-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G3AaYs+sVEipE9AsgXrbrpIHd60bH2wbh/E2gVrI1ayQ66fPIkCMhHrIknkjK6ca u4xbPgaod3gMoxbkWPbUkA== 0000950129-97-003660.txt : 19970912 0000950129-97-003660.hdr.sgml : 19970912 ACCESSION NUMBER: 0000950129-97-003660 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19970908 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: IRI INTERNATIONAL CORP CENTRAL INDEX KEY: 0001044979 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-35117 FILM NUMBER: 97676605 BUSINESS ADDRESS: STREET 1: FIRST INTERSTATE BANK PLAZA STREET 2: 1000 LOUISIANA SUITE 5900 CITY: HOUSTON STATE: TX ZIP: 77002 BUSINESS PHONE: 7136518002 MAIL ADDRESS: STREET 1: FIRST INTERSTATE BANK PLAZA STREET 2: 1000 LOUISIANA SUITE 5900 CITY: HOUSTON STATE: TX ZIP: 77002 S-1 1 IRI INTERNATIONAL CORPORATION 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 8, 1997 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ IRI INTERNATIONAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 3533 75-2044681 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
------------------------ 1000 LOUISIANA, SUITE 5900 HOUSTON, TEXAS 77002 (713) 651-8002 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ MUNAWAR H. HIDAYATALLAH EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER 1000 LOUISIANA, SUITE 5900 HOUSTON, TEXAS 77002 (713) 651-8002 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: WILLIAM F. HENZE II, ESQ. JOSHUA DAVIDSON, ESQ. JONES, DAY, REAVIS & POGUE BAKER & BOTTS, L.L.P. 599 LEXINGTON AVENUE 910 LOUISIANA NEW YORK, NEW YORK 10022 HOUSTON, TEXAS 77002 (212) 326-3939 (713) 229-1234
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE ================================================================================
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF SECURITIES TO BE REGISTERED(1) AGGREGATE OFFERING PRICE(2) REGISTRATION FEE - -------------------------------------------------------------------------------------------------------------- Common Stock, par value $.01 per share.................... $234,600,000 $71,090.91 ==============================================================================================================
(1) In accordance with Rule 457(o) under the Securities Act of 1933, as amended, the number of shares being registered and the proposed maximum offering price per share are not included in this table. (2) Estimated solely for the purpose of determining the registration fee. ------------------------ 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 THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 2 EXPLANATORY NOTE This Registration Statement contains two forms of prospectus: one to be used in connection with an offering in the United States and Canada (the "U.S. Prospectus") and the other to be used in connection with a concurrent offering outside the United States and Canada (the "International Prospectus"). The two prospectuses are identical in all respects except for the front and back cover pages. The form of the U.S. Prospectus is included herein. The forms of the alternate pages for the International Prospectus follow the U.S. Prospectus. Each of the pages for the International Prospectus included herein is labeled "Alternate Page for International Prospectus." 3 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 September , 1997 PROSPECTUS 12,000,000 SHARES [LOGO] IRI INTERNATIONAL CORPORATION COMMON STOCK --------------------------- Of the 12,000,000 shares of common stock, par value $.01 per share (the "Common Stock"), of IRI International Corporation (the "Company") offered hereby, 9,000,000 shares are being issued and sold by the Company and 3,000,000 shares are being offered for the account of certain stockholders of the Company (the "Selling Stockholders"). Of the shares being offered hereby, 9,600,000 shares are being offered initially in the United States and Canada by the U.S. Underwriters (the "U.S. Offering"), and 2,400,000 shares are being offered initially outside the United States and Canada by the International Managers (the "International Offering" and, together with the U.S. Offering, the "Offering"). The initial public offering price and underwriting discounts and commissions will be identical for both offerings. See "Underwriting." The Company will not receive any of the proceeds from the sale of the shares by the Selling Stockholders. Prior to the Offering, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price for the Common Stock will be between $14.00 and $17.00 per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. The Company intends to apply to have the Common Stock listed for trading on the New York Stock Exchange (the "NYSE") under the symbol "IIL". --------------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. --------------------------- 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.
======================================================================================================================= UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS (1) COMPANY (2) STOCKHOLDERS - ----------------------------------------------------------------------------------------------------------------------- Per Share.................. $ $ $ $ - ----------------------------------------------------------------------------------------------------------------------- Total (3).................. $ $ $ $ =======================================================================================================================
(1) The Company and the Selling Stockholders have agreed to indemnify the U.S. Underwriters and the International Managers against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting offering expenses payable by the Company estimated to be $ . (3) Each of the Company and the Selling Stockholders have granted the U.S. Underwriters a 30-day option to purchase up to 720,000 additional shares of Common Stock on the same terms and conditions as set forth above to cover over-allotments, if any. Each of the Company and the Selling Stockholders have granted the International Managers a similar option to purchase up to 180,000 additional shares of Common Stock to cover over-allotments, if any. If such options (the "Underwriters' Over-Allotment Options") are exercised in full, the total Price to Public, Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to Selling Stockholders will be $ , $ , $ and $ , respectively. See "Underwriting." --------------------------- The shares of Common Stock offered by this Prospectus are offered severally by the U.S. Underwriters subject to prior sale, to withdrawal, cancellation or modification of the offer without notice, to delivery to and acceptance by the U.S. Underwriters and to certain further conditions. It is expected that delivery of the shares of Common Stock will be made at the offices of Lehman Brothers Inc., New York, New York on or about , 1997. --------------------------- LEHMAN BROTHERS HOWARD, WEIL, LABOUISSE, FRIEDRICHS INCORPORATED PRUDENTIAL SECURITIES INCORPORATED CREDIT LYONNAIS SECURITIES (USA) INC. , 1997 4 [Diagram and Photos to Come] ------------------------ CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. Unless the context otherwise requires, references in this Prospectus to the "Company" refer to IRI International Corporation together with its subsidiaries and its predecessors, including its Bowen Tools Division ("Bowen"), its IRI Division ("IRI") and its wholly-owned subsidiary, Cardwell International, Ltd. ("Cardwell"). Except as otherwise specified herein, all information assumes that the Underwriters' Over-Allotment Options will not be exercised. This Prospectus contains certain forward-looking statements within the meaning of the federal securities laws. Actual results and the timing of certain events could differ materially from those projected in the forward-looking statements due to a number of factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY The Company is one of the world's largest manufacturers of land-based drilling and well-servicing rigs and rig component parts for use in the global oil and gas industry and is principally engaged in the design, manufacture, service, sale and rental of onshore and offshore oilfield equipment for the domestic and international markets. Through its IRI and Cardwell operations, the Company designs and produces rigs to meet the special requirements of its global clientele for service in remote areas and harsh climatic conditions. Through its Bowen Tools Division, the Company is a leading manufacturer of downhole fishing and drilling tools and offers a complete line of oilfield power equipment, including top drives, power-swivels, wireline pressure control equipment and coiled tubing systems, which complement the Company's drilling and well- servicing rigs. The Company also manufactures and maintains a significant inventory of replacement parts for rigs produced by the Company and by others, enabling it to meet the needs of its customers on a timely basis. As a result of its diverse product lines and the availability, on a sale or rental basis, of the products of the Bowen Tools Division, the Company is able to satisfy a wide range of its customers' special requirements. Through its Specialty Steel Division, the Company produces premium alloy steel for commercial and military use and for use in manufacturing oilfield equipment products. The Company markets its oilfield equipment primarily through its own sales force and through designated agents and distributors in every major oil and gas producing region in the world. The Company supplements its marketing efforts by maintaining 27 domestic sales, parts and service centers in areas of significant drilling and production operations and 7 international parts and service centers. The Company's network of service centers in the United States provides its customers with refurbishment or repair services as well as ready access to replacement parts for equipment in the field. The Company's worldwide sales and marketing activities are closely coordinated with and supported by a staff of more than 50 engineers and design technicians, resulting in a competitive advantage for the Company to provide its customers with products meeting customized design specifications for drilling and well-servicing rigs and associated equipment. The Company has combined the global recognition of its strong brand names, the extensive background and experience of its management team in international markets and its commitment to technological excellence and high quality products to achieve significant growth in a favorable industry climate. As of June 30, 1997, the Company's rig manufacturing backlog was $93.0 million. See "Business -- Drilling and Well-Servicing Rigs -- Backlog." In the fiscal year ended March 31, 1996, the nine month period ended December 31, 1996 and the six month period ended June 30, 1997, the Company's revenues were $52.5 million, $62.3 million and $57.8 million, respectively. Operating income for the same periods was $7.6 million, $9.1 million and $4.2 million, respectively. Giving pro forma effect to the Acquisitions (as defined below) as if they had been completed as of January 1, 1996, revenues for the twelve month period ended December 31, 1996 and the six month period ended June 30, 1997 would have been $188.4 million and $80.2 million, respectively. Pro forma operating income for the same periods would have been $17.9 million and $5.3 million, respectively. The Company, which traces its history in the oilfield equipment industry for nearly 100 years, was acquired in 1994 from Dresser Industries, Inc. and Ingersoll-Rand Corporation. The Company acquired the business and operations of Bowen (the "Bowen Acquisition") on March 31, 1997 and Cardwell (the "Cardwell Acquisition") on April 17, 1997 (together, the "Acquisitions"). See "Recent Developments." 3 6 BUSINESS STRATEGY The Company's business strategy is to continue its significant expansion and growth as a leader in the design, manufacture, service, sale and rental of oilfield equipment products by: Leveraging Strong Brand Names and Leading Market Shares. The Company manufactures its drilling rigs and well-servicing rigs and component parts under internationally recognized brand names which include IDECO(R), FRANKS(R), CARDWELL(R), CABOT(TM) and IRI(TM). The Company manufactures fishing and drilling tools, top drives, power-swivels and coiled tubing systems under the BOWEN(R) brand name. The Company believes the majority of the land-based drilling rigs and well-servicing rigs currently operating worldwide were manufactured by it or its predecessors. The Company estimates that BOWEN(R) fishing tools, considered the industry standard since they were first introduced by S.R. Bowen in 1930, maintain an approximate 50% share of the worldwide market for such products. Under the BOWEN(R) brand name, the Company maintains the leading market share in power-swivels and is among the market leaders in drilling tools and wireline equipment. The Company believes it will benefit significantly from increased demand for oilfield equipment and products as customers seek to obtain new equipment or replace existing equipment with similarly branded products. Building on Manufacturing, Engineering and Design Capabilities. The Company manufactures a substantial portion of the equipment and components for its rigs, as contrasted with most of its competitors, which primarily assemble components manufactured by third parties. The Company's integrated design, engineering and manufacturing process is central to the production of its high quality products and enables the Company to provide its customers with products meeting customized design specifications. The Company employs more than 50 people on its engineering and design staff and maintains a research and development program to develop creative solutions for its customers. Recent innovations include rotating substructures for drilling rigs, hydraulic disc brake systems for drawworks, skidding systems for 270 ton and 400 ton drilling rigs and the V/S 110/130 power-swivel. The Company believes its manufacturing, engineering and design capabilities give it a strategic competitive advantage. Capitalizing on Strategic Acquisitions. The Company expects to evaluate and, where feasible, make strategic acquisitions that (i) strengthen the Company's market shares for existing products, (ii) diversify the Company's product lines in key business segments or (iii) increase the Company's geographic diversity. The Company believes that strategic acquisitions should also enhance profitability by leveraging the Company's existing products, engineering and design capabilities, sales force or network of parts and service centers. The Company believes the recent Bowen Acquisition and Cardwell Acquisition were consistent with these criteria, and the Company will seek to capitalize on similar opportunities when available. Emphasizing Recurring Revenue Businesses. The Company intends to focus on its recurring revenue businesses to mitigate the effects of potential fluctuations in the worldwide demand for rigs. The Company's replacement parts business takes advantage of the increased demand for parts required by the aging worldwide rig fleet, which was generally constructed prior to 1982. The Company is well positioned to provide replacement parts as a result of the large number of operating rigs manufactured under the Company's brand names and the preference of equipment owners to obtain replacement parts fabricated by the original manufacturer. The Company's rental tool business takes advantage of the increased number of customers who prefer to rent or lease equipment on a temporary basis. Increasing Efficiency and Cost Containment. The Company is in the process of implementing MRP2, a fully integrated business planning and control system supported by Baan and Symix software packages designed to increase productivity and enhance the Company's ability to coordinate design engineering, raw material orders and deliveries and manufacturing schedules. The Company expects the new system to increase its ability to process large orders simultaneously and reduce working capital requirements by shortening cycle times. The MRP2 system should enable the Company to improve its profit margins and respond more effectively to the current strong demand for oilfield equipment products and services. 4 7 RECENT DEVELOPMENTS On March 31, 1997, the Company acquired substantially all of the assets and business of Bowen from Air Liquide America Corporation ("Air Liquide") and established its Bowen Tools Division. Management believes that the acquisition of Bowen significantly facilitates its acquisition strategy by diversifying into key product lines that have dominant market shares and are complementary to the Company's existing product lines. The Bowen Acquisition brings to the Company an additional brand name long recognized in the oilfield equipment industry as being associated with innovative products. BOWEN(R) tools have significant, and in the case of fishing tools and power-swivels, dominant, market shares. The Company's Bowen Tools Division will continue to market its products under the BOWEN(R) brand name. Management anticipates that the acquisition of Bowen will also result in future cost savings and margin improvement opportunities. On April 17, 1997, the Company acquired all of the outstanding capital stock of Cardwell. Cardwell designs and manufactures a full line of land-based drilling and well-servicing rigs and related components. Management believes that the acquisition of Cardwell furthers its acquisition strategy by strengthening its overall market share in the land-based drilling and well-servicing rig market. Land-based well-servicing rigs manufactured under the Company's brand names together with those manufactured by Cardwell accounted for a majority of 1996 sales of such products worldwide. In addition to the IDECO(R), FRANKS(R), CABOT(TM) and IRI(TM) brand names, the Company will continue to market land-based drilling and well-servicing rigs under the CARDWELL(R) brand name. The acquisition of Cardwell, a brand name associated with quality products, will also provide opportunities to achieve cost savings and margin improvements through the consolidation of engineering and administrative functions and sales and service locations. The Acquisitions were financed with the proceeds of a $65.0 million Term Loan (as defined below) and $31.0 million principal amount of the Company's Senior Notes (as defined below), all of which remained outstanding as of July 31, 1997. See "Use of Proceeds." THE OFFERING Common Stock Offered by: The Company.................................. 9,000,000 shares The Selling Stockholders..................... 3,000,000 shares Total Shares.................................... 12,000,000 shares Common Stock to be Outstanding after the Offering........................................ 39,000,000 shares(1) Use of Proceeds................................... The net proceeds of the Offering received by the Company will be used to repay in full the indebtedness incurred in connection with the Acquisitions and for general corporate purposes. See "Use of Proceeds." Proposed New York Stock Exchange Symbol........... "IIL"
- --------------- (1) Excludes Common Stock issuable upon exercise of options to purchase Common Stock granted under the Incentive Plan (as defined herein). See "Management - Stock Options." RISK FACTORS See "Risk Factors" for a discussion of certain material factors that should be considered in connection with an investment in the Common Stock offered hereby. 5 8 SUMMARY SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA The following tables set forth certain summary historical and pro forma condensed consolidated financial data of the Company. The summary historical financial data presented below for the period from April 1, 1994 through September 19, 1994, the period from September 20, 1994 through March 31, 1995, the year ended March 31, 1996 and the nine month period ended December 31, 1996 are derived from the audited financial statements of the Company included elsewhere in this Prospectus. The summary historical financial data presented below for the nine months ended December 31, 1995 are derived from unaudited financial statements of the Company. The summary historical financial data presented below for the six month periods ended June 30, 1996 and 1997 are derived from the unaudited financial statements of the Company included elsewhere in this Prospectus which, in the opinion of management, include all adjustments necessary for a fair presentation of the financial data for such periods. The summary unaudited pro forma consolidated statements of operations are derived from the unaudited Pro Forma Condensed Consolidated Statements of Operations included elsewhere in this Prospectus. The unaudited pro forma consolidated statements of operations give effect to (i) the Acquisitions and (ii) the completion of this Offering and the application of the estimated net proceeds to the Company therefrom as if these transactions occurred on January 1, 1996. The unaudited as adjusted balance sheet data give effect to the completion of this Offering and the application of the estimated net proceeds to the Company therefrom as described under "Use of Proceeds" as if these transactions occurred on June 30, 1997. The pro forma information set forth below is not necessarily indicative of results that actually would have been achieved as of the dates and for the periods set forth below or that may be achieved in the future. The summary financial data set forth below should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, the Selected Financial Data, the Financial Statements of the Company and related notes thereto and the unaudited Pro Forma Condensed Consolidated Financial Statements and related notes thereto included elsewhere in this Prospectus.
PREDECESSOR THE COMPANY ------------- ------------------------------------------------- HISTORICAL ------------------------------------------------- PERIOD FROM PERIOD FROM NINE MONTHS APRIL 1, 1994 SEPTEMBER 20, ENDED THROUGH 1994 THROUGH YEAR ENDED DECEMBER 31, SEPTEMBER 19, MARCH 31, MARCH 31, ------------------- 1994 1995 1996 1995 1996 ------------- ------------- ---------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) OPERATING DATA: Revenues...................... $16,473 $20,206 $52,506 $39,141 $62,298 Cost of goods sold(1)......... 16,216 14,058 36,877 28,815 44,968 Administrative and selling expense..................... 2,102 2,305 7,990 5,400 8,220 ------- ------- ------- ------- ------- Operating income (loss)....... (1,845) 3,843 7,639 4,926 9,110 Interest expense.............. (2,675) (25) (47) -- (615) Other income (expense) -- net............ 106 8 371 210 (20) Income taxes.................. -- (263) -- -- (98) ------- ------- ------- ------- ------- Net income (loss)............. (4,414) 3,563 7,963 5,136 8,377 Preferred stock dividend requirements(2)............. (400) (400) (800) (600) (600) ------- ------- ------- ------- ------- Net income (loss) attributable to outstanding common stock....................... $(4,814) $ 3,163 $ 7,163 $ 4,536 $ 7,777 ======= ======= ======= ======= ======= Common stock outstanding(2)... Income (loss) per common share(2).................... THE COMPANY --------------------------------------------- PRO FORMA HISTORICAL PRO FORMA ------------ ----------------- ---------- SIX MONTHS YEAR ENDED SIX MONTHS ENDED JUNE 30, ENDED DECEMBER 31, ----------------- JUNE 30, 1996 1996 1997 1997 ------------ ------- ------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) OPERATING DATA: Revenues...................... $188,391 $29,347 $57,785 $80,195 Cost of goods sold(1)......... 126,272 21,149 44,631 57,688 Administrative and selling expense..................... 44,246 5,295 8,928 17,213 -------- ------- ------- ------- Operating income (loss)....... 17,873 2,903 4,226 5,294 Interest expense.............. (1,308) (207) (3,147) (280) Other income (expense) -- net............ (72) 213 (490) (303) Income taxes.................. (1,896) -- (168) (850) -------- ------- ------- ------- Net income (loss)............. 14,597 2,909 421 3,861 Preferred stock dividend requirements(2)............. -- (400) (400) -- -------- ------- ------- ------- Net income (loss) attributable to outstanding common stock....................... $ 14,597 $ 2,509 $ 21 3,861 ======== ======= ======= ======= Common stock outstanding(2)... 39,000 39,000 ======== ======= Income (loss) per common share(2).................... $ 0.37 $ 0.10 ======== =======
- --------------- (1) Cost of goods sold is adjusted for amortization of negative goodwill. See Notes to Pro Forma Condensed Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General." (2) Pursuant to the Merger, the Company increased its issued and outstanding shares of Common Stock to 30,000,000 and effected the cancellation of all issued and outstanding shares of its preferred stock (including all accrued and unpaid dividends thereon). See "Certain Relationships and Related Party Transactions -- Corporate Consolidation."
JUNE 30, 1997 ------------------------ HISTORICAL AS ADJUSTED ---------- ----------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital............ $ 89,865 119,068 Total assets............... 164,191 187,081 Long-term debt and obligations under capital lease, less current installments............. 100,281 1,031 Shareholder's equity....... 25,324 150,214
6 9 RISK FACTORS In addition to the other information contained in this Prospectus, the following risks and investment considerations should be carefully considered before purchasing shares of Common Stock offered hereby. Each of the following factors may have a material adverse effect on the Company's operations, financial results, financial condition, liquidity, market valuation or market liquidity in future periods. In addition, this Prospectus contains forward-looking statements reflecting the Company's current views with respect to future events and financial performance. Actual results could differ materially from those expressed in such forward-looking statements due to a number of factors described in this Prospectus, including those set forth below. DEPENDENCE ON OIL AND GAS INDUSTRY The Company's business is substantially dependent upon the condition of the oil and gas industry and worldwide levels of exploration, development and production activity, including the number of oil and gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of workover activity. Exploration, development and production activity is largely dependent on the prevailing view of future oil and natural gas prices, which have been characterized by significant volatility over the last 20 years. Oil and natural gas prices are influenced by numerous factors affecting the supply and demand for oil and gas, including the level of drilling activity, worldwide economic activity, interest rates and the cost of capital, environmental regulation, tax policies, political requirements of national governments, coordination by the Organization of Petroleum Exporting Countries ("OPEC") and the cost of producing oil and gas. Demand for the Company's products in certain emerging market countries may depend somewhat less on the prevailing view of future oil and natural gas prices as such countries may generally place greater emphasis on their need for internal development, energy self-sufficiency or hard currency earnings. Since 1986, domestic spot oil prices (West Texas Intermediate) have ranged from a month-end low of approximately $11.63 per barrel in July 1986 to a month-end high of approximately $40 per barrel in October 1990; domestic spot gas prices (Henry Hub) have ranged from a month-end low of approximately $1.19 per mcf of gas in July 1991 to a month-end high of approximately $4.41 per mcf in February 1996. These price changes have caused numerous shifts in the strategies of oil and gas companies and drilling contractors and their expenditure levels and patterns, particularly with respect to decisions to purchase major capital equipment of the type manufactured by the Company. Any significant reduction in oil and natural gas prices would likely cause a reduction in exploration, development and production activity which, in turn, would likely result in a drop in demand for products manufactured and sold by the Company. No assurance can be given as to the future price levels of oil and gas or the volatility thereof or that the future price of oil and gas will be sufficient to support the level of exploration and production-related activities necessary for the Company to grow or maintain its business. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General." COMPETITION The Company's revenues and earnings are affected by a competitive oilfield equipment industry, the introduction of new or improved products by competitors, increases in the supply of, or improvements in the deliverability of, competing products and significant price competition. The Company competes with a number of entities, some of which may possess greater financial and other resources than the Company. See "Business -- Competition." INTEGRATION OF RECENT ACQUISITIONS The Company recently consummated the Bowen Acquisition and the Cardwell Acquisition and expects to evaluate and, where feasible, make additional strategic acquisitions in the future. The Company expects to successfully integrate the operations and assets of Bowen and Cardwell with those of IRI; however, there is no guarantee that the Company will not encounter integration difficulties or that it will extract expected cost savings and margin enhancements. 7 10 RISKS OF INTERNATIONAL SALES On a pro forma basis, giving effect to the Acquisitions as if they had occurred on January 1, 1996, for the twelve months ended December 31, 1996, 60% of the Company's total revenues were earned from international sales of its products, and as of June 30, 1997, approximately 79% of the Company's backlog consisted of orders from customers outside of North America. International sales may be subject to risks of instability of certain foreign economies, currency fluctuations, risks of expropriation and changes in law affecting international trade and investment. The Company attempts to mitigate certain financial risks in sales to international markets by requiring, where commercially feasible, cash advances, irrevocable letters of credit denominated in U.S. dollars and confirmed by a United States money center bank or foreign equivalent or similar credit support arrangements. See "Business -- Drilling and Well-Servicing Rigs -- Backlog." SIGNIFICANT CONTRACTS A significant portion of the Company's revenues has historically been derived from a limited number of rig manufacturing contracts. On a pro forma basis, giving effect to the Acquisitions as if they had occurred on January 1, 1996, for the twelve month period ended December 31, 1996, 40% of the Company's revenues were derived from five contracts with five customers. The cancellation of any significant rig manufacturing contract or failure to replace such contracts as they are completed could adversely affect future revenues. In addition, the existence of a limited number of large contracts increases the effect associated with potential cost overruns. POTENTIAL PRODUCT LIABILITY AND WARRANTY CLAIMS Certain products of the Company are used in potentially hazardous drilling, completion and production applications that can cause personal injury or loss of life, damage to property, equipment or the environment and suspension of operations. In addition, claims for loss of oil and gas production and damages to formations can occur in the workover business. The Company maintains insurance coverage against such risks in such amounts as it believes to be in accordance with normal industry practice. See "Business -- Risks and Insurance." Such insurance does not, however, provide coverage for all liabilities (including liabilities for certain events involving pollution), and there can be no assurance that such insurance will be adequate to cover all losses or liabilities that may be incurred by the Company in its operations. Moreover, no assurance can be given that in the future the Company will be able to maintain insurance at levels it deems adequate and at rates it considers reasonable or that any particular types of coverage will be available. Litigation arising from a major accident or occurrence at a location where the Company's equipment is used may, in the future, result in the Company's being named as a defendant in product liability or other lawsuits asserting potentially large claims. The Company is a party to various legal and administrative proceedings which have arisen for ongoing and discontinued operations. See "Business -- Legal Proceedings." No assurance can be given with respect to the outcome of these or any other pending legal and administrative proceedings or the effect such outcomes may have on the Company. IMPACT OF GOVERNMENTAL REGULATIONS Many aspects of the Company's operations are affected by political developments and are subject to both domestic and foreign governmental regulation, including regulations relating to oilfield operations, worker safety and the protection of the environment. The technical requirements of these laws and regulations, particularly those related to the environment, are becoming increasingly expensive, complex and stringent. In addition, the Company depends on the demand for its services from the oil and gas industry and, therefore, is affected by changing taxes, price controls and other laws and regulations relating to the oil and gas industry generally, such as those curtailing exploration for or production of oil and gas for economic or other policy reasons. The Company cannot determine the extent to which its future operations and earnings may be affected by new legislation, new regulations or changes in existing regulations. See "Business -- Environmental Matters." 8 11 RELIANCE ON MANAGEMENT The Company is dependent on the services of several key management personnel. The loss of the services of certain of these individuals could have a material adverse effect on the Company. The Company does not maintain key-man life insurance on any member of management. See "Management." CONTROL BY PRINCIPAL STOCKHOLDER Following the Offering, Hushang Ansary, the Chairman of the Board and the Chief Executive Officer of the Company, will directly own or have direct voting control of approximately 47.6% of the outstanding shares (excluding shares owned by his children) of Common Stock (assuming exercise of all vested options held by Directors of the Company). See "Security Ownership of Certain Beneficial Owners and Management." As a result of such ownership, Mr. Ansary may be able to control the vote on matters submitted to stockholders, including the election of members of the Company's Board of Directors. The interests of Mr. Ansary may not always reflect the interests of other stockholders. NO ANTICIPATED DIVIDENDS The Company does not anticipate paying any dividends on the Common Stock in the foreseeable future following the consummation of the Offering, and in addition, the payment of dividends is limited by the terms of the Senior Facility (as defined below). The Company intends to retain earnings to provide funds for the continued growth and development of the Company's business. See "Dividend Policy." NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offering, there has been no public market for the Common Stock. The Company intends to apply to have the Common Stock listed for trading on the NYSE. However, there can be no assurance that an active public market for the Common Stock will develop upon completion of the Offering or, if developed, that such market will be sustained. The initial public offering price of the Common Stock will be determined through negotiations among the Company, the Selling Stockholders and the Underwriters and may bear no relationship to the market prices of the Common Stock after the Offering. For information relating to the factors to be considered in determining the initial public offering price, see "Underwriting." Prices for the Common Stock after the Offering may be influenced by a number of factors, including the liquidity of the market for the Common Stock, the Company's results of operations, actual or anticipated announcements of technical innovations or new products and services by the Company or its competitors, general conditions in the oilfield services industry and the oil and gas industry and general economic and other conditions. Sales of substantial amounts of Common Stock in the public market, or the perception of the availability of shares for sale, following the Offering could adversely affect the prevailing market price of the Common Stock. Subject to Rule 144 restrictions, 27,000,000 shares of Common Stock will be eligible to be sold in the public market within 180 days after the Offering. See "Shares Eligible for Future Sale." Additionally, the Company has granted to each of the Directors not employed by the Company options to purchase shares of Common Stock which commence vesting on the date of the Offering. See "Management -- Stock Options." DILUTION Purchasers of the Common Stock offered hereby will experience immediate and substantial dilution in the net tangible book value per share of the Common Stock from the initial public offering price. At an assumed initial public offering price of $15.50 per share (the mid-point of the filing range), the dilution to new investors would be $11.47 per share. See "Dilution." 9 12 THE COMPANY The Company is one of the world's largest manufacturers of land-based drilling and well-servicing rigs and rig component parts for use in the global oil and gas industry and is principally engaged in the design, manufacture, service, sale and rental of onshore and offshore oilfield equipment for the domestic and international markets. Through its IRI and Cardwell operations, the Company designs and produces rigs to meet the special requirements of its global clientele for service in remote areas and harsh climatic conditions. Through its Bowen Tools Division, the Company is a leading manufacturer of downhole fishing and drilling tools and offers a complete line of oilfield power equipment, including top-drives, power-swivels, wireline pressure control equipment and coiled tubing systems, which complement the Company's drilling and well- servicing rigs. The Company also manufactures and maintains a significant inventory of replacement parts for rigs produced by the Company and by others, enabling it to meet the needs of its customers on a timely basis. As a result of its diverse product lines and the availability, on a sale or rental basis, of the products of the Bowen Tools Division, the Company is able to satisfy a wide range of its customers' special requirements. Through its Specialty Steel Division, the Company produces premium alloy steel for commercial and military use and for use in manufacturing oilfield equipment products. The Company markets its oilfield equipment primarily through its own sales force and through designated agents and distributors in every major oil and gas producing region in the world. The Company supplements its marketing efforts by maintaining 27 domestic sales, parts and service centers in areas of significant drilling and production operations and 7 international parts and service centers. The Company's network of service centers in the United States provides its customers with refurbishment or repair services as well as ready access to replacement parts for equipment in the field. The Company's worldwide sales and marketing activities are closely coordinated with and supported by a staff of more than 50 engineers and design technicians, resulting in a competitive advantage for the Company to provide its customers with products meeting customized design specifications for drilling and well-servicing rigs and associated equipment. The Company has combined the global recognition of its strong brand names, the extensive background and experience of its management team in international markets and its commitment to technological excellence and high quality products to achieve significant growth in a favorable industry climate. As of June 30, 1997, the Company's rig manufacturing backlog was $93.0 million. See "Business -- Drilling and Well-Servicing Rigs -- Backlog." In the fiscal year ended March 31, 1996, the nine month period ended December 31, 1996 and the six month period ended June 30, 1997, the Company's revenues were $52.5 million, $62.3 million and $57.8 million, respectively. Operating income for the same periods was $7.6 million, $9.1 million and $4.2 million, respectively. Giving pro forma effect to the Acquisitions as if they had been completed as of January 1, 1996, revenues and operating income for the twelve month period ended December 31, 1996 and the six month period ended June 30, 1997 would have been $188.4 million and $80.2 million, respectively. Pro forma operating income for the same periods would have been $17.9 million and $5.3 million, respectively. The Company's executive offices are located at 1000 Louisiana, Suite 5900, Houston, Texas 77002, and its telephone number at that address is (713) 651-8002. 10 13 USE OF PROCEEDS Net proceeds to the Company from the Offering, calculated at an assumed initial public offering price of $15.50 per share, are expected to be approximately $128.5 million, after deducting underwriting discounts and commissions and estimated offering expenses. The Company will use a portion of the net proceeds of the Offering to repay indebtedness outstanding under the Company's credit facilities, which consist of the Senior Notes, the Term Loan and the Revolving Credit Facility (each as defined below and collectively, the "Credit Facilities") as follows: (i) $31.0 million to redeem the Senior Notes in full; (ii) $64.5 million to repay in full the principal amount outstanding under the Term Loan; and (iii) $15.0 million to repay all amounts anticipated to be outstanding under the Revolving Credit Facility. The remaining proceeds to the Company of approximately $18.0 million will be used for general corporate purposes, which may include, under certain circumstances, the making of strategic acquisitions. See "Business -- Business Strategy." Pending the application of the net proceeds of the Offering, such net proceeds will be invested in short-term, investment grade, interest bearing instruments. The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholders offered hereby. The Credit Facilities consist of (i) a senior secured credit facility (the "Senior Facility") and (ii) the Company's outstanding $31.0 million aggregate principal amount Senior Subordinated Increasing Rate Notes (the "Senior Notes"). In March 1997, pursuant to the Senior Facility, certain financial institutions, as lenders, Credit Lyonnais New York Branch, as a lender and as administrative agent, and Lehman Commercial Paper Inc., an affiliate of Lehman Brothers Inc., as a lender and as advisor, arranger and syndication agent (collectively, the "Lenders") provided to the Company a $65.0 million five-year term loan (the "Term Loan") and a $25.0 million three-year revolving credit facility with a $20.0 million sublimit for the issuance of letters of credit (the "Revolving Credit Facility"). As of July 31, 1997, the outstanding indebtedness under the Term Loan and the Revolving Credit Facility were $64.5 million and $9.0 million, respectively. Absent a default or an event of default (as defined in the Senior Facility), outstanding borrowings under the Term Loan accrue interest at a rate per annum equal to one, two, three or six month LIBOR plus 3 1/4% and outstanding borrowings under the Revolving Credit Facility accrue interest at a rate per annum equal to one, two, three or six month LIBOR plus 2 3/4%. As of July 31, 1997, the weighted average interest rate applicable to outstanding borrowings under the Term Loan and the Revolving Credit Facility were 8.97% and 8.52%, respectively. For a description of the Senior Facility, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- The Senior Facility." In March 1997, the Company issued the Senior Notes pursuant to a Senior Subordinated Increasing Rate Note Purchase Agreement (the "Senior Notes Agreement") to certain investors, as interim lenders, including Strategic Resource Partners, an affiliate of Lehman Brothers Inc. As of July 31, 1997, the principal amount of the outstanding Senior Notes was $31.0 million. As of July 31, 1997, the weighted average interest rate applicable to the outstanding principal amounts of the Senior Notes was 12.27%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Senior Notes." DIVIDEND POLICY The Company does not anticipate paying any dividends on the Common Stock for the foreseeable future following the consummation of the Offering. The Company intends to retain earnings to provide funds for the continued growth and development of the Company's business. Any determination to pay dividends in the future will be at the discretion of the Board of Directors and will be dependent upon the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant by the Board of Directors. In addition, the payment of dividends is limited by the terms of the Senior Facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 11 14 CAPITALIZATION The following table sets forth (i) the historical capitalization of the Company at June 30, 1997 and (ii) the adjusted capitalization of the Company at June 30, 1997 after giving effect to the Offering, certain changes in its capital structure effected by the Company in contemplation of the Offering and the application of the estimated net proceeds therefrom as described under "Use of Proceeds." The net proceeds to the Company from the Offering (after deduction of the underwriting discounts and commissions and estimated offering expenses payable by the Company) are estimated to be approximately $128.5 million, assuming an initial public offering price of $15.50 per share. The information below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the pro forma financial information and the financial statements and notes thereto included elsewhere in this Prospectus.
