscribe for, any such shares of capital stock, or grant or
accelerate any right to convert or exchange any securities of Grey Wolf for
shares of GW Common Stock, or (B) any other securities in respect of, in lieu
of, or in substitution for, shares of GW Common Stock outstanding on the date
of the Merger Agreement; (ii) redeem or otherwise acquire, or propose to redeem
or otherwise acquire, any of the outstanding equity securities of Grey Wolf
(including shares of GW Common Stock); (iii) declare, set aside or pay any
dividend or other distribution in respect of any shares of capital stock of
Grey Wolf; (iv) make any acquisition, by means of a merger or otherwise, of a
material amount of assets or securities; (v) agree to any sale, lease,
encumbrance or other disposition of a material amount of assets or securities
or any material change in its capitalization, other than sales or other
dispositions in the ordinary course consistent with past practice; (vi) enter
into any material contract other than in the ordinary course or agree to any
release or relinquishment of any material contract rights; (vii) incur any
long-term debt or short-term debt for borrowed money except for debt incurred
in the ordinary course consistent with past practice; (viii) propose or adopt
any amendments to the Articles of Incorporation or Bylaws of Grey Wolf; (ix)
enter into any new employment, consulting, severance or indemnification
agreement with any officer, director or key management Employee; or (x) agree
in writing or otherwise to take (A) any of the foregoing actions or (B) any
action which would make any representation or warranty of Grey Wolf in the
Merger Agreement untrue or incorrect
44
<PAGE> 52
in any material respect. Grey Wolf is also prohibited from paying bonuses and
granting salary increases without the prior written consent of Purchaser.
NON-SOLICITATION
In the Merger Agreement, Grey Wolf has agreed that it will not,
directly or indirectly, and will instruct its officers, directors, employees,
agents or advisors or other representatives or consultants not to, directly or
indirectly, solicit or initiate any proposals or offers from any person
relating to any acquisition or purchase of all or a material amount of the
assets of, or any securities of, or any merger, consolidation or business
combination with, Grey Wolf (any such proposal or offer being referred to
herein as an "Acquisition Proposal"), and that it will immediately cease and
cause to be terminated any existing activities, discussions or negotiations
with any persons conducted heretofore with respect to any such Acquisition
Proposal. The Merger Agreement also provides, however, that Grey Wolf may
furnish information and may engage in discussions or negotiations with any
person if, following the receipt of an unsolicited bona fide written
Acquisition Proposal from any such person (i) counsel advises Grey Wolf's
directors that failure to furnish such information or engage in such
discussions or negotiations could involve Grey Wolf's directors in a breach of
their fiduciary duties and (ii) Grey Wolf's directors believe, in good faith,
after consultation with Grey Wolf's financial advisors, that such person may
make a bona fide proposal for a transaction more favorable to Grey Wolf's
shareholders than the transactions contemplated by the Merger. Also, the Merger
Agreement does not prohibit Grey Wolf and its Board of Directors from making
such disclosure to Grey Wolf shareholders concerning Acquisition Proposals or
related matters as, in the judgment of the Board of Directors with the advice
of counsel, may be required under applicable law. Grey Wolf has agreed promptly
to notify DI of the receipt of any Acquisition Proposal and, subject to the
fiduciary duties of Grey Wolf's Board of Directors, keep DI informed of the
status thereof.
BEST EFFORTS TO CONCLUDE THE MERGER
All of the parties to the Merger Agreement have agreed to use their
respective best efforts to consummate the Merger and the other transactions
contemplated by the Merger Agreement and to cooperate with each other in so
doing, subject in each case to the terms and conditions of the Merger
Agreement, and to the fiduciary duties of the Board of Directors of Grey Wolf
under applicable law as advised by counsel. The Merger Agreement provides that
the parties will use their best efforts to (i) obtain any necessary waivers,
consents and approvals from other parties to material notes, licenses,
agreements, and other instruments and obligations; (ii) obtain any material
consents, approvals, authorizations and permits required to be obtained under
any federal, state or local statute, rule or regulation; (iii) defend all
lawsuits or other legal proceedings challenging the Merger Agreement or the
consummation of the transactions contemplated thereby and (iv) effect promptly
all necessary filings and notifications including, but not limited to, filings
under the HSR Act and prompt submissions of information requested by
governmental authorities.
ANTITRUST MATTERS
Under the Merger Agreement, each of DI, the Purchaser and Grey Wolf
have agreed to use their reasonable best efforts to resolve such objections, if
any, that may be asserted with respect to the Merger under federal or state
antitrust laws. In the event a suit is instituted challenging the Merger as
violative of antitrust laws, each of DI, the Purchaser and Grey Wolf have
agreed in the Merger Agreement to use their reasonable best efforts to resist
or resolve such suit. Each of DI, the Purchaser and Grey Wolf further agreed to
use its best efforts to take such action as may be required by the Antitrust
Division of the Department of Justice or the Federal Trade Commission in order
to resolve such objections as either of them may have to the Merger under the
antitrust laws or by any federal or state court of the
United States, in any suit brought by a private party or governmental entity
challenging the Merger as violative of the antitrust laws, in order to avoid
the entry of, or to effect the dissolution of, any injunction, temporary
restraining order or other order which has the effect of preventing the
consummation of the Merger. The Merger Agreement provides, however, that in
resolving any such antitrust objections, DI and the Purchaser are not required
to offer to accept an order providing for the divestiture of such of the
properties, assets, operations, or business of Grey Wolf (or, in lieu thereof,
such properties, assets, operations, or business of DI and the Purchaser or any
of DI and the Purchaser's affiliates) as are necessary to permit the
consummation of the transactions contemplated by the Merger Agreement,
including an offer to hold separate such properties, assets, operations or
businesses pending any such divestiture. Similarly, neither DI nor the
Purchaser are required under the Merger Agreement to accept any other
conditions, restrictions, limitations or agreements affecting the full rights
of ownership of Grey Wolf's assets (or any portion thereof) as may be necessary
to permit the consummation of the transactions contemplated by the Merger.
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<PAGE> 53
INDEMNIFICATION AND INSURANCE
From and after the Effective Time, DI and the Purchaser have agreed in
the Merger Agreement to indemnify and hold harmless each present and former
employee, agent, officer or director of Grey Wolf (the "Indemnified Parties")
to the fullest extent permitted under applicable law against any losses,
claims, damages, liabilities, costs, expenses, judgments and amounts paid in
settlement ("Damages") in connection with any claim, action, suit, proceeding
or investigation arising out of or pertaining to any action or omission
occurring prior to or at the Effective Time (including, without limitation, any
claim, action, suit, proceeding or investigation which arises out of or relates
to the transactions contemplated by the Merger Agreement (a "Claim") without
regard to the form of action whether in law or in equity and including but not
limited to claims based on negligence or strict liability of any indemnified
party or any other theory of recovery. These rights to indemnification survive
the Merger and will continue in full force and effect for a period of not less
than six years from the Effective Time. In the event any Indemnified Party
asserts in writing that he is entitled to be indemnified and held harmless
against any potential Damages arising out of or pertaining to any Claim prior
to the end of such six-year period, all rights to indemnification in respect of
any such Damages will continue until disposition of any such Claim. DI and the
Purchaser have also agreed, to the fullest extent permitted under applicable
law, to periodically advance expenses as incurred with respect to any Claim or
potential Claim; provided that the person to whom expenses are advanced, if
required by applicable law, provides a written affirmation of his good faith
belief that he has met the standard of conduct prescribed by law as being
necessary for indemnification and a written undertaking to repay such advances
if it is ultimately determined by a court of competent jurisdiction that such
person is not entitled to indemnification.
The Merger Agreement provides that DI will amend its bylaws to contain
provisions with respect to indemnification and directors' and officers'
insurance consistent with those set forth in Grey Wolf's bylaws, as in effect
on the date of the Merger Agreement, and that DI will not amend such provisions
for a period of six years from the Effective Time in any manner that would
adversely affect the rights thereunder of individuals who on or prior to the
Effective Time were directors, officers, employees or agents of Grey Wolf,
except if such amendment is required by law.
In addition to the indemnification arrangements described above, Grey
Wolf has entered into contractual indemnification arrangements with its
directors and certain of its officers (the "Indemnification Agreements") which
provide indemnification to the indemnified party effective as of March 6, 1997,
the day immediately prior to the date on which the Merger Agreement was
executed. Pursuant to the Indemnification Agreements, the officer or director
is indemnified, to the fullest extent permitted by law, from claims and
expenses in any way related to the fact that such person was or is a director,
officer, employee, trustee, agent or fiduciary of Grey Wolf, or was serving at
the request of Grey Wolf in a similar capacity with respect to any other
corporation, trust, partnership or other entity or enterprise. Under the terms
of the Merger, the Indemnification Agreements will become contractual
obligations of the Purchaser following the Effective Time. The forms of
Indemnification Agreement have been filed as exhibits to the Registration
Statement.
DI and the Purchaser are required under the Merger Agreement to use
their reasonable best efforts to cause to be maintained in effect for six years
from the Effective Time the current policies of directors' and officers'
liability insurance maintained by Grey Wolf with respect to all matters,
including the transactions contemplated by the Merger Agreement, occurring
prior to or at the Effective Time. DI and the Purchaser may, however,
substitute therefor policies of at least the same coverage containing terms and
conditions which are no less advantageous so long as no lapse in coverage
occurs as a result of such substitution. DI and the Purchaser are also entitled
to reduce the coverage provided by such directors' and officers' liability
insurance if and to the extent required to cause the total annual premium for
such directors' and officers' liability insurance not to exceed a total annual
premium of $150,000.
EMPLOYEE BENEFIT PLANS
The Merger Agreement requires the Purchaser to replace the Grey Wolf
Drilling Co. Employees' 401(k) and Profit Sharing Plan with another plan or
plans providing, in the aggregate, for a substantially equivalent or greater
level of compensation, funding, and benefits for employees of Grey Wolf who
remain employed by the Purchaser after the Effective Time. DI believes that its
existing 401(k) plan meets the requirements of the Merger Agreement.
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<PAGE> 54
CONDITIONS TO CONSUMMATION OF THE MERGER
The obligations of each party to effect the Merger are subject to the
satisfaction or waiver, if permissible, at or prior to the Effective Time, of
the following conditions: (i) the Merger Agreement must have been approved and
adopted by the requisite affirmative vote of the shareholders of Grey Wolf in
accordance with the TBCA and Grey Wolf's Articles of Incorporation; (ii) no
statute, rule, regulation, order, decree, ruling or injunction shall have been
promulgated, enacted, or issued by any court or governmental authority of
competent jurisdiction which is in effect and has the effect of prohibiting the
consummation of the Merger; (iii) the waiting period applicable to the
consummation of the Merger under the HSR Act must have expired or been
terminated; (iv) the DI Common Stock Price must not be less than $2.20 or more
than $4.80; (v) DI and the Purchaser must have obtained and have in hand
sufficient funds, or binding written commitments from responsible and reputable
financial institutions reasonably satisfactory to Grey Wolf to provide such
funds, to enable DI and the Purchaser to pay the Closing Cash Consideration and
make the $5.0 million escrow deposit (if any) to be made without resulting in a
breach or violation of certain of DI's representations and warranties; and (vi)
the Escrow Agreement must have been executed and delivered by DI, Grey Wolf,
the Stockholder Representatives, and the Escrow Agent.
The obligations of DI and the Purchaser under the Merger Agreement are
subject to the satisfaction (or waiver by DI and the Purchaser), at or prior to
the Effective Time, of each of the following conditions: (i) all
representations and warranties of Grey Wolf contained in the Merger Agreement
or in any certificate or document delivered to DI and the Purchaser pursuant
thereto must be true and correct on and as of the date made, and Grey Wolf must
have performed all obligations and agreements, and complied with all covenants
and conditions, contained in the Merger Agreement to be performed or complied
with by it prior to or at the Effective Time; (ii) there must have been no
material adverse change in the financial condition, business or operations of
Grey Wolf from the date of the Merger Agreement until the Effective Time; (iii)
DI must have received a favorable opinion of Arthur Andersen LLP or of KPMG
Peat Marwick LLP, addressed to DI and in form and substance reasonably
satisfactory to it to the effect that the Merger will constitute a
reorganization for federal income tax purposes within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"); (iv) the
number of shares of GW Common Stock held by persons who have evidenced an
intent to exercise dissenters' rights of appraisal must not be in excess of 5%
of the outstanding GW Common Stock; and (v) the holders of shares of GW Common
Stock who will receive, in the aggregate, ninety percent of the Stock
Consideration must have executed letters stating that they have no plan or
intent to sell, exchange, transfer, distribute or otherwise reduce their risk
of ownership of the DI Common Stock that they will receive in the Merger;
provided that no such holder will have liability to DI or the Purchaser by
reason of execution or delivery of any such letter or any representation made
therein.
The obligations of Grey Wolf under the Merger Agreement are subject to
the satisfaction (or waiver by Grey Wolf), at or prior to the Effective Time,
of the following conditions: (i) all representations and warranties of DI and
the Purchaser contained in the Merger Agreement or in any certificate or
document delivered to Grey Wolf pursuant to the Merger Agreement must be true
and correct on and as of the date made, and DI and the Purchaser must have
performed all obligations and agreements, and complied with all covenants and
conditions contained in the Merger Agreement to be performed or complied with
by them prior to or at the Effective Time; and (ii) Grey Wolf must have
received a favorable opinion of Arthur Andersen LLP or of KPMG Peat Marwick
LLP, addressed to Grey Wolf and its stockholders and in form and substance
reasonably satisfactory to it to the effect that the Merger will constitute a
reorganization for federal income tax purposes within the meaning of Section
368(a) of the Code.
TERMINATION RIGHTS
The Merger Agreement may be terminated and the transactions
contemplated thereby may be abandoned at any time prior to the Effective Time,
notwithstanding approval and adoption of the Merger Agreement by the
shareholders of Grey Wolf under the following circumstances: (i) by mutual
written consent duly authorized by the Boards of Directors of Grey Wolf, DI and
the Purchaser; (ii) by the Purchaser and DI or Grey Wolf if any court or
governmental authority of competent jurisdiction issue an order, decree or
ruling, or takes any other action, permanently enjoining or otherwise
prohibiting the consummation of the Merger and such order, decree, ruling or
other action becomes final and nonappealable; (iii) by Grey Wolf if, prior to
the Effective Time, Grey Wolf is not in breach of its obligations summarized
under "--Non-Solicitation," above, and a person other than the Purchaser has
made an unsolicited bona fide proposal for a transaction which Grey Wolf's
Board of Directors believes, in good faith, after consultation with Grey Wolf's
financial advisors, is more favorable to Grey Wolf's shareholders than the
transactions contemplated by the Merger; (iv) by DI if neither DI nor the
Purchaser is in material breach of the Merger Agreement
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<PAGE> 55
and Grey Wolf's Board of Directors has (A) withdrawn its recommendation that
the shareholders of Grey Wolf vote in favor of approval and adoption of the
Merger Agreement, or (B) recommended or approved the acceptance or approval by
stockholders of Grey Wolf of any Acquisition Proposal (other than one by DI or
its affiliates); (v) by Grey Wolf, if Grey Wolf is not in material breach of
the Merger Agreement and the Effective Time has not occurred on or prior to
July 1, 1997; or (vi) by DI, if neither DI nor the Purchaser is in material
breach of the Merger Agreement and the Effective Time has not occurred on or
prior to July 1, 1997.
If the Merger Agreement is terminated by Grey Wolf because Grey Wolf's
Board of Directors receives an unsolicited competing Acquisition Proposal which
the Grey Wolf Board of Directors believes is more favorable to Grey Wolf
shareholders than the Merger, or if the Merger Agreement is terminated by DI
because Grey Wolf's Board of Directors has withdrawn its recommendation of the
Merger to Grey Wolf shareholders or has recommended or approved another
Acquisition Proposal, then Grey Wolf is obligated to pay to DI, on demand, as
the sole remedy of DI and the Purchaser under the Merger Agreement, a fee of
$2.0 million in full reimbursement and compensation for DI's time and effort in
negotiating and entering into the Merger Agreement and taking actions pursuant
thereto.
If closing of the Merger does not occur because DI and the Purchaser
have not obtained or have in hand sufficient funds, or binding written
commitments from responsible and reputable financial institutions reasonably
satisfactory to Grey Wolf to provide such funds, to enable DI to pay the cash
merger consideration and fund the $5.0 million escrow fund if so required (in
either event without breach of certain of DI's representations and warranties),
then DI is obligated to pay to Grey Wolf on demand, as Grey Wolf's sole remedy
under the Merger Agreement, $2.0 million as liquidated damages in full
reimbursement and compensation to Grey Wolf and its shareholders.
AMENDMENT; WAIVERS
To the extent permitted by applicable law, the Merger Agreement may be
amended by action taken by or on behalf of the Boards of Directors of Grey
Wolf, DI and the Purchaser at any time before or after approval and adoption of
the Merger Agreement by the shareholders of Grey Wolf. After any such
shareholder approval and adoption, however, no amendment shall be made which
decreases the merger consideration, changes the form thereof or adversely
affects the rights of Grey Wolf's shareholders under the Merger Agreement
without the approval of the holders of at least two-thirds of the outstanding
shares of GW Common Stock. The Merger Agreement may not be amended except by an
instrument in writing signed on behalf of the parties thereto.
At any time prior to the Effective Time, Grey Wolf on the one hand and
DI and the Purchaser on the other, by action taken by or on behalf of the
Boards of Directors of Grey Wolf, DI and the Purchaser, may (a) extend the time
for the performance of any of the obligations or other acts of any other party
under the Merger Agreement, (b) waive any inaccuracies in the representations
and warranties of any other party contained in the Merger Agreement or in any
document, certificate or writing delivered by any other party pursuant to the
Merger Agreement or (c) waive compliance with any of the agreements or
conditions contained in the Merger Agreement. Any agreement on the part of any
party to any such extension or waiver will be valid only if set forth in an
instrument in writing signed on behalf of such party.
DISSENTING SHARES
Under the provisions of the TBCA, record holders of GW Common Stock
will be entitled to exercise dissenter's rights with respect to the Merger.
Accordingly, shares of GW Common Stock that are issued and outstanding
immediately before the Effective Time and which are held by shareholders who
have not voted such shares of GW Common Stock in favor of the Merger and have
delivered a written objection to the Merger in the manner provided in the TBCA
(the "Dissenting Shares") will not be converted into the right to receive the
Merger Consideration, unless and until such holders have failed to perfect or
have effectively withdrawn or lost their rights to appraisal and payment under
the TBCA. If any such holder fails to perfect or is deemed to have effectively
withdrawn or lost such right, such holder's shares of GW Common Stock will
thereupon be deemed to have been converted into the right to receive, as of the
Effective Time, the Merger Consideration as provided in the Merger Agreement,
without any interest thereon.
SALES TAX OBLIGATIONS
Sales or use taxes, if any, imposed by any domestic or foreign taxing
authority with respect to the property of Grey Wolf due with respect to the
Merger will be borne by DI or the Purchaser and will not be a liability of the
shareholders of Grey Wolf.
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<PAGE> 56
UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
The accompanying unaudited pro forma consolidated financial statements of
DI are based upon DI's historical consolidated financial statements as of and
for the three months ended March 31, 1997, and for the year ended December 31,
1996. These historical financial statements have been adjusted for certain
items as discussed in the notes to these unaudited pro forma consolidated
financial statements.
On March 7, 1997, DI entered into an agreement to acquire by merger Grey
Wolf for up to approximately $61.6 million in cash and approximately 14.0
million shares of DI 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
Common Stock three days before 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 DI Common Stock. For pro forma presentation, it was assumed that there would
be no adjustment to the purchase price based upon changes in DI's stock price.
An escrow will be established for certain post-closing contingencies with $5.0
million of the cash consideration. The Merger is subject to obtaining
regulatory and Grey Wolf shareholder's approval and certain other conditions.
For pro forma presentation, it has been assumed that DI will fund the cash
portion of the Grey Wolf acquisition by issuing $125.0 million of senior
unsecured debt in the public market. Based upon current market conditions, an
interest rate of 9.75% was assumed with interest payments only required until
maturity which is expected to be in ten years. It was also assumed that the
costs of issuing the debt would approximate $3.25 million. The remainder of the
proceeds in excess of the cash portion of the Grey Wolf purchase price were
assumed to be used to pay down DI's existing debt.
On January 31, 1997, DI Industries, Inc. completed the acquisition of the
operating assets of Flournoy Drilling Company ("Flournoy") and elected Mr.
Lucien Flournoy, the founder of Flournoy, to DI's Board of Directors. This
acquisition was pursuant to a definitive asset purchase agreement based on arms
length negotiations among the parties. The assets were acquired for 12,426,000
shares of DI Common Stock, par value $0.10 per share, and cash of approximately
$800,000 which was utilized to repay certain of Flournoy's debt. The assets
acquired include 13 land drilling rigs, 17 rig hauling trucks, a yard and
office facility in Alice, Texas and various other equipment and drill pipe.
Flournoy utilized and DI intends to utilize these assets in contract oil and
gas land drilling services. DI agreed to issue additional shares of DI Common
Stock to Flournoy's shareholders if, and to the extent that on January 31,
1998, the aggregate market value of one-half of the shares received by the
Flournoy shareholders, plus the gross proceeds from any sales of DI Common
Stock by the Flournoy shareholders prior to January 31, 1998, is, in total,
less than $12.4 million.
On December 31, 1996, DI completed the acquisition of the South Texas
operating assets of Diamond M Onshore, Inc. ("Diamond M"), a wholly owned
subsidiary of Diamond Offshore Drilling, Inc., pursuant to a definitive asset
purchase agreement. DI acquired the assets (which includes ten land drilling
rigs, all of which are currently operating, 19 rig hauling trucks, a yard and
office facility in Alice, Texas and various other drill pipe and equipment) for
approximately $26.0 million in cash.
DI entered into a loan facility dated as of December 31, 1996, with
Bankers Trust Company, ING (US) Capital Corporation and NordlandsBanken AS
which provided the funds to acquire the assets of Diamond M (the "1996 Credit
Facility"). In April 1997, the 1996 Credit Facility was amended and restated.
See "Information Concerning DI--Bank Credit Facility. The 1996 Credit Facility
provided for an initial $35.0 million reducing revolving line of credit which
reduced by $5.0 million on each anniversary date until maturity on December 31,
1999. The 1996 Credit Facility was and the Bank Credit Facility continues to
be, secured by substantially all of DI'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%. Prior to and as a condition of
closing the 1996 Credit Facility, DI paid off its existing credit facility with
NordlandsBanken AS in the amount of approximately $9.5 million.
In connection with closing the 1996 Credit Facility, DI also completed a
private placement of 1.75 million shares of DI Common Stock for approximately
$4.12 million to four funds managed by Wexford Management LLC.
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<PAGE> 57
These proceeds were utilized to repay a $4.0 million note plus accrued interest
of $132,000. DI also agreed to issue more shares of DI Common Stock to the
extent the Wexford funds hold value less than $4.12 million on December 30,
1997.
On October 3, 1996, DI acquired all of the South Texas operating assets of
Mesa Drilling, Inc. ("Mesa") in exchange for 5,500,000 shares of DI 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 August 29, 1996, DI closed two separate transactions (collectively, the
"August Mergers") resulting in a $25.0 million equity infusion and the
acquisition of deep drilling equipment.
In the first transaction, R. T. Oliver, Inc. ("RTO") and Land Rig
Acquisition Corporation ("LRAC") merged into a new subsidiary of DI with the
capital stock of RTO and LRAC being exchanged for 39,423,978 shares of DI
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. Subsequently, warrants representing 1,108,000
shares have been canceled. This transaction resulted in the acquisition of 18
inactive, deep capacity land drilling rigs which include five 3,000 horsepower
and nine 2,000 horsepower land rigs which are rated for depths of 25,000 feet
or greater.
In the second transaction, Somerset Investment Corp. ("Somerset"), was
merged into DI. The stock of Somerset 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.
Subsequently, warrants representing 1,383,400 shares have been canceled. This
merger transaction resulted in a $25.0 million equity infusion into DI.
On June 24, 1996, DI closed a transaction whereby it sold all of the
operational assets of Western Oil Well Service Co. ("Western"), a wholly-owned
subsidiary of DI, 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. DI recorded a gain of $2.8 million
in the second quarter of 1996 as a result of the sale. This gain is not
reflected in the attached unaudited pro forma consolidated financial statements
as the gain was non-recurring in nature.
The Unaudited Pro Forma Consolidated Balance Sheet assumes the Grey Wolf
acquisition occurred on March 31, 1997. The other events noted above occurred
prior to March 31, 1997, and are included in DI's historical balance sheet as
of March 31, 1997. The Unaudited Pro Forma Consolidated Statement of Operations
for the three months ended March 31, 1997, assumes the Flournoy acquisition and
the Grey Wolf acquisition occurred on January 1, 1996, while all the other
events noted above are included in historical results for the period. The
Unaudited Pro Forma Consolidated Statement of Operations for the year ended
December 31, 1996 assumes all of the above transactions occurred on January 1,
1996.
The unaudited pro forma consolidated financial statements should be read
in conjunction with the (i) consolidated financial statements of DI included in
DI's Quarterly Report on Form 10-Q as of and for the three months ended March
31, 1997, and DI's Annual Report on Form 10-K as of and for the year ended
December 31, 1996 and (ii) the financial statements of Grey Wolf as of and for
the year ended October 31, 1996, included elsewhere herein. Pro forma financial
data is not necessarily indicative of future operations of DI due to numerous
factors, including changes in utilization rates for drilling rigs, changes in
the rates received for drilling services and future equipment sales and
acquisitions.
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<PAGE> 58
DI INDUSTRIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
March 31, 1997
(In thousands)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------- PRO FORMA
DI GREY WOLF ADJUSTMENTS PRO FORMA
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ $ 899 $ 121,062 (a) $
(61,600)(b)
(28,330)(a)
Restricted cash - insurance deposits (300)(b)
Accounts receivable, net of allowance 7,852
Rig inventory and supplies
Assets held for sale
Prepaids and other current assets 1,524
----------- --------- ----------- --------
Total current assets 10,275 30,832
----------- --------- ----------- --------
Property and equipment:
Land, buildings and improvements 815
Drilling and well service equipment 54,502 81,867 (b)
Furniture and fixtures 409
Accumulated depreciation and amortization (37,300) 37,300 (b)
----------- --------- ----------- --------
Net property and equipment 18,426 119,167
----------- --------- ----------- --------
Other noncurrent assets 345 (177)(b)
3,938 (a)
----------- --------- ----------- --------
$ $ 29,046 $ 153,760 $
=========== ========= =========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ $ 8 $ $
Trade accounts payable 8,483
Accrued workers' compensation
Payroll and related employee costs
Customer advances
Other accrued liabilities
----------- --------- ----------- --------
Total current liabilities 8,491
----------- --------- ----------- --------
Senior unsecured debt 125,000 (a)
Long-term debt net of current maturities 1,484 (28,330)(a)
Other long-term liabilities and minority interest 381
Deferred income taxes 2,933 30,847 (b)
Series A preferred stock-mandatory redeemable
Shareholders' equity:
Common stock, $.10 par value 1,400 (b)
Additional paid-in capital 15,757 24,843 (b)
Deficit
Cumulative translation adjustments
----------- --------- ----------- --------
Total shareholders' equity 15,757 26,243
----------- --------- ----------- --------
$ $ 29,046 $ 153,760 $
=========== ========= =========== ========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS.
51
<PAGE> 59
DI INDUSTRIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1997
(In thousands except per share data)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------- PRO FORMA
DI FLOURNOY GREY WOLF ADJUSTMENTS PRO FORMA
----------- ---------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Contract drilling $ $ $ $ ( ) $
Costs and expenses:
Drilling operations ( )
Depreciation, depletion and
amortization ( )
General and administrative ( )
Non-recurring charges
----------- ---------- ----------- ------------ ---------
Total costs and expenses
----------- ---------- ----------- ------------ ---------
Operating income (loss)
----------- ---------- ----------- ------------ ---------
Other income (expense):
Interest income
Interest expense
Gain (loss) on sale of assets
Minority interest and other
----------- ---------- ----------- ------------ ---------
Other income (expense), net
----------- ---------- ----------- ------------ ---------
Income (loss) before income taxes
Income taxes
----------- ---------- ----------- ------------ ---------
Net income (loss)
Series B preferred stock subscription
dividend requirement
----------- ---------- ----------- ------------ ---------
Net income (loss) applicable to
common stock $ $ $ $ $
=========== ========== =========== ============ =========
Net income (loss) per common share $ $
=========== =========
Weighted average common shares
outstanding
=========== =========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS.
52
<PAGE> 60
DI INDUSTRIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1996
(In thousands except per share data)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS HISTORICAL
--------------------- ------------------------------------
HISTORICAL WESTERN AUGUST PRO FORMA
DI SALE MERGERS MESA DIAMOND FLOURNOY GREY WOLF ADJUSTMENTS PRO FORMA
---------- ------- ------- ------ ------- -------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Contract drilling.............. $ 81,767 $(3,206)(c) $4,693 $22,675 $42,850 $56,537 $ $205,316
Costs and expenses
Drilling operations............ 80,388 (3,029)(c) 84 (d) 3,428 19,405 33,970 44,735 2,624 (f) 181,605
Depreciation, depletion and
amortization................ 4,689 (117)(c) 759 1,655 2,163 15,362 (g) 24,511
General and administrative........ 4,274 (254)(c) 476 2,994 4,036 (3,867)(h) 7,659
Non-recurring charges............. 6,131 6,131
-------- ------- ---- ------ ------- ------- ------- -------- --------
Total costs and expenses..... 95,482 (3,400) 84 3,428 20,640 38,619 50,934 14,119 219,906
-------- ------- ---- ------ ------- ------- ------- -------- --------
Operating income (loss)........... (13,715) 194 84 1,265 2,035 4,231 5,603 (14,119) (14,590)
-------- ------- ---- ------ ------- ------- ------- -------- --------
Other income (expense):
Interest income................ 505 2 507
Interest expense............... (1,220) 4 (c) (87) (394) (10,885)(i) (12,582)
Gain (loss) on sale of assets.. 3,078 (2,775)(c) 368 671
Minority interest and other.... 475 66 541
-------- ------- ---- ------ ------- ------- ------- -------- --------
Other income (expense),
net....................... 2,838 (2,771) (87) (42) (10,885) (10,863)
-------- ------- ---- ------ ------- ------- ------- -------- --------
Income (loss) before income
taxes.......................... (10,877) (2,577) (84) 1,265 2,035 4,144 5,645 (25,004) (25,453)
Income taxes...................... 845 2,265 (2,265)(j) 845
-------- ------- ---- ------ ------- ------- ------- -------- --------
Net income (loss)................. (11,722) (2,577) (84) 1,265 2,035 4,144 3,380 (22,739) (26,298)
Series B preferred stock
subscription dividend
requirement.................... (402) 402 (d)
-------- ------- ---- ------ ------- ------- ------- -------- --------
Net income (loss) applicable
to common stock................ $(12,124) $(2,577) $318 $1,265 $ 2,035 $ 4,144 $ 3,380 $(22,739) $(26,298)
======== ======= ==== ====== ======= ======= ======= ======== ========
Net loss per common share......... $ (0.18) $ (0.17)
Weighted average common ======== ========
shares outstanding............. 67,495 151,469
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS.
53
<PAGE> 61
DI INDUSTRIES, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The following sets forth the explanations and assumptions used in
preparing the Unaudited Pro Forma Consolidated Balance Sheet of DI Industries,
Inc. ("DI") as of March 31, 1997, and the Unaudited Pro Forma Consolidated
Statements of Operations for the three months ended March 31, 1997, and for the
year ended December 31, 1996.
The unaudited pro forma consolidated financial statements should be read
in conjunction with (i) the consolidated financial statements of DI included in
DI's Quarterly Report on Form 10-Q as of and for the three months ended March
31, 1997, and DI's Annual Report on Form 10-K as of and for the year ended
December 31, 1996, and (ii) the financial statements of Grey Wolf as of and for
the year ended October 31, 1996, included elsewhere herein. Pro forma financial
data is not necessarily indicative of future operations of DI due to numerous
factors, including changes in utilization rates for drilling rigs, changes in
the rates received for drilling services and future equipment sales and
acquisitions.
(2) Adjustment to the Historical Financial Statements
The Unaudited Pro Forma Consolidated Balance Sheet assumes the Grey Wolf
acquisition occurred on March 31, 1997. The other events noted occurred prior
to March 31, 1997, and are included in DI's historical balance sheet as of
March 31, 1997. The Unaudited Pro Forma Consolidated Statement of Operations
for the three months ended March 31, 1997, assumes the Flournoy acquisition and
the Grey Wolf Acquisition occurred on January 1, 1996, while all the other
events noted above are included in historical results for the period. The
Unaudited Pro Forma Consolidated Statement of Operations for the year ended
December 31, 1996, assumes all of the above transactions occurred on January 1,
1996.
The following assumptions and pro forma adjustments have been made with
respect to the historical balance sheet of DI:
(a) To reflect the issuance of $125.0 million of senior unsecured ten
year notes and related issuance costs and the repayment of DI's
existing long-term debt.
(b) To reflect the purchase of Grey Wolf for $61.6 million in cash and
the issuance of 14,000,000 shares of DI Common Stock. Also assumes
the payment of approximately $300,000 in transaction costs which were
capitalized as part of the cost of the acquisition. For pro forma
presentation, it was assumed that there would be no adjustment to the
purchase price for changes in the price of DI Common Stock.
The following assumptions and pro forma adjustments have been made to the
historical statements of operations of DI:
(c) To reflect the effect, on the revenue and expenses of DI, of the sale
of the operational assets of Western.
(d) To adjust operating expense for the estimated cost to store the rigs
acquired in the August Mergers.
(e) To provide for the liquidation of the Series B preferred stock
subscription and related dividend requirement in connection with the
August Mergers.
(f) To reclassify certain of Grey Wolf's general and administrative
expenses to operating costs to conform to DI's presentation of
expenses.
(g) To reflect the additional depreciation expense associated with the
acquisition of the Mesa assets ($648,000), the Diamond M assets ($2.7
million), the Flournoy assets ($2.7 million) and the Grey Wolf merger
($9.4 million). Pro forma depreciation was calculated on a straight
line basis over the estimated useful lives of the assets.
54
<PAGE> 62
(h) To reflect the elimination of $217,000 of general and administrative
expenses of Diamond M allocated by its parent, Diamond Offshore
Drilling, Inc. less the additional general and administrative
expenses estimated by DI for an additional corporate accounting
employee. To reflect the elimination of general and administrative
expenses of Flournoy for the cost of the founder and president of
Flournoy and one other employee who did not join DI totaling
$800,000. To reflect the reclassification of general and
administrative expenses of Grey Wolf to drilling operations costs
($2.6 million) (see note (f) above) and the elimination of general and
administrative expenses for the cost of the president and other
employees who will not be joining DI ($226,000).
(i) To reflect: (i) the elimination of interest expense of Flournoy on the
debt that was repaid by DI at closing of the Flournoy acquisition of
$87,000; (ii) the additional interest expense associated with the
issuance of the $125.0 million of unsecured senior debt in the Senior
Note Offering; and (iii) the reduction of interest expense for the
retirement of DI's outstanding long term debt totaling $11.0 million.
The effect of a 0.25% change in the annual interest rate of the
unsecured senior debt would change pro forma interest expense by
$78,125 for the three months ended March 31, 1997, and $312,500 for
the year ended December 31, 1996.
(j) To eliminate the income tax expense of Grey Wolf in order to conform
to DI's income tax position.
55
<PAGE> 63
INFORMATION CONCERNING DI
GENERAL
DI Industries, Inc., a Texas corporation formed in 1980, is engaged
primarily in the business of providing onshore contract drilling services to
the oil and gas industry. Domestic operations are conducted by DI in Texas,
Louisiana, Arkansas, Oklahoma, Ohio, Pennsylvania, New York, Michigan and other
states. DI's foreign operations are currently conducted only in Venezuela. In
1996, DI elected a substantially new Board of Directors (except for its
Chairman), installed new senior management and completed several transactions
that significantly improved its financial condition and added drilling rigs to
its existing fleet. The combined effect of these changes materially changed DI's
principal shareholders, management, capital structure, and business strategy.
DI's principal office is located at 10370 Richmond Avenue, Suite 600, Houston,
Texas 77042, and its telephone number is (713) 435-6100.
Additional information concerning DI is contained in its Annual Report on
Form 10-K for 1996, and other filings under the Exchange Act, which are
incorporated herein by reference. See "Available Information" and
"Incorporation of Certain Documents by Reference."
RECENT DEVELOPMENTS
Flournoy Acquisition. In January 1997, DI acquired the operating assets of
Flournoy Drilling Company, a land drilling company operating primarily in South
Texas, for approximately 12.4 million shares of DI Common Stock and cash of
approximately $800,000 which was utilized to repay certain of Flournoy's debt.
The assets acquired include 13 land 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 issued in the Flournoy
transaction, DI has agreed to issue additional shares if the shareholders of
Flournoy hold value of less than $2.00 per share of DI Common Stock on January
31, 1998. See DI's Current Report on Form 8-K filed January 31, 1997, as
amended by its Report on Form 8-K/A filed April 11, 1997, for additional
information concerning the Flournoy transaction.
Bank Credit Facility. On April , 1997, DI and the Purchaser entered into
an Amended and Restated Senior Secured Revolving Credit Agreement as
co-borrowers (the "Bank Credit Facility"). DI's wholly-owned subsidiary, DI
International, Inc. ("International"), guaranteed the obligations of the
borrowers under such credit agreement. The credit agreement, which replaced the
Purchaser's 1994 term credit facility, provides DI and the Purchaser with the
ability to borrow up to $50.0 million from time to time prior to April 30,
2000, with up to ________ million of such amount available for letters of
credit. Interest under the credit agreement accrues at a variable rate, using
(at the borrowers' election) either a prime rate plus a margin ranging from
0.75% to 1.50%, depending upon DI's ratio of debt to EBITDA, or a rate based on
the interbank Eurodollar market plus a margin ranging from 1.75% to 2.50%,
depending upon DI's ratio of debt to EBITDA. Letters of credit accrue a letter
of credit fee equal to the margin described above for the interbank Eurodollar
market interest rate plus a facing fee of 0.25% per annum. The borrowers pay a
commitment fee of 0.5% per annum on the average unused portion of the lenders'
commitments. The credit facility is secured by substantially all of the assets
of DI, the Purchaser and International.
The lenders' commitments will be reduced by any (i) net proceeds received
by DI or its subsidiaries from sales of debt or equity securities in a public
offering or private placement, (ii) net cash proceeds received by DI or its
subsidiaries from asset sales and (iii) any insurance proceeds on collateral
securing the Bank Credit Facility, in each case to the extent that such proceeds
are in excess of $500,000 individually or $1.0 million in the aggregate in any
12-month period (other than proceeds from dispositions of inventory in the
ordinary course of business, certain licenses of intellectual property, certain
inter-company transfers, and sales of rigs identified in the credit agreement as
equipment held for resale). The final maturity date of the facility is April 30,
2000.
The initial borrowings under the credit agreement on December 31, 1996,
were used to complete DI's acquisition of substantially all of the assets of
the land drilling division of Diamond Offshore Drilling, Inc. Other borrowings
may be used to make land rig acquisitions, fund rig upgrades and for general
corporate purposes.
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<PAGE> 64
Among the various covenants that must be satisfied by DI are the following
four financial covenants:
(i) working capital may not be less than $5,000,000 on the last day of
any fiscal quarter;
(ii) consolidated net worth may never be less than ____________________;
(iii) the ratio of (A) the appraised value of rigs and related equipment
to (B) the lenders' commitments must always exceed 2 to 1; and
(iv) the ratio of consolidated debt to total capitalization may never
exceed __________ to 1.
The credit agreement also contains covenants restricting the ability of DI
and its subsidiaries to (i) engage in new lines of business unrelated to their
current activities, (ii) enter into mergers or consolidations or asset sales or
purchases (with specified exceptions), (iii) incur liens or debts or make
advances, investments or loans (in each case, with specified exceptions), (iv)
pay dividends or redeem stock (except for certain inter-company transfers), (v)
enter into transactions with affiliates other than on an arm's-length basis in
the ordinary course of business (with specified exceptions), (vi) prepay or
materially amend any other indebtedness, (vii) modify any certificate of
incorporation or by-laws in a manner adverse to the lenders, (viii) issue any
stock (other than common stock), (ix) agree to or incur any restriction on the
rights of DI's subsidiaries to pay dividends, make loans, transfer assets or
take similar actions (with certain exceptions) or (x) form new subsidiaries
(with certain exceptions).
Events of default under the credit agreement include (i) non-payment of
amounts owing under the credit agreement, (ii) misrepresentation, (iii) breach
of covenants, (iv) default with respect to other indebtedness in excess of
$350,000, (v) bankruptcy, (vi) certain ERISA events, (vii) default under, or
noneffectiveness of, the security documents covering the collateral, (viii)
default under, or noneffectiveness of, the guaranty by International (or any
other future guaranty), (ix) judgments in excess of $350,000 and (x) a change
of control (meaning that (A) DI ceases to own 100% of the Purchaser and
International, or (B) some person or group has either acquired beneficial
ownership of 30% or more of DI or obtained the power to elect a majority of
DI's board of directors, or (C) DI's board of directors ceases to consist of a
majority of "continuing directors" (as defined in the credit agreement), or (D)
Norex Drilling Ltd., Somerset Drilling Associates, L.L.C., and Somerset Capital
Partners cease to own or control at least 30% of DI).
Indebtedness outstanding under the Bank Credit Facility will be secured by
substantially all of DI's assets, including the stock of its subsidiaries.
SOURCE OF DI FUNDS
DI intends to finance the cash portion of the Merger consideration from
the proceeds of a proposed underwritten public offering by DI of "high-yield,"
unsecured debt securities. Accordingly, DI intends to file a registration
statement on Form S-3 under the Securities Act with the Securities and Exchange
Commission covering the offering by DI of $125.0 million of its Senior Notes
(the "Senior Note Offering"). Proceeds of the Senior Note Offering will also be
used to refinance substantially all of the indebtedness then outstanding under
the Bank Credit Facility and for general corporate purposes, including working
capital for DI's expanded operations following the Merger. DI therefore
anticipates that upon closing of the Merger and Senior Notes Offering, DI will
have credit availability under the Bank Credit Facility of approximately $50.0
million. DI anticipates that the Senior Notes will rank pari passu with any
indebtedness that may from time to time be outstanding under the Bank Credit
Facility but that the Senior Notes will be effectively subordinated to Bank
Credit Facility indebtedness to the extent of the collateral securing
indebtedness under the Bank Credit Facility.
DI's ability to consummate the Merger will depend upon, among other
things, the successful closing of the proposed Senior Notes Offering. It is
anticipated that closing of the Senior Notes Offering will be conditioned upon
the substantially contemporaneous closing of the Merger. Upon closing of the
Senior Note Offering, DI will be subject to substantial indebtedness. This
indebtedness and other aspects of the Merger and DI's business pose certain
risks to Grey Wolf shareholders, all of whom will receive DI Common Stock in
the Merger. See "Risk Factors." Additional information concerning the Senior
Note Offering is contained in the unaudited pro forma consolidated financial
statements contained in the Senior Notes Prospectus, which pro forma
consolidated financial statements are incorporated herein by reference. See
"Available Information."
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<PAGE> 65
INFORMATION CONCERNING GREY WOLF
INTRODUCTION
Grey Wolf provides onshore contract drilling services for third parties
using its own drilling rigs and equipment. Grey Wolf's predecessor was founded
in 1919 for the purposes of drilling and exploring for oil and gas in East
Texas. Grey Wolf was most recently incorporated under the laws of the State of
Texas in 1978. In 1978, Grey Wolf was purchased by its present owners,
including James K. B. Nelson, Tamarack Oil Co. and Lubar & Co. and their
affiliates.
In 1978 Grey Wolf owned six land drilling rigs, which were primarily used
for drilling deep wells in Louisiana. Grey Wolf has since grown to 18 land
rigs. Grey Wolf's headquarters are located at 1980 Post Oak Blvd., Suite 1150,
Houston, Texas. In addition, Grey Wolf has an operational yard in Duson,
Louisiana.
BUSINESS STRATEGY
Grey Wolf's management believes that its operating strategy, developed
over the course of its 77-year history of oil and gas well drilling, gives it a
competitive advantage over other land contractors. Because of the numerous
unquantifiable and unpredictable problems that can occur while drilling a well,
especially in the Gulf Coast region, a drilling contractor must rely on the
experience level of its personnel. Grey Wolf's operating strategy objectives
are to (i) recruit, train and retain the best drilling personnel in the
industry, (ii) maintain a quality, standardized, and efficient rig fleet, (iii)
apply conservative risk management techniques, (iv) focus on drilling
operations in the Gulf Coast region and (v) maintain an effective cost control
system. Besides developing a competitive advantage through its extensive
knowledge of the geology and local drilling conditions in the Gulf Coast
region, Grey Wolf has also established long-term relationships with most of the
oil and gas operators in the region. Grey Wolf believes that its competitive
advantage derives primarily from its experienced management team and work force
and its fleet of large rigs. Grey Wolf provides training and safety programs to
help retain a quality work force.
Management of Grey Wolf believes that its ability to increase its share of
the Gulf Coast drilling business will depend on its ability to acquire
additional drilling rigs at reasonable cost, but that Grey Wolf's access to
funds to make such acquisitions is basically limited to funds generated from
its operations unless it were to obtain funds from an offering of its equity
securities. With the assistance of Jefferies, Grey Wolf has explored several
strategic alternatives. Management has concluded that the Merger affords Grey
Wolf the best means of realizing shareholder value and positioning Grey Wolf to
respond to changing conditions in the drilling industry. See "The Merger--Grey
Wolf's Reasons for the Merger".
DRILLING RIG FLEET
Grey Wolf's principal operating assets are its fleet of 18 deep capacity
land drilling rigs, related equipment and vehicles. Each of Grey Wolf's 18
operational rigs is currently working in either South Louisiana or in the Texas
Gulf Coast. Certain information concerning Grey Wolf's rig fleet is set forth
in the table below:
58
<PAGE> 66
GREY WOLF DRILLING COMPANY
RIG FLEET
<TABLE>
<CAPTION>
RATED
DRILLING
RIG DRIVE DEPTH
NUMBER DRAWWORKS SYSTEM HORSEPOWER (FEET) STATUS
- --------- ------------------------------- ------------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C>
1 Continental-Emsco Electric C-II Diesel 2,000 25,000 Working
electric
2 National 1320 UE Diesel 2,000 25,000 Working
electric
3 National 110 M Mechanical 2,000 18,000 Working
4 National 1320 UE Diesel 2,000 25,000 Working
electric
5 Continental-Emsco Electric C-II Diesel 2,000 25,000 Working
electric
6 Continental-Emsco Electric C-II Diesel 2,000 25,000 Working
electric
7 Continental-Emsco Electric C-II Diesel 2,000 25,000 Working
electric
8 Continental-Emsco Electric C-II Diesel 2,000 25,000 Working
electric
9 Continental-Emsco Electric C-I Mechanical 2,000 20,000 Working
10 National 110 M Mechanical 2,200 18,000 Working
11 National 110 UE SCR 1,500 16,000 Working
12 Oilwell 760 E SCR 1,000 14,000 Working
13 Oilwell 760 E SCR 1,000 14,000 Working
14 Oilwell 860 M Mechanical 1,400 20,000 Working
15 Continental-Emsco Electric C-I-II Diesel 2,000 20,000 Working
electric
16 Continental-Emsco Electric C-I-II Diesel 2,000 20,000 Working
electric
17 Oilwell 840 E SCR 1,400 20,000 Working
18 National 1320 UE SCR 2,000 25,000 Working
</TABLE>
BUSINESS AND OPERATIONS
Grey Wolf provides onshore contract drilling services for independent oil
and gas operators and major oil companies. It provides its services primarily
in the Gulf Coast region of the United States, where it has operated for
approximately 30 years. Grey Wolf owns and operates a fleet of 18 onshore
drilling rigs capable of drilling to depths of 14,000 to 25,000 feet. As of
April 15, 1997, Grey Wolf was operating eight rigs in South Louisiana and 10
rigs in Texas.
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<PAGE> 67
The following table provides data on Grey Wolf's rig operations during the
five-year period ending October 31, 1996:
<TABLE>
<CAPTION>
AVERAGE #
NUMBER OF ANNUAL WELLS
YEAR OPERATING RIGS % UTILIZATION DRILLED
- --------- ---------------- --------------- ---------
<S> <C> <C> <C>
1992 16 90.0% 107
1993 16 90.9 112
1994 16 95.6 93
1995 17 91.2 96
1996 17 95.1 113
</TABLE>
Grey Wolf provides its contract drilling services to independent operators
as well as major oil companies. Such services are generally offered based on
contracts that are charged for by the day ("daywork") or by the foot
("footage"), with the rate of billing dependent on the complexity of
operations, on-site drilling conditions, type of equipment used and the
anticipated duration of the work to be performed. Grey Wolf also works on a
turnkey basis whereby Grey Wolf assumes the risks of drilling a well to an
agreed-upon depth and is paid a fixed fee for the completion of the well to
such depth. Turnkey contracts involve greater risk of potential drilling
problems in completing the contract, but afford an opportunity to earn a higher
return than would be available normally on a straight daywork or footage basis
if the contract can be completed successfully without complications. During the
fiscal year ended October 31, 1996, approximately 48% of Grey Wolf's gross
income from drilling operations was generated from daywork contracts, 10% from
footage contracts and 42% from turnkey contracts.
As of April 15, 1997, all of Grey Wolf's rigs were working at an average
dayrate in excess of $7,500 per day. In addition, Grey Wolf's rigs are
currently committed to work 60 additional jobs. Grey Wolf's rigs are currently
committed further ahead, and at increasingly higher dayrates, than at any time
since 1981.
From time to time in the past, industry-wide shortages of supplies,
services, skilled personnel and equipment necessary to conduct Grey Wolf's
business, including drill pipe, have occurred, and such shortages could recur,
although currently Grey Wolf is not experiencing such shortages.
Drilling operations are supervised from Grey Wolf's corporate office
located in Houston, Texas and its operational yard in Duson, Louisiana.
CUSTOMERS
Contracts for drilling services are usually obtained as a result of direct
negotiation or through competitive bidding by Grey Wolf with its customers.
Such contracts are generally terminable on short notice prior to commencement
of operations and obligate Grey Wolf, after commencement of the contract, to
advance certain costs such as wages, materials and supplies, tubular goods and
incidental purchases of drilling rig equipment. Except to the extent that Grey
Wolf is required to advance these costs, however, it does not generally assume
any of the usual capital risks associated with oil and gas exploration unless
it undertakes to perform services under a turnkey drilling arrangement.
During the fiscal year ended October 31, 1996, Texas Meridian Resources
Exploration, Inc. and Union Pacific Resources Company accounted for
approximately 12% and 11%, respectively, of Grey Wolf's operating revenue.
During fiscal 1996 Grey Wolf's 10 largest customers accounted for approximately
53% of its operating revenue.
COMPETITION
The drilling industry in the Gulf Coast region of the United States is
highly competitive. Generally, competition involves numerous factors including
price, the experience of the work force, customer service, equipment
availability and suitability, efficiency, operating integrity, reputation,
industry standing and customer relations, with price being the most significant
factor with most customers. Competition is primarily on a regional basis and
may vary significantly from one region to the next. Demand for drilling
services is also dependent on the exploration and development programs of oil
and gas companies, which are in turn influenced by the financial condition of
the companies, by general economic conditions, including prices of natural gas
and crude oil, and from time to time by world politics and internal policies
(such as tax laws).
60
<PAGE> 68
Grey Wolf faces competition from many other drilling contractors both
larger and smaller than itself, many of which are companies with greater
financial resources than those of Grey Wolf. Although a large portion of the
total available drilling business in the Gulf Coast region is currently awarded
on a bid basis, Grey Wolf believes that it has obtained contracts with some of
its major customers based on Grey Wolf's quality of service, rather than solely
based on price. Although historically depressed conditions in the industry have
resulted in consolidation, management of Grey Wolf believes that competition
will continue to be intense.
EMPLOYEES AND EMPLOYEE RELATIONS
Grey Wolf employs approximately 425 individuals. The majority of Grey
Wolf's employees are compensated on an hourly basis. The following table
categorizes Grey Wolf's employees by function and compensation basis.
<TABLE>
<CAPTION>
NUMBER OF
FUNCTION EMPLOYEES SALARIED/CONTRACT
-------- --------- -----------------
<S> <C> <C>
Officers and managers....................... 10 Salaried
Administrative and clerical................. 10 Salaried
Mechanics................................... 21 Hourly
Truck drivers and swampers.................. 4 Hourly
Toolpushers................................. 40 Salaried
Rig hands................................... 340 Hourly
---
Total.................................... 425
===
</TABLE>
None of Grey Wolf's employees are subject to collective bargaining
agreements, and management believes that its employee relations are good. Grey
Wolf has not experienced a high turnover rate relative to other companies in
its industry. Many of its employees have more than ten years of service with
Grey Wolf, and several have more than twenty years of service.
Grey Wolf provides a paid life and health insurance program for all
employees. Grey Wolf pays for substantially all of the employee's coverage and
part of the cost for dependents. Grey Wolf also provides standard vacation,
sick pay and holiday benefits for salaried employees.
LEGAL PROCEEDINGS
TEPCO, Inc. vs. Grey Wolf Drilling Company, Cause No. 96-49194, in the
164th Judicial District Court of Harris County, Texas. In its petition filed in
September 1996, the plaintiff alleges that Grey Wolf breached contractual
obligations it owed to TEPCO, Inc. by failing to drill an oil and gas well or
wells for TEPCO in the Treasure Isle Field, located in Galveston, Texas. The
plaintiff also alleges that it lost rights under an oil and gas lease it had
under an alleged agreement with Mobil Producing Texas and New Mexico, Inc.,
causing plaintiff to suffer money damages, which it values in its petition as
"many tens of millions of dollars." Grey Wolf believes that TEPCO's claim is
entirely without merit and intends to vigorously defend this action. Grey Wolf
has filed a counterclaim in the lawsuit for approximately $250,000 for recovery
of unpaid statements, and interest, for services rendered or materials provided
by Grey Wolf in connection with the drilling of two wells for TEPCO, Inc.,
which were completed before Grey Wolf ceased performing work for TEPCO, Inc.
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<PAGE> 69
MANAGEMENT OF GREY WOLF
Set forth below is certain information with respect to the executive
officers and directors of Grey Wolf.
<TABLE>
<CAPTION>
NAME AGE OCCUPATION
- ---- --- ----------
<S> <C> <C>
J. K. B. Nelson............ 69 President and a Director of Grey Wolf
B. Emanis.................. 64 Vice President-Operations of Grey Wolf
T. Ferguson................ 50 Vice President-Marketing of Grey Wolf
B. Brannon................. 61 Vice President-Engineering of Grey Wolf
J. Peterson................ 42 Principal Accounting Officer of Grey Wolf
Sheldon Lubar.............. 67 Director of Grey Wolf; Chairman of Lubar & Co.;
Director of Christiana Companies, Inc.,
Ameritech Corporation, Massachusetts Mutual
Life Insurance Company, Firstar Corporation,
MGIC Investment Corp. and Energy Ventures, Inc.
Robert Probst.............. 53 Director of Grey Wolf; Executive Vice President
and Director of Tamarack Petroleum Company,
Inc.; Director of Active Investor
Management, Inc. and Seistech Development
Uriel Dutton............... 66 Director of Grey Wolf; Partner, Fulbright &
Jaworski L.L.P
</TABLE>
Each of the directors of Grey Wolf has served in such capacity for more
than the past five years. Each of the persons named in the foregoing table has
engaged in the occupation set forth therein for more than the past five years.
Mr. Nelson joined Grey Wolf in 1960 and has served as President and Chief
Executive Officer of Grey Wolf since 1978. He began his career in the oil field
drilling industry as a roughneck in 1946. Mr. Nelson holds B.S. Degrees in
Mechanical and Petroleum Engineering from Texas A&M University.
For the calendar year ended December 31, 1996, Mr. Nelson's compensation
from Grey Wolf was $176,126, of which $138,773 was salary and the balance was
the value of personal benefits.
William T. Donovan, together with Mr. Nelson, will be appointed to DI's
board of directors if the Merger is consummated. Since 1980, Mr. Donovan has
been a Principal and Managing Director of Lubar & Co., a private investment and
venture capital firm. Mr. Donovan also serves as Executive Vice President and
Chief Financial Officer of Christiana Companies, Inc. and as a director of
various private industrial companies. Prior to joining Lubar & Co., Mr. Donovan
was an officer with Manufacturers Hanover Trust from 1976 to 1980, where he
specialized in merger and acquisition financing. Mr. Donovan holds B.S. and
M.B.A. degrees from the University of Notre Dame.
62
<PAGE> 70
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS OF GREY WOLF
Directors and Management. The following table sets forth the number of
shares of GW Wolf Common Stock beneficially owned on March 31, 1997 by each
director of Grey Wolf, by Mr. Donovan and by all directors and Mr. Donovan as a
group. Unless otherwise noted, each individual has sole voting and investment
power over all shares indicated as beneficially owned by him.
<TABLE>
<CAPTION>
SHARES OF GW COMMON STOCK PERCENT OF DI
BENEFICIALLY OWNED COMMON STOCK
------------------------- OWNED AFTER THE
NAME OF BENEFICIAL OWNER NUMBER PERCENT MERGER(1)
------------------------ --------- ------- ---------------
<S> <C> <C> <C>
Sheldon Lubar .......................... 1,068,552(2) 35.8% 3.3%
Robert Probst .......................... 430,985(3) 14.4% 1.3%
Uriel Dutton ........................... -- -- *
J. K. B. Nelson ........................ 1,000,371(4) 33.5% 3.1%
William T. Donovan ..................... 73,342(5) 2.5% *
All directors and Mr. Donovan as a
group (five persons)................. 2,573,250 86.2% 8.0%
</TABLE>
- -------------
* Less than 1%.
(1) Assumes that the stock portion of the Merger consideration consists of
14.0 million shares of DI Common Stock. and that the total number of
shares of DI Common Stock outstanding at April 3, 1996, 137,524,034
shares, remains unchanged until the Merger. See "The Merger Agreement and
Related Contracts -- Conversion of Shares of GW Common Stock."
(2) Consists of 254,549 shares held by Mr. Lubar and his wife, 629,585 shares
held by trusts for the benefit of Mr. Lubar's descendants and 184,418
shares held by associates (excluding Mr. Donovan) of Mr. Lubar. Does not
include the 73,342 shares held by Mr. Donovan, an associate of Mr. Lubar,
because Mr. Donovan's shares are reported separately in the table. Mr.
Lubar disclaims beneficial ownership of the shares held by such associates.
(3) Consists of 113,173 shares held by Tamarack Petroleum Co., Inc., of which
Mr. Probst is Executive Vice President and 317,812 shares held by
associates of Mr. Probst. Tamarack Petroleum Co., Inc. and Mr. Probst
disclaim beneficial ownership of the shares held by such associates.
(4) Includes 667,000 shares held by Felicity Ventures, Ltd., a limited
partnership comprised of Mr. Nelson and members of his family.
(5) Information is included for Mr. Donovan because, if the Merger is
consummated, he, together with Mr. Nelson, will be appointed to the Board
of Directors of DI. Includes 5,726 shares held by a limited partnership
comprised of Mr. Donovan and members of his family.
Except as indicated in the foregoing table, no person owns of record or,
to the knowledge of Grey Wolf, beneficially, more than five percent of the
outstanding GW Common Stock.
See "The Merger--Interest of Certain Persons in the Merger" for
information regarding the interests of certain persons in the Merger.
DIVIDENDS AND MARKET FOR GREY WOLF STOCK
There is no public market for the GW Common Stock. Grey Wolf has not paid
any dividends on its Common Stock.
63
<PAGE> 71
GREY WOLF'S MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements of Grey Wolf included elsewhere in this Prospectus/Proxy Statement.
INDUSTRY OVERVIEW
Grey Wolf is a contract land drilling company, operating primarily in
south Louisiana and the upper Texas Gulf Coast, and accordingly is subject to
substantially the same industry conditions and risks with respect to operations
in the United States as DI.
FINANCIAL CONDITION AND LIQUIDITY
Grey Wolf primarily funds its activities through a combination of cash
generated from operations and borrowings under credit facilities with a bank.
Grey Wolf's primary uses of cash are cash used in operations, capital and
maintenance expenditures related to drill pipe and drilling rigs and debt
service on facilities with a bank and under a capital lease obligation.
The following table summarizes Grey Wolf's Financial Position at January
31, 1997, and October 31, 1996 and 1995.
<TABLE>
<CAPTION>
JANUARY 31, 1997 OCTOBER 31, 1996 OCTOBER 31, 1995
------------------ ----------------- -----------------
AMOUNT % AMOUNT % AMOUNT %
------- ------- ------- ------- ------- -------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Working capital ............... $ 1,784 9 $ 1,435 7 $ 1,712 10
Property and equipment, net ... 18,426 90 17,836 91 15,127 89
Other noncurrent assets ....... 345 1 345 2 129 1
------- ------- ------- ------- ------- -------
Total ................ $20,555 100 $19,616 100 $16,968 100
======= ======= ======= ======= ======= =======
Long-term debt ................ $ 1,484 7 $ 1,971 10 $ 4,815 28
Other long-term liabilities ... 3,314 16 3,259 17 1,181 7
Shareholders' equity .......... 15,757 77 14,386 73 10,972 65
------- ------- ------- ------- ------- -------
Total ................ $20,555 100 $19,616 100 $16,968 100
======= ======= ======= ======= ======= =======
</TABLE>
The most significant changes in Grey Wolf's financial position for October
31, 1995 to October 31, 1996 are the increases in property and equipment, other
long-term obligations and shareholders' equity and the decrease in long-term
debt. The increase in property and equipment is primarily the result of normal
capital improvements to drilling rigs and the acquisition of drill pipe for use
in operations. Other long-term obligations are related to increased deferred
income taxes and obligations of approximately $0.4 million under certain
post-retirement contracts with two employees. The increase in shareholders'
equity is primarily related to net income for 1996. The decrease in long-term
debt reflects repayments made from increased cash flows from operations. As of
October 31, 1996, Grey Wolf had $4.2 million available under a $4.5 million
revolving credit facility due in March 1998 and $3.0 million available under a
capital credit facility which terminates in June 1998 and is due in March 2001.
Grey Wolf's liquidity at any time and the amount of cash available for
operations and reinvestment is affected by a number of factors including: (i)
demand for and utilization of Grey Wolf's operating drilling rigs; (ii) prices
received for daywork, footage and turnkey contracts; (iii) costs to maintain
existing drilling rigs and maintenance and replacement of drill pipe and (iv)
the amount of bank borrowings and the extent of repayment of existing
indebtedness.
Grey Wolf has not paid any cash dividend on common stock for the last five
years. Furthermore, Grey Wolf's credit agreements with a bank prohibit the
payment of dividends without the consent of the bank.
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<PAGE> 72
RESULTS OF OPERATIONS
The following tables highlight rig days worked, revenues and operating
expenses, for Grey Wolf's operations.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED JANUARY 31, FOR THE YEARS ENDED OCTOBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS EXCEPT PER DAY INFORMATION)
<S> <C> <C> <C> <C> <C>
Rig days worked ................ 1,526 1,428 5,915 5,452 5,585
Rig utilization ................ 98% 91% 95% 91% 96%
Average revenue per day ........ $10,395 $ 9,637 $ 9,558 $ 8,522 $ 9,085
Contract drilling revenues ..... $15,863 $13,761 $56,537 $46,463 $50,740
Drilling operations expenses ... 12,219 10,960 44,518 38,395 42,914
------- ------- ------- ------- -------
Gross profit ................... $ 3,644 $ 2,801 $12,019 $ 8,068 $ 7,826
======= ======= ======= ======= =======
Gross profit percentage ........ 23% 20% 21% 17% 15%
======= ======= ======= ======= =======
</TABLE>
Grey Wolf is primarily engaged in the contract drilling industry in south
Louisiana and the Texas Gulf Coast. Grey Wolf's operations are conducted
through daywork and turnkey and to a lesser extent footage based drilling
contracts. For each of the three years ended October 31, 1996, approximately
one-third of its contract drilling revenues were generated from turnkey
drilling arrangements. To limit the exposure on turnkey contracts, Grey Wolf
has a policy to accept only turnkey contracts that meet certain criteria,
including the existence of a sufficient number of reference wells. However,
even with such a conservative acceptance policy, turnkey contracts entail
significantly more risk to profitability than day rate contracts due to the
limit on ultimate revenue to be received and the risk of inability to complete
the well as required to receive payment.
COMPARISON OF THE THREE MONTH PERIOD ENDED JANUARY 31, 1997 AND 1996
Contract drilling revenues increased approximately $2.1 million to $15.9
million for the three-month period ended January 31, 1997, compared to $13.8
million for the three-month period ended January 31, 1996. The increase is
primarily related to an overall increase of approximately 7% in rig utilization
(98% in 1997 and 91% in 1996) and a 10% increase in average day rates received
during 1997 versus 1996 due to an improvement in the domestic contract drilling
market.
Drilling expenses increased approximately $1.2 million to $12.2 million
for the three-month period ended January 31, 1997, compared to $11.0 million
for the three-month period ended January 31, 1996. The increase is primarily
related to the overall increase in rig utilization and an increase in direct
labor costs due to pay rate adjustments which took effect during April 1996.
Gains on sales of assets primarily relate to recoveries from contractors
or contractor's insurance carriers for drill pipe and collars which are damaged
or lost in performing drilling operations, net of the costs to purchase or
repair damaged or lost drill pipe or collars. The recoveries in any year are
dependent upon the level of drill pipe and collars damaged or lost and
resulting recoveries thereon.
Income taxes increased approximately $0.3 million to $0.9 million for the
three-month period ended January 31, 1997, compared to $0.6 million for the
three-month period ended January 31, 1996. The increase primarily relates to
the increase in income before income taxes.
COMPARISON OF FISCAL YEAR OCTOBER 31, 1996 AND 1995
Contract drilling revenues increased approximately $10.0 million to $56.5
million for the year ended October 31, 1996, compared to $46.5 million for the
year ended October 31, 1995. The increase is primarily related to: (i) an
overall increase of approximately 4% in rig utilization (95% in 1996 and 91% in
1995) due to an improvement in the domestic contract drilling market, (ii) an
increase in overall turnkey operations and revenues, (iii) a slight increase in
the average day rate received during 1996 versus 1995 due to an improvement in
the domestic contract drilling market and (iv) the placement in service of a
drilling rig in June of 1995, which was operating for the entire year of 1996.
65
<PAGE> 73
Drilling expenses increased approximately $6.1 million to $44.5 million
for the year ended October 31, 1996, compared to $38.4 for the year ended
October 31, 1995. The increase is primarily related to the overall increase in
rig utilization, the increase in turnkey operations and the placement in
service of a drilling rig in June 1995 discussed above and an increase in
direct labor costs due to pay rate adjustments which took effect during April
1996. Additionally, in 1995 there was approximately $0.6 million of gross
margin elimination related to the recoupment of restoration costs on certain
drilling rigs under an operating lease arrangement which were acquired under a
capital lease in March 1995. See Note 8 to the Grey Wolf financial statements
included elsewhere in this Prospectus/Proxy Statement.
Depreciation and amortization expense increased approximately $0.8 million
to $2.2 million for the year ended October 31, 1996, compared to $1.4 million
for the year ended October 31, 1995. The increase is primarily related to
capital additions during 1996 and 1995, including the acquisition of certain
rigs under a capital lease in March 1995 for $3.0 million.
General and Administrative expenses increased approximately $1.2 million
to $4.0 million for the year ended October 31, 1996, compared to $2.8 million
for the year ended October 31, 1995. During 1996, Grey Wolf recorded
nonrecurring charges of $0.4 million related to retirement contracts with two
employees. The remainder of the increase relates to various less significant
increases including; professional and legal services related to proposed
offering activities and the resulting definitive agreement with DI Industries,
Inc. and a lawsuit filed against an insurance carrier which was subsequently
settled, operations of real estate acquired in south Texas during 1996,
increases in various insurance costs and claims under a self-insured medical
plan and office related pay rate adjustments which took effect during April
1996.
Interest expense increased approximately $0.2 million to $0.4 million for
the year ended October 31, 1996, compared to $0.2 million for the year ended
October 31, 1995. The increase is related to a $0.2 million increase related to
a capital lease obligation to acquire certain drilling rigs, partially offset
by lower average monthly indebtedness on a revolving credit facility and
certain notes and shareholder loans which were repaid in February 1996.
Gains on disposition of assets primarily relate to recoveries from
contractors or contractor's insurance carriers for drill pipe and collars which
are damaged or lost in performing drilling operations, net of the costs to
purchase or repair damaged or lost drill pipe or collars. The recoveries in any
year are dependent upon the level of drill pipe and collars damaged or lost and
resulting recoveries thereon. In 1995, the amount includes $0.5 million related
to insurance recoveries, under a Grey Wolf policy, related to property damage
to one of Grey Wolf's rigs.
Income taxes increased $0.6 million to $2.3 million for the year ended
October 31, 1996, compared to $1.7 million for the year ended October 31, 1995.
The increase is primarily related to the $1.0 million increase in income before
income taxes.
COMPARISON OF FISCAL YEAR OCTOBER 31, 1995 AND 1994
Contract drilling revenues decreased approximately $4.2 million to $46.5
million for the year ended October 31, 1995, compared to $50.7 million for the
year ended October 31, 1994. The decrease is primarily related to; (i) an
overall decrease of approximately 5% in rig utilization (91% in 1995 and 96% in
1994) and (ii) a decrease in overall turnkey operations and in average turnkey
revenues received per day, partially offset by a slight increase in the average
day rate received during 1995 versus 1994 due to an improvement in the domestic
contract drilling market.
Drilling expenses decreased approximately $4.5 million to $38.4 million
for the year ended October 31, 1995, compared to $42.9 million for the year
ended October 31, 1994. The decrease is primarily related to the overall
decrease in rig utilization and turnkey operations discussed above.
Additionally, the gross margin elimination related to the recoupment of
restoration costs on certain drilling rigs under an operating lease arrangement
was $0.6 million in 1995 as compared to $1.3 million for the year ended October
31, 1994. See Note 8 to the Grey Wolf financial statements included elsewhere
in this Prospectus/Proxy Statement.
Depreciation and amortization expense increase approximately $0.7 million
to $1.4 million for the year ended October 31, 1995, compared to $0.7 million
for the year ended October 31, 1994. The increase is primarily related to
capital additions during 1995 and 1994, including the acquisition of certain
rigs under a capital lease in March 1995 for $3.0 million.
66
<PAGE> 74
Interest expense decreased approximately $0.2 million to $0.2 million for
the year ended October 31, 1995, compared to $0.4 million for the year ended
October 31, 1994. The decrease is primarily related to retirement of certain
notes payable and shareholder loans and a lower average monthly indebtedness on
revolving credit facilities.
Gains on sales of assets primarily relate to recoveries from contractors
or contractor's insurance carriers for drill pipe and collars which are damaged
or lost in performing under drilling operations, net of the costs to purchase
or repair damaged or lost drill pipe or collars. The recoveries in any year are
dependent upon the level of drill pipe and collars damaged or lost and
resulting recoveries thereon. In 1995, the amount includes $0.5 million related
to insurance recoveries, under a Grey Wolf policy, related to property damage
to one of Grey Wolf's rigs.
Other income (expense) - other, net for the year ended October 31, 1994,
primarily relates to a refund of insurance premiums expensed in prior periods
and fees for services rendered in the organizing and rigging up of a rig owned
and to be used by a third party.
Income taxes increased $1.0 million to $1.7 million for the year ended
October 31, 1995, compared to $0.7 million for the year ended October 31, 1994.
The increase is primarily related to a smaller reversal of the deferred tax
valuation allowance in 1995 compared to 1994, and the $0.7 million increase in
income before income taxes.
67
<PAGE> 75
COMPARISON OF SHAREHOLDER RIGHTS
If the Merger is consummated, Grey Wolf shareholders will receive shares
of DI Common Stock, and the rights of such shareholders will be governed by
DI's Articles of Incorporation, as amended (the "DI Articles"), and its Bylaws,
as amended (the "DI Bylaws"). The following is a summary of material
differences between the rights of holders of DI Common Stock and the rights of
holders of GW Common Stock. As each of DI and Grey Wolf is organized under the
laws of Texas, these differences arise primarily from various provisions of the
DI Articles and DI Bylaws and the Articles of Incorporation and Bylaws of Grey
Wolf. This summary does not purport to be a complete statement of the rights of
holders of DI Common Stock and GW Common Stock under, and is qualified in its
entirety by reference to, the TBCA and the respective Articles of Incorporation
and Bylaws of DI and Grey Wolf.
AUTHORIZED CAPITAL
Grey Wolf. The authorized capital stock of Grey Wolf consists of
11,000,000 shares, 10,000,000 of which are shares of GW Common Stock, no par
value, and 1,000,000 of which are shares of Grey Wolf preferred stock, par
value $1.00 per share (the "GW Preferred Stock"). The Grey Wolf Articles of
Incorporation, as amended (the "GW Articles"), grant specific authority to the
Board of Directors to designate the preferences, conversion rights, cumulative,
relative, participating, optional or other rights, qualifications, restrictions
thereof of one or more series of Preferred Stock. As of the Record Date,
2,983,579 shares of GW Common Stock were outstanding and no shares of GW
Preferred Stock were outstanding. The holders of GW Common Stock are entitled
to such dividends as may be declared from time to time by the Board of
Directors from funds legally available therefor, and upon liquidation are
entitled to receive pro rata all assets of Grey Wolf available for distribution
to such holders.
DI. The authorized capital stock of DI consists of 301,000,000 shares,
300,000,000 of which are shares of DI Common Stock, par value $.10 per share,
and 1,000,000 of which are shares of DI Preferred Stock, par value $1.00 per
share. Of the 1,000,000 shares of DI Preferred Stock, 200,000 have been
designated as "Series A Preferred Stock." For a description of the DI capital
stock, see "Description of Capital Stock of DI" contained in DI's definitive
proxy statement for its 1996 Annual Meeting of Shareholders held August 27,
1996, incorporated herein by reference.
VOTING REQUIREMENTS AND QUORUMS OF SHAREHOLDER MEETINGS
Grey Wolf. The GW Articles provide that at any meeting of shareholders,
the holders of two-thirds of the outstanding shares of stock then issued,
outstanding and entitled to vote will constitute a quorum for the transaction
of any business. In addition, the GW Articles provide that when a quorum is
present, the affirmative vote of the holders of two-thirds of the stock
present, in person or by proxy, will be required for the acts of the
shareholders, except for the election of directors, which require the
affirmative vote of a plurality of the votes cast.
DI. The DI Bylaws provide that holders of a majority of the shares
entitled to vote, present in person or by proxy, will constitute a quorum and
further specify that the affirmative vote of a majority of the shares present
at a meeting of shareholders will decide any matter submitted to such meeting,
unless the matter is one upon which the vote of a greater number is required by
law or express provision of the DI Articles or Bylaws.
ELECTION OF DIRECTORS
Grey Wolf. The GW Articles permit the shareholders to cumulate their votes
in the election of directors. Under cumulative voting, a shareholder may
multiply the number of shares owned by the number of directors to be elected,
and cast that total number of votes in any proportion among as many nominees as
the shareholder desires.
DI. Cumulative voting by shareholders in the election of directors is
expressly denied by the DI Articles.
VACANCIES ON THE BOARD OF DIRECTORS
Grey Wolf. The GW Articles provide that the shareholders may fill
vacancies which arise on the Board of Directors, but if not filled within sixty
days after such vacancy is created, the Grey Wolf Bylaws, as amended (the "Grey
Wolf Bylaws"), provide that the remaining members of the Board of Directors may
fill any vacancy by unanimous written consent.
DI. The DI Bylaws provide that a majority of the remaining directors may
fill vacancies occurring on the Board of Directors. Because the DI Articles and
the DI Bylaws are silent as to the right of shareholders to fill vacancies
arising on the Board of Directors, the TBCA permits the shareholders of DI to
fill such vacancies.
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<PAGE> 76
NUMBER OF DIRECTORS
The Grey Wolf Bylaws provide that the number of directors may be fixed
from time to time by vote of the shareholders, whereas the DI Bylaws provide
that the number of directors may be increased or decreased by resolution of the
Board of Directors.
APPROVAL OF CERTAIN ACTIONS
Grey Wolf. The GW Articles give shareholders the exclusive right to decide
the following issues: (i) the sale, lease or exchange of a major portion of the
property or assets of the corporation and (ii) the alteration, amendment or
appeal of the bylaws or adoption of new bylaws.
DI. The DI Articles do not contain any comparable provisions. However,
unless otherwise provided by articles of incorporation, the TBCA allows a
corporation's board of directors to: (i) authorize the sale, lease, exchange or
other disposition of all, or substantially all, the property and assets of the
corporation without the authorization or consent of the shareholders, provided
that such transaction is in the usual and regular course of the business of the
corporation and (ii) amend or repeal the corporation's bylaws or adopt new
bylaws.
AMENDMENT OF BYLAWS
Grey Wolf. The Grey Wolf Bylaws vest in the shareholders the exclusive
ability to amend or repeal the Grey Wolf Bylaws, or adopt new bylaws, and
require such action to be approved by two-thirds of the outstanding stock of
the corporation entitled to vote thereon.
DI. The DI Bylaws expressly provide the Board of Directors with the
ability to amend or repeal the DI Bylaws, or adopt new bylaws and, since not
otherwise disclaimed in the DI Articles or DI Bylaws, the shareholders also are
provided such rights pursuant to the TBCA.
ACTION BY WRITTEN CONSENT OF SHAREHOLDERS
Grey Wolf. The Grey Wolf Bylaws provide that action may be taken by
written consent of the shareholders but specify that the consent or consents,
setting forth in writing the action to be taken, must be signed by all the
shareholders entitled to vote on the subject matter thereof.
DI. The DI Articles provide that any action to be taken at any annual or
special meeting of shareholders may be taken without a meeting, without prior
notice, and without a vote, if a consent or consents in writing, setting forth
the action so taken, is signed by the holder or holders of shares having not
less than the minimum number of votes that would be necessary to take such
action at a meeting at which the holders of all shares entitled to vote on the
action were present and voted.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Grey Wolf. The Grey Wolf Bylaws provide that Grey Wolf will indemnify its
directors and officers against expenses actually and necessarily incurred in
connection with the defense of any action, suit or proceeding in which such
persons are a party by reason of having been a director or officer of Grey Wolf
or, at its request, any corporation in which Grey Wolf owns shares of capital
stock or of which it is a creditor, except that no such indemnification will be
awarded to a director or officer found liable for negligence or misconduct in
the performance of such person's duty to the corporation. Grey Wolf will also
reimburse its directors and officers for the reasonable cost of settlement of
any such action, suit or proceeding if a majority of the directors not involved
in the matter find that it is in the best interest of the corporation to make
such settlement and that such director or officer was not guilty of negligence
or misconduct. The Grey Wolf Bylaws contain no provision regarding the payment
of directors' or officers' expenses in advance of the final disposition of an
action or proceeding regarding service as a director or officer of Grey Wolf.
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<PAGE> 77
DI. The DI Bylaws provide that DI will, to the fullest extent permitted by
law, indemnify each of its directors or officers against reasonable expenses,
damages, fines, penalties, judgments, amounts paid in settlement, and other
liabilities actually and reasonably incurred by such person in connection with
any proceeding to which such person is or may be a party by reason of having
served in the capacity of director or officer of DI or, at its request, any
other corporation or other entity or employee benefit plan. However, no
indemnification will be made in respect of any matter as to which such director
or officer is found liable for gross negligence, recklessness or willful
misconduct in the performance of such person's duty to the corporation. The
determination that indemnification is proper under the circumstances is to be
made by (i) the members of the Board of Directors not involved in the
proceeding, (ii) a committee designated by the Board of Directors, (iii)
special legal counsel or (iv) the shareholders. In certain cases, expenses
incurred by a director or officer in connection with participation in any
proceeding concerning such person's service as a director or officer shall be
paid by DI in advance of the final disposition of such proceeding.
LEGAL MATTERS
The legality of the shares of DI Common Stock being offered hereby will be
passed upon by Porter & Hedges, L.L.P., of Houston, Texas. Certain legal
matters pertaining to the Merger will be passed upon by Fulbright & Jaworski
L.L.P., Houston, Texas. Neither Porter & Hedges, L.L.P. nor Fulbright &
Jaworski L.L.P. has passed upon the federal or state income tax consequences of
the Merger.
EXPERTS
The opinion regarding the federal income tax consequences of the Merger
referred to in this Prospectus/Proxy Statement and elsewhere in the
Registration Statement has been rendered by Arthur Andersen LLP, independent
public accountants, and has been referred to herein in reliance upon the
authority of such firm as experts in giving said opinion.
The financial statements incorporated by reference in this
Prospectus/Proxy Statement from DI's Annual Report on Form 10-K for 1996 have
been audited by two independent accounting firms. The independent accounting
firms and the periods covered by their audits are indicated in each respective
firm's reports included in such Annual Report on Form 10-K. Such financial
statements have been so included in reliance on the reports of the two
independent accounts given on the authority of such firms as experts in
auditing and accounting.
The audited financial statements of Grey Wolf Drilling Company
included in this Prospectus/Proxy Statement to the extent and for the periods
indicated in their report have been audited by Arthur Andersen LLP, independent
public accountants, and are included herein in reliance upon the authority of
said firm as experts in accounting and auditing in giving said report.
The fairness opinion of Jefferies & Company, Inc. included in this
Prospectus/Proxy Statement has been so included in reliance upon the authority
of Jefferies & Company, Inc. as experts in investment banking.
70
<PAGE> 78
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
1996 Credit Facility ........................................................ 49
Acquisition Proposal ........................................................ 45
Additional Amount ........................................................... 41
Additional Closing Cash Consideration ................................... 38, 40
Aggregate Contingent Cash Consideration ................................. 38, 39
Aggregate Stock Consideration ............................................... 38
Allocation Factor ........................................................... 43
AMEX ..................................................................... 1, 11
August Mergers .............................................................. 50
Bank Credit Agreement ....................................................... 16
Bank Credit Facility .................................................... 16, 56
Bid Invitation .............................................................. 24
boot ........................................................................ 35
Cash Consideration .......................................................... 38
CFPS ........................................................................ 28
Claim ....................................................................... 46
Closing Cash Consideration .................................................. 38
Code ................................................................ 10, 34, 47
Collar Adjustment ............................................................ 6
Commission ................................................................... 2
Comparable Companies ........................................................ 28
Comparable Rig Acquisitions ................................................. 29
Comparable Transactions ..................................................... 28
Contingent Cash Consideration ........................................... 38, 39
continuity of interest requirement .......................................... 35
Damages ..................................................................... 46
daywork ..................................................................... 60
DI ................................................................. 1, 2, 5, 54
DI Common Stock ........................................................... 1, 2
DI Common Stock Price .................................................... 6, 40
Diamond M ................................................................... 49
Dissenting Shareholders ...................................................... 7
Dissenting Shares ........................................................... 48
EBITDA ...................................................................... 28
Effective Time ........................................................... 6, 38
Employee Trust ........................................................... 7, 43
EPS ......................................................................... 28
Escrow Agent ............................................................. 7, 39
Escrow Agreement ............................................................ 39
Exchange Act ................................................................. 2
Exchange Agent .......................................................... 10, 41
Flournoy .................................................................... 49
footage ..................................................................... 60
Grey Wolf ................................................................. 1, 2
Grey Wolf Bylaws ............................................................ 68
Grey Wolf Drilling Company ............................................... 6, 38
Grey Wolf Employees ......................................................... 43
GW Articles.................................................................. 68
GW Common Stock............................................................ 2, 1
GW Letter of Transmittal..................................................... 41
GW Preferred Stock........................................................... 68
HSR Act ......................................................... 10, 33, 34, 47
Indemnification Agreements .................................................. 46
Indemnified Parties ......................................................... 46
IRS ..................................................................... 19, 34
Jefferies .................................................................... 7
Jefferies Opinion ........................................................... 27
LRAC ........................................................................ 50
Meeting ................................................................... 1, 2
Merger ....................................................................... 2
Merger Agreement .......................................................... 1, 2
Merger Consideration ........................................................ 38
Mesa ........................................................................ 50
NOLs ........................................................................ 19
Plan ........................................................................ 43
Purchaser ................................................................. 1, 2
Record Date .............................................................. 6, 21
Registration Statement ................................................... 2, 42
Required Ratio ....................................................... 6, 40, 41
Required Ratio Adjustment .................................................... 6
RTO ......................................................................... 50
Section 382 Limitation ...................................................... 19
Securities Act ............................................................... 1
Senior Note Offering ........................................................ 57
Senior Notes ................................................................ 11
Senior Notes Prospectus .................................................. 3, 11
Series A Preferred Stock .................................................... 68
Settlement Payment .......................................................... 40
Share Fraction .......................................................... 38, 39
Shelf Registration Statement ................................................ 42
Somerset .................................................................... 50
Stock Consideration ......................................................... 38
Stock Value ................................................................. 41
Stockholder Representatives ................................................. 39
Tax Counsel ................................................................. 34
TBCA ................................................................ 10, 31, 38
TEPCO Lawsuit ............................................................... 39
Trust Agreement ............................................................. 43
Trustee .................................................................. 7, 43
Voting and Support Agreements ............................................ 9, 44
Western ..................................................................... 50
</TABLE>
71
<PAGE> 79
INDEX TO GREY WOLF FINANCIAL STATEMENTS
GREY WOLF DRILLING COMPANY
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants ................................. F-2
Balance Sheets as of January 31, 1997 (unaudited) and
October 31, 1996 and 1995 .............................................. F-3
Statements of Operations for the Three-Month Periods Ended
January 31, 1997 and 1996 (unaudited) and the Years Ended
October 31, 1996, 1995 and 1994 ........................................ F-4
Statements of Shareholders' Investment for the Three-Month
Period Ended January 31, 1997 (unaudited) and the Years
Ended October 31, 1996, 1995 and 1994 .................................. F-5
Statements of Cash Flows for the Three-Month Periods Ended
January 31, 1997 and 1996 (unaudited) and the Years Ended
October 31, 1996, 1995 and 1994 ........................................ F-6
Notes to Financial Statements ............................................ F-7
</TABLE>
F-1
<PAGE> 80
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Grey Wolf Drilling Company:
We have audited the accompanying balance sheets of Grey Wolf Drilling Company
(a Texas corporation) as of October 31, 1996 and 1995, and the related
statements of operations, shareholders' investment and cash flows for each of
the three years in the period ended October 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Grey Wolf Drilling Company as
of October 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended October 31, 1996, in
conformity with generally accepted accounting principles.
As explained in Note 2 to the financial statements, the Company has given
retroactive effect to the change in accounting for turnkey and footage drilling
contracts from the completed-contract method to the percentage-of-completion
method.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Houston, Texas
January 13, 1997
F-2
<PAGE> 81
GREY WOLF DRILLING COMPANY
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 31,
JANUARY 31, ------------------------
1997 1996 1995
---------- ---------- ----------
(UNAUDITED) (RESTATED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash ........................................................... $ 899 $ 482 $ 62
Accounts receivable, net of allowance for uncollectible
accounts of $63, $169, and $134, respectively ............... 7,334 7,639 7,371
Contracts in progress ............................................. 518 2,238 437
Prepaid expenses .................................................. 1,524 1,089 778
---------- ---------- ----------
Total current assets ........................................ 10,275 11,448 8,648
---------- ---------- ----------
Property and equipment, at cost:
Drilling rigs and equipment .................................... 47,316 46,256 43,558
Drill pipe and collars ......................................... 6,267 6,141 4,592
Other .......................................................... 2,143 2,144 1,594
---------- ---------- ----------
55,726 54,541 49,744
Less: accumulated depreciation and amortization ................... (37,300) (36,705) (34,617)
---------- ---------- ----------
Net property and equipment .................................. 18,426 17,836 15,127
---------- ---------- ----------
Other assets ...................................................... 345 345 129
---------- ---------- ----------
Total assets ................................................ $ 29,046 $ 29,629 $ 23,904
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Current maturities of long-term debt ........................... $ 8 $ 8 $ 744
Accounts payable and accrued liabilities ....................... 8,483 10,005 6,192
---------- ---------- ----------
Total current liabilities ................................... 8,491 10,013 6,936
---------- ---------- ----------
Post-retirement benefits obligation ............................... 381 385 --
Long-term debt, net of current maturities ......................... 1,484 1,971 4,815
Deferred income taxes ............................................. 2,933 2,874 1,181
Commitments and contingencies (Note 7)
Shareholders' investment:
Common stock, no par value; 10,000,000 shares authorized;
2,987,379 shares issued; and 2,983,579 shares outstanding ... 6,553 6,553 6,553
Deferred compensation .......................................... (25) (34) (68)
Treasury stock, 3,800 shares ................................... (8) (8) (8)
Retained earnings .............................................. 9,237 7,875 4,495
---------- ---------- ----------
Total shareholders' investment .............................. 15,757 14,386 10,972
---------- ---------- ----------
Total liabilities and shareholders' investment .............. $ 29,046 $ 29,629 $ 23,904
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 82
GREY WOLF DRILLING COMPANY
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31, YEAR ENDED OCTOBER 31,
-------------------- --------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(UNAUDITED) (RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C>
Revenues:
Contract drilling ...................... $ 15,863 $ 13,761 $ 56,537 $ 46,463 $ 50,740
Costs and expenses:
Drilling operations .................... 12,219 10,960 44,518 38,395 42,914
Depreciation and amortization .......... 626 453 2,163 1,425 745
General and administrative ............. 974 977 4,036 2,792 2,816
-------- -------- -------- -------- --------
Total costs and expenses ............ 13,819 12,390 50,717 42,612 46,475
-------- -------- -------- -------- --------
Operating income .......................... 2,044 1,371 5,820 3,851 4,265
-------- -------- -------- -------- --------
Other income (expense):
Gain on disposition of assets .......... 235 133 368 1,223 --
Interest income ........................ 8 1 2 43 44
Interest expense ....................... (42) (113) (394) (242) (431)
Provision for uncollectible accounts
receivable .......................... (41) (8) (217) (374) (397)
Other, net ............................. 66 49 66 54 397
-------- -------- -------- -------- --------
226 62 (175) 704 (387)
-------- -------- -------- -------- --------
Income before income taxes ................ 2,270 1,433 5,645 4,555 3,878
Provision for income taxes ................ 908 572 2,265 1,669 686
-------- -------- -------- -------- --------
Net income ................................ $ 1,362 $ 861 $ 3,380 $ 2,886 $ 3,192
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 83
GREY WOLF DRILLING COMPANY
STATEMENTS OF SHAREHOLDERS' INVESTMENT
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DEFERRED
COMMON RETAINED COMPEN- TREASURY
STOCK EARNINGS SATION STOCK TOTAL
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, October 31, 1993, as previously reported ... $ 6,553 $ (1,686) $ (136) $ -- $ 4,731
Adjustment for the cumulative effect of
retroactively applying the percentage-of-
completion method of accounting for turnkey
and footage contracts (Note 2) ................ -- 103 -- -- 103
-------- -------- -------- -------- --------
Balance, October 31, 1993, as restated .............. 6,553 (1,583) (136) -- 4,834
Net income, as restated .......................... -- 3,192 -- -- 3,192
Acquisition of treasury shares ................... -- -- -- (8) (8)
Deferred compensation earned ..................... -- -- 34 -- 34
-------- -------- -------- -------- --------
Balance, October 31, 1994 ........................... 6,553 1,609 (102) (8) 8,052
Net income, as restated .......................... -- 2,886 -- -- 2,886
Deferred compensation earned ..................... -- -- 34 -- 34
-------- -------- -------- -------- --------
Balance, October 31, 1995 ........................... 6,553 4,495 (68) (8) 10,972
Net income ....................................... -- 3,380 -- -- 3,380
Deferred compensation earned ..................... -- -- 34 -- 34
-------- -------- -------- -------- --------
Balance, October 31, 1996 ........................... 6,553 7,875 (34) (8) 14,386
Net income ....................................... -- 1,362 -- -- 1,362
Deferred compensation earned ..................... -- -- 9 -- 9
-------- -------- -------- -------- --------
Balance, January 31, 1997 (unaudited) ............... $ 6,553 $ 9,237 $ (25) $ (8) $ 15,757
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 84
GREY WOLF DRILLING COMPANY
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31, YEAR ENDED OCTOBER 31,
-------------------- --------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(UNAUDITED) (RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $ 1,362 $ 861 $ 3,380 $ 2,886 $ 3,192
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................ 626 453 2,163 1,425 745
Rig restoration costs recouped through operations .... -- -- -- 633 1,303
Restricted stock compensation earned ................. 9 9 34 34 34
Gains on dispositions of assets ...................... (235) (133) (368) (1,223) --
Deferred income taxes ................................ 59 572 1,693 1,240 487
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ........... 305 (136) (334) 181 (1,912)
(Increase) decrease in contracts in progress ......... 1,720 (2,497) (1,801) 1,469 (738)
(Increase) decrease in prepaid expenses .............. (435) (82) (311) 1,263 24
Increase (decrease) in accounts payable and
accrued liabilities ............................... (1,522) 3,445 3,813 (2,536) (824)
Increase (decrease) in post-retirement benefits
obligation ........................................ (4) 98 345 -- --
(Increase) decrease in long-term equipment lease
collateral ........................................ -- -- -- 151 (151)
-------- -------- -------- -------- --------
Net cash provided by operating activities ....... 1,885 2,590 8,614 5,523 2,160
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment ............ 242 213 467 1,288 --
Property and equipment additions ......................... (1,223) (1,322) (4,747) (4,222) (1,180)
Advances for rig restoration ............................. -- -- -- (183) (634)
Other .................................................... -- -- (111) (60) (58)
-------- -------- -------- -------- --------
Net cash used in investing activities ........... (981) (1,109) (4,391) (3,177) (1,872)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt ........................................ (487) (1,244) (3,945) (2,599) --
Accrued interest on capital lease obligation ............. -- 36 142 -- --
Acquisition of treasury stock ............................ -- -- -- -- (8)
-------- -------- -------- -------- --------
Net cash used in financing activities ........... (487) (1,208) (3,803) (2,599) (8)
-------- -------- -------- -------- --------
INCREASE (DECREASE) IN CASH ................................. 417 273 420 (253) 280
CASH, beginning of period ................................... 482 62 62 315 35
-------- -------- -------- -------- --------
CASH, end of period ......................................... $ 899 $ 335 $ 482 $ 62 $ 315
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest ................. $ 182 $ 61 $ 245 $ 249 $ 487
======== ======== ======== ======== ========
Cash paid during the period for income taxes ............. $ -- $ -- $ 430 $ 479 $ 79
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 85
GREY WOLF DRILLING COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND NATURE OF OPERATIONS
Grey Wolf Drilling Company (the Company) is a Texas corporation with
offices in Houston, Texas, and Lafayette, Louisiana. The Company operates land
drilling rigs which are used in contract drilling operations primarily in
Louisiana and Texas.
The Company's results of operations and its financial condition have
historically been adversely affected by the depression in the domestic oil and
gas exploration industry which commenced in 1982. This market condition
resulted in depressed rates received for contract drilling services and reduced
the number of active rigs in domestic drilling operations on an industry-wide
basis. The Company had profitable results between 1990 and 1996 (excluding
1993), after a prolonged period of negative results (1982 - 1989).
Demand for drilling equipment is dependent on the exploration and
development programs of oil and gas companies, which are in turn influenced by
the financial conditions of such companies, by general economic conditions, by
prices of oil and gas and, from time to time, by political considerations and
policies. The Company's business operations are subject to the risks associated
with a business having a limited number of customers for which it can operate
at any given time. A decrease in the drilling programs of customers in the
areas where the Company is employed may adversely affect the Company's
revenues. The contracts under which the Company operates its drilling rigs are
obtained either through individual negotiations with the customer or by
submitting proposals in competition with other drilling contractors and vary in
their terms and conditions. The Company competes with several other drilling
contractors, most of which are substantially larger than the Company and
possess appreciably greater financial and other resources. Price competition is
generally the most important factor in the drilling industry, but the technical
capability of specialized drilling equipment and personnel at the time and
place required by customers is also important. Other competitive factors
include work force experience, rig suitability, efficiency, condition of
equipment, reputation and customer relations. The Company believes that it
competes favorably with respect to these factors.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Data. The financial statements and related information as of
January 31, 1997, and for the three-month periods ended January 31, 1997 and
1996, have been prepared by the Company without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. Such statements reflect
all adjustments (consisting only of normal recurring entries) which are, in the
opinion of management, necessary for a fair presentation of the financial
position, results of operations, cash flows and changes in shareholders'
investment at and for such periods. Interim period results are not necessarily
indicative of the results to be achieved for an entire year.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Property and Equipment. The costs of drilling rigs and equipment, drill
pipe and collars, other property and equipment and major replacements which
extend the useful lives of property and equipment are capitalized. Replaced
units are retired by removing the cost and related accumulated depreciation.
Maintenance and repairs and minor replacements are expensed as incurred. Gains
or losses resulting from sales, dispositions or retirements are included in
other income.
Depreciation is provided for financial reporting purposes using the
straight-line method over estimated useful lives of seven years for drilling
rigs and equipment, three years for drill pipe and collars and from five to 30
years for other property and equipment.
Prepaid expenses. Prepaid expenses primarily consist of insurance deposits
which are held by the carrier and are released at the expiration of the
applicable policy and prepaid premiums which are amortized over the life of the
applicable policy.
F-7
<PAGE> 86
Recognition of Operating Revenues and Expenses. Operating revenues and
expenses are recognized on the basis of contract terms as follows:
Turnkey and Footage Contracts--In 1996, the Company changed its method of
accounting for turnkey and footage contracts from the completed-contract
method to the percentage-of-completion method. The
percentage-of-completion method of accounting, which is generally the
preferred accounting, was adopted to more closely approximate the concept
of accrual-based recognition of revenues and profit as earned. Under the
percentage-of-completion method, revenues, costs and estimated profits for
turnkey and footage contracts are recognized based upon the percentage of
completion of the individual contracts in progress at year-end. All
information available through the date of the financial statements is
considered in determining the estimated costs and profits upon completion
of an in-progress contract. The percentage of completion for an
in-progress contract is based upon the days worked compared to total
expected days under the performance of the contract. Any estimated
contract losses are charged to earnings when identified.
As required for a change in the method of recognizing contract revenues,
all prior years have been restated to reflect the change. The effect of the
accounting change on net income for 1996 and on net income previously reported
in 1995 and 1994 was approximately $600,000, $(199,000) and $169,000,
respectively. The balance of retained earnings as of October 31, 1993, has been
adjusted for the effect (net of income taxes) of applying retroactively the new
method of accounting.
Daywork Contracts--Revenues and expenses are recognized as the work
progresses.
Combination Contracts--Revenues and expenses are recognized in accordance
with the turnkey, footage or daywork terms of the contracts as described
above.
Income Taxes. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes," whereby deferred income taxes are provided at the balance sheet
date, based upon enacted tax laws, for all differences between the tax basis of
assets and liabilities and their respective carrying amounts for financial
statement purposes. See Note 4 for additional discussion.
Earnings Per Share. The Company is a closely held private company, thus
earnings per share amounts are not meaningful and, accordingly, not presented.
(3) LONG-TERM DEBT
The long-term debt of the Company is as follows (amounts in thousands):
<TABLE>
<CAPTION>
OCTOBER 31
JANUARY 31, -----------------------
1997 1996 1995
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Bank debt, due March 31, 1998, interest at
prime plus 1-1/4% ................................... $ 1,275 $ 300 $ 2,100
Capital lease obligation, including accrued interest ... -- 1,460 2,715
Property mortgage, due monthly through February 21,
2006, interest at 8-1/2% ............................ 217 219 --
Notes payable, due February 1, 1996, interest at 10% ... -- -- 718
Notes payable to shareholders, due
February 1, 1996, interest at 10% ................... -- -- 26
---------- ---------- ----------
1,492 1,979 5,559
Less- Current maturities ............................... 8 8 744
---------- ---------- ----------
Total long-term debt ............................ $ 1,484 $ 1,971 $ 4,815
========== ========== ==========
</TABLE>
Bank Debt. During 1991, the Company secured a $3.0 million revolving
credit facility with a bank (the Bank) which was increased to $4.5 million
effective February 28, 1995. On May 31, 1996, the Company entered into an
amended and restated loan agreement (the Agreement) with the Bank which
combined the existing $4.5 million revolving credit facility and a new $3.0
million capital credit facility (the Facilities). Under the revolving credit
facility, the maximum amount of borrowings is subject to a borrowing base
limitation of up to 75 percent of eligible accounts
F-8
<PAGE> 87
receivable, as defined. At October 31, 1996, the borrowing base limitation
amount exceeded the $4.5 million maximum line of credit. The revolving credit
facility provides for a maturity date of March 31, 1998. The capital credit
facility terminates June 15, 1998, with the entire principal balance due on
March 15, 2001. The Company is required to pay a commitment fee of 1/2 percent
on the unfunded portion of the Facilities. The outstanding portion of the
Facilities bears interest at 1-1/4 percent above the Bank's prime rate (8.25
percent at October 31, 1996), payable monthly. As any borrowings under the
Facilities bear interest at market-responsive rates, the carrying value of
borrowings outstanding approximates fair value. All of the Company's property
and equipment and accounts receivable are pledged as security on the loan.
The Agreement contains certain restrictive covenants regarding future
borrowings, capital expenditures and payment of cash dividends. In addition,
the Company must meet certain reporting requirements and maintain the following
financial covenants, as defined by the agreement: (a) a current ratio (as
defined) of 1.0:1.0, (b) a minimum net worth of $10.0 million at the end of any
quarter commencing with the quarter ended October 31, 1995, increasing by the
sum of 50 percent of quarterly net income thereafter, which resulted in a
minimum net worth requirement of approximately $11.7 million at November 1,
1996, and (c) a cash flow (as defined) of $2.5 million for the year ended
October 31, 1995, and $2.5 million for the 12 months ended at each subsequent
fiscal quarter thereafter. As of October 31, 1996, the Company was not in
compliance with certain of these restrictive covenants, for which waivers were
obtained.
Capital Lease Obligation. On March 1, 1995, the Company entered into a
lease agreement with L&GW, Inc., to lease a 50 percent interest in six rigs, a
25 percent interest in a seventh rig and certain other assets. The Company
presently owns the remaining interest in these assets. Reference is made to
Note 8 for further discussion of this agreement. The lease payments are
contingent based upon cash flows from the rigs, as defined, and equal from 50
percent to 75 percent of such cash flows. The agreement provides the Company a
purchase option through April 2000. The purchase option at the date of the
lease agreement, March 1, 1995, is $3.0 million, which increases over time
based upon a defined interest factor (12.7 percent per annum which generally
accrues in full beginning April 30, 1997, and defined lesser amounts prior to
such time), and decreases over time by the lease payments made by the Company.
The Company intends to acquire the leased assets through the exercise of the
purchase option.
Property and equipment includes $3.0 million of costs capitalized relating
to the capital lease obligation.
During 1996 and 1995, interest expense accrued on the option price was
$142,000 and $-, and lease payments totaling $1,397,000 and $285,000 were
made, thereby reducing the purchase option amount to $1,460,000 at October 31,
1996.
Property Mortgage. During 1996, the Company acquired certain real estate
property in Texas for a purchase price of approximately $300,000. The Company
entered into a note payable with a bank to finance $224,000 of the purchase
price. The note payable bears interest at 8-1/2 percent and is repayable in
equal monthly installments through February 21, 2006. The note is secured by
the real estate purchased. The $224,000 mortgage financing has been excluded
from the statement of cash flows as it is a noncash transaction. As the
interest rate on this note payable approximates the effective market-responsive
rate for borrowings under the Facilities, the carrying value of this note
payable approximates fair value.
Notes Payable and Notes Payable to Shareholders. Notes payable originated
in the purchase of the common stock of a predecessor company in 1978 with
interest at 10 percent. During 1991, a group of shareholders purchased $552,000
of the above-described notes payable from the original noteholders. Under the
amended terms of the notes payable, the Company was required to make annual
repayments of principal equal to 35 percent of excess cash flow (as defined).
Repayments were required to be made 83 percent to the original noteholder and
17 percent to the shareholders. At October 31, 1996, all amounts outstanding
under the notes payable have been repaid.
F-9
<PAGE> 88
(4) INCOME TAXES
The components of the Company's income tax provision are as follows
(amounts in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Current ............................................. $ 572 $ 429 $ 199
Deferred ............................................ 1,693 1,240 487
------ ------ ------
Total ........................................ $2,265 $1,669 $ 686
====== ====== ======
</TABLE>
The difference between taxes computed at the U.S. federal statutory rate
and the Company's reported income tax expense is as follows (amounts in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Federal income tax at the statutory rate of 34% ... $1,919 $1,549 $1,318
Nondeductible costs ............................... 207 174 208
State income tax, less federal benefit ............ 107 75 69
Change in valuation allowance ..................... -- (279) (834)
Other, net ........................................ 32 150 (75)
------ ------ ------
Total income tax provision ................. $2,265 $1,669 $ 686
====== ====== ======
</TABLE>
The Company's deferred tax position is comprised of the following as of
October 31, 1996 and 1995 (amounts in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets-
Investment tax credit carryforwards ............. $ 101 $ 595
Alternative minimum tax credits ................. 87 296
Accrued liabilities ............................. 225 137
Post-retirement benefits obligation ............. 131 --
Other ........................................... 89 75
-------- --------
633 1,103
-------- --------
Deferred tax liabilities-
Depreciation of property and equipment .......... (3,044) (2,168)
Contracts in progress ........................... (348) (38)
State taxes, net of loss carryforwards .......... (115) (78)
-------- --------
(3,507) (2,284)
-------- --------
Valuation allowance .................................... -- --
-------- --------
Deferred income tax asset (liability) .................. $ (2,874) $ (1,181)
======== ========
</TABLE>
The Company has federal investment tax credit (ITC) carryforwards totaling
$101,000 which expire as follows (amounts in thousands):
<TABLE>
<C> <C>
1999 ...................... $ 88
2000 ...................... 7
2001 ...................... 6
----
$101
====
</TABLE>
F-10
<PAGE> 89
The alternative minimum tax credits may be carried forward indefinitely.
No valuation allowance has been provided for the ITC carryforwards as
management believes that it is more likely than not that such carryforwards
will be utilized prior to their respective expiration dates.
(5) PROFIT-SHARING PLAN
The Company's profit-sharing plan for the benefit of employees provides
for Company contributions from net income and accumulated retained earnings as
determined by the Company's board of directors, limited to 15 percent of the
participants' annual compensation. No contributions have been made to the plan
since fiscal 1982. Effective October 1, 1996, the Company adopted a 401(k) plan
in which certain Company employees have been named as trustee. As a result of
adopting the 401(k) plan, management currently does not intend to make any
future contributions to the profit-sharing plan.
Under the 401(k) plan, participating employees may elect to contribute up
to $9,500, with the Company matching 50 percent of the employee contributions
up to 6 percent of their salaries for a maximum contribution by the Company of
up to 3 percent of each employee's salary for the year ended December 31, 1996.
Participating employees vest in the Company's contributions over a period of
seven years. Total expense recognized for the Company's contributions to the
401(k) plan in 1996 was approximately $8,000.
(6) GREY WOLF DRILLING COMPANY EMPLOYEE HEALTH PLAN AND TRUST
The Grey Wolf Drilling Company Employee Health Plan and Trust (the Plan)
is a defined contribution plan that provides certain health care benefits to
its active employees. Effective July 15, 1996, the Company amended the Plan
allowing retired employees to continue health care coverage for themselves and
their spouses from the age of 60 to 65. To be eligible for this health care
benefit, the employee must be under the age of 65, but at least age 60, with at
least 25 years of service as a full-time employee.
As of October 31, 1996, the accumulated post-retirement benefit obligation
(APBO) totals approximately $40,000, which relates to prior service costs. The
Company has recognized the APBO as of October 31, 1996, and will amortize the
prior service cost over the estimated service life of the remaining active
employees along with the annual benefit costs. Actuarial assumptions include a
6 percent health care cost trend and a 7-1/2 percent discount rate. The Company
does not currently intend to pre-fund these obligations.
(7) COMMITMENTS AND CONTINGENCIES
Minimum Lease Payments. Aggregate minimum rental payments required under
noncancelable operating leases having lease terms greater than one year are as
follows as of October 31, 1996 (amounts in thousands):
<TABLE>
<C> <C>
1997 ................... $320
1998 ................... 154
1999 ................... 72
2000 ................... 21
2001 ................... --
</TABLE>
Rent expense for 1996, 1995 and 1994 was approximately $339,000, $340,000
and $289,000, respectively.
Insurance. The Company has commercial insurance coverage for workers'
compensation which contains a deductible of $100,000 per claim ($50,000 per
claim in 1995 and 1994). The Company also provides certain group medical
benefits to its employees for which it is self-insured under a plan in which
certain Company employees have been named as trustee; however, the Company has
acquired a stop-loss policy limiting its exposure to $100,000 per claim
($50,000 per claim in 1995 and 1994) and $783,000 in the aggregate ($699,000
and $687,000 in 1995 and 1994, respectively). See Note 6 for additional
discussion of the plan. As of October 31, 1996, the Company had executed a
letter of credit in the amount of $500,000 to an insurance carrier as security
for its obligations under the insurance fund.
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Pending Litigation. The Company is named as defendant in a lawsuit styled
TEPCO, Inc. v. Grey Wolf Drilling Company, Cause No. 96-49194, in the 164th
Judicial District Court of Harris County, Texas. In its petition filed on
September 26, 1996, the plaintiff alleged that the Company breached alleged
contractual obligations to TEPCO, Inc. (TEPCO), by failing to drill an oil or
gas well or wells for TEPCO in the Treasure Isle Field, located in Galveston
County, Texas. The plaintiff also alleges that it lost alleged rights under an
oil and gas lease as a consequence of failure to drill such well or wells,
allegedly causing the plaintiff to suffer money damages asserted in the
plaintiff's petition to amount to "many tens of millions of dollars." The
Company believes that the claims asserted by the plaintiff are unfounded. Prior
to filing of TEPCO's suit, the Company had filed lien claims against two wells
which the Company had drilled for TEPCO, for unpaid statements for services or
materials provided prior to the time when the Company ceased further work for
TEPCO, and the Company has filed a counterclaim in the TEPCO suit seeking
recovery of approximately $250,000 with respect to such statements and interest
and attorneys' fees. Discovery is in progress in the TEPCO suit, and the
Company is vigorously defending the action. It is the opinion of the management
that the ultimate resolution of the suit will not have a material adverse
effect on the Company's financial position.
In the normal course of business, the Company becomes involved in
litigation incident to operations. Management is of the opinion that ultimate
resolution of all matters of litigation and dispute will not have a material
adverse effect on the Company's financial position.
(8) DISSOLUTION OF L&GW VENTURE AND LEASE AGREEMENT
In May 1987, the Company entered into the L&GW Venture (the Venture) with
an entity controlled by a major shareholder. The Company's interest in the
Venture was 1 percent until payout, as defined in the Venture agreement. The
entity controlled by this shareholder contributed drilling equipment to the
Venture. The Company acted as co-manager of the Venture and was reimbursed by
the Joint Venture for costs and expenses incurred on behalf of the Joint
Venture (approximately $45,000 was invoiced for the year ended October 31,
1994).
In 1990, an agreement was reached whereby the Company would restore six
drilling rigs owned by the Venture to operating condition and subsequently
would operate the rigs. Pursuant to the agreement, the Company and its joint
venture partner were each entitled to one-half of the net cash receipts from
the rigs, generally defined as cash receipts in excess of operating costs,
after the Company recouped the total cost paid to restore the rigs to
production, including interest. The costs incurred to restore the rigs were
deferred and, prior to recoupment, the Company was entitled to 100 percent of
the net cash flow. The Company's operating revenues and expenses, therefore,
included 100 percent of the activity related to these six rigs, and profit was
eliminated until recoupment of restoration costs. As of February 28, 1995,
unrecovered advances for rig restoration totaled $1,995,000, and the gross
revenues from the six rigs recognized by the Company (100 percent) for the four
months of 1995 and for 1994 totaled approximately $4,477,000 and $14,304,000,
respectively.
On March 1, 1995, the Venture, owner of 100 percent interest in six rigs
and a 50 percent interest in one rig, was dissolved. As a result of the
dissolution, the Company and L&GW, Inc., each acquired 50 percent of the
Venture's interest in the subject rigs and the Company acquired the Venture's
100 percent interest in certain other assets with no further obligations with
respect thereto. Upon completion of the dissolution, Grey Wolf converted its
advances for rig restoration and settled payables to the Venture into its basis
for the acquired interests ($1,641,000). Such basis is classified as property
and equipment.
Additionally, on March 1, 1995, the Company entered into a lease agreement
with L&GW, Inc., to lease from L&GW, Inc., its interest in the subject rigs.
The lease of the subject rig interests from L&GW, Inc., is being accounted for
as a capital lease (see Note 3). Property and equipment was recorded in the
amount of $3.0 million based on the present purchase option in the lease
agreement with an assumption of $3.0 million of long-term debt to finance such
acquisition. The purchase option at the date of the lease agreement, March 1,
1995, was $3.0 million. Such purchase option increases over time based upon a
defined interest factor (12.7 percent per annum which generally accrues in full
beginning April 30, 1997, and defined lesser amounts prior to such time) and
decreases over time by the amounts of any lease payments made by the Company.
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<PAGE> 91
The combination of the Venture dissolution and capital lease arrangement
resulted in the Company acquiring a 100 percent interest in the Venture's
assets (seven rigs and certain other related assets). The costs assigned and
consideration given is shown as follows (amounts in thousands):
<TABLE>
<S> <C>
Costs assigned to Venture assets ................ $ 4,641
Capital lease obligation ........................ (3,000)
Unrecovered rig restoration costs ............... (1,995)
Payable to Venture settled ...................... 354
-------
Cash paid ................................ $ --
=======
</TABLE>
The above transaction has been excluded from the statement of cash flows
because it is a noncash transaction.
(9) COMPENSATION ARRANGEMENTS
On March 17, 1992, the board of directors passed a resolution to grant Mr.
James K. B. Nelson, president and a shareholder of the Company, 130,769 shares
of restricted common stock. The restricted stock agreement, in general,
prohibits the transfer of these shares to anyone for a period of five years.
This transfer restriction terminates as to 20 percent of the shares (26,153) at
the end of each year on March 17, 1993, through March 17, 1997. The agreement
also provides that, if Mr. Nelson ceases to be employed by the Company within
such five-year period (other than by reason of death or disability or discharge
without good cause), remaining stock subject to such transfer restriction will
be reassigned to the Company.
The deferred compensation related to the restricted stock is deducted from
shareholders' investment and is charged to compensation expense over the
vesting period.
In 1994, the Company entered into a split-dollar life insurance
arrangement with the trustee of the James K. B. Nelson Family Trust (the
Trust). Under the terms of the arrangement, the Company pays the annual
premiums on two whole-life insurance policies owned by the Trust and receives
the equivalent premium of comparable term policies for the year. Under certain
events, the Company would be reimbursed for aggregate premiums paid and, in
other events, the cash surrender value of the policies. Premium payments are
recorded in other assets, limited to the cash surrender value of the policies
($157,000 and $63,000 at October 31, 1996 and 1995, respectively), or
compensation expense ($-, $21,000 and $21,000 for the years ended October 31,
1996, 1995 and 1994, respectively), as appropriate. As of October 31, 1996 and
1995, a receivable of $8,000 and $14,000, respectively, is due from the Trust
for reimbursement of equivalent term rates.
During 1996, the Company entered into retirement agreements with two
employees. Under the retirement agreements, the Company will pay a fixed amount
per month for up to 10 years. Additionally, the Company will continue to fund
life insurance policies with benefits payable to the employees. The Company has
accrued the obligation for the estimated net present value of these payments of
approximately $384,000 and has included the related expense in general and
administrative expense.
(10) SIGNIFICANT CUSTOMERS
During the year ended October 31, 1996, Texas Meridian Resources
Exploration, Inc. and Union Pacific Resources Company accounted for
approximately 12 percent and 11 percent, respectively, of the Company's
contract drilling revenues. During the year ended October 31, 1995, Black Stone
Oil Company and Union Pacific Resources Company accounted for approximately 14
percent and 12 percent, respectively, of the Company's contract drilling
revenues. During the year ended October 31, 1994, there were no customers that
accounted for more than 10% of the Company's contract drilling revenues.
(11) EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF AUDITORS' REPORT
On March 7, 1997, the Company entered into a definitive agreement to be
acquired by DI Industries, Inc. (DI), for up to $61.6 million in cash and
approximately 14.0 million shares of DI common stock. The terms of the
agreement call for the Company to merge with and into Drillers, Inc., a
subsidiary of DI, subject to obtaining regulatory and Company shareholder
approval and certain other conditions. The number of shares of DI common stock
to be issued
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<PAGE> 92
in the merger is subject to decrease or increase if the average trading price
of DI common stock in the 10 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 percent of the value of the merger
consideration consists of DI common stock. An escrow will be established for
contingencies relating to the TEPCO litigation with $5.0 million of the cash
consideration. In certain events, if the merger is terminated by the Company, a
$2.0 million termination fee is payable to DI, and if the merger is terminated
by DI, a $2.0 million termination fee is payable to the Company.
The merger agreement provides that prior to closing, the Company will
establish an irrevocable trust (the Employee Trust) for the benefit of certain
of the Company's employees. The Company will contribute $2.4 million to the
Employee Trust and Mr. James K. B. Nelson, president of the Company and a
Company shareholder, will contribute $1.65 million to the Employee Trust. The
employees vest in Employee Trust amounts one-year from the establishment of the
Employee Trust and earlier in certain events.
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<PAGE> 93
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of March 7, 1997, by and among DI
INDUSTRIES, INC., a Texas corporation ("Parent"), DRILLERS, INC., a Texas
corporation (the "Purchaser") and a wholly-owned subsidiary of Parent, and GREY
WOLF DRILLING COMPANY, a Texas corporation (the "Company").
Parent, the Purchaser and the Company agree as follows:
ARTICLE 1
THE MERGER
Section 1.1. The Merger. Upon the terms and subject to the conditions
hereof, and in accordance with the relevant provisions of the Texas Business
Corporation Act (the "TBCA"), the Company will be merged with and into the
Purchaser (the "Merger") as soon as practicable following the satisfaction or
waiver, if permissible, of the conditions set forth in Article 5 hereof.
Following the Merger, the Purchaser will continue as the surviving corporation
(the "Surviving Corporation") under the name "GREY WOLF DRILLING COMPANY" and
will continue its existence under the laws of the State of Texas, and the
separate corporate existence of the Company will cease.
Section 1.2. Effective Time. The Merger will be consummated by filing with
the Texas Secretary of State articles of merger executed in accordance with the
relevant provisions of the TBCA. The Merger will become effective upon the
issuance of a certificate of merger by the Texas Secretary of State (the time
the Merger becomes effective being the "Effective Time").
Section 1.3. Effects of the Merger. The Merger will have the effects set
forth in the TBCA.
Section 1.4. Articles of Incorporation and Bylaws. The Articles of
Incorporation and Bylaws of the Purchaser will be the Articles of Incorporation
and Bylaws of the Surviving Corporation.
Section 1.5. Directors and Officers. The directors and the officers of the
Purchaser immediately before the Effective Time will be the directors and
officers of the Surviving Corporation until their respective successors are
duly elected or appointed and qualified.
Section 1.6. Conversion of Shares of Company Common Stock.
(a) (i) Subject to Sections 1.6(c), 1.6(d), 1.6(e) and 1.6(f), at the
Effective Time each issued and outstanding share of common stock without par
value of the Company ("Company Common Stock") will be converted into the right
to receive the "Share Fraction" (defined below) of:
(x) an amount in cash (the "Cash Consideration") equal to the "Closing
Cash Consideration" (defined below), plus
(y) a number of shares (the "Stock Consideration") of the common stock,
$0.10 par value, of Parent ("Parent Common Stock") equal to the
"Aggregate Stock Consideration" (defined below), plus (if applicable
under the provisions of Section 1.6(a)(vi))
(z) an amount, if any, in cash (the "Contingent Cash Consideration")
equal to the "Aggregate Contingent Cash Consideration" (defined
below).
The Cash Consideration, the Stock Consideration, and, if applicable, Contingent
Cash Consideration are collectively referred to herein as the "Merger
Consideration."
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(ii) The "Closing Cash Consideration" means $56,600,000,
less such amount, if any, as shall be deducted from the Closing Cash
Consideration pursuant to Section 1.6(f), and plus the amount, if any, of the
"Additional Closing Cash Consideration" which shall be added thereto pursuant
to Section 1.6(a)(vi).
(iii) The "Aggregate Stock Consideration" means 14,000,000
shares of Parent Common Stock, plus or minus such number, if any, of shares of
Parent Common Stock by which the Aggregate Stock Consideration shall be
increased or decreased pursuant to Section 1.6(e), and plus such number, if
any, of shares of Parent Common Stock as shall be added to the Aggregate Stock
Consideration pursuant to Section 1.6(f).
(iv) The "Aggregate Contingent Cash Consideration" means an
amount, if any, equal to the sum of the "Contingent Cash Consideration" of all
"Stockholders" as such terms are defined in the Escrow Agreement described in
Section 1.6(a)(vi) determined as of the "Distribution Date" as provided for in
said Escrow Agreement.
(v) The "Share Fraction" means a fraction having "1" as its
numerator and having as its denominator the number of shares of the Company
Common Stock outstanding at the Effective Time (except and excluding any shares
of Company Common Stock issued and held in the Company's treasury immediately
before the Effective Time).
(vi) Promptly after designation by the Company and approval
by Parent of the Designated Bank pursuant to Section 1.7(a), the Company,
Parent, the Purchaser, Messrs. James K. B. Nelson and Sheldon B. Lubar, as
"Stockholder Representatives," and the Designated Bank as escrow agent (in said
capacity being herein called "Escrow Agent") shall enter into an Escrow
Agreement in substantially the form attached hereto and incorporated herein as
Schedule 1.6 (the "Escrow Agreement"). Unless otherwise stated herein, terms
defined in the Escrow Agreement shall have the meaning therein stated when used
in this Agreement. Unless the Escrow Agreement terminates prior to the
Effective Time pursuant to Section 4 of the Escrow Agreement, Parent or
Purchaser shall deposit with the Escrow Agent for inclusion in the Escrow Fund
the sum of $5,000,000 at or immediately after the Effective Time. Further, if
the Escrow Agreement is not thus terminated prior to the Effective Time and the
Merger occurs, Parent and the Surviving Corporation shall be jointly and
severally obligated to pay or cause to be paid and agree to pay or cause to be
paid to each Stockholder on the Distribution Date the Contingent Cash
Consideration, if any, owing to such Stockholder as described in clause (z) of
Section 1.6(a)(i) of this Agreement, unless the Termination Date occurs
pursuant to Section 5 of the Escrow Agreement. Said agreement of Parent and the
Surviving Corporation to pay or cause to be paid the Contingent Cash
Consideration, if any, to each Stockholder shall be secured by the security
interest and common law pledge, assignment and lien on the Escrow Fund granted
in Section 14 of the Escrow Agreement. If, however, the Escrow Agreement is
terminated prior to the Effective Time pursuant to clause (i) or clause (ii) of
Section 4 of the Escrow Agreement, no amount of Contingent Cash Consideration
shall be payable to the holders of Company Common Stock or included in the
Merger Consideration pursuant to Section 1.6(a)(i) above, and the Closing Cash
Consideration shall be increased by adding thereto an amount (the "Additional
Closing Cash Consideration") equal to $5,000,000, less the amount, if any, of
any "Settlement Payment" (defined below). If, in the discretion of the Company,
the Company shall settle the Lawsuit and Subject Claims and obtain an agreement
for a full release of the Subject Claims by TEPCO prior to the Effective Time,
the amount, if any, of money paid or payable by the Company to TEPCO in
consideration for such release of the Subject Claims is herein called the
"Settlement Payment." The Company shall be entitled, in its discretion, to
effect such a settlement at any time prior to the Effective Time; provided only
that the Company shall not, without the consent of Parent (which consent shall
not unreasonably be withheld or delayed), make or agree to make a Settlement
Payment in excess of $5,000,000 to effect such a settlement (which the Company
has no intention whatsoever of doing) or undertake any affirmative obligation
to TEPCO or any other person in consideration for a release of the Subject
Claims other than to make a Settlement Payment (if any) in money and, if and to
the extent the Company should so elect, to release (in whole or in part) claims
of the Company against TEPCO and indemnify TEPCO against such claims (to the
extent thus released) and to effect a dismissal of the Lawsuit. By approving
this Agreement, the shareholders of the Company shall adopt and approve, and
consent to and join in the terms of, the Escrow Agreement, and shall agree to
the appointment of the Stockholder Representatives and confirm the authority of
the Stockholder Representatives to enter into the Escrow Agreement and to
exercise the rights and authority and discretion as the representatives of the
shareholders of the Company and have and be entitled to the benefit of the
rights and releases therein granted to them.
(b) As a result of the Merger and without any action on the part of
the holders thereof, at the Effective Time all shares of Company Common Stock
will cease to be outstanding and will be canceled and retired and will cease
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<PAGE> 95
to exist, and each holder of shares of Company Common Stock will thereafter
cease to have any rights with respect to such shares of Company Common Stock,
except the right to receive, without interest, the Merger Consideration
(including cash in lieu of fractional shares of Parent Common Stock in
accordance with Section 1.7(d)) upon the surrender of a certificate
representing such shares of Company Common Stock (a "Company Certificate").
(c) Notwithstanding anything contained in this Section 1.6 to the
contrary, each share of Company Common Stock issued and held in the Company's
treasury immediately before the Effective Time will, by virtue of the Merger,
cease to be outstanding and will be canceled and retired without payment of any
consideration therefor.
(d) Notwithstanding anything in this Section 1.6 to the contrary,
shares of Company Common Stock that are issued and outstanding immediately
before the Effective Time and that are held by shareholders who have not voted
such shares in favor of the Merger and who shall have properly exercised their
rights of appraisal for such shares in the manner provided by the TBCA (the
"Dissenting Shares") will not be converted into or be exchangeable for the
right to receive the Merger Consideration, unless and until such holder shall
have failed to perfect or shall have effectively withdrawn or lost his right to
appraisal and payment, as the case may be. If such holder shall have so failed
to perfect or shall have effectively withdrawn or lost such right, his shares
will thereupon be deemed to have been converted into and to have become
exchangeable for, at the Effective Time, the right to receive the Merger
Consideration, without any interest thereon.
(e) As provided in Section 1.6(a), the number of shares of Parent
Common Stock included in the Aggregate Stock Consideration has initially been
agreed to be 14,000,000 shares. It is, however, agreed and stipulated that if
the "Parent Common Stock Price" (as defined below) shall be less than $3.00 or
more than $4.00, the number of shares of Parent Common Stock included in the
Aggregate Stock Consideration shall be increased or decreased above or below
14,000,000 shares (before giving effect to any increase in the number of shares
of Parent Common Stock included in the Aggregate Stock Consideration pursuant
to Section 1.6(f), if applicable) as provided hereinafter in this Section. If
the Parent Common Stock Price is less than $3.00, the number of shares of
Parent Common Stock included in the Aggregate Stock Consideration shall be
increased pursuant to this Section 1.6(e) to a number of shares equal to
$42,000,000 divided by the Parent Common Stock Price. If the Parent Common
Stock Price is more than $4.00, the number of shares of Parent Common Stock
included in the Aggregate Stock Consideration shall be decreased pursuant to
this Section 1.6(e) to the greater of (x) 11,666,667 shares, or (y) a number of
shares equal to $56,000,000 divided by the Parent Common Stock Price. The
"Parent Common Stock Price" means an amount equal to the average of the closing
sales price of Parent Common Stock on the American Stock Exchange Consolidated
Tape as reported by the Wall Street Journal (Southwest Addition) on each of the
ten consecutive trading days immediately preceding the third trading day before
the Effective Time of the Merger. The Company agrees that it will not, and
agrees that it will request each of its officers and directors to agree that
they will not, engage in trading in Parent Common Stock during the twenty
consecutive days immediately preceding the Effective Time of the Merger.
(f) If the number of shares of Parent Common Stock included in the
Aggregate Stock Consideration (after giving effect to any increase or decrease
in such number of shares pursuant to Section 1.6(e), if applicable) is not
sufficient to achieve the "Required Ratio" (hereinafter defined), then the
number of shares of Parent Common Stock included in the Aggregate Stock
Consideration (after giving effect to any increase or decrease in such number
of shares pursuant to Section 1.6(e), if applicable) shall be increased by such
additional number of shares of Parent Common Stock as shall be required to
achieve the "Required Ratio" (hereinafter defined). If the number of shares of
Parent Common Stock included in the Aggregate Stock Consideration is increased
pursuant to this Section 1.6(f), then the amount of the Closing Cash
Consideration shall be reduced by deducting from the Closing Cash Consideration
an amount equal to the product of (x) the number of additional shares of Parent
Common Stock by which the Aggregate Stock Consideration has been increased
pursuant to this Section 1.6(f), multiplied by (y) the Parent Common Stock
Price. The "Required Ratio", for purposes hereof, shall mean that the number of
shares of Parent Common Stock included in the Aggregate Stock Consideration,
after the adjustments thereof, if any, made pursuant to Section 1.6(e) and this
Section 1.6(f), multiplied by the Parent Common Stock Price (the product being
called the "Stock Value"), is equal to forty-five percent (45%) of the sum of
the Stock Value and an amount (the "Additional Amount") determined as follows:
(i) If the Escrow Agreement is terminated prior to the Effective
Time pursuant to clause (i) or clause (ii) of Section 4 of the Escrow
Agreement, the "Additional Amount" shall be equal to the Closing Cash
Consideration (as adjusted pursuant to Section 1.6(a)(vi) and this Section
1.6(f)); or
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(ii) If the Escrow Agreement is not terminated prior to the
Effective Time pursuant to Section 4 of the Escrow Agreement, the "Additional
Amount" shall be equal to the sum of the Closing Cash Consideration (as
adjusted pursuant to this Section 1.6(f)) and $5,000,000.
Section 1.7. Exchange Procedures; Fractional Shares.
(a) Promptly after the Effective Time, (i) Parent or the Purchaser
shall deposit (or cause to be deposited) with a National Bank (the "Designated
Bank") doing business in Houston, Texas, to be designated by the Company within
twenty (20) days after the date of this Agreement subject to approval of Parent
(which approval shall not unreasonably be withheld or delayed) as exchange
agent (in said capacity being herein called the "Exchange Agent"), for the
benefit of the holders of record of shares of Company Common Stock immediately
before the Effective Time (excluding any shares of Company Common Stock that
will be canceled pursuant to Section 1.6(c)), for exchange in accordance with
this Article 1, cash in the amount of the Closing Cash Consideration, and (ii)
Parent shall deposit (or cause to be deposited) with the Exchange Agent, for
the benefit of the holders of record of shares of Company Common Stock
immediately before the Effective Time (excluding any shares of Company Common
Stock that will be canceled pursuant to Section 1.6(c)), certificates
representing the Aggregate Stock Consideration ("Parent Certificates") issued
in the names of such respective holders for the Stock Consideration to be
received by such respective holders, for exchange in accordance with this
Article 1 (the cash and shares deposited pursuant to clauses (i) and (ii) being
hereinafter referred to as the "Exchange Deposit"). Parent Common Stock into
which Company Common Stock shall be converted pursuant to the transactions
contemplated hereby will be deemed to have been issued at the Effective Time.
(b) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record of Company Common Stock
immediately before the Effective Time (excluding any shares of Company Common
Stock that will be canceled pursuant to Section 1.6(c) or Dissenting Shares)
(A) a letter of transmittal (the "Company Letter of Transmittal") (which shall
specify that delivery shall be effected, and risk of loss and title to the
Company Certificates shall pass, only upon delivery of the Company Certificates
to the Exchange Agent, and shall be in such form and have such other provisions
as the Purchaser shall reasonably specify, including without limitation
provisions designed to comply with any necessary tax withholding obligations
required by applicable law (if any there be) and (B) instructions for use in
effecting the surrender of the Company Certificates in exchange for the Merger
Consideration with respect to the shares of Company Common Stock formerly
represented thereby.
(c) Upon surrender of a Company Certificate for cancellation to the
Exchange Agent, together with the Company Letter of Transmittal, duly executed,
and such other documents as the Purchaser or the Exchange Agent shall
reasonably request, with signatures thereon guaranteed, the holder of such
Company Certificate will be entitled to receive in exchange therefor (A) a bank
check in the amount equal to the Cash Consideration which such holder has the
right to receive pursuant to the provisions of this Article 1 (plus any cash in
lieu of fractional shares of Parent Common Stock pursuant to Section 1.7(d) and
less any required tax withholding, if any there be), and (B) a Parent
Certificate representing that number of shares of Parent Common Stock that such
holder has the right to receive pursuant to this Article 1 as the Stock
Consideration, and the Company Certificate so surrendered will forthwith be
canceled. Certificates representing shares of Parent Company Stock issued to
affiliates of the Company (as defined for purposes of Rule 145 under the
Securities Act) shall bear a restrictive legend in a form reasonably required
by the Parent. Until surrendered as contemplated by this Section 1.7, each
Company Certificate will be deemed at any time after the Effective Time to
represent only the right to receive the Merger Consideration with respect to
the shares of Company Common Stock formerly represented thereby.
(d) No fractional shares of Parent Common Stock shall be issued
pursuant to the Merger. In lieu of the issuance of any fractional share of
Parent Common Stock pursuant to the Merger, cash adjustments will be paid to
holders in respect of any fractional share of Parent Common Stock that would
otherwise be issuable, and the amount of such cash adjustment shall be equal to
the product of such fractional amount and the Parent Common Stock Price.
(e) Any portion of the Exchange Deposit (including the proceeds of
any investments thereof) that remains unclaimed by the holders of Company
Common Stock six months after the Effective Time will be returned to the
Surviving Corporation. Any holders of Company Certificates who have not
theretofore surrendered such Company Certificates as set forth in Section
1.7(c) hereof shall thereafter look only to the Surviving Corporation for
payment of their claims for the Merger Consideration provided in Section 1.6
hereof, without any interest thereon, or for payment of the fair value of their
Dissenting Shares. If any Company Certificates shall not have been surrendered
before seven
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years after the Effective Time (or immediately before such earlier date on
which any payment in respect thereof would otherwise escheat or become the
property of a governmental authority pursuant to applicable law), the Merger
Consideration in respect of such Company Certificates will, to the extent
permitted by applicable law, become the property of the Surviving Corporation,
free and clear of all claims or interests of any person previously entitled to
any such Merger Consideration.
(f) If the Escrow Agreement is not terminated prior to the Effective
Time pursuant to clause (i) or clause (ii) of Section 4 of the Escrow
Agreement, and if the Termination Date does not occur pursuant to Section 5 of
the Escrow Agreement, the Aggregate Contingent Cash Consideration shall be paid
and distributed from the Escrow Fund by the Escrow Agent to itself in its
capacity as the Exchange Agent on the Distribution Date. Upon payment of the
Aggregate Contingent Cash Consideration to the Exchange Agent, the Aggregate
Contingent Cash Consideration shall be the property of the Stockholders in
proportion to the respective amounts of the Contingent Cash Consideration
payable to the Stockholders pursuant to clause (z) of Section 1.6(a)(i) and
shall be received and held by the Exchange Agent as bailee for said
Stockholders; and as promptly as practicable after the Distribution Date the
Exchange Agent shall distribute and pay the applicable Contingent Cash
Consideration to each Stockholder by bank check issued and mailed to such
Stockholder at the Stockholder's address provided pursuant to the Company
Letter of Transmittal.
Section 1.8. Dissenting Shares. Notwithstanding anything in this Agreement
to the contrary, shares of Company Common Stock that are issued and outstanding
immediately before the Effective Time and which are held by shareholders who
have not voted such shares of Company Common Stock in favor of the Merger and
shall have delivered a written objection to the Merger in the manner provided
in the TBCA (the "Dissenting Shares") shall not be converted into the right to
receive the Merger Consideration provided in Section 1.6 hereof, unless and
until such holders shall have failed to perfect or shall have effectively
withdrawn or lost their rights to appraisal and payment under the TBCA. If any
such holder shall have so failed to perfect or shall have effectively withdrawn
or lost such right, such holder's shares of Company Common Stock will thereupon
be deemed to have been converted into the right to receive, as of the Effective
Time, the Merger Consideration provided in Section 1.6 hereof, without any
interest thereon.
Section 1.9. Conversion of Purchaser's Common Stock. Each share of common
stock, par value $0.10 per share, of the Purchaser issued and outstanding
immediately before the Effective Time, by virtue of the Merger and without any
action on the part of the holder thereof, will be converted into one issued and
outstanding share of common stock of the Surviving Corporation.
Section 1.10. Registration Statements.
(a) The Company and Parent will prepare and file with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933
(the "Securities Act") as promptly as practicable, and will use all reasonable
efforts to have declared effective by the Commission, a prospectus/proxy
statement with respect to the approval of the Merger, including a registration
statement on Form S-4 (the "Registration Statement") for the purpose of
registering the Parent Common Stock to be issued to the holders of the Company
Common Stock as the Stock Consideration. As promptly as practicable after the
Registration Statement has been declared effective by the Commission, the
Company will mail the prospectus/proxy statement contained therein to its
stockholders.
(b) (i) If the Merger occurs, as promptly as practicable after the
receipt of a written demand therefor (a "Registration Demand") from a "Holder"
or "Holders" (as hereinafter defined) who holds or hold, in the aggregate, in
excess of 1% of the Parent Common Stock then outstanding, Parent will, on one
occasion only, prepare and file with the Commission under the Securities Act a
registration statement on Form S-3 (the "Shelf Registration Statement") for the
purpose of registering the resale in the market from time to time of "Subject
Securities" (as below defined) by Holders or by potential assignees of such
Holders to which all or a portion of such Holders' Subject Securities may be
transferred in a No-Sale Transaction (as hereinafter defined). As used herein,
(i) "Subject Securities" means shares of Parent Common Stock issued incident to
the Merger to Holders and any common stock or other security issued or issuable
as a dividend or other distribution with respect to, or in exchange for, or
upon conversion or in replacement of, any of such Parent Common Stock, (ii)
"Holders" means holders of Company Common Stock at the Effective Time or any
person who becomes a holder of Subject Securities after the Effective Time as a
result of a No- Sale Transaction and (iii) "No-Sale Transaction" means a
transfer from a Holder of Subject Securities that does not constitute a "sale"
(as such term is understood and defined under the Securities Act), including
without limitation a distribution from a Holder that is a corporation,
partnership, joint venture, limited liability company, association or trust
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to the owner of a beneficial interest in such Holder. Notwithstanding the
foregoing, no Holder shall be entitled to include Subject Securities in a Shelf
Registration Statement unless such Holder is identified in a written notice (a
"Seller Designation Notice," whether one or more) to Parent prior to or within
five days after receipt by Parent of the first Registration Demand received by
Parent, specifying (i) the address to which notices may be given by Parent to
such Holder pursuant to this Section 1.10 until such address is changed by
written notice given by such Holder to Parent and (ii) the number of shares of
Subject Securities owned by such Holder and the number of such shares to be
included in the Shelf Registration Statement; provided that Parent agrees that
Parent will include in such Shelf Registration Statement potential sales of
Subject Securities by potential assignees in No-Sale Transactions of all or a
part of a Holder's Subject Securities if such potential assignees and the
number, if any, of shares of Parent Common Stock then owned by such potential
assignees are identified in a Seller Designation Notice.
(ii) Parent will use its best efforts to have the Shelf
Registration Statement promptly declared effective by the Commission and
thereafter to maintain the effectiveness of the Shelf Registration Statement
and to maintain such Shelf Registration Statement "current" (as below defined)
at all times until the "Registration Termination Date" (as below defined).
Parent shall promptly give written notice to the Holders when the Registration
Statement has been declared effective by the Commission and is available for
use by Holders for the resale of Subject Securities. The "Registration
Termination Date" means the second anniversary of the date (the "Effective
Registration Date") when the Shelf Registration Statement is first declared
effective by the Commission; provided that the Registration Termination Date
shall be extended for a period of time after the second anniversary of the
Effective Registration Date corresponding to the sum of (A) all periods of time
after the expiration of 45 days after the date of receipt by Parent of a
Registration Demand and prior to the Registration Termination Date (as
theretofore extended pursuant to this provision, if applicable) during which
Holders are unable to use the Shelf Registration Statement for resale of
Subject Securities because the Shelf Registration Statement has not been
declared effective by the Commission or is otherwise not effective or current,
and (B) all periods of time prior to the Registration Termination Date (as
theretofore extended pursuant to this provision, if applicable) during which
Holders are prohibited from using the Shelf Registration Statement for resale
of Subject Securities by reason of giving of a notice from Parent pursuant to
Section 1.10(b)(iv).
(iii) The Shelf Registration Statement shall not be considered
to be "current" at any time when, by reason of occurrence of any event or by
reason of the passage of time, such Shelf Registration Statement does not meet
the requirements of Section 10, Section 12(2) or Section 17 of the Securities
Act, or such Shelf Registration Statement contains an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading. The Shelf
Registration Statement shall disclose that Holders may elect to resell Subject
Securities without registration of such sales under the Shelf Registration
Statement, by making such sales under and as permitted by Rules 144 or 145, as
applicable, of the Commission under the Securities Act.
(iv) If at any time or times after the Shelf Registration
Statement is declared effective by the Commission, the Parent determines that
the offering of Parent Shares under the Shelf Registration Statement would be
significantly disadvantageous to the Parent because of, or improper in view of
(or improper without disclosure in the prospectus included in the Shelf
Registration Statement of), the existence or anticipation of a material
financing, merger, acquisition or other material transaction involving the
Parent or its subsidiaries that has not been publicly disclosed, the
unavailability of any required financial statements for reasons substantially
beyond the control of the Parent, or other similar events or conditions
involving the Parent or its subsidiaries that have not been publicly disclosed
(a "Disadvantageous Condition"), the Parent shall be entitled to either suspend
the effectiveness of the Shelf Registration Statement with the Commission or
suspend the availability of the Shelf Registration for resales of Subject
Securities by Holders, or may take both such actions, and shall promptly notify
all Holders thereof by delivery of written notice (a "Suspension Notice");
provided, however, that Parent's obligation to maintain the Shelf Registration
Statement current under this Section 1.10(b) shall not be suspended by reason
of Parent's failure to disclose information at a time when public disclosure of
such information is required by law. Upon receipt of a Suspension Notice,
Holders shall immediately discontinue the use of the Shelf Registration
Statement for any purpose until notified by the Parent that the Shelf
Registration Statement is current and available for use by Holders for sales of
Subject Securities. The Parent shall not be entitled to suspend the
effectiveness of the Shelf Registration Statement or its availability for
resales for more than (A) 60 consecutive days, or (B) 180 days within any
twelve month period. As promptly as practicable after the Disadvantageous
Condition has been publicly disclosed or the Parent determines that the
Disadvantageous Condition no longer exists, the Company shall amend or
supplement the Shelf Registration Statement to the extent necessary to
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make the Shelf Registration Statement current, and shall give prompt written
notice to all Holders when the Shelf Registration Statement is again available
for resales of Subject Securities.
(v) Parent shall promptly notify all Holders of Subject
Securities of, and confirm in writing, the issuance by the Commission of any
stop order suspending the effectiveness of the Shelf Registration Statement or
the initiation of any proceedings for that purpose. Parent shall use its best
efforts to obtain the withdrawal of any order suspending the effectiveness of
the Shelf Registration Statement at the earliest possible time.
(c) (i) If at any time during the "Registration Period" (as
hereinafter defined) Parent proposes to file a registration statement under the
Securities Act with respect to an underwritten public offering by the Parent
for its own account or for the account of any other person, including any
security convertible into or exchangeable for any equity securities (other than
(A) a registration statement on Form S-4 or S-8 (or any substitute form for
comparable purposes that may be adopted by the Commission), (B) a registration
statement filed in connection with an exchange offer or an offering of
securities solely to the Parent's existing security holders, (C) a registration
statement that is on a form pursuant to which an offering of the Subject
Securities cannot be registered, or (D) a registration statement only for debt
securities or convertible or exchangeable securities under which no Parent
Common Stock other than Parent Common Stock issuable upon conversion or
exchange is to be registered), then Parent shall in each case give written
notice of such proposed filing to the Holders of Subject Securities (limited to
Holders theretofore identified in any Holder Designation Notice theretofore
received by Parent) at least 20 days before the anticipated filing date, and
such notice shall offer such Holders the opportunity to register such number of
Subject Securities as each such Holder may request. Upon the written request of
any Holder received by Parent within ten days after the date of Parent's
delivery of its notice to the Holder of its intention to file such a
registration statement, Parent shall, subject to the conditions and in
accordance with the procedures set forth herein, use its best efforts to cause
the managing underwriter or underwriters of a proposed underwritten offering to
permit the Subject Securities requested by the Holder to be included in the
registration statement for such offering on the same terms and conditions as
any similar securities of Parent included therein. Notwithstanding the
foregoing, if the managing underwriter or underwriters of such offering
indicates in writing to the Parent its reasonable belief that the inclusion of
the Subject Securities requested to be included might reasonably be expected to
jeopardize the success of the offering of the securities of Parent to be
offered and sold by Parent for its own account, then the amount of securities
to be offered for the account of the Holders shall be reduced to the extent
necessary to reduce the total amount of securities to be included in such
offering to the amount recommended by such managing underwriter or underwriters
(which recommendation may be that no securities to be sold by Holders be
included in such registration statement), and selected in the following order
of priority: (A) first, all of the securities that Parent proposes to sell for
its own account, if any; (B) second, any securities held by persons who, as of
the date of this Agreement, are contractually entitled to priority over Holders
in the inclusion of their securities in such registration; (C) third, the
Subject Securities requested to be included in such registration by the Holders
that have requested their Subject Securities to be included therein and any
securities proposed to be included by other persons who, as of the date of this
Agreement, are contractually entitled to include a portion of their securities
in such registration on a pro rata basis with Holders (i.e., such shares to be
allocated between Holders and non-Holders based on the amount of securities
that each proposes to offer in relation to the total amount of securities
proposed to be offered by all such selling shareholders); and (D) fourth, any
other securities to be offered and sold by other holders of Parent's
securities. The "Registration Period" as such term is used in this Section
shall commence on the date of receipt by Parent of a Registration Demand; and
the Registration Period shall continue until the Registration Termination Date.
(ii) Parent may, without the consent of any selling Holder,
withdraw any registration statement and abandon any proposed offering initiated
by Parent, notwithstanding the request of a Holder to participate therein in
accordance with this Section 1.10(c) if Parent determines that such action is
in the best interests of Parent.
(d) Parent will indemnify and hold harmless each Holder, each of such
Holder's officers, directors, partners, or members, as the case may be, and
each person controlling such Holder, with respect to which registration or
qualification of Subject Securities has been effected pursuant to Section 1.10
against all claims, losses, damages, and liabilities, joint or several (or
actions in respect thereof), arising out of or based upon any untrue statement
(or alleged untrue statement) of a material fact contained in any registration
statement, prospectus, or offering circular, or in any document incorporated by
reference in any of the foregoing, or arising out of or based upon any omission
(or alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or any
violation by Parent of any rule or regulation promulgated under the Securities
Act applicable to Parent and relating to action or inaction required of Parent
in connection with any such registration or qualification, and
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will promptly reimburse each such Holder, each of such Holder's officers,
directors, partners, or members, as the case may be, and each person
controlling such Holder, for any legal and any other expenses reasonably
incurred in connection with investigating or defending any such claims, loss,
damage, liability or action; provided, however, that Parent will not be liable
in any such case to the extent that any such claim, loss, damage, liability or
expense arises out of or is based upon any untrue statement or omission based
upon written information furnished to Parent by such Holder specifically for
inclusion in any such registration statement, prospectus or offering circular.
The obligations of Parent under the foregoing indemnity agreement shall survive
the completion of the offering of Subject Securities under any registration
statement provided for in this Section 1.10.
(e) Each Holder with respect to which registration or
qualification of Subject Securities has been effected pursuant to this Section
1.10 will indemnify and hold harmless Parent, each of Parent's officers,
directors, and each person controlling Parent, against all claims, losses,
damages, and liabilities, joint or several (or actions in respect thereof),
arising out of or based upon any untrue statement (or alleged untrue statement)
of a material fact contained in any registration statement, prospectus, or
offering circular, or in any document incorporated by reference in any of the
foregoing, or arising out of or based upon any omission (or alleged omission)
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, or any violation by such Holder of
any rule or regulation promulgated under the Securities Act applicable to such
Holder and relating to action or inaction required of such Holder in connection
with any such registration or qualification, and will promptly reimburse
Parent, each of Parent's officers, directors, and each person controlling
Parent, for any legal and any other expenses reasonably incurred in connection
with investigating or defending any such claims, loss, damage, liability or
action; provided, however, that such Holder will not be liable in any such case
to the extent that any such claim, loss, damage, liability or expense does not
arise out of or is not based upon any untrue statement or omission based upon
written information furnished by such Holder specifically for inclusion in any
such registration statement, prospectus or offering circular. The obligations
of Holders under the foregoing indemnity agreement shall survive the completion
of the offering of Subject Securities under any registration statement provided
for in this Section 1.10.
(f) All expenses incident to Parent's performance of or compliance
with this Section 1.10, including, without limitation, all registration and
filing fees, fees and expenses of compliance with securities or blue sky laws
(including fees and disbursements of counsel in connection with blue sky
qualifications of the Subject Securities), rating agency fees, printing
expenses, messenger and delivery expenses, internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the fees and expenses incurred in
connection with the listing of the securities to be registered on the American
Stock Exchange and all securities exchanges on which similar securities issued
by Parent are then quoted or listed, the fees and disbursements of counsel for
Parent and its independent certified public accountants (including the expenses
of any special audit or comfort letters required by or incident to such
performance), securities act liability insurance (if Parent elects to obtain
such insurance), the fees and expenses of any special experts retained by
Parent in connection with such registration, and fees and expenses of other
persons retained by Parent, in connection with each registration hereunder (but
not including discounts, commissions, fees or expenses payable to underwriters
that are attributable to the sale of Subject Securities or the fees and
expenses of counsel for any selling Holder) (collectively, the "Registration
Expenses") will be borne by Parent.
(g) Parent will also take such action as may be required to be taken
under applicable blue sky laws in connection with issuance of the Parent Common
Stock pursuant to this Agreement and in connection with resale of Subject
Securities by Holders pursuant to the Shelf Registration Statement or pursuant
to Section 1.10(c)(i); provided that Parent will not be required to become
qualified as a foreign corporation in any jurisdiction.
Section 1.11. Shareholders' Meeting; Proxy Statement. The Company, acting
through its Board of Directors, will, in accordance with applicable law, the
Company's Articles of Incorporation and its Bylaws:
(i) duly call, give notice of, convene and hold a special
meeting of its shareholders as soon as practicable after the
effectiveness of the Registration Statement for the purpose of
considering and taking action upon this Agreement; and
(ii) subject to the fiduciary duties of the Company's Board
of Directors under applicable law as advised by counsel, include in
the Registration Statement the recommendation of the Board of
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Directors of the Company that the shareholders of the Company vote in
favor of approval and adoption of this Agreement.
Section 1.12. Closing. Upon the terms and subject to the conditions
hereof, as soon as practicable following the satisfaction or waiver of the
conditions set forth in Section 5.1 hereof, and in any event within ten days
thereafter, the Company and the Purchaser will execute and file articles of
merger in the manner required by the TBCA and the parties will take all such
other and further actions as may be required by law to make the Merger
effective.
Section 1.13. Employee Trust. After the satisfaction or waiver of the
conditions set forth in Section 5.1 hereof, and on the date (the "Trust
Establishment Date") which is one day prior to the Effective Time, if:
(i) the conditions precedent set forth in Sections 5.2 and 5.3
hereof would be satisfied if the Trust Effective Date were the
Effective Time, or, if applicable, the party or parties entitled to
do so have irrevocably agreed to waive satisfaction of any such
condition precedent which would not thus be satisfied; and
(ii) none of the conditions or circumstances authorizing
termination of this Agreement under Section 6.1 hereof have occurred
or exist as of the Trust Establishment Date, or if applicable, the
Company, Parent and the Purchaser have all agreed to waive any right
to terminate this Agreement pursuant to Section 6.1 by reason of the
occurrence or existence of any such condition or circumstance which
has occurred or exists as of the Trust Establishment Date,
the Company shall establish an irrevocable trust (the "Employee Trust") by
execution of a Trust Agreement (the "Trust Agreement") with the Designated Bank
as trustee (in such capacity being herein called the "Trustee") in the form of
Schedule 1.13 attached hereto and incorporated herein, and will contribute and
pay to the Trustee for inclusion in the principal of the Employee Trust the sum
of $2,400,000 in cash. As more fully set forth in and subject to the provisions
of the Trust Agreement, the Employee Trust shall be for the benefit of those
employees of the Company identified in Exhibit A to the Grey Wolf Drilling
Company Deferred Compensation Plan (the "Plan") attached to the Trust Agreement
who remain employed by the Company on the date of establishment of the Employee
Trust (the "Grey Wolf Employees").
Section 1.14. Contribution by Nelson. If the Merger occurs, then promptly
after the Effective Time, James K.B. Nelson (the President of the Company and
one of the major holders of the Company Common Stock, herein called "Nelson")
shall be required to, and by his joinder in this Agreement Nelson hereby agrees
that he will, contribute and pay to the Trustee the sum of $1,650,000 in cash
to be added to the principal of the Employee Trust and held and distributed by
the Trustee to Grey Wolf Employees pursuant to the Trust Agreement and Plan.
Nelson, individually, is executing this Agreement solely to evidence his
agreement to the terms and provisions of this Section 1.14, as consideration
for and to induce the Company, Parent and the Purchaser to enter into and
perform this Agreement.
Section 1.15. Appointment of Parent Directors; Change of Name. Promptly
after the Effective Time, the Board of Directors of Parent shall elect James K.
B. Nelson and William T. Donovan to serve as members of the Board of Directors
of Parent, to serve until the next regularly scheduled election of members of
the Board of Directors of Parent. At the next annual shareholder meeting after
the Effective Time, the Parent shall, if it has not previously done so,
circulate a proxy statement to its shareholders soliciting their approval to
the change of Parent's name so that it includes the words "Grey Wolf."
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company represents and warrants to Parent and the Purchaser that,
except as otherwise disclosed to Parent and the Purchaser before the execution
hereof on a schedule making reference to this Article 2:
Section 2.1. Organization and Qualification. The Company is a duly
organized and validly existing corporation in good standing under the laws of
its jurisdiction of incorporation, with all requisite corporate power and
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authority to own its properties and conduct its business as it is now being
conducted, except where the failure to be in good standing would not have a
Material Adverse Effect (as hereinafter defined). The Company is duly qualified
and in good standing as a foreign corporation authorized to do business in each
of the jurisdictions in which the character of the properties owned or held
under lease by it or the nature of the business transacted by it makes such
qualification necessary, except where the failure to be so qualified and in
good standing would not have a Material Adverse Effect. The Company has no
direct or indirect subsidiaries. The Company has heretofore made available to
Parent and the Purchaser accurate and complete copies of the Articles of
Incorporation and Bylaws of the Company as currently in effect.
Section 2.2. Capitalization. The authorized capital stock of the Company
consists of 10,000,000 shares of Company Common Stock. All of the issued and
outstanding shares of Company Common Stock have been duly authorized and
validly issued and are fully paid and nonassessable and free of preemptive
rights. As of the date hereof, (a) 2,987,379 shares of Company Common Stock are
issued and outstanding and (b) an additional 3,800 shares of Company Common
Stock are held in the treasury of the Company. Except as set forth in Schedule
2.2 hereto, there are not as of the date hereof any outstanding or authorized
options, warrants, calls, rights, commitments or any other agreements of any
character by which the Company is bound requiring it to issue or sell (i) any
shares of its capital stock or any securities or rights convertible into,
exchangeable for, or evidencing the right to subscribe for, any shares of its
capital stock or (ii) any options, warrants, calls, rights, commitments or any
other agreements of any character to purchase or acquire any shares of its
capital stock or any securities or rights convertible into, exchangeable for,
or evidencing the right to subscribe for, any shares of its capital stock. To
the knowledge of the Company, there are no voting or other stockholder
agreements to which any Company Common Stock is subject.
Section 2.3. Authority Concerning This Agreement. The Company has full
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby (subject to approval and
adoption of this Agreement by the shareholders of the Company in accordance
with applicable law). The execution and delivery of this Agreement by the
Company and the consummation by the Company of the transactions contemplated
hereby have been duly and validly authorized by the Board of Directors of the
Company and no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement or to consummate the transactions
contemplated hereby (other than approval and adoption of this Agreement by the
shareholders of the Company in accordance with applicable law). This Agreement
has been duly and validly executed and delivered by the Company and, assuming
this Agreement constitutes a valid and binding agreement of each of Parent and
the Purchaser, this Agreement constitutes a valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms, except
as such enforceability may be limited by bankruptcy or principles applicable to
creditors' rights generally or governing the availability of equitable relief.
The Company's Board of Directors has, subject to its continuing duties to the
shareholders of the Company, (i) resolved that the Merger is fair to the
Company's shareholders, and (ii) resolved to recommend authorization of the
Merger and adoption of the Agreement by the Company's shareholders. The Company
represents that it has received the opinion of Jefferies & Company, Inc. that
the proposed consideration to be received by the shareholders of the Company is
fair to such shareholders from a financial point of view.
Section 2.4. Reports; Financial Statements. The audited and unaudited
consolidated balance sheets of the Company and the related statements of
earnings, stockholders' equity and changes in financial position set forth in
Schedule 2.4 hereto present fairly the financial position of the Company as of
their respective dates, and the results of its operations and the changes in
its financial position, as the case may be, for the periods presented therein,
all in conformity with generally accepted accounting principles applied on a
consistent basis except as otherwise noted therein and subject, in the case of
the unaudited interim financial statements, to normal year-end adjustments and
any other adjustments described therein. Since October 31, 1996, there has not
been any change in the assets, liabilities, financial condition, or operations
of the Company from that reflected in such financial statements, other than
changes in the ordinary course of business and other than the exercise by the
Company in January 1997 of the option to purchase interests in seven drilling
rigs under the March 1, 1995, lease agreement with L&GW, Inc. described in the
Notes to Financial Statements of the Company's Financial Statements as of
October 31, 1996, set forth in Schedule 2.4 and payment of the option purchase
price of approximately $1,480,000 for the interests of L&GW, Inc. in said seven
drilling rigs, none of which individually or in the aggregate have had or will
have a Material Adverse Effect.
Section 2.5. The Registration Statement. None of the information relating
to the Company supplied in writing by the Company specifically for inclusion in
the Registration Statement (and any amendments thereof), at the time the
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Registration Statement becomes effective or at the time that the
prospectus/proxy statement contained therein is first published, sent or given
to the Company's shareholders, shall contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
Section 2.6. Consents and Approvals; No Violation. Neither the execution
and delivery of this Agreement by the Company nor the consummation of the
transactions contemplated hereby will (a) conflict with or result in any breach
of any provision of the Articles of Incorporation or Bylaws (or other similar
governing documents) of the Company; (b) require any consent, approval,
authorization or permit of, or filing with or notification to, any governmental
authority, except (i) in connection with the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), (ii) pursuant to the
Securities Act, (iii) the filing and recordation of articles of merger as
required by the TBCA, or (iv) where the failure to obtain such consent,
approval, authorization or permit, or to make such filing or notification, in
the aggregate would not have a Material Adverse Effect or materially adversely
affect the ability of the Company to consummate the Merger; (c) except as set
forth in Schedule 2.6 hereto, result in a default (or give rise to any right of
termination, cancellation or acceleration) under any of the terms, conditions
or provisions of any note, license, agreement or other instrument or obligation
to which the Company is a party or by which the Company or any of its assets
may be bound, except for such defaults (or rights of termination, cancellation
or acceleration) as to which requisite waivers or consents have been obtained
or which in the aggregate would not have a Material Adverse Effect or
materially adversely affect the ability of the Company to consummate the
Merger; or (d) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to the Company or any of its assets, except for
violations that in the aggregate would not have a Material Adverse Effect or
materially adversely affect the ability of the Company to consummate the
Merger. Notwithstanding the foregoing provisions of this Section 2.6, it is
expressly stipulated that it is intended that at or immediately prior to the
Effective Time the May 31, 1996, amended and restated loan agreement ("Loan
Agreement") between the Company and Bank One, Texas, N.A. will be terminated;
and Parent and the Purchaser acknowledge that some of the actions herein
provided to be taken by the Company may violate or fail to comply with
requirements of the Loan Agreement and agree that any violation of or failure
to comply with requirements of the Loan Agreement resulting from Company's
compliance with or performance of its agreements under this Agreement shall not
be deemed to violate or breach the representations or warranties of Company
under this Agreement.
Section 2.7. Brokerage Fees and Commissions. Except for the fees and
expenses payable to Jefferies & Company, Inc. pursuant to a letter agreement
dated July 18, 1996, a copy of which has previously been delivered to Parent,
no person or entity is entitled to receive from the Company any investment
banking, brokerage or finder's fee in connection with this Agreement or the
transactions contemplated hereby.
Section 2.8. Employment Agreements. Except as set forth in Schedule 2.8
hereto, there exist no employment, consulting, severance or indemnification
agreements between the Company and any current or former director, officer or
employee of the Company.
Section 2.9. Taxes. All returns and reports, including, without
limitation, information and withholding returns and reports ("Tax Returns") of
or relating to any foreign, federal, state or local tax, withholding
obligation, assessment or other governmental charge ("Taxes" or a "Tax") that
are required to be filed on or before the Effective Time by or with respect to
the Company have been or will be duly and timely filed, and all Taxes,
including, without limitation, interest and penalties, due and payable pursuant
to such Tax Returns have been paid or adequately provided for in reserves
established by the Company, except where the failure to file, pay or provide
for would not, either individually or in the aggregate, have a Material Adverse
Effect. There is no material claim against the Company with respect to any
Taxes, and no material assessment, deficiency or adjustment has been asserted
or proposed with respect to any Tax Return of the Company that has not been
adequately provided for in reserves established by the Company.
Section 2.10. Environmental. The Company is in substantial compliance with
all applicable federal, state and local laws and regulations relating to
pollution control and environmental contamination including, but not limited
to, all laws and regulations governing the generation, use, collection,
treatment, storage, transportation, recovery, removal, discharge or disposal of
Hazardous Materials and all laws and regulations with regard to record keeping,
notification and reporting requirements respecting Hazardous Materials. For
purposes of this Section 2.10, "substantial compliance" shall mean compliance,
except to the extent that failure to comply would not have a Material Adverse
Effect. The term "Hazardous Materials" means material, substances, waste or
by-products defined as "hazardous substances, "hazardous wastes" or "solid
wastes" in the Comprehensive Environmental Responses, Compensation, and
Liability Act of 1980,
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42 U.S.C. Sections 9601-9657 and any amendments thereto, or the Resource
Conservation and Recovery Act, 42 U.S.C. Sections 6901-6987 and any amendments
thereto.
The Company is not subject to any order or decree nor has it received,
within the past three years, any notice from any governmental agency with
respect to any alleged violation by the Company of, or the incurrence of any
remedial obligation by the Company under, any applicable federal, state or
local environmental or health and safety statutes and regulations.
Section 2.11. Litigation, Etc. As of the date hereof, except as set forth
in Schedule 2.11 hereto, there is no action or proceeding pending or, to the
knowledge of the Company, threatened to which the Company is or would be a
party before any court or governmental authority acting in an adjudicative
capacity or any arbitrator or arbitration tribunal with respect to which there
is a reasonable likelihood of a determination that would have a Material
Adverse Effect. The Company is not subject to any outstanding order, writ,
injunction or decree that would have a Material Adverse Effect. The Company is
in compliance with all laws, rules or regulations applicable to it, except
where failure to be in compliance would not have a Material Adverse Effect. To
the knowledge of the Company, as of the date hereof it has not received any
threats of litigation from any party seeking to restrain or set aside the
execution of this Agreement or the consummation of the Merger, and no
shareholder of the Company has informed any officer or director of the Company
of an intention or possible intent of such shareholder to exercise dissenter's
rights with respect to the Merger.
Section 2.12. Employee Benefit Plans and Arrangements. Schedule 2.8 and
Schedule 2.12 hereto list all written employee benefit plans and collective
bargaining, labor and employment agreements and severance agreements or other
similar arrangements (together with all documents or instruments establishing
or constituting any related trust, annuity contract or other funding
instrument), and whether or not legally enforceable, to which the Company is a
party or by which the Company is bound or has continuing liability thereunder,
including (1) any profit-sharing, deferred compensation, bonus, stock option,
stock purchase, pension, retainer, consulting, retirement, severance, or
incentive compensation plan, agreement or arrangement, (2) any welfare benefit
plan, agreement or arrangement or any plan, agreement or arrangement providing
for "fringe benefits" or perquisites to employees, officers, directors or
agents, including benefits relating to automobiles, clubs, vacation, child
care, parenting or maternity leave, sabbaticals, sick leave, medical expenses,
dental expenses, disability, accidental death or dismemberment,
hospitalization, life insurance and other types of insurance, (3) any
employment agreement, or (4) any other "employee benefit plan" (within the
meaning of Section 3(3) of ERISA) (each, a "Benefit Plan"). Each Benefit Plan
has been maintained and contributed to in compliance with the requirements of
applicable law, except for such failures to maintain or contribute that would
not, in the aggregate, have a Material Adverse Effect, and each such Benefit
Plan can, except as set forth in Schedule 2.12 hereto, be terminated by the
Company within a period of 30 days without the payment of any additional
compensation or amount or the additional vesting or acceleration of any such
benefits.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
OF PARENT AND THE PURCHASER
Parent and the Purchaser each represents and warrants to the Company as
follows:
Section 3.1. Organization and Qualification. Each of the Parent and the
Purchaser is a duly organized and validly existing corporation in good standing
under the laws of its jurisdiction of incorporation, with all requisite
corporate power and authority to own its properties and conduct its business as
it is now being conducted, except where the failure to be in good standing
would not have an adverse effect on the financial condition, business or
operations of Parent and its subsidiaries taken as a whole that is material to
Parent and its subsidiaries taken as a whole. Each of Parent and the Purchaser
is duly qualified and in good standing as a foreign corporation authorized to
do business in each of the jurisdictions in which the character of the
properties owned or held under lease by it or the nature of the business
transacted by it makes such qualification necessary, except where the failure
to be so qualified and in good standing would not have an adverse effect on the
financial condition, business or operations of Parent and its subsidiaries
taken as a whole that is material to Parent and its subsidiaries taken as a
whole. The only direct or indirect subsidiaries of Parent are those set forth
in Exhibit 22 to Parent's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 or in Schedule 3.1 hereto.
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Section 3.2. Authority Concerning this Agreement. Parent and the Purchaser
each has full corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement by Parent and the Purchaser and the consummation
by Parent and the Purchaser of the transactions contemplated hereby have been
duly and validly authorized by the Boards of Directors of Parent and the
Purchaser and by Parent as the sole shareholder of the Purchaser, and no other
corporate proceedings on the part of Parent or the Purchaser are necessary to
authorize this Agreement or to consummate the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by each of
Parent and the Purchaser and, assuming this Agreement constitutes a valid and
binding obligation of the Company, this Agreement constitutes a valid and
binding agreement of each of Parent and the Purchaser, enforceable against each
of Parent and the Purchaser in accordance with its terms, except as such
enforceability may be limited by bankruptcy or principles applicable to
creditors' rights generally or governing the availability of equitable relief.
Section 3.3. Reports; Financial Statements.
(a) Since September 30, 1993, Parent has filed with the Securities
and Exchange Commission (the "SEC") all forms, reports and documents required
to be filed by it pursuant to the Securities Act or the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and the rules and regulations of the
SEC thereunder, all of which have complied as of their respective filing dates
in all material respects with the applicable provisions of the Securities Act
and the Exchange Act, and the rules and regulations of the SEC thereunder, and
none of such forms, reports or documents, including without limitation any
financial statements or schedules included therein, at the time filed,
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(b) The audited or unaudited consolidated balance sheets of Parent
and subsidiaries and the related consolidated statements of earnings,
stockholders' equity and changes in financial position (including the related
notes thereto) included in Parent's Annual Reports on Form 10-K for the fiscal
years ended December 31, 1995, 1994, and 1993, or in Parent's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 30, 1996, present fairly
the financial position of Parent and its subsidiaries as of their respective
dates, and the results of their operations and the changes in their financial
position, as the case may be, for the periods presented therein, all in
conformity with generally accepted accounting principles applied on a
consistent basis except as otherwise noted therein and subject, in the case of
the unaudited interim financial statements, to normal year-end adjustments and
any other adjustments described therein.
Section 3.4. The Registration Statement. None of the information relating
to the Parent and its subsidiaries, at the time the Registration Statement
becomes effective or at the time that the prospectus/proxy statement contained
therein is first published, sent or given to the Company's shareholders, shall
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
Section 3.5. Consents and Approvals; No Violation. Neither the execution
and delivery of this Agreement by Parent and the Purchaser nor the consummation
of the transactions contemplated hereby will (a) conflict with or result in any
breach of any provision of the respective Certificate of Incorporation or
Bylaws (or other similar governing documents) of Parent or the Purchaser; (b)
require any consent, approval, authorization or permit of, or filing with or
notification to, any governmental authority, except (i) in connection with the
HSR Act, (ii) pursuant to the Securities Act or the Exchange Act, (iii) the
filing and recordation of articles of merger as required by the TBCA, or (iv)
where the failure to obtain such consent, approval, authorization or permit, or
to make such filing or notification, in the aggregate would not have any
adverse effect on the financial condition, business or operations of Parent and
its subsidiaries that is material to Parent and its subsidiaries taken as a
whole or materially adversely affect the ability of Parent and the Purchaser to
consummate the Merger; (c) except as set forth in Schedule 3.5 hereto, result
in a default (or give rise to any right of termination, cancellation or
acceleration) under any of the terms, conditions or provisions of any note,
license, agreement or other instrument or obligation to which Parent, the
Purchaser or any of Parent's other subsidiaries is a party or by which Parent,
the Purchaser or any of Parent's other subsidiaries or any of their assets may
be bound, except for such defaults (or rights of termination, cancellation or
acceleration) as to which requisite waivers or consents have been obtained or
which in the aggregate would not have any adverse effect on the financial
condition, business or operations of Parent and its subsidiaries which is
material to Parent and its subsidiaries taken as a whole or
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materially adversely affect the ability of Parent and the Purchaser to
consummate the Merger, or (d) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to Parent, the Purchaser, any of
Parent's other subsidiaries or any of their assets, except for violations which
in the aggregate would not have any adverse effect on the financial condition,
business or operations of Parent and its subsidiaries which is material to
Parent and its subsidiaries taken as a whole or materially adversely affect the
ability of Parent and the Purchaser to consummate the Merger. Notwithstanding
the foregoing provisions of this Section 3.5, the Company acknowledges that
some of the actions herein provided to be taken by the Parent and the Purchaser
may violate or fail to comply with the requirements of the Senior Secured
Reducing Revolving Credit Agreement among the Parent, the Purchaser, Bankers
Trust Company, and certain other parties dated as of December 31, 1996 (the
"Credit Agreement"), and agree that any violation or failure to comply with the
requirements of the Credit Agreement resulting from the Parent's or the
Purchaser's compliance with or performance of its agreements under this
Agreement shall not be deemed to violate or breach the representations or
warranties of the Parent or the Purchaser under this Agreement if at the
Effective Time such Credit Agreement is either no longer in effect or any such
violation or failure to comply has been waived thereunder.
Section 3.6. Brokerage Fees and Commissions. No person or entity is
entitled to receive from Parent or any of its subsidiaries any investment
banking, brokerage or finder's fee in connection with this Agreement or the
transactions contemplated hereby.
Section 3.7. Financing. Prior to July 1, 1997, and at the Effective Time,
Parent and the Purchaser shall have funds available, or shall have written
commitments from reputable financial institutions (copies of which shall have
been delivered to the Company) for funds, sufficient to consummate the Merger
on the terms contemplated hereby, and at the Effective Time, Parent and the
Purchaser will have available all of the funds necessary for the consummation
of the Merger and to make all payments or deposits of funds provided to be made
pursuant to Section 1.6(a)(vi) and Section 1.7(a).
ARTICLE 4
COVENANTS
Section 4.1. Conduct of Business of the Company. Except as contemplated by
this Agreement (including matters referred to on the Schedules hereto), during
the period from the date hereof to the Effective Time, unless otherwise agreed
to in writing by Parent, the Company will conduct its business in the ordinary
course consistent with past practice and will use best efforts to preserve
intact the business organization of the Company, to keep available as a group
the services of its current officers and key employees, and to preserve the
good will of its material customers. Without limiting the generality of the
foregoing, except as otherwise contemplated by this Agreement or as otherwise
agreed to in writing by Parent, prior to the Effective Time, the Company will
not (a) issue, sell or pledge, or authorize or propose the issuance, sale or
pledge of (i) any shares of capital stock of the Company or any securities or
rights convertible into, exchangeable for, or evidencing the right to subscribe
for, any shares of capital stock of the Company, or any options, warrants,
calls, rights, commitments or any other agreements of any character to purchase
or acquire any shares of capital stock of the Company or any securities or
rights convertible into, exchangeable for, or evidencing the right to subscribe
for, any such shares of capital stock, or grant or accelerate any right to
convert or exchange any securities of the Company for shares of Company Common
Stock, or (ii) any other securities in respect of, in lieu of, or in
substitution for, shares of Company Common Stock outstanding on the date
hereof; (b) redeem or otherwise acquire, or propose to redeem or otherwise
acquire, any of the outstanding equity securities of the Company (including
shares of Company Common Stock); (c) declare, set aside or pay any dividend or
other distribution in respect of any shares of capital stock of the Company;
(d) make any acquisition, by means of a merger or otherwise, of a material
amount of assets or securities; (e) agree to any sale, lease, encumbrance or
other disposition of a material amount of assets or securities or any material
change in its capitalization, other than sales or other dispositions in the
ordinary course consistent with past practice; (f) enter into any material
contract other than in the ordinary course of business or agree to any release
or relinquishment of any material contract rights; (g) incur any long-term debt
or short-term debt for borrowed money except for debt incurred in the ordinary
course consistent with past practice; (h) propose or adopt any amendments to
the Articles of Incorporation or Bylaws of the Company; (i) enter into any new
employment, consulting, severance or indemnification agreement with any
officer, director or key management employee; or (j) agree in writing or
otherwise to take (i) any of the foregoing actions or (ii) any action which
would make any representation or warranty of the Company herein untrue or
incorrect in any material respect. Without limiting the foregoing, the Company
shall not be permitted to pay bonuses and grant salary increases without the
prior written consent of Purchaser.
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Section 4.2. Acquisition Proposals. From and after the date hereof, the
Company will not, directly or indirectly, and will instruct its officers,
directors, employees, agents or advisors or other representatives or
consultants not to, directly or indirectly, solicit or initiate any proposals
or offers from any person relating to any acquisition or purchase of all or a
material amount of the assets of, or any securities of, or any merger,
consolidation or business combination with, the Company (any such proposal or
offer being referred to herein as an "Acquisition Proposal"), and shall
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any persons conducted heretofore with respect
to any such Acquisition Proposal; provided, however, that the Company may
furnish information and may engage in discussions or negotiations with any
person if, following the receipt of an unsolicited bona fide written
Acquisition Proposal from any such person (i) counsel advises the Company's
directors that failure to furnish such information or engage in such
discussions or negotiations could involve the Company's directors in a breach
of their fiduciary duties and (ii) the Company's directors believe, in good
faith, after consultation with the Company's financial advisors, that such
person may make a bona fide proposal for a transaction more favorable to the
Company's shareholders than the transactions contemplated by the Merger;
provided further, however, that nothing contained in this Section 4.2 shall
prohibit the Company or its Board of Directors from making such disclosure to
the Company's shareholders which, in the judgment of the Board of Directors
with the advice of counsel, may be required under applicable law. The Company
will promptly notify Parent of the receipt of any Acquisition Proposal and,
subject to the fiduciary duties of the Company's board of directors, keep
Parent informed of the status thereof.
Section 4.3. Access to Information.
(a) Between the date hereof and the Effective Time, the Company shall
(i) give Parent, the Purchaser and their authorized representatives such access
during regular business hours to the Company's books, records, properties,
personnel and to such other information as Parent and the Purchaser reasonably
request and shall instruct the Company's independent public accountants to
provide access to their work papers and such other information as Parent and
the Purchaser may reasonably request, and (ii) cause its officers to furnish
Parent and the Purchaser with such financial and operating data and other
information with respect to the business and properties of the Company as
Parent and the Purchaser may reasonably request.
(b) Information obtained by Parent and the Purchaser and their
representatives pursuant to this Agreement shall be subject to the provisions
of the Confidentiality Agreement between Parent and the Company dated September
16, 1996, which agreement remains in full force and effect.
Section 4.4. Best Efforts. Upon the terms and subject to the conditions
hereof, and to the fiduciary duties of the Board of Directors of the Company
under applicable law as advised by counsel, all of the parties hereto agree to
use their best efforts to take, or cause to be taken, all appropriate action,
and to do, or cause to be done, all things necessary, proper or advisable to
consummate and make effective the transactions contemplated by this Agreement
and to cooperate in connection with the foregoing, including using best efforts
(a) to obtain any necessary waivers, consents and approvals from other parties
to material notes, licenses, agreements, and other instruments and obligations;
(b) to obtain any material consents, approvals, authorizations and permits
required to be obtained under any federal, state or local statute, rule or
regulation; (c) to defend all lawsuits or other legal proceedings challenging
this Agreement or the consummation of the transactions contemplated hereby; and
(d) promptly to effect all necessary filings and notifications including, but
not limited to, filings under the HSR Act and prompt submissions of information
requested by governmental authorities. In case at any time after the Effective
Time any further action is necessary or desirable to carry out the purposes of
this Agreement, the proper officers and directors of the Surviving Corporation
and Parent on behalf of the Company and the Purchaser shall take all such
action.
Section 4.5. Compliance with Antitrust Laws. Each of Parent, the Purchaser
and the Company will use its best efforts to resolve such objections, if any,
which may be asserted with respect to the Merger under the antitrust laws. In
the event a suit is instituted challenging the Merger as violative of the
antitrust laws, each of Parent, the Purchaser and the Company will use its best
efforts to resist or resolve such suit. Each of Parent, the Purchaser and the
Company will use its best efforts to take such action as may be required (a) by
the Antitrust Division of the Department of Justice or the Federal Trade
Commission in order to resolve such objections as either of them may have to
the Merger under the antitrust laws or (b) by any federal or state court of the
United States, in any suit brought by a private party or governmental entity
challenging the Merger as violative of the antitrust laws, in order to avoid
the entry of, or to effect the dissolution of, any injunction, temporary
restraining order or other order which has the effect of preventing the
consummation of the Merger; provided, however, that the best efforts of Parent
and the Purchaser shall not include
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(a) proffering Parent and the Purchaser's willingness to accept an order
providing for the divestiture of such of the properties, assets, operations, or
business of the Company (or, in lieu thereof, such properties, assets,
operations, or business of Parent and the Purchaser or any of Parent and the
Purchaser's affiliates) as are necessary to permit the consummation of the
transactions contemplated by this Agreement, including an offer to hold
separate such properties, assets, operations or businesses pending any such
divestiture, or (b) proffering Parent and the Purchaser's willingness to accept
any other conditions, restrictions, limitations or agreements affecting the
full rights of ownership of the Company's assets (or any portion thereof) as
may be necessary to permit the consummation of the transactions contemplated by
this Agreement.
Section 4.6. Indemnification and Insurance.
(a) It is understood and agreed that the Company shall indemnify and
hold harmless, and, after the Effective Time, the Surviving Corporation and
Parent shall indemnify and hold harmless, each present and former employee,
agent, officer or director of the Company (the "Indemnified Parties") to the
fullest extent permitted under applicable law against any losses, claims,
damages, liabilities, costs, expenses, judgments and amounts paid in settlement
("Damages") in connection with any claim, action, suit, proceeding or
investigation arising out of or pertaining to any action or omission occurring
prior to or at the Effective Time (including, without limitation, any claim,
action, suit, proceeding or investigation which arises out of or relates to the
transactions contemplated hereby) (a "Claim") without regard to the form of
action whether in law or in equity and including but not limited to claims
based on NEGLIGENCE OR STRICT LIABILITY OF ANY INDEMNIFIED PARTY or any other
theory of recovery. These rights to indemnification and the obligations set
forth in this Section 4.6(a) shall survive the Merger and shall continue in
full force and effect for a period of not less than six years from the
Effective Time. In the event any Indemnified Party asserts in writing that he
is entitled to be indemnified and held harmless against any potential Damages
arising out of or pertaining to any Claim prior to the end of such six-year
period, all rights to indemnification in respect of any such Damages shall
continue until disposition of any such Claim. Without limiting the foregoing,
the Company and Parent, and, after the Effective Time, the Surviving
Corporation and Parent, to the fullest extent permitted under applicable law,
will periodically advance expenses as incurred with respect to any Claim or
potential Claim; provided that the person to whom expenses are advanced, if
required by applicable law, provides a written affirmation of his good faith
belief that he has met the standard of conduct prescribed by law as being
necessary for indemnification and a written undertaking to repay such advances
if it is ultimately determined by a court of competent jurisdiction that such
person is not entitled to indemnification pursuant to this Section 4.6(a).
(b) In the event any Claim is brought against any Indemnified Party
(whether before or after the Effective Time) in connection with which such
Indemnified Party asserts that he is entitled to be indemnified and held
harmless pursuant to Section 4.6(a) hereof, the Company (or, after the
Effective Time, the Surviving Corporation) shall have the right to assume the
defense thereof and shall not be liable to any Indemnified Party for any legal
expenses of other counsel or other expenses subsequently incurred by such
Indemnified Parties in connection with the defense thereof, except that if the
Surviving Corporation elects not to assume such defense or if such counsel for
the Indemnified Parties advises that there are issues which raise conflicts
between the Surviving Corporation and the Indemnified Parties, (i) the
Indemnified Parties may retain counsel reasonably satisfactory to the Company
(or the Surviving Corporation and Parent after the Effective Time), (ii) the
Company (or, after the Effective Time, the Surviving Corporation and Parent)
shall pay all fees and expenses of such counsel for the Indemnified Parties
promptly as statements therefor are received, so long as the Indemnified Party
has delivered the written items set forth in the last sentence of Section
4.6(a) to the extent required by applicable law and (iii) the Company (or,
after the Effective Time, the Surviving Corporation and Parent) will use their
best efforts to assist in the vigorous defense of any such matter. Neither the
Company, the Surviving Corporation nor Parent shall be liable for any
settlement effected without their written consent, which consent, however,
shall not be unreasonably withheld. Any Indemnified Party wishing to claim
indemnification under Section 4.6(a) hereof, upon learning of any such Claim,
shall notify the Company or the Surviving Corporation thereof but any failure
to so notify the Company or the Surviving Corporation shall not relieve either
of them or Parent of its obligations under this Section 4.6 unless it has been
actually prejudiced by such lack of notice. The Indemnified Parties as a group
may retain only one law firm in each jurisdiction to represent them with
respect to any such matter unless there is, under applicable standards of
professional conduct (based on the advice of counsel to the Indemnified
Parties), a conflict of interest on any significant issue between the positions
of any two or more Indemnified Parties.
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(c) Parent and the Surviving Corporation shall use their best efforts
to cause to be maintained in effect for six years from the Effective Time the
current policies of directors' and officers' liability insurance maintained by
the Company with respect to all matters, including the transactions
contemplated hereby, occurring prior to or at the Effective Time; provided,
however, that Parent and the Surviving Corporation may substitute therefor
policies of at least the same coverage containing terms and conditions which
are no less advantageous so long as no lapse in coverage occurs as a result of
such substitution; and provided further, that the Parent and the Surviving
Corporation shall be entitled to reduce the coverage provided by such
directors' and officers' liability insurance if and to the extent required to
cause the total annual premium for such directors' and officers' liability
insurance not to exceed a total annual premium of $150,000. Upon request of any
former officer or director of the Company, Parent will provide to such former
officer or director a certificate from the insurer under the directors' and
officers' liability insurance policy provided for in this Section 4.6(c) as to
the nature and amount of the insurance coverage provided by such policy and
stating that such policy will not be canceled, terminated or amended without
prior written notice being mailed to such former officer or director. If Parent
or the Surviving Corporation fail at any time to maintain in effect directors'
and officers' liability insurance provided for in this Section 4.6(c) at a time
when such insurance is required under this Section 4.6(c), any former officer
or director of the Company may procure and maintain a directors' and officers'
liability insurance policy providing such insurance for the benefit of the
former officers and directors of the Company for such period of time as is
required under this Section 4.6(c), and Parent and the Surviving Corporation
shall be jointly and severally obligated to reimburse such former officer or
director, upon demand from time to time, for all premiums paid for such
insurance up to a maximum of $150,000 per annum in the aggregate for all such
former officers and directors, less all premium amounts actually paid by the
Company for such directors' and officers' liability insurance policy.
(d) The Bylaws of Parent will contain the provisions with respect to
indemnification and insurance set forth in Article IX of the Parent's Bylaws,
as in effect on the date hereof, which provisions will not be amended for a
period of six years from the Effective Time in any manner that would adversely
affect the rights thereunder of individuals who on or prior to the Effective
Time were directors, officers, employees or agents of the Company, except if
such amendment is required by law.
Section 4.7. 401(k) Plan; Executive Office. The Surviving Corporation will
replace the Grey Wolf Drilling Co. Employees' 401(k) and Profit Sharing Plan
with another plan or plans providing, in the aggregate, for a substantially
equivalent or greater level of compensation, funding, and benefits for
employees of the Company who remain employed by the Surviving Corporation after
the Effective Time. The Surviving Corporation shall maintain its executive
headquarters in the Houston area for a period of not less than one year from
the Effective Time.
Section 4.8. Security Interest and Lien. Parent and Purchaser covenant,
warrant and represent that the security interest and common law pledge,
assignment and lien in and to the Escrow Fund granted to the Stockholders and
Stockholder Representatives pursuant to Section 14 of the Escrow Agreement will
be and remain a first and prior security interest and common law pledge,
assignment and lien in and to said Escrow Fund at the Effective Time and at all
times thereafter until completion of disbursement of the Escrow Fund by the
Escrow Agent pursuant to the Escrow Agreement.
ARTICLE 5
CONDITIONS TO CONSUMMATION OF THE MERGER
Section 5.1. Conditions to Each Party's Obligation to Effect the Merger.
The obligations of each party to effect the Merger are subject to the
satisfaction or waiver, if permissible, at or prior to the Effective Time, of
the following conditions:
(a) this Agreement shall have been approved and adopted by the
requisite affirmative vote of the shareholders of the Company in
accordance with the TBCA and the Company's Articles of Incorporation;
(b) no statute, rule, regulation, order, decree, ruling or
injunction shall have been promulgated, enacted, or issued by any
court or governmental authority of competent jurisdiction which is in
effect and has the effect of prohibiting the consummation of the
Merger;
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(c) the waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated;
(d) the Parent Common Stock Price shall not be less than $2.20
or more than $4.80;
(e) Parent and the Purchaser shall have obtained and have in
hand sufficient funds, or binding written commitments from
responsible and reputable financial institutions reasonably
satisfactory to the Company to provide such funds, to enable Parent
and the Purchaser to pay the Closing Cash Consideration as required
in Section 1.7 and to make the deposit (if any) provided to be made
pursuant to Section 1.6(a)(vi) without resulting in a breach or
violation of the representations and warranties set forth in Section
3.5; and
(f) the Escrow Agreement shall have been executed and delivered
by the Parent, the Company, the Stockholder Representatives, and
Designated Bank as provided for in Section 1.6(a)(vi).
Section 5.2. Conditions Precedent to Obligations of Parent and the
Purchaser. The obligations of Parent and the Purchaser under this Agreement are
subject to the satisfaction (or waiver by Parent and the Purchaser), at or
prior to the Effective Time, of each of the following conditions:
(a) All representations and warranties of the Company contained
herein or in any certificate or document delivered to Parent and the
Purchaser pursuant hereto shall be true and correct on and as of the
date made, and the Company shall have performed all obligations and
agreements, and complied with all covenants and conditions, contained
in this Agreement to be performed or complied with by it prior to or
at the Effective Time.
(b) There shall have been no Material Adverse Change from the
date of this Agreement until the Effective Time.
(c) The Parent shall have received a favorable opinion of Arthur
Andersen LLP or of KPMG Peat Marwick, L.L.P., addressed to Parent and
in form and substance reasonably satisfactory to it to the effect
that the Merger will constitute a reorganization for federal income
tax purposes within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code").
(d) The number of shares of Company Common Stock held by persons
who have evidenced an intent to exercise dissenters' rights of
appraisal shall not be in excess of five percent of the outstanding
Company Common Stock.
(e) The holders of shares of Company Common Stock who will
receive, in the aggregate, ninety percent of the Stock Consideration
shall have executed letters stating that they have no plan or intent
to sell, exchange, transfer, distribute or otherwise reduce their
risk of ownership of the Parent Common Stock they will receive in the
Merger; provided that no such holder shall have liability to Parent
or the Surviving Corporation by reason of execution or delivery of
any such letter or any representation made therein.
Section 5.3. Conditions Precedent to the Obligations of the Company. The
obligations of Company under this Agreement are subject to the satisfaction (or
waiver by the Company), at or prior to the Effective Time, of the following
conditions:
(a) All representations and warranties of Parent and the
Purchaser contained herein or in any certificate or document
delivered to the Company pursuant hereto shall be true and correct on
and as of the date made, and Parent and the Purchaser shall have
performed all obligations and agreements, and complied with all
covenants and conditions contained in this Agreement to be performed
or complied with by them prior to or at the Effective Time.
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(b) The Company shall have received a favorable opinion of
Arthur Andersen LLP or of KPMG Peat Marwick, L.L.P., addressed to the
Company and its stockholders and in form and substance reasonably
satisfactory to it to the effect that the Merger will constitute a
reorganization for federal income tax purposes within the meaning of
Section 368(a) of the Code.
ARTICLE 6
TERMINATION; AMENDMENT; WAIVER
Section 6.1. Termination. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time prior to the
Effective Time, notwithstanding approval and adoption of this Agreement by the
shareholders of the Company:
(a) by mutual written consent duly authorized by the Boards of
Directors of the Company, Parent and the Purchaser;
(b) by the Purchaser and Parent or the Company if any court or
governmental authority of competent jurisdiction shall have issued an
order, decree or ruling, or taken any other action, permanently
enjoining or otherwise prohibiting the consummation of the Merger and
such order, decree, ruling or other action shall have become final
and nonappealable;
(c) by the Company if, prior to the Effective Time, the Company
is not in breach of its obligations under Section 4.2 and a person
other than the Purchaser shall have made an unsolicited bona fide
proposal for a transaction, which the Company's Board of Directors
believes, in good faith, after consultation with the Company's
financial advisors, is more favorable to the Company's shareholders
than the transactions contemplated by the Merger;
(d) by the Parent if neither the Parent nor the Purchaser is in
material breach of this Agreement and the Company's Board of
Directors shall have (i) withdrawn its recommendation that the
shareholders of the Company vote in favor of approval and adoption of
this Agreement, or (ii) recommended or approved the acceptance or
approval by stockholders of the Company of any Acquisition Proposal
(other than one by Parent or its affiliates);
(e) by the Company, if the Company is not in material breach of
this Agreement and the Effective Time shall not have occurred on or
prior to July 1, 1997; or
(f) by Parent, if neither Parent nor the Purchaser is in
material breach of this Agreement and the Effective Time shall not
have occurred on or prior to July 1, 1997.
Section 6.2. Effect of Termination. In the event of the termination and
abandonment of this Agreement pursuant to Section 6.1 hereof, this Agreement,
except for Section 4.3(b) hereof and Section 7.9 hereof, shall forthwith become
void and have no effect, without any liability on the part of any party hereto
or its directors, officers, employees, agents or shareholders. Nothing in this
Section 6.2 shall relieve any party hereto of any liability for a breach of
this Agreement.
Section 6.3. Amendment. To the extent permitted by applicable law, this
Agreement may be amended by action taken by or on behalf of the Boards of
Directors of the Company, Parent and the Purchaser at any time before or after
approval and adoption of this Agreement by the shareholders of the Company but,
after any such shareholder approval and adoption, no amendment shall be made
which decreases the consideration provided for in Section 1.6 or changes the
form thereof or which adversely affects the rights of the Company's
shareholders hereunder, without the approval of a the holders of at least
two-thirds of the outstanding shares of Company Common Stock. This Agreement
may not be amended except by an instrument in writing signed on behalf of the
parties hereto.
Section 6.4. Extension; Waiver. At any time prior to the Effective Time,
the Company on the one hand and the Parent and the Purchaser on the other, by
action taken by or on behalf of the Board of Directors of the Company, Parent
and the Purchaser, may (i) extend the time for the performance of any of the
obligations or other acts of any other
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party hereto, (ii) waive any inaccuracies in the representations and warranties
contained herein of any other party or in any document, certificate or writing
delivered pursuant hereto by any other party or (iii) waive compliance with any
of the agreements or conditions contained herein. Any agreement on the part of
any party to any such extension or waiver shall be valid only if set forth in
an instrument in writing signed on behalf of such party.
ARTICLE 7
MISCELLANEOUS
Section 7.1. Survival. The representations and warranties made in Articles
2 and 3 hereof shall not survive the Effective Time. Except for those covenants
and agreements which by their terms contemplate performance after the Effective
Time, all covenants and agreements set forth herein shall not survive the
Merger. This Section 7.1 shall not limit the term of any covenant or agreement
which by its terms contemplates performance after the Effective Time.
Section 7.2. Entire Agreement; Assignment. This Agreement, including the
exhibits and schedules hereto and the documents and instruments referred to
herein, and the Confidentiality Agreement between Parent and the Company, dated
September 16, 1996, (a) constitute the entire agreement among the parties
hereto with respect to the subject matter hereof and supersede all other prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof and (b) shall not be assigned by operation
of law or otherwise; provided that the Purchaser may assign any of its rights
and obligations to any other wholly owned subsidiary of Parent, but no such
assignment shall relieve the Purchaser of its obligations hereunder.
Section 7.3. Validity. The invalidity or unenforceability of any provision
of this Agreement in any jurisdiction shall not affect the validity or
enforceability of any other provisions of this Agreement, which shall remain in
full force and effect in such jurisdiction, or the validity or enforceability
of such provision in any other jurisdiction.
Section 7.4. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given when delivered if delivered in person, by cable, telegram or telex,
or five business days after delivery if delivered by registered or certified
mail (postage prepaid, return receipt requested) to the respective parties as
follows:
If to Parent and the Purchaser:
DI Industries, Inc.
625 Paragon Center One
450 Gears Road
Houston, Texas 77067
Attention: T. P. Richards, President
With a copy to:
Gardere Wynne Sewell & Riggs, L.L.P.
333 Clay Avenue, Suite 800
Houston, Texas 77002
Attention: Frank M. Putman
If to the Company:
Grey Wolf Drilling Company
1980 Post Oak Boulevard, Suite 1150
Houston, Texas 77056-3808
Attention: J. K. B. Nelson, President
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With a copy to:
Fulbright & Jaworski L.L.P.
1301 McKinney, Suite 5100
Houston, Texas 77010-3095
Attention: Uriel E. Dutton
or to such other address as the person to whom notice is to be given shall have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof).
Section 7.5. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas regardless of the
laws that might otherwise govern under principles of conflicts of laws
applicable hereto.
Section 7.6. Descriptive Headings; Schedules.
(a) The descriptive headings herein are inserted for convenience of
reference only and are not intended to be part of or to affect the meaning or
interpretation of this Agreement.
(b) The reference to any matter on any Schedule hereto shall not be
deemed an admission that such matter is material.
Section 7.7. Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of the parties hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement except pursuant to Sections 1.6, 1.7, 1.10, 4.6 and 4.7 hereof (which
are intended to be for the benefit of the persons described therein and may be
enforced by such persons).
Section 7.8. Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which shall constitute
one and the same instrument.
Section 7.9. Expenses.
(a) Except as otherwise provided in this Section 7.9, all costs and
expenses incurred in connection with the transactions contemplated hereby shall
be paid by the party incurring such expenses, whether or not such transactions
shall be consummated.
(b) If this Agreement is terminated by the Company pursuant to
Section 6.1(c), or by the Parent pursuant to Section 6.1(d), then Company shall
pay to Parent, on demand, as the sole remedy of Parent and the Purchaser under
this Agreement, a fee of $2,000,000 in full reimbursement and compensation for
Parent's time and effort in negotiating and entering into this Agreement and
taking actions pursuant thereto.
(c) If closing of the Merger under this Agreement does not occur
because the condition set forth in Section 5.1(e) is not satisfied, then Parent
shall pay to Company on demand, as Company's sole remedy under this Agreement,
$2,000,000 as liquidated damages in full reimbursement and compensation to
Company and its shareholders.
Section 7.10. Certain Definitions. As used herein:
(a) "subsidiary" shall mean, when used with reference to any entity,
any corporation a majority of the outstanding voting securities of which
are owned directly or indirectly by such former entity.
(b) "Material Adverse Effect" shall mean any adverse change in the
financial condition, business or operations of the Company which is
material to the Company.
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(c) "best efforts" means a party's best efforts in accordance with
reasonable commercial practice and without the incurrence of unreasonable
expense or the initiation or continuation of any litigation.
(d) "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
(e) "person" means any individual, corporation, partnership, limited
liability company, joint venture, association, trust, or government or any
agency or department thereof.
Section 7.11. Press Releases. Parent and the Company will seek to consult
with each other before issuing any press release or otherwise making any public
statement with respect to the transactions contemplated hereby.
Section 7.12. Sales Taxes. Any sales or use tax imposed by any domestic or
foreign taxing authority with respect to the property of the Company due with
respect to the Merger shall be borne by the Parent or Surviving Corporation and
expressly shall not be a liability of the shareholders of the Company.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed on its behalf by its officers thereunto duly
authorized on the day and year first above written.
PARENT:
DI INDUSTRIES, INC.
By /s/ T. P. RICHARDS
--------------------------------
T. P. Richards, President
PURCHASER:
DRILLERS, INC.
By /s/ T. P. RICHARDS
--------------------------------
T. P. Richards, President
COMPANY:
GREY WOLF DRILLING COMPANY
By /s/ J. K. B. NELSON
--------------------------------
J. K. B. Nelson, President
/s/ JAMES K. B. NELSON
-----------------------------------
JAMES K. B. NELSON, INDIVIDUALLY
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SCHEDULE 1.6 TO
MERGER AGREEMENT
ESCROW AGREEMENT
This ESCROW AGREEMENT ("Agreement"), dated as of ____________, 1997,
between DI INDUSTRIES, INC., a Texas corporation ("Parent"), DRILLERS, INC., a
Texas corporation and wholly owned subsidiary of Parent ("Purchaser"), GREY
WOLF DRILLING COMPANY, a Texas corporation ("Company"), JAMES K. B. NELSON
("Nelson"), SHELDON B. LUBAR ("Lubar") (Nelson and Lubar being herein sometimes
individually referred to as a "Stockholder Representative" or collectively
referred to as the "Stockholder Representatives"), and , a national banking
association ("Escrow Agent"),
WITNESSETH:
WHEREAS, Parent, Purchaser and the Company have entered into an
Agreement and Plan of Merger dated March ___, 1997 (as amended from time to
time, the "Merger Agreement"), which provides, among other things, for the
merger (the "Merger") of Company into and with Purchaser, with the Purchaser
being the surviving corporation (the "Surviving Corporation") with the result
that the Surviving Corporation will be a wholly owned subsidiary of Parent; and
WHEREAS, the parties to this Agreement desire, pursuant to Section
1.6(a)(vi) of the Merger Agreement, to provide for the deposit, investment and
reinvestment and distribution of an Escrow Fund as hereinafter provided, for
the purpose of providing for payment of any Final Judgment Amount or Approved
Settlement Amount for which the Surviving Corporation may become liable in
connection with the Lawsuit, and to provide for the payment of Contingent Cash
Consideration (if any) to the Stockholders of Company on the Distribution Date
pursuant to the Merger Agreement if the Escrow Fund has not theretofore been
fully distributed or expended pursuant to Section 5 of this Agreement.
NOW, THEREFORE, in consideration of the premises and as required
pursuant to the Merger Agreement, the parties hereto hereby agree as follows:
1. Definitions. Unless otherwise stated herein, terms defined in the
Merger Agreement shall have the meaning therein stated when used in this
Agreement, and the following terms shall have the following meanings:
(a) "Approved Settlement" shall mean a settlement agreement approved
by the Stockholder Representatives (subject to Section 15 hereof) pursuant
to which the Subject Claims shall be fully and finally released by TEPCO.
(b) "Approved Settlement Amount" shall mean the amount of money
required to be paid to TEPCO by the Surviving Corporation pursuant to an
Approved Settlement in consideration for a full and final release of the
Subject Claims, minus any amounts payable to TEPCO from the Surviving
Corporation pursuant to such Approved Settlement which are paid, or
reimbursed to the Surviving Corporation or Parent, pursuant to insurance
policies of the Company (if any) covering the Subject Claims.
(c) "Contingent Cash Consideration" shall mean, as to each
Stockholder, an amount, if any, equal to (i) the Escrow Account Balance,
(ii) divided by the number of shares of the Company Common Stock
outstanding at the Effective Time (except and excluding any shares of
Company Common Stock issued and held in the Company's treasury immediately
before the Effective Time), and (iii) multiplied by the number of shares
of Company Common Stock held by such Stockholder at the Effective Time
(except and excluding any Dissenting Shares as to which such Stockholder
shall not have failed to perfect, or effectively withdrawn or lost, his
right to appraisal and payment with respect thereto prior to the
Distribution Date).
(d) "Designated Attorneys" shall mean the law firm of Fulbright &
Jaworski L.L.P. or such other attorney or law firm as shall from time to
time hereafter be designated by Stockholder Representatives (with the
consent of the Surviving Corporation, which consent shall not unreasonably
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be withheld or delayed) to represent the Company, Surviving Corporation
and Parent (and any of them) in the Lawsuit.
(e) "Distribution Date" means the date which is the first business day
(excluding Saturdays, Sundays and holidays on which National Banks in
Houston, Texas are authorized to close) ensuing after the expiration of 20
days after the first to occur of (i) receipt of notice by the Escrow Agent
from the Stockholder Representatives and the Surviving Corporation that
the Subject Claims have been disposed of by final judgment in the Lawsuit
not subject to further appeal denying the Subject Claims, (ii) the date of
distribution from the Escrow Fund and payment by the Escrow Agent to the
Surviving Corporation of the Final Judgment Amount pursuant to paragraph
5(a) of this Agreement (without causing the Termination Date to occur), or
(iii) the date of distribution from the Escrow Fund and payment by the
Escrow Agent to the Surviving Corporation of the Approved Settlement
Amount pursuant to paragraph 5(b) of this Agreement (without causing the
Termination Date to occur). When and if a judgment denying the Subject
Claims has been entered in the Lawsuit and has become final and not
subject to further appeal, the Surviving Corporation shall join with the
Stockholder Representatives in giving notice of such fact to the Escrow
Agent pursuant to clause (i) of the last preceding sentence, promptly upon
request by the Stockholder Representatives.
(f) "Effective Time" shall mean the effective time of the Merger as
provided in the Merger Agreement.
(f) "Escrow Account Balance" shall mean the amount, if any, held in
the Escrow Fund by the Escrow Agent pursuant to this Agreement on the
Distribution Date, including the initial escrow deposit of $5,000,000 made
pursuant to Section 2 of this Agreement and all income and interest earned
on and profits realized from and proceeds of investments of the Escrow
Fund, less, however, any losses incurred from investments of the Escrow
Fund and any amounts paid or owing from the Escrow Fund on or prior to the
Distribution Date pursuant to Section 5 hereof to pay expenses or fees of
the Escrow Agent, to pay amounts payable to the Surviving Corporation for
Reimbursable Expenses and certain taxes payable by the Surviving
Corporation pursuant to Section 8 hereof, to pay expenses of the
Stockholder Representatives, or to pay a Final Judgment Amount or Approved
Settlement Amount to the Surviving Corporation.
(g) "Escrow Fund" shall mean the initial deposit of $5,000,000 made by
Purchaser with the Escrow Agent pursuant to Section 3 of this Agreement
and all investments of the Escrow Fund and income and interest earned on
and profits realized from investments of the Escrow Fund prior to the
Distribution Date, subject to the provisions of Section 7 hereof.
(h) "Final Judgment" shall mean a final judgment rendered in the
Lawsuit which is not subject to further appeal, pursuant to which TEPCO is
awarded the right to receive payment of any amount from the Surviving
Corporation based upon the Subject Claims.
(i) "Final Judgment Amount" shall mean the net amount of money (after
deduction of any offsetting amounts awarded the Surviving Corporation
pursuant to the Final Judgment) which TEPCO is entitled to recover from
the Surviving Corporation based upon the Subject Claims pursuant to a
Final Judgment, minus any amounts payable to TEPCO from the Surviving
Corporation pursuant to such Final Judgment which are paid, or reimbursed
to the Surviving Corporation or Parent, pursuant to insurance policies of
the Company (if any) covering the Subject Claims.
(j) "Lawsuit" shall mean Cause No. 96-49194, styled TEPCO, Inc. v.
Grey Wolf Drilling Company, now pending in the 164th Judicial District
Court of Harris County, Texas, and any other lawsuits arising during the
term of this Agreement in which the Subject Claims are asserted by TEPCO
against the Company or Surviving Corporation.
(k) "Lawsuit Expenses" shall have the meaning specified in Section 13
of this Agreement.
(l) "Reimbursable Expenses" shall have the meaning specified in
Section 13 of this Agreement.
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(m) "Stockholder" means a holder of Company Common Stock at the
Effective Time, and any person who shall have succeeded to the right of
such holder to receive payment of the Contingent Cash Consideration prior
to the Distribution Date by will or intestate succession or by operation
of law.
(n) "Subject Claims" shall mean the claims asserted by TEPCO against
the Company in the Lawsuit as set forth in the Plaintiff's Original
Petition heretofore filed in the Lawsuit or which may be asserted by TEPCO
against the Company or Surviving Corporation in the Lawsuit based upon the
facts, events or circumstances described or referred to in the Plaintiff's
Original Petition heretofore filed in the Lawsuit.
(o) "TEPCO" shall mean TEPCO, Inc., the plaintiff in the Lawsuit, and
any successor to the claims against the Company (or Successor Corporation
following the Merger) asserted by the plaintiff in the Lawsuit.
(p) "Termination Date" means the date (if such date occurs) when all
amounts remaining in the Escrow Fund are disbursed and distributed
pursuant to Section 5 of this Agreement.
2. Appointment of Escrow Agent; Fees and Expenses. Parent, Purchaser
and Company hereby appoint ____________________, as Escrow Agent for the
purposes set forth herein, and the Escrow Agent hereby accepts such appointment
on the terms herein provided. From and after the execution of this Agreement,
the Escrow Agent shall be entitled to be paid or reimbursed for the Escrow
Agent's fees for services under this Agreement in accordance with the Escrow
Agent's fee schedule in effect from time to time, and for reasonable
out-of-pocket expenses (including, without limitation, reasonable attorneys'
fees) incurred by the Escrow Agent in connection with the performance of its
services as Escrow Agent pursuant to this Agreement, which fees and expenses
may be withdrawn from the Escrow Fund by the Escrow Agent and paid to itself
from time to time upon giving of written notice by the Escrow Agent to the
Surviving Corporation and the Stockholder Representatives of the amount and
nature of such fees and expenses. If the Escrow Fund is insufficient to pay the
fees and expenses of the Escrow Agent, the Surviving Corporation agrees to pay
such fees and expenses to the extent not paid from the Escrow Fund.
3. Deposit of Escrow Fund. For the purposes herein set forth, unless
this Agreement is terminated pursuant to Section 4 hereof prior to the
Effective Time, Parent or Purchaser (who shall be jointly and severally liable
to do so) shall, at or immediately after the Effective Time of the Merger,
deposit with the Escrow Agent the sum of $5,000,000, which shall be included in
the Escrow Fund hereunder. The Escrow Fund will be held, invested, reinvested
and disbursed by the Escrow Agent in accordance with the terms hereof.
4. Termination Prior to Effective Time. If (i) the Subject Claims are
fully and finally released prior to the Effective Time, (ii) a judgment denying
the Subject Claims in their entirety is entered in the Lawsuit and becomes
final and not subject to further appeal prior to the Effective Time, or (iii)
the Merger Agreement is terminated pursuant to the provisions of the Merger
Agreement prior to the Effective Time, then in any such event this Agreement
shall terminate and be of no further force or effect; and neither Parent nor
Purchaser shall be obligated to deposit any amount with the Escrow Agent
pursuant to Section 3 of this Agreement.
5. Application of Escrow Fund Before Distribution Date; Termination
Date. At all times before the close of business on the Distribution Date, the
Escrow Fund will be retained by the Escrow Agent and shall be distributed or
expended at any time or from time to time to the extent required to effect
payment of the following:
(a) If at any time the Escrow Agent shall receive notice from the
Stockholder Representatives and the Surviving Corporation that a Final
Judgment exists, specifying the Final Judgment Amount payable to TEPCO
pursuant to such Final Judgment, the Escrow Agent shall, as promptly as
practicable, liquidate investments of the Escrow Fund (to the extent
required) and distribute from the Escrow Fund (up to all amounts then
remaining in the Escrow Fund) and pay to the Surviving Corporation such
Final Judgment Amount or such lesser total amount as shall then remain in
the Escrow Fund after payment of any amounts then authorized to be
disbursed from the Escrow Fund pursuant to paragraph 5(c), 5(d), or 5(e)
of this Agreement. When and if a Final Judgment exists the Surviving
Corporation shall join with the Stockholder Representatives in giving
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notice to the Escrow Agent that such Final Judgment exists, promptly upon
request after determination of the amount of the Final Judgment Amount.
(b) If at any time the Escrow Agent shall receive notice from the
Stockholder Representatives that an Approved Settlement exists, specifying
the amount of the Approved Settlement Amount payable to TEPCO pursuant to
such Approved Settlement, the Escrow Agent shall, as promptly as
practicable, liquidate investments of the Escrow Fund (to the extent
required) and distribute from the Escrow Fund (up to all amounts then
remaining in the Escrow Fund) and pay to the Surviving Corporation such
Approved Settlement Amount or such lesser total amount as shall then
remain in the Escrow Fund after payment of any amounts then authorized to
be disbursed from the Escrow Fund pursuant to paragraph 5(c), 5(d) or 5(e)
of this Agreement.
(c) From time to time when and as authorized pursuant to Section 2 of
this Agreement, the Escrow Agent shall liquidate investments of the Escrow
Fund (to the extent required) and disburse funds from the Escrow Fund to
pay or reimburse the Escrow Agent for fees of the Escrow Agent for its
service hereunder and for expenses reasonably incurred by Escrow Agent in
connection with this Agreement, to the extent that such fees or expenses
can be paid or reimbursed from amounts then remaining in the Escrow Fund.
(d) From time to time when and as authorized pursuant to Section 8 of
this Agreement, the Escrow Agent shall liquidate investments of the Escrow
Fund (to the extent required) and disburse funds from the Escrow Fund to
reimburse the Surviving Corporation for Reimbursable Expenses and certain
taxes paid or payable by the Surviving Corporation as described in said
Section 8, to the extent that such Reimbursable Expenses and taxes can be
reimbursed from amounts then remaining in the Escrow Fund.
(e) From time to time when and as authorized pursuant to Section 11
of this Agreement, the Escrow Agent shall liquidate investments of the
Escrow Fund (to the extent required) and disburse funds from the Escrow
Fund to pay or reimburse the Stockholder Representatives, and either of
them, for expenses reasonably incurred by the Stockholder Representatives
in connection with this Agreement, to the extent that such expenses can be
paid or reimbursed from amounts then remaining in the Escrow Fund.
If at any time the entirety of the then remaining Escrow Fund shall be required
to be distributed and disbursed pursuant to this Section 5, the date of final
disbursement and distribution of the remaining funds in the Escrow Fund by the
Escrow Agent pursuant to this Section 5 shall be the Termination Date. If the
Termination Date occurs, the Distribution Date will not occur, and no amount of
the Escrow Fund will be disbursed or distributed by the Escrow Agent pursuant
to Section 6 of this Agreement.
6. Application of Escrow Fund on the Distribution Date. If the
Termination Date does not occur and an event which will cause the Distribution
Date to occur after the expiration of 20 days pursuant to paragraph 1(e) shall
have occurred, then at least five days prior to the Distribution Date the
Escrow Agent shall liquidate all investments of the Escrow Fund. On the
Distribution Date, the Escrow Agent shall distribute and pay to itself in its
capacity as the Exchange Agent pursuant to the Merger Agreement, as bailee for
the Stockholders for distribution to the Stockholders pursuant to the Merger
Agreement, an amount of the Escrow Account Balance equal to the sum of the
Contingent Cash Consideration of all Stockholders. Payment by Escrow Agent of
the sum of the Contingent Cash Consideration of all Stockholders to itself in
its capacity as the Exchange Agent under the Merger Agreement as bailee for the
Stockholders as provided for herein shall be deemed to constitute payment to
each Stockholder of the Contingent Cash Consideration owing by Parent and the
Surviving Corporation to such Stockholder for all purposes including Section 14
of this Agreement. Any amount of the Escrow Account Balance in excess of the
sum of the Contingent Cash Consideration of all Stockholders (consisting of the
amount, if any, of the Escrow Account Balance which would be payable as
Contingent Cash Consideration with reference to Dissenting Shares if all
Stockholders who owned such Dissenting Shares at the Effective Time had
effectively withdrawn their right to appraisal and payment with respect
thereto) shall be distributed and paid by the Escrow Agent to the Surviving
Corporation on the Distribution Date. The right of a Stockholder to receive
payment through the Exchange Agent of any amount of the Escrow Account Balance
pursuant to this Section 6 may not be transferred or otherwise assigned by the
Stockholder to any person, unless such transfer
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occurs by will or intestate succession or by operation of law. Parent shall
provide a statement to the Stockholder Representatives and the Escrow Agent no
later than five days prior to the Distribution Date setting forth the aggregate
percentage of the Escrow Account Balance to be distributed to the Exchange
Agent on the Distribution Date as the sum of the Contingent Cash Consideration
of all Stockholders.
7. Investment of the Escrow Fund. The Escrow Agent shall invest and
reinvest the Escrow Fund in readily marketable securities of the United States
of America or its lawful agencies or in securities guaranteed by the full faith
and credit of the United States, which securities, in each case, shall have
maturities of one year or less after purchase thereof by the Escrow Agent. It
is expressly agreed and stipulated that none of the Escrow Agent, the Parent,
the Surviving Corporation or the Stockholder Representatives shall in any way
whatsoever be liable for losses on any investment of the Escrow Fund,
including, but not limited to, losses from market risks, due to premature
liquidation or resulting from other actions taken pursuant to this Agreement.
The Escrow Agent shall provide written reports to the Surviving Corporation and
the Stockholder Representatives (i) prior to the fifteenth day of each month
until the Distribution Date or Termination Date occurs, and (ii) if the
Termination Date does not occur, prior to the fifteenth day of the month next
succeeding the month during which the Distribution Date occurs, or (iii) if the
Termination Date occurs, prior to the fifteenth day of the month next
succeeding the month during which the Termination Date occurs, in each case
showing investments and reinvestments made of the Escrow Fund, income or
interest received on investments of the Escrow Fund, proceeds received and
profits or losses realized on sales of investments of the Escrow Fund, and
disbursements, if any, from the Escrow Fund through the end of the last
preceding calendar month. Additionally, at any time upon request from the
Surviving Corporation or the Stockholder Representatives the Escrow Agent shall
provide them with a special report reflecting such of the information specified
in the last preceding sentence as they shall request with respect to the period
since the end of the period covered by the last report provided pursuant to the
last preceding sentence down to the date of such special report. All income and
profits realized on investment and reinvestment and sale or liquidation of
investments of the Escrow Fund shall become a part of the Escrow Fund, and all
losses and expenses suffered or incurred on investment and reinvestment and
sale or liquidation of investments of the Escrow Fund shall be deducted from
and shall no longer constitute part of the Escrow Fund.
8. Taxes on Income and Profits of Escrow Fund; Reimbursable Expenses.
Any income or profits realized from investment or reinvestment or sale or
liquidation of investments of the Escrow Fund by the Escrow Agent which are
taxable for federal income tax purposes ("Taxable Income or Profits"), and any
expenses or losses incurred in connection with the Escrow Fund and this
Agreement and the investment or reinvestment or sale or liquidation of the
Escrow Fund which are payable or deducted from the Escrow Fund and are
deductible for federal income tax purposes ("Deductible Expenses or Losses")
shall be deemed for federal income tax purposes to be income, profits, expenses
or losses, as applicable, of the Surviving Corporation and not the Escrow Fund
or Stockholders. The Surviving Corporation or Parent, as applicable, shall
report and pay any federal income taxes attributable to the amount, if any, of
such Taxable Income or Profits in excess of such Deductible Expenses or Losses,
as applicable. Upon payment of any such taxes, the Surviving Corporation shall
certify in writing to the Escrow Agent and the Stockholder Representatives that
it has paid such taxes, specifying the amount thereof and the amounts of the
Taxable Income or Profits and Deductible Expenses or Losses (as applicable)
taken into account in determining the amount of such taxes. Additionally, on or
prior to the Distribution Date, the Surviving Corporation shall certify in
writing to the Escrow Agent and the Stockholder Representatives the amount, if
any, of any additional federal income taxes not theretofore paid by the
Surviving Corporation or Parent which the Surviving Corporation or Parent will
be required to pay on account of the amount, if any, of Taxable Income or
Profits in excess of Deductible Expenses or Losses. In each instance, the
amount of the federal income taxes paid or payable by the Surviving Corporation
or Parent with respect to the excess, if any, of Taxable Income or Profits
above Deductible Expenses or Losses shall be calculated at the Parent's
marginal federal corporate income tax rate actually applicable to the Parent's
taxable income, if any, for the tax year of the Parent during which the
applicable Taxable Income or Profits accrued; and if for any tax year of the
Surviving Corporation or Parent the Deductible Losses or Expenses available for
deduction from Taxable Income or Profits for such tax year shall exceed such
Taxable Income or Profits, the excess shall be carried forward to the
succeeding tax year or years and deducted from Taxable Income or Profits in
such succeeding tax year or years for purposes of calculating the amount, if
any, of the federal income tax paid or payable by the Surviving Corporation or
Parent with respect to Taxable Income or Profits for such succeeding tax year
or years. The amounts of federal income taxes paid or payable by the Surviving
Corporation or Parent on account of an excess of Taxable Income or Profits
above Deductible Expenses or Losses which shall be certified by the Surviving
Corporation to the Escrow Agent and Stockholder Representatives from time to
time as provided for above in this section shall be distributed and paid by the
Escrow Agent from the Escrow Fund to the Surviving Corporation (or Parent if
directed by the Surviving Corporation) within five days after receipt of each
such
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certification. Additionally, upon payment by the Surviving Corporation from
time to time of any Lawsuit Expenses (as defined in Section 13 below) incurred
after the Effective Time, the Surviving Corporation shall certify in writing to
the Escrow Agent and the Stockholder Representatives that it has paid such
Lawsuit Expenses, specifying in reasonable detail the nature and amounts
thereof and the amount of the Reimbursable Expenses (as defined, and calculated
as provided, in said Section 13) for which the Surviving Corporation is
entitled to reimbursement from the Escrow Fund by reason of payment of such
Lawsuit Expenses. Additionally, on or prior to the Distribution Date, the
Surviving Corporation shall certify in writing to the Escrow Agent and the
Stockholder Representatives the amount, if any, of any additional Lawsuit
Expenses which have been incurred by the Surviving Corporation after the
Effective Time and which it will be required to pay but which have not
theretofore been paid by it, specifying in reasonable detail the nature and
amounts of such Lawsuit Expenses and the amount of the Reimbursable Expenses
(as defined, and calculated as provided, in said Section 13) for which the
Surviving Corporation is entitled to reimbursement from the Escrow Fund by
reason of being required to pay such Lawsuit Expenses. The amounts of
Reimbursable Expenses for which the Surviving Corporation is entitled to
reimbursement from the Escrow Fund by reason of Lawsuit Expenses paid or
payable by the Surviving Corporation which shall be certified by the Surviving
Corporation to the Escrow Agent and Stockholder Representatives from time to
time as provided for above in this section shall be distributed and paid by the
Escrow Agent from the Escrow Fund to the Surviving Corporation within five days
after receipt of each such certification. If requested by Escrow Agent, Parent
and the Surviving Corporation shall provide the Escrow Agent with taxpayer
identification numbers for Parent and the Surviving Corporation promptly after
receipt of such request.
9. Liability of Escrow Agent. The duties of the Escrow Agent hereunder
will be limited to the observance of the express provisions of this Agreement;
and all parties acknowledge and agree that the Escrow Agent is acting solely
and exclusively as a depository hereunder. The Escrow Agent will not be subject
to, or be obligated to recognize, any other agreement between the parties
hereto or directions or instructions not specifically set forth or provided for
herein. The Escrow Agent may rely upon and act upon any instrument received by
it pursuant to the provisions of this Agreement that it reasonably believes to
be genuine and in conformity with the requirements of this Agreement. The
Escrow Agent shall never be required to use, advance or risk its own funds or
otherwise incur financial liability in the performance of any of its duties or
the exercise of any of its rights and powers hereunder. The Escrow Agent may
consult with its counsel or other counsel satisfactory to it concerning any
question relating to its duties or responsibilities hereunder or otherwise in
connection herewith and shall not be liable for any action taken, suffered or
omitted by it in good faith upon the advice of counsel. Without limiting the
foregoing, the Escrow Agent will not be liable for any error of judgment or any
act done or omitted to be done or any step taken by it in good faith or for any
mistake of fact or law or for anything that it might do or refrain from doing
in connection with this Agreement, INCLUDING, WITHOUT LIMITATION, NEGLIGENCE OF
ESCROW AGENT, except to the extent such actions or omissions shall be proved to
constitute gross negligence or willful misconduct on the part of the Escrow
Agent.
10. Indemnification of Escrow Agent. PARENT AND THE SURVIVING
CORPORATION, JOINTLY AND SEVERALLY, WILL INDEMNIFY AND HOLD THE ESCROW AGENT
HARMLESS FROM AND AGAINST ANY AND ALL LOSSES, COSTS, DAMAGES OR EXPENSES
(INCLUDING, BUT NOT LIMITED TO, REASONABLE ATTORNEYS' FEES) IT MAY SUSTAIN BY
REASON OF ITS SERVICES AS ESCROW AGENT HEREUNDER, BUT ONLY TO THE EXTENT SUCH
LOSSES, COSTS, DAMAGES OR EXPENSES EXCEED THE AMOUNT OF THE FUNDS AVAILABLE IN
THE ESCROW FUND TO PAY OR REIMBURSE SAME, AND EXCEPT SUCH LOSSES, COSTS,
DAMAGES OR EXPENSES INCURRED BY REASON OF ACTS OR OMISSIONS FOR WHICH THE
ESCROW AGENT IS LIABLE OR RESPONSIBLE UNDER THE PROVISIONS OF THE LAST SENTENCE
OF SECTION 9 OF THIS AGREEMENT. THE FOREGOING INDEMNITY AGREEMENT SHALL SURVIVE
THE RESIGNATION OF THE ESCROW AGENT OR THE TERMINATION OF THIS ESCROW
AGREEMENT.
11. Stockholder Representatives. Company hereby appoints James K. B.
Nelson and Sheldon B. Lubar as Stockholder Representatives to act hereunder on
behalf of all Stockholders as herein provided. In consideration of James K. B.
Nelson and Sheldon B. Lubar (and any successor Stockholder Representative)
acting as the Stockholder Representatives hereunder on behalf of all
Stockholders, each such Stockholder, by accepting the Merger Consideration in
respect of such Stockholder's shares of Company Common Stock pursuant to the
Merger Agreement and becoming a beneficiary of this Agreement, consents to and
affirms the appointment of the Stockholder Representatives to act hereunder on
behalf of all Stockholders as herein provided, authorizes the Stockholder
Representatives to act on behalf of such Stockholder pursuant to the terms of
this Agreement, and releases each Stockholder Representative from liability for
any error of judgment or action taken or not taken by such Stockholder
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Representative in connection with this Agreement, INCLUDING, WITHOUT
LIMITATION, NEGLIGENCE OF SUCH STOCKHOLDER REPRESENTATIVE, except only for such
Stockholder Representative's gross negligence or willful misconduct, and
further agrees, without limiting the foregoing, that each Stockholder
Representative shall be fully protected and shall have no liability if acting
in good faith in conformity with the opinion of counsel. The Stockholder
Representatives shall not be deemed to be trustees and shall not be held to a
standard of conduct applicable to a trustee or other fiduciary. Any action
taken by any one of the Stockholder Representatives shall be deemed for all
purposes as an action taken by both Stockholder Representatives and shall bind
the Stockholders accordingly; but no Stockholder Representative shall be liable
for any action or omission of any other Stockholder Representative in which the
former Stockholder Representative did not participate. In each instance, in
case of the resignation, death or inability to act of a Stockholder
Representative, a successor Stockholder Representative shall be designated by
Stockholders formerly holding a majority of the outstanding shares of Company
Common Stock at the Effective Time of the Merger, any such designation to be
evidenced by a writing signed by such Stockholders and to take effect when
executed copies thereof have been delivered to the Escrow Agent and the
Surviving Corporation. The remaining Stockholder Representative shall continue
to serve and act on behalf of the Stockholder Representatives under this
Agreement pending designation of any such successor Stockholder Representative.
Each successor Stockholder Representative shall have all the power, authority,
rights, and privileges hereby conferred upon an original Stockholder
Representative hereunder, and the term Stockholder Representative as used
herein shall be deemed to include each such successor Stockholder
Representative. Each Stockholder Representative shall be entitled to be
reimbursed from the Escrow Fund, as provided in paragraph 5(e) of this
Agreement, all reasonable out-of-pocket expenses (including, without
limitation, reasonable attorneys' fees) incurred in connection with the
performance of services as Stockholder Representative pursuant to this
Agreement, upon presentation to the Escrow Agent and the Surviving Corporation
of a statement and reasonable supporting evidence of payment by such
Stockholder Representative of such expenses.
12. Resignation of Escrow Agent. The Escrow Agent may resign from its
duties hereunder by giving written notice of such resignation to Parent, the
Surviving Corporation, and the Stockholder Representatives at least 30 days
prior to the effective date of such resignation. A successor Escrow Agent shall
be appointed by agreement of Parent and the Stockholder Representatives, which
appointment shall be evidenced by a written agreement signed by Parent and the
Stockholder Representatives, copies of which shall be delivered to the Escrow
Agent. Upon the effective date of resignation by the Escrow Agent, the Escrow
Agent shall deliver the Escrow Fund to the successor Escrow Agent appointed as
aforesaid. If a successor Escrow Agent has not been appointed prior to the
effective date of resignation by the Escrow Agent, the Escrow Agent's sole
responsibility after the effective date of such resignation shall be, at the
election of the Escrow Agent:
(a) to hold the Escrow Fund (without any obligation to reinvest the
same) and to deliver the same to a designated successor Escrow Agent, if
any, thereafter appointed by Parent and the Stockholder Representatives as
above provided, or in accordance with the directions of a final order or
judgment of a court of competent jurisdiction, or
(b) to institute a petition for interpleader in a court of competent
jurisdiction and pay and deliver the Escrow Fund into the registry of such
court,
in either which event the Escrow Agent's obligations hereunder shall cease and
terminate upon payment or delivery of the Escrow Fund as provided in paragraph
(a) or (b), as applicable, of this section.
13. Control of Lawsuit. The Company believes that the Subject Claims
asserted by TEPCO in the Lawsuit are entirely without merit and believes that
if the Lawsuit is tried the Subject Claims will be denied in their entirety and
the Company will recover judgment against TEPCO on its counterclaim which has
been asserted in the Lawsuit. The Company has agreed to enter into this Escrow
Agreement incident to execution of the Merger Agreement solely to avoid
potential delay in or interference with closing of the Merger which might
otherwise result from the pendency of the nebulous and unquantified claims for
alleged "damages" which have been asserted by TEPCO in its petition filed in
the Lawsuit. The Designated Attorneys shall be engaged to represent the Company
and, after the Effective Time, the Surviving Corporation (and Parent, if it is
made a party to the Lawsuit) in connection with the investigation, preparation
for trial, trial and any appeal of any judgment entered in the Lawsuit and in
connection with any mediation or other settlement negotiations in connection
with the Subject Claims and the Lawsuit. The fees (calculated at the customary
hourly rates charged by the Designated Attorneys from time to time) and charges
for expenses of the Designated Attorneys for such services and all other costs
and expenses and court costs in connection
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with the Lawsuit and any appeal of any judgment entered therein, except only
amounts of a Final Judgment Amount or Approved Settlement Amount which are to
be paid out of the Escrow Fund as provided for in Section 5 of this Agreement,
are herein collectively called "Lawsuit Expenses." The Company and, after the
Effective Time, the Surviving Corporation shall bear and pay the Lawsuit
Expenses; provided that the Surviving Corporation shall be entitled to receive
reimbursement from the Escrow Fund from time to time (to the extent of the
funds available in the Escrow Fund to effect such reimbursement) as provided in
Section 8 of this Agreement for amounts (herein called "Reimbursable Expenses")
equal to one-half (1/2) of all Lawsuit Expenses incurred after the Effective
Time which are paid or incurred by the Surviving Corporation from time to time
and which have not theretofore been taken into account in certificates of
Lawsuit Expenses and Reimbursable Expenses theretofore provided by the
Surviving Corporation to the Escrow Agent and Stockholder Representatives
pursuant to said Section 8. From and after the Effective Time, the Stockholder
Representatives shall be authorized and empowered to control and direct and
shall control and direct the handling of the Lawsuit by the Designated
Attorneys; and the Surviving Corporation and Parent shall provide such
assistance and cooperation as shall be reasonably requested by the Designated
Attorneys, including production of documents and records, provision of
depositions or testimony of employees as witnesses, and provision of such
information as shall be available to the Company, Surviving Corporation or
Parent. After the Effective Time, the Surviving Corporation shall be entitled
to participate in (but not control) the defense of the Lawsuit through
attorneys of its choice at its sole cost and expense (which shall not
constitute "Lawsuit Expenses") and shall be entitled to updates of the status
of the Lawsuit from the Designated Attorneys from time to time upon request.
After the Effective Time, the Stockholder Representatives shall be entitled, if
they so elect in the exercise of their discretion, to approve and to require
that the Surviving Corporation and Parent (and either of them, as applicable)
enter into a settlement agreement with TEPCO providing for a full and final
release of the Subject Claims and dismissal of the Lawsuit; provided that the
Stockholder Representatives shall not be authorized, without consent of the
Surviving Corporation and Parent, to approve a settlement which will require
the Surviving Corporation or Parent to pay any amount of money in excess of
funds available to be paid and which are paid out of the Escrow Fund pursuant
to this Agreement or are paid or reimbursed pursuant to insurance policies (if
any) maintained by the Company covering the Subject Claims, or which will
require the Surviving Corporation or Parent to undertake any affirmative
obligation (other than customary agreements to indemnify TEPCO with respect to
claims of the Company, Parent or Surviving Corporation against TEPCO which are
released pursuant to a settlement) to TEPCO or any other person other than for
the payment of amounts of money which are available to be paid and are paid out
of the Escrow Fund pursuant to this Agreement or are paid or reimbursed
pursuant to insurance policies (if any) maintained by the Company covering the
Subject Claims; provided that the Stockholder Representatives shall be entitled
and authorized, if they so elect in the exercise of their discretion, to
approve and require the Surviving Corporation and Parent to enter into a
settlement which will require that the Surviving Corporation or Parent release
(in whole or in part) any counterclaim or counterclaims against TEPCO which
have been or are asserted in the Lawsuit on behalf of the Company, Surviving
Corporation or Parent as full or partial consideration for the full and final
release of the Subject Claims. Parent and Purchaser recognize and acknowledge
that a conflict of interest may exist as between Parent and the Surviving
Corporation, on the one hand, and the Stockholders and Stockholder
Representatives, on the other hand, concerning negotiation or approval of any
proposed or possible settlement of the Lawsuit and Subject Claims; and Company,
Parent and Purchaser expressly agree and stipulate (subject to and without
waiving the rights of Parent and the Surviving Corporation under Section 15 of
this Agreement) that:
(a) The Designated Attorneys shall be authorized and directed to, and
shall, render and provide advice, assistance and recommendations
concerning any proposed or possible settlement of the Lawsuit and Subject
Claims based solely on the opinion of the Designated Attorneys, in the
exercise of their professional judgment and discretion, as to whether any
such settlement would be in the best interest of the Stockholders, and
without regard to whether any such settlement would be in the best
interest of the Surviving Corporation or Parent. Specifically, and without
limiting the foregoing, the Designated Attorneys shall have no duty or
obligation whatsoever to the Surviving Corporation or Parent to recommend
or to attempt to negotiate or obtain a settlement of the Lawsuit or
Subject Claims unless the Designated Attorneys conclude, in the exercise
of their professional judgment and discretion, that such settlement would
be in the best interest of the Stockholders (determined without regard for
the interests of the Surviving Corporation or Parent). The Surviving
Corporation and Parent shall consult with and shall rely upon counsel
other than the Designated Attorneys with reference to any proposed or
possible settlement of the Lawsuit and Subject Claims; and the Designated
Attorneys shall have no liability or responsibility whatsoever to the
Surviving Corporation or Parent for any decision, advice or recommendation
of the Designated Attorneys
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concerning whether to approve or disapprove or to seek to obtain or
negotiate any possible or proposed settlement of the Lawsuit or Subject
Claims or any action or omission of the Designated Attorneys in connection
with negotiating or attempting to negotiate any such settlement.
(b) The Stockholder Representatives shall be authorized and empowered
to, and shall, make decisions whether to seek to settle, or to approve any
proposed or possible settlement providing for a full release of, the
Subject Claims based solely on the opinion of the Stockholder
Representatives, in the exercise of their discretion, as to whether any
such settlement would be in the best interest of the Stockholders, and
without regard to whether any such settlement would be in the best
interest of the Surviving Corporation or Parent. Specifically, and without
limiting the foregoing, the Stockholder Representatives shall have no duty
or obligation whatsoever to the Surviving Corporation or Parent to approve
or to attempt to negotiate or obtain a settlement of the Lawsuit or
Subject Claims unless the Stockholder Representatives conclude, in the
exercise of their discretion, that such settlement would be in the best
interest of the Stockholders (determined without regard for the interests
of the Surviving Corporation or Parent); and the Stockholder
Representatives shall have no liability or responsibility whatsoever to
the Surviving Corporation or Parent for any decision of the Stockholder
Representatives concerning whether to approve or disapprove or to seek to
obtain or negotiate any possible or proposed settlement of the Lawsuit or
Subject Claims or any action or omission of the Stockholder
Representatives in connection with negotiating or attempting to negotiate
any such settlement.
14. Security Interest and Pledge. Under the provisions of the Merger
Agreement, unless the Termination Date occurs, Parent and the Surviving
Corporation are jointly and severally liable and responsible to pay or cause to
be paid, and have agreed to pay or cause to be paid, the Contingent Cash
Consideration to the respective Stockholders on the Distribution Date. To
secure such obligation of Parent and the Surviving Corporation to pay such
Contingent Cash Consideration to the respective Stockholders as provided in the
Merger Agreement, Parent and Purchaser (as the corporate entity which will be
the Surviving Corporation upon the Merger) hereby pledge and collaterally
assign to the Stockholders and the Stockholder Representatives for the use and
benefit of and as representatives of the Stockholders, and grant to the
Stockholders and the Stockholder Representatives for the use and benefit of and
as representatives of the Stockholders a lien on and a continuing security
interest in and to, the Escrow Fund (including, without limitation, all bank
accounts in which the Escrow Agent may at any time deposit funds in the Escrow
Fund, all securities in which the Escrow Fund may at any time or times be
invested or reinvested by the Escrow Agent, all income from and proceeds of
securities in which the Escrow Fund is at any time or times invested or
reinvested by the Escrow Agent, all money at any time held by the Escrow Agent
as a part of the Escrow Fund, and all accounts, documents, instruments and
general intangibles at any time owing to or held by the Escrow Agent and
constituting a part of the Escrow Fund). If the Distribution Date occurs,
failure of the Parent and Surviving Corporation to pay or cause to be paid the
Contingent Cash Consideration to any Stockholder on the Distribution Date shall
constitute a default. Upon any such default, the pledge and collateral
assignment and lien and security interest in and to the Escrow Fund herein
granted to the Stockholders and to the Stockholder Representatives for the use
and benefit of and as representatives of the Stockholders may be enforced or
foreclosed by the Stockholder Representatives for the use and benefit of the
Stockholders in any manner authorized by applicable law, including, without
limitation, in accordance with the provisions of Subchapter E of Chapter 9 of
the Uniform Commercial Code of Texas (including, without limitation, exercise
of the rights and powers and in accordance with the provisions and procedures
provided for or described in any or all of Sections 9.502, 9.503 and 9.504 of
the Uniform Commercial Code of Texas), with the proceeds of the Escrow Fund,
after deduction of expenses of enforcement or foreclosure, to be applied toward
payment of the Contingent Cash Consideration owing to the respective
Stockholders, in proportion to the respective amounts of the Contingent Cash
Consideration owing to such respective Stockholders. Prior to the Effective
Time, Parent and the Purchaser will execute and file financing statements under
the Uniform Commercial Code in favor of the Stockholder Representatives as
secured parties to evidence and perfect the security interest in the Escrow
Fund hereinabove granted by Parent and the Purchaser (to the extent, if any,
that filing of a financing statement is required to perfect such security
interest), and immediately after the Effective Time the Surviving Corporation
shall execute and file a financing statement (in the same form as the financing
statement executed and filed by the Purchaser of even date herewith) in the
name of the Surviving Corporation as debtor in favor of the Stockholder
Representatives as secured parties to further evidence and perfect such
security interest. Parent and Surviving Corporation will timely execute and
file continuation statements as and when required under Section 4.403 of the
Uniform Commercial Code of Texas to maintain the effectiveness of such
financing statements at all times until the Contingent Cash Consideration has
been paid to the
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Stockholders or the Termination Date has occurred. Upon payment of the
Contingent Cash Consideration to the Stockholders or upon occurrence of the
Termination Date, the Stockholder Representatives shall, upon request, execute
and deliver to Parent and the Surviving Corporation termination statements with
respect to the financing statements and continuation statements (if any)
executed and filed by Parent, the Purchaser and the Surviving Corporation
pursuant to this Section, as provided for in Section 9.404 of the Uniform
Commercial Code of Texas. Escrow Agent acknowledges and agrees that Escrow
Agent shall receive, hold and maintain possession and control of the Escrow
Fund as bailee of and for the Stockholder Representatives and Stockholders as
secured parties and as holders of the common law pledge and assignment and lien
herein granted in and to the Escrow Fund (including, without limitation, all
bank accounts in which the Escrow Agent may at any time deposit funds in the
Escrow Fund, all securities in which the Escrow Fund may at any time or times
be invested or reinvested by the Escrow Agent, all income from and proceeds of
securities in which the Escrow Fund is at any time or times invested or
reinvested by the Escrow Agent, all money at any time held by the Escrow Agent
as a part of the Escrow Fund, and all accounts, documents, instruments and
general intangibles at any time owing to or held by the Escrow Agent and
constituting a part of the Escrow Fund) at all times until distribution of the
Escrow Fund by the Escrow Agent on the Distribution Date pursuant to Section 6
of this Agreement or occurrence of the Termination Date (whichever first
occurs); provided, of course, that Escrow Agent may disburse or distribute
amounts from the Escrow Fund from time to time as and when required under the
provisions of Section 5 or Section 6 of this Agreement, and amounts thus
disbursed or distributed from the Escrow Fund pursuant to and as authorized in
Section 5 of this Agreement shall not thereafter be subject to the security
interest and common law pledge and assignment and lien herein granted to the
Stockholders and Stockholder Representatives.
15. Arbitration Regarding Proposed Settlement Agreements.
Notwithstanding the provisions of Section 13 of this Agreement, if at any time
or times during the term of this Agreement TEPCO shall make an offer ("TEPCO
Settlement Offer") to settle and release the Subject Claims which would require
payment of an Approved Settlement Amount from the Escrow Fund if such offer
were accepted and approved by the Stockholder Representatives, and if the
Stockholder Representatives do not approve or accept such TEPCO Settlement
Offer but the Surviving Corporation believes that such TEPCO Settlement Offer
is fair and reasonable and should be accepted, the Surviving Corporation shall
have the right to require that the decision ("Disputed Decision") whether to
accept or reject the TEPCO Settlement Offer be determined by arbitration as
hereinafter provided, by giving written notice (an "Arbitration Demand Notice")
to the Stockholder Representatives. If the Surviving Corporation gives an
Arbitration Demand Notice to the Stockholder Representatives with respect to a
TEPCO Settlement Offer, the Surviving Corporation and Stockholder
Representatives shall endeavor in good faith to agree upon a "Qualified
Arbitrator" (as hereinafter defined) to whom the Disputed Decision shall be
submitted for resolution. If a Qualified Arbitrator has not been selected by
agreement within ten days after giving of an Arbitration Demand Notice to the
Stockholder Representatives, either the Surviving Corporation or the
Stockholder Representatives shall have the right to request that a Qualified
Arbitrator be appointed by the Judge of the United States District Court for
the Southern District of Texas, Houston Division, who is senior in service. A
"Qualified Arbitrator" shall be a neutral, licensed, well-regarded attorney
practicing in Houston, Texas, who has significant experience in, and who
regularly engages in, the defense of commercial litigation and who does not
represent and has not represented the Company or Parent or any of Parent's
subsidiaries or either of the Stockholder Representatives (and who is not and
has not within the preceding five years been associated with a law firm which
represents or has within the preceding five years represented the Company or
Parent or any of Parent's subsidiaries or either of the Stockholder
Representatives). Upon the selection or appointment of a Qualified Arbitrator,
the Qualified Arbitrator shall be provided access to all available information
and files concerning the Lawsuit and Subject Claims and the TEPCO Settlement
Offer, subject only to such restrictions as shall be necessary to preserve the
attorney-client privilege and work-product privilege with respect to privileged
communications between the Designated Attorneys and the Company, Surviving
Corporation (and Parent, if applicable) and Stockholder Representatives and the
work-product of the Designated Attorneys; and the Surviving Corporation and
Stockholder Representatives shall each be afforded the right to present their
views and arguments to the Qualified Arbitrator as to whether the TEPCO
Settlement Offer is fair and reasonable and should be accepted or rejected. The
Qualified Arbitrator shall render a decision, in the exercise of his
professional judgment and discretion, whether the TEPCO Settlement Offer is
fair and reasonable and should be accepted or rejected, based upon the
assumptions and standards hereinafter specified. In making such decision, the
Qualified Arbitrator shall assume that this Escrow Agreement does not exist and
that any obligation of the Surviving Corporation or Parent to pay any amount of
Contingent Cash Consideration to the Stockholders is wholly independent of and
would not be affected in any manner by the Lawsuit or Subject Claims or any
settlement of the Subject Claims or final judgment, either favorable or
adverse, entered in the Lawsuit, and shall further assume that the Surviving
Corporation and Parent and Parent's shareholders would be required to bear the
entire cost, expense and burden of the settlement proposed in the TEPCO
Settlement Offer and would likewise be required
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to bear the entire cost, expense and burden of continuing to defend the Subject
Claims and of appeal and, if required, payment of any adverse judgment which
might be entered in the Lawsuit (without either increasing or diminishing any
obligations to or rights with respect to the Stockholders); and such decision
shall be based upon the opinion of the Qualified Arbitrator, in the exercise of
his professional judgment and discretion, whether acceptance or rejection of
the TEPCO Settlement Offer would be advisable or inadvisable and in or not in
the best interest of the Surviving Corporation and Parent based upon the
aforesaid assumptions. The decision of the Qualified Arbitrator with reference
to a Disputed Decision shall be signed by the Qualified Arbitrator and provided
in writing to the Stockholder Representatives and the Surviving Corporation and
shall be final and binding upon the Stockholder Representatives, Stockholders,
Parent and the Surviving Corporation. The decision shall not state reasons for
the conclusions of the Qualified Arbitrator, but shall simply state the
decision of the Qualified Arbitrator whether the TEPCO Settlement Offer should
be accepted or rejected based upon the assumptions and standards prescribed
herein. All hearings and proceedings in connection with arbitration of any
Disputed Decision and any decision of the Qualified Arbitrator shall be
maintained confidential to the maximum extent allowed by law, except that the
decision of the Qualified Arbitrator may be disclosed if and to the extent
required to enforce compliance with such decision by the Stockholder
Representatives, if necessary. If the Qualified Arbitrator renders a decision
that a TEPCO Settlement Offer should be accepted, such decision shall specify
the Approved Settlement Amount which would be required to be paid to TEPCO
pursuant to an Approved Settlement in accordance with such TEPCO Settlement
Offer; and the Stockholder Representatives shall be required to approve the
acceptance by the Surviving Corporation (and Parent, if applicable) of such
TEPCO Settlement Offer, and, if TEPCO agrees, the Surviving Corporation (and
Parent, if applicable) shall enter into an Approved Settlement in accordance
with such TEPCO Settlement Offer providing for payment of the Approved
Settlement Amount specified in the Qualified Arbitrator's decision, in which
event the Stockholder Representatives shall promptly give notice of such
Approved Settlement and the Approved Settlement Amount payable to TEPCO
pursuant to such Approved Settlement as provided for in paragraph 5(b) of this
Agreement. The Designated Attorneys shall represent the Stockholder
Representatives in connection with any arbitration of a Disputed Decision; and
the fees and expense charges of the Designated Attorneys in connection such
arbitration shall be paid by the Surviving Corporation and shall be deemed and
considered to be "Lawsuit Expenses" as hereinabove defined (so that the
Surviving Corporation may certify such Lawsuit Expenses to the Escrow Agent to
request reimbursement from the Escrow Fund of one-half thereof as Reimbursable
Expenses as provided for in Section 8 of this Agreement). The Surviving
Corporation shall also bear and pay all fees and expenses of the Qualified
Arbitrator and any fees or expenses of attorneys or other representatives of
the Surviving Corporation in connection with any arbitration of a Disputed
Decision; and such fees and expenses shall likewise be deemed to be "Lawsuit
Expenses" as hereinabove defined (so that the Surviving Corporation may certify
such Lawsuit Expenses to the Escrow Agent to request reimbursement from the
Escrow Fund of one-half thereof as Reimbursable Expenses as provided for in
Section 8 of this Agreement) A Qualified Arbitrator to whom a Disputed Decision
is submitted for decision by arbitration pursuant to this section shall not
have an attorney-client relationship with, or have or be subject to the duties
or responsibility of an attorney representing, any of the Stockholders, the
Stockholder Representatives, the Surviving Corporation or Parent; and such
Qualified Arbitrator shall have no liability to any of the Stockholders,
Stockholder Representatives, Surviving Corporation or Parent for any decision
with respect to a Disputed Decision rendered by such Qualified Arbitrator in
good faith in the exercise of such Qualified Arbitrator's professional judgment
and discretion. The arbitration agreement set forth in this section is made
pursuant to the Federal Arbitration Act, 9 U.S.C. sections 1, et seq.
("Arbitration Act"); and, pursuant to section 9 of the Arbitration Act, a
judgment of the United States District Court for the Southern District of
Texas, Houston Division, shall be entered to enforce any decision of a
Qualified Arbitrator requiring approval of a TEPCO Settlement Offer pursuant to
an arbitration hereunder, upon the request of the Surviving Corporation if the
Stockholder Representatives shall fail or refuse to comply with their
agreements with respect to compliance with such decision set forth herein.
16. Notices. All notices, requests, claims, demands and other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given if (a) delivered against
receipt therefor, (b) mailed by registered or certified mail, return receipt
requested and postage prepaid, in the United States mail, or (c) sent by
telefax machine, in each case to the address or telefax number, as the case may
be, set forth below:
If to the Escrow Agent:
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If to Parent or the Purchaser or the Surviving Corporation:
DI Industries, Inc.
625 Paragon Center One
450 Gears Road
Houston, Texas 77067
Attention: T. P. Richards, President
Fax No.: (713) 874-0194
With a copy to:
Gardere Wynne Sewell & Riggs, L.L.P.
333 Clay Avenue, Suite 800
Houston, Texas 77002
Attention: Frank M. Putman, Esq.
Fax No.: (713) 308-5555
If to the Company:
Grey Wolf Drilling Company
1980 Post Oak Boulevard, Suite 1150
Houston, Texas 77056-3808
Attention: J. K. B. Nelson, President
Fax No.: (713) 626-9653
With a copy to:
Fulbright & Jaworski L.L.P.
1301 McKinney, Suite 5100
Houston, Texas 77010
Attention: Uriel E. Dutton, Esq.
Fax No.: (713) 651-5246
If to the Stockholder Representatives:
James K. B. Nelson
1980 Post Oak Boulevard, Suite 1150
Houston, Texas 77056-3808
Fax No.: (713) 626-9653
and
Sheldon B. Lubar
777 E. Wisconsin Avenue, Suite 3380
Milwaukee, Wisconsin 53202-5302
Fax No.: (414) 291-9061
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With a copy to:
Fulbright & Jaworski L.L.P.
1301 McKinney, Suite 5100
Houston, Texas 77010-3095
Attention: Uriel E. Dutton, Esq.
Fax No.: (713) 651-5246
Delivery of any communication given in accordance herewith shall be effective
only upon actual receipt thereof by the party or parties to whom such
communication is directed. Any party to this Agreement may change the address
to which communications to such party hereunder are to be directed by giving
notice to the other parties hereto in the manner provided in this section. Any
notice delivered to the Escrow Agent with respect to any payment requested to
be made from the Escrow Fund shall specifically reference the governing Section
of this Agreement pursuant to which such payment request is being made.
17. Further Rights of Escrow Agent. In the event of any conflicting or
inconsistent claims or demands being made against the Escrow Agent in
connection with the subject matter of this Agreement, or in the event the
Escrow Agent is in doubt as to what action it should take hereunder, the Escrow
Agent may, at its option, refuse to comply with any claims or demands on it, or
refuse to take any other action hereunder so long as such disagreement
continues or such doubt exists, and in any such event, the Escrow Agent shall
not be or become liable in any way or to any person for its failure or refusal
to act, and the Escrow Agent shall be entitled to continue to refrain from
acting until (i) the rights of all parties have been fully and finally
adjudicated by a court of competent jurisdiction, or (ii) all differences shall
have been settled and all doubt resolved by agreement among all of the
interested parties, and the Escrow Agent shall have been notified thereof in
writing signed by all such parties. In addition to the foregoing rights, in the
event the Escrow Agent has any doubt as to the course of action it should take
under this Agreement, the Escrow Agent is hereby authorized to petition any
District Court of Harris County, Texas, or the United States District Court for
the Southern District of Texas, Houston Division, for instructions or to
interplead the funds or assets so held (including the Escrow Fund) into such
court. The parties agree to the jurisdiction of either of said courts over
their persons as well as the Escrow Fund. The Purchaser and Parent hereby agree
to indemnify and hold the Escrow Agent harmless from any liability or losses
occasioned thereby and to pay any and all of its fees, costs, expenses, and
counsel fees and expenses incurred in any such action to the extent that any
such fees, costs, expenses, or counsel fees and expenses are not paid out of
the Escrow Fund and agree that upon the deposit of the Escrow Fund in the
registry of the court in any such interpleader action the Escrow Agent and its
servants, agents, employees or officers will be relieved of further liability
under this Agreement.
18. Amendment; Waiver. No amendment, modification or waiver of any
provision of this Agreement or consent to any departure by any party from the
provisions hereof shall be effective in any event unless the same shall be in
writing and signed by all parties to this Agreement, and then any such waiver
or consent shall be effective only in the specific instance and purpose for
which given.
19. Binding Effect. This Agreement will be binding upon and inure to
the benefit of the parties hereto and their respective successors, heirs,
devisees, executors, administrators, personal representatives, legal
representatives, trustees, receivers and assigns and shall also inure to the
benefit of the Stockholders and Designated Attorneys; provided that (a) the
Escrow Agent may not assign its duties or rights hereunder without prior
consent of the Parent and Stockholder Representatives, and (b) the right of the
Surviving Corporation to receive payment of any amount of the Escrow Account
Balance on the Distribution Date pursuant to Section 6 of this Agreement may
not be assigned or transferred except incident to the merger or consolidation
of the Surviving Corporation into or with another corporation or entity, the
sale of all or substantially all the assets of the Surviving Corporation, or
otherwise by operation of law; and provided, further, that except as otherwise
hereinabove expressly provided in this section, this Agreement shall be for the
sole and exclusive benefit of the parties hereto, and nothing in this
Agreement, express or implied, is intended to confer or shall be construed as
conferring upon any other person any rights, remedies or any other type or
types of benefits.
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20. Severability. If one or more of the provisions hereof shall for
any reason be held invalid, illegal or unenforceable in any respect under
applicable law, such invalidity, illegality or unenforceability shall not
affect any other provision hereof, and this Agreement shall be construed as if
such invalid, illegal or unenforceable provision had never been contained
herein, and the remaining provisions hereof shall be given full force and
effect.
21. Choice of Laws and Forum. This Agreement shall be construed under
and governed by the laws of the State of Texas, excluding, however, its
conflicts of laws rules which might result in giving application to the laws of
any other jurisdiction. The parties hereto agree and stipulate that the forum
for resolution of any dispute arising under this Agreement shall be Harris
County, Texas, and each party hereto hereby consents, and submits itself, to
the jurisdiction of any state or federal court sitting in Harris County, Texas.
22. General. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute but one and the same instrument. Unless the context
shall otherwise require, the singular shall include the plural and vice versa,
and each pronoun in any gender shall include all other genders.
WITNESS the execution hereof to be effective as of the date first
above written.
PARENT:
DI INDUSTRIES, INC.
By
--------------------------------
T. P. Richards, President
PURCHASER:
DRILLERS, INC.
By
--------------------------------
T. P. Richards, President
COMPANY:
GREY WOLF DRILLING COMPANY
By
--------------------------------
J. K. B. Nelson, President
STOCKHOLDER REPRESENTATIVES:
-----------------------------------
JAMES K. B. NELSON, INDIVIDUALLY
-----------------------------------
SHELDON B. LUBAR
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<PAGE> 129
ESCROW AGENT:
By
--------------------------------
Name:
-----------------------------
Title:
----------------------------
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<PAGE> 130
TRUST UNDER GREY WOLF DRILLING COMPANY
DEFERRED COMPENSATION PLAN
(a) This Trust Agreement made on the effective date of this Trust
Agreement set out hereinafter, by and between GREY WOLF DRILLING COMPANY
("Company") and ______________________________ ("Trustee");
(b) WHEREAS, Company has adopted the deferred compensation plan ("Plan")
attached hereto and incorporated herein as Appendix A;
(c) WHEREAS, Company has incurred or expects to incur liability under the
terms of the Plan with respect to the individuals participating in the Plan;
(d) WHEREAS, Company wishes to establish a trust (hereinafter called
"Trust") and to contribute to the Trust assets that shall be held therein,
subject to the claims of Company's creditors in the event of Company's
Insolvency, as herein defined, until paid to Plan participants and their
beneficiaries in such manner and at such times as specified in the Plan;
(e) WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and plan for the purpose of providing
deferred compensation for a designated group of employees of the Company
identified in the Plan;
(f) WHEREAS, it is the intention of Company to make contributions to the
Trust to provide itself with a source of funds to assist it in the meeting of
its liabilities under the Plan;
NOW, THEREFORE, the parties do hereby establish the Trust and agree that
the Trust shall be comprised, held and disposed of as follows:
SECTION 1. ESTABLISHMENT OF TRUST
(a) Company hereby deposits with Trustee in trust Two Million, Four
Hundred Thousand Dollars ($2,400,000), which shall become the principal of the
Trust to be held, administered and disposed of by Trustee as provided in this
Trust Agreement.
(b) The Trust hereby established shall be irrevocable.
(c) The Trust is intended to be a grantor trust, of which Company is the
grantor, within the meaning of subpart E, part I, subchapter J, chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
(d) The principal of the Trust, and any earnings thereon shall be held
separate and apart from other funds of Company and shall be used exclusively
for the uses and purposes of Plan participants and general creditors as herein
set forth. Plan participants and their beneficiaries shall have no preferred
claim on, or any beneficial ownership interest in, any assets of the Trust. Any
rights created under the Plan and this Trust Agreement shall be mere unsecured
contractual rights of Plan participants and their beneficiaries against
Company. Any assets held by the Trust will be subject to the claims of
Company's general creditors under federal and state law in the event of
Insolvency, as defined in Section 3(a) herein.
(e) Pursuant to an Agreement and Plan of Merger ("Merger Agreement") dated
as of _____________, 1997, between and among Company, DI Industries, Inc. and
Drillers, Inc. ("Purchaser"), joined by James K. B. Nelson ("Nelson"), it is
contemplated that Company will be merged into and with Purchaser (the
"Merger"). Under the Merger Agreement, Company has required Nelson to agree
that, if the Merger occurs, Nelson will make an irrevocable contribution
("Additional Contribution") of One Million Six Hundred Fifty Thousand Dollars
($1,650,000) to the Trust. If the Merger occurs, Company expects that Nelson
will make such Additional Contribution to the Trust and Trustee shall be
entitled (but shall not be obligated) to exercise any right of Company under
the Merger Agreement to require
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making of such Additional Contribution by Nelson; but Company shall have no
liability whatsoever to Trustee or any Plan participant or beneficiary for
failure or refusal of Nelson to make such Additional Contribution or any part
thereof, nor shall Trustee have any liability whatsoever to any Plan
participant or beneficiary for failure or refusal of Nelson to make such
Additional Contribution or any part thereof.
SECTION 2. PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES.
(a) Except as otherwise provided herein, Trustee shall make payments to
the Plan participants and their beneficiaries in accordance with and subject to
the terms and conditions of the Plan. Trustee shall make provision for the
reporting and withholding of any federal, state or local taxes that may be
required to be withheld with respect to the payment of benefits pursuant to the
terms of the Plan and shall pay amounts withheld to the appropriate taxing
authorities or determine that such amounts have been reported, withheld and
paid by Company.
(b) The entitlement of a Plan participant or his or her beneficiaries to
benefits under the Plan shall be determined by Company or such party as it
shall designate under the Plan, and any claim for such benefits shall be
considered and reviewed under the procedures set out in the Plan.
(c) Company may make payment of benefits directly to Plan participants or
their beneficiaries as they become due under the terms of the Plan. Company
shall notify Trustee of its decision to make payment of benefits directly prior
to the time amounts are payable to participants or their beneficiaries. In
addition, if the principal of the Trust, and any earnings thereon, are not
sufficient to make payments of benefits in accordance with the terms of the
Plan, Company shall make the balance of each such payment as it falls due.
Trustee shall notify Company where principal and earnings are not sufficient.
SECTION 3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST BENEFICIARY WHEN
COMPANY IS INSOLVENT.
(a) Trustee shall cease payment of benefits to Plan participants and their
beneficiaries if the Company is Insolvent. Company shall be considered
"Insolvent" for purposes of this Trust Agreement if (i) Company is unable to
pay its debts as they become due, or (ii) Company is subject to a pending
proceeding as a debtor under the United States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided in
Section 1(d) hereof, the principal and income of the Trust shall be subject to
claims of general creditors of Company under federal and state law as set forth
below.
(1) The Board of Directors and the President of Company shall have the
duty to inform Trustee in writing of Company's Insolvency. If a person
claiming to be a creditor of Company alleges in writing to Trustee that
Company has become Insolvent, Trustee shall determine whether Company is
Insolvent and, pending such determination, Trustee shall discontinue
payment of benefits to Plan participants or their beneficiaries.
(2) Unless Trustee has actual knowledge of Company's Insolvency, or
has received notice from Company or a person claiming to be a creditor
alleging that Company is Insolvent, Trustee shall have no duty to inquire
whether Company is Insolvent. Trustee may in all events rely on such
evidence concerning Company's solvency as may be furnished to Trustee and
that provides Trustee with a reasonable basis for making a determination
concerning Company's solvency.
(3) If at any time Trustee has determined that Company is Insolvent,
Trustee shall discontinue payments to Plan participants or their
beneficiaries and shall hold the assets of the Trust for the benefit of
Company's general creditors. Nothing in this trust Agreement shall in any
way diminish any rights of Plan participants or their beneficiaries to
pursue their rights as general creditors of Company with respect to
benefits due under the Plan or otherwise.
(4) Trustee shall resume the payment of benefits to Plan participants
or their beneficiaries in accordance with Section 2 of this Trust
Agreement only after Trustee has determined that Company is not Insolvent
(or is no longer Insolvent).
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(c) Provided that there are sufficient assets, if Trustee discontinues the
payment of benefits from the Trust pursuant to Section 3(b) hereof and
subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to Plan
participants or their beneficiaries under the terms of the Plan during the
period of such discontinuance, less the aggregate amount of any payments made
to Plan participants or their beneficiaries by Company in lieu of the payments
provided for hereunder during any such period of discontinuance.
SECTION 4. PAYMENTS TO COMPANY. Except as provided in Section 3 hereof, Company
shall have no right or power to direct Trustee to return to Company or to
divert to others any of the Trust assets before all payments of benefits have
been made to Plan participants and their beneficiaries pursuant to the terms of
the Plan.
SECTION 5. INVESTMENT AUTHORITY.
(a) In no event may Trustee invest in securities (including stock or
rights to acquire stock) or obligations issued by Company, other than a de
minimis amount held in common investment vehicles in which Trustee invests. All
rights associated with assets of the Trust shall be exercised by Trustee or the
person designated by Trustee, and shall in no event be exercisable by or rest
with Plan participants.
(b) Trustee shall invest the assets of the Trust only in (i)
interest-bearing accounts or short-term certificates of deposit in banks in
which deposits are insured by the Federal Deposit Insurance Corporation, in
such amounts and in such manner that the entire amount of the Trust assets
deposited or invested with or in each such bank shall at all times be fully
insured by the Federal Deposit Insurance Corporation, (ii) overnight government
cash funds invested in debt instruments issued by the United States government
or a lawful agency thereof or guaranteed by the full faith and credit of the
United States, or (iii) short-term debt instruments issued by the United States
government or a lawful agency thereof or guaranteed by the full faith and
credit of the United States. "Short-term" shall mean instruments which by their
terms mature not more than one year from the date of their purchase; and the
Trustee shall endeavor to limit the term of any instruments in which Trust
assets are invested with a view to insuring availability of cash when required
to make distributions from the Trust while minimizing penalties or losses
incident to sale or liquidation of such instruments.
SECTION 6. DISPOSITION OF INCOME. During the term of this Trust, all income
received by the Trust, net of expenses and taxes, shall be accumulated and
reinvested.
SECTION 7. ACCOUNTING BY TRUSTEE. Trustee shall keep accurate and detailed
records of all investments, receipts, disbursements and all other transactions
required to be made, including such specific records as shall be agreed upon in
writing between Company and Trustee. Within sixty days following the close of
each calendar year and within thirty days after the removal or resignation of
Trustee, Trustee shall deliver to Company a written account of its
administration of the Trust during such year or during the period from the
close of the last preceding year to the date of such removal or resignation,
setting forth all investments, receipts, disbursements and other transactions
effected by it, including a description of all securities and investments
purchased and sold with the cost or net proceeds of such purchases or sales
(accrued interest paid or receivable being shown separately), and showing all
cash, securities and other property held in the Trust at the end of such year
or as of the date of such removal or resignation, as the case may be.
SECTION 8. RESPONSIBILITY OF TRUSTEE.
(a) Trustee shall act with the care, skill, prudence and diligence under
the circumstances then prevailing that a prudent person acting in like capacity
and familiar with such matters would use in the conduct of an enterprise of a
like character and with like aims, provided, however, that Trustee shall incur
no liability to any person for any action taken pursuant to a direction,
request or approval given by Company which is contemplated by, and in
conformity with, the terms of the Plan or this Trust and is given in writing by
Company. In the event of a dispute between Company and a party, Trustee may
apply to a court of competent jurisdiction to resolve the dispute.
(b) If Trustee undertakes or defends any litigation arising in connection
with this Trust, Trustee shall be entitled to obtain payment from the Trust of
Trustee's costs, expenses and liabilities (including, without limitation,
attorneys' fees and expenses) relating thereto.
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(c) Trustee may consult with legal counsel (who may also be counsel for
Company generally) with respect to any of its duties or obligations hereunder.
Trustee shall be entitled to obtain payment from the Trust of fees and expenses
of such legal counsel; and Trustee shall not be liable for any action taken,
suffered or omitted by it in good faith upon the advice of counsel.
(d) Trustee may hire accountants or other professionals to assist it in
performing any of its duties or obligations hereunder. Trustee shall be
entitled to obtain payment from the Trust of fees and expenses of such
professionals.
(e) Trustee shall have, without exclusion, all powers conferred on
Trustees by applicable law, unless expressly provided otherwise herein.
(f) The duties of Trustee hereunder will be limited to the observance of
the express provisions of this Trust Agreement and the Plan. Trustee will not
be subject to, or be obligated to recognize, any other agreement between the
parties hereto or directions or instructions not specifically set forth or
provided for herein or in the Plan. Trustee may rely upon and act upon any
instrument received by it pursuant to the provisions of this Trust Agreement or
the Plan that it reasonably believes to be genuine and in conformity with the
requirements of this Trust Agreement or the Plan. Trustee shall never be
required to use, advance or risk its own funds or otherwise incur financial
liability in the performance of any of its duties or the exercise of any of its
rights and powers hereunder. Without limiting the foregoing, Trustee will not
be liable for any error of judgment or any act done or omitted to be done or
any step taken by it in good faith or for any mistake of fact or law or for
anything that it might do or refrain from doing in connection with this
Agreement, INCLUDING, WITHOUT LIMITATION, NEGLIGENCE OF TRUSTEE, except to the
extent such actions or omissions shall be proved to constitute gross negligence
or willful misconduct on the part of Trustee.
(g) Company will indemnify and hold Trustee harmless from and against any
and all losses, costs, damages or expenses (including, but not limited to,
reasonable attorneys' fees) it may sustain by reason of its services as Trustee
hereunder, but only to the extent such losses, costs, damages or expenses
exceed the amount of the funds available in the Trust to pay or reimburse same,
and except such losses, costs, damages or expenses incurred by reason of acts
or omissions for which Trustee is liable or responsible under the provisions of
the last sentence of Section 8(f) of this Trust Agreement. The foregoing
indemnity agreement shall survive the resignation of Trustee or the termination
of this Trust Agreement.
(h) Notwithstanding any powers granted to Trustee pursuant to this Trust
Agreement or to applicable law, Trustee shall not have any power that could
give this Trust the objective of carrying on a business and dividing the gains
therefrom, within the meaning of section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the Internal Revenue Code.
SECTION 9. COMPENSATION AND EXPENSES OF TRUSTEE. All expenses and fees of
Trustee in connection with the administration of the Trust shall be paid from
the Trust. If there are insufficient assets remaining in the Trust to pay any
such expenses or fees of Trustee, Company shall be obligated to pay or
reimburse Trustee for all such expenses or fees not paid from the Trust.
SECTION 10. RESIGNATION AND REMOVAL OF TRUSTEE.
(a) Trustee may resign at any time by written notice to Company, which
shall be effective thirty days after receipt of such notice unless Company and
Trustee agree otherwise.
(b) Trustee may be removed by Company on thirty days notice or upon
shorter notice accepted by Trustee.
(c) Upon resignation or removal of Trustee and appointment of a successor
Trustee, all assets shall subsequently be transferred to the successor Trustee.
The transfer shall be completed within thirty days after receipt of notice of
resignation, removal or transfer, unless Company extends the time limit.
(d) If Trustee resigns or is removed, a successor shall be appointed, in
accordance with Section 11 hereof, by the effective date of resignation or
removal under paragraphs (a) or (b) of this section. If no such appointment has
been made, Trustee may apply to a court of competent jurisdiction for
appointment of a successor or for instructions. All expenses of Trustee in
connection with the proceeding shall be allowed as administrative expenses of
the Trust.
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SECTION 11. APPOINTMENT OF SUCCESSOR.
(a) If Trustee resigns or is removed in accordance with Section 10(a) or
10(b) hereof, Company may appoint any bank trust department or other party that
may be granted corporate trust powers under state law, as a successor to
replace Trustee upon such resignation or removal. The appointment shall be
effective when accepted in writing by the new Trustee, who shall have all of
the rights and powers of the former Trustee, including ownership rights in the
Trust assets. The former Trustee shall execute any instrument necessary or
reasonably requested by Company or the successor Trustee to evidence the
transfer.
(b) The successor Trustee need not examine the records and acts of any
prior Trustee and may retain or dispose of existing Trust assets, subject to
Sections 5, 7 and 8 hereof. The successor Trustee shall not be responsible for
any claim or liability resulting from any action or inaction of any prior
Trustee or from any other past event, or any condition existing at the time it
becomes successor Trustee.
SECTION 12. AMENDMENT OR TERMINATION.
(a) This Trust Agreement may be amended by a written instrument executed
by Trustee and Company. Notwithstanding the foregoing, no such amendment shall
conflict with the terms of the Plan or shall make the Trust revocable.
(b) The Trust shall not terminate until the date on which Plan
participants and their beneficiaries are no longer entitled to benefits
pursuant to the terms of the Plan. Upon termination of the Trust any assets
remaining in the Trust shall be returned to Company.
SECTION 13. NOTICES. All notices, requests, claims, demands and other
communications required or permitted to be given under this Trust Agreement
shall be in writing and shall be deemed to have been duly given if (a)
delivered against receipt therefor, (b) mailed by registered or certified mail,
return receipt requested and postage prepaid, in the United States mail, or (c)
sent by telefax machine, in each case to the address or telefax number, as the
case may be, set forth below:
If to Trustee:
---------------------------
---------------------------
---------------------------
Attention:
Fax No.:
If to Company:
Grey Wolf Drilling Company
1980 Post Oak Boulevard, Suite 1150
Houston, Texas 77056-3808
Attention: J. K. B. Nelson, President
Fax No.: (713) 626-9653
SECTION 14. MISCELLANEOUS.
(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(b) Benefits payable to Plan participants and their beneficiaries under
this Trust Agreement may not be anticipated, assigned (either at law or in
equity), alienated, pledged, encumbered or subjected to attachment,
garnishment, levy, execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in accordance
with the laws of the State of Texas.
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<PAGE> 135
SECTION 15. EFFECTIVE DATE. The effective date of this Trust Agreement
shall be __________________, 1997.
COMPANY:
GREY WOLF DRILLING COMPANY
By
--------------------------------
J. K. B. Nelson, President
TRUSTEE
-----------------------------------
By
--------------------------------
Name:
-----------------------------
Title:
----------------------------
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APPENDIX A
GREY WOLF DRILLING COMPANY
DEFERRED COMPENSATION PLAN
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GREY WOLF DRILLING COMPANY
DEFERRED COMPENSATION PLAN
WHEREAS, GREY WOLF DRILLING COMPANY desires to establish the Grey
Wolf Drilling Company Deferred Compensation Plan, to provide a deferred
compensation plan for a designated group of employees in recognition and
appreciation of, and as compensation for, their many years of valuable and
faithful service and so as to retain their loyalty and to offer a further
incentive to them to maintain their standard of performance and refrain from
voluntarily terminating their employment by the Corporation for at least the
one year term of the Plan as hereinafter provided;
NOW, THEREFORE, GREY WOLF DRILLING COMPANY adopts the Grey Wolf
Drilling Company Deferred Compensation Plan as follows:
ARTICLE I
DEFINITIONS
1.1. ALLOCATION FACTOR. "Allocation Factor" means the "Allocation
Factor" number set out opposite a Participant's name in Exhibit A hereto.
1.2. BENEFICIARY. "Beneficiary" means a person or entity designated by
a Participant under the terms of this Plan to receive any amounts distributed
under the Plan upon the death of the Participant prior to the Termination Date.
1.3. BOARD OF DIRECTORS. "Board of Directors" means the Board of
Directors of the Corporation.
1.4. CAUSE. "Cause" means the commission by a Participant of an act
constituting fraud, embezzlement, theft, dishonesty in the course of employment
by the Corporation, or other act of material misconduct or constituting a
felony under the laws of any state or of the United States to which the
Corporation or the Participant is subject, and which act results (or is
intended to result directly or indirectly) in the Participant's material gain
or personal enrichment or in causing material detriment to the Corporation.
1.5. CORPORATION. "Corporation" means Grey Wolf Drilling Company and
its successors, including, without limitation, the surviving corporation
following the anticipated merger of Grey Wolf Drilling Company into and with
Drillers, Inc. (if such merger occurs), as provided for in that certain
Agreement and Plan of Merger dated March __, 1997, between and among Grey Wolf
Drilling Company, DI Industries, Inc., and Drillers, Inc., joined by James K.
B. Nelson.
1.6. CORPORATION REPRESENTATIVE. "Corporation Representative" means
the President or any other officer of the Corporation who has been authorized
by the Board of Directors of the Corporation as of any particular relevant time
to make determinations of eligibility of Participants (or their Beneficiaries)
to receive payment of the Participant's Plan Benefit Amount and to make
determinations as to the forfeiture by Participants of their entitlement to
receive payment of any deferred compensation pursuant to the Plan.
1.7. DISABILITY. "Disability" means an injury or any other physical
or mental condition that results in the inability of a Participant to perform
such Participant's regular duties as an employee of the Corporation,
incapacitating such Participant for a continuous period exceeding sixty days,
excluding any leaves of absence approved by the Corporation. If the employment
of a Participant by the Corporation shall be terminated either by withdrawal or
resignation by the Participant from such employment or the discharge by the
Corporation of such Participant from such employment while a Disability of such
Participant continues after expiration of a continuous period of Disability
exceeding sixty days, it shall be deemed that the employment of such
Participant has been terminated by reason of "Disability" for purposes of this
Plan.
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1.8. FORMER PARTICIPANT. "Former Participant" means a person named in
Exhibit A who has forfeited such person's entitlement to participate in the
Plan or receive payment of any deferred compensation from the Plan pursuant to
Section 2.2 of this Plan or whose employment by the Corporation has been
terminated for any reason prior to the Termination Date (including, without
limitation, termination of employment by reason of death, Disability, voluntary
withdrawal or resignation by the Participant, or discharge of the Participant
from employment by the Corporation). As to a Former Participant who dies after
the Interim Termination Date of such Former Participant, the terms "Former
Participant" or "Participant" shall also include the estate of such deceased
Former Participant where appropriate.
1.9. GOOD CAUSE EVENT. "Good Cause Event" means, as to any
Participant, the occurrence of any of the following events:
(a) the assignment by the Corporation to the Participant, without the
Participant's consent, of duties that are materially inconsistent with the
Participant's duties to the Corporation or position as an employee of the
Corporation at the time of such assignment, or the removal by the
Corporation from the Participant, without the Participant's consent, of a
material portion of those duties usually appertaining to the Participant's
position with the Corporation at the time of such removal, or a material
change by the Corporation, without the Participant's consent, in the
Participant's responsibilities to the Corporation; or
(b) a reduction by the Corporation in the amount of the Participant's
base salary or wages (including any entitlement to overtime compensation)
as of the date of this Agreement (or as subsequently increased), or the
failure of the Corporation to pay such base salary or wages to the
Participant at or prior to the times when such base salary or wages have
heretofore been customarily paid to the Participant by the Corporation, in
each case without the consent of the Participant; or
(c) the discontinuance (without comparable replacement) or material
reduction by the Corporation of the Participant's participation in any
bonus or other employee benefit arrangement (including, without
limitation, any thrift, life insurance, medical, dental, hospitalization,
stock option or retirement plan or arrangement) in which the Participant
is a participant as of the date of this Plan, as in effect on the date
hereof or as may be improved from time to time hereafter, in each case
without the consent of the Participant; or
(d) insofar only as to a Participant who is primarily assigned to and
regularly performs services in the Corporation's principal operating
offices, the moving by the Corporation of the Participant's principal
office space (other than a move to another location in Houston, Texas),
related facilities, or support personnel, from the Corporation's principal
operating offices, or the Corporation's requiring the Participant to
perform a majority of his duties outside the Corporation's principal
operating offices for a period of more than 30 consecutive days, or the
Corporation's requiring that the Participant travel in connection with the
Corporation's business to an extent and in a manner which is substantially
inconsistent with the Participant's current business travel obligations,
in each case without the consent of the Participant; or
(e) insofar only as to a Participant who is primarily assigned to and
regularly performs services in the Corporation's principal operating
offices in the Houston, Texas, area, the relocation, without the
Participant's consent, of the Corporation's principal operating offices to
a location outside the Houston, Texas, area; or
(f) insofar only as to a Participant who is primarily assigned to and
regularly performs services in the Corporation's principal operating
offices, the Corporation's requiring the Participant, without the
Participant's consent, to reside at a location more
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than 25 miles from the Corporation's principal operating offices, except
for occasional travel in connection with the Corporation's business to an
extent and in a manner which is substantially consistent with the
Participant's current business travel obligations; or
(g) as to a Participant who has heretofore been engaged primarily in
working on or in the vicinity of drilling rigs operated by the
Corporation, the Corporation's requiring that such Participant regularly
perform services, without the Participant's consent, at locations outside
the historic area of drilling operations of the Corporation in the Gulf
Coast region in Texas and Louisiana, other than occasional work of
reasonably limited duration in connection with drilling operations in
other jurisdictions; or
(h) insofar only as to a Participant who is primarily assigned to and
regularly performs services in the Corporation's principal operating
offices, the failure of the Corporation, without the consent of the
Participant, to continue to provide the Participant with office space or
other facilities or support personnel (including, without limitation, any
applicable administrative or secretarial assistance) that are commensurate
with the Participant's responsibilities to and position with the
Corporation; or
(i) insofar only as to a Participant who is primarily assigned to and
regularly performs services in the Corporation's principal operating
offices in Houston, Texas, in the event the Participant consents to a
relocation of the Corporation's principal operating offices to a location
outside Houston, Texas, the failure of the Corporation to (A) pay or
reimburse the Participant on an after-tax basis for all reasonable moving
expenses incurred by the Participant in connection with such relocation or
(B) indemnify the Participant on an after-tax basis against any loss
realized by the Participant on the sale of his principal residence in
connection with such relocation; or
(j) the failure by the Corporation to promptly reimburse the
Participant for the reasonable business expenses incurred by the
Participant in the performance of duties for the Corporation, of the
nature of expenses for which the Participant is entitled to reimbursement
in accordance with the policy of the Corporation, unless the Participant
shall have consented to waive the right to receive reimbursement for such
expenses.
1.10. INTERIM TERMINATION DATE. "Interim Termination Date" as to any
Participant means the date prior to the Termination Date as of which the
employment of such Participant as an employee of the Corporation terminates by
reason of Disability, death, withdrawal or resignation by such Participant from
such employment, or discharge by the Corporation of such Participant from such
employment.
1.11. NET PLAN VALUE. "Net Plan Value" means, as of the Termination
Date or any Interim Termination Date, an amount equal to:
(a) the net book value of all assets held in the Rabbi Trust on such
date as reflected in the records of the Trustee (including, without
limitation, any "Additional Contribution" made to the Rabbi Trust by James
K. B. Nelson pursuant to the "Merger Agreement" as described in Section
1(e) of the Trust Agreement, and the income therefrom), determined on an
accrual basis in accordance with generally accepted accounting principles
consistently applied, including the principal and accrued interest of
securities and other investments held in the Rabbi Trust and determined
after deducting fees and expenses theretofore paid or accrued to the date
of determination of Net Plan Value; provided that in determining the Net
Plan Value as of the Termination Date, fees and expenses accrued to or
incurred by the Trustee after the Termination Date and prior to final
distribution of the Rabbi Trust assets shall also be deducted in
determining the Net Plan Value; plus
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(b) an amount, if any, equal to all money and the principal and
accrued interest owing (as of the date of removal from the Rabbi Trust) on
all certificates of deposit and other debt instruments theretofore removed
from the assets of the Rabbi Trust to pay general creditors of the
Corporation after the Corporation has become "Insolvent" as provided in
Section 3 of the Trust Agreement (not including distributions made from
the Rabbi Trust to pay Plan Benefit Amounts to Former Participants or
their Beneficiaries pursuant to Article IV of this Plan).
1.12. PARTICIPANT. "Participant" means an employee of the Corporation
named in Exhibit A attached hereto and incorporated herein, each of whom has
been designated by the Corporation as participating in the Plan.
1.13. PARTICIPANT'S SHARE. "Participant's Share" means, as to any
particular Participant as of any date, a fraction having as its numerator that
Participant's Allocation Factor, and having as its denominator the sum of the
Allocation Factors of that Participant and all other Participants (except and
excluding Former Participants) as of such date.
1.14. PLAN. "Plan" means the Grey Wolf Drilling Company Deferred
Compensation Plan set forth in this document.
1.15. PLAN BENEFIT AMOUNT. "Plan Benefit Amount" means, as to each
Participant who does not forfeit his right to receive payment of any amount of
deferred compensation under the Plan pursuant to Section 2.2 of this Plan, an
amount calculated with respect to such Participant as follows:
(a) As to a Participant whose Initial Termination Date occurs prior to
the Termination Date, his Plan Benefit Amount shall be an amount equal to
his Participant's Share of the Net Plan Value determined as of his Interim
Termination Date; and
(b) As to a Participant who does not become a Former Participant prior
to the Termination Date, his Plan Benefit Amount shall be an amount equal
to his Participant's Share of the Net Plan Value determined as of the
Termination Date (subject to Section 1.11).
1.16. RABBI TRUST. "Rabbi Trust" means the rabbi trust being created
by the Corporation contemporaneously with adoption of this Plan, to which
the Corporation has contributed cash to fund the obligations of the Corporation
under this Plan.
1.17. TERMINATION DATE. "Termination Date" means the first anniversary
of the date of this Plan, on ________________, 1998.
1.18. TRUST AGREEMENT. "Trust Agreement" means the Agreement of even
date with this Plan between the Corporation and _________________________,
Trustee, pursuant to which the Rabbi Trust is being created and to which this
Plan is attached as Appendix A.
1.19. TRUSTEE. "Trustee" means the Trustee of the Rabbi Trust,
including any successor Trustee of such Rabbi Trust serving as such at any
relevant time.
ARTICLE II
ELIGIBILITY; FORFEITURE
2.1. The individuals who shall be eligible to participate in the Plan
shall be those Participants named in Exhibit A attached hereto and incorporated
herein, subject, however, to the provisions of Section 2.2.
2.2. If (a) a Participant shall be discharged by the Corporation from
employment by the Corporation for Cause at any time prior to the Termination
Date, or (b) a Participant shall voluntarily withdraw or resign from employment
by the Corporation other than by reason of the occurrence of a Good Cause Event
with respect to such
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Participant at any time prior to the Termination Date (not including
termination of employment of a Participant by reason of death or Disability of
such Participant), then in either such event said Participant shall immediately
cease to be eligible or entitled to participate in the Plan and shall
immediately forfeit all rights of such Participant to receive payment of any
amount of deferred compensation under the Plan.
ARTICLE III
VESTING
Except for the events of forfeiture described in Section 2.2, a
Participant shall have a fully nonforfeitable interest in such Participant's
Plan Benefit Amount determined as provided in this Plan upon the earliest to
occur of the following: (a) the Participant dies, (b) the Participant's
employment by the Corporation is terminated by reason of Disability of such
Participant, (c) the Participant withdraws or resigns from employment by the
Corporation by reason of the occurrence of a Good Cause Event with respect to
such Participant, (d) the Participant's employment is terminated by the
Corporation without Cause, or (e) the Termination Date occurs.
ARTICLE IV
DISTRIBUTIONS
4.1. DEATH. Upon the death of a Participant (not including a Former
Participant) prior to the Termination Date, the Participant's Beneficiary or
Beneficiaries shall receive the Participant's Plan Benefit Amount, which shall
be paid by the Trustee from the Rabbi Trust in a lump sum payment within 30
days after the Participant's death, or as soon thereafter as is
administratively practicable (subject to Sections 4.7 and 5.1). Each
Participant shall file with the Corporation Representative a designation of one
or more Beneficiaries to whom distributions shall be made pursuant to this
Section 4.1 in the event of such Participant's death prior to the Termination
Date (and prior to otherwise becoming a Former Participant). The designation
will be effective upon receipt by the Corporation Representative of a properly
executed form which the Corporation Representative has approved for that
purpose. The Participant may from time to time revoke or change any designation
of Beneficiary by filing another approved Beneficiary designation form with the
Corporation Representative. If there is no valid designation of Beneficiary on
file with the Corporation Representative at the time of the Participant's
death, or if all of the Beneficiaries designated in the last Beneficiary
designation have predeceased the Participant or otherwise ceased to exist, the
Beneficiary shall be the Participant's spouse, if the spouse survives the
Participant, or otherwise the Participant's estate. As to any married
Participant, any Beneficiary designation which designates any person or entity
other than such Participant's spouse must be consented to in writing by the
spouse in a form acceptable to the Corporation Representative to be effective.
4.2. DISABILITY. Upon the termination of employment of a Participant
(not including a Former Participant) prior to the Termination Date by
reason of Disability of such Participant, the Participant shall receive the
Participant's Plan Benefit Amount, which shall be paid by the Trustee from the
Rabbi Trust in a lump sum payment within 30 days after the Interim Termination
Date of such Participant, or as soon thereafter as is administratively
practicable (subject to Sections 4.7 and 5.1).
4.3. WITHDRAWAL FOR GOOD CAUSE. Upon the withdrawal or resignation by
a Participant (not including a Former Participant) from employment by the
Corporation prior to the Termination Date by reason of the occurrence of a Good
Cause Event as to such Participant, the Participant shall receive the
Participant's Plan Benefit Amount, which shall be paid by the Trustee from the
Rabbi Trust in a lump sum payment within 30 days after the Interim Termination
Date of such Participant, or as soon thereafter as is administratively
practicable (subject to Sections 4.7 and 5.1).
4.4. DISCHARGE WITHOUT CAUSE. Upon the discharge of a Participant (not
including a Former Participant) from employment by the Corporation other than
for Cause (and other than by reason of Disability) prior to the Termination
Date, the Participant shall receive the Participant's Plan Benefit Amount,
which shall be paid by the Trustee from the Rabbi Trust in a lump sum payment
within 30 days after the Interim Termination Date of such Participant, or as
soon thereafter as is administratively practicable (subject to Sections 4.7 and
5.1).
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4.5. TERMINATION DATE. Each Participant who does not become a Former
Participant prior to the Termination Date shall receive such Participant's Plan
Benefit Amount, which shall be paid by the Trustee from the Rabbi Trust in a
lump sum payment within 30 days after the Termination Date, or as soon
thereafter as is administratively practicable (subject to Section 4.7 and 5.1).
4.6. RESPONSIBILITY FOR DISTRIBUTIONS AND WITHHOLDING OF TAXES. The
Corporation will calculate the amount, if any, of deductions from the amount of
the benefit to be paid under the Plan to any Former Participant or Beneficiary
for any taxes required to be withheld by federal, state or local government
laws or regulations and shall provide such information to the Trustee prior to
the date when payment of such benefit from the Rabbi Trust is due; and the
Trustee shall cause such taxes to be withheld from any distribution from the
Rabbi Trust pursuant to Article IV of this Plan and remitted to the appropriate
governmental tax agency or department.
4.7 DISPUTED AMOUNTS. If at any time when the Trustee is required to
pay a Former Participant's Plan Benefit Amount to such Former Participant
(or his Beneficiary or Beneficiaries) pursuant to any of the foregoing Sections
of this Article IV a dispute ("Subject Dispute") shall exist between the
Corporation Representative and another Former Participant (a "Disputing
Participant") as to whether such Disputing Participant is entitled to payment
of his Plan Benefit Amount (the "Disputed Plan Benefit Amount") under the Plan,
and if such Disputed Plan Benefit Amount has not been distributed from the
Rabbi Trust as a consequence of the Subject Dispute, the Trustee shall deduct
the Disputed Plan Benefit Amount from the Net Plan Value for purposes of
calculating the Plan Benefit Amount (the "Preliminary Plan Benefit Amount") to
be distributed to any Former Participant (or Beneficiary) from the Rabbi Trust
prior to resolution of the Subject Dispute and shall distribute such
Preliminary Plan Benefit Amount within the time provided above in this Article
IV. If, at any time after distribution of a Preliminary Plan Benefit Amount
from the Rabbi Trust pursuant to this Section, it shall be finally determined
that the Disputing Participant was not entitled to receive payment of the
Disputed Plan Benefit Amount under the Plan, the Trustee shall, as promptly as
practicable, distribute from the Rabbi Trust to each Former Participant who has
received (or to the Beneficiary or Beneficiaries of each Former Participant who
have received) payment of a Preliminary Plan Benefit Amount by reason of the
Subject Dispute, an additional amount equal to the Participant's Share of such
Former Participant of the Disputed Plan Benefit Amount involved in the Subject
Dispute.
ARTICLE V
ARBITRATION
5.1. CORPORATION REPRESENTATIVE DECISIONS. In each instance prior to
the Termination Date when the employment of a Participant by the
Corporation terminates for any reason, the Corporation Representative will
promptly make a determination, in the good faith judgment of the Corporation
Representative, as to whether the Participant has forfeited the right to
receive any payment of deferred compensation from the Plan pursuant to Section
2.2 or has become entitled to receive payment to such Participant (or such
Participant's Beneficiaries) of the Participant's Plan Benefit Amount. The
Corporation Representative will promptly give written notice of such decision
to the Trustee and to such Participant (or to the Beneficiary or Beneficiaries
or guardian of a deceased or disabled Participant, if applicable). If the
Corporation Representative gives notice that the Participant (or Participant's
Beneficiaries) are entitled to receive payment of the Participant's Plan
Benefit Amount under the Plan, the Trustee will make payment from the Rabbi
Trust to the Participant (or Participant's Beneficiary or Beneficiaries)
pursuant to Article IV. The decision of the Corporation Representative that a
Former Participant (or his Beneficiary or Beneficiaries) is entitled to receive
payment of his Plan Benefit Amount under the Plan shall be final and conclusive
and binding on all parties; and no Participant or Former Participant shall ever
have any right to question or dispute or require change of such a decision. If,
however, the Corporation Representative gives notice that a Participant has
forfeited the right to receive any payment of deferred compensation under the
Plan pursuant to Section 2.2, the Trustee shall not make payment of any amount
from the Rabbi Trust to the Participant unless and until directed in writing by
the Corporation Representative to do so or upon receipt of a final decision of
arbitrators pursuant to Section 5.2 that such Participant is entitled to
receive payment of the Participant's Plan Benefit Amount pursuant to the Plan.
If the Participant disputes a determination by the Corporation Representative
that such Participant has forfeited the right to receive any payment of
deferred compensation under the Plan pursuant to Section 2.2, the dispute shall
be resolved by arbitration as provided in Section 5.2.
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5.2. ARBITRATION. Any dispute between the Corporation Representative
and a Former Participant as to whether such Former Participant has
forfeited any right to receive any payment of deferred compensation from the
Plan pursuant to Section 2.2 shall be resolved by final and binding arbitration
in accordance with the Commercial Arbitration Rules of the American Arbitration
Association (the "AAA"). Arbitration under this section must be initiated
within 60 days of the receipt by a Former Participant of notice of a
determination by the Corporation Representative that such Former Participant
has forfeited any right to receive any payment of deferred compensation under
the Plan pursuant to Section 2.2. To initiate arbitration under this section,
the Former Participant must give written notice to the Corporation
Representative. Within ten days of the receipt of such notice, each of the
Former Participant and the Corporation Representative shall designate an
arbitrator pursuant to Rule 14 of the AAA Rules. The appointed arbitrators will
appoint a neutral arbitrator from the panel in the manner prescribed in Rule 13
of the AAA Rules. The decision of the arbitrators selected hereunder will be
final and binding on both the Former Participant and the Corporation; and if
the arbitrators decide that the Former Participant is entitled to receive
payment of the Plan Benefit Amount of such Former Participant under this Plan,
the Trustee shall promptly make payment thereof out of the Rabbi Trust. The
Corporation shall bear all arbitrators' fees and expenses of the arbitration
except attorneys' fees and expenses incurred by the Former Participant;
provided that if the arbitrators in an arbitration proceeding pursuant to this
Section 5.2 shall determine that the Former Participant is entitled to receive
payment of his Plan Benefit Amount under this Plan, the Corporation shall
reimburse the Former Participant for all reasonable legal fees and expenses, if
any, incurred by the Former Participant in connection with the arbitration and,
additionally, shall pay such Former Participant an amount equal to interest on
the amount of the Plan Benefit Amount of such Former Participant calculated at
the prime interest rate per annum as reported in the Wall Street Journal from
time to time, but in no event higher than the maximum legal rate permissible
under applicable law, for the period from the thirtieth day after the Interim
Termination Date of such Former Participant until the date of payment of the
Plan Benefit Amount to such Former Participant. This arbitration provision is
expressly made pursuant to and shall be governed by the Federal Arbitration
Act, 9 U.S.C. sections 1-14. Pursuant to section 9 of that Act, a judgment of
the United States District Court for the Southern District of Texas shall be
entered upon the award made pursuant to the arbitration.
ARTICLE VI
AMENDMENT AND/OR TERMINATION
6.1. AMENDMENT OR TERMINATION OF THE PLAN. This Plan may not be
amended or terminated (prior to termination thereof under Section 6.2)
except by approval of the Board of Directors with the written consent of all
Participants (excluding any Former Participants who have received payment of
their Plan Benefit Amount or have forfeited any right to receive payment of any
amount of deferred compensation under the Plan).
6.2. This Plan will terminate when all payments of deferred
compensation which can become due to Participants (or their Beneficiaries)
under the terms hereof have been paid in full.
ARTICLE VII
FUNDING
7.1. PAYMENTS UNDER THIS PLAN ARE THE OBLIGATION OF THE CORPORATION.
The Trustee of the Rabbi Trust will pay the benefits due the Participants under
this Plan; however, should it fail to do so when a benefit is due, the benefit
shall be paid by the Corporation. If the Rabbi Trust fails to pay for any
reason, the Corporation remains liable for the payment of all benefits provided
by this Plan.
7.2. RABBI TRUST TO ENABLE CORPORATION TO MEET ITS OBLIGATIONS UNDER
THE PLAN. The Corporation has contemporaneously contributed cash to the Rabbi
Trust to fund part or all of the obligations of the Corporation under this
Plan. However, under all circumstances, the Participants shall have no rights
to any assets held in the Rabbi Trust other than those rights expressed in this
Plan. Nothing contained in the Trust Agreement which creates the Rabbi Trust
shall constitute a guarantee by the Corporation that assets of the Corporation
transferred to the Rabbi Trust will be sufficient to pay any benefits under
this Plan or would place the Participant in a secured position ahead of general
creditors should the Corporation become insolvent or bankrupt. Any trust
created by the Corporation to assist the Corporation in meeting its obligations
under this Plan, and any assets held by the trust, must conform to the terms of
the model trust described in Revenue Procedure 92-64 issued by the Internal
Revenue Service.
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7.3. PARTICIPANTS MUST RELY ONLY ON GENERAL CREDIT OF THE CORPORATION.
This Plan is only a general corporate commitment and each Participant must rely
upon the general credit of the Corporation for the fulfillment of its
obligations hereunder. Under all circumstances the rights of Participants to
any asset held by the Corporation will be no greater than the rights expressed
in this Plan. Nothing contained in this Plan shall constitute a guarantee by
the Corporation that the assets of the Corporation will be sufficient to pay
any benefits under this Plan or would place the Participant in a secured
position ahead of general creditors of the Corporation; the Participants are
only unsecured creditors of the Corporation with respect to their Plan benefits
and the Plan constitutes a mere promise by the Corporation to make benefit
payments in the future. Although the Corporation has established the Rabbi
Trust, as indicated in Section 7.2, to accumulate assets to fulfill its
obligations, the Plan and the Rabbi Trust will not create any lien, claim,
encumbrance, right, title or other interest of any kind whatsoever in any
Participant in any asset held by the Corporation, contributed to the Rabbi
Trust or otherwise designated to be used for payment of any of its obligations
created in this Plan. No specific assets of the Corporation have been or shall
be set aside, or shall in any way be transferred to the Rabbi Trust or shall be
pledged in any way for the performance of the Corporation's obligations under
this Plan which would remove such assets from being subject to the general
creditors of the Corporation.
ARTICLE VIII
MISCELLANEOUS
8.1. LIMITATION OF RIGHTS. Nothing in this Plan shall be construed:
(a) to give a Participant any right with respect to contributions to
the Rabbi Trust described in Section 7.2, and earnings thereon, except in
accordance with the terms of this Plan;
(b) to limit in any way the right of the Corporation to terminate a
Participant's employment with the Corporation at any time;
(c) to evidence any agreement or understanding, expressed or implied,
that the Corporation will employ a Participant in any particular position
or for any particular remuneration; or
(d) to give a Participant or any other person claiming through him any
interest or right under this Plan other than that of an unsecured general
creditor of the Corporation.
8.2. DISTRIBUTIONS TO INCOMPETENTS OR MINORS. Should a Participant
become incompetent or should a Participant designate a Beneficiary who is a
minor or incompetent, the Trustee of the Rabbi Trust is authorized to pay the
funds due to the parent of the minor or to the guardian of the minor or
incompetent or directly to the minor or to apply those funds for the benefit of
the minor or incompetent in any manner the Trustee determines in its sole
discretion.
8.3. NONALIENATION OF BENEFITS. No right or benefit provided in this
Plan shall be transferable by any Participant except, upon his death, to a
named Beneficiary as provided in this Plan. No right or benefit under this Plan
shall be subject to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, attachment, or garnishment by creditors of any Participant
or any Participant's Beneficiary. Any attempt to anticipate, alienate, sell,
assign, pledge, encumber, or charge the same shall be void. No right or benefit
under this Plan shall in any manner be liable for or subject to any debts,
contracts, liabilities or torts of the person entitled to such benefits.
8.4. SEVERABILITY. If any term, provision, covenant or condition of
this Plan is held to be invalid, void or otherwise unenforceable, the rest of
the Plan shall remain in full force and effect and shall in no way be affected,
impaired or invalidated.
8.5. NOTICE. Any notice or filing required or permitted to be given to
the Corporation Representative or a Participant or Former Participant shall be
sufficient if in writing and hand delivered or sent by U.S. mail, postage
prepaid, to the principal office of the Corporation or to the residential
mailing address of the Participant or Former Participant. Notice will be deemed
to be given as of the date of hand delivery or if delivery is by mail, as of
the date
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shown on the postmark. Unless and until a Participant has received written
notice from the Corporation designating a different Corporation Representative,
the President of the Corporation shall be deemed to be the Corporation
Representative for purposes of receiving notices and designations, and changes
of designations, of Beneficiaries by the Participant. Each Corporation
Representative appointed by the Corporation from time to time shall be deemed
to have received and have on file all designations, or changes of designations,
of Beneficiaries theretofore filed by Participants with preceding Corporation
Representatives.
8.6. GENDER AND NUMBER. If the context requires it, words of one
gender when used in this Plan will include the other genders, and words used in
the singular or plural will include the other.
8.7. GOVERNING LAW. The Plan will be construed, administered and
governed in all respects by the laws of the State of Texas.
8.8. UNFUNDED ARRANGEMENT. It is intended that this Plan shall be
unfunded for tax purposes.
8.9. EFFECTIVE DATE. This Plan will be operative and effective as of
the date of execution of this document by the Corporation set out below.
IN WITNESS WHEREOF, the Corporation has executed this document on
this _____ day of ____________________ 1997.
GREY WOLF DRILLING COMPANY
By
-----------------------------
J. K. B. Nelson, President
A-53
<PAGE> 146
EXHIBIT A
GREY WOLF DRILLING COMPANY
DEFERRED COMPENSATION PLAN
(TOTAL PARTICIPANTS-196)
<TABLE>
<CAPTION>
ALLOCATION
PARTICIPANT FACTOR
- --------------------------------------------------------------------------------------------- --------------
<S> <C> <C>
HOUSTON MANAGEMENT (6)
- ----------------------
16. Janet V. Campbell ................................................................... 150
17. Billy G. Emanis ..................................................................... 7,500
18. Tom L. Ferguson ..................................................................... 1,000
19. John D. Peterson, Jr. ............................................................... 1,000
20. Jack D. Robinson .................................................................... 400
21. Robert J. Urbanowski ................................................................ 1,000
LAFAYETTE MANAGEMENT (6)
- ------------------------
1. Martin R. Bounds .................................................................... 300
2. Bobby G. Chandler ................................................................... 300
3. Daniel J. Gary ...................................................................... 400
4. Billy R. Poston ..................................................................... 250
5. Bernard R. Stakes ................................................................... 300
6. Anthony R. Stewart .................................................................. 400
HOUSTON OFFICE STAFF (5)
- ------------------------
1. Linda M. Clay ...................................................................... 120
2. Ricky H. Espinoza ................................................................... 75
3. Lynda C. Kelley ..................................................................... 120
4. Shirley Payne ....................................................................... 120
5. Michele Ruth Whitt .................................................................. 120
DUSON OFFICE STAFF (2)
- ----------------------
1. Kerry Emanis ........................................................................ 100
2. Daniel D. Yates ..................................................................... 100
DRILLING SUPERINTENDENTS (4)
- ----------------------------
1. Larry D. Daigle ..................................................................... 500
2. David R. Kirkpatrick ................................................................ 500
3. Dennis Lejeune ...................................................................... 500
4. Thomas F. Patin, Jr. ................................................................ 500
RIG MANAGERS (36)
- -----------------
1. Joseph N. Arceneaux ................................................................. 350
2. Ronald J. Beard ..................................................................... 350
3. Kenneth J. Benoit ................................................................... 350
4. Kenneth R. Bergeron ................................................................. 350
5. Terry W. Best ....................................................................... 350
6. George Royce Coats .................................................................. 350
7. Jude Alter Cormier .................................................................. 350
8. William Cullen ...................................................................... 350
9. Paul A. Daugereaux .................................................................. 350
10. John B. David ....................................................................... 350
11. Andrew Warren Doise ................................................................. 350
12. Gerard Fall ......................................................................... 350
13. Allen G. Goolsby .................................................................... 350
14. Larry J. Hanks ...................................................................... 350
15. Wilbur J. Harrington ................................................................ 350
16. Harvey H. Hebert, Jr. ............................................................... 350
17. Marshall A. Hornsby ................................................................. 350
18. Ronald K. Hornsby ................................................................... 350
</TABLE>
A-54
<PAGE> 147
EXHIBIT A
GREY WOLF DRILLING COMPANY
DEFERRED COMPENSATION PLAN
(TOTAL PARTICIPANTS-196)
<TABLE>
<CAPTION>
ALLOCATION
PARTICIPANT FACTOR
- --------------------------------------------------------------------------------------------- --------------
<S> <C> <C>
19. John G. Istre ....................................................................... 350
20. Toby J. Kershaw ..................................................................... 350
21. Casey R. Kirkpatrick ................................................................ 350
22. Joel D. Kirkpatrick ................................................................. 350
23. Michael R. Kirkpatrick .............................................................. 350
24. Steven N. Kirkpatrick ............................................................... 350
25. Michael G. McFarlain ................................................................ 350
26. Todd H. Meaux ....................................................................... 350
27. Patrick Alfin Miller ................................................................ 350
28. Tom Tate Moncrief ................................................................... 350
29. Carl Murphy, Jr. .................................................................... 350
30. Dennis H. Pressnall ................................................................. 350
31. John G. Quibodeaux, Sr. ............................................................. 350
32. Robert J. Schexnider ................................................................ 350
33. Gene A. Smith ....................................................................... 350
34. Preston R. Smith .................................................................... 350
35. Paul Viator ......................................................................... 350
36. Patrick Vidrine ..................................................................... 350
DRILLERS (56)
- -------------
1. Richard W. Bolt ..................................................................... 150
2. Anthony D. Breaux ................................................................... 150
3. Daniel P. Brogden ................................................................... 150
4. George Robert Burch ................................................................. 150
5. Joseph H. Burleigh, Jr. ............................................................. 150
6. Mark Carriere ....................................................................... 150
7. James A. Cormier .................................................................... 150
8. Joseph L. Credeur ................................................................... 150
9. Steven W. Daigle .................................................................... 150
10. Kenneth N. Daniel ................................................................... 150
11. Charles W. Deshotel ................................................................. 150
12. Hershel R. Doucet ................................................................... 150
13. James Rodney Forrestier ............................................................. 150
14. Joel W. Franks ...................................................................... 150
15. Roicy Fusilier ...................................................................... 150
16. Fred Bradford Gibson ................................................................ 150
17. Ronald W. Guillotte ................................................................. 150
18. Merlin J. Hebert, Jr. ............................................................... 150
19. Curtis J. Hoffpauir ................................................................. 150
20. Carl D. Istre ....................................................................... 150
21. Malcolm L. Johnson .................................................................. 150
22. Marvin J. Lantz ..................................................................... 150
23. Tony James Lejeune .................................................................. 150
24. Lawrence Julius Matthews, Sr. ....................................................... 150
25. Malcolm David Meaux ................................................................. 150
26. Preston Maurice Menard .............................................................. 150
27. Terry J. Monceaux ................................................................... 150
28. William R. Moore .................................................................... 150
</TABLE>
A-55
<PAGE> 148
EXHIBIT A
GREY WOLF DRILLING COMPANY
DEFERRED COMPENSATION PLAN
(TOTAL PARTICIPANTS-196)
<TABLE>
<CAPTION>
ALLOCATION
PARTICIPANT FACTOR
- --------------------------------------------------------------------------------------------- --------------
<S> <C> <C>
29. Wendell R. Murphy ................................................................... 150
30. Carl D. Nero ........................................................................ 150
31. Walter D. Puckett ................................................................... 150
32. Richard Brian Quebodeaux ............................................................ 150
33. John Quibodeaux, Jr. ................................................................ 150
34. James G. Randall .................................................................... 150
35. Harry J. Richard .................................................................... 150
36. Patrick J. Richard .................................................................. 150
37. Richard A. Richard .................................................................. 150
38. Ronald J. Richard ................................................................... 150
39. Fredrick Lynn Robinson .............................................................. 150
40. Clarence Andrew Rousse .............................................................. 150
41. Herman C. Russell ................................................................... 150
42. Michael Ray Schexnider .............................................................. 150
43. Russell J. Schexnider ............................................................... 150
44. Jon Martin Smith .................................................................... 150
45. Sherman J. Smith Jr. ................................................................ 150
46. Donald R. Soileau ................................................................... 150
47. Curtis J. Sonnier ................................................................... 150
48. Dennis L. Stoute .................................................................... 150
49. Randy Lane Theriot .................................................................. 150
50. Joby Ernest Thibodeaux ............................................................. 150
51. Scott A. Thibodeaux ................................................................. 150
52. John Bradley Trahan ................................................................. 150
53. Jerry W. Walker ..................................................................... 150
54. Henry R. West ....................................................................... 150
55. Johnnie Ray Willis .................................................................. 150
56. Robert A. Ziegler ................................................................... 150
DERRICKMEN, MOTORMEN, FLOORMEN (71)
- -----------------------------------
1. Cecil Antie ......................................................................... 60
2. Jean Francois Arceneaux ............................................................. 60
3. Danny P. Aube ....................................................................... 60
4. David J. Beard ...................................................................... 60
5. Lonny K. Beard ...................................................................... 60
6. John Bellard ........................................................................ 60
7. Darryl Lynn Billiot ................................................................. 60
8. Keith A. Billiot .................................................................... 60
9. Jody Bourque ........................................................................ 60
10. Joey Joseph Brasseaux ............................................................... 60
11. David Elliot Breaux ................................................................. 60
12. Alex J. Broussard ................................................................... 60
13. Lonnie L. Broussard ................................................................. 60
14. Stephen Bundick, Jr. ................................................................ 60
15. Jerry Burleigh ...................................................................... 60
16. Joseph W. Chauffepied ............................................................... 60
17. Billy Ray Coats ..................................................................... 60
18. Charles Ray Collins ................................................................. 60
</TABLE>
A-56
<PAGE> 149
EXHIBIT A
GREY WOLF DRILLING COMPANY
DEFERRED COMPENSATION PLAN
(TOTAL PARTICIPANTS-196)
<TABLE>
<CAPTION>
ALLOCATION
PARTICIPANT FACTOR
- --------------------------------------------------------------------------------------------- --------------
<S> <C> <C>
19. Junius R. Comeaux ................................................................... 60
20. Scott Anthony Comeaux ............................................................... 60
21. Troy Neal Comeaux ................................................................... 60
22. Michael Keith Cormier ............................................................... 60
23. Thomas H. Cormier ................................................................... 60
24. Billy J. Courville .................................................................. 60
25. Gerald W. Cox ....................................................................... 60
26. Jackie W. Daniels ................................................................... 60
27. Derwin Paul Davy .................................................................... 60
28. David Wayne Duhon ................................................................... 60
29. Ray O. Duplechin .................................................................... 60
30. Mark David Faul ..................................................................... 60
31. Don V. Garcia ....................................................................... 60
32. John Kenneth Gaspard ................................................................ 60
33. Corwin Hebert ....................................................................... 60
34. Joseph Floyd Hoffpauir .............................................................. 60
35. Ricky Lee Istre ..................................................................... 60
36. Owen P. Johnson ..................................................................... 60
37. Melvin D. LeBlanc ................................................................... 60
38. Timothy J. LeBlanc .................................................................. 60
39. Leroy A. Lejeune .................................................................... 60
40. Michael W. Leleu .................................................................... 60
41. Curtis Leleux ....................................................................... 60
42. Jeffery Mark Lormand ................................................................ 60
43. Francis Ray Lormand, Jr. ............................................................ 60
44. Wilbur Ray Manuel, Jr. .............................................................. 60
45. Lonnie Charles Matthews ............................................................. 60
46. Jesse Lynn Meche .................................................................... 60
47. Carl J. Menard ...................................................................... 60
48. Carroll L. Nero ..................................................................... 60
49. Kenneth J. Nolan .................................................................... 60
50. James T. Quibodeaux ................................................................. 60
51. Clayton Richard ..................................................................... 60
52. Murphy H. Richard ................................................................... 60
53. Shannon Wayne Richard ............................................................... 60
54. Murphy H. Richard, Jr. .............................................................. 60
55. Paul D. Robinson .................................................................... 60
56. Russell Romero ...................................................................... 60
57. Harry Rose, Jr. ..................................................................... 60
58. Joseph H. Schedxnider, Jr. .......................................................... 60
59. Harvey B. Shelton ................................................................... 60
60. Burnice Shreve ...................................................................... 60
61. D. James Simon ...................................................................... 60
62. Travis Scott Simon .................................................................. 60
63. Roy Allen Sittig .................................................................... 60
64. Mark Smith .......................................................................... 60
65. Ricky Paul Sonnier .................................................................. 60
</TABLE>
A-57
<PAGE> 150
EXHIBIT A
GREY WOLF DRILLING COMPANY
DEFERRED COMPENSATION PLAN
(TOTAL PARTICIPANTS-196)
<TABLE>
<CAPTION>
ALLOCATION
PARTICIPANT FACTOR
- --------------------------------------------------------------------------------------------- --------------
<S> <C> <C>
66. Timson R. Terro ..................................................................... 60
67. Jimmy M. Thibodeaux ................................................................. 60
68. Louis C. Thibodeaux ................................................................. 60
69. Otis James Thibodeaux ............................................................... 60
70. Paul Julius Thibodeaux .............................................................. 60
71. Jeffrey A. Toney .................................................................... 60
YARD EMPLOYEES/DRIVERS (10)
- ---------------------------
1. Byron L. Beard ...................................................................... 60
2. Randy J. Bourque .................................................................... 60
3. Joe Ed Bunton ....................................................................... 60
4. Marshall L. Derrick ................................................................. 200
5. Frank J. Marceaux ................................................................... 60
6. David R. Monceaux ................................................................... 60
7. Wilson J. Monceaux .................................................................. 150
8. Darren G. Richard ................................................................... 60
9. Kernes Schexnayder, Jr. ............................................................. 60
10. James E. Thibodeaux ................................................................. 100
--------------
TOTAL: 41,885
</TABLE>
NOTE: IF, PRIOR TO THE TRUST ESTABLISHMENT DATE, ANY OF THE ABOVE LISTED
PARTICIPANTS CEASE TO BE EMPLOYED BY THE COMPANY, THIS EXHIBIT A WILL BE
REVISED PRIOR TO EXECUTION OF THE FOREGOING DEFERRED COMPENSATION PLAN TO
DELETE SUCH PARTICIPANT'S NAME AND TO MAKE APPROPRIATE CHANGES TO THE NUMBER OF
PARTICIPANTS AND TOTAL OF THE ALLOCATION FACTORS SHOWN HEREIN.
A-58
<PAGE> 151
APPENDIX B
FORM OF VOTING AND SUPPORT AGREEMENT
March 7, 1997
DI Industries, Inc.
450 Gears Road, Suite 625
Houston, Texas 77067
Dear Sirs:
The undersigned understands that DI Industries, Inc. ("Parent"), Drillers,
Inc. ("Purchaser") and Grey Wolf Drilling Company (the "Company") are entering
into an Agreement and Plan of Merger (the "Agreement") pursuant to which
Company will be merged with and into the Purchaser (the "Merger") and whereby
each share of the Company's common stock, without par value (the "Company
Common Stock") issued and outstanding immediately as of the effective date of
the Merger will be converted into the right to receive cash and shares of the
Parents common stock, par value $.10 per share ("Parent Common Stock").
The undersigned is a stockholder of the Company (the "Shareholder") and is
entering into this letter agreement to induce you to enter into the Agreement
and to consummate the transactions contemplated thereby. Capitalized terms used
herein without definition are used as they are defined in the Agreement
The Shareholder confirms his agreement with Parent as follows:
1. The Shareholder represents, warrants and agrees that he is the record
or beneficial owner of [number of shares] of Company Stock (collectively, the
"Shares"), all free and clear of all liens, charges, encumbrances, voting
agreements and commitments of every kind except as disclosed in writing on a
schedule attached to this letter agreement and made a part hereof. The
Shareholder does not own or hold any rights to acquire any shares of the
capital stock of Parent or any interest therein or any voting rights with
respect to any shares, except pursuant to the Agreement.
2. The Shareholder agrees that, from the date hereof until the Agreement
is terminated in accordance with its terms, he will not, and will not permit
any entity controlled by the Shareholder to, (i) contract to sell, sell or
otherwise transfer or dispose of any of the Shares or any interest therein or
securities convertible thereinto or any voting rights with respect thereto,
other than (x) pursuant to the Merger or (y) with Parent's prior written
consent, (ii) consent to any amendment to the articles of incorporation of the
Company or (iii) encumber any Shares.
3. The Shareholder agrees that, from the date hereof until the Agreement
is terminated in accordance with its terms, all of the Company Common Stock
(including the Shares) beneficially owned by the Shareholder, or over which the
Shareholder has voting power or control, directly or indirectly, will be voted
by the Shareholder to approve the Agreement, the Merger, and the transactions
contemplated by the Agreement and that such shares will not be voted in favor
of any other Acquisition Proposal (as such term is defined in the Agreement)
during such period.
4. The Shareholder agrees to cooperate fully with Parent in connection
with the Agreement and to support transactions contemplated thereby. The
Shareholder agrees that he will not, and will not instruct his agents,
employees or representatives or the officers, employees, agents or
representatives of the Company to, directly or indirectly, (i) solicit or
initiate, or encourage the submission of, any Acquisition Proposal or (ii)
participate in any discussions or negotiations regarding, or furnish to any
person any information with respect to, or take any other
B-1
<PAGE> 152
DI Industries, Inc.
March 7, 1997
Page 2
action to facilitate any inquiries or the making of any proposal that
constitutes, or may reasonably be expected to lead to, any Acquisition
Proposal.
5. None of the information relating to the Shareholder to be supplied in
writing by the Shareholder specifically for inclusion in the Registration
Statement (and any amendments thereof), at the time the Registration Statement
becomes effective or at the time that the prospectus/proxy statement contained
therein is first published, sent or given to the Company's stockholders, shall
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
6. The Shareholder has been advised that the issuance of Parent Common
Stock to him pursuant to the Merger will be registered with the Commission
under the Act on a Registration Statement on Form S-4. However, because at the
time the Merger is submitted for a vote of the stockholders of the Company, (a)
the Shareholder may be deemed to be an affiliate of the Company, and (b) other
than as set forth in the Agreement, the distribution by the Shareholder of the
Parent Common Stock has not been registered under the Act, the Shareholder
agrees that he will not sell, transfer or otherwise dispose of Parent Common
Stock issued to him in the Merger unless (i) such sale, transfer or other
disposition is made in conformity with the volume and other limitations of Rule
145 promulgated by the Commission under the Act, (ii) such sale, transfer or
other disposition has been made pursuant to an effective registration statement
under the Act or (iii) in the opinion of counsel reasonably acceptable to
Parent or as described in a "no-action" or interpretive letter from the Staff
of the Commission, such sale, transfer or other disposition is otherwise exempt
from registration under the Act.
7. There does not exist any plan or intention by Shareholder to engage in
a sale, exchange, transfer, distribution, pledge, disposition or any other
transaction which results in a reduction in the risk of ownership or a direct
or indirect disposition of any shares of Parent Common Stock to be received by
him in the Merger.
8. Notwithstanding anything to the contrary contained elsewhere in this
letter agreement, it is expressly stipulated and provided that the agreements
and undertakings of Shareholder under this letter agreement are subject to the
provisions set forth in Section 4.2 of the Agreement concerning the duties of
directors, acting in their capacity as a director, with respect to unsolicited
bona fide written Acquisition Proposals received from any person; and
Shareholder in his capacity as a director shall be entitled to take any action
which the Company or its directors are authorized to take in response to or
with respect to any such unsolicited Acquisition Proposal under the provisions
of said Section 4.2.
9. This letter agreement, together with the Agreement and the Escrow
Agreement of even date therewith referred to therein, constitutes the entire
agreement among the parties hereto with respect to the subject matter hereof
and supersedes all other prior agreements and understandings, both written and
oral, among the parties with respect to the subject matter hereof and shall not
be assigned by operation of law or otherwise; provided that the Parent may
assign any of its rights and obligations to any wholly owned subsidiary of
Parent, but no such assignment shall relieve the Parent of its obligations
hereunder.
10. The invalidity or unenforceability of any provision of this letter
agreement in any jurisdiction shall not affect the validity or enforceability
of any other provisions of this letter agreement, which shall remain in full
force and effect in such jurisdiction, or the validity or enforceability of
such provision in any other jurisdiction. The Shareholder acknowledges that
Parent will be irreparably harmed and that there will be no adequate remedy at
law for a violation of any of the covenants or agreements of the Shareholder
contained herein. It is accordingly agreed that, in addition to any other
remedies that may be available to Parent upon the breach by the Shareholder of
such covenants and agreements, Parent shall have the right to obtain injunctive
relief to restrain any breach or threatened
B-2
<PAGE> 153
DI Industries, Inc.
March 7, 1997
Page 3
breach of such covenants or agreements or otherwise to obtain specific
performance of any of such covenants or agreements.
11. This letter agreement shall be governed by and construed in accordance
with the laws of the State of Texas regardless of the laws that might otherwise
govern under principles of conflicts of laws applicable hereto. Any judicial
proceeding brought against any party hereto with respect to this letter
agreement, or any transaction contemplated hereby, may be brought in the
Federal District Court for the Southern District of Texas and, by execution and
delivery of this letter agreement, each of the parties hereto (i) accepts,
generally and unconditionally, the nonexclusive jurisdiction of such court and
any related appellate court, and irrevocably agrees to be bound by any judgment
rendered thereby in connection with this letter agreement, subject, in each
case, to all rights to appeal such decisions to the extent available to the
parties and (ii) irrevocably waives any objection it may now or hereafter have
as to the venue of any such suit, action or proceeding brought in such a court
or that such court is an inconvenient forum. Each party hereto hereby waives
personal service of process and consents that service of process upon it may be
made by certified or registered mail, return receipt requested, at its address
specified in the letter agreement, and service so made shall be deemed
completed on the fifth business day after such service is deposited in the
mail. Nothing herein shall affect the right to serve process in any other
manner permitted by law. EACH PARTY HEREBY WAIVES TRIAL BY JURY IN ANY JUDICIAL
PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT
OF, RELATED TO, OR CONNECTED WITH THIS AGREEMENT WHETHER SOUNDING IN CONTRACT,
TORT OR OTHERWISE.
12. This letter agreement may be executed in counterparts, each of which
shall be deemed an original, but all of which shall constitute one and the same
instrument.
13. This letter agreement may be terminated at the option of any party at
any time after termination of the Agreement in accordance with its terms.
14. The undersigned agrees not to trade in Parent Common Stock during the
twenty (20) consecutive days preceding the Effective Time of the Merger.
B-3
<PAGE> 154
DI Industries, Inc.
March 7, 1997
Page 4
Please confirm that the foregoing correctly states the understanding
between us by signing and returning to us a counterpart hereof.
Very truly yours,
/s/
------------------------------------
[NAME OF SHAREHOLDER]
Confirmed on the date
first above written
DI INDUSTRIES, INC.
By:
-----------------------------------
T. P. Richards, President
B-4
<PAGE> 155
APPENDIX C
JEFFERIES & COMPANY, INC.
March 6, 1997
The Board of Directors
Grey Wolf Drilling Company
1980 Post Oak Blvd., Suite 1150
Houston, Texas 77056-3808
Members of the Board:
You have advised us that DI Industries, Inc. ("DI" or the "Buyer")
proposes to acquire (the "Acquisition") all of the common stock of Grey Wolf
Drilling Company ("Grey Wolf" or the "Seller"). The Acquisition will be
effected pursuant to a definitive agreement (the "Agreement") to be entered
into between DI and Grey Wolf. Subject to the terms and conditions of the
Agreement, upon consummation of the Acquisition, the Seller will receive at
least $98.6 million (consisting of $56.6 million in cash, approximately 14.0
million shares of DI common stock and up to an additional $5.0 million in cash
contingent upon resolution of certain litigation) in consideration for all of
Grey Wolf's common stock. You have requested our opinion (the "Opinion") as to
whether the Acquisition is fair, from a financial point of view, to the holders
of shares of Grey Wolf common stock ("Grey Wolf Common Stock").
Jefferies & Company, Inc. ("Jefferies") will receive a fee of $25,000 from
Grey Wolf for services in preparation of this Opinion. In addition, Jefferies
will receive a fee of 1% (less the fee for the Opinion) of the aggregate
consideration paid upon completion of the Acquisition. Jefferies has not
rendered any investment banking or financial advisory services to the Buyer.
In our review and analysis and in rendering our Opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided to us by Grey Wolf and DI management, and have not assumed
any responsibility for the independent verification of such information. With
respect to the financial projections provided to and examined by us, we note
that projecting future results of any company is inherently subject to vast
uncertainty. With respect to Grey Wolf financial projections supplied to us by
Grey Wolf's management, you have informed us and we have assumed with your
permission that such projections are reasonable and have been prepared in
accordance with accepted practice and reasonably reflect the best currently
available estimates and judgments of Grey Wolf's management as to the future
financial performance of Grey Wolf. We have not conducted a physical inspection
of any of the properties or facilities of Grey Wolf and DI, nor have we made or
considered any independent evaluations or appraisals of any of such properties
or facilities.
In conducting our analysis and rendering this Opinion as expressed herein,
we have reviewed and considered such financial and other factors as we have
deemed appropriate under the circumstances, including, among others: (i) a
draft of the Agreement dated March 4, 1997, (ii) the historical and current
financial condition and results of operations of Grey Wolf and DI, including
(A) the audited financial statements of Grey Wolf for the years ended October
31, 1995, and October 31, 1996, (B) the unaudited financial statements of Grey
Wolf for the quarters ended January 31, 1996, April 30, 1996, and July 30,
1996, (C) the Annual Reports on Form 10-K of DI for the years ended December
31, 1993, 1994 and 1995 and (D) the Quarterly Reports on Form 10-Q of DI for
the quarters ended March 31, 1996, June 30, 1996 and September 30, 1996; (iii)
certain non-public financial and non-financial information, including financial
projections, prepared by Grey Wolf and DI; (iv) published information regarding
the financial performance and operating characteristics of a selected group of
companies that we deemed comparable; (v) publicly available information,
including research reports on companies we considered relevant to our inquiry;
(vi) recent transactions in the oil service industry; and (vii) the value of
certain intangible benefits that will accrue to DI as a result of the
Acquisition. We have
C-1
<PAGE> 156
The Board of Directors
March 6, 1997
Page 2
met with certain officers and employees of Grey Wolf and DI to discuss the
foregoing as well as other matters believed relevant to this Opinion. We have
also taken into account general economic, monetary, political, market and other
conditions as well as our experience in connection with similar transactions
and securities valuations generally. This Opinion is based upon all of such
conditions, including the level of oil and gas prices, as they exist currently
and can be evaluated on the date hereof. Existing conditions are subject to
rapid and unpredictable change and any such changes could impact this Opinion.
This Opinion does not constitute a recommendation of the Acquisition over any
alternative transactions which may be available to Grey Wolf and does not
address Grey Wolf's underlying business decision to enter into the Acquisition.
Finally, the amount of consideration to be paid in the Acquisition is based
upon arms length negotiations between Grey Wolf and DI, and we are not opining
as to the market value of the consideration to be received by Grey Wolf or the
prices at which any of the securities of DI may trade following the
consummation of the Acquisition.
Based upon and subject to the foregoing, and upon such other matters as we
consider relevant, we are of the opinion that the Acquisition is fair, from a
financial point of view, to the holders of Grey Wolf Common Stock.
This letter is solely for the information of the Board of Directors of
Grey Wolf and does not constitute a recommendation to any holder of Grey Wolf
Common Stock. This Opinion, and any supporting analyses or other material
prepared by us, are not to be quoted or referred to, in whole or in part, in
any public filing or in any written document used in connection with the
Acquisition, or used for any other purpose, without our prior written consent.
It is understood and agreed that this Opinion is provided solely for the
use of the Board of Directors of Grey Wolf as one element in the Board's
consideration of the Acquisition and may not be used for any other purpose, or
otherwise referred to, relied upon or circulated without our prior written
consent. Without limiting the foregoing, this Opinion does not constitute a
recommendation to any member of the Board of Directors of Grey Wolf as to how
such person should vote with respect to the Acquisition.
Very truly yours,
/s/ JEFFERIES & COMPANY, INC.
Jefferies & Company, Inc.
C-2
<PAGE> 157
APPENDIX D
EXCERPTS FROM THE TEXAS BUSINESS CORPORATION ACT
ART. 5.11. RIGHTS OF DISSENTING SHAREHOLDERS IN THE EVENT OF CERTAIN
CORPORATE ACTIONS
A. Any shareholder of a domestic corporation shall have the right to
dissent from any of the following corporate actions:
(1) Any plan of merger to which the corporation is a party if shareholder
approval is required by Article 5.03 or 5.16 of this Act and the shareholder
holds shares of a class or series that was entitled to vote thereon as a class
or otherwise;
(2) Any sale, lease, exchange or other disposition (not including any
pledge, mortgage, deed of trust or trust indenture unless otherwise provided in
the articles of incorporation) of all, or substantially all, the property and
assets, with or without good will, of a corporation requiring the special
authorization of the shareholders as provided by this Act;
(3) Any plan of exchange pursuant to Article 5.02 of this Act in which the
shares of the corporation of the class or series held by the shareholder are to
be acquired.
B. Notwithstanding the provisions of Section A of this Article, a
shareholder shall not have the right to dissent from any plan of merger in
which there is a single surviving or new domestic or foreign corporation, or
from any plan of exchange, if (1) the shares held by the shareholder are part
of a class shares of which are listed on a national securities exchange, or are
held of record by not less than 2,000 holders, on the record date fixed to
determine the shareholders entitled to vote on the plan of merger or the plan
of exchange, and (2) the shareholder is not required by the terms of the plan
of merger or the plan of exchange to accept for his shares any consideration
other than (a) shares of a corporation that, immediately after the effective
time of the merger or exchange, will be part of a class or series of shares of
which are (i) listed, or authorized for listing upon official notice of
issuance, on a national securities exchange, or (ii) held of record by not less
than 2,000 holders, and (b) cash in lieu of fractional shares otherwise
entitled to be received.
ART. 5.12. PROCEDURE FOR DISSENT BY SHAREHOLDERS AS TO SAID CORPORATE ACTIONS
A. Any shareholder of any domestic corporation who has the right to
dissent from any of the corporate actions referred to in Article 5.11 of this
Act may exercise that right to dissent only by complying with the following
procedures:
(1)(a) With respect to proposed corporate action that is submitted to a
vote of shareholders at a meeting, the shareholder shall file with the
corporation, prior to the meeting, a written objection to the action, setting
out that the shareholder's right to dissent will be exercised if the action is
effective and giving the shareholder's address, to which notice thereof shall
be delivered or mailed in that event. If the action is effected and the
shareholder shall not have voted in favor of the action, the corporation, in
the case of action other than a merger, or the surviving or new corporation
(foreign or domestic) or other entity that is liable to discharge the
shareholder's right of dissent, in the case of a merger, shall within ten (10)
days after the action is effected, deliver or mail to the shareholder written
notice that the action has been effected, and the shareholder may, within ten
(10) days from delivery or mailing of the notice, make written demand on the
existing, surviving, or new corporation (foreign or domestic) or other entity,
as the case may be, for payment of the fair value of the shareholder's shares.
The fair value of the shares shall be the value thereof as of the day
immediately preceding the meeting, excluding any appreciation or depreciation
in anticipation of the proposed action. The demand shall state the number and
class of the shares owned by the shareholder and the fair value of the shares
as estimated by the shareholder. Any shareholder failing to make demand within
the ten (10) day period shall be bound by the action.
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(b) With respect to proposed corporate action that is approved pursuant to
Section A of Article 9.10 of this Act, the corporation, in the case of action
other than a merger, and the surviving or new corporation (foreign or domestic)
or other entity that is liable to discharge the shareholder's right of dissent,
in the case of a merger, shall, within ten (10) days after the date the action
is effected, mail to each shareholder of record as of the effective date of the
action notice of the fact and date of the action and that the shareholder may
exercise the shareholder's right to dissent from the action. The notice shall
be accompanied by a copy of this Article and any articles or documents filed by
the corporation with the Secretary of State to effect the action. If the
shareholder shall not have consented to the taking of the action, the
shareholder may, within twenty (20) days after the mailing of the notice, make
written demand on the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, for payment of the fair value of
the shareholder's shares. The fair value of the shares shall be the value
thereof as of the date the written consent authorizing the action was delivered
to the corporation pursuant to Section A of Article 9.10 of this Act, excluding
any appreciation or depreciation in anticipation of the action. The demand
shall state the number and class of shares owned by the dissenting shareholder
and the fair value of the shares as estimated by the shareholder. Any
shareholder failing to make demand within the twenty (20) day period shall be
bound by the action.
(2) Within twenty (20) days after receipt by the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, of a
demand for payment made by a dissenting shareholder in accordance with
Subsection (1) of this Section, the corporation (foreign or domestic) or other
entity shall deliver or mail to the shareholder a written notice that shall
either set out that the corporation (foreign or domestic) or other entity
accepts the amount claimed in the demand and agrees to pay that amount within
ninety (90) days after the date on which the action was effected, and, in the
case of shares represented by certificates, upon the surrender of the
certificates duly endorsed, or shall contain an estimate by the corporation
(foreign or domestic) or other entity of the fair value of the shares, together
with an offer to pay the amount of that estimate within ninety (90) days after
the date on which the action was effected, upon receipt of notice within sixty
(60) days after that date from the shareholder that the shareholder agrees to
accept that amount and, in the case of shares represented by certificates, upon
the surrender of the certificates duly endorsed.
(3) If, within sixty (60) days after the date on which the corporate
action was effected, the value of the shares is agreed upon between the
shareholder and the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, payment for the shares shall be
made within ninety (90) days after the date on which the action was effected
and, in the case of shares represented by certificates, upon surrender of the
certificates duly endorsed. Upon payment of the agreed value, the shareholder
shall cease to have any interest in the shares or in the corporation.
B. If, within the period of sixty (60) days after the date on which the
corporate action was effected, the shareholder and the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, do
not so agree, then the shareholder or the corporation (foreign or domestic) or
other entity may, within sixty (60) days after the expiration of the sixty (60)
day period, file a petition in any court of competent jurisdiction in the
county in which the principal office of the domestic corporation is located,
asking for a finding and determination of the fair value of the shareholder's
shares. Upon the filing of any such petition by the shareholder, service of a
copy thereof shall be made upon the corporation (foreign or domestic) or other
entity, which shall, within ten (10) days after service, file in the office of
the clerk of the court in which the petition was filed a list containing the
names and addresses of all shareholders of the domestic corporation who have
demanded payment for their shares and with whom agreements as to the value of
their shares have not been reached by the corporation (foreign or domestic) or
other entity. If the petition shall be filed by the corporation (foreign or
domestic) or other entity, the petition shall be accompanied by such a list.
The clerk of the court shall give notice of the time and place fixed for the
hearing of the petition by registered mail to the corporation (foreign or
domestic) or other entity and to the shareholders named on the list at the
addresses therein stated. The forms of the notices by mail shall be approved by
the court. All shareholders thus notified and the corporation (foreign or
domestic) or other entity shall thereafter be bound by the final judgment of
the court.
C. After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The
appraisers shall have power to examine any of the books and records of the
corporation the shares of which they are charged with the duty of valuing, and
they shall make a determination of the fair value of the shares upon such
investigation as to them may seem proper. The appraisers shall also afford a
reasonable opportunity to the parties interested to submit to them pertinent
evidence as to the value of the
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shares. The appraisers shall also have such power and authority as may be
conferred on Masters in Chancery by the Rules of Civil Procedure or by the
order of their appointment.
D. The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of duly
endorsed certificates for those shares. Upon payment of the judgment, the
dissenting shareholders shall cease to have any interest in those shares or in
the corporation. The court shall allow the appraisers a reasonable fee as court
costs, and all court costs shall be allotted between the parties in the manner
that the court determines to be fair and equitable.
E. Shares acquired by the existing, surviving, or new corporation (foreign
or domestic) or other entity, as the case may be, pursuant to the payment of
the agreed value of the shares or pursuant to payment of the judgment entered
for the value of the shares, as in this Article provided, shall, in the case of
a merger, be treated as provided in the plan of merger and, in all other cases,
may be held and disposed of by the corporation as in the case of other treasury
shares.
F. The provisions of this Article shall not apply to a merger if, on the
date of the filing of the articles of merger, the surviving corporation is the
owner of all the outstanding shares of the other corporations, domestic or
foreign, that are parties to the merger.
G. In the absence of fraud in the transaction, the remedy provided by this
Article to a shareholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the shareholder with respect to the action.
If the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Article, any
shareholder who fails to comply with the requirements of this Article shall not
be entitled to bring suit for the recovery of the value of his shares or money
damages to the shareholder with respect to the action.
ART. 5.13. PROVISIONS AFFECTING REMEDIES OF DISSENTING SHAREHOLDERS
A. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act shall not thereafter be entitled
to vote or exercise any other rights of a shareholder except the right to
receive payment for his shares pursuant to the provisions of those articles and
the right to maintain an appropriate action to obtain relief on the ground that
the corporate action would be or was fraudulent, and the respective shares for
which payment has been demanded shall not thereafter be considered outstanding
for the purposes of any subsequent vote of shareholders.
B. Upon receiving a demand for payment from any dissenting shareholder,
the corporation shall make an appropriate notation thereof in its shareholder
records. Within twenty (20) days after demanding payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act, each holder of
certificates representing shares so demanding payment shall submit such
certificates to the corporation for notation thereon that such demand has been
made. The failure of holders of certificated shares to do so shall, at the
option of the corporation, terminate such shareholder's rights under Articles
5.12 and 5.16 of this Act unless a court of competent jurisdiction for good and
sufficient cause shown shall otherwise direct. If uncertificated shares for
which payment has been demanded or shares represented by a certificate on which
notation has been so made shall be transferred, any new certificate issued
therefor shall bear similar notation together with the name of the original
dissenting holder of such shares and a transferee of such shares shall acquire
by such transfer no rights in the corporation other than those which the
original dissenting shareholder had after making demand for payment of the fair
value thereof.
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C. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act may withdraw such demand at any
time before payment for his shares or before any petition has been filed
pursuant to Article 5.12 or 5.16 of this Act asking for a finding and
determination of the fair value of such shares, but no such demand may be
withdrawn after such payment has been made or, unless the corporation shall
consent thereto, after any such petition has been filed. If, however, such
demand shall be withdrawn as hereinbefore provided, or if pursuant to Section B
of this Article the corporation shall terminate the shareholder's rights under
Article 5.12 or 5.16 of this Act, as the case may be, or if no petition asking
for a finding and determination of fair value of such shares by a court shall
have been filed within the time provided in Article 5.12 or 5.16 of this Act,
as the case may be, or if after the hearing of a petition filed pursuant to
Article 5.12 or 5.16, the court shall determine that such shareholder is not
entitled to the relief provided by those articles, then, in any such case, such
shareholder and all persons claiming under him shall be conclusively presumed
to have approved and ratified the corporate action from which he dissented and
shall be bound thereby, the right of such shareholder to be paid the fair value
of his shares shall cease, and his status as a shareholder shall be restored
without prejudice to any corporate proceedings which may have been taken during
the interim, and such shareholder shall be entitled to receive any dividends or
other distributions made to shareholders in the interim.
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APPENDIX E
FORM OF TAX OPINION
OF
ARTHUR ANDERSEN LLP
, 1997
Board of Directors
The Shareholders
Grey Wolf Drilling Company
Board of Directors
DI Industries, Inc.
1980 Post Oak Blvd., Suite 1150
Houston, Texas 77056
Gentlemen:
This opinion is being furnished to you in connection with the proposed
acquisition of Grey Wolf Drilling Company ("Grey Wolf") by DI Industries, Inc.
("DI"), which is expected to be completed on June , 1997 (the "Effective
Date"). You have requested our opinion concerning the following:
o Whether the merger of Grey Wolf into Drillers, Inc.
("Drillers"), a wholly owned subsidiary of DI (the "Merger"),
will qualify as a reorganization under Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code").
o Whether DI, Drillers and Grey Wolf will recognize any gain or
loss as a result of the Merger.
o Whether the exchange of Grey Wolf common stock, to the extent
exchanged for DI common stock, will give rise to gain or loss
for federal income tax purposes to the holders of Grey Wolf
common stock with respect to such exchange.
You have asked for our opinion on the federal income tax consequences to DI,
Drillers, Grey Wolf, and the stockholders of Grey Wolf. We have not considered
any non-income tax, state, local or foreign income tax consequences, and,
therefore, do not express any opinion regarding the treatment that would be
given the Merger by the applicable authorities on any non-income tax or any
state, local or foreign tax issues. We also express no opinion on nontax
issues, such as corporate law or securities law matters, including, but not
limited to, all securities law disclosure requirements.
In rendering our opinion, we have relied upon the accuracy and completeness of
the facts and information as contained in the Agreement and Plan of Merger
dated as of March 7, 1997, as amended ("Plan of Merger"), including all
exhibits attached thereto, the Registration Statement on Form S-4, and the
representations included below. To the extent there are any changes to the Plan
of Merger, the Registration Statement on Form S-4, or representations, our
opinion may be affected accordingly.
The discussion and conclusions set forth below are based upon the Code, the
Treasury Regulations, and existing administrative and judicial interpretations
thereof as of the Effective Date, all of which are subject to change. All
section references are to the Code unless otherwise stated. If there is a
change in the Code, the Treasury Regulations or public rulings thereunder, the
current Internal Revenue Service ("IRS") rulings or releases, or in the
prevailing judicial interpretation of the foregoing, the opinion expressed
herein would necessarily have to be re-evaluated in light of any such changes.
We have no responsibility to update this opinion for events, transactions,
changes in the above-listed law and authority or circumstances occurring after
the Effective Date.
This opinion is solely for the benefit of Grey Wolf, Grey Wolf's common
stockholders, Drillers and DI and is not intended to be relied upon by anyone
other than Grey Wolf, Grey Wolf's common stockholders, Drillers and DI.
Although you do hereby have our express consent to inform DI's common
stockholders of our opinion by including copies of this letter as an exhibit to
the Plan of Merger and as an exhibit in the Registration Statement on Form S-4
for
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the proposed transaction and by making reference to us and our opinion in
the Prospectus/Proxy Statement forming a part of the registration statement, we
assume no responsibility for any tax consequences to them. Instead, each of
these parties should consult and rely upon the advice of his/her counsel,
accountant or other tax advisor. Except to the extent expressly permitted
hereby, and without the prior written consent of this firm, this letter may not
be quoted in whole or in part or otherwise referred to in any documents or
delivered to any other person or entity.
REPRESENTATIONS
The following representations have been made to us by representatives of DI,
Drillers, and Grey Wolf:
a) DI, Drillers, Grey Wolf, and stockholders of Grey Wolf will pay their
respective expenses, if any, incurred in connection with the
successful consummation of the transaction.
b) There is no intercorporate indebtedness existing between DI and Grey
Wolf, or between Drillers and Grey Wolf, that was issued, acquired,
or will be settled at a discount.
c) Grey Wolf will be merged with and into Drillers pursuant to the
provisions of Section 368(a)(1)(A) and Section 368(a)(2)(D).
d) The ratio for the exchange of shares of Grey Wolf common stock for DI
common stock and boot in the transaction was negotiated through arm's
length bargaining. Accordingly, the fair market value of the DI
common stock and boot to be received by Grey Wolf common stockholders
in the transaction will be approximately equal to the fair market
value of the Grey Wolf common stock surrendered by such stockholders
in exchange therefor.
e) Drillers will acquire at least 90 percent of the fair market value of
the net assets and at least 70 percent of the fair market value of
the gross assets held by Grey Wolf immediately prior to the
transaction. For purposes of this representation, amounts paid by
Grey Wolf to dissenters, amounts paid by Grey Wolf to shareholders
who receive cash or other property, amounts used by Grey Wolf to pay
reorganization expenses, and all redemptions and distributions
(except for regular, normal dividends) made by Grey Wolf immediately
preceding the transfer, will be included as assets of Grey Wolf held
immediately prior to the transaction.
f) None of the compensation received by any stockholder-employees of
Grey Wolf will be separate consideration for, or allocable to, any of
their shares of Grey Wolf common stock; none of the shares of DI
common stock received by any stockholder-employees will be separate
consideration for, or allocable to, any employment agreement; and the
compensation paid to any stockholder-employees will be for services
actually rendered and will be commensurate with amounts paid to third
parties bargaining at arm's length for similar services.
g) The Merger will qualify as a merger under the laws of the state of
Texas. Drillers will be the acquiring and surviving corporation in
the Merger.
The following additional representations have been made to us by
representatives of DI and Drillers:
h) DI and Drillers do not own, directly or indirectly, nor have either
owned during the past five years, directly or indirectly, any stock
of Grey Wolf.
i) The payment of cash in lieu of fractional shares of DI common stock
is solely for the purpose of avoiding the expense and inconvenience
to DI of issuing fractional shares and does not represent separately
bargained- for consideration. The total cash consideration that will
be paid in the transaction to the Grey Wolf stockholders instead of
issuing fractional shares of DI common stock will not exceed one
percent of the total consideration that will be issued in the
transaction to the Grey Wolf stockholders in exchange for their
shares of Grey Wolf common stock. The fractional share interests of
each Grey Wolf stockholder will be aggregated, and no Grey Wolf
stockholder will receive cash for such fractional share interests in
an amount equal to or greater than the value of one full share of DI
common stock.
j) DI has no plan or intention to redeem or otherwise reacquire any of
its stock issued in the transaction.
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k) The proposed transaction is being undertaken for reasons germane to
the continuance of the business of DI and Drillers.
l) Prior to the transaction, DI will be in control of Drillers within
the meaning of Section 368(c) of the Code.
m) DI has no plan or intention to sell or otherwise dispose of the stock
of Drillers; and neither DI nor Drillers has a plan or intention to
sell or otherwise dispose of any of the assets of Grey Wolf acquired
in the transaction, except for dispositions made in the ordinary
course of business or transfers described in Section 368(a)(2)(C) of
the Code.
n) DI has no plan or intention to liquidate Drillers or to merge
Drillers with and into another corporation.
o) DI and Drillers are not investment companies as defined in Sections
368(a)(2)(F)(iii) and 368(a)(2)(F)(iv) of the Code.
p) Drillers has no plan or intention to issue additional shares of its
stock after the transaction that would result in DI losing control of
Drillers within the meaning of Section 368(c) of the Code.
q) No stock of Drillers will be issued in the Merger.
r) The assumption by Drillers of the liabilities of Grey Wolf pursuant
to the transaction is for bona fide business purposes and the
principal purpose of such assumption is not the avoidance of federal
income tax on the transfer of assets of Grey Wolf pursuant to the
transaction.
s) Following the transaction, Drillers will continue the historic
business of Grey Wolf, or use a significant portion of these historic
business assets in the operation of a trade or business.
t) The Plan of Merger and the agreements provided for therein, copies of
which are attached thereto as Schedules, and the agreements filed as
exhibits or referred to in the Registration Statement represent the
full and complete agreement between DI, Drillers and Grey Wolf
relating to the Merger, and no other agreements relating to the
Merger, whether written or oral, exist.
u) The Merger has been duly adopted by the Board of Directors of each DI
and Drillers. DI and Drillers will comply with Treasury Reg. Section
1.368-3 regarding records to be kept and information to be filed with
the returns.
v) To the best knowledge of DI and Drillers, the facts relating to the
Merger as described in the Prospectus/Proxy Statement included as
part of the Registration Statement, including attachments, exhibits
and annexes thereto, are true, correct and complete in all material
respects.
w) There is no plan or intention to take any action inconsistent with
any representation on the part of DI and Drillers.
The following representations have been made to us by representatives of Grey
Wolf:
x) The holders of shares of the outstanding common stock of Grey
Wolf, constituting [to be completed with exact percent, but to be not
less than 90%] of the total outstanding shares of common stock of
Grey Wolf, have made written representations to us, which have been
provided to us, that such stockholders have no plan or intention to
sell, exchange, transfer, distribute, or otherwise reduce such
stockholders' risk of ownership of the DI common shares to be
received by such stockholders in the Merger. For purposes of this
representation, shares of Grey Wolf common stock exchanged for cash
in lieu of fractional shares of DI stock will be treated as
outstanding Grey Wolf common stock on the Effective Date. Moreover,
shares of Grey Wolf common stock and shares of DI common stock held
by Grey Wolf stockholders and otherwise sold, redeemed, or disposed
of prior to the transaction in contemplation thereof, or subsequent
to the Merger in contemplation thereof, will be considered in making
this representation.
y) On the Effective Date, the fair market value of the assets of Grey
Wolf transferred to Drillers will exceed the sum of its liabilities
assumed by Drillers plus the amount of liabilities, if any, to which
the assets are subject, within the meaning of Section 357(c).
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z) The proposed transaction is being undertaken for reasons germane to
the continuance of the business of Grey Wolf.
aa) Grey Wolf is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
bb) Grey Wolf is not an investment company as defined in Sections
368(a)(2)(F)(iii) and 368(a)(2)(F)(iv) of the Code.
cc) The liabilities of Grey Wolf assumed by Drillers, and the liabilities
to which the transferred assets of Grey Wolf are subject were
incurred by Grey Wolf in the ordinary course of business.
dd) Grey Wolf has no other outstanding shares of stock other than the
common shares to be exchanged pursuant to the Merger and the 3,800
shares of common stock of Grey Wolf held as treasury stock which are
to be canceled incident to the Merger.
ee) At the time of the Merger, Grey Wolf will not have outstanding any
warrants, options, convertible securities or any other type of right
pursuant to which any person could acquire stock in Grey Wolf that,
if exercised or converted, would affect DI's acquisition or retention
of control of Grey Wolf as defined in Section 368(c) of the Code.
ff) No stock of Drillers will be issued in the Merger.
gg) There are no fractional shares of Grey Wolf outstanding. No
fractional shares of DI will be issued or redeemed in the Merger. The
payment of cash in lieu of fractional shares of DI is solely for the
purpose of avoiding the expense and inconvenience to DI of issuing
fractional shares and does not represent separately bargained for
consideration.
hh) During the five years preceding the Effective Date of the Merger,
neither DI nor Drillers owned any shares of Grey Wolf's stock.
ii) The Plan of Merger, with the agreements provided for therein, copies
of which are attached thereto as Schedules, represents the full and
complete agreement between DI, Drillers and Grey Wolf regarding the
Merger, other than the agreements filed as exhibits to the
Registration Statement, no other agreements either written or oral
exist.
jj) The Plan of Merger, including schedules, has been duly adopted by
Grey Wolf and shall be shown by acts of their duly constituted
responsible officers and appear of their official records.
kk) To the best knowledge of Grey Wolf the facts relating to the Merger
as described in the Prospectus/Proxy Statement included as part of
the Registration Statement, including attachments, exhibits and
annexes thereto, are true, correct and complete in all material
respects.
ll) There is no plan or intention to take any action inconsistent with
any representation on the part of Grey Wolf.
CONTINGENT CONSIDERATION
The Merger of Grey Wolf into Drillers should qualify as a non-taxable
transaction except for the fact that the shareholders of Grey Wolf will also
receive cash and contingent consideration. The contingent consideration is held
in the form of a deposit to an escrow account. The terms of the Escrow
Agreement provide that any funds remaining in the escrow account after
settlement by, or payment of a monetary judgment against, DI and Drillers in
relation to the TEPCO Lawsuit will be paid out of the escrow to the Grey Wolf
shareholders in proportion to their ownership of Grey Wolf common stock at the
Effective Date. The proper tax treatment of the escrowed funds must be
determined by DI, Drillers and the Grey Wolf shareholders.
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Installment sale reporting allows all or a portion of the gain from a
disposition to be deferred if certain requirements are met. Under Section
453(b), an installment sale is a disposition of property where at least one
payment is to be received after the close of the taxable year in which the
disposition occurs. Section 453(f)(6) allows installment sale treatment for
gain recognized under Section 356(a), that is not treated as a dividend.
Therefore, if the shareholders of Grey Wolf receive at least one payment in the
year following the disposition, the gain recognized on the disposition of stock
in Grey Wolf may qualify for installment sale treatment. However, Treasury Reg.
Section 15A.453-1(b)(3)(i) defines the term payment and states that the receipt
of an evidence of indebtedness which is secured directly or indirectly by cash
or a cash equivalent is treated as the receipt of payment. Under Treasury Reg.
Section 15A.453-1(b)(3)(i), the Grey Wolf shareholders could be considered to
have received payment of the escrowed funds in a year of the disposition
because the payment obligation is secured directly by the escrow funds.
Therefore, the transaction may not qualify as an installment sale.
Subsequent to the publication of Treasury Reg. Section 15A. 453-1(B)(3)(i), the
IRS issued a private letter ruling that addresses the issue of escrow accounts
in connection with installment sale reporting. In PLR 8629038, cash deposited
in an escrow was not treated as payment although the buyer's obligation was
secured by the escrow funds. Because the seller's right to receive the escrowed
funds was considered to be subject to substantial restriction and not only the
mere passage of time, the sellers were not considered to have received payment
of the escrowed funds in the year of disposition and were permitted to use the
installment method. The IRS denied installment reporting in TAM 9238005 where
there was no substantial restriction other than the passage of time. If the
Grey Wolf shareholders' receipt of the escrowed funds is considered to be
subject to substantial restriction other than the mere passage of time, the
Grey Wolf shareholders could take the position that escrowed funds are not
payments received in the year of disposition. The transaction could therefore
qualify as an installment sale. Proposed Reg. Section 1.453-1(f) issued in 1984
addresses the treatment of installment sale reporting in a non-recognition
transaction.
If the transaction does not qualify as an installment sale, or if the Grey Wolf
shareholders elect out of installment sale treatment under Treasury Reg.
Section 1.453-1(d)(3), the amount of gain recognized by the Grey Wolf
shareholders is determined under the provisions of Section 1001, discussed
above. Treasury Reg. Section 1.1001-1(g)(2)(ii) states that if a debt
instrument subject to Treasury Reg. Section 1.1275-4(c) is issued in exchange
for property, where the income from the exchange is not reported under the
installment method, the amount realized attributable to the debt instrument is
the issue price of the debt instrument as determined under Treasury Reg.
Section 1.1274-2(g), increased by the fair market value of the contingent
payments payable on the debt instrument.
If, however, the fair market value of the contingent payments is not reasonably
ascertainable, Treasury Reg. Section 1.1001-1(g)(2)(ii) does not apply, and the
transaction could qualify as an open transaction. This judicially created
doctrine would permit the Grey Wolf shareholders to defer all or a part of the
gain until the escrow funds are distributed to the shareholders.
The payment deferred through the escrow arrangement does not include a stated
interest rate. If a loan has a below market interest rate, the IRS requires
interest to be imputed. Treasury Reg. Section 1.1275-4(c)(iii). Under the
principles of Treasury Reg. Section 1.1275-4(c), each payment from the escrow
will have an interest component.
Each shareholder should consult their own tax advisors regarding the tax
consequences of the deferred payment held under the Escrow Agreement.
OPINION
Based upon the representations of management of DI and Drillers and certain
shareholders, management and Board of Directors of Grey Wolf as set forth
above, it is our opinion with respect to the Merger that:
a) The acquisition by Drillers of substantially all of the assets of
Grey Wolf in exchange for DI common stock and boot and the assumption
by Drillers of the liabilities of Grey Wolf will qualify as a
reorganization under the provisions of Section 368. For purposes of
this opinion, "substantially all" means at least 90 percent of the
fair market value of the net assets and at least 70 percent of the
fair market value of the gross assets of Grey Wolf held immediately
prior to the proposed transaction.
b) DI, Drillers, and Grey Wolf will each be a "party to a
reorganization" (Section 368 (b)).
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c) No gain or loss will be recognized by DI or Drillers on the Merger of
Grey Wolf into Drillers (Section 354(a)(1)).
d) No gain or loss will be recognized by Grey Wolf on the transfer of
all of its assets to Drillers pursuant to the Plan of Merger (Section
361).
e) The tax basis of Grey Wolf's assets in the hands of Drillers will be
the same as the basis of those assets in the hands of Grey Wolf
immediately prior to the transaction (Section 362(b)). The tax basis
of Grey Wolf's assets in the hands of Drillers will not be increased
by any boot paid to shareholders, cash paid to dissenters or cash
paid in lieu of fractional shares.
f) The holding period of the assets of Grey Wolf in the hands of
Drillers will include the period during which such assets were held
by Grey Wolf (Section 1223(2)).
g) No gain or loss will be recognized by Grey Wolf shareholders as a
result of the exchange of Grey Wolf common stock for DI common stock
pursuant to the Merger, except gain will be recognized to the extent
boot is received. Provided that such gain is properly characterized
as gain from a sale or exchange and not as a dividend, the gain
recognized will not exceed the gain realized on the transaction.
(Section 354(a)(1) and Section 356(a)(1)). The gain recognized by the
shareholders of Grey Wolf (as determined under Section 356(a)(1))
will be capital gain provided the Grey Wolf stock exchanged would
constitute a capital asset in the hands of the exchanging shareholder
and the hypothetical redemption of stock is either substantially
disproportionate, or not essentially equivalent to a dividend.
(Sections 302(b)(1) and 302(b)(2) and Clarke vs. Comm'r,
489 U.S. 726).
h) The payment of cash in lieu of fractional share interests of DI
common stock will be treated as if each fractional share was
distributed as part of the exchange and then redeemed by DI. Pursuant
to Section 302(a) of the Code, these cash payments will be treated as
having been received as distributions in full payment in exchange for
the DI common stock. Any gain or loss recognized upon such exchange
(as determined under Section 1001 and subject to the limitations of
Section 267) will be capital gain or loss provided the fractional
share would constitute a capital asset in the hands of the exchanging
stockholder and is not essentially equivalent to a dividend (Rev.
Rul. 66-365 and Rev. Proc. 77-41).
i) Each shareholder of Grey Wolf who elects to dissent from the Merger
transaction involving Grey Wolf and DI, under the provisions of the
Texas Business Corporation Act, and receives cash in exchange for his
or her shares of Grey Wolf common stock, will be treated as receiving
such payment in complete redemption of his or her shares of Grey
Wolf, provided such shareholder does not actually or constructively
own any Grey Wolf or DI common stock after the exchange under the
provisions and limitations of Section 302 and the constructive
ownership rules of Section 318.
j) The tax basis of the DI common stock received by Grey Wolf
shareholders will be the same as the basis of the Grey Wolf common
stock surrendered in exchange therefor, decreased by boot received in
the transaction (other than payments in lieu of fractional shares),
increased by gain recognized in the transaction (other than gain
recognized on the hypothetical redemption of fractional shares), and
decreased by the amount of basis allocated to the fractional shares
that are hypothetically received by the stockholder and redeemed for
cash (Section 358(a)(1)).
k) The holding period of the DI common stock received by Grey Wolf
shareholders will include the period during which the Grey Wolf
common stock surrendered in exchange therefor was held, provided that
the Grey Wolf common stock is held as a capital asset in the hands of
the Grey Wolf shareholders on the Effective Date (Section 1223(1)).
l) In relation to the contingent consideration, the Grey Wolf
shareholders may be able to use the installment method. If the Grey
Wolf shareholders are not permitted to use the installment method, or
if the Grey Wolf shareholders elect out of installment sale
treatment, the Grey Wolf shareholders may be able to treat the
transfer as an open transaction with contingent consideration, as
discussed above. We express no opinion on this issue. Shareholders
should consult their own tax advisors.
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We express no opinion on the impact, if any, on any other sections of the Code,
including but not limited to Section 302 and Section 453, other than that as
stated immediately above, and neither this opinion nor any prior statements are
intended to imply or to be an opinion on any other matters.
In analyzing the authorities relevant to the potential tax issues outlined in
this opinion we have applied the standards of "substantial authority" and "more
likely than not proper," as used in Section 6662 under current law. Based upon
our analysis, we have concluded that there is substantial authority for the
indicated tax treatment of the transaction, and we also believe the indicated
tax treatment of the transaction is more likely than not proper.
This opinion is based solely upon our interpretation of the Code and Treasury
Regulations as further interpreted by court decisions, rulings, and procedures
issued by the Internal Revenue Service, as of the date of this letter. Our
opinion may be subject to change in the event of changes in any of the
foregoing authorities, some of which could be retroactive. The opinion
expressed herein is not binding on the Internal Revenue Service, and there can
be no assurance that the Internal Revenue Service will not take a position
contrary to the opinion expressed herein, or if the Internal Revenue Service
took such a position, whether it would be sustained by the courts. Further,
Grey Wolf common stockholders are urged to discuss the consequences of the
proposed transactions with their own tax advisors.
Very truly yours,
ARTHUR ANDERSEN LLP
By
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Article 1302-7.06 of the Texas Miscellaneous Corporation Laws Act,
the articles of incorporation of a Texas corporation may provide that a
director of that corporation shall not be liable, or shall be liable only to
the extent provided in the articles of incorporation, to the corporation or its
shareholders for monetary damages for acts or omissions in the director's
capacity as a director, except that the articles of incorporation cannot
provide for the elimination or limitation of liability of a director to the
extent that the director is found liable for (i) a breach of the director's
duty of loyalty to the corporation or its shareholders, (ii) acts or omissions
not in good faith that constitute a breach of duty of the director to the
corporation or an act or omission that involves intentional misconduct or a
knowing violation of the law, (iii) any transaction from which the director
received an improper benefit, or (iv) an act or omission for which the
liability of a director is expressly provided by an applicable statute. Article
XII of the Registrant's Articles of Incorporation, as amended, states that a
director of the Registrant shall not be liable to the Registrant or its
shareholders for monetary damages except to the extent otherwise expressly
provided by the statutes of the State of Texas.
In addition, Article 2.02-1 of the Texas Business Corporation Act (the
"TBCA") authorizes a Texas corporation to indemnify a person who was, is, or is
threatened to be made a named defendant or respondent in a proceeding,
including any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative, arbitrative, or investigative because
the person is or was a director. The TBCA provides that unless a court of
competent jurisdiction determines otherwise, indemnification is permitted only
if it is determined that the person (1) conducted himself in good faith; (2)
reasonably believed (a) in the case of conduct in his official capacity as a
director of the corporation, that his conduct was in the corporation's best
interests; and (b) in all other cases, that his conduct was at least not
opposed to the corporation's best interests; and (3) in the case of any
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. A person may be indemnified under Article 2.02-1 of the TBCA against
judgments, penalties (including excise and similar taxes), fines, settlements,
and reasonable expenses actually incurred by the person (including court costs
and attorneys' fees), but if the person is found liable to the corporation or
is found liable on the basis that personal benefit was improperly received by
him, the indemnification is limited to reasonable expenses actually incurred
and shall not be made in respect of any proceeding in which the person has been
found liable for willful or intentional misconduct in the performance of his
duty to the corporation. A corporation is obligated under Article 2.02-1 of the
TBCA to indemnify a director or officer against reasonable expenses incurred by
him in connection with a proceeding in which he is named defendant or
respondent because he is or was a director or officer if he has been wholly
successful, on the merits or otherwise, in the defense of the proceeding. Under
Article 2.02-1 of the TBCA a corporation may (i) indemnify and advance expenses
to an officer, employee, agent or other persons who are or were serving at the
request of the corporation as a director, officer, partner venturer,
proprietor, trustee, employee, agent or similar functionary of another entity
to the same extent that it may indemnify and advance expenses to its directors,
(ii) indemnify and advance expenses to directors and such other persons
identified in (i) to such further extent, consistent with law, as may be
provided in the corporation's articles of incorporation, bylaws, action of its
board of directors, or contract or as permitted by common law and (iii)
purchase and maintain insurance or another arrangement on behalf of directors
and such other persons identified in (i) against any liability asserted against
him and incurred by him in such a capacity or arising out of his status as such
a person.
The Bylaws of the Registrant set forth specific provisions for
indemnification of directors, officers, agents and other persons which are
substantially identical to the provisions of Article 2.02-1 of the TBCA,
described above.
The Registrant maintains directors' and officers' insurance.
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ITEM 21. EXHIBITS
(a) EXHIBITS
The exhibits listed in the Exhibit Index below are filed as part of the
Registration Statement:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 -- Agreement and Plan of Merger dated May 7, 1996, among DI
Industries, Inc., DI Merger Sub, Inc., Roy T. Oliver, Jr., Mike
L. Mullen, R.T. Oliver, Inc. and Land Rig Acquisition Corp.
(incorporated herein by reference to Exhibit 2.1 to Registration
Statement No. 333-6077).
2.1.1 -- Amendment to Agreement and Plan of Merger dated May 7, 1996,
among DI Industries, Inc., DI Merger Sub, Inc., Roy T. Oliver,
Jr., Mike L. Mullen, R.T. Oliver, Inc. and Land Rig Acquisition
Corp. (incorporated herein by reference to Exhibit 2.1.1 to
Registration Statement No. 333-6077).
2.1.2 -- Second Amendment to Agreement and Plan of Merger dated July 26,
1996, among DI Industries, Inc., DI Merger Sub, Inc., Roy T.
Oliver, Jr., Mike L. Mullen, R.T. Oliver, Inc. and Land Rig
Acquisition Corp. (incorporated herein by reference to Exhibit
2.1.2 to Amendment No. 1 to Registration Statement No.
333-6077).
2.2 -- Agreement and Plan of Merger dated May 7, 1996, among DI
Industries, Inc. and Somerset Investment Corp. (incorporated
herein by reference to Exhibit 2.2 to Registration Statement No.
333-6077).
2.2.1 -- Amendment to Agreement and Plan of Merger dated May 7, 1996,
among DI Industries, Inc. and Somerset Investment Corp.
(incorporated herein by reference to Exhibit 2.2.1 to
Registration Statement No. 333-6077).
2.2.2 -- Second Amendment to Agreement and Plan of Merger dated
July 26, 1996, among DI Industries, Inc. and Somerset Investment
Corp. (incorporated herein by reference to Exhibit 2.2.2 to
Amendment No. 1 to Registration Statement No. 333-6077).
2.3 -- Asset Purchase Agreement dated October 3, 1996, by and
between the Registrant and Meritus, Inc., a Texas corporation,
Mesa Rig 4 L.L.C., a Texas limited liability company, Mesa
Venture, a Texas general partnership and Mesa Drilling, Inc., a
Texas corporation (incorporated herein by reference to Exhibit
2.1 to Registration No. 333-14783).
2.4.1 -- Asset Purchase Agreement dated November 12, 1996, between
Diamond M Onshore, Inc. and Drillers, Inc. (incorporated herein
by reference to Exhibit 2.1 to Form 8-K dated December 30,
1996).
2.4.2 -- 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).
2.5.1 -- 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).
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2.5.2 -- 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
Registration Statement No. 333-20423).
2.6.1 -- 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 Compensation
Plan, and form of Grey Wolf Drilling Company Deferred
Compensation Plan (incorporated herein by reference to Exhibit
10.1 to Form 8-K dated March 10, 1997).
2.6.2 -- 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).
2.6.3 -- 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).
2.6.4 -- 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).
2.6.5 -- 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).
2.6.6 -- 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).
2.6.7 -- 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).
2.6.8 -- 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).
2.6.9 -- 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).
2.6.10 -- 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).
2.6.11 -- 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).
2.6.12 -- 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).
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2.6.13 -- 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).
2.7 -- Agreement between Pool Company and Western Oil Well Service
Company dated May 31, 1996 (incorporated by reference to Exhibit
2.1 to Form 8-K dated June 24, 1996).
5.1+ -- Opinion of Porter & Hedges, L.L.P.
8.1* -- Form of Opinion of Arthur Andersen LLP concerning federal income
tax matters (included in the prospectus as Appendix E)
10.1 -- 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).
23.1+ -- Consent of KPMG Peat Marwick LLP.
23.2+ -- Consent of Deloitte & Touche LLP.
23.3* -- Consent of Arthur Andersen LLP with respect to report on Grey
Wolf Drilling Company financial statements.
23.4+ -- Consent of Arthur Andersen LLP with respect to opinion regarding
certain federal income tax matters.
23.5+ -- Consent of Jefferies & Company, Inc.
23.6+ -- Consent of James K. B. Nelson.
23.7+ -- Consent of William T. Donovan.
23.8+ -- Consent of Porter & Hedges, L.L.P. (included in their opinion
filed as Exhibit 5.1 hereto.)
24* -- Power of Attorney (included on the signature page hereto).
99.1+ -- Proxy Card for Grey Wolf Meeting.
- ------
* Filed herewith.
+ To be filed by amendment.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an Employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act
of 1934) that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
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<PAGE> 172
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The registrant undertakes that every prospectus : (i) that is filed
pursuant to the immediately preceding paragraph, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and DI being
acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable.
[Signature Page Follows]
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<PAGE> 173
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned directors and
officers of DI Industries, Inc., do hereby constitute and appoint Ivar Siem,
Thomas P. Richards and T. Scott O'Keefe, or any of them, our true and lawful
attorneys and agents, to do any and all acts and things in our name and on our
behalf in our capacities as directors and officers, and to execute any and all
instruments for us and in our names in the capacities indicated below, which
said attorneys and agents, or any of them, may deem necessary or advisable to
enable said corporation to comply with the Securities Act of 1933, as amended,
and any rules, regulations and requirements of the Commission, in connection
with the filing of this Registration Statement, including specifically without
limitation, power and authority to sign for any of us, in our names in the
capacities indicated below, any and all amendments hereto; and we do each
hereby ratify and confirm all that the said attorneys and agents, or either of
them, shall do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on April 24, 1997.
DI INDUSTRIES, INC.
By: /s/ THOMAS P. RICHARDS
----------------------------------
Thomas P. Richards,
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on April 24, 1997.
SIGNATURE TITLE
/s/ THOMAS P. RICHARDS
- ------------------------------------- President and Chief
Thomas P. Richards Executive Officer
/s/ T. SCOTT O'KEEFE
- ------------------------------------- Senior Vice President
T. Scott O'Keefe and Chief Financial Officer
/s/ DAVID W. WEHLMANN
- ------------------------------------- Vice President
David W. Wehlmann and Controller
- ------------------------------------- Director
Lucien Flournoy
/s/ PETER M. HOLT
- ------------------------------------- Director
Peter M. Holt
/S/ ROY T. OLIVER, JR. Director
- -------------------------------------
Roy T. Oliver, Jr.
/S/ IVAR SIEM Director
- -------------------------------------
Ivar Siem
/s/ STEVEN A. WEBSTER Director
- -------------------------------------
Steven A. Webster
- ------------------------------------- Director
William R. Ziegler
<PAGE> 174
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 -- Agreement and Plan of Merger dated May 7, 1996, among DI
Industries, Inc., DI Merger Sub, Inc., Roy T. Oliver, Jr., Mike
L. Mullen, R.T. Oliver, Inc. and Land Rig Acquisition Corp.
(incorporated herein by reference to Exhibit 2.1 to Registration
Statement No. 333-6077).
2.1.1 -- Amendment to Agreement and Plan of Merger dated May 7, 1996,
among DI Industries, Inc., DI Merger Sub, Inc., Roy T. Oliver,
Jr., Mike L. Mullen, R.T. Oliver, Inc. and Land Rig Acquisition
Corp. (incorporated herein by reference to Exhibit 2.1.1 to
Registration Statement No. 333-6077).
2.1.2 -- Second Amendment to Agreement and Plan of Merger dated July 26,
1996, among DI Industries, Inc., DI Merger Sub, Inc., Roy T.
Oliver, Jr., Mike L. Mullen, R.T. Oliver, Inc. and Land Rig
Acquisition Corp. (incorporated herein by reference to Exhibit
2.1.2 to Amendment No. 1 to Registration Statement No.
333-6077).
2.2 -- Agreement and Plan of Merger dated May 7, 1996, among DI
Industries, Inc. and Somerset Investment Corp. (incorporated
herein by reference to Exhibit 2.2 to Registration Statement No.
333-6077).
2.2.1 -- Amendment to Agreement and Plan of Merger dated May 7, 1996,
among DI Industries, Inc. and Somerset Investment Corp.
(incorporated herein by reference to Exhibit 2.2.1 to
Registration Statement No. 333-6077).
2.2.2 -- Second Amendment to Agreement and Plan of Merger dated
July 26, 1996, among DI Industries, Inc. and Somerset Investment
Corp. (incorporated herein by reference to Exhibit 2.2.2 to
Amendment No. 1 to Registration Statement No. 333-6077).
2.3 -- Asset Purchase Agreement dated October 3, 1996, by and
between the Registrant and Meritus, Inc., a Texas corporation,
Mesa Rig 4 L.L.C., a Texas limited liability company, Mesa
Venture, a Texas general partnership and Mesa Drilling, Inc., a
Texas corporation (incorporated herein by reference to Exhibit
2.1 to Registration No. 333-14783).
2.4.1 -- Asset Purchase Agreement dated November 12, 1996, between
Diamond M Onshore, Inc. and Drillers, Inc. (incorporated herein
by reference to Exhibit 2.1 to Form 8-K dated December 30,
1996).
2.4.2 -- 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).
2.5.1 -- 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).
<PAGE> 175
2.5.2 -- 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
Registration Statement No. 333-20423).
2.6.1 -- 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 Compensation
Plan, and form of Grey Wolf Drilling Company Deferred
Compensation Plan (incorporated herein by reference to Exhibit
10.1 to Form 8-K dated March 10, 1997).
2.6.2 -- 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).
2.6.3 -- 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).
2.6.4 -- 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).
2.6.5 -- 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).
2.6.6 -- 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).
2.6.7 -- 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).
2.6.8 -- 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).
2.6.9 -- 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).
2.6.10 -- 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).
2.6.11 -- 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).
2.6.12 -- 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).
<PAGE> 176
2.6.13 -- 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).
2.7 -- Agreement between Pool Company and Western Oil Well Service
Company dated May 31, 1996 (incorporated by reference to Exhibit
2.1 to Form 8-K dated June 24, 1996).
5.1+ -- Opinion of Porter & Hedges, L.L.P.
8.1* -- Form of Opinion of Arthur Andersen LLP concerning federal income
tax matters (included in the prospectus as Appendix E)
10.1 -- 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).
23.1+ -- Consent of KPMG Peat Marwick LLP.
23.2+ -- Consent of Deloitte & Touche LLP.
23.3* -- Consent of Arthur Andersen LLP with respect to report on Grey
Wolf Drilling Company financial statements.
23.4+ -- Consent of Arthur Andersen LLP with respect to opinion regarding
certain federal income tax matters.
23.5+ -- Consent of Jefferies & Company, Inc.
23.6+ -- Consent of James K. B. Nelson.
23.7+ -- Consent of William T. Donovan.
23.8+ -- Consent of Porter & Hedges, L.L.P. (included in their opinion
filed as Exhibit 5.1 hereto.)
24* -- Power of Attorney (included on the signature page hereto).
99.1+ -- Proxy Card for Grey Wolf Meeting.
- ------
* Filed herewith.
+ To be filed by amendment.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to incorporation by reference in this registration statements
of DI Industries, Inc. on Form S-4 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
April , 1997
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the registration
statements of DI Industries, Inc. on Form S-4 of our report dated March 28,
1996, appearing in the Annual Report on Form 10-K of DI Industries, Inc. for
the year ended December 31, 1996.
Deloitte & Touche LLP
Houston, Texas
April , 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report on the financial statements of Grey Wolf Drilling Company and to all
other references to our Firm included in or made a part of this registration
statement.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Houston, Texas
April 24, 1997
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
written tax opinion regarding the federal income tax consequences of the Merger
to the Board of Directors and Shareholders of Grey Wolf Drilling Company and
the Board of Directors of DI Industries, Inc., included as an exhibit to this
registration statement and to all other references to our opinion included in
or made a part of this registration statement.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
April , 1997
<PAGE> 1
EXHIBIT 23.5
CONSENT OF JEFFERIES & COMPANY, INC.
We hereby consent to the use of our written opinion to the board of
directors of Grey Wolf Drilling Company included as an appendix to this
registration statement, and to all other references to Jefferies & Company,
Inc. included in or made a part of this registration statement.
Jefferies & Company, Inc.
Houston, Texas
April , 1997
<PAGE> 1
EXHIBIT 23.6
CONSENT OF JAMES K. B. NELSON
The undersigned hereby consents to the references in this registration
statement to the undersigned as becoming a director of the registrant upon
closing of the Merger to which this registration statement relates, and to all
other references to the undersigned included in or made a part of this
registration statement.
Houston, Texas JAMES K. B. NELSON
April , 1997
<PAGE> 1
EXHIBIT 23.7
CONSENT OF WILLIAM T. DONOVAN
The undersigned hereby consents to the references in this registration
statement to the undersigned as becoming a director of the registrant upon
closing of the Merger to which this registration statement relates, and to all
other references to the undersigned included in or made a part of this
registration statement.
Houston, Texas WILLIAM T. DONOVAN
April , 1997