JUNE 30, 1997 ------------------------- HISTORICAL AS ADJUSTED ---------- ----------- (DOLLARS IN THOUSANDS) Short-term debt: Current installments of long-term debt and current obligations under capital lease........................ $ 2,970 $ 220 ========= ========= Long-term debt and obligations under capital lease (less current installments): Obligations under capital lease (less current installments).......................................... 468 468 Term Loan................................................. 62,250 -- Revolving Credit Facility................................. 6,000 -- Senior Notes.............................................. 31,000 -- Other..................................................... 563 563 --------- --------- Total long-term debt...................................... 100,281 1,031 --------- --------- Stockholders' equity: Preferred Stock, $1.00 par value, 8,000,000 shares authorized, 80,000 issued and outstanding (historical); 25,000,000 shares authorized, 0 issued and outstanding (as adjusted)(1)....................................... 80 -- Common Stock, $.01 par value, 100,000,000 shares authorized, 168,000 issued,163,600 outstanding (historical); 100,000,000 shares authorized, 39,000,000 shares issued and outstanding (as adjusted)(1)......... 2 390 Additional paid-in capital.................................. 5,358 132,694 Retained earnings(2)........................................ 20,324 17,130 Treasury stock, 4,400 common shares at cost (historical), 0 shares (as adjusted)(1)................................... (440) -- --------- --------- Total stockholders' equity............................. 25,324 150,214 --------- --------- Total capitalization.............................. $ 128,575 $ 151,465 ========= =========
- --------------- (1) Pursuant to the Merger, the Company increased its issued and outstanding shares of Common Stock to 30,000,000, effected the cancellation of all issued and outstanding shares of its preferred stock (including all accrued and unpaid dividends thereon) and of the treasury stock. See "Certain Relationships and Related Party Transactions -- Corporate Consolidation." (2) As adjusted reflects a charge of $3.2 million for write-off of deferred debt issuance costs associated with the Credit Facilities to be repaid with proceeds of this Offering. 12 15 DILUTION "Dilution" means the difference between the initial public offering price per share of Common Stock and the pro forma tangible book value per share of Common Stock after giving effect to the Offering. Pro forma net tangible book value per share represents the amount of tangible assets of the Company, less total liabilities, divided by the number of shares of Common Stock outstanding. The pro forma net tangible book value of the Company prior to the Offering at June 30, 1997 was $28.6 million, or $0.95 per share of Common Stock. Without taking into account any other changes in pro forma net tangible book value after June 30, 1997, other than to give effect to the sale of 9,000,000 shares of Common Stock offered hereby by the Company at an assumed offering price of $15.50 per share (after deduction of the underwriting discount and other estimated offering expenses and the application of the estimated net proceeds therefrom as specified in "Use of Proceeds"), the pro forma net tangible book value of the Company at June 30, 1997 would have been $157.0 million, or $4.03 per share. This represents an immediate increase in pro forma net tangible book value of $3.08 per share of Common Stock to existing stockholders and an immediate dilution of approximately $11.47 per share to new investors purchasing shares in the Offering. The following table illustrates the per share dilution to new investors: Assumed initial public offering price per share............. $15.50 Pro forma net tangible book value per share as of June 30, 1997...................................................... 0.95 ---- Increase per share attributable to new investors............ 3.08 ---- Pro forma net tangible book value per share after the Offering.................................................. 4.03 ------ Dilution per share to new investors......................... $11.47 ======
The following table sets forth on a pro forma basis at June 30, 1997 the number shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid by the existing stockholders (including the Selling Stockholders) and new investors purchasing shares of Common Stock in the Offering, assuming an initial public offering price of $15.50 per share (in thousands).
SHARES PURCHASED TOTAL CONSIDERATION ----------------- ------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------- ------- -------- -------- ------------- Existing stockholders.................... 30,000 77% 5,000 3% $ 0.17 New investors............................ 9,000 23% 139,500 97% $15.50 ------- --- ------- --- Total............................. 39,000 100% 144,500 100% ======= === ======= ===
13 16 PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following tables set forth (i) the unaudited pro forma condensed consolidated balance sheet as of June 30, 1997 after giving effect to this Offering, as if it had occurred on June 30, 1997, and (ii) the unaudited pro forma condensed consolidated statements of income for the twelve months ended December 31, 1996 and the six months ended June 30, 1997 after giving effect to the Bowen Acquisition, the Cardwell Acquisition and this Offering, as if all of such transactions had occurred on January 1, 1996. The unaudited pro forma condensed consolidated balance sheet is based on the unaudited balance sheet of the Company as of June 30, 1997, included elsewhere in this Prospectus. The unaudited pro forma condensed consolidated statements of income are based on the historical Statements of Income of the Company and unaudited financial information related to the Acquisitions. The pro forma adjustments are based upon available information and certain assumptions that management believes are reasonable. The pro forma financial information does not purport to represent what the Company's financial position or results of operations would actually have been had the transactions occurred on the dates set forth above. In addition, the pro forma financial statements are not necessarily indicative of the results of future operations of the Company and should be read in conjunction with "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company and the related notes thereto included elsewhere in this Prospectus. 14 17 PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997 (DOLLARS IN THOUSANDS)
PRO FORMA IRI HISTORICAL ADJUSTMENTS PRO FORMA CONSOLIDATED FOR THE OFFERING CONSOLIDATED -------------- ---------------- ------------ ASSETS: Current assets: Cash and cash equivalents.......................... $ 2,366 $ 128,453(a) $ 28,819 (102,000)(b) Accounts receivable................................ 23,073 -- 23,073 Inventories........................................ 84,629 -- 84,629 Other current assets............................... 4,550 -- 4,550 -------- --------- -------- Total current assets....................... 114,618 26,453 141,071 Property, plant and equipment, net................... 38,354 -- 38,354 Excess of cost over fair value of net tangible assets of businesses acquired, net........................ 5,842 -- 5,842 Other assets......................................... 5,377 (3,194)(b) 1,814 (369)(a) -------- --------- -------- Total assets............................... $164,191 $ 22,890 $187,081 ======== ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities........... $ 12,187 $ -- $ 12,187 Customer advances and security deposits............ 7,875 -- 7,875 Other liabilities.................................. 1,721 -- 1,721 Current installment of long-term debt and capital lease........................................... 2,970 (2,750)(b) 220 -------- --------- -------- Total current liabilities.................. 24,753 (2,750) 22,003 Negative goodwill, net............................... 12,657 -- 12,657 Long-term debt and capital lease, less current installments....................................... 100,281 (99,250)(b) 1,031 Accrued postretirement benefits...................... 1,176 -- 1,176 -------- --------- -------- Total liabilities.......................... 138,867 (102,000) 36,867 -------- --------- -------- Shareholders' equity: Preferred stock.................................... 80 (80)(c) -- Common stock....................................... 2 90(a) 390 298(c) Additional paid-in capital......................... 5,358 127,994(a) 132,694 (658)(c) Retained earnings.................................. 20,324 (3,194)(b) 17,130 Less treasury stock, 4,400 common shares, at cost............................................ (440) 440(c) -- -------- --------- -------- Total shareholders' equity................. 25,324 124,890 150,214 -------- --------- -------- Total liabilities and shareholders' equity................................... $164,191 $ 22,890 $187,081 ======== ========= ========
15 18 PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA FOR ACQUISITIONS PRO FORMA IRI CARDWELL BOWEN ------------------ FOR THE PRO FORMA HISTORICAL HISTORICAL HISTORICAL CARDWELL BOWEN SUBTOTAL OFFERING CONSOLIDATED ---------- ---------- ---------- -------- ------- -------- --------- ------------ Revenues................... $75,663 $45,871 $66,857 $ -- $ -- $188,391 $ -- $188,391 Cost of goods sold(1)...... 53,030 35,885 36,636 (498)(d) -- 126,272 -- 126,272 1,219(e) ------- ------- ------- ------- ------- -------- ------- -------- Gross profit........... 22,633 9,986 30,221 (721) 62,119 62,119 Administrative and selling expense.................. 10,810 8,026 25,362 48(e) 44,246 -- 44,246 ------- ------- ------- ------- ------- -------- ------- -------- Operating income......... 11,823 1,960 4,859 (769) 17,873 -- 17,873 Other income (expense): Interest expense......... (662) (646) -- (1,302)(f) (8,823)(f) (11,433) 10,125(g) (1,308) Interest income.......... 251 116 -- -- -- 367 -- 367 Other, net............... (110) 123 (452) -- -- (439) -- (439) ------- ------- ------- ------- ------- -------- ------- -------- (521) (407) (452) (1,302) (8,823) (11,505) 10,125 (1,380) ------- ------- ------- ------- ------- -------- ------- -------- Income before taxes........ 11,302 1,553 4,407 (2,071) (8,823) 6,368 10,125 16,493 Income taxes............... (98) (407) (1,603) 301(h) 1,462(h) (345) (1,551)(h) (1,896) ------- ------- ------- ------- ------- -------- ------- -------- Net income............. 11,204 1,146 2,804 (1,770) (7,361) 6,023 8,574 14,597 Preferred stock dividend requirements............. (800) -- -- -- -- (800) 800(i) -- ------- ------- ------- ------- ------- -------- ------- -------- Net income attributable to outstanding common stock................ $10,404 $ 1,146 $ 2,804 $(1,770) $(7,361) $ 5,223 $ 9,374 $ 14,597 ======= ======= ======= ======= ======= ======== ======= ======== Net income per common share $ 63.59 $ 31.93 $ 0.37 ======= ======== ======== Weighted average shares outstanding.............. 164 164 38,836(j) 39,000 ======= ======== ======= ========
- --------------- (1) Cost of goods sold is adjusted for amortization of negative goodwill. See Notes to Pro Forma Condensed Consolidated Statement of Operations and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General." 16 19 PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA FOR ACQUISITIONS PRO FORMA IRI CARDWELL BOWEN ------------------ FOR THE PRO FORMA HISTORICAL HISTORICAL HISTORICAL CARDWELL BOWEN SUBTOTAL OFFERING CONSOLIDATED ---------- ---------- ---------- -------- ------- -------- --------- ------------ Revenues..................... $57,785 $5,818 $16,592 $ -- $ -- $80,195 $ -- $80,195 Cost of goods sold(1)........ 44,631 4,736 8,141 (125)(d) -- 57,668 -- 57,688 305(e) ------- ------ ------- ----- ------- ------- ------- ------- Gross profit............... 13,154 1,082 8,451 (180) -- 22,507 -- 22,507 Administrative and selling expense.................... 8,928 1,016 7,257 12(e) 17,213 -- 17,213 ------- ------ ------- ----- ------- ------- ------- ------- Operating income (loss).... 4,226 66 1,194 (192) 5,294 5,294 Other income (expense): Interest expense........... (3,147) (132) -- (365)(f) (2,240)(f) (5,884) 5,604(g) (280) Interest income............ 79 41 -- -- -- 120 -- 120 Other, net................. (569) 22 124 -- -- (423) -- (423) ------- ------ ------- ----- ------- ------- ------- ------- Income (loss) before taxes... 589 (3) 1,318 (557) (2,240) (893) 5,604 4,711 Income taxes................. (168) -- (493) -- 323(h) (338) (512)(h) (850) ------- ------ ------- ----- ------- ------- ------- ------- Net income (loss).......... 421 (3) 825 (557) (1,917) (1,231) 5,092 3,861 Preferred stock dividend requirements............... (400) -- -- (400) 400(i) -- ------- ------ ------- ----- ------- ------- ------- ------- Net income attributable to outstanding common stock.................... $ 21 $ (3) $ 825 $(557) $(1,917) $(1,631) $ 5,492 $ 3,861 ======= ====== ======= ===== ======= ======= ======= ======= Net income per common share...................... $ 0.13 $ 9.97 $ 0.10 ======= ======= ======= Weighted average shares outstanding................ 164 164 38,836(j) 39,000 ======= ======= ======= =======
- -------------------------------------------------------------------------------- (1) Cost of goods sold is adjusted for amortization of negative goodwill. See Notes to Pro Forma Condensed Consolidated Statement of Operations and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General." 17 20 NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS GENERAL The following sets forth the assumptions used in preparing the unaudited pro forma condensed consolidated financial statements. The pro forma adjustments are based on estimates made by the Company's management using information currently available. For purposes of preparing these unaudited pro forma condensed consolidated financial statements, the allocations of the purchase prices of the Cardwell Acquisition and the Bowen Acquisition were based on preliminary purchase price allocations and are subject to change pending the completion of detailed evaluation and appraisal of the assets acquired and liabilities assumed. The pro forma condensed statement of income for the year ended December 31, 1996 does not include $1.6 million of additional cost of sales related to the purchase price allocation to inventory which is expected to be sold in the year following the Bowen Acquisition. The pro forma condensed consolidated statement of income for the year ended December 31, 1996 does not reflect amortization of debt acquisition costs ($3,194,000) associated with the Company's indebtedness assumed to be retired with Offering proceeds as described in (f). PRO FORMA ADJUSTMENTS BALANCE SHEET (a) To record the sale by the Company of 9,000,000 shares of Common Stock at $15.50 per share in this Offering after deducting estimated underwriting commissions of $9,416,250 and offering expenses of $2,000,000, including $369,000 incurred as of June 30, 1997. (b) To record the reduction of indebtedness and write-off of related deferred debt issuance costs of the Company through the application of a portion of the net proceeds to the Company from this Offering. (c) To record the cancellation of preferred stock outstanding and cancellation of treasury stock outstanding prior to this Offering. STATEMENTS OF INCOME (d) To reverse payments under license agreements for the use of trademark, patterns and prints purchased by the Company as part of the Cardwell Acquisition. (e) To record additional depreciation and amortization expense as a result of the purchase price allocations of the net assets acquired in the Acquisitions as follows:
YEAR SIX MONTHS ENDED ENDED DECEMBER 31, JUNE 30, ESTIMATED LIFE 1996 1997 -------------- ------------ ---------- Additional depreciation of Cardwell Acquisition property, plant and equipment.................................. 7 to 30 years $ 48,000 $ 12,000 Amortization of excess of cost over fair value of Cardwell net tangible assets acquired................................... 5 years 403,000 101,000 Amortization of excess of cost over fair value of Cardwell affiliate tangible assets acquired................................... 5 years 816,000 204,000 ---------- -------- $1,267,000 $317,000 ========== ========
(f) To record additional interest expense and related amortization of debt issuance costs associated with Company indebtedness incurred related to the Acquisitions. Amortization of debt issuance costs is 18 21 based on the interest method. Interest expense was estimated based on the average 90-Day LIBOR as of June 30, 1997 plus the applicable percentage as specified in the debt agreements. (g) To record reduction in interest expense and amortization of debt issuance costs for repayment of Company indebtedness related to the Acquisitions. (h) To record the income tax related to the effects of the pro forma adjustments. (i) To eliminate preferred stock dividend requirements after the cancellation of preferred stock prior to this Offering. (j) To adjust weighted average shares outstanding to reflect an increase to 30,000,000 in the number of shares of Common Stock outstanding prior to the Offering and issuance of 9,000,000 shares of Common Stock in conjunction with the Offering. 19 22 SELECTED FINANCIAL DATA The following table sets forth selected historical financial information for the Company. The information presented for the period from September 20, 1994 through March 31, 1995, for the year ended March 31, 1996 and the nine month period ended December 31, 1996 is derived from the audited financial statements of the Company. The information presented for the period from April 1, 1994 through September 19, 1994 is derived from the audited financial statements of the Company while owned by Dresser Industries, Inc. and Ingersoll-Rand Corporation (the "Predecessor"). The information presented as of and for the years ended March 31, 1993 and 1994 is derived from the unaudited financial statements of the Company while owned by the Predecessor. The information for the nine month period ended December 31, 1995 is derived from the unaudited financial statements of the Company. The information presented as of June 30, 1997 and for the six month periods ended June 30, 1996 and 1997 is derived from the unaudited financial statements of the Company, which include all adjustments that the Company considers necessary for a fair presentation of the financial position and results of operations for those periods. Operating results for the six months ended June 30, 1997 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1997. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements of the Company, including the notes thereto, included elsewhere in this Prospectus.
PREDECESSOR THE COMPANY ----------------------------------- ---------------------------------------------- PERIOD FROM PERIOD FROM NINE MONTHS YEARS ENDED APRIL 1, 1994 SEPTEMBER 20, ENDED MARCH 31, THROUGH 1994 THROUGH YEAR ENDED DECEMBER 31, ------------------- SEPTEMBER 19, MARCH 31, MARCH 31, ----------------- 1993 1994 1994 1995 1996 1995 1996 -------- -------- ------------- ------------- ---------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) OPERATING DATA: Revenue......................... $ 45,547 $ 95,312 $16,473 $20,206 $52,506 $39,141 $62,298 Cost of goods sold(1)........... 46,747 87,073 16,216 14,058 36,877 28,815 44,968 -------- -------- ------- ------- ------- ------- ------- Gross profit (loss)............. (1,200) 8,239 257 6,148 15,629 10,326 17,330 Selling and administrative expense....................... 5,430 5,027 2,102 2,305 7,990 5,400 8,220 -------- -------- ------- ------- ------- ------- ------- Operating income (loss)......... (6,630) 3,212 (1,845) 3,843 7,639 4,926 9,110 Interest expense................ (7,981) (7,015) (2,675) (25) (47) -- (615) Other income (expense) -- net(2)........... (17,257) (617) 106 8 371 210 (20) Income taxes.................... -- -- -- (263) -- -- (98) -------- -------- ------- ------- ------- ------- ------- Net income (loss)............... (31,868) (4,420) (4,414) 3,563 7,963 5,136 8,377 Preferred stock dividend requirements.................. (800) (800) (400) (400) (800) (600) (600) -------- -------- ------- ------- ------- ------- ------- Net income (loss) attributable to outstanding common stock... $(32,668) $ (5,220) $(4,814) $ 3,163 $ 7,163 $ 4,536 $ 7,777 ======== ======== ======= ======= ======= ======= ======= Weighted average shares outstanding................... 164 164 164 164 164 164 164 ======== ======== ======= ======= ======= ======= ======= Income (loss) per common share......................... $(199.68) $ (31.91) $(29.43) $ 19.33 $ 43.78 27.73 $ 47.54 ======== ======== ======= ======= ======= ======= ======= THE COMPANY ----------------- SIX MONTHS ENDED JUNE 30, ----------------- 1996 1997 ------- ------- OPERATING DATA: Revenue......................... $29,347 $57,785 Cost of goods sold(1)........... 21,149 44,631 ------- ------- Gross profit (loss)............. 8,198 13,154 Selling and administrative expense....................... 5,295 8,928 ------- ------- Operating income (loss)......... 2,903 4,226 Interest expense................ (207) (3,147) Other income (expense) -- net(2)........... 213 (490) Income taxes.................... -- (168) ------- ------- Net income (loss)............... 2,909 421 Preferred stock dividend requirements.................. (400) (400) ------- ------- Net income (loss) attributable to outstanding common stock... $ 2,509 $ 21 ======= ======= Weighted average shares outstanding................... 164 164 ======= ======= Income (loss) per common share......................... $ 15.34 $ 0.13 ======= =======
PREDECESSOR THE COMPANY -------------------- ---------------------------------------------- MARCH 31, ------------------------------------------ DECEMBER 31, JUNE 30, 1993 1994 1995 1996 1996 1997 -------- -------- ------- ------- ------------ -------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital........................................ $(45,343) $(47,776) $33,767 $35,461 $38,658 $ 89,865 Total assets........................................... 97,655 71,200 39,644 46,631 58,671 164,191 Long-term debt and obligation under capital lease, less current installments................................. -- -- -- -- 522 100,281 Shareholder's equity................................... (56,063) (60,483) 8,563 16,526 24,903 25,324
- --------------- (1) Cost of goods sold is adjusted for amortization of negative goodwill. See Notes to Pro Forma Condensed Consolidated Statement of Operations and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General." (2) Other expense for the year ended March 31, 1993 includes a charge of approximately $17.5 million related to the adoption of Statement of Financial Accounting Standards No. 106, "Employer's Accounting for Postretirement Benefits Other than Pensions." 20 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis of the financial condition and results of operations of the Company should be read in conjunction with the Company's Consolidated Financial Statements, including the notes thereto, included elsewhere in this Prospectus. GENERAL The Company is one of the world's largest manufacturers of land-based drilling and well-servicing rigs and rig component parts for use in the domestic and international markets. The Company's revenues are thus substantially dependent upon the condition of the oil and gas industry and worldwide levels of exploration, development and production activity, including the number of oil and gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of workover activity. Exploration, development and production activity is largely dependent on the prevailing view of future oil and natural gas prices which have been characterized by significant volatility over the last 20 years. Oil and natural gas prices are influenced by numerous factors affecting the supply of and demand for oil and gas, including the level of drilling activity, worldwide economic activity, interest rates and the cost of capital, environmental regulation, tax policies, political requirements of national governments, coordination by OPEC and the cost of producing oil and gas. Demand for the Company's products in certain emerging market countries may depend somewhat less on the prevailing view of future oil and natural gas prices as such countries may generally place greater emphasis on their need for internal development, energy self-sufficiency or hard currency earnings. The Company has achieved significant growth in recent years through the efforts of its experienced management team and its focus on expanding the Company's international sales and marketing activities, while also taking advantage of the favorable industry climate in the United States. The Company's revenues were $36.7 million, $52.5 million and $62.3 million, respectively, in the fiscal year ended March 31, 1995 (which included the results of operations of the Predecessor from April 1, 1994 through September 19, 1994), for the fiscal year ended March 31, 1996 and for the nine month period ended December 31, 1996. Operating income for the same periods was $2.0 million, $7.6 million and $9.1 million, respectively. As discussed below, the Company Acquisition (as defined below) was recorded using the purchase method of accounting, making operating income for the fiscal year ended March 31, 1995 not comparable to operating income for later periods. An important component of the Company's growth strategy has been, and will continue to be, to evaluate and, where feasible, make strategic acquisitions that (i) strengthen the Company's market share for existing products, (ii) diversify the Company's product lines in key business segments or (iii) increase the Company's geographic diversity. In furtherance of these strategies, the Company recently acquired the businesses and operations of Bowen and Cardwell. See "-- Capital Expenditures and Acquisitions." The Company currently expects that 1997 results will continue to benefit from the favorable industry climate. The Acquisitions are also expected to result in increased revenue and, over time, improved margins. Results, however, will be dependent on market conditions, in particular the level of worldwide oil and gas exploration and production activity. Accordingly, there can be no assurance as to future results and profitability. On September 20, 1994, all of the outstanding stock of the Company was acquired by an affiliate of the Selling Stockholders for $5 million in cash (the "Company Acquisition"). The Company Acquisition was recorded using the purchase method of accounting and the purchase price allocated to the assets acquired and liabilities assumed based upon their fair values at the date of the Company Acquisition. The excess of the fair value of net assets acquired over consideration paid was applied against nonmonetary assets (property, plant and equipment), reducing the balances at the date of the Company Acquisition to zero. The remaining excess of the fair value of net assets acquired over consideration paid was recorded as negative goodwill in the amount of $26.8 million and is being amortized using the straight-line method over five years ending September 19, 1999. The comparability of the results of operations between the periods ended March 31, 1995 (which included the results of operations of the Predecessor from April 1, 1994 to September 19, 1994) and March 31, 1996 is affected by, in addition to the amortization of negative goodwill (which reduces the post- 21 24 Company Acquisition cost of sales), the exclusion of depreciation expense related to fixed assets written down to zero on the Company Acquisition date, both of which have a positive effect on earnings. See Note 1 to the Consolidated Financial Statements. Amortization of negative goodwill decreased cost of goods sold by $2.7 million in each of the six month periods ended June 30, 1997 and June 30, 1996, $4.0 million in each of the nine month periods ended December 31, 1996 and December 31, 1995, $5.4 million in the year ended March 31, 1996 and $2.7 million for the period from September 20, 1994 through March 31, 1995. RESULTS OF OPERATIONS Sales of new rigs manufactured by the Company can produce large fluctuations in revenues depending on the size and timing of the shipment of orders. Individual orders of rig packages range from $1 million to $25 million and cycle times for the design, engineering and manufacturing of rig packages range from six to nine months. These fluctuations affect the Company's revenues and operating income. SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996 Revenues and operating income were $57.8 million and $4.2 million, respectively, for the six month period ended June 30, 1997, as compared to $29.3 and $2.9, respectively, for the six month period ended June 30, 1996. For the six month period ended June 30, 1997, revenues and operating income/(loss) reflect contributions thereto by Bowen of $19.7 million and $1.4 million, respectively, and by Cardwell of $4.8 million and $(.3) million, respectively. The increases in revenues and operating income were primarily the result of the Acquisitions. Gross margin for the six month period ended June 30, 1997 was 22.8%, as compared to 27.9% for the six month period ended June 30, 1996. This decrease resulted principally from the inclusion of the results of Bowen's operations (gross margin of 23.1%) and Cardwell's operations (gross margin of 8.7%) in the results for the six month period ended June 30, 1997. Selling and administrative expenses were $8.9 million for the six month period ended June 30, 1997 as compared to $5.3 million for the six month period ended June 30, 1996. The increase was due primarily to the inclusion of Bowen and Cardwell's selling and administrative expenses of $3.1 million and $0.7 million, respectively, for the 1997 period. Interest expense increased from $0.2 million for the six month period ended June 30, 1996 to $3.1 million for the six month period ended June 30, 1997. The increase in interest expense is a result of (i) borrowings on March 31, 1997 under the Term Loan facility and the issuance of the Senior Notes on such date to fund the Acquisitions and (ii) borrowings under the Revolving Credit Facility during the period to fund working capital requirements of Cardwell. NINE MONTHS ENDED (FISCAL YEAR) DECEMBER 31, 1996 COMPARED TO NINE MONTHS ENDED DECEMBER 31, 1995 Revenues and operating income were $62.3 million and $9.1 million, respectively, for the nine month period ended December 31, 1996 as compared to $39.1 million and $4.9 million, respectively, for the nine month period ended December 31, 1995. The increases in revenues and operating income were primarily attributable to an increase in sales of the Company's oilfield equipment products to exploration and production companies and contract drillers. The elevated levels of sales of the Company's products reflected the increased oil and gas exploration and production activity worldwide. Gross margin for the nine month period ended December 31, 1996 was 27.8% compared to 26.4% for the nine month period ended December 31, 1995, reflecting a different product mix sold by the Company in each period. Selling and administrative expenses were $8.2 million, representing 13.2% of revenues, for the nine month period ended December 31, 1996 and $5.4 million, representing 13.8% of revenues, for the nine month period ended December 31, 1995. The higher levels of selling and administrative expense were a consequence of increased international sales efforts. Interest expense was $0.6 million for the nine month period ended December 31, 1996, compared to $0.2 million of interest income for the nine month period ended December 31, 1995, due to borrowings by the Company under a former credit facility established in April 1996. The funds borrowed were used by the 22 25 Company to fund increased working capital needs necessitated by the increases in the orders for its oilfield equipment products during the nine month period ended December 31, 1996. YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995 The results of operations for the year ended March 31, 1995 include approximately 5 1/2 months of operations of the Predecessor. The application of the purchase method of accounting in connection with the Company Acquisition makes the results of operations for the fiscal year ended March 31, 1995 not comparable to the fiscal year ended March 31, 1996 or later periods. The Company Acquisition was recorded using the purchase method of accounting and the purchase price was allocated to the assets acquired and liabilities assumed based upon their fair values at the date of the acquisition. See "-- General" and Note 1 to the Consolidated Financial Statements. Revenues were $52.5 million in the fiscal year ended March 31, 1996, compared to $36.7 million in the fiscal year ended March 31, 1995 (which included the results of operations of the Predecessor from April 1, 1994 to September 19, 1994). This increase was due primarily to an increase in sales of the Company's oilfield equipment products to exploration and production companies and contract drillers, resulting from the increase in oil and gas production activities worldwide and management's focus on expanding the Company's international marketing activities and sales. As a result of the application of the purchase method of accounting to the Company Acquisition, operating income, gross margin and selling and administrative expenses for the fiscal year ended March 31, 1995 are not comparable to the fiscal year ended March 31, 1996 or later periods. ACCOUNTING POLICIES In March 1995, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The methodology required by SFAS No. 121 is not materially different from the Company's past practice, and its adoption on April 1, 1996 did not have a material impact on the Company's financial position. In March 1997, the Company changed its fiscal year from a March 31 year-end to a December 31 year-end, effective with the period ending December 31, 1996, in order to harmonize the fiscal years of IRI, Cardwell and Bowen. In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," which specifies the computation, presentation and disclosure requirements for earnings per share for entities with publicly held common stock or potential common stock. This Statement is effective for financial statements for both interim and annual periods ending after December 15, 1997. Earlier application is not permitted. The Company believes the adoption of this statement will not have a material effect on its financial statements. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. This Statement is effective for fiscal years beginning after December 15, 1997. The Company believes the adoption of this statement will not have a material effect on its financial statements. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This Statement is effective for financial statements for periods beginning after December 15, 1997. The Company has not determined the effect of adoption of this statement on its financial statements. 23 26 LIQUIDITY AND CAPITAL RESOURCES At June 30, 1997, the Company had cash and cash equivalents of $2.4 million, compared to $8.6 million at December 31, 1996. At June 30, 1997, the Company's working capital was $89.9 million, compared to $38.7 million at December 31, 1996. The increase in working capital at June 30, 1997 was attributable to the establishment of the Credit Facilities and the consummation of the Acquisitions. At June 30, 1997, the Company's debt to total capitalization ratio was approximately 80.3%. On March 31, 1997, the Company established the Credit Facilities and borrowed approximately $98 million thereunder, primarily to fund the Acquisitions. The Credit Facilities replaced a $15 million revolving credit facility established in April 1996. At July 31, 1997, approximately $17.7 million was available for additional borrowings under the Credit Facilities, and the average interest rate under the Credit Facilities was 10%. The Credit Facilities consist of the Senior Facility, which includes the Term Loan and the Revolving Credit Facility, and the Senior Notes. With proceeds of the Offering, the Company will redeem fully the Senior Notes, repay in full the outstanding balance of Term Loan and reduce the outstanding balance of the Revolving Credit Facility to zero. See "Use of Proceeds." The Senior Facility The Company is permitted to make voluntary prepayments of amounts outstanding under the Term Loan at any time without premium or penalty. Amounts prepaid may not be reborrowed. The Revolving Credit Facility matures on March 31, 2000, and prior thereto amounts repaid may be reborrowed. The Company's obligations under the Senior Facility are secured by first priority security interests in substantially all of the assets of the Company, including all personal property and material real property, the pledge by the Company of all of the outstanding capital stock of Cardwell and the pledge by the Company or Cardwell, as the case may be, of 66% of the outstanding capital stock of each of the Company's direct and indirect foreign subsidiaries. Such obligations are also guaranteed by Cardwell. The Senior Facility contains certain representations and warranties and covenants customary for facilities of this type, including: (i) financial maintenance tests consisting of a fixed charge coverage ratio, an interest coverage ratio, a leverage ratio and a minimum EBITDA test; (ii) conduct of business, preservation of corporate existence, compliance with laws, maintenance of properties and insurance, maintenance of interest rate protection and reporting requirements; and (iii) limitations (subject to certain baskets and exceptions) on indebtedness, liens, guarantees, mergers and acquisitions, asset sales, cash dividends and stock repurchases and redemptions, capital expenditures, leases, investments, loans and advances, optional prepayments of indebtedness, modifications of the documentation relating to the Senior Notes, material amendments to the Company's organizational documents, transactions with affiliates, changes in the Company's fiscal year, negative pledge clauses, changes in lines of business and creation of foreign subsidiaries. The Senior Facility contains events of default customary for facilities of this type, including: (i) the nonpayment of principal, interest or other amounts due under the Senior Facility when due; (ii) breaches of representations and warranties by the Company; (iii) the failure of the Company to observe certain covenants contained in the Senior Facility, subject to applicable cure periods; (iv) the nonpayment of principal or interest on certain other indebtedness of the Company having an outstanding principal amount of $1.0 million or more; (v) the occurrence of certain events of insolvency or bankruptcy involving the Company; (vi) the occurrence of certain events under ERISA; (vii) a judgment for the payment of money in the amount of $1.0 million or more being rendered against the Company and not being discharged, stayed or bonded pending appeal for a period of 60 days; (viii) the failure of any of the security documents securing the Senior Facility to be in full force and effect or to create enforceable security interests; and (ix) certain changes in control of the Company. 24 27 Senior Notes The Senior Notes currently bear interest at a rate per annum equal to three-month LIBOR plus 6 1/2%, and will be fully redeemed out of proceeds from the Offering. The Senior Notes may be redeemed at the option of the Company, in whole or in part, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption. CAPITAL EXPENDITURES AND ACQUISITIONS On March 31, 1997, the Company acquired substantially all of the assets and business of Bowen from Air Liquide America Corporation for a purchase price of approximately $73.1 million, and established its Bowen Tools Division. On April 17, 1997, the Company acquired all of the outstanding capital stock of Cardwell, a privately owned company, as well as certain assets held by affiliates of Cardwell, for approximately $12.0 million in cash and partial payment ($3.0 million) of a note payable to one of Cardwell's bank lenders. In addition, the Company incurred approximately $2.4 million ($1.8 million for Bowen and $0.6 million for Cardwell) of transaction costs in connection with the Acquisitions. The Acquisitions were financed with the proceeds of the Credit Facilities. The Acquisitions have been recorded using the purchase method of accounting, and the results of operations of the acquired companies will be included in the statement of operations of the Company from the date of the respective closings. In addition to funds used to finance the Acquisitions, capital expenditures by the Company during the twelve months ended June 30, 1997 totaled $11.8 million. During the nine month period ended December 31, 1996, on a pro forma basis, capital expenditures were $6.4 million and included those relating to information technology hardware and software, the re-opening of the Company's Beaumont, Texas plant, which had been closed since 1985, and the purchase of machinery and equipment at its Pampa, Texas facility. For the six months ended June 30, 1997, the Company used cash flow in operations of $8.2 million primarily to increase inventory levels to support anticipated increases in sales. The Company believes that cash generated from operations, amounts available under the Revolving Credit Facility and proceeds from this Offering will be sufficient to fund operations, working capital needs, capital expenditure requirements and financing obligations. Ongoing routine capital expenditures for the last two quarters of 1997 are budgeted at $5.3 million and include approximately $1.2 million for the MRP2 system, $2.1 million for purchases of equipment facilities and $2.0 million for the purchase of equipment for use in the Bowen Tools Division's rental tool operations. Capital expenditures are expected to be funded with available cash, cash flow from operations and borrowings under the Revolving Credit Facility. 25 28 BUSINESS The Company is one of the world's largest manufacturers of land-based drilling and well-servicing rigs and rig component parts for use in the global oil and gas industry and is principally engaged in the design, manufacture, service, sale and rental of onshore and offshore oilfield equipment for the domestic and international markets. Through its IRI and Cardwell operations, the Company designs and produces rigs to meet the special requirements of its global clientele for service in remote areas and harsh climatic conditions. Through its Bowen Tools Division, the Company is a leading manufacturer of downhole fishing and drilling tools and offers a complete line of oilfield power equipment, including top drives, power-swivels, wireline pressure control equipment and coiled tubing systems, which complement the Company's drilling and well- servicing rigs. The Company also manufactures and maintains a significant inventory of replacement parts for rigs produced by the Company and by others, enabling it to meet the needs of its customers on a timely basis. As a result of its diverse product lines and the availability, on a sale or rental basis, of the products of the Bowen Tools Division, the Company is able to satisfy a wide range of its customers' special requirements. Through its Specialty Steel Division, the Company produces premium alloy steel for commercial and military use and for use in manufacturing oilfield equipment products. The Company markets its oilfield equipment primarily through its own sales force and through designated agents and distributors in every major oil and gas producing region in the world. The Company supplements its marketing efforts by maintaining 27 domestic sales, parts and service centers in areas of significant drilling and production operations and 7 international parts and service centers. The Company's network of service centers in the United States provides its customers with refurbishment or repair services as well as ready access to replacement parts for equipment in the field. The Company's worldwide sales and marketing activities are closely coordinated with and supported by a staff of more than 50 engineers and design technicians, resulting in a competitive advantage for the Company to provide its customers with products meeting customized design specifications for drilling and well-servicing rigs and associated equipment. The Company has combined the global recognition of its strong brand names, the extensive background and experience of its management team in international markets and its commitment to technological excellence and high quality products to achieve significant growth in a favorable industry climate. As of June 30, 1997, the Company's rig manufacturing backlog was $93.0 million. See "-- Drilling and Well-Servicing Rigs -- Backlog." In the fiscal year ended March 31, 1996, the nine month period ended December 31, 1996 and the six month period ended June 30, 1997, the Company's revenues were $52.5 million, $62.3 million and $57.8 million, respectively. Operating income for the same periods was $7.6 million, $9.1 million and $4.2 million, respectively. Giving pro forma effect to the Acquisitions as if they had been completed as of January 1, 1996, revenues for the twelve month period ended December 31, 1996 and the six month period ended June 30, 1997 would have been $188.4 million and $80.2 million, respectively. Pro forma operating income for the same periods would have been $17.9 million and $5.3 million, respectively. The Company, which traces its history in the oilfield equipment industry for nearly 100 years, was acquired in 1994 from Dresser Industries, Inc. and Ingersoll-Rand Corporation. BUSINESS STRATEGY The Company's business strategy is to continue its significant expansion and growth as a leader in the design, manufacture, service, sale and rental of oilfield equipment products by: Leveraging Strong Brand Names and Leading Market Shares. The Company manufactures its drilling rigs and well-servicing rigs and component parts under internationally recognized brand names which include IDECO(R), FRANKS(R), CARDWELL(R), CABOT(TM) and IRI(TM). The Company manufactures fishing and drilling tools, top drives, power-swivels and coiled tubing systems under the BOWEN(R) brand name. The Company believes the majority of the land-based drilling rigs and well-servicing rigs currently operating worldwide were manufactured by it or its predecessors. The Company estimates that BOWEN(R) fishing tools, considered the industry standard since they were first introduced by S.R. Bowen in 1930, maintain an approximate 50% share of the worldwide market for such products. Under the BOWEN(R) brand name, the 26 29 Company maintains the leading market share in power-swivels and is among the market leaders in drilling tools and wireline equipment. The Company believes it will benefit significantly from increased demand for oilfield equipment and products as customers seek to obtain new equipment or replace existing equipment with similarly branded products. Building on Manufacturing, Engineering and Design Capabilities. The Company manufactures a substantial portion of the equipment and components for its rigs, as contrasted with most of its competitors, which primarily assemble components manufactured by third parties. The Company's integrated design, engineering and manufacturing process is central to the production of its high quality products and enables the Company to provide its customers with products meeting customized design specifications. The Company employs more than 50 people on its engineering and design staff and maintains a research and development program to develop creative solutions for its customers. Recent innovations include rotating substructures for drilling rigs, hydraulic disc brake systems for drawworks, skidding systems for 270 ton and 400 ton drilling rigs and the V/S 110/130 power-swivel. The Company believes its manufacturing, engineering and design capabilities give it a strategic competitive advantage. Capitalizing on Strategic Acquisitions. The Company expects to evaluate and, where feasible, make strategic acquisitions that (i) strengthen the Company's market shares for existing products, (ii) diversify the Company's product lines in key business segments or (iii) increase the Company's geographic diversity. The Company believes that strategic acquisitions should also enhance profitability by leveraging the Company's existing products, engineering and design capabilities, sales force or network of parts and service centers. The Company believes the recent Bowen Acquisition and Cardwell Acquisition were consistent with these criteria, and the Company will seek to capitalize on similar opportunities when available. Emphasizing Recurring Revenue Businesses. The Company intends to focus on its recurring revenue businesses to mitigate the effects of potential fluctuations in the worldwide demand for rigs. The Company's replacement parts business takes advantage of the increased demand for parts required by the aging worldwide rig fleet, which was generally constructed prior to 1982. The Company is well positioned to provide replacement parts as a result of the large number of operating rigs manufactured under the Company's brand names and the preference of equipment owners to obtain replacement parts fabricated by the original manufacturer. The Company's rental tool business takes advantage of the increased number of customers who prefer to rent or lease equipment on a temporary basis. Increasing Efficiency and Cost Containment. The Company is in the process of implementing MRP2, a fully-integrated business planning and control system supported by Baan and Symix software packages designed to increase productivity and enhance the Company's ability to coordinate design engineering, raw material orders and deliveries and manufacturing schedules. The Company expects the new system to increase the Company's ability to process large orders simultaneously and reduce working capital requirements by shortening cycle times. The MRP2 system should enable the Company to improve its profit margin and respond more effectively to the current strong demand for oilfield equipment products and services. DRILLING AND WELL-SERVICING RIGS The Company designs, constructs and sells a complete line of drilling and well-servicing rigs which utilize component parts manufactured by the Company under the IDECO(R), FRANKS(R), CARDWELL(R), CABOT(TM) and IRI(TM) brand names. The sale of drilling and well-servicing rigs accounted for $24.3 million of the Company's revenues for the six month period ended June 30, 1997. A drilling rig is used to bore an oil production hole and to install pipe in order for the continuous extraction of oil to begin. A well-servicing rig performs services on producing wells in need of service in order to sustain or accelerate production, including removing the existing well head equipment, installing or pulling up the down-hole pump, installing or pulling up the existing pipe and reversing this process by installing new pipe and replacing the down-hole pump and well head. A well-servicing rig also handles certain completion operations that must take place before the oil extraction process can begin. 27 30 The Company specializes in manufacturing highly mobile rigs that are designed to meet the specified requirements of its customers, many of whom demand products suitable for harsh and remote environments, including arctic, desert and jungle locations. In addition, the Company manufactures offshore platform well-servicing rigs in modular, easily transported units that allow for a significant reduction in the time and expense historically associated with offshore workover operations. A typical well-servicing rig package consists of a mast, guy wires for stability, drawworks (or large winch) and multiple motors mounted on a truck chassis. A drilling rig package is equipped with modules including engines, an AC/DC converter, rotary table with substructure, mast to support the drill string, racking for pipe, tools, air compressors and a mud pump system. The hoisting system, which consists of a mast or derrick, drawworks, crown block, traveling block and deadline anchor, is used to raise and lower the drill pipe. Power transmission from electric motors or diesel engines to the drawworks, rotary table and mud pumps is through a drive group. The mud system, which consists of separators, degassers, hoppers, valves and pumps, is used to circulate and clean drilling mud which carries the cuttings from the drill bit to the surface. The function of a rig, either drilling or well-servicing, dictates the size of the rig chassis, drawworks and mast, and also determines the type of equipment necessary for operation. In addition to the production of complete drilling and well-servicing rigs, the Company designs, manufactures and sells component products used in the original construction, modernization or repair of land and offshore rigs under its IDECO(R), FRANKS(R), CARDWELL(R), CABOT(TM) and IRI(TM) brand names, including masts, derricks, substructures and other components used in hoisting, power transmission, pumping and mud systems. Products The Company manufactures a total of 48 standard models of land-based drilling and well-servicing rigs under the IDECO(R), FRANKS(R), CARDWELL(R), CABOT(TM) and IRI(TM) brand names. In addition to the standard models, the Company manufactures customized drilling and well-servicing rigs to customer specifications to accommodate, among other things, extreme weather conditions, moving systems or hook load capacities. The Company's drilling and well-servicing rigs and component parts fall within the following categories and classifications: Land-Based Skid-Mounted Drilling Rigs. Large, high-horsepower and skid-mounted, these rigs are used primarily for exploration drilling. With the addition of a moving system, these rigs can be used for multi-well production pad drilling. The Company manufactures 14 models of skid-mounted rigs under the IDECO(R) and CARDWELL(R) brand names ranging from 500 to 3,000 horsepower for operations at well depths up to 35,000 feet. These rigs are furnished complete with power, drawworks, mast, mud pumps and mud circulation systems. Offshore Drilling and Well-Servicing Rigs. The Company manufactures 34 models of offshore drilling and well-servicing rigs under the IDECO(R) and CARDWELL(R) brand names. The Company's offshore well-servicing rigs are specifically engineered and manufactured in module units to be deployable on an existing offshore production platform using the platform's own pedestal crane. This innovative design has enhanced the economics of offshore workovers by eliminating the need for a heavy-lift barge crane, thereby reducing the expense and eliminating one of the scheduling difficulties historically associated with offshore platform rig deployment. Self-Propelled Drilling and Well-Servicing Rigs. These land-based rigs can be driven from location to location. Each unit utilizes its diesel engines for both road transportation and rig machinery operation. Highly mobile, this type of rig is used for well-servicing and shallow drilling, and makes up the largest portion of the land-based rig fleet currently in operation. The Company believes that the FRANKS(R) well-servicing rig is the most popular mobile rig in the domestic market and that the Company's IDECO(R), FRANKS(R) and CARDWELL(R) brands account for 50% of the domestic market. The Company offers 30 models of self-propelled rigs ranging from 200 horsepower to 900 horsepower. 28 31 Trailer Drilling Rigs. The Company manufactures three models of trailer drilling rigs designed for medium depth drilling to 16,000 feet, in 1,100, 1,200 and 1,500 horsepower ratings, under its CABOT(TM) brand name. The Company also manufactures trailer rigs under the IDECO(R) and CARDWELL(R) brand names. These rigs are designed to accommodate 500 to 1,000 horsepower mechanical or electric drawworks and 350,000 to 750,000 pound hook load masts. Slant Hole Drilling Rigs. The Company's slant hole drilling and well-servicing rigs are manufactured under the IDECO(R), FRANKS(R) and CARDWELL(R) brand names and are available mounted on carriers, trailers, truck-type carriers and skid units. Carrier-mounted units are typically equipped with a combination top-head drive and pull-down unit, a platform with hydraulic slip specially designed for slant mast use, pipe handling equipment to add or remove pipe and all necessary controls. All units are capable of drilling from 0 degrees (vertical) to 45 degrees. Heli-Rigs. The Company's heli-rigs are manufactured under the IDECO(R) and CARDWELL(R) brand names and consist of drawworks, substructure and a free-standing cantilever mast in mechanical and electrical units. All components can be divided into loads of 4,000, 6,000, 8,000 and 16,000 pounds for transport by helicopter. The drawworks is equipped with rotary drive, assist brakes and hydraulic make-up and break-out systems. Rig assembly for operations is done at ground level so no crane is required. Masts and Derricks. Hoisting systems consist of a mast or derrick, drawworks, crown block, traveling block and deadline anchor. Masts and derricks manufactured by the Company are designed to support vertical loads ranging from 60 to 1,000 tons for drilling to depths of more than 35,000 feet. Masts are generally used on land-based drilling rigs and are manufactured in easily joined sections so that they are easily transportable. Once at the drilling site, masts are self-erected or, after assembly, are erected by the drawworks. Derricks are generally used on offshore drilling rigs and are delivered in pieces for semi-permanent assembly on the rig. Substructures. Substructures are rig floors and support structures which are used on both land and offshore rigs. The Company manufactures substructures in a wide range of sizes, depending upon the size of mast or derrick chosen, the drawworks and power transmission system used and the working floor space and floor height required. Mud Pumps and Mud Systems. Mud systems are used to contain and treat drilling mud which is circulated through the drill pipe and drill bits to remove cuttings from the hole being drilled. The Company manufactures mud system components and fabricates complete mud systems using components manufactured by the Company and by others. Mud pumps manufactured by the Company under the IDECO(R) trade name include duplex and triplex mud pumps. Drawworks. A drawworks is essentially a large winch used to raise and lower drill pipe. Drawworks manufactured by the Company under the IDECO(R), CARDWELL(R) and CABOT(TM) trade names range in size from 250 to 3,000 input horsepower and are suitable for drilling to depths up to 35,000 feet. Drawwork Braking Systems. The Company manufactures drawwork braking systems under the IRI(TM) and CARDWELL(R) brand names. The Company's patented DuraBrake(TM) system features engineered brake blocks which allow for better air flow, improved flexibility between the brakes and the flange and improved braking efficiency. The Company believes the DuraBrake(TM) system is one of the simplest, safest and most affordable drawworks braking systems in the industry. The Company has also developed and patented a hydraulic actuated disc brake which eliminates water cooling and hydromatic retardation and is simple to maintain. This new braking system is being installed on new rigs and is being retro-fitted on the older rigs with standard band brake systems. Additional Drilling and Well-Servicing Equipment. Under the CARDWELL(R), IDECO(R), VARI-SWIVEL(TM) and HYDRAULIC FLOORMAN(TM) trade names, the Company manufactures tubing and traveling blocks and power swivels. The Company also manufactures drive groups that transmit power to the drawworks and mud pumps, independent rotary drives that transmit power to the rotary table, crown blocks, traveling blocks and deadline anchors that attach the drilling line to the hoisting system. 29 32 Competition The Company's revenues and earnings are affected by the actions of competitors, including price changes, introduction of new or improved products and changes in the supply of, and improvements in the deliverability of, competing products. The Company's principal competitors in the manufacture of drilling rigs and components are National-Oilwell, Inc., Dreco Energy Services Ltd., Continental Emsco Company and Varco International, Inc. The Company believes that its manufacturing capabilities distinguish it from certain of its competitors that are believed to subcontract the production of the majority of their manufactured drilling equipment and rig component parts to third parties. The Company believes that its ability to control the complete manufacturing process, and thus product delivery schedules, is a competitive advantage. Backlog Sales of the Company's drilling and well-servicing rigs are made almost exclusively on the basis of written purchase orders or contracts. The Company includes in its rig backlog those orders or purchase commitments which management believes to be reasonably certain of consummation based on industry practice, the historical relationship between the Company and the customer or the financial terms of the sale, including cash advances, letters of credit or similar credit support arrangements. Giving pro forma effect to the Acquisitions as if they had occurred on January 1, 1996, the Company estimates that the total value of its rig backlog as of June 30, 1997 and June 30, 1996 was $93.0 million and $92.2 million, respectively. Of the $93.0 million in value of rig backlog at June 30, 1997, the Company expects approximately $76.0 million will be shipped during the remainder of 1997, with the balance being shipped during 1998. As of June 30, 1997, the Company has received approximately $7.7 million in cash down payments and approximately $18.8 million of letters of credit or assignments of letters of credit. Raw Materials The Company's manufacturing operations require a variety of components, parts and raw materials which the Company purchases from multiple commercial sources. The Company believes that the loss of any of its suppliers would not have a material adverse effect on the Company's operations. FISHING AND DRILLING TOOLS Through Bowen, the Company designs, manufactures, sells and rents fishing and drilling tools under the BOWEN(R) brand name. Fishing and drilling tool sales and rentals accounted for $26.3 million of the Company's revenues for the six months ended June 30, 1997. Fishing tools are used in the retrieval of drill bits, drill pipe, tubing, casings and bottomhole assemblies from a well bore in order to permit normal drilling operations or production to continue. Bowen fishing tools have been considered the industry standard since they were first introduced in 1930 by S.R. Bowen, who pioneered the forerunner of all modern fishing tools, the Bowen Overshot. Drilling tools are used to assist in drilling operations. The Company estimates that it maintains approximately 50% of the world market for the sale of fishing tools and a 20% market share in the sale of drilling tools. The Company provides certain of its drilling equipment, principally stroking tools such as jars and bumper subs as well as top drives, to its domestic customers on a rental basis. Products Bowen manufactures a broad range of fishing and drilling tools, including: External Catch Fishing Tools. Products in this group include releasing and circulating overshots, sucker rod overshots, overshot accessories, die collars and impression blocks. These products are primarily used to retrieve tubing, casing or drill pipe when well bore conditions allow the external diameter to be engaged. The "Series 150" overshot is the most widely used fishing tool in the industry and employs an internal "grapple" 30 33 with sharp teeth to engage the fish while an outer bowl with internal tapers forces the grapple into the fish with increasing force as pull loads increase. Internal Catch Fishing Tools. Products in this group include rotary taper taps, a variety of releasing spears, knuckle joints and packer retrievers. These products are used to retrieve tubing, casing drill pipe and packers when well bore conditions allow only the internal diameter of the fish to be engaged. The ITCO spear is the most widely used internal catch fishing tool and operates much like the overshot described above except from an internal catch direction. Packer retrievers are used specifically for catching and retrieving a packer which must be disengaged from the casing and removed from a well. Junk Catch Fishing Tools. Products in this group include standard junk baskets, reverse circulation junk baskets and fishing magnets. These products are used to retrieve small irregularly shaped bits of debris from the well bore. A junk basket employs a series of spring loaded "fingers" which flex upward to allow a bit of debris to enter but will not flex downward to allow it to escape. Reverse circulation baskets use a series of fluid ports to redirect flow from a mud pump and "pull" bits of debris into the fingers. A fishing magnet is a permanent magnet fitted within a housing to allow retrieval of a variety of metallic debris from a well. These tools are frequently used to "clean" a well bore so that drilling may continue. Milling and Cutting Tools. Products in this group include Itcoloy milling tools, junk subs, ditch magnets, magnet chargers, internal cutters and external cutters. Milling tools are available in variety of shapes and employ crushed carbide (Itcoloy) teeth to mill or cut away a fish that cannot otherwise be retrieved. They may also be used to reshape the top of a fish for retrieval with an overshot. Ditch magnets and junk subs are employed to catch the cuttings from milling operations. Internal and external cutters are used to cut pipe for removal in sections. They are available in both mechanical and hydraulically operated models. Accessory Tools. Products in this group include jars, jar intensifiers and bumper subs. Tools in this group are often referred to as "stroking" tools since they all operate by telescoping open and closed as they perform their function. Jars are most often used in conjunction with a fishing tool and provide the operator with a means of delivering a sharp upward or downward blow to a fish that is "stuck" in the well bore. The jar intensifier is often used with a jar as a means of enhancing or "intensifying" the jarring blow. A computer program developed by Bowen accurately predicts the intensity of the "jarring" blow delivered to a stuck fish. Jars are available in a wide variety of types and sizes. Bumper subs may be used to aid in loosening a stuck fish but are most often used to release a fishing tool from a fish downhole if necessary. Drilling tools in this category include a drilling jar designed for continuous drilling operations and the Bowen Cushion Sub. The Cushion Sub is a fluid filled shock sub which is used near the drilling bit to reduce shock load on the bit and improve drilling penetration rates. The low spring rates of the fluid spring make this tool highly desirable. Repair and Remedial Tools. Products in this group include casing patches, tubing patches, casing scrapers and tubing and casing rollers. Casing and tubing patches are devices related to the overshot which allow a portion of damaged casing or tubing to be replaced downhole without removing the entire string. They are available in a wide range of sizes, types and pressure ratings. Casing scrapers employ a series of blades set in a housing to scrape paraffin and scale from the internal diameter of casing. Rollers are a series of eccentric rollers mounted on a shaft which are used to "roll" the internal diameter of casing back to the original size after it has been damaged, possibly by a formation shift. Competition In the fishing and drilling tool business, like the rig manufacturing business, the Company's revenues and earnings can be affected by actions of competitors, including price changes, the introduction of new products or improved products and changes in supply of, and improvements in the deliverability of, competing products. The Company's primary competitors in the manufacture of fishing tools are Gotco International Inc. and Houston Engineers Inc., which the Company believes have market shares of approximately 15% and 25%, respectively. In the drilling tool market, the Company's primary competitors are Houston Engineers Inc. and Dailey Petroleum Services Corp., each with an estimated 35% market share. 31 34 POWER AND WIRELINE/PRESSURE CONTROL EQUIPMENT Power Equipment The Company, through its Bowen Tools Division, has more than 50 years' experience in the power equipment market, particularly with power-swivel systems used in well-servicing and drilling applications. The Company estimates it holds a 75% market share in these product lines. Other power equipment products include top drives, power subs, bucking units, power tongs and coiled tubing systems. Sales and rentals of power equipment products accounted for $8.0 million of the Company's revenues for the six month period ended June 30, 1997. The Company manufactures power equipment under the BOWEN(R) brand name. Top drives play a critical role in new drilling and well-servicing applications, replacing a rig's rotary swivel, kelly and rotary table. Top drives enable drilling companies to significantly reduce drilling times, lessen the probability of stuck pipe and improve well control. The Company's top drive features a fully integrated swivel and pipe handler, which the Company believes is more compact and lighter than competing products and can be installed in hours, as opposed to days for similar products. The Company's top drives are all portable. The portable segment of the top drive market enjoys the greatest demand since these systems offer customers increased flexibility. The Company currently manufactures two top drive models: a 350 ton unit for offshore and heavy-duty land applications and a 120 ton model designed for the workover rig market. The Company is developing a 250 ton unit for applications between its 120 ton and 350 ton designs, as well as a high range unit having 450-500 ton capacity. Other products in this group include power tongs, manufactured under the Peck-O-Matic brand name, grease injection systems and bucking units. The market for power equipment is very competitive. Competition is based on product design and quality, ability to meet delivery requirements and pricing. The Company's principal competitor in this segment is Tesco Drilling Company. In addition, the Company's power equipment products compete with products manufactured by Maritime Hydraulics US, Inc., Canadian Rig Ltd. and Varco International, Inc. Wireline/Pressure Control Equipment The Company manufactures products in this group under the BOWEN(R) brand name. The products include small blowout preventers, unions, tool traps, tool catchers, lubricator risers, control heads, stuffing boxes and wellhead adapters. These products are designed to seal around a wire line and control well pressure during wire-line logging operations. Tool traps and tool catchers are included in a set of pressure control equipment to catch expensive logging tools which may be inadvertently pulled loose from the logging cable. Many of these products are also adapted for use in controlling well pressure during coiled tubing operations. This line of products accounted for 3.3% of the Company's revenues on a pro forma basis in the twelve month period ended December 31, 1996. The Company estimates that its market share is approximately 12%. The market for pressure control equipment is very competitive. Competition is based on product design, quality, ability to meet delivery requirements and pricing. The Company's principal competitors in the market include Hydrolex, Inc., Elmar Ltd. and Texas Oil Tools. REPLACEMENT PARTS The Company manufactures and maintains a significant inventory of replacement parts and replacement components. The Company also refurbishes older rigs for its customers. The Company believes that the replacement parts and refurbishment businesses will grow significantly over the next several years as a result of increased worldwide rig utilization and the age of the international rig fleet. The Company is well positioned to provide replacement parts and refurbishment services as a result of the large number of operating rigs manufactured under the Company's brand names and the preference of equipment owners to obtain replacement parts and refurbishment services from the original manufacturer. Replacement parts accounted for $13.1 million of the Company's revenues for the six month period ended June 30, 1997. 32 35 SPECIALTY STEEL PRODUCTS Through its Specialty Steel Division, the Company manufactures premium specialty steel forgings for civilian and military uses. Specialty steel products accounted for $6.8 million of the Company's revenues for the six month period ended June 30, 1997. The Company manufactures over 100 different alloys to form forged products in round, square and rectangular solid, trepanned, counterbored and stepped forms to meet customer specifications. The Company sells its specialty steel products primarily to customers in the heavy equipment, aircraft, petroleum and power generation industries in North America and to the United States military. Specialty steel products are also sold as feedstock directly to forgers and extruders. The Division's largest customer accounted for 24% of the Division's revenue for the nine months ended December 31, 1996. In addition, 13% of production for 1996 was sold to the government and military sectors. Raw Materials Raw materials used to manufacture specialty steel products consist of premium steel scrap and various alloys, of which the Company believes there is an adequate supply in the North American market. Competition The U.S. specialty steel market is highly competitive due primarily to the high cost of freight associated with moving small amounts of high tonnage finished goods. Competitive factors include price, delivery, quality and service. Steel ingots and billets are commodities and are extremely price competitive. The Company's major competitors in the specialty steel market are National Flame and Forge Company Inc., Ellwood Group Inc., Scot Forge Company Inc., Erie Forge and Steel Inc., First Miss Steel Inc. and British Steel PLC. ENGINEERING AND PRODUCT DEVELOPMENT The Company maintains a staff of more than 50 engineers and design technicians to (i) design and test new products, components and systems for use in manufacturing and drilling applications, (ii) enhance the capabilities of existing products and (iii) assist the Company's sales organization and customers with special requirements and products. The Company intends to continue its research, engineering and product development programs to develop proprietary products that are complementary to the Company's existing products, particularly with respect to harsh environment rigs and equipment. Recent innovations include (i) articulating mobile carrier rigs for former Soviet Union markets, (ii) a disc brake hydraulic actuated system, (iii) skidding systems for 270 ton and 400 ton drilling rigs, (iv) the V/S 110/130 power swivel, (v) a series of jars and intensifiers designed specifically for the coiled tubing market, (vi) Slide-Lok II blowout preventers, (vii) a lightweight ball check valve for grease injection control heads, (viii) multi-line vertical blowout preventers, (ix) a new lightweight wireline grease injector and (x) a new offshore drifting mast. The Company's total engineering and product development expenses for the twelve month period ended March 31, 1997 was $1.4 million. The Company has budgeted $5.1 million for engineering and product development expenses for the 1997 fiscal year. MARKETING, SALES AND DISTRIBUTION The Company markets its oilfield products primarily through its own sales force and through designated agents and distributors in all important oil and gas producing countries around the world. The Company's customers include international and domestic drilling contractors and international and domestic oil and gas exploration and production companies, including foreign state-owned oil and gas enterprises. The Company supplements its marketing efforts by maintaining 27 domestic sales and service centers in areas of significant drilling and production operations and 7 international parts and service centers. 33 36 See Note 13 to the Financial Statements for financial information related to the Company's revenues by geographic region. INTELLECTUAL PROPERTY The Company owns or has license to use a number of U.S. and foreign patents covering a variety of products. Although in the aggregate these patents are of importance to the Company, the Company does not consider any single patent to be essential. In general, the Company depends upon product name recognition, manufacturing quality control and application of its expertise rather than patented technology in the conduct of its business. The Company enjoys product brand name recognition, principally through its BOWEN(R), CABOT(TM), CARDWELL(R), FRANKS(R), IDECO(R) and IRI(TM) trademarks, and considers such trademarks to be important to its business. EMPLOYEES As of July 31, 1997 the Company employed a total of 1,378 persons, of whom 33 were employed outside the United States. Approximately 28% of these employees were salaried and the balance were compensated on an hourly basis. Approximately 24% of the Company's employees are represented by a union or are parties to collective bargaining agreements. The Company considers its relations with its employees to be good. RISKS AND INSURANCE The Company's operations are subject to the usual hazards inherent in manufacturing products and providing services for the oil and gas industry. These hazards can cause personal injury and loss of life, business interruptions, property and equipment damage and pollution or environmental damage. The Company maintains comprehensive insurance covering its assets and insuring against risks at levels which management believes to be appropriate and in accordance with industry practice. No assurance can be given, however, that insurance coverage will be adequate in all circumstances or against all hazards or risks, or that the Company will be able to maintain adequate insurance coverage in the future at commercially reasonable rates or on acceptable terms. The Company's services and products are used in drilling, production and well-servicing operations which are subject to inherent risks that could result in property damage, personal injury, suspension of operations or loss of production. The Company maintains product liability and worker's compensation insurance. Although the limits of its insurance coverage against an accident are generally in accordance with industry practice, such insurance may not be adequate to protect the Company against liability or losses accruing from all the consequences of such an incident. ENVIRONMENTAL MATTERS The manufacture of oilfield equipment and specialty steel products is subject to a broad range of federal, state and local environmental laws and regulations, both in the United States and in foreign jurisdictions, including those governing discharges into the air and water, the handling and disposal of solid and hazardous wastes, the remediation of soil and groundwater contaminated by petroleum products or hazardous substances or wastes, and the health and safety of employees. It has been the Company's policy to eliminate and minimize generation of wastes at its facilities through plant operations, process design and maintenance. The Company continually strives to reduce wastes by sending these materials off-site for recycling and/or reuse. The Company has taken, and continues to take, into account the requirements of such environmental laws and regulations in the improvement, modernization, expansion and start-up of its facilities and believes that it is currently in substantial compliance with such material laws and regulations. As is the case with most industrial manufacturers, the Company could incur significant costs related to environmental compliance. To the extent the Company might incur any such compliance costs, these costs most likely would be incurred over a number of years; however, no assurance can be given that future regulatory action regarding soil or groundwater at the Company's facilities, as well as continued compliance with environmental requirements, will not require the 34 37 Company to incur significant costs that may have a material adverse effect on the Company's financial condition and results of operations. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") imposes liability without regard to fault or the legality of the original conduct, on certain classes of persons with respect to the release of a hazardous substance into the environment. These persons include the owner and operator of the disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances found at such site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources, and it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. The Company currently owns or leases, and has in the past owned or leased, numerous properties that for many years have been used for the manufacture and storage of products and equipment containing or requiring oil and/or hazardous substances. Although the Company has utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons or other wastes may have been disposed of or released on or under the properties owned or leased by the Company or on or under other locations where such wastes have been taken for disposal. In addition, many of these properties have been operated by third parties whose treatment and disposal or release of hydrocarbons or other wastes was not under the Company's control. These properties and the wastes disposed thereon may be subject to CERCLA, the Resource Conservation and Recovery Act and analogous state laws. Under such laws, the Company could be required to remove or remediate previously disposed wastes (including wastes disposed of or released by prior owners or operators) or property contamination (including groundwater contamination) or to perform remedial operations to prevent future contamination. Various federal, state and local laws, regulations and ordinances govern the removal, encapsulation or disturbance of asbestos containing materials ("ACMs"). Such laws and regulations may impose liability for the release of ACMs and may provide for third parties to seek recovery from owners or operators of facilities at which ACMs were or are located for personal injury associated with exposure to ACMs. The Company is aware of the presence of ACMs at its facilities, but it believes that such materials are in acceptable condition at this time. The Company believes that any future costs related to remediation of ACMs at these sites will not be material, either on an annual basis or in the aggregate, although there can be no assurance with respect thereto. The Company has sought to reduce the impact of costs arising from or related to actual or potential environmental conditions at the Bowen Tool Division facilities caused or created by Bowen or its predecessors in title through the Company's contractual arrangements with Air Liquide. Pursuant to such arrangements, Air Liquide and Bowen agreed to indemnify the Company for such costs, subject to a limit of $15 million. The indemnity survives the closing of the Bowen Acquisition for five years. Air Liquide provided the Company with certain environmental assessments with respect to most of the Bowen properties conveyed to the Company. Air Liquide is conducting a further environmental review of the Bowen Tool Division facilities to determine the potential scope, if any, of required remediation at such facilities by Air Liquide or Bowen. There can be no assurance that Air Liquide or Bowen will meet its obligations under the indemnification arrangements or that there will not be future contamination for which the Company might be fully liable and that may require the Company to incur significant costs that could have a material adverse effect on the Company's financial condition and results of operations. Although the Company believes that it is in substantial compliance with existing laws and regulations, there can be no assurance that substantial costs for compliance will not be incurred in the future. Moreover, it is possible that other developments, such as stricter environmental laws, regulations and enforcement policies thereunder, could result in additional, presently unquantifiable, costs or liabilities to the Company. 35 38 FACILITIES The principal offices and facilities owned or leased by the Company and their current uses are described in the following table:
FACILITY SIZE PROPERTY SIZE LOCATION (SQ. FT.) (ACRES) TENANCY USE -------- ------------- ------------- ------- --- Pampa, TX.............. 1,000,000 499 Owned Rig and specialty steel manufacturing, administration and warehousing Houston, TX............ 539,700 19 Owned Drilling tool manufacturing, administration and warehousing Beaumont, TX........... 350,000 10 Owned Rig manufacturing, administration and warehousing El Dorado, KS.......... 139,912 23 Owned Rig manufacturing, administration and warehousing Houston, TX............ 16,249 N/A Leased Executive Offices Houston, TX............ 50,154 2 Owned Administration
The Company also owns or leases facilities at 34 domestic and international locations, substantially all of which are sales, service or warehouse locations. LEGAL PROCEEDINGS There are pending or threatened against the Company various claims, lawsuits and administrative proceedings all arising from the ordinary course of business with respect to commercial product liability and employee matters which seek remedies or damages. Although no assurance can be given with respect to the outcome of these or any other pending legal and administrative proceedings and the effects such outcomes may have on the Company, management believes that any ultimate liability resulting from the outcome of such proceedings to the extent not otherwise provided for will not have a material adverse effect on the Company's consolidated financial statements. The Company maintains comprehensive liability insurance. The Company believes such coverage to be of a nature and amount sufficient to ensure that it is adequately protected from any material financial loss as a result of such claims. The Company currently is not the subject of any legal actions for which it is neither insured nor indemnified and which the Company believes will individually or in the aggregate have a material adverse effect on the Company's financial condition or results of operations, nor to the Company's knowledge is any such litigation threatened. 36 39 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The Company's directors and executive officers, and their ages and positions with the Company as of the date of this Prospectus, are as follows:
NAME AGE POSITION ---- --- -------- Hushang Ansary........................... 70 Chairman of the Board and Chief Executive Officer Daniel G. Moriarty....................... 63 Vice-Chairman of the Board Abdallah Andrawos........................ 40 Director and Secretary Nina Ansary.............................. 31 Director Frank C. Carlucci........................ 66 Director Dr. Philip David......................... 65 Director Munawar H. Hidayatallah.................. 53 Director, Executive Vice President and Chief Financial Officer Richard D. Higginbotham.................. 60 Director, President and Chief Operating Officer -- Bowen Tools Division John D. Macomber......................... 69 Director Edward L. Palmer......................... 79 Director Stephen J. Solarz........................ 56 Director Gary W. Stratulate....................... 41 Director, President and Chief Operating Officer -- IRI Division Arthur C. Teichgraeber................... 41 Director, President and Chief Operating Officer -- Cardwell International Ltd. Alexander B. Trowbridge.................. 67 Director J. Robinson West......................... 50 Director
HUSHANG ANSARY is an international entrepreneur, investor and industrialist. He has served as Chairman of the Board of the Company since September 1994 and was elected to the additional position of Chief Executive Officer of the Company in March 1997. He has served as Chairman of SunResorts, Ltd. N.V., a resort company, since 1986 and of Parman Capital Investments Ltd., a private investment company, since 1982. DANIEL G. MORIARTY has been a director of the Company since 1994 and served as Chief Executive Officer of the Company from 1994 to April 1997, when he was elected Vice-Chairman of the Board. He served as President of Cooper Manufacturing, a rig manufacturing division of Allied Production Corp. from 1992 to 1994 and of Smith Energy Services, an oilfield services division of Allied Production Corp., from 1987 to 1992. From 1982 to 1987, Mr. Moriarty served as the President and Chief Executive Officer of Leamco Services, Inc. From 1960 to 1982, Mr. Moriarty held various positions with Halliburton Company, rising from engineer to Vice President of the Central Region. ABDALLAH ANDRAWOS has been Secretary of the Company since 1994 and a director of the Company since April 1997. Since 1989 Mr. Andrawos has served as Secretary and Chief Financial Officer of SunResorts, Ltd. N.V., a resort company. NINA ANSARY has served as a director of the Company since April 1997. Ms. Ansary has been a Vice President of Parman Capital Investments Ltd., a private investment company, since 1994. Prior to 1994 Ms. Ansary was a student. Ms. Ansary is the daughter of Hushang Ansary and holds a masters degree in political science from Columbia University. 37 40 FRANK C. CARLUCCI has been a director of the Company since 1994. Since 1993, Mr. Carlucci has served as Chairman and partner of The Carlyle Group, a Washington, D.C. based merchant bank and from 1989 to 1993 served as Vice-Chairman and partner. Mr. Carlucci serves on the following corporate boards: BDM International, Mass Mutual Life Insurance Company, General Dynamics Corporation, Kaman Corporation, Neurogen Corporation, Northern Telecom Ltd., Quaker Oats Company, SunResorts, Ltd. N.V., Texas Biotechnology Corporation, Pharmacia & Upjohn Inc., Ashland Inc. and Westinghouse Electric Corporation. He is also a Trustee of the Rand Corporation. DR. PHILIP DAVID has been a director of the Company since 1994. Dr. David was a consultant to Fairchild Corporation from January 1988 to June 1993 and was a Professor of Urban Studies and Planning at the Massachusetts Institute of Technology from 1971 until June 1987. Dr. David is a director of Fairchild Corporation. MUNAWAR H. HIDAYATALLAH has been a director and Executive Vice President -- Corporate Development of the Company since 1994 and the Company's Chief Financial Officer since April 1997. From 1982 to 1994, Mr. Hidayatallah served as President and Chief Executive Officer of Crescott Inc., a holding company with interests in financial services, food processing and franchising, and from 1992 to 1994, President and Chief Executive Officer of its subsidiary, Beverly Hills Securities Company. RICHARD D. HIGGINBOTHAM has been a director of the Company and President and Chief Operating Officer of the Bowen Tools Division of the Company since April 1997. Prior to the Bowen Acquisition, Mr. Higginbotham served as President of Bowen since 1988 and from 1982 to 1988 served as Bowen's Senior Vice President of Marketing. JOHN D. MACOMBER has been a director of the Company since 1994. Mr. Macomber has been a principal of JDM Investment Group, a private investment company, since 1992. From 1988 to 1992, he was Chairman and President of the Export-Import Bank of the United States, from 1973 to 1986 he was Chairman of the Board and Chief Executive Officer of Celanese Corp. and from 1954-1973 he was a managing partner of McKinsey & Co. He is also a director of Bristol-Myers Squibb Company, The Brown Group, Lehman Brothers Holdings Inc., Pilkington Ltd., Textron Inc. and Xerox Corporation. He is also a director and Vice-Chairman of The Atlantic Council of the United States and a director of the French American Foundation and the National Executive Services Corp. Mr. Macomber is a trustee of The Folger Library and a member of the Council on Foreign Relations and the Bretton Woods Committee. Mr. Macomber is Chairman of the Council for Excellence in Government and a trustee of the Carnegie Institute of Washington. EDWARD L. PALMER has been a director of the Company since June 1997. Mr. Palmer has been President of the Mill Neck Group Inc., a management consulting firm, since 1982, and prior thereto he served as Chairman of the Executive Committee and director of Citicorp and Citibank, N.A. He is also director of Devon Group Inc., Holmes Protection Group Inc. and SunResorts, Ltd. N.V. STEPHEN J. SOLARZ has been a director of the Company since 1994. Mr. Solarz has been President of Solarz Associates, an international consulting firm, since 1993. From 1975 to 1993, he was a member of the U.S. House of Representatives, where he served on the Foreign Affairs, the Merchant Marine and Fisheries, the Intelligence and the Joint Economic Committees. He is also a director of Samsonite Corp., Culligan Water Technologies Inc., Geophone Company, L.L.C. and First Philippine Fund Inc. GARY W. STRATULATE has been a director of the Company and President and Chief Operating Officer of its IRI Operations since April 1997. From December 1994 to April 1997, he served as the Executive Vice President of the International Division of the Company. From June 1991 to May 1994, Mr. Stratulate was the Chief Operating Officer of Dreco Energy Services Ltd., a manufacturer of oilfield equipment. ARTHUR C. TEICHGRAEBER has been a director of the Company and President and Chief Operating Officer of Cardwell since April 1997. Prior to the Cardwell Acquisition, Mr. Teichgraeber held various positions at Cardwell, rising from sales engineer to President. ALEXANDER B. TROWBRIDGE has been a director of the Company since 1994. Since 1990, Mr. Trowbridge has been the President of Trowbridge Partners, Inc., a management consulting firm. He was 38 41 President of the National Association of Manufacturers from 1980 through 1989. He is also a director of The Gillette Company, New England Life Insurance Company, E.M. Warburg-Pincus Counsellors Fund, Rouse Company, Sun Company, Harris Corporation, Waste Management Inc., ICOS Corporation and SunResorts, Ltd. N.V. He is a charter trustee of Phillips Academy, Andover. J. ROBINSON WEST has been a director of the Company since 1994. Mr. West is Chairman of The Petroleum Finance Company, Ltd., a petroleum industry consulting firm, and served as its President from 1984 to 1996. COMMITTEES The Company has the following standing committees of the Board of Directors: Executive Committee. The Executive Committee consists of Messrs. Ansary, Carlucci, Solarz and Moriarty, with Mr. Ansary serving as Chairman. The Executive Committee has full power and authority to exercise all the powers of the Board of Directors in the management of the business except the power to fill vacancies on the Board of Directors and the power to amend the Bylaws and except as provided by law. Audit Committee. The Audit Committee consists of Mr. Macomber and Dr. David, with Mr. Macomber serving as Chairman. The Audit Committee has responsibility for, among other things, (i) recommending the selection of the Company's independent accountants, (ii) reviewing and approving the scope of the independent accountants' audit activity and extent of non-audit services, (iii) reviewing with management and the independent accountants the adequacy of the Company's basic accounting systems and the effectiveness of the Company's internal audit plan and activities, (iv) reviewing with management and the independent accountants the Company's financial statements and exercising general oversight of the Company's financial reporting process, (v) reviewing the Company's litigation and other legal matters that may affect the Company's financial condition and (vi) monitoring compliance with the Company's business ethics and other policies. Compensation Committee. The Compensation Committee consists of Dr. David and Mr. West, with Dr. David serving as Chairman. The Compensation Committee has responsibility for (i) reviewing and approving the recommendations of the Chief Executive Officer as to appropriate compensation of the Company's principal executive officers, (ii) examining periodically the general compensation structure of the Company and (iii) supervising the welfare, pension and compensation plans of the Company. DIRECTOR COMPENSATION Directors who are not also officers or employees of the Company are paid annual fees equal to $30,000 plus $1,000 for each Board of Directors' meeting (but not committee meeting) attended. 39 42 EXECUTIVE COMPENSATION The following table sets forth certain information regarding the compensation paid to Hushang Ansary, Chairman and Chief Executive Officer, and each of the five other most highly compensated executive officers of the Company for the 12 months ended December 31, 1996 (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE(1)
ANNUAL COMPENSATION LONG-TERM COMPENSATION ---------------------------------- ----------------------------------- AWARDS ------------------------- RESTRICTED SECURITIES OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION AWARDS OPTIONS/SARS PAYOUTS COMPENSATION - --------------------------- -------- -------- ------------ ---------- ------------ ------- ------------ Hushang Ansary............. -- -- -- -- -- -- -- Chairman and Chief Executive Officer Daniel G. Moriarty......... $145,254 $106,504 -- -- -- -- -- Vice-Chairman of the Board Munawar H. Hidayatallah.... $186,750 $121,324 -- -- -- -- -- Executive Vice President and Chief Financial Officer Richard D. Higginbotham.... $135,000 -- -- -- -- -- -- President and Chief Operating Officer of Bowen Tools Division Gary W. Stratulate......... $186,750 $137,500 -- -- -- -- -- President and Chief Operating Officer of IRI Division Arthur C. Teichgraeber..... $100,514 -- -- -- -- -- $498,110(2) President and Chief Operating Officer of Cardwell
- --------------- (1) Under rules promulgated by the Securities and Exchange Commission, since the Company was not a reporting company during the three immediately preceding fiscal years, only the information with respect to the most recent completed fiscal year is required to be presented in the Summary Compensation Table. As a consequence of the change in its fiscal year, the Company's most recent completed fiscal year is a nine month period. In order to provide compensation information for a twelve month period, the information provided in the Summary Compensation Table is for the twelve months ended December 31, 1996. (2) Consists of license fees paid by Cardwell to Mr. Teichgraeber and to certain entities directly or indirectly owned by Mr. Teichgraeber. STOCK OPTIONS On June 17, 1997, in anticipation of the Offering, the Company granted options to purchase 20,000 shares of Common Stock to each of the Directors not employed by the Company (the "Outside Directors") contingent on the consummation of the Offering. The options were granted pursuant to the Incentive Plan (as described below) and are not intended to qualify as "incentive stock options" (as described below under "The Incentive Plan -- Options"). The options have an exercise price per share equal to the Offering price per share and generally have a five-year term. The options are exercisable (i) cumulatively to the extent of one-half of the shares on the effective date of the Offering and (ii) cumulatively to the extent of one-quarter of the shares after each of the first two anniversaries of the effective date of the Offering for so long as the Outside Director remains in continuous service with the Company. In addition, the options become immediately exercisable upon an Outside Director's death or disability. 40 43 As of December 31, 1996, no stock options or stock appreciation rights had been granted to the Named Executive Officers. Except as described above with respect to the Outside Directors, no stock options have been or will be granted prior to or in anticipation of the Offering. COMPENSATION PLANS AND ARRANGEMENTS Compensation of Named Executive Officers -- In General Prior to the Offering, the compensation of the Named Executive Officers was as approved by the Compensation Committee upon the recommendation of the Chief Executive Officer and, in the case of Mr. Teichgraeber, in accordance with his employment agreement with Cardwell. Following the Offering, the compensation of the Named Executive Officers will continue to be approved by the Compensation Committee upon the recommendation of the Chief Executive Officer and, in the case of Mr. Teichgraeber, in accordance with his employment agreement with Cardwell (described below). The Incentive Plan On June 17, 1997, the Company adopted an equity incentive plan (the "Incentive Plan") to attract and retain qualified officers, directors and other key employees of, and consultants to, the Company. Shares Available Under the Incentive Plan. Subject to adjustment as provided in the Incentive Plan, the number of shares of Common Stock that may be issued or transferred and covered by outstanding awards granted under the Incentive Plan will not exceed 4,000,000, which may be shares of original issuance or treasury shares or a combination thereof. Officers, directors and other key employees of and consultants to the Company ("Participants") may be selected by the Compensation Committee to receive benefits under the Incentive Plan. Options. The Compensation Committee may authorize the grant of rights that entitle the optionee to purchase Common Stock ("Option Rights") at a price equal to or greater or less than market value on the date of grant. Subject to adjustment as provided in the Incentive Plan, no participant will be granted Option Rights, in the aggregate, for more than 3,000,000 shares during any three consecutive calendar years. The Compensation Committee may provide that the option price is payable at the time of exercise (i) in cash, (ii) by the transfer to the Company of nonforfeitable, unrestricted shares of Common Stock, (iii) with any other legal consideration the Compensation Committee may deem appropriate, or (iv) by any combination of the foregoing methods of payment. A grant may provide for deferred payment of the option price from the proceeds of sale through a broker on the date of exercise of some or all of the shares of Common Stock to which the exercise relates if there is then a public market for the Common Stock. A grant may provide for automatic grant of reload option rights upon the exercise of Option Rights, including reload option rights, for shares of Common Stock or any other noncash consideration authorized under the Incentive Plan, except that the term of any reload option right may not extend beyond the term of the Option Right originally exercised. The Compensation Committee has the authority to specify at the time Option Rights are granted that shares of Common Stock will not be accepted in payment of the option price until they have been owned by the optionee for a specified period; however, the Incentive Plan does not require any such holding period and would permit immediate sequential exchanges of shares of Common Stock at the time of exercise of Option Rights. Option Rights granted under the Incentive Plan may be Option Rights that are intended to qualify as "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or Option Rights that are not intended to so qualify. Any grant may provide for the payment of dividend equivalents to the optionee on a current, deferred or contingent basis or may provide that dividend equivalents be credited against the option price. No Option Right may be exercised more than 10 years from the date of grant. Each grant must specify the period of continuous employment with, or continuous engagement of consulting services by, the Company that is necessary before the Option Rights will become exercisable and may provide for the earlier exercise of the Option Rights in the event of a change of control of the Company or other similar transaction or event. 41 44 Successive grants may be made to the same optionee regardless of whether Option Rights previously granted to him or her remain unexercised. Transferability. No Option Right is transferable by a participant except by will or the laws of descent and distribution. Option Rights may not be exercised during a participant's lifetime except by the participant or, in the event of the participant's incapacity, by the participant's guardian or legal representative acting in a fiduciary capacity on behalf of the participant under state law and court supervision. Notwithstanding the foregoing, the Compensation Committee, in its sole discretion, may provide for the transferability of particular awards under the Incentive Plan. The Compensation Committee may specify at the date of grant that all or any part of shares of Common Stock that is to be issued or transferred by the Company upon the exercise of Option Rights shall be subject to further restrictions on transfer. Adjustments. The maximum number of shares that may be issued or transferred under the Incentive Plan, the number of shares covered by outstanding Option Rights and the option prices or base prices per share applicable thereto are subject to adjustment in the event of stock dividends, stock splits, combinations of shares, recapitalizations, mergers, consolidations, spinoffs, reorganizations, liquidations, issuances of rights or warrants and similar transactions or events. In the event of any such transaction or event, the Committee may in its discretion provide in substitution for any or all outstanding awards under the Incentive Plan such alternative consideration as it may in good faith determine to be equitable in the circumstances and may require the surrender of all awards so replaced. The Compensation Committee may also, as it determines to be appropriate in order to reflect any such transaction or event, make or provide for such adjustments in the number of shares that may be issued or transferred and covered by outstanding awards granted under the Incentive Plan and the number of shares permitted to be covered by awards granted under the plan to any one participant during any calendar year. Administration and Amendments. The Incentive Plan will be administered by the Compensation Committee of the Board (such committee is referred to in this description of the Incentive Plan as the "Committee"). Following the consummation of the Offering, the Committee must consist of not less than two members who are "non-employee directors" within the meaning of Rule 16b-3 and "outside directors" within the meaning of Section 162(m) of the Code. In connection with its administration of the Incentive Plan, the Committee is authorized to interpret the Incentive Plan and related agreements and other documents. The Committee may make grants to participants under any or a combination of all of the various categories of awards that are authorized under the Incentive Plan and may condition the grant of awards on the surrender or deferral by the participant of the participant's right to receive a cash bonus or other compensation otherwise payable by the Company to the participant. The Incentive Plan may be amended from time to time by the Committee, but without further approval by the shareholders of the Company no such amendment may cause the Incentive Plan to cease to satisfy any applicable condition of Rule 16b-3 or cause any award under the Incentive Plan to cease to qualify for any applicable exception to Section 162(m) of the Code. Federal Income Tax Consequences. The following is a brief summary of certain of the federal income tax consequences of certain transactions under the Incentive Plan based on federal income tax laws in effect on the date of this Prospectus. This summary is not intended to be exhaustive and does not describe state or local tax consequences. In general, (i) no income will be recognized by an optionee at the time a nonqualified Option Right is granted, (ii) at the time of exercise of a nonqualified Option Right, ordinary income will be recognized by the optionee in an amount equal to the difference between the option price paid for the shares and the fair market value of the shares if they are nonrestricted on the date of exercise and (iii) at the time of sale of shares acquired pursuant to the exercise of a nonqualified Option Right, any appreciation (or depreciation) in the value of the shares after the date of exercise will be treated as either short-term or long-term capital gain (or loss) depending on how long the shares have been held. No income generally will be recognized by an optionee upon the grant or exercise of an incentive stock option. If shares of Common Stock are issued to an optionee pursuant to the exercise of an incentive stock option and no disqualifying disposition of the shares is made by the optionee within two years after the date of 42 45 grant or within one year after the transfer of the shares to the optionee, then upon the sale of the shares any amount realized in excess of the option price will be taxed to the optionee as long-term capital gain and any loss sustained will be a long-term capital loss. If shares of Common Stock acquired upon the exercise of an incentive stock option are disposed of prior to the expiration of either holding period described above, the optionee generally will recognize ordinary income in the year of disposition in an amount equal to any excess of the fair market value of the shares at the time of exercise (or, if less, the amount realized on the disposition of the shares in a sale or exchange) over the option price paid for the shares. Any further gain (or loss) realized by the optionee generally will be taxed as short-term or long-term gain (or loss) depending on the holding period. In limited circumstances where the sale of stock that is received as the result of a grant of an award could subject an officer or director to suit under Section 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), the tax consequences to the officer or director may differ from the tax consequences described above. In these circumstances, unless a special election has been made, the principal difference usually will be to postpone valuation and taxation of the stock received so long as the sale of the stock received could subject the officer or director to suit under Section 16(b) of the Exchange Act, but not longer than six months. To the extent that a participant recognizes ordinary income in the circumstances described above, the Company will be entitled to a corresponding deduction provided that, among other things, (i) the income meets the test of reasonableness, is an ordinary and necessary business expense and is not an "excess parachute payment" within the meaning of Section 280G of the Code and is not disallowed by the Section 162(m) $1.0 million limitation on certain executive compensation and (ii) any applicable reporting obligations are satisfied. Other Compensation Plans or Programs The Company does not maintain any other compensation plans or programs that apply to the Named Executive Officers, other than broad-based retirement plans. EMPLOYMENT AGREEMENTS, SEVERANCE AGREEMENTS AND CHANGE-IN-CONTROL AGREEMENTS Mr. Teichgraeber has a five-year employment agreement with Cardwell, commencing as of April 17, 1997 and ending as of April 16, 2002. Under the agreement, Mr. Teichgraeber receives an annual base salary of $250,000, subject to review by Cardwell for increase (but not decrease) at the end of each twelve month period. Commencing with the twelve month period ending March 31, 1998, Mr. Teichgraeber also is eligible to receive an annual performance bonus of up to $600,000. The actual amount of such bonus, if any, is determined by the Company in its sole discretion. If a Change in Control (as defined in such agreement) occurs during the term of the agreement and while Mr. Teichgraeber is still employed by Cardwell, Mr. Teichgraeber is eligible to receive a special change in control bonus. The actual amount of such bonus, if any, shall be determined by the Company in its sole discretion. If Mr. Teichgraeber's employment with Cardwell is terminated during the term of the agreement: (i) by Cardwell for Cause (as defined in such agreement) or by Mr. Teichgraeber for any reason other than Good Reason (as defined in such agreement), Mr. Teichgraeber is not entitled to receive any further compensation or benefits under the agreement; (ii) by Cardwell for any reason other than Cause or Disability (as defined in such agreement), Mr. Teichgraeber is entitled to receive a lump sum payment equal to his then-current base salary for the remainder of the term of the agreement; or (iii) as a result of his death or by Cardwell as a result of his Disability, Mr. Teichgraeber is entitled to receive payments equal to his then-current base salary (less any applicable disability benefits) for a period of six months. Finally, during the period ending on the later of the effective date of the termination of Mr. Teichgraeber's employment with Cardwell or the last day of the term of the agreement, Mr. Teichgraeber is prohibited from engaging in Competitive Activity (as defined in such agreement) with the Company, and is prohibited from soliciting any employee of the Company or any of its affiliates to terminate employment. No other Named Executive Officer has an employment agreement, severance agreement or change-in-control agreement with the Company or any affiliate. 43 46 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of Common Stock as of , 1997 and as adjusted to reflect the sale of the shares of Common Stock offered hereby by (i) each person that owns beneficially more than 5% of the Common Stock, (ii) each director and Named Executive Officer of the Company and (iii) all directors and executive officers of the Company as a group. For purposes of the table, a person or group of persons is deemed to have "beneficial ownership" of any shares as of a given date which such person has the right to acquire within 60 days after such date.
PERCENTAGE OF NUMBER OF SHARES OWNED SHARES OWNED --------------------------- ---------------------- PRIOR TO AFTER PRIOR TO AFTER OFFERING OFFERING(1) OFFERING OFFERING(1) ---------- ----------- -------- ----------- DIRECTORS AND EXECUTIVE OFFICERS Hushang Ansary.............................. 27,300,000(2) 24,580,000(2) 91.0% 62.9% Daniel G. Moriarty.......................... 0 0 0 0 Abdallah Andrawos........................... 0 0 0 0 Nina Ansary................................. 3,000,000 3,010,000(3) 10.0% 7.7% Frank C. Carlucci........................... 1,200,000 1,090,000(3) 4.0% 2.8% Dr. Philip David............................ 1,500,000 1,360,000(3) 5.0% 3.5% Munawar H. Hidayatallah..................... 0 0 0 0 Richard D. Higginbotham..................... 0 0 0 0 John D. Macomber............................ 0 10,000(3) * * Edward L. Palmer............................ 0 10,000(3) * * Stephen J. Solarz........................... 0 10,000(3) * * Gary W. Stratulate.......................... 0 0 0 0 Arthur C. Teichgraeber...................... 0 0 0 0 Alexander B. Trowbridge..................... 0 10,000(3) * * J. Robinson West............................ 0 10,000(3) * * All Directors and executive officers as a group (15 persons)...................... 30,000,000(2) 27,080,000(2)(3) 100% 69.3% CERTAIN OTHER HOLDERS Nader Ansary................................ 3,000,000 3,000,000 10.0% 7.7% The Ansary Family Trust..................... 2,850,000(2) 2,850,000(2) 9.5% 7.3%
- --------------- * Less than 1%. (1) Assumes exercise of vested options held by the Outside Directors. See "Management -- Stock Options." (2) Mr. Ansary, The Ansary Family Trust, a trust controlled by Mr. Ansary for the benefit, inter alia, of members of his immediate family, and a private charitable foundation controlled by Mr. Ansary directly own in the aggregate 21,300,000 shares of Common Stock. Includes shares of Common Stock owned by Nina Ansary and Nader Ansary (Mr. Ansary's daughter and son), of which Mr. Ansary disclaims beneficial ownership. (3) Including, in the case of Ms. Ansary, Mr Carlucci and Mr. David, and otherwise consisting of, options to purchase shares of Common Stock granted pursuant to the Incentive Plan. See "Management -- Stock Options." SELLING STOCKHOLDERS The Selling Stockholders consist of Mr. Ansary, Mr. Carlucci and Dr. David, who are offering 2,730,000, 120,000 and 150,000 shares of Common Stock, respectively. If the Underwriters' Over-Allotment Options are exercised, Mr. Ansary, Mr. Carlucci and Dr. David will sell an additional 819,000, 36,000 and 45,000 shares, respectively. See "Security Ownership of Certain Beneficial Owners and Management." The Company is 44 47 paying all the expenses of the Offering, including the expenses attributable to the shares being sold by the Selling Stockholders, other than underwriting discounts and commissions. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CORPORATE CONSOLIDATION On , 1997, in anticipation of the Offering, the Company and its then sole stockholder, Energy Services International Ltd. ("ESI"), merged pursuant to Section 253 of the Delaware General Corporation Law (the "Merger"), and ESI, as the surviving entity, changed its name to IRI International Corporation. As a result of the Merger, the stockholders of ESI became the stockholders of the Company, the number of issued and outstanding shares of Common Stock was increased to 30,000,000, all issued and outstanding shares of the Company's preferred stock (including all accrued and unpaid dividends thereon) and all shares of treasury stock were cancelled. OTHER TRANSACTIONS During the three month period ended March 31, 1997, the Company paid ESI approximately $450,000 to reimburse ESI for certain administrative services costs (compensation and related expenses) paid by ESI on behalf of the Company for services rendered between September 20, 1994 and March 31, 1997. ESI discontinued making such payments on behalf of the Company effective March 31, 1997. At December 31, 1996, the Company was owed $158,000 by an affiliate for services rendered by Company personnel to the affiliate during 1996. Payment was received in July 1997, and no further services have been rendered. REGISTRATION RIGHTS AGREEMENT In connection with the Offering, the Company will enter into a registration rights agreement with each of the current stockholders (the "Registration Rights Agreement"). The Registration Rights Agreement will provide for demand registration rights pursuant to which, upon the request of a holder or holders (the "Requesting Holders") who are affiliates of the Company or who own at least 10% of the shares of Common Stock subject to such agreement (the "Registrable Securities"), the Company will file a registration statement under the Securities Act to register Registrable Securities held by the Requesting Holder and any other stockholders holding Registrable Securities, provided that at least 10% of the number of shares of Registrable Securities or aggregate principal amount of Registrable Securities outstanding at such time is requested to be registered. In addition, subject to certain conditions and limitations, the Registration Rights Agreement will provide that holders of Registrable Securities may participate in any registration by the Company of its shares of Common Stock in an underwritten offering. The Registration Rights conferred by the Registration Rights Agreement will be transferable to transferees of the Registrable Securities covered thereby. Under the Registration Rights Agreement, the Company is required to pay all the costs associated with such an offer other than underwriting discounts and commissions and transfer taxes attributable to the Registrable Securities sold. In addition, the Company will indemnify the Requesting Holders, and the Requesting Holders will indemnify the Company, against certain liabilities in respect of any registration statement or offering covered by the Registration Rights Agreement. INDEMNIFICATION AGREEMENTS In connection with the Offering, the Company will enter into an indemnification agreement (each, an "Indemnification Agreement") with each of its directors and executive officers (each, an "Indemnitee"). Each Indemnification Agreement will provide that the Company will indemnify each Indemnitee when he or she is involved in any manner or is threatened to be involved in any proceeding (i) by reason of the fact he or she is or was or had agreed to become a director or officer of the Company, or is or was serving or had agreed to serve at the request of the Company as a director, officer, employee or agent of another entity, or by reason of any action alleged to have been taken or omitted in such capacity, against all liabilities actually incurred by the Indemnitee in connection therewith so long as the Indemnitee acted in good faith and in a manner he or 45 48 she reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful or (ii) by or in the right of the Company to procure a judgment in its favor by reason of the fact that he or she is or was or had agreed to become a director or officer of the Company, or is or was serving or had agreed to serve at the request of the Company as a director, officer, employee or agent of another entity, against all liabilities actually incurred by the Indemnitee in connection therewith so long as he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company, except no indemnification will be made if the Indemnitee is adjudged to be liable to the Company, unless and only to the extent a proper court determines that despite the adjudication of liability the Indemnitee is entitled to indemnity. The Company will also agree to indemnify each Indemnitee against liabilities arising from the Indemnitee's alleged or actual negligence or breach of duty or misstatement made, or acquiesced to, in his or her capacity as an officer or director of the Company, or while serving at the request of the Company as a director, officer, employee or agent of another entity. In the event the Company disputes an Indemnitee's right to indemnification under a Indemnification Agreement, the Company has agreed to pay all expenses relating to the Indemnitee's enforcement of its rights under his or her Indemnification Agreement. DESCRIPTION OF CAPITAL STOCK GENERAL The Company's Certificate of Incorporation (the "Certificate of Incorporation") provides that the authorized capital stock of the Company consists of 100,000,000 shares of Common Stock, par value $.01 per share, and 25,000,000 shares of Preferred Stock, par value $1.00 per share (the "Preferred Stock"). Upon consummation of the Offering, 39,000,000 shares of Common Stock will be issued and outstanding, and no shares of Preferred Stock will be issued and outstanding. The summary below is a description summary and is qualified in its entirety by the provisions of the Certificate of Incorporation. COMMON STOCK Except as may otherwise be provided in a Preferred Stock designation, the holders of shares of Common Stock are entitled to one vote per share on all matters to be voted on by shareholders and do not have cumulative voting rights. Subject to preferential rights that may be applicable to any Preferred Stock outstanding, holders of Common Stock are entitled to receive dividends, if, as and when declared by the Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share equally and ratably in assets remaining after payment of liabilities, subject to prior distribution rights of any outstanding Preferred Stock. Holders of Common Stock have no preemptive or conversion rights or other subscription rights, and there are no redemption or sinking fund provisions applicable to the Common Stock. PREFERRED STOCK The Board of Directors has the authority, with the approval of the holders of a majority of the outstanding shares of Common Stock, to issue the Preferred Stock in one or more series and to fix the number of shares to be included in any such series and the designations, relative powers, preferences, rights and qualifications, limitations or restrictions of all shares of each such series. The issuance of Preferred Stock could decrease the amount of earnings and assets available for distributions to the holders of Common Stock. LIMITATIONS OF LIABILITY Under Delaware law, a corporation may include provisions in its certificate of incorporation that will relieve its directors of monetary liability for breaches of their fiduciary duty to the corporation, except under certain circumstances, including a breach of the director's duty of loyalty, acts or omissions of the director not in good faith or which involve intentional conduct or a knowing violation of law, the approval of an improper payment of a dividend or an improper purchase by the Company of stock or any transaction from which the 46 49 director derived an improper personal benefit. The Certificate of Incorporation provides that, to the full extent permitted by Delaware law, no director will be personally liable to the Company or its stockholders for or with respect to any acts or omissions in the performance of his or her duties as a director of the Company. TRANSFER AGENT AND REGISTRAR The Company has appointed Continental Stock Transfer & Trust Co. as the transfer agent and registrar for the Common Stock. SHARES ELIGIBLE FOR FUTURE SALE Upon consummation of the Offering (assuming the Underwriters' Over-Allotment Options and the options granted to the Outside Directors are not exercised), the Company will have 39,000,000 shares of Common Stock outstanding. The 12,000,000 shares of Common Stock sold in the Offering will be freely tradeable by persons other than "affiliates" of the Company without restriction or limitation under the Securities Act. The remaining 27,000,000 shares are "restricted securities" within the meaning of Rule 144 under the Securities Act (the "Restricted Shares") and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including the exemption contained in Rule 144. In general, under Rule 144, if one year has elapsed since the later of the date of acquisition of Restricted Shares from the Company or any "affiliate" of the Company, as that term is defined under the Securities Act, the acquiror or subsequent holder thereof is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the Common Stock then outstanding or the average weekly trading volume of the Common Stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. If two years have elapsed since the date of acquisition of Restricted Shares from the Company or from any "affiliate" of the Company, and the acquiror or subsequent holder thereof is deemed not to have been an affiliate of the Company at any time during the preceding three months 90 days preceding a sale, such person would be entitled to sell such shares in the public market under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements. The Company and the Selling Stockholder have agreed that, subject to certain limited exceptions, for a period of 180 days from the date of this Prospectus they will not, without the prior written consent of Lehman Brothers Inc., sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable for Common Stock. See "Certain Relationships and Related Transactions -- Registration Rights Agreement." The Company intends to file a registration statement on Form S-8 under the Securities Act to register the shares of Common Stock reserved or to be available for issuance pursuant to the Incentive Plan. Shares of Common Stock issued pursuant to such plan generally will be available for sale in the open market by holders who are not affiliates of the Company and, subject to the volume and other limitations of Rule 144, by holders who are affiliates of the Company. Prior to the Offering there has been no public market for the Common Stock. See "Risk Factors -- No Prior Public Market for Common Stock; Possible Volatility of Stock Price." The Company can make no predictions as to the effect, if any, that future sales of Restricted Shares, or the availability of such Restricted Shares for sale, or the issuance of shares of Common Stock upon the exercise of options or otherwise, or the perception that such sales or exercise could occur, will have on the market price prevailing from time to time. Sales of substantial amounts of Restricted Shares in the public market or the perception that such sales might occur could have an adverse effect on the market price of the Common Stock. 47 50 UNDERWRITING Under the terms of, and subject to the conditions contained in, the U.S. Underwriting Agreement, the U.S. Underwriters, for whom Lehman Brothers Inc., Howard, Weil, Labouisse, Friedrichs Incorporated, Prudential Securities Incorporated and Credit Lyonnais Securities (USA) Inc. are acting as representatives (the "Representatives"), have severally agreed to purchase from the Company and the Selling Stockholders, and the Company and the Selling Stockholders have agreed to sell to each U.S. Underwriter, the aggregate number of shares of Common Stock set forth opposite the name of each U.S. Underwriter below:
NUMBER OF UNDERWRITER SHARES ----------- --------- Lehman Brothers Inc. ....................................... Howard, Weil, Labouisse, Friedrichs Incorporated............ Prudential Securities Incorporated.......................... Credit Lyonnais Securities (USA), Inc. ..................... --------- Total............................................. 9,600,000 =========
Under the terms of, and subject to the conditions contained in, the International Underwriting Agreement, the International Managers, for whom Lehman Brothers International (Europe), Credit Lyonnais Securities, Howard, Weil, Labouisse, Friedrichs Incorporated and Prudential-Bache Securities (U.K.) Inc. are acting as representatives (the "Lead Managers"), have severally agreed to purchase from the Company and the Selling Stockholders, and the Company and the Selling Stockholders have agreed to sell to each International Manager, the aggregate number of shares of Common Stock set forth opposite the name of each International Manager below:
NUMBER OF INTERNATIONAL MANAGERS SHARES ---------------------- --------- Lehman Brothers International (Europe)...................... Credit Lyonnais Securities.................................. Howard, Weil, Labouisse, Friedrichs Incorporated............ Prudential-Bache Securities (U.K.) Inc. .................... --------- Total............................................. 2,400,000 =========
48 51 The U.S. Underwriters and the International Managers (collectively, the "Underwriters") propose to offer the shares to the public at the initial public offering price set forth on the cover page of this Prospectus, and to certain selected dealers (who may include the U.S. Underwriters and the International Managers) at such price, less a selling concession not in excess of $ per share. The U.S. Underwriters and the International Managers may allow, and such dealers may re-allow, a concession not in excess of $ per share to certain other Underwriters or to certain other brokers and dealers. After the initial offering to the public, the offering price and other selling terms may be changed by the Representatives and the Lead Managers. The U.S. Underwriting Agreement and the International Underwriting Agreement (collectively, the "Underwriting Agreements") provide that the obligations of the several U.S. Underwriters and the International Managers, respectively, to pay for and accept delivery of the shares of Common Stock offered hereby are subject to the approval of certain legal matters by counsel and certain other conditions. The nature of the U.S. Underwriters' and the International Managers' obligations is such that, if any of the shares of Common Stock are purchased by the U.S. Underwriters pursuant to the U.S. Underwriting Agreement or by the International Managers pursuant to the International Underwriting Agreement, all the shares of Common Stock agreed to be purchased by either the U.S. Underwriters or the International Managers, as the case may be, pursuant to their respective Underwriting Agreements, must be so purchased. The initial public offering price and underwriting discounts and commissions for the U.S. Offering and the International Offering are identical. The closing of the U.S. Offering is a condition to the closing of the International Offering. The closing of the International Offering is a condition to the closing of the U.S. Offering. The Company and the Selling Stockholders have agreed in the Underwriting Agreements to indemnify the U.S. Underwriters and the International Managers against certain liabilities, including liabilities under the Securities Act, and to contribute to payments that the U.S. Underwriters and the International Managers may be required to make in respect thereof. Each of the Company and the Selling Stockholders has granted to the U.S. Underwriters a 30-day option to purchase up to 720,000 additional shares on the same terms and conditions as set forth above to cover over-allotments, if any. Each of the Company and the Selling Stockholders has granted to the International Managers a similar option to purchase up to 180,000 additional shares to cover over-allotments, if any. To the extent that such options are exercised, each Underwriter will be committed, subject to certain conditions, to purchase a number of the additional shares of Common Stock proportionate to such Underwriter's initial commitment, as indicated in the preceding tables. The U.S. Underwriters and the International Managers have entered into an Agreement Between U.S. Underwriters and International Managers (the "Agreement Between") pursuant to which each U.S. Underwriter has agreed that, as part of the distribution of the shares of Common Stock (plus any of the shares of Common Stock to cover over-allotments) offered in the U.S. Offering, (a) it is not purchasing any of such shares for the account of anyone other than a U.S. or Canadian Person (as defined below) and (b) it has not offered or sold, and will not offer, sell, resell or deliver, directly or indirectly, any of such shares outside the United States or Canada or to anyone other than a U.S. or Canadian Person. In addition, pursuant to the Agreement Between, each International Manager has agreed that, as part of the distribution of the shares of Common Stock (plus any of the shares of Common Stock to cover over-allotments) offered in the International Offering, (a) it is not purchasing any of such shares for the account of any U.S. or Canadian Person and (b) it has not offered or sold, and will not offer, sell, resell or deliver, directly or indirectly, any of such shares in the United States or Canada or to any U.S. or Canadian Person. Each International Manager has also agreed that it will offer to sell shares of Common Stock only in compliance with all relevant requirements of any applicable laws. As used herein, "U.S. or Canadian Person" means any resident or citizen of the United States or Canada, any corporation, partnership or other entity created or organized in or under the laws of the United States or Canada or any political subdivision thereof or any estate or trust, the income of which is subject to United States federal income taxation or Canadian income taxation regardless of the source of income (other than a foreign branch of any U.S. or Canadian Person), and includes any United States or Canadian branch of a 49 52 person who is not otherwise a U.S. or Canadian Person. The term "United States" means the United States of America (including the District of Columbia) and its territories, possessions and other areas subject to its jurisdiction. The term "Canada" means Canada, its provinces, territories and possessions and other areas subject to its jurisdiction. The foregoing limitations do not apply to stabilization transactions or to certain other transactions specified in the Underwriting Agreements and the Agreement Between, including: (i) certain purchases and sales between the U.S. Underwriters and the International Managers; (ii) certain offers, sales, resales, deliveries or distributions to or through investment advisors or other persons exercising investment discretion; (iii) purchases, offers or sales by a U.S. Underwriter who is also acting as an International Manager or by an International Manager who also is acting as a U.S. Underwriter; and (iv) other transactions specifically approved by the Representatives and the Lead Managers. Pursuant to the Agreement Between, sales may be made between the U.S. Underwriters and the International Managers of such number of shares of Common Stock as may be mutually agreed upon. Unless otherwise agreed, the price of any shares of Common Stock so sold shall be the public offering price then in effect for the shares of Common Stock being sold by the U.S. Underwriters and the International Managers, less the selling concession allocable to such shares. To the extent that there are sales between the U.S. Underwriters and the International Managers pursuant to the Agreement Between, the number of shares initially available for sale by the U.S. Underwriters or by the International Managers may be more or less than the amount specified on the cover page of this Prospectus. This Prospectus is not, and under no circumstances is to be construed as, an advertisement or a public offering of shares of Common Stock in Canada or any province or territory thereof. Any offer or sale of shares of Common Stock in Canada may only be made pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which such offer or sale is made. Each International Manager has represented and agreed that: (i) it has not offered or sold and, prior to the date six months after the latest closing date, will not offer or sell any shares of Common Stock to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 (the "1986 Act") with respect to anything done by it in relation to the shares of Common Stock in, from or otherwise involving the United Kingdom; and (iii) it has only issued or passed on, and will only issue or pass on, to any person in the United Kingdom any investment advertisement (within the meaning of the 1986 Act) relating to the shares of Common Stock if that person falls within Article II(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to whom such document may otherwise lawfully be issued or passed on. No action has been taken or will be taken in any jurisdiction by the Company, the Selling Stockholders or the Underwriters that would permit a public offering of shares of Common Stock in any jurisdiction where action for that purpose is required, other than the United States. Persons into whose possession this Prospectus comes are required by the Company, the Selling Stockholders and the Underwriters to inform themselves about, and to observe any restrictions as to, the offering of shares of Common Stock offered pursuant to the Offering and the distribution of this Prospectus. Purchasers of the shares of Common Stock offered hereby may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase in addition to the offering price set forth on the cover page hereof. The Company and each of its stockholders have agreed, for a period of 180 days from the date of this Prospectus, not to, directly or indirectly, offer, sell or otherwise dispose of (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any Common Stock of the Company, or sell or grant options, rights or warrants with respect to any 50 53 Common Stock of the Company, without the prior written consent of Lehman Brothers Inc. on behalf of the Representatives and the Lead Managers. Prior to this Offering, there has been no public market for the Common Stock. The initial public offering price will be negotiated among the Company, the Selling Stockholders, the Representatives and the Lead Managers. Among the factors considered in determining the initial public offering price of the Common Stock, in addition to prevailing market conditions, are recent financial and operating results of the Company, the proposed capital structure, assets and liabilities of the Company, estimates of the business potential and earnings prospects of the Company, the prospects for the industry in which the Company operates, an assessment of the Company's management, consideration of the above factors in relation to market valuation of companies in related businesses and other factors deemed relevant. Additionally, consideration was given to the general status of the securities markets, the market conditions for new offerings of securities, the demand for similar securities of publicly traded companies in related businesses and other relevant factors. The initial public offering price set forth on the cover page of this Prospectus should not, however, be considered an indication of the actual value of the Common Stock. Such price will be subject to change as a result of market conditions and other factors. There can be no assurance that an active trading market will develop for the Common Stock or that the Common Stock will trade in the public market subsequent to the Offering at or above the initial public offering price. At June 30, 1997, Lehman Commercial Paper Inc. and Strategic Resource Partners Inc., each an affiliate of Lehman Brothers Inc., in the aggregate owned 10% or more of the outstanding subordinated debt of the Company. As a result of such ownership, the National Association of Securities Dealers, Inc. ("NASD") may view this offering as a participation by Lehman Brothers in the distribution in a public offering of securities issued by a company with which Lehman Brothers has a conflict of interest. As a result, this offering is being made pursuant to the provisions of Rule 2720 of the NASD's Conduct Rules. Such provisions require, among other things, that the initial public offering price be no higher than that recommended by a "qualified independent underwriter," who must participate in the preparation of the registration statement and the prospectus and who must exercise the usual standards of "due diligence" with respect thereto. Prudential Securities Incorporated is acting as a qualified independent underwriter in this Offering, and the initial public offering price of the shares is not higher than the price recommended by Prudential Securities Incorporated, which price was determined based on the factors discussed above. In accordance with such Rule 2720, the U.S. Underwriters and the International Managers will not make sales of shares of Common Stock offered hereby to customers' discretionary accounts without the prior specific written approval of such customers. In connection with its roles as Advisor, Arranger and Syndication Agent under the Senior Credit Facility, Lehman Commercial Paper Inc., an affiliate of Lehman Brothers Inc., was paid customary fees. In connection with its role as an interim lender under the Senior Notes Agreement, Strategic Resource Partners, an affiliate of Lehman Brothers Inc., was paid customary fees. Until the distribution of the Common Stock is completed, rules of the Securities and Exchange Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase shares of Common Stock. As an exception to these rules, the Representatives and the Lead Managers are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions may consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If the Representatives and Lead Managers create a short position in the Common Stock in connection with the Offering, (i.e., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus), the Representatives and the Lead Managers may reduce that short position by purchasing Common Stock in the open market. The Representatives and the Lead Managers also may elect to reduce any short position by exercising all or part of the Underwriters' Over-Allotment Options described herein. The Representatives and the Lead Managers also may impose a penalty bid on certain Underwriters and selling group members. This means that if the Representatives or the Lead Managers purchase shares of Common Stock in the open market to reduce such Underwriters' short position or to stabilize the price of the 51 54 Common Stock they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those shares as part of this Offering. In general, purchases of a security for the purpose of stabilization or to reduce a syndicate short position could cause the price of the security to be higher than it might otherwise be in the absence of such purchases. The imposition of a penalty bid might have an effect on the price of a security to the extent that it were to discourage resales of the security by purchasers in this Offering. Neither the Company, the Selling Stockholders nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company, the Selling Stockholders nor any of the Underwriters makes any representation that the Representatives or Lead Managers will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. The Company intends to apply to have the Common Stock listed for trading on the NYSE. In order to meet one of the requirements for listing the Common Stock on the NYSE, the U.S. Underwriters will undertake to sell lots of 100 or more shares of Common Stock to a minimum of 2,000 beneficial owners. LEGAL MATTERS Certain legal matters with respect to the Common Stock offered hereby will be passed upon for the Company by Jones, Day, Reavis & Pogue, New York, New York and for the Underwriters by Baker & Botts, L.L.P., Houston, Texas. EXPERTS The financial statements of the Company for the period from April 1, 1994 through September 19, 1994 (Predecessor), the period from September 20, 1994 through March 31, 1995, the year ended March 31, 1996 and the nine months ended December 31, 1996; the financial statements of Bowen Tools, Inc. as of December 31, 1995 and 1996 and for each of the years in the three year period ended December 31, 1996; and the financial statements of Cardwell International, Ltd. as of October 31, 1996 and for the ten month period then ended, have been included herein and in the registration statement in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, and upon the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission a Registration Statement on Form S-1 under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus, which is a part of the Registration Statement, omits certain information contained in the Registration Statement, and reference is made to the Registration Statement and the exhibits thereto for further information with respect to the Company and the Common Stock offered hereby. Statements contained herein concerning the provisions of any documents are not necessarily complete, and in each instance reference is made to the copy of such document filed as an exhibit to the Registration Statement. Each such statement is qualified in its entirety by such reference. The Registration Statement, including exhibits filed therewith, may be inspected and copied at the public reference facilities maintained by the Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and will also be available for inspection and copying at the regional offices of the Securities and Exchange Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may also be obtained from the Public Reference Section of the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 upon payment of the fees prescribed by the Securities and Exchange Commission. The Securities and Exchange Commission maintains a World Wide Web site on the Internet at http://www.sec.gov that contains 52 55 reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission. The Company will be required to file reports and other information with the Securities and Exchange Commission pursuant to the Exchange Act. The Company intends to furnish its stockholders annual reports containing consolidated financial statements certified by its independent accountants and quarterly reports containing unaudited condensed consolidated financial statements for each of the first three quarters of each fiscal year. 53 56 INDEX TO FINANCIAL STATEMENTS
PAGE ---- IRI INTERNATIONAL CORPORATION Independent Auditors' Report.............................. F-2 Balance Sheets as of March 31, 1996 and December 31, 1996................................................... F-3 Statements of Operations for the Period from April 1, 1994 through September 19, 1994 (predecessor), Period from September 20, 1994 through March 31, 1995, Year Ended March 31, 1996 and Nine Months Ended December 31, 1996................................................... F-4 Statements of Shareholder's Equity for the Period from April 1, 1994 through September 19, 1994 (predecessor), Period from September 20, 1994 through March 31, 1995, Year Ended March 31, 1996 and Nine Months Ended December 31, 1996...................................... F-5 Statements of Cash Flows for the Period from April 1, 1994 through September 19, 1994 (predecessor), Period from September 20, 1994 through March 31, 1995, Year Ended March 31, 1996 and Nine Months Ended December 31, 1996................................................... F-6 Notes to Financial Statements............................. F-7 Consolidated Balance Sheet as of June 30, 1997 (unaudited)............................................ F-17 Consolidated Statements of Operations for the Six Months Ended June 30, 1996 and 1997 (unaudited)............... F-18 Consolidated Statement of Shareholder's Equity for the Six Months Ended June 30, 1997 (unaudited)................. F-19 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1996 and 1997 (unaudited)............... F-20 Notes to Condensed Consolidated Financial Statements (unaudited)............................................ F-21 BOWEN TOOLS, INC. AND SUBSIDIARIES Independent Auditors' Report.............................. F-24 Consolidated Balance Sheets as of December 31, 1995 and December 31, 1996...................................... F-25 Consolidated Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996....................... F-26 Consolidated Statements of Shareholder's Equity for the Years Ended December 31, 1994, 1995 and 1996........... F-27 Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996....................... F-28 Notes to Consolidated Financial Statements................ F-29 Consolidated Statements of Operations for the Three Months Ended March 31, 1996 and 1997 (unaudited).............. F-37 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1996 and 1997 (unaudited).............. F-38 Notes to Condensed Consolidated Financial Statements (unaudited)............................................ F-39 CARDWELL INTERNATIONAL LTD. AND SUBSIDIARIES Independent Auditors' Report.............................. F-40 Consolidated Balance Sheet as of October 31, 1996......... F-41 Consolidated Statement of Operations for the Ten Months Ended October 31, 1996................................. F-42 Consolidated Statement of Shareholder's Equity for the Ten Months Ended October 31, 1996.......................... F-43 Consolidated Statement of Cash Flows for the Ten Months Ended October 31, 1996................................. F-44 Notes to Consolidated Financial Statements................ F-45 Consolidated Statements of Operations for the Five Months Ended March 31, 1996 and 1997 (unaudited).............. F-51 Consolidated Statement of Shareholder's Equity for the Five Months Ended March 31, 1997 (unaudited)........... F-52 Consolidated Statements of Cash Flows for the Five Months Ended March 31, 1996 and 1997 (unaudited).............. F-53 Notes to Condensed Consolidated Financial Statements (unaudited)............................................ F-54
F-1 57 INDEPENDENT AUDITORS' REPORT The Board of Directors IRI International Corporation: We have audited the accompanying balance sheets of IRI International Corporation as of March 31, 1996 and December 31, 1996 and the related statements of operations, shareholder's equity and cash flows for the period from April 1, 1994 through September 19, 1994 (Predecessor), the period from September 20, 1994 through March 31, 1995, the year ended March 31, 1996 and the nine months ended December 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 IRI International Corporation as of March 31, 1996 and December 31, 1996 and the results of its operations and its cash flows for the period from April 1, 1994 through September 19, 1994 (Predecessor), the period from September 20, 1994 through March 31, 1995, the year ended March 31, 1996 and the nine months ended December 31, 1996 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Dallas, Texas June 27, 1997 F-2 58 IRI INTERNATIONAL CORPORATION BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS
MARCH 31, DECEMBER 31, 1996 1996 --------- ------------ Current assets: Cash and cash equivalents................................. $ 7,704 $ 8,635 Accounts receivable, less allowance for doubtful accounts of $27 at March 31, 1996 and $36 at December 31, 1996................................................... 5,442 8,036 Inventories............................................... 31,155 37,995 Costs and estimated earnings in excess of billings on uncompleted contracts.................................. -- 23 Other current assets...................................... 855 957 ------- ------- Total current assets.............................. 45,156 55,646 Property, plant and equipment, net.......................... 775 2,398 Prepaid pension cost........................................ 700 627 ------- ------- $46,631 $58,671 ======= ======= LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Notes payable............................................. $ -- $ 3,157 Accounts payable.......................................... 4,470 6,790 Accrued liabilities....................................... 3,122 3,530 Customer advances......................................... 1,720 2,607 Other liabilities......................................... 383 760 Current installments of obligation under capital lease.... -- 144 ------- ------- Total current liabilities......................... 9,695 16,988 Negative goodwill, less accumulated amortization............ 18,786 14,760 Obligation under capital lease, less current installments... -- 522 Accrued postretirement benefits other than pensions......... 1,624 1,498 ------- ------- Total liabilities................................. 30,105 33,768 ------- ------- Shareholder's equity: Preferred stock, $1.00 par value, 8,000,000 shares authorized, 80,000 issued and outstanding.............. 80 80 Common stock, $.01 par value, 100,000,000 shares authorized, 168,000 shares issued, 163,600 shares outstanding............................................ 2 2 Additional paid-in capital................................ 5,358 5,358 Retained earnings......................................... 11,526 19,903 Less treasury stock, 4,400 common shares, at cost......... (440) (440) ------- ------- Total shareholder's equity........................ 16,526 24,903 Commitments and contingencies ------- ------- $46,631 $58,671 ======= =======
See accompanying notes to financial statements. F-3 59 IRI INTERNATIONAL CORPORATION STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PERIOD FROM PERIOD FROM APRIL 1, SEPTEMBER 20, NINE MONTHS 1994 THROUGH 1994 THROUGH YEAR ENDED ENDED SEPTEMBER 19, MARCH 31, MARCH 31, DECEMBER 31, 1994 1995 1996 1996 ------------- ------------- ---------- ------------ (PREDECESSOR) Revenues.................................... $16,473 $20,206 $52,506 $62,298 Cost of goods sold.......................... 16,216 14,058 36,877 44,968 ------- ------- ------- ------- Gross profit...................... 257 6,148 15,629 17,330 Selling expense............................. 696 955 3,513 3,026 Administrative expense...................... 1,406 1,350 4,477 5,194 ------- ------- ------- ------- Operating income (loss)........... (1,845) 3,843 7,639 9,110 Other income (expense): Interest income........................... 16 21 371 90 Interest expense.......................... (2,675) (25) (47) (615) Other, net................................ 90 (13) -- (110) ------- ------- ------- ------- (2,569) (17) 324 (635) ------- ------- ------- ------- Income (loss) before income taxes........................... (4,414) 3,826 7,963 8,475 Income taxes................................ -- 263 -- 98 ------- ------- ------- ------- Net income (loss)................. (4,414) 3,563 7,963 8,377 Preferred stock dividend requirements....... (400) (400) (800) (600) ------- ------- ------- ------- Net income (loss) attributable to outstanding common stock........ $(4,814) $ 3,163 $ 7,163 $ 7,777 ======= ======= ======= ======= Net income (loss) per common share.......... $(29.43) $ 19.33 $ 43.78 $ 47.54 ======= ======= ======= =======
See accompanying notes to financial statements. F-4 60 IRI INTERNATIONAL CORPORATION STATEMENTS OF SHAREHOLDER'S EQUITY (IN THOUSANDS)
ADDITIONAL RETAINED TOTAL PREFERRED COMMON PAID-IN EARNINGS TREASURY SHAREHOLDER'S STOCK STOCK CAPITAL (DEFICIT) STOCK EQUITY --------- ------ ---------- --------- -------- ------------- Balances at April 1, 1994 (predecessor)................. $80 $ 2 $ 24,718 $(84,843) $(440) $(60,483) Net loss (predecessor).......... -- -- -- (4,414) -- (4,414) --- ---- -------- -------- ----- -------- Balances at September 19, 1994 (predecessor)................. 80 2 24,718 (89,257) (440) (64,897) Acquisition by Energy Services International................. -- 0 (19,360) 89,257 -- 69,897 --- ---- -------- -------- ----- -------- Balances at September 20, 1994.......................... 80 2 5,358 -- (440) 5,000 Net income...................... -- -- -- 3,563 -- 3,563 --- ---- -------- -------- ----- -------- Balances at March 31, 1995...... 80 2 5,358 3,563 (440) 8,563 Net income...................... -- -- -- 7,963 -- 7,963 --- ---- -------- -------- ----- -------- Balances at March 31, 1996...... 80 2 5,358 11,526 (440) 16,526 Net income...................... -- -- -- 8,377 -- 8,377 --- ---- -------- -------- ----- -------- Balances at December 31, 1996... $80 $ 2 $ 5,358 $ 19,903 $(440) $ 24,903 === ==== ======== ======== ===== ========
See accompanying notes to financial statements. F-5 61 IRI INTERNATIONAL CORPORATION STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PERIOD FROM PERIOD FROM APRIL 1, SEPTEMBER 20, YEAR NINE MONTHS 1994 THROUGH 1994 THROUGH ENDED ENDED SEPTEMBER 19, MARCH 31, MARCH 31, DECEMBER 31, 1994 1995 1996 1996 ------------- ------------- --------- ------------ (PREDECESSOR) Cash flows from operating activities: Net income (loss)............................. $(4,414) $ 3,563 $ 7,963 $ 8,377 Adjustments to reconcile net income to net cash provided by operations: Depreciation............................... 341 6 64 98 Amortization of negative goodwill.......... -- (2,684) (5,367) (4,026) Change in employee benefit accounts........ 370 (648) (249) (53) Changes in assets and liabilities: Accounts receivable...................... (662) 378 72 (2,594) Inventories.............................. 684 4,175 (2,043) (6,840) Other current assets..................... (101) 708 (201) (125) Accounts payable and accrued liabilities........................... (555) 995 3,580 2,728 Customer advances and other liabilities........................... 3,957 (2,612) 360 1,264 Intercompany payable..................... 101 -- -- -- ------- ------- ------- ------- Net cash provided by (used in) operations.......................... (279) 3,881 4,179 (1,171) ------- ------- ------- ------- Cash flows used in investing activities -- purchases of property, plant and equipment..................................... (109) (128) (717) (911) ------- ------- ------- ------- Cash flows from financing activities: Payments on capital lease obligation.......... -- -- -- (144) Proceeds from notes payable................... -- -- -- 3,157 ------- ------- ------- ------- Net cash flows provided by financing activities.......................... -- -- -- 3,013 ------- ------- ------- ------- Increase (decrease) in cash and cash equivalents................................... (388) 3,753 3,462 931 Cash and cash equivalents at beginning of year.......................................... 877 489 4,242 7,704 ------- ------- ------- ------- Cash and cash equivalents at end of year........ $ 489 $ 4,242 $ 7,704 $ 8,635 ======= ======= ======= ======= Interest paid................................... $ -- $ 25 $ 47 $ 303 ======= ======= ======= ======= Income taxes paid............................... $ -- $ -- $ 263 $ -- ======= ======= ======= =======
See accompanying notes to financial statements. F-6 62 IRI INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS (1) GENERAL IRI International Corporation (IRI or Company), a Delaware Corporation, was formed on July 31, 1985, through the combination of Ingersoll-Rand Oilfield Products Company, a wholly-owned subsidiary of Ingersoll-Rand Company, established August 1, 1980, and the Ideco Division of Dresser Industries, Inc. The Company manufactures and sells a full line of oil and gas mobile well servicing and drilling rigs, deep oil and gas skid-mounted drilling rigs, associated drilling equipment (Oilfield Equipment), and specialty steel products (Specialty Steel). Most of the Company's customers are located in Asia. Raw materials are readily available and the Company is not dependent upon a single or a few suppliers. On September 20, 1994, all of the outstanding common and preferred stock of IRI was acquired by Energy Services International (ESI) for cash of $5 million. The acquisition has been recorded using the purchase method of accounting and the purchase price has been allocated to the assets acquired and liabilities assumed based upon their fair values at the date of the acquisition as follows (in thousands): Inventories....................................... $ 33,287 Other current assets.............................. 7,743 Current liabilities............................... (7,372) Accrued retirement benefits....................... (1,821) Negative goodwill................................. (26,837) -------- $ 5,000 ========
The excess of the fair value of net assets acquired over consideration paid was applied against nonmonetary assets (property, plant and equipment) reducing the balances at the acquisition date to zero. The remaining excess of the fair value of net assets acquired over consideration paid was recorded as negative goodwill and is being amortized using the straight-line method over 5 years. Financial statements previously issued by the Company for the period from September 20, 1994 through March 31, 1995 and the year ended March 31, 1996 have been restated to reflect the purchase adjustments arising from the acquisition of the Company by ESI. During 1997, the Company elected to change its fiscal year end from March 31 to December 31. (2) SIGNIFICANT ACCOUNTING POLICIES (a) Statements of Cash Flows Cash equivalents of $7.7 million and $8.6 million at March 31, 1996 and December 31, 1996, respectively, consisted of interest-bearing cash deposits. For purposes of the statement of cash flows, the Company considers all cash and short-term investments with original maturities of three months or less to be cash equivalents. During the nine months ended December 31, 1996, the Company entered into a capital lease obligation of $810,000. (b) Inventories Inventories are stated at the lower of cost or market. Cost is determined using standard costs which approximate actual cost on a first-in, first-out basis. F-7 63 IRI INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (c) Property, Plant and Equipment Depreciation of property, plant and equipment is provided over the estimated service lives of assets principally using the straight-line method. Maintenance, repairs and minor replacements are charged to operations as incurred; major repairs, replacements or improvements are capitalized. (d) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (e) Revenue Recognition During 1996, The Company changed its method for recognizing revenues on construction contracts from the completed contract method to the percentage-of-completion method. The change was made to better match recognition of income on contracts to the related costs incurred as construction progresses. The Company continues to utilize the completed contract method of revenue recognition for tax purposes. Under the percentage-of-completion method, revenues and profits are recognized based on the percentage of completion throughout the performance period of the contract. The percentage-of-completion is calculated based on the ratio of contract costs incurred to date to total estimated contract costs after providing for all known or anticipated costs. Costs include material, direct labor and engineering and manufacturing overhead. Selling expenses and general and administrative expenses are charged to operations as incurred. The effect of changes in estimates of contract costs is recorded currently. All remaining revenue is generally recorded when the equipment is shipped. Costs and estimated earnings in excess of billings on uncompleted contracts represent revenues earned under the percentage-of-completion method but not yet billable under the terms of the contract. Amounts are billable under contracts generally upon shipment of the products or completion of the contracts. Included in revenues and cost of goods sold for the nine months ended December 31, 1996 is $764,000 and $741,000, respectively, related to uncompleted contracts ($23,000 net) at December 31, 1996. (f) Earnings per Common Share Earnings per common share is based on the net income applicable to common stock and weighted average common stock outstanding (16,360,000 shares) during the periods and year presented. (g) Financial Instruments and Credit Risk Concentrations The Company invests its excess cash in financial instruments, primarily overnight investments and money market mutual funds. These financial instruments could potentially subject the Company to concentrations of credit risk; however, the Company's management considers the financial stability and creditworthiness of a financial institution before investing the Company's funds. The carrying amounts of the financial instruments in the accompanying financial statements (cash, accounts receivables and payables) approximate fair value because of the short maturities of these instruments. The note payable to bank and capital lease obligation bear interest at rates that approximate market rates and, thus the carrying amount of debt approximates estimated fair value. F-8 64 IRI INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) A substantial portion of the Company's customers are engaged in the energy industry. This concentration of customers may impact the Company's overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. The Company performs ongoing credit evaluations of its customers. The Company maintains reserves for potential credit losses, and actual losses have historically been within the Company's expectations. Foreign sales also present various risks, including risks of war, civil disturbances and governmental activities that may limit or disrupt markets, restrict the movement of funds or result in the deprivation of contract rights or the taking of property without fair consideration. Most of the Company's foreign sales, however, are to large international companies or are secured by letters of credit or similar arrangements. (h) 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. (i) Long-Lived Assets In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, was issued which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and estimated future undiscounted cash flows indicate the carrying value of those assets may not be recoverable. The Company implemented SFAS No. 121 on April 1, 1996 and the adoption did not have a material effect on the financial statements. (3) CHANGE IN ACCOUNTING METHOD As discussed in note 1(e), the Company adopted the percentage of completion method of accounting for long-term contracts to conform its accounting policies with industry standards. For purposes of the proposed registration statement, the accompanying financial statements have been restated to reflect the new accounting method for all periods presented. (4) INVENTORIES A summary of inventories follows (in thousands):
MARCH 31, DECEMBER 31, 1996 1996 --------- ------------ Raw materials and supplies.................. $22,473 $29,163 Work in process............................. 7,237 7,645 Finished goods.............................. 1,445 1,187 ------- ------- Total............................. $31,155 $37,995 ======= =======
F-9 65 IRI INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (5) PROPERTY, PLANT AND EQUIPMENT A summary of property, plant and equipment follows (in thousands):
MARCH 31, DECEMBER 31, 1996 1996 --------- ------------ Land and land improvements................... $ -- $ 13 Buildings.................................... 203 277 Machinery and equipment...................... 642 2,276 ---- ------ 845 2,566 Less accumulated depreciation................ (70) (168) ---- ------ Property, plant and equipment, net.............................. $775 $2,398 ==== ======
Machinery and equipment includes capitalized lease assets of $810,000 at December 31, 1996. (6) NOTES PAYABLE During the year ended March 31, 1996, the Company obtained a $15,000,000 revolving credit facility with a bank available through February 1998. The facility agreement contains provisions, among others, that restrict incurrence of indebtedness, guarantees, acquisitions, and distributions to shareholders, and require the Company to meet specified net worth ratios. Borrowings under the credit facility bear interest at the prime rate (8.25% at December 31, 1996) plus an applicable margin. As of December 31, 1996, there was $21,000 outstanding on the line of credit. The line of credit was cancelled on March 31, 1997 in connection with the acquisitions and related financing described in note 14. At December 31, 1996 the Company had a $3 million unsecured demand note payable to Towers Financial Services bearing interest at 14% per annum. The note and accrued interest were paid in January 1997. (7) SHAREHOLDER'S EQUITY The Company's authorized capitalization consists of 100,000,000 shares of common stock, par value $.01 per share, and 80,000 issued and outstanding shares of preferred stock, par value $1.00 per share, cumulative $10 per annum dividend. Cumulative unpaid preferred stock dividends at December 31, 1996 were $9,353,000. The preferred stock has a liquidation value of $1.00 per share, plus cumulative unpaid dividends, and is senior in liquidation preference to the common equity of the Company. (8) INCOME TAXES Income tax expense (benefit) differs from the amount computed by applying the statutory rate of 34 percent to income before income taxes as follows (in thousands):
PERIOD FROM PERIOD FROM NINE MONTHS APRIL 1, SEPTEMBER 20, ENDED 1994 THROUGH 1994 THROUGH YEAR ENDED DECEMBER SEPTEMBER 19, MARCH 31, MARCH 31, 31, 1994 1995 1996 1996 ------------- ------------- ---------- ------------ (PREDECESSOR) Computed "expected" tax expense (benefit).......................... $(1,501) $1,301 $ 2,707 $ 2,882 Change in the valuation allowance.... 1,501 (502) (1,046) (1,504) Amortization of negative goodwill.... -- (896) (1,825) (1,369) Other................................ -- 360 164 89 ------- ------ ------- ------- $ -- $ 263 $ -- $ 98 ======= ====== ======= =======
F-10 66 IRI INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The income tax expense for the period from September 20, 1994 through March 31, 1994 consists of current federal alternative minimum tax. The tax effects of temporary differences that give rise to significant portions of the deferred federal income tax assets and liabilities as of March 31, 1996 and December 31, 1996, are as follows (in thousands):
MARCH 31, DECEMBER 31, 1996 1996 --------- ------------ Deferred income tax assets: Basis in inventories............................... $1,587 $1,692 Basis in and depreciation of plant, property and equipment....................................... 1,432 1,345 Employee benefits.................................. 552 509 Net operating loss carryforwards................... 3,445 1,800 Other.............................................. 395 536 ------ ------ Total deferred income tax assets........... 7,411 5,882 Less valuation allowance........................... 7,173 5,669 ------ ------ Net deferred income tax assets............. 238 213 Deferred income tax liabilities -- prepaid pension cost............................................... 238 213 ------ ------ Net deferred federal income tax liability................................ $ -- $ -- ====== ======
Because of the uncertainty of generating future taxable income, the Company has provided a valuation allowance for deferred tax assets of $7,173,000 and $5,669,000 at March 31, 1996 and December 31, 1996, respectively. The valuation allowance decreased $1,504,000 during the nine months ended December 31, 1996. Under the Internal Revenue Code of 1986, in general, a change of more than 50% in the composition of a company's equity owners during any three years results in a limitation on such company's ability to utilize its loss carryforwards in subsequent years. The Company has undergone such an ownership change as a result of the sale described in note 1; accordingly, the amount of the Company's preacquisition net operating loss carryforwards that may be utilized per year is limited to approximately $300,000 (aggregate $3,600,000 available at December 31, 1996) expiring from 2003 through 2009. To the extent such carryforwards are not utilized in a year, they may be utilized in subsequent years. In addition, the Company has $1,694,000 of net operating loss carryforwards, without limitations, expiring from 2010 through 2011. (9) LEASES At December 31, 1996, minimum future annual payments required under a capital lease together with the present value of the net minimum lease payments and noncancelable operating leases, primarily for repair facilities and offices and office equipment, were as follows (in thousands):
OPERATING CAPITAL LEASES LEASES --------- ------- 1997.............................................. $ 767 $200 1998.............................................. 367 200 1999.............................................. 311 200 2000.............................................. 259 200 2001.............................................. 186 50 ------ ---- Total minimum lease payments............ $1,890 850 ====== Less amount representing interest................. 184 ---- Present value of minimum lease payments........... $666 ====
F-11 67 IRI INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Total rental expense was $289,000 for the period April 1, 1994 through September 19, 1994 (predecessor), $196,000 for the period from September 20, 1994 through March 31, 1995, $546,000 for the year ended March 31, 1996 and $860,000 for the nine months ended December 31, 1996. (10) PENSION PLAN The Company has a noncontributory defined benefit plan, which covers substantially all employees. Employees with 10 or more years of service are entitled to pension benefits beginning at normal retirement age (65) based on years of service and the employees' compensation for the 60 consecutive month period in which his compensation is the highest. The plan incorporates provisions for early retirement, the privilege to elect a life annuity, surviving spouse benefits, and disability benefits. Employees of the Company who were employees of Ingersoll-Rand Oilfield Products Company or the Ideco Division of Dresser Industries, Inc., immediately prior to becoming employees of IRI, are entitled to uninterrupted service tenure for purposes of retirement benefit calculations. Benefits payable under the IRI retirement plan are offset by benefits payable under the retirement plans of Dresser and Ingersoll-Rand Oilfield Products Company. The Company uses the accrued benefit cost method to compute the annual contributions to the plan, with minimum and maximum contributions determined on a cumulative basis and the Company having the flexibility to choose which contribution to make and which can vary from one period to the next. The accrued benefit cost includes a normal cost which is computed as the present value of the pro rata portion for the benefit accrual during the year being valued and a past service cost which is the present value of that portion of the projected benefit which has been accrued up to the valuation date. The unfunded past-service cost may be liquidated over a period of between 10 and 30 years. The funded status and the amounts recognized in the balance sheets as of March 31, 1996 and December 31, 1996, the date of the latest actuarial valuation, are as follows (in thousands):
MARCH 31, DECEMBER 31, 1996 1996 --------- ------------ Actuarial present value of benefit obligations: Vested............................................ $(6,613) $(7,231) Nonvested......................................... (769) (58) ------- ------- Accumulated benefit obligation...................... $(7,382) $(7,289) ======= ======= Projected benefit obligation for service rendered to date.............................................. (7,382) (7,289) Plan assets at fair value........................... 7,433 7,321 ------- ------- Projected benefit obligation less than plan assets............................................ 51 32 Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions....................................... 649 595 ------- ------- Prepaid pension cost................................ $ 700 $ 627 ======= =======
The Plan assets consist primarily of time share real estate notes and fixed income time deposits. F-12 68 IRI INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Net pension cost includes the following components (in thousands):
PERIOD FROM PERIOD FROM APRIL 1, 1994 SEPTEMBER 20, NINE MONTHS THROUGH 1994 THROUGH YEAR ENDED ENDED SEPTEMBER 19, MARCH 31, MARCH 31, DECEMBER 31, 1994 1995 1996 1996 ------------- ------------- ---------- ------------ (PREDECESSOR) Service cost............................ $ 381 $ 50 $ 108 $ 81 Interest cost........................... 320 257 556 419 Actual return on plan assets............ (274) (274) (565) (270) Net amortization and deferral........... 34 -- 154 (157) ----- ------ ----- ----- Total pension expense (income).................... $ 461 $ 33 $ 253 $ 73 ===== ====== ===== =====
As of September 1, 1995, the pension plan was frozen insofar as future accrual of pension benefits. Because the plan amendment to freeze the plan was planned in conjunction with the ESI acquisition discussed in note 1, the resulting curtailment gain was taken into consideration in remeasuring the Company's projected benefit obligation and the date of the acquisition. The development of the actuarial present value of the projected benefit obligation at March 31, 1996 and December 31, 1996 was based upon a weighted average discount rate of 7.75% and 7.90%, respectively, and an expected long-term rate of return on assets of 8.0%. The Pension Benefit Guaranty Corporation provides protection to plan participants by assuring employees that the fixed commitment of the Company for funding vested accrued benefits of the plan will be paid up to specified maximum amounts should the Company be unable to fund the fixed commitment. The plan is administered by the Pension Committee which is appointed by IRI's Board of Directors. (11) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS In addition to the Company's defined benefit pension plan, the Company sponsors a defined benefit health care plan that provides postretirement medical benefits to retirees or full-time employees who retire after attaining age 55 with at least 10 years of service as of September 1, 1996. Current retirees receive benefits for life while full time employees (future retirees) only receive benefits until age 65. The plan is contributory, with retirees contributing 20% of the health care cost. The Company's contribution is capped at a 5% annual increase in health care costs, with the remaining increases to be paid by the employee. The Company's policy is to fund the cost of medical benefits in amounts determined at the discretion of management. Summary information on the Company's plan at March 31, 1996 and December 31, 1996 is as follows (in thousands):
MARCH 31, DECEMBER 31, 1996 1996 --------- ------------ Accumulated postretirement benefit obligation: Actives employees eligible to retire............... $ 572 $ 594 Retired participants............................... 1,240 1,227 Unamortized gain or loss associated with actuarial assumption changes and plan amendment.............. (188) (323) ------ ------ Accrued postretirement benefit costs....... $1,624 $1,498 ====== ======
F-13 69 IRI INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Net period postretirement benefit cost includes the following components (in thousands):
PERIOD FROM PERIOD FROM APRIL 1, 1994 SEPTEMBER 20, NINE MONTHS THROUGH 1994 THROUGH YEAR ENDED ENDED SEPTEMBER 19, MARCH 31, MARCH 31, DECEMBER 31, 1994 1995 1996 1996 ------------- ------------- ---------- ------------ (PREDECESSOR) Service cost..................... $247 $ 42 $ 30 $ -- Interest cost.................... 664 138 187 103 Net amortization and deferral.... -- -- -- 2 ---- ---- ---- ---- Net periodic postretirement benefit cost (income)............. $911 $180 $217 $105 ==== ==== ==== ====
On August 11, 1995, the plan was amended to terminate all employees from the plan except those eligible to retire on June 30, 1995 and all current retirees. In addition under the amended plan, active employees eligible to retire will, after the age of 65, receive through the retirement plan, 80% of the cost of medical insurance with a 5% cap over a base year premium of calendar 1996. Because it was expected that the plan would be terminated in conjunction with the ESI acquisition discussed in note 1, the effects were considered in measuring the Company's accumulated post retirement benefit obligation as of the acquisition date. The discount rate used in determining the accumulated postretirement benefit obligation was 7.75% at March 31, 1996 and December 31, 1996. The assumed health care cost trend rate was 10% in 1995 graded down to 5% after 12 years. Because health care cost increases over 5% annually are borne by the employees, the amounts reported are not affected by increases in the assumed health care cost trend rate. (12) RELATED PARTY TRANSACTIONS ESI charged the Company $450,000 during the nine months ended December 31, 1996 for certain administrative overhead functions performed from September 20, 1994 through December 31, 1996. The Company has an account receivable from a related party of $158,000 at December 31, 1996 for services rendered by IRI personnel. The receivable is expected to be paid during fiscal year 1997. (13) BUSINESS SEGMENTS The Company operates through two business segments consisting of Oilfield Equipment and Specialty Steel. The Oilfield Equipment segment is principally engaged in the design and manufacture of drilling and well servicing rigs and components for use on land and on offshore drilling platforms. The Company specializes in providing small truck-mounted rigs to stationary land deep drilling rigs to meet the functional requirements of customers drilling in remote and harsh environments. The Company's Specialty Steel segment manufactures premium carbon, alloy and specialty steel for use in commercial and military products as well as for the manufacture of oilfield equipment products. IRI's steel products are also used in the petroleum, aircraft and power generation industries. F-14 70 IRI INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Financial information by industry segment is summarized below (in thousands).
OILFIELD SPECIALTY CORPORATE EQUIPMENT STEEL AND OTHER TOTAL --------- --------- --------- -------- Period from April 1, 1994 through September 19, 1994 (predecessor): Sales to unaffiliated customers....... $12,545 $ 3,928 $ -- $ 16,473 Operating income (loss)............... (671) 232 (1,406) (1,845) Identifiable assets................... 34,169 5,184 1,677 41,030 Depreciation.......................... 188 136 17 341 Capital expenditures.................. 24 85 -- 109 Period from September 20, 1994 through March 31, 1995: Sales to unaffiliated customers....... 14,399 5,807 -- 20,206 Operating income...................... 1,269 1,240 1,334 3,843 Identifiable assets................... 28,924 5,804 5,402 40,130 Depreciation.......................... 2 2 2 6 Amortization of negative goodwill..... -- -- (2,684) (2,684) Capital expenditures.................. 23 13 92 128 Year ended March 31, 1996: Sales to unaffiliated customers....... $40,176 $12,330 $ -- $ 52,506 Operating income...................... 4,141 2,608 890 7,639 Identifiable assets................... 30,979 6,302 9,350 46,631 Depreciation.......................... 40 12 12 64 Amortization of negative goodwill..... -- -- (5,367) (5,367) Capital expenditures.................. 581 130 6 717 Nine months ended December 31, 1996: Sales to unaffiliated customers....... $52,029 $10,269 $ -- $ 62,298 Operating income (loss)............... 7,399 2,879 (1,168) 9,110 Identifiable assets................... 40,169 6,956 11,546 58,671 Depreciation.......................... 79 10 9 98 Amortization of negative goodwill..... -- -- (4,026) (4,026) Capital expenditures.................. 545 218 958 1,721
Sales outside the United States accounted for 65%, 55%, 50% and 50% of total revenues for the period from April 1, 1994 through September 19, 1994 (preacquisition), the period from September 20, 1994 through March 31, 1995, the year ended March 31, 1996 and the nine months ended December 31, 1996, respectively, based upon the ultimate destination in which equipment or services were sold, shipped or provided to the customer by the Company. During the period from April 1, 1994 through September 19, 1994 (preacquisition), one customer constituted 11% of total revenues. During the period from September 20, 1994 through March 31, 1995, two customers each accounted for revenues of 12%. For the year ended March 31, 1996, one customer accounted for 36% of revenues and for the nine months ended December 31, 1996, two customers accounted for 38% and 14% of revenues, respectively. (14) ACQUISITIONS On March 31, 1997, the Company acquired certain assets and assumed certain liabilities of Bowen Tools, Inc. ("Bowen"), a wholly owned subsidiary of the French chemical concern L'Air Liquide, for a total consideration of $73.1 million. On April 17, 1997, the Company also acquired the stock of Cardwell F-15 71 IRI INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) International Ltd. ("Cardwell"), a privately owned company, as well as certain assets held by affiliates of Cardwell for approximately $12 million in cash at closing and partial payment ($3 million) of a note payable to bank. In addition the Company incurred approximately $2.4 million ($1.8 million for Bowen and $0.6 million for Cardwell) of transaction costs in connection with the acquisitions. The acquisitions were financed through a $65 million senior secured term loan facility and $31 million of interim senior subordinated increasing rate notes. The term loan is payable in increasing amounts over a five-year period and bears interest at a base rate (as defined) plus 1.5% or the Eurodollar rate plus 3.25%. The interim notes bear interest at LIBOR plus 6.5%, increasing .5% per three month period if the notes are not repaid within eight months, to a maximum of 18%. The interim notes mature one year from issuance and at maturity the holders of the interim notes shall receive warrants representing 5% of the common stock of ESI. In addition, holders are required to exchange their interim notes for rollover notes if no event of default has occurred, the Company pays a 3% rollover fee to the holders, the rollover debt registration is declared effective by the SEC and the shelf registration statement with respect to the warrants and warrant shares has been declared effective by the SEC. Proceeds from any public offering or private placement are to be used, subject to certain agreed exceptions, to redeem the interim notes. Bowen, headquartered in Houston, Texas, designs, manufactures and markets fishing tools and drilling, power and wireline/pressure control equipment used in the drilling and completion of oil and gas wells. Cardwell, headquartered in El Dorado, Kansas, manufactures and sells drilling rigs, related oilfield equipment and supplies predominantly to foreign customers. The acquisitions have been recorded using the purchase method of accounting and results of operations of the acquired companies will be included in the statement of operations of IRI from the date of the respective acquisitions. (15) COMMITMENTS AND CONTINGENCIES The Company has contract commitments aggregating $14.8 million at December 31, 1996 for the manufacture and delivery of drilling rigs during fiscal year 1997. At December 31, 1996, the Company was contingently liable for approximately $7.3 million in letters of credit which guarantee the Company's performance for payment to third parties in accordance with specified contractual terms and conditions. These letters of credit are primarily secured by the Company's cash, accounts receivable and inventory. Management does not expect any material losses to result from these off-balance-sheet instruments as it anticipates full performance on the related contracts. F-16 72 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET JUNE 30, 1997 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS Current assets: Cash and cash equivalents................................. $ 2,366 Accounts receivable, less allowance for doubtful accounts of $228................................................ 23,073 Inventories (note 2)...................................... 84,629 Costs and estimated earnings in excess of billings on uncompleted contracts.................................. 2,508 Other current assets...................................... 2,042 -------- Total current assets.............................. 114,618 -------- Property, plant and equipment, net.......................... 38,354 Excess of cost over fair value of net tangible assets of businesses acquired, net.................................. 5,842 Prepaid pension cost........................................ 578 Other assets, principally debt issuance costs, net.......... 4,799 -------- $164,191 ======== LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Accounts payable.......................................... $ 7,162 Accrued liabilities....................................... 5,025 Customer advances and security deposits................... 7,875 Other liabilities......................................... 1,721 Current installments of long-term debt.................... 2,826 Current installments of obligation under capital lease.... 144 -------- Total current liabilities......................... 24,753 Negative goodwill, less accumulated amortization............ 12,657 Long-term debt, less current installments................... 99,813 Obligation under capital lease, less current installments... 468 Accrued postretirement benefits other than pensions......... 1,176 -------- Total liabilities................................. 138,867 -------- Shareholder's equity: Preferred stock, $1 par value, 8,000,000 shares authorized, 80,000 shares issued and outstanding....... 80 Common stock, $.01 par value, 100,000,000 shares authorized, 168,000 shares issued, 163,600 outstanding............................................ 2 Additional paid-in capital................................ 5,358 Retained earnings......................................... 20,324 Less treasury stock, 4,400 common shares, at cost......... (440) -------- Total shareholder's equity........................ 25,324 Commitments and contingencies -------- Total liabilities and shareholder's equity.................. $164,191 ========
See accompanying notes to condensed consolidated financial statements. F-17 73 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1997 ------- ------- Revenues.................................................... $29,347 $57,785 Cost of goods sold.......................................... 21,149 44,631 ------- ------- Gross profit...................................... 8,198 13,154 Administrative and selling expense.......................... 5,295 8,928 ------- ------- Operating income.................................. 2,903 4,226 ------- ------- Other income (expense): Interest income........................................... 213 79 Interest expense.......................................... (207) (3,147) Other, net................................................ -- (569) ------- ------- 6 (3,637) ------- ------- Income before income taxes........................ 2,909 589 Income taxes................................................ -- 168 ------- ------- Net income........................................ 2,909 421 Preferred stock dividend requirements....................... (400) (400) ------- ------- Net income attributable to outstanding common stock............................................ $ 2,509 $ 21 ======= ======= Net income per common share................................. $ 15.34 .13 ======= =======
See accompanying notes to condensed consolidated financial statements. F-18 74 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (UNAUDITED) (IN THOUSANDS)
ADDITIONAL TOTAL PREFERRED COMMON PAID-IN RETAINED TREASURY SHAREHOLDER'S STOCK STOCK CAPITAL EARNINGS STOCK EQUITY --------- ------ ---------- -------- -------- ------------- Balances at December 31, 1996..... $80 2 5,358 19,903 (440) 24,903 Net income........................ -- -- -- 421 -- 421 --- --- ----- ------ ---- ------ Balances at June 30, 1997......... $80 2 5,358 20,324 (440) 25,324 === === ===== ====== ==== ======
See accompanying notes to condensed consolidated financial statements. F-19 75 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED) (IN THOUSANDS)
1996 1997 ------- -------- Cash flows from operating activities: Net income................................................ $ 2,909 $ 421 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization.......................... 132 1,073 Amortization of negative goodwill...................... (2,684) (2,684) Change in accrued employee benefits.................... (278) (272) Changes in assets and liabilities (exclusive of effects of acquisitions): Inventory............................................ (6,384) (6,755) Accounts receivable.................................. 2,107 (1,770) Other assets......................................... 862 2,054 Accounts payable and accrued expenses, customer advances and other liabilities...................... (4,738) (244) ------- -------- Net cash used in operations....................... (8,074) (8,177) ------- -------- Cash flows from investing activities: Purchases of property, plant and equipment................ (336) (1,191) Acquisition of Bowen assets, net of liabilities assumed... -- (74,978) Acquisition of Cardwell assets, net of liabilities assumed................................................ -- (12,565) ------- -------- Net cash used in investing activities............. (336) (88,734) ------- -------- Cash flows from financing activities: Proceeds from notes payable............................... -- 99,503 Payments on capital lease obligation...................... (77) (54) Debt issuance costs....................................... -- (3,807) Payments on notes payable................................. -- (5,000) ------- -------- Net cash flows provided from financing activities......... (77) 90,642 ------- -------- Decrease in cash and cash equivalents....................... (8,487) (6,269) Cash and cash equivalents at beginning of year.............. 12,393 8,635 ------- -------- Cash and cash equivalents at end of year.................... $ 3,906 $ 2,366 ======= ======== Interest paid............................................... $ 17 $ 81 ======= ======== Income taxes paid........................................... $ -- $ -- ======= ========
See accompanying notes to condensed consolidated financial statements. F-20 76 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) GENERAL The accompanying condensed consolidated financial statements of IRI International Corporation and subsidiaries (the Company) as of June 30, 1997 and for the six months ended June 30, 1996 and 1997 are unaudited; however, they include all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation for such periods. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire year. Certain footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been omitted herein. The interim information should be read in conjunction with the Company's annual financial statements and notes. (2) INVENTORIES Inventories consist of the following at June 30, 1997 (in thousands): Raw materials............................................... $39,171 Work in process............................................. 23,425 Finished goods.............................................. 22,033 ------- $84,629 =======
(3) COMMITMENTS AND CONTINGENCIES The Company has contract commitments aggregating $93.0 million at June 30, 1997 for the manufacture and delivery of drilling rigs. At June 30, 1997, the Company was contingently liable for approximately $9.3 million in letters of credit which guarantee the Company's performance for payment to third parties in accordance with specified contractual terms and conditions. These letters of credit are primarily secured by the Company's cash, accounts receivable and inventory. Management does not expect any material losses to result from these off-balance-sheet instruments as it anticipates full performance on the related contracts. The Company is subject to various claims and legal actions arising in the ordinary course of business. Management believes that any ultimate liability resulting from the outcome of such proceedings to the extent not otherwise provided for in the financial statements will not have a material adverse effect on the Company's financial condition. (4) ACQUISITIONS On March 31, 1997, the Company acquired certain assets and assumed certain liabilities of Bowen Tools, Inc. ("Bowen"), a wholly owned subsidiary of the French chemical concern L'Air Liquide, for a total consideration of $73.1 million. The Company also held an option to purchase certain real property from Bowen for additional cash consideration of $1.575 million which it exercised in July 1997. On April 17, 1997, the Company also acquired the stock of Cardwell International Ltd. ("Cardwell"), a privately owned company, as well as certain assets held by affiliates of Cardwell for approximately $12 million in cash at closing and partial payment ($3 million) of a note payable to bank. In addition the Company incurred approximately $2.4 million ($1.8 million for Bowen and $.6 million for Cardwell) of transaction costs in connection with the acquisitions. The acquisitions were financed through a $65 million senior secured term loan facility and $31 million of interim senior subordinated increasing rate notes. The term loan is payable in increasing amounts over a five-year period and bears interest at a base rate (as defined) plus 1.5% or the Eurodollar rate plus 3.25%. The interim notes bear interest at LIBOR plus 6.5%, increasing .5% per three month period if the notes are not F-21 77 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) repaid within eight months, to a maximum of 18%. The interim notes mature one year from issuance and at maturity the holders of the interim notes shall receive warrants representing 5% of the common stock of the Company. In addition, holders are required to exchange their interim notes for rollover notes if no event of default has occurred, the Company pays a 3% rollover fee to the holders, the rollover debt registration is declared effective by the SEC and the shelf registration statement with respect to the warrants and warrant shares has been declared effective by the SEC. Proceeds from any public offering or private placement are to be used, subject to certain agreed exceptions, to redeem the interim notes. Bowen, headquartered in Houston, Texas, designs, manufactures and markets fishing tools and drilling, power and wireline/pressure control equipment used in the drilling and completion of oil and gas wells. Cardwell, headquartered in El Dorado, Kansas, manufactures and sells drilling rigs, related oilfield equipment and supplies predominantly to foreign customers. The acquisitions have been recorded using the purchase method of accounting and results of operations of the acquired companies have been included in the statement of operations of IRI from the date of the respective acquisitions. Based on management's preliminary estimates, the cost of the Bowen and Cardwell acquisitions have been allocated to the assets acquired and liabilities assumed based on their respective fair values as follows (in thousands): Current assets.............................................. $ 56,143 Property, plant and equipment............................... 37,647 Excess of cost over fair value of net tangible assets of businesses acquired, net.................................. 6,096 Other assets................................................ 976 Current liabilities......................................... (13,319) -------- $ 87,543 ========
The following sets forth selected consolidated financial information for the Company on a pro forma basis for the six months ended June 30, 1996 and 1997 assuming the Bowen and Cardwell acquisitions had occurred on January 1, 1996 (in thousands, except per share amounts):
1996 1997 -------- -------- Revenues.......................................... $83,300 $80,195 ======= ======= Gross profit...................................... $23,829 $22,507 ======= ======= Operating income.................................. $ 4,180 $ 5,294 ======= ======= Net loss.......................................... $(1,416) $(1,231) ======= ======= Net loss attributable to outstanding common stock............................................ $(1,816) $(1,631) ======= ======= Net loss per common share......................... $(11.10) $ (9.97) ======= =======
Pro forma adjustments primarily relate to additional interest expense resulting from debt to finance the acquisitions, additional depreciation and amortization expense as a result of the purchase price allocations to property, plant and equipment and excess of cost over net tangible assets purchased and the related tax effects of these adjustments. The pro forma information is not necessarily indicative of the results that actually would have been achieved had such transactions been consummated as of January 1, 1996, or that may be achieved in the future. F-22 78 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (5) LONG-TERM DEBT The Company had debt outstanding at June 30, 1997 as follows (in thousands): Revolving credit note, due March 31, 2000................... $ 6,000 Senior subordinated note, due March 31, 1998................ 31,000 Senior secured term loan, due in increasing quarterly payments beginning June 30, 1997................................... 65,000 Other....................................................... 639 -------- 102,639 Less current installments................................... (2,826) -------- Long-term debt, less current installments................... $ 99,813 ========
The senior secured term loan facility contains provisions that requires the Company to maintain certain financial ratios commencing June 30, 1997 and achieve consolidated earnings before interest, taxes, depreciation and amortization of $25 million by December 31, 1997. The senior secured term loan facility also limits sales of assets, the incurrence of additional indebtedness, and restricts payments to shareholders. F-23 79 INDEPENDENT AUDITORS' REPORT The Board of Directors Bowen Tools, Inc. We have audited the accompanying consolidated balance sheets of Bowen Tools, Inc. as of December 31, 1995 and 1996 and the related consolidated statements of operations, shareholder's equity and cash flows for each of the years in the three-year period ended December 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 Bowen Tools, Inc. as of December 31, 1995 and 1996 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Houston, Texas May 23, 1997 F-24 80 BOWEN TOOLS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1996 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1995 1996 ------- ------- ASSETS Current assets: Cash...................................................... $ 1,193 1,656 Accounts receivable, less allowance for doubtful accounts of $155 and $200 at 1995 and 1996...................... 10,597 13,035 Inventories (note 5)...................................... 20,706 27,125 Receivable from Parent (notes 4 and 7).................... 7,053 -- Other assets.............................................. 1,647 1,288 ------- ------- Total current assets.............................. 41,196 43,104 ------- ------- Property, plant and equipment, net.......................... 29,260 32,604 Shop inventories............................................ 4,456 3,672 Prepaid pension cost (note 9)............................... 2,971 3,333 Other assets................................................ 240 196 ------- ------- Total assets...................................... $78,123 82,909 ======= ======= LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Bank overdraft............................................ $ 622 1,812 Accounts payable.......................................... 2,882 1,514 Accrued liabilities (note 10)............................. 2,462 4,045 Deferred tax liability (note 7)........................... 3,183 2,737 Payable to Parent (notes 4 and 7)......................... -- 897 ------- ------- Total current liabilities......................... 9,149 11,005 ------- ------- Deferred tax liability (note 7)............................. 7,080 7,316 Other postretirement benefit obligation..................... 423 457 ------- ------- Total liabilities................................. 16,652 18,778 ------- ------- Shareholder's equity: Common stock, $1 par value, 1,000 shares authorized, issued and outstanding................................. 1 1 Common stock, $2.50 par value, 10,000 shares authorized, 400 shares issued and outstanding...................... 1 1 Capital in excess of par.................................. 39,189 39,189 Retained earnings......................................... 23,015 25,819 Accumulative translation adjustment....................... (735) (879) ------- ------- Total shareholder's equity........................ 61,471 64,131 Commitments and contingencies (note 11) ------- ------- Total liabilities and shareholder's equity........ $78,123 82,909 ======= =======
See accompanying notes to consolidated financial statements. F-25 81 BOWEN TOOLS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (IN THOUSANDS)
1994 1995 1996 ------- ------ ------ Net sales................................................... $46,785 45,123 53,445 Rental tool income.......................................... 10,775 12,587 13,412 ------- ------ ------ Net sales......................................... 57,560 57,710 66,857 ------- ------ ------ Cost of goods sold.......................................... 32,224 32,282 36,636 ------- ------ ------ Gross profit...................................... 25,336 25,428 30,221 ------- ------ ------ Operating expenses: Selling and distribution............................... 15,934 17,492 19,144 General and administrative............................. 4,088 3,476 3,748 Depreciation and amortization.......................... 2,360 1,973 2,470 ------- ------ ------ Operating income.................................. 2,954 2,487 4,859 Other income (expense): Gain (loss) on sale of property and equipment.......... (931) 1,109 40 Other.................................................. 908 177 (492) ------- ------ ------ Income before taxes............................... 2,931 3,773 4,407 ------- ------ ------ Income taxes................................................ 1,113 1,352 1,603 ------- ------ ------ Net income........................................ $ 1,818 2,421 2,804 ======= ====== ======
See accompanying notes to consolidated financial statements. F-26 82 BOWEN TOOLS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (IN THOUSANDS)
CAPITAL IN ACCUMULATIVE TOTAL COMMON EXCESS OF RETAINED TRANSLATION SHAREHOLDER'S STOCK PAR VALUE EARNINGS ADJUSTMENT EQUITY ------ ---------- -------- ------------ ------------- Balances at December 31, 1993.............. $2 39,189 61,409 90 100,690 Net income............................ -- -- 1,818 -- 1,818 Change in accumulative translation adjustment.......................... -- -- -- (321) (321) Dividends to Parent................... -- -- (2,633) -- (2,633) -- ------- -------- ----- -------- Balances at December 31, 1994.............. 2 39,189 60,594 (231) 99,554 Net income............................ -- -- 2,421 -- 2,421 Change in accumulative translation adjustment.......................... -- -- -- (504) (504) Dividends to Parent................... -- -- (40,000) -- (40,000) -- ------- -------- ----- -------- Balances at December 31, 1995.............. 2 39,189 23,015 (735) 61,471 Net income............................ -- -- 2,804 -- 2,804 Change in accumulative translation adjustment.......................... -- -- -- (144) (144) -- ------- -------- ----- -------- Balances at December 31, 1996.............. $2 39,189 25,819 (879) 64,131 == ======= ======== ===== ========
See accompanying notes to consolidated financial statements. F-27 83 BOWEN TOOLS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (IN THOUSANDS)
1994 1995 1996 ------- ------- ------- Cash flows from operating activities: Net income................................................ $ 1,818 2,421 2,804 Adjustments to reconcile net income to net cash provided by operations: Depreciation........................................... 2,360 1,973 2,470 Deferred income taxes.................................. 42 504 (210) (Gain) loss on sales of property and equipment......... 931 (1,109) (40) Gain on sale of rental tools........................... (536) (833) (1,286) Foreign currency translation........................... 1,058 (475) 72 Changes in assets and liabilities: Accounts receivable.................................. (1,368) 793 (2,438) Inventory............................................ 5,193 4,779 (5,635) Receivable from Parent............................... (5,519) (4,736) 7,053 Other current assets................................. (224) (1,117) 359 Other................................................ (184) (31) 44 Prepaid pension cost................................. (330) (107) (362) Accounts payable..................................... 449 (118) (1,368) Other postretirement benefits........................ 26 30 34 Accrued liabilities.................................. 749 (1,180) 1,583 Payable to Parent.................................... -- -- 897 ------- ------- ------- Net cash provided by operations................... 4,465 794 3,977 ------- ------- ------- Cash flows from investing activities: Purchases of property, plant and equipment................ (2,993) (3,580) (6,321) Proceeds on sales of property and equipment............... 842 1,916 1,833 ------- ------- ------- Net cash used in investing activities............. (2,151) (1,664) (4,488) ------- ------- ------- Cash flows from financing activities -- change in bank overdraft................................................. 557 65 1,190 ------- ------- ------- Effect of exchange rate changes on cash..................... (1,379) (30) (216) Increase (decrease) in cash................................. 1,492 (835) 463 Cash at beginning of year................................... 536 2,028 1,193 ------- ------- ------- Cash at end of year......................................... $ 2,028 1,193 1,656 ======= ======= ======= Income taxes paid to Parent................................. $ 524 681 1,364 ======= ======= ======= Noncash item -- dividend of receivable from Parent.......... $ 2,633 40,000 -- ======= ======= =======
See accompanying notes to consolidated financial statements. F-28 84 BOWEN TOOLS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994, 1995 AND 1996 (1) ORGANIZATION (a) General Bowen Tools, Inc. (the Company) is a wholly-owned subsidiary of Air Liquide America Corporation (Air Liquide or Parent). The Company was acquired in 1986 and these financial statements reflect Air Liquide's purchase price allocation to the Company's net assets. The Company designs, manufactures, and markets fishing tools and drilling, power, and wireline/pressure control equipment used in the drilling and completion of oil and gas wells. The Company also rents equipment used in the drilling and completion of oil and gas wells. The Company has four foreign locations, which market the Company's products abroad, located in Scotland, Holland, Singapore, and Canada. On March 31, 1997, IRI International Corporation, a manufacturer of drilling rigs and related equipment, acquired virtually all the assets (excluding the pension asset, cash and cash equivalents and certain fixed assets) and assumed certain liabilities (excluding intercompany payables and certain pending litigation) of the Company for approximately $75,000,000. (b) Risks Associated with the Company's Business The Company is subject to certain risks inherent in the ownership and operation of foreign subsidiaries including tax increases, retroactive tax claims, expropriation, adverse changes in currency values, foreign exchange controls, import and export regulations, environmental controls and other laws, regulations or international development that may adversely affect the Company's subsidiaries. The Company does not maintain political risk insurance. The availability of a ready market and prices received for the Company's products depend upon numerous factors beyond the control of the Company including fluctuating market demand, the price of oil and gas commodities, competition, governmental regulation and world and economic developments. World oil and gas markets are highly volatile and shortage or surplus conditions could substantially affect prices the Company receives for its products. (2) SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its allocable portion of sales from Air Liquide's Foreign Sales Corporation. All significant intercompany balances and transactions have been eliminated in consolidation. (b) Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method for all inventories. (c) Property, Plant, and Equipment Property, plant, and equipment are stated at cost. Depreciation is principally provided on the straightline method over the estimated useful lives of the assets (20 years for buildings and improvements; 5-12 years for machinery and equipment; and 7-12 years for rental tools). Repairs and maintenance, including rental tool rework costs, are expensed as incurred while betterments are capitalized. F-29 85 BOWEN TOOLS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (d) Revenue Recognition The Company recognizes revenue from product sales upon shipment to the customer. Revenue is recognized from rentals under operating leases in the month in which they accrue. The sale of rental tools is considered part of the Company's normal operations and, accordingly, are included in net sales in the accompanying consolidated statements of operations. (e) Shop Inventories Shop inventories of approximately $4,456,000 (net of an allowance of $5,342,000) and $3,672,000 (net of an allowance of $4,456,000) at December 31, 1995 and 1996, respectively, represent replacement parts for customers and are stated at estimated net realizable value. (f) Currency Translation The assets and liabilities of the Company's Canadian subsidiary are translated at current exchange rates. The assets and liabilities of the other foreign subsidiaries where the functional currency is the U.S. dollar are translated at current exchange rates for monetary assets and liabilities and historical exchange rates for nonmonetary assets and liabilities. Revenue and expense accounts are translated using an average rate for the period. Translation gains and losses are not included in determining net income but are reflected as a separate component of shareholder's equity. (g) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company is included in the Air Liquide consolidated income tax return. Income taxes are provided as though the Company files a separate income tax return. Income taxes payable are included in the payable to Parent in the accompanying financial statements. (h) Long-Lived Assets In March 1995, SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, was issued which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and estimated future undiscounted cash flows indicate the carrying value of those assets may not be recoverable. The Company implemented SFAS No. 121 on January 1, 1994 and the adoption did not have a material effect on the financial statements. (i) Research and Development, and Advertising Research and development, and advertising costs are expensed in the year in which such costs are incurred. Research and development costs amounted to approximately $142,000, $143,000 and $159,000 in 1994, 1995 and 1996 respectively. Advertising costs amounted to approximately $234,000, $323,000 and $356,000 in 1994, 1995 and 1996, respectively. (j) Fair Value of Financial Instruments The Company defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. Financial instruments in the accompany- F-30 86 BOWEN TOOLS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ing financial statements include cash, accounts receivable and accounts payable. The carrying value of financial instruments is considered to approximate fair value due to the short maturity and characteristics of those instruments. (k) Earnings Per Share Earnings per share is not presented for each of the three years ended December 31, 1996 because it is not meaningful due to the sole ownership of the Company's stock by Air Liquide. (l) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect 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. (3) GEOGRAPHIC AREA INFORMATION The Company is engaged in the business of manufacturing and distributing fishing and drilling equipment for the oil and gas industry in the United States, Scotland, Canada, Singapore, Amsterdam and Mexico. Summarized information regarding the Company's significant operations in different geographic areas, including domestic and export operations, as of and for the years ended December 31, 1994, 1995 and 1996 follows:
UNITED UNITED OTHER ADJUSTMENTS STATES STATES FOREIGN AND DOMESTIC EXPORT SCOTLAND CANADA OPERATIONS ELIMINATIONS CONSOLIDATED -------- ------ -------- ------ ---------- ------------ ------------ 1994 - ----------------------------- Net sales and rental tools... $27,118 19,176 4,659 3,592 5,040 (2,025) 57,560 ======= ====== ====== ====== ====== ======= ======== Gross profit................. $18,244 3,095 1,805 2,089 2,128 (2,025) 25,336 ======= ====== ====== ====== ====== ======= ======== Depreciation and amortization............... $ 2,185 -- 79 41 55 -- 2,360 ======= ====== ====== ====== ====== ======= ======== Selling and distribution..... $12,494 1,661 495 472 812 -- 15,934 ======= ====== ====== ====== ====== ======= ======== G & A expense................ $ 888 938 973 176 1,113 -- 4,088 ======= ====== ====== ====== ====== ======= ======== Net income................... $ 2,257 323 258 928 77 (2,025) 1,818 ======= ====== ====== ====== ====== ======= ======== Identifiable assets.......... $92,498 3,855 5,105 5,991 8,862 595 116,906 ======= ====== ====== ====== ====== ======= ========
F-31 87 BOWEN TOOLS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNITED UNITED OTHER ADJUSTMENTS STATES STATES FOREIGN AND DOMESTIC EXPORT SCOTLAND CANADA OPERATIONS ELIMINATIONS CONSOLIDATED -------- ------ -------- ------ ---------- ------------ ------------ 1995 - ----------------------------- Net sales and rental tools... $30,069 17,526 4,052 3,223 4,794 (1,954) 57,710 ======= ====== ====== ====== ====== ======= ======== Gross profit................. $18,482 3,835 1,047 1,529 2,489 (1,954) 25,428 ======= ====== ====== ====== ====== ======= ======== Depreciation and amortization............... $ 1,801 -- 74 45 53 -- 1,973 ======= ====== ====== ====== ====== ======= ======== Selling and distribution..... $13,731 1,736 604 467 954 -- 17,492 ======= ====== ====== ====== ====== ======= ======== G & A expense................ $ 229 1,026 874 174 1,173 -- 3,476 ======= ====== ====== ====== ====== ======= ======== Net income................... $ 1,555 698 (506) 362 312 -- 2,421 ======= ====== ====== ====== ====== ======= ======== Identifiable assets.......... $58,867 3,238 4,386 2,577 7,810 1,245 78,123 ======= ====== ====== ====== ====== ======= ======== 1996 - ----------------------------- Net sales and rental tools... $32,832 23,275 4,714 4,228 4,413 (2,605) 66,857 ======= ====== ====== ====== ====== ======= ======== Gross profit................. $23,053 4,173 1,864 1,437 2,299 (2,605) 30,221 ======= ====== ====== ====== ====== ======= ======== Depreciation and amortization............... $ 2,077 -- 121 45 227 -- 2,470 ======= ====== ====== ====== ====== ======= ======== Selling and distribution..... $15,469 1,643 594 556 882 -- 19,144 ======= ====== ====== ====== ====== ======= ======== G & A expense................ $ 298 1,093 1,077 186 1,094 -- 3,748 ======= ====== ====== ====== ====== ======= ======== Net income................... $ 3,937 934 72 370 95 (2,605) 2,803 ======= ====== ====== ====== ====== ======= ======== Identifiable assets.......... $68,028 4,907 3,475 3,488 4,957 (1,946) 82,909 ======= ====== ====== ====== ====== ======= ========
For the years ending December 31, 1994, 1995 and 1996, three, two and two customers, respectively, individually accounted for more than 10% of consolidated sales. Sales to these customers were approximately $19,346,000, $21,856,000 and $23,011,000 in 1994, 1995, and 1996, respectively. No account receivable from one customer exceeded 10% of consolidated stockholder's equity at December 31, 1994, 1995 or 1996. (4) RELATED PARTY TRANSACTIONS The Company has a receivable from and a payable to Air Liquide of approximately $7,053,000 and $897,000 at December 31, 1995 and 1996, respectively. The amount bears no interest and includes allocations by Air Liquide for such items as taxes and insurance. Air Liquide does not incur any general and administrative overhead on behalf of the Company other than certain insurance which was allocated to the Company. F-32 88 BOWEN TOOLS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (5) INVENTORIES Inventories consist of the following at December 31, 1995 and 1996 (in thousands):
1995 1996 ------- ------ Raw materials............................................. $ 3,074 3,321 Work-in-progress.......................................... 3,374 5,415 Finished goods............................................ 14,258 18,389 ------- ------ $20,706 27,125 ======= ======
(6) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following at December 31, 1995 and 1996 (in thousands):
1995 1996 ------- ------- Land and land improvements............................... $ 3,615 3,571 Building and improvements................................ 15,454 15,349 Machinery and equipment.................................. 6,696 8,843 Rental tools............................................. 12,446 14,772 Construction in progress................................. 1,671 2,256 ------- ------- 39,882 44,791 Less accumulated depreciation............................ (10,622) (12,187) ------- ------- Net property, plant and equipment.............. $29,260 32,604 ======= =======
(7) INCOME TAXES The components of income tax expense for the years ended December 31, 1994, 1995 and 1996 are as follows (in thousands):
1994 1995 1996 ------ ----- ----- Current: Federal........................................ $ 868 459 1,418 State.......................................... 29 13 50 Foreign........................................ 174 376 345 Deferred......................................... 42 504 (210) ------ ----- ----- $1,113.. 1,352 1,603 ====== ===== =====
Income tax expense for the years ended December 31, 1994, 1995 and 1996 differed from the amounts computed by applying the U.S. federal income tax rate of 35 percent to pretax income from continuing operations as a result of the following (in thousands):
1994 1995 1996 ------ ----- ----- Computed "expected" tax expense.................. $1,026 1,321 1,542 State taxes, net of federal benefit.............. 10 4 18 Unrealized exchange gain or loss................. 62 13 1 Nondeductible meals and entertainment expenses... 22 24 37 Other............................................ (7) (10) 5 ------ ----- ----- $1,113 1,352 1,603 ====== ===== =====
F-33 89 BOWEN TOOLS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1995 and 1996 are presented below (in thousands).
1995 1996 ------- ------ Deferred income tax assets: Current: Accounts receivable and other assets principally due to allowance for doubtful accounts....................... $ 76 105 Other.................................................. 190 190 ------- ------ Total deferred income tax assets.................. 266 295 ------- ------ Deferred income tax liabilities: Current: Inventories, principally due to LIFO cost method used for tax purposes and reserve for excess and obsolete.............................................. 3,449 3,032 Noncurrent: Property, plant and equipment, principally due to differences in depreciation and capitalized interest.............................................. 6,040 6,149 Pension asset.......................................... 1,040 1,167 ------- ------ Total deferred income tax liabilities............. 10,529 10,348 ------- ------ Net deferred income tax liability........................... $10,263 10,053 ======= ======
In assessing the reliability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences. There are no deferred taxes provided on the Company's foreign investments due to their permanent nature and the determination of the deferred tax attributable to such foreign investments is not practicable. IRI International Corporation expects to convert to the FIFO (first-in, first-out cost method) inventory method upon the closing of the sale transaction. (8) LEASES The Company has several noncancelable operating leases for certain office, shop and warehouse facilities; automobile; and equipment, that expire over the next three years. These leases generally contain renewal options for periods ranging from three to five years and require the Company to pay all executory costs such as maintenance and insurance. Rental expense for leases during 1994, 1995 and 1996 were approximately $529,000, $594,000 and $628,000, respectively. Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 1996 follows (in thousands): 1997........................................................ $763 1998........................................................ 765 1999........................................................ 721 2000........................................................ 706 2001........................................................ 707
F-34 90 BOWEN TOOLS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (9) BENEFIT PLANS The Company participates in a defined benefit pension plan which covers all domestic full-time employees of the Company who have completed one year of service and are at least age 21. The defined benefit plan provides for benefits based primarily on years of service and the employee's compensation near the time of retirement. It is the policy of the Company to fund the plan currently based upon actuarial determination and applicable regulations. The Company made no contributions during 1994, 1995 and 1996, respectively. The following table presents the defined benefit pension plan's funded status as of December 31, 1995 and 1996, reconciled with amounts recognized in the Company's consolidated balance sheets at December 31, 1995 and 1996 (in thousands):
1995 1996 ------- ------- Actuarial present value of accumulated benefit obligations: Vested benefit obligation................................. $10,515 11,015 ======= ======= Accumulated benefit obligation............................ $11,118 11,709 ======= ======= Actuarial present value of projected benefit obligation..... (13,343) (14,189) Plan assets at fair value................................... 20,447 21,669 ------- ------- Projected benefit obligation less than plan assets.......... 7,104 7,480 Unrecognized net gain....................................... (3,389) (3,589) Prior service cost not yet recognized in net periodic pension cost.............................................. 316 237 Unrecognized net transition asset........................... (1,060) (795) ------- ------- Prepaid pension cost included in the balance sheet.......... $ 2,971 3,333 ======= =======
Net pension cost for 1994, 1995 and 1996 included the following components (in thousands):
1994 1995 1996 ------- ------ ------ Service cost -- benefits earned during the period....... $ 368 386 428 Interest cost on projected benefit obligation........... 920 966 1,044 Actual return on plan assets............................ (1,377) (1,270) (1,511) Net amortization and deferral........................... (328) (186) (323) ------- ------ ------ Net pension cost........................................ $ (417) (104) (362) ======= ====== ======
Assumptions used in accounting for the pension plan as of December 31, 1994, 1995 and 1996 were (in thousands):
1994 1995 1996 ---- ---- ---- Discount rates.............................................. 8.5% 7.0 7.5 Rates of increase in compensation levels.................... 6.6 6.6 6.6 Expected long-term rate of return on assets................. 7.5 7.5 7.5
The assumed rates used above have a significant effect on the amounts reported. For example, increasing the assumed discount rates by one percentage point in each year would decrease the projected benefit obligation as of December 31, 1996 by approximately $2,000,000 and the unrecognized net gain for the year ended December 31, 1996 by approximately $2,000,000. Increasing the assumed rate of increase in compensation levels by one percentage point in each year would increase the projected benefit obligation as of December 31, 1996 by approximately $1,400,000 and would decrease the unrecognized net gain for the year ended December 31, 1996 by approximately $1,400,000. Increasing the expected long-term rate of return on F-35 91 BOWEN TOOLS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) assets by one percentage point in each year would decrease the unrecognized net gain for the year ended December 31, 1996 by $200,000. The Company also has a defined contribution plan which covers most of their employees. Participants can contribute a percentage of their annual compensation and receive a 50% matching employer contribution on up to 6% of their annual compensation. The Company contributed approximately $382,000 and $452,000 for the year ended December 31, 1995 and 1996, respectively. (10) OTHER POSTRETIREMENT BENEFIT PLANS In addition to the Company's defined benefit pension plan and defined contribution plan, the Company sponsors a defined benefit health care plan that provides postretirement medical benefits to full-time employees who meet minimum age and service requirements. The plan is contributory, with retiree contributions adjusted annually, and contains other cost-sharing features such as deductibles and coinsurance. The accounting for the plan anticipates future cost-sharing changes to the written plan that are consistent with the Company's expressed intent to increase the retiree contribution rate annually for the expected general inflation rate for that year. The Company's policy is to fund the cost of medical benefits in amounts determined at the discretion of management. The following table presents the plans' funded status reconciled with amounts recognized in the Company's consolidated balance sheets at December 31, 1995 and 1996 (in thousands):
1995 1996 ---- ---- Accumulated post-retirement benefit obligation: Retirees.................................................. $ 52 56 Fully eligible active plan participants................... 87 94 Other active plan participants............................ 284 307 ---- ---- 423 457 Plan assets at fair value................................... -- -- ---- ---- Accumulated postretirement benefit obligation in excess of plan assets............................................... $423 457 ==== ====
Net postretirement benefit cost for 1994, 1995 and 1996 include the following components (in thousands):
1994 1995 1996 ---- ---- ---- Service cost................................................ $22 24 26 Interest cost............................................... 29 32 35 --- -- -- Net periodic postretirement benefit cost.................... $51 56 61 === == ==
For measurement purposes, 10.5% and 8.0% annual rates of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was assumed for 1996 for pre-65 and post-65 employees, respectively; the rate was assumed to decrease gradually to 5.25% by the year 2003 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996 by $65,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1996 by $12,000. A discount rate of 8.0% was used in accounting for the pension plan as of December 31, 1994, 1995 and 1996. F-36 92 BOWEN TOOLS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED) (IN THOUSANDS)
1996 1997 ------- ------- Net sales................................................... $10,400 12,349 Rental tool income.......................................... 3,862 4,243 ------- ------- Net sales......................................... 14,262 16,592 ------- ------- Cost of goods sold.......................................... 6,930 8,141 ------- ------- Gross profit...................................... 7,332 8,451 ------- ------- Operating expenses: Selling and distribution.................................. 4,747 5,319 General and administrative................................ 1,102 1,158 Depreciation and amortization............................. 537 780 ------- ------- Operating income.................................. 946 1,194 Other income (expense): Gain (loss) on sale of property and equipment............. 37 (32) Other..................................................... (199) 156 ------- ------- Income before taxes............................... 784 1,318 ------- ------- Income taxes................................................ 301 493 ------- ------- Net income........................................ $ 483 825 ======= =======
See accompanying notes to consolidated financial statements. F-37 93 BOWEN TOOLS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 (IN THOUSANDS)
1996 1997 ------- ------- Cash flows from operating activities: Net income................................................ $ 483 $ 825 Adjustments to reconcile net income to net cash provided by operations: Depreciation........................................... 537 780 Deferred income taxes.................................. (50) 157 (Gain) loss on sales of property and equipment......... 37 (32) Foreign currency translation........................... 27 1,750 Changes in assets and liabilities: Accounts receivable.................................. (2,981) 1,056 Inventory............................................ (3,395) (3,619) Other current assets................................. 1,118 539 Other................................................ 46 -- Accounts payable..................................... (1,499) 667 Accrued liabilities.................................. 592 (475) Payable to Parent.................................... 3,938 1,292 ------- ------- Net cash provided by (used in) operations......... (1,147) 2,940 ------- ------- Cash flows from investing activities: Purchases of property, plant and equipment................ (966) (2,748) Proceeds on sales of property and equipment............... 1,427 1,521 ------- ------- Net cash provided by (used in) investing activities....................................... 461 (1,227) ------- ------- Cash flows from financing activities -- change in bank overdraft................................................. 605 (855) ------- ------- Effect of exchange rate changes on cash..................... (17) (1,658) Decrease in cash............................................ $ (98) $ (800) ------- ------- Cash at beginning of year................................... 1,193 1,656 ------- ------- Cash at end of period....................................... $ 1,095 $ 856 ------- ------- Income taxes paid to Parent................................. $ 122 $ -- ======= =======
See accompanying notes to consolidated financial statements. F-38 94 BOWEN TOOLS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) GENERAL Bowen Tools, Inc. (the Company) is a wholly-owned subsidiary of Air Liquide America Corporation (Air Liquide or Parent). The Company was acquired in 1986 and these financial statements reflect Air Liquide's purchase price allocation to the Company's net assets. The Company designs, manufactures, and markets fishing tools and drilling, power, and wireline/pressure control equipment used in the drilling and completion of oil and gas wells. The Company also rents equipment used in the drilling and completion of oil and gas wells. The Company has four foreign locations, which market the Company's products abroad, located in Scotland, Holland, Singapore, and Canada. The accompanying condensed consolidated financial statements of the Company as of March 31, 1997 and the three months ended March 31, 1996 and 1997 are unaudited; however, they include all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation for such periods. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. The results of operations for the interim periods presented are not necessary indicative of the results to be expected for the entire year. Certain footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been omitted herein. The interim information should be read in conjunction with the Company's annual consolidated financial statements and notes. (2) COMMITMENTS AND CONTINGENCIES The Company is subject to various claims and legal actions arising in the ordinary course of business, inclusive of various claims pertaining to the Company's inactive Sanstorm operations, which previously marketed a line of blast cleaning equipment and related accessories unrelated to the Company's core oilfield tool product lines. In the opinion of management, the amount of liability with respect to these actions and claims is either not material to the Company's financial statements or, in the case of such claims relating to the inactive Sanstorm operations, are reasonably provided for by Air Liquide, who assumed these liabilities upon its acquisition of Bowen and is also a defendant in such litigation. (3) ACQUISITION On March 31, 1997, IRI International Corporation, a manufacturer of drilling rigs and related equipment, acquired virtually all the assets (excluding the pension asset, cash and cash equivalents and certain fixed assets) and assumed certain liabilities (excluding intercompany payables and certain pending litigation) of the Company for approximately $73,100,000. The acquisition of the Company by IRI was recorded as a purchase transaction effective for accounting purposes as of March 31, 1997. F-39 95 INDEPENDENT AUDITORS' REPORT The Board of Directors Cardwell International Ltd.: We have audited the accompanying consolidated balance sheet of Cardwell International Ltd. and subsidiaries as of October 31, 1996, and the related consolidated statements of operations and shareholder's equity and cash flows for the ten months then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cardwell International Ltd. and subsidiaries as of October 31, 1996, and the results of their operations and their cash flows for the ten-months then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Dallas, Texas December 6, 1996, except as to note 10, which is as of April 17, 1997 F-40 96 CARDWELL INTERNATIONAL LTD. CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE AMOUNTS) OCTOBER 31, 1996 ASSETS Current assets: Cash and cash equivalents................................. $ 432 Letter of credit deposits................................. 1,915 Accounts receivable, less allowance for doubtful accounts of $21................................................. 574 Costs and estimated earnings in excess of billings on uncompleted contracts.................................. 2,109 Inventories............................................... 12,743 Other current assets...................................... 315 Deferred income taxes..................................... 77 ------- Total current assets.............................. 18,165 Property, plant and equipment, net.......................... 1,108 Letter of credit deposits................................... 2,097 Other noncurrent assets..................................... 57 ------- $21,427 ======= LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Accounts payable and accrued liabilities.................. $ 4,974 Commissions payable....................................... 1,194 Customer advances......................................... 3,047 Income taxes payable...................................... 468 Notes payable to bank..................................... 5,935 Current installments of long-term debt.................... 146 Demand notes payable to related parties................... 1,230 ------- Total current liabilities......................... 16,994 Long-term debt, less current installments................... 340 Deferred income taxes....................................... 51 ------- Total liabilities................................. 17,385 ------- Shareholder's equity: Class A common stock -- $1 par value; 30,000 shares, authorized; 3,000 shares issued and outstanding........ 3 Retained earnings......................................... 4,083 ------- 4,086 Less treasury stock, 2,000 shares, at cost................ 44 ------- Total shareholder's equity........................ 4,042 ------- Commitments and contingencies ------- $21,427 =======
See accompanying notes to consolidated financial statements. F-41 97 CARDWELL INTERNATIONAL LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TEN MONTHS ENDED OCTOBER 31, 1996 (IN THOUSANDS) Revenues.................................................... $40,598 Cost of goods sold.......................................... 31,615 ------- Gross profit...................................... 8,983 Administrative and selling expense.......................... 6,836 ------- Operating income (loss)........................... 2,147 ------- Other income (expense): Interest income........................................... 95 Interest expense.......................................... (532) Other, net................................................ 76 ------- (361) ------- Income before income taxes........................ 1,786 Income taxes................................................ 512 ------- Net income........................................ $ 1,274 =======
See accompanying notes to consolidated financial statements. F-42 98 CARDWELL INTERNATIONAL LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY FOR THE TEN MONTHS ENDED OCTOBER 31, 1996 (IN THOUSANDS)
TOTAL COMMON RETAINED TREASURY SHAREHOLDER'S STOCK EARNINGS STOCK EQUITY ------ -------- -------- ------------- Balances at December 31, 1995............................ $3 2,809 (44) 2,768 Net income............................................... -- 1,274 -- 1,274 -- ----- --- ----- Balances at October 31, 1996............................. $3 4,083 (44) 4,042 == ===== === =====
See accompanying notes to consolidated financial statements. F-43 99 CARDWELL INTERNATIONAL LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE TEN MONTHS ENDED OCTOBER 31, 1996 (IN THOUSANDS) Cash flows from operating activities: Net income................................................ $ 1,274 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization.......................... 149 Deferred income taxes.................................. (12) Loss on sale of property and equipment................. 50 Changes in assets and liabilities: Deposits............................................. (2,052) Accounts receivable.................................. 2 Costs and estimated earnings in excess of billings on uncompleted contracts............................... (306) Inventories.......................................... (8,377) Other current assets................................. (45) Accounts payable and accrued liabilities............. 1,488 Commissions payable.................................. 1,037 Customer advances.................................... 2,909 Income taxes payable................................. 536 Other................................................ (96) -------- Net cash used in operating activities............. (3,443) -------- Cash flows from investing activities -- purchases of property, plant and equipment............................. (368) -------- Cash flows from financing activities: Payments on long-term debt................................ (20) Proceeds from notes payable to bank....................... 16,559 Payments on notes payable to bank......................... (13,568) Proceeds from demand notes payable to related parties..... 4,541 Payments on demand notes payable to related parties....... (3,311) -------- Net cash provided by financing activities......... 4,201 -------- Increase in cash and cash equivalents....................... 390 Cash and cash equivalents at beginning of year.............. 42 -------- Cash and cash equivalents at end of year.................... $ 432 ======== Interest paid............................................... $ 485 ======== Income taxes paid........................................... $ 98 ========
See accompanying notes to consolidated financial statements. F-44 100 CARDWELL INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) GENERAL Cardwell International, Ltd. and subsidiaries (the Company), incorporated in 1980, manufactures and sells drilling rigs and related oilfield equipment and supplies to predominately foreign customers. Raw materials are readily available and the Company is not dependent upon a single or a few suppliers. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation The Company consolidates the accounts of its wholly-owned subsidiaries, Cardwell Manufacturing Co., Ltd., a Canadian company, and Cardwell Exports, Ltd., a foreign sales corporation. All significant intercompany transactions are eliminated. (b) Cash and Cash Equivalents Cash and cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less. Cash equivalents consist of money market accounts at October 31, 1996. (c) Letter of Credit Deposits Letter of credit deposits consist of certificates of deposit and other investments placed with financial institutions as collateral to secure letters of credit on contract performance guarantees and bid bonds. The Company classifies deposits between current and long-term based on the investment maturity date. All investments with a maturity date of less than one year are classified as current. Deposits are to be returned to the Company upon the expiration of the performance guarantee or bid bond. (d) Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. (e) Property and Equipment Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the following estimated useful lives: Land improvements........................................... 15 years Buildings................................................... 27-39 years Machinery and equipment..................................... 7 years Computer equipment.......................................... 3-7 years Automotive equipment........................................ 5 years Furniture, fixtures and other............................... 5-7 years
Maintenance, repairs and renewals which neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Gains or losses on dispositions of property and equipment are included in operations. (f) Revenues Significant contracts (generally valued at $50,000 or greater) are accounted for by the Company using the percentage-of-completion revenue recognition method, whereby revenues and profits are recognized throughout the performance period of the contract. The percentage-of-completion is calculated based on the F-45 101 CARDWELL INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ratio of contract costs incurred to date to total estimated contract costs after providing for all known or anticipated costs. Costs include material, direct labor and engineering and manufacturing overhead. Selling expenses and general and administrative expenses are charged to operations as incurred. The effect of changes in estimates of contract costs is recorded currently. All remaining revenues are generally recorded when the equipment is shipped. Costs and estimated earnings in excess of billings on uncompleted contracts represent revenues earned under the percentage of completion revenue recognition method but not yet billable under the terms of the contract. These amounts are billable based on the terms of the contract which include shipment of the products or completion of the contracts. Included in revenues and cost of goods sold for the ten months ended October 31, 1996 is $9,803,000 and $7,694,000, respectively, related to uncompleted contracts ($2,109,000, net). For the ten months ended October 31, 1996, approximately 91% of the Company's revenues were provided by sales to Russian customers. Additionally, 3 customers, each accounting for more than 10% of total revenues, aggregated 79% of the Company's gross revenues for the ten months ended October 31, 1996. (g) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to operating losses and tax credit carryforwards and differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (h) Financial Instruments The carrying amounts of the financial instruments in the accompanying financial statements (cash and cash equivalents, deposits, accounts receivable and payable) approximate fair value because of the short maturity of these instruments. Letter of credit deposits approximate fair value because they earn interest at current market rates. Outstanding borrowings (notes payable to bank, long-term debt and demand notes payable to related parties) bear interest at current market rates and thus the carrying amount of debt approximates estimated fair value. All of the Company's customers are engaged in the energy industry. This concentration of customers may impact the Company's overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. The Company performs ongoing credit evaluations of its customers. The Company maintains reserves for potential credit losses, and actual losses have historically been within the Company's expectations. Foreign sales also present various risks, including risks of war, civil disturbances and governmental activities that may limit or disrupt markets, restrict the movement of funds or result in the deprivation of contract rights or the taking of property without fair consideration. Most of the Company's foreign sales, however, are to larger international companies or are secured by letters of credit or similar arrangements. (i) 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 F-46 102 CARDWELL INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (j) Commissions Payable The Company accrues commissions payable as related revenues are recognized. (k) Customer Advances The Company requires customers to make prepayments on certain contracts. The amount of prepayment varies from contract to contract, but is typically based on a percentage of the contract price. These prepayments are recorded as customer advances until the contract has been completed and billed, at which time the customer advance is offset against accounts receivable. (3) INVENTORIES Inventories consist of the following at October 31, 1996 (in thousands): Raw materials............................................... $ 783 Work in process............................................. 7,786 Parts....................................................... 3,791 Used equipment.............................................. 383 ------- $12,743 =======
(4) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following at October 31, 1996 (in thousands): Land and improvements....................................... $ 70 Buildings................................................... 569 Machinery and equipment..................................... 696 Computer equipment.......................................... 166 Automotive equipment........................................ 129 Furniture, fixtures and other............................... 48 ------ 1,678 Less accumulated depreciation............................... 570 ------ $1,108 ======
(5) NOTE PAYABLE TO BANKS The Company has a $10,000,000 revolving line of credit with a bank available for working capital purposes subject to borrowing base limitations. The net borrowing base was $6,799,000 at October 31, 1996. Notes payable outstanding under the line of credit as of October 31, 1996 aggregated $5,935,000. The note is secured by accounts receivable, inventories, property and equipment and guarantees of the sole stockholder of the Company and a company wholly-owned by the sole stockholder. The note bears interest at .75% above prime rate (8.25% at October 31, 1996). Interest is payable monthly and all unpaid principal and interest are due on October 31, 1997. F-47 103 CARDWELL INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The note agreement contains covenants which, among other things, restrict additional borrowings and payment of dividends, and require that the Company maintain minimum tangible net worth and other minimum financial ratios. (6) LONG-TERM DEBT Long-term debt consists of the following at October 31, 1996 (dollars in thousands): 7.75% (interest rate changes to 1.75% over prime on June 3, 1999 and is adjusted each April 1 thereafter) note payable to bank, payable in monthly installments of $12, including interest, to June 2, 2004; collateralized by certain real property and guarantees of the (1) sole stockholder of the Company, (2) a company wholly-owned by the sole stockholder of the Company and (3) 75% by the Small Business Administration................................... $405 10.55% note payable in monthly installments of $1, including interest, to August 1999; secured by lien on an automobile................................................ 24 7% note payable, payable in monthly installments of $2, including interest, to July 1998 -- July 2000............. 57 ---- 486 Less current installments................................... 146 ---- $340 ====
Aggregate installments of long-term debt at October 31, 1996 follow (in thousands): October 31: 1997...................................................... $146 1998...................................................... 153 1999...................................................... 160 2000...................................................... 27
(7) INCOME TAXES Income taxes consist of the following components for the ten-month period ended October 31, 1996 (in thousands): Current..................................................... $524 Deferred.................................................... (12) ---- $512 ====
Income tax expense for the ten-month period ended October 31, 1996 differs from the amount computed by applying the U.S. federal tax rate of 34% to income before income taxes as a result of the following (in thousands): Computed "expected" tax expense............................. $ 607 Nondeductible expenses...................................... 10 Foreign sales corporation exclusion......................... (160) States taxes, net of federal benefit........................ 54 Other....................................................... 1 ----- $ 512 =====
F-48 104 CARDWELL INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The tax effect (federal and state) of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at October 31, 1996 are as follows (in thousands): Current deferred tax assets: Allowance for doubtful accounts........................... $ 8 Vacation accrual.......................................... 49 Warranty accrual.......................................... 20 --- $77 === Noncurrent deferred tax liability -- plant and equipment depreciation.............................................. $51 ===
No valuation allowance related to the deferred tax asset was necessary for any of the periods presented as management believes it is more likely than not that such deferred tax assets will be realized within the next fiscal year. (8) LEASES The Company has operating leases for office facilities, machinery and equipment and certain automotive equipment. Rental expense on operating leases was $410,000 for the ten-month period ended October 31, 1996. The following is a yearly schedule of future minimum rental payments under operating leases as of October 31, 1996 (in thousands): 1997........................................................ $200 1998........................................................ 142 1999........................................................ 62 2000........................................................ 62 2002........................................................ 49 Thereafter.................................................. 140
(9) RELATED PARTY TRANSACTIONS The Company leases certain buildings, equipment and automotive equipment from related parties including management of the Company, members of their families and companies related by common ownership. Related party rental expense was $206,000 for the ten months ended October 31, 1996 and is included in general and administrative expense in the accompanying consolidated statement of operations. The Company has license agreements with certain businesses owned by the President of the Company. The agreements provide for payments of $11,000 and $2,000 per month plus 4.5% of spare parts sales for the use of trademarks, patterns and prints used by the Company. Payments under the license agreements totaled $430,000 for the ten months ended October 31, 1996 and are included in general and administrative expense in the accompanying consolidated statement of operations. Demand notes payable to related parties are unsecured and bear interest at 8% to 15%. Interest expense on these notes aggregated $83,000 for the ten months ended October 31, 1996. On certain of the demand notes payable to related parties, the Company pays a fee in excess of stated interest for the use of the related party's funds. On contracts awarded to the Company and for which the related party funded the related bid bond, the Company is required to pay the related lending party a fee of approximately .5% of the contract price. No fee is required if the contract is not awarded to the Company. For the ten months ended October 31, 1996 the Company paid fees of approximately $151,000. Such fees are included in general and administrative expense in the accompanying consolidated statement of operations. F-49 105 CARDWELL INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (10) CONTINGENCIES The Company has contract commitments aggregating $8,670,706 at October 31, 1996 for the manufacture and delivery of drilling rigs during fiscal 1997. At October 31, 1996, the company had outstanding letters of credit for bid and performance bonds totaling $6,313,000 of which $2,256,000 is secured by the Company's bank revolving line of credit (see note 10). (11) SUBSEQUENT EVENT On April 17, 1997, all of the outstanding common stock of the Company and certain assets held by affiliates of the Company were purchased by IRI International Corporation (IRI) for $12,000,000 in cash. In addition, IRI partially paid ($3,000,000) of Cardwell's notes payable to bank, and Cardwell liquidated outstanding letters of credit deposits to pay off the remaining notes payable to bank ($2,119,000) outstanding prior to the close of the purchase. IRI assumed the underlying obligations on the bid and performance bonds. F-50 106 CARDWELL INTERNATIONAL LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FIVE MONTHS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED) (IN THOUSANDS)
1996 1997 ------- ------- Revenues.................................................... $21,794 11,091 Cost of goods sold.......................................... 16,999 9,005 ------- ------- Gross profit...................................... 4,795 2,086 Administrative and selling expense.......................... 3,303 2,206 ------- ------- Operating income (loss)........................... 1,492 (120) Other income (expense): Interest income........................................... 5 62 Interest expense.......................................... (222) (246) Other, net................................................ 14 70 ------- ------- (203) (114) ------- ------- Income (loss) before taxes........................ 1,289 (234) Income tax expense (benefit)................................ 299 (73) ------- ------- Net income (loss)................................. $ 990 (161) ======= =======
See accompanying notes to condensed consolidated financial statements. F-51 107 CARDWELL INTERNATIONAL LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY FOR THE FIVE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) (IN THOUSANDS)
TOTAL COMMON RETAINED TREASURY SHAREHOLDER'S STOCK EARNINGS STOCK EQUITY ------ -------- -------- ------------- Balances at October 31, 1996............................. $3 4,083 (44) 4,042 Net loss................................................. -- (161) -- (161) -- ----- --- ----- Balances at March 31, 1997............................... $3 3,922 (44) 3,881 == ===== === =====
See accompanying notes to condensed consolidated financial statements. F-52 108 CARDWELL INTERNATIONAL LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FIVE MONTHS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED) (IN THOUSANDS)
1996 1997 ------- -------- Cash flows from operating activities: Net income (loss)......................................... $ 990 (161) Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization.......................... 62 70 Deferred income taxes.................................. 51 (111) Loss on disposal of property and equipment............. -- 5 Changes in assets and liabilities: Letter of credit deposits............................ 550 997 Accounts receivable.................................. 3,812 (911) Costs and estimated earnings in excess of billings on uncompleted contracts............................... (5,748) 1,593 Inventories.......................................... (2,247) 6,510 Other current assets................................. 95 22 Accounts payable and accrued liabilities............. 1,063 (1,776) Commissions payable.................................. (39) (995) Customer advances.................................... 2,157 (2,729) Income taxes payable................................. 180 (407) Other................................................ 72 13 ------- -------- Net cash provided by operating activities......... 998 2,120 ------- -------- Cash flows from investing activities -- purchases of property, plant and equipment............................. (162) (18) ------- -------- Cash flows from financing activities: Payments on long-term debt................................ (48) (57) Proceeds from notes payable to bank....................... 7,868 10,665 Payments on notes payable................................. (8,265) (11,910) Proceeds from demand notes payable to related parties..... 300 86 Payments on demand notes payable to related parties....... (469) (1,135) ------- -------- Net cash used in financing activities............. (614) (2,351) ------- -------- Increase in cash and cash equivalents....................... 222 (249) Cash and cash equivalents at beginning of period............ 34 432 ------- -------- Cash and cash equivalents at end of period.................. $ 256 183 ======= ======== Interest paid............................................... $ 262 270 ======= ======== Income taxes paid........................................... $ 87 320 ======= ========
See accompanying notes to condensed consolidated financial statements. F-53 109 CARDWELL INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) GENERAL The accompanying condensed consolidated financial statements of Cardwell International, Ltd. and subsidiaries (the Company), as of March 31, 1997 and for the five months ended March 31, 1996 and 1997 are unaudited; however, they include all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation for such periods. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire year. Certain footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been omitted herein. The interim information should be read in conjunction with the Company's annual consolidated financial statements and notes included elsewhere herein. Summarized results from operations for the three months ended March 31, 1996 and 1997 follows (in thousands):
1996 1997 ------- ------ Revenues.................................................... $12,948 5,818 ======= ====== Gross profit................................................ $ 3,196 1,082 ======= ====== Net income (loss)........................................... $ 928 (35) ======= ======
(2) INVENTORIES Inventories consist of the following at March 31, 1997 (in thousands): Raw materials............................................... $ 752 Work in process............................................. 2,614 Parts....................................................... 2,517 Used equipment.............................................. 350 ------ $6,233 ======
(3) COMMITMENTS AND CONTINGENCIES The Company had contract commitments aggregating $17.9 million at March 31, 1997 for the manufacture and delivery of drilling rigs during the remainder of fiscal 1997. At March 31, 1997, the Company had outstanding letters of credit for bid and performance bonds totaling $3,597,000 of which $3,020,747 is secured by the Company's bank revolving line of credit (see note 3). (4) SUBSEQUENT EVENT On April 17, 1997, all of the outstanding common stock of the Company and certain assets held by affiliates of the Company were purchased by IRI International Corporation (IRI) for $12,000,000 in cash. In addition, IRI partially paid ($3,000,000) of Cardwell's notes payable to bank, and Cardwell liquidated outstanding letters of credit deposits to pay off the remaining notes payable to bank ($2,119,000) outstanding prior to the close of the purchase. IRI assumed the underlying obligations on the bid and performance bonds secured by the letters of credit. F-54 110 ============================================================ NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY U.S. UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSONS IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. --------------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary......................... 3 Risk Factors............................... 7 The Company................................ 10 Use of Proceeds............................ 10 Dividend Policy............................ 11 Capitalization............................. 12 Dilution................................... 13 Pro Forma Financial Data................... 14 Selected Financial Data.................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 21 Business................................... 26 Management................................. 37 Security Ownership of Certain Beneficial Owners and Management.................... 44 Selling Stockholders....................... 44 Certain Relationships and Related Transactions............................. 45 Description of Capital Stock............... 46 Shares Eligible for Future Sale............ 46 Underwriting............................... 48 Legal Matters.............................. 52 Experts.................................... 52 Additional Information..................... 52 Index to Financial Statements.............. F-1
--------------------------- UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ============================================================ ============================================================ 12,000,000 SHARES [LOGO] IRI INTERNATIONAL CORPORATION COMMON STOCK ------------------------ PROSPECTUS , 1997 ------------------------ LEHMAN BROTHERS HOWARD, WEIL, LABOUISSE, FRIEDRICHS INCORPORATED PRUDENTIAL SECURITIES INCORPORATED CREDIT LYONNAIS SECURITIES (USA) INC. ============================================================ 111 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. [Alternate page for International Prospectus] Subject to Completion, dated September, 1997 PROSPECTUS 12,000,000 SHARES [LOGO] IRI INTERNATIONAL CORPORATION COMMON STOCK --------------------------- Of the 12,000,000 shares of common stock, par value $.01 per share (the "Common Stock"), of IRI International Corporation (the "Company") offered hereby, 9,000,000 shares are being issued and sold by the Company and 3,000,000 shares are being offered for the account of certain stockholders of the Company (the "Selling Stockholders"). Of the shares being offered hereby, 2,400,000 shares are being offered initially outside the United States and Canada by the International Managers (the "International Offering"), and 9,600,000 shares are being offered initially in the United States and Canada by the U.S. Underwriters (the "U.S. Offering" and, together with the U.S. Offering, the "Offering"). The initial public offering price and underwriting discounts and commissions will be identical for both offerings. See "Underwriting." The Company will not receive any of the proceeds from the sale of the shares by the Selling Stockholders. Prior to the Offering, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price for the Common Stock will be between $14.00 and $17.00 per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. The Company intends to apply to have the Common Stock listed for trading on the New York Stock Exchange (the "NYSE") under the symbol "IIL". --------------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. --------------------------- 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.
======================================================================================================================= UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS (1) COMPANY (2) STOCKHOLDERS - ----------------------------------------------------------------------------------------------------------------------- Per Share.................. $ $ $ $ - ----------------------------------------------------------------------------------------------------------------------- Total (3).................. $ $ $ $ =======================================================================================================================
(1) The Company and the Selling Stockholders have agreed to indemnify the International Managers and the U.S. Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting offering expenses payable by the Company estimated to be $ . (3) Each of the Company and the Selling Stockholders have granted the International Managers a 30-day option to purchase up to 180,000 additional shares of Common Stock on the same terms and conditions as set forth above to cover over-allotments, if any. Each of the Company and the Selling Stockholders have granted to the U.S. Underwriters a similar option to purchase up to 720,000 additional shares of Common Stock to cover over-allotments, if any. If such options (the "Underwriters' Over-Allotment Options") are exercised in full, the total Price to Public, Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to Selling Stockholders will be $ , $ , $ and $ , respectively. See "Underwriting." --------------------------- The shares of Common Stock offered by this Prospectus are offered severally by the International Managers subject to prior sale, to withdrawal, cancellation or modification of the offer without notice, to delivery to and acceptance by the International Managers and to certain further conditions. It is expected that delivery of the shares of Common Stock will be made at the offices of Lehman Brothers Inc., New York, New York on or about , 1997. --------------------------- LEHMAN BROTHERS CREDIT LYONNAIS SECURITIES HOWARD, WEIL, LABOUISSE, FRIEDRICHS INCORPORATED PRUDENTIAL-BACHE SECURITIES , 1997 112 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] ============================================================ NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY INTERNATIONAL MANAGER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSONS IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. --------------------------- TABLE OF CONTENTS
Page ---- Prospectus Summary......................... 3 Risk Factors............................... 7 The Company................................ 10 Use of Proceeds............................ 10 Dividend Policy............................ 11 Capitalization............................. 12 Dilution................................... 13 Pro Forma Financial Data................... 14 Selected Financial Data.................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 21 Business................................... 26 Management................................. 37 Security Ownership of Certain Beneficial Owners and Management.................... 44 Selling Stockholders....................... 44 Certain Relationships and Related Transactions............................. 45 Description of Capital Stock............... 46 Shares Eligible for Future Sale............ 46 Underwriting............................... 48 Legal Matters.............................. 52 Experts.................................... 52 Additional Information..................... 52 Index to Financial Statements.............. F-1
--------------------------- UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ============================================================ ============================================================ 12,000,000 SHARES [LOGO] IRI INTERNATIONAL CORPORATION COMMON STOCK ------------------------ PROSPECTUS , 1997 ------------------------ LEHMAN BROTHERS CREDIT LYONNAIS SECURITIES HOWARD, WEIL, LABOUISSE, FRIEDRICHS INCORPORATED PRUDENTIAL-BACHE SECURITIES ============================================================ 113 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the expenses, other than underwriting discounts and commissions, paid or payable in connection with the issuance and distribution of the Common Stock being registered hereby: Securities and Exchange Commission Registration Fee......... $ National Association of Securities Dealers, Inc. Filing Fee....................................................... New York Stock Exchange Listing Fee......................... Printing and Engraving Expenses............................. Legal Fees and Expenses..................................... Accounting Fees and Expenses................................ Blue Sky Fees and Expenses.................................. Transfer Agent and Registrar Fees........................... Miscellaneous Fees and Expenses............................. ------- Total............................................. =======
All amounts are estimated except the Securities and Exchange Commission Registration Fee, the National Association of Securities Dealers, Inc. Filing Fee and the New York Stock Exchange Listing Fee. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Certificate of Incorporation provides that the personal liability of directors of the Company to the Company is eliminated to the maximum extent permitted by Delaware law. Under Delaware law, absent these provisions, directors could be held liable for gross negligence in the performance of their duty of care, but not for simple negligence. The Company's Certificate of Incorporation absolves directors of liability for negligence in the performance of their duties, including gross negligence. However, the Company's directors remain liable for breaches of their duty of loyalty to the Company and its stockholders, as well as for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law and transactions from which a director derives improper personal benefit. The Company's Certificate of Incorporation also does not absolve directors of liability under Section 174 of the Delaware General Corporation Law, which makes directors personally liable for unlawful dividends or unlawful stock repurchases or redemptions in certain circumstances and expressly sets forth a negligence standard with respect to such liability. Under Delaware law, directors, officers, employees, and other individuals may be indemnified against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement in connection with specified actions, suits or proceedings, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation -- a "derivative action") if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. A similar standard of care is applicable in the case of a derivative action, except that indemnification only extends to expenses (including attorneys' fees) incurred in connection with defense or settlement of such an action and Delaware law requires court approval before there can be any indemnification of expenses where the person seeking indemnification has been found liable to the Company. The Company entered into indemnification agreements with each of its directors and executive officers. These indemnification agreements provide for, among other things, (i) the indemnification by the Company of the indemnities thereunder to the extent described above and (ii) the advancement of attorneys' fees and other expenses. II-1 114 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since September 20, 1994 (the date of the Company Acquisition), the Company has made the following sales of unregistered securities, all of which were exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof: On March 31, 1997 the Company issued (i) $31 million aggregate principal amount of promissory notes pursuant to the Senior Notes Agreement and (ii) a $65 million principal amount promissory note pursuant to the Term Loan. ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES. (A) EXHIBITS.
EXHIBIT NO. DESCRIPTION ------- ----------- *1.1 Form of Underwriting Agreement. 3.1 Certificate of Incorporation of the Company dated July 30, 1985. 3.2 Certificate of Amendment of Certificate of Incorporation dated September 1, 1996. *3.3 Certificate of Merger of ESI with the Company dated , 1997. 3.4 Form of Certificate of Amendment of Certificate of Incorporation of the Company. 3.5 Form of Amended and Restated By-Laws of the Company. *4.1 Specimen Common Stock Certificate. 4.2 Form of Registration Rights Agreement between the Company and its current stockholders. *5.1 Opinion of Jones, Day, Reavis & Pogue regarding the legality of issuance of the Common Stock being registered. 10.1 Form of Indemnification Agreement among the Company and its officers and directors. 10.2 Employment Agreement, dated as of April 17, 1997, between Cardwell and A.C. Teichgraeber and joined by the Company. 10.3 Credit Agreement, dated as of March 31, 1997, among ESI, the Company, the several lenders from time to time parties thereto, Credit Lyonnais New York Branch and Lehman Commercial Paper Inc. (the "Credit Agreement"). *10.3A Amendment No. 1 to the Credit Agreement. 10.4 Senior Subordinated Increasing Rate Note Purchase Agreement, dated as of March 31, 1997, the Company, Energy Services International Limited and Strategic Resource Partners Fund. 10.5 Asset Purchase Agreement, dated as of January 20, 1997, by and among Bowen Tools, Inc.-Delaware, Bowen, Air Liquide and the Company. *10.6 Acquisition Agreement, dated as of March 20, 1997, by and among A.C. Teichgraeber, Teichgraeber Family Limited Partnership, L.P., Arthur C. Teichgraeber Charitable Remainder Trust, Greenwood Pipe and Threading Company, EDCO Drilling Company Inc. and the Company. 10.7 Equity Incentive Plan of the Company. 10.8 Form of Nonqualified Stock Option Agreement. 21 List of Subsidiaries of the Company. 23.1 Consent of KPMG Peat Marwick LLP. *23.2 Consent of Jones, Day, Reavis & Pogue (included in Exhibit 5.1).
- --------------- * To be filed by amendment. II-2 115 (B) FINANCIAL STATEMENT SCHEDULES. All schedules for which provision is made in the applicable regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable or the information is contained in the Financial Statements and therefore have been omitted. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Securities Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 116 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, in the State of Texas, on September 8, 1997. IRI INTERNATIONAL CORPORATION By: /s/ HUSHANG ANSARY ------------------------------------ Hushang Ansary Chairman and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below does hereby constitute and appoint Daniel G. Moriarty, Munawar H. Hidayatallah and William F. Henze II, and each of them, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution in each of them, to do any and all acts and things in such person's respective name and on such person's respective behalf in any and all capacities that they or any of them may deem necessary or advisable to enable IRI International Corporation to comply with the Securities Act of 1933, as amended (the "Securities Act"), and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with a Registration Statement on Form S-1 to be filed by IRI International Corporation, including specifically, but not limited to, power and authority to sign for such respective person any and all amendments (including post-effective amendments and filings under Rule 462(b) under the Securities Act) thereto and to file the same, with all exhibits thereto and other documents therewith, with the Securities and Exchange Commission; and each such person does hereby ratify and confirm all that they, or any of them, shall do or cause by virtue hereof. This power of attorney may be signed in counterparts. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities indicated as of September 8, 1997:
SIGNATURE TITLE --------- ----- /s/ HUSHANG ANSARY Chairman of the Board and - ----------------------------------------------------- Chief Executive Officer Hushang Ansary /s/ DANIEL G. MORIARTY Vice Chairman of the Board - ----------------------------------------------------- Daniel G. Moriarty /s/ MUNAWAR H. HIDAYATALLAH Chief Financial and Accounting Officer - ----------------------------------------------------- and Director Munawar H. Hidayatallah /s/ ABDALLAH ANDRAWOS Secretary and Director - ----------------------------------------------------- Abdallah Andrawos /s/ GARY W. STRATULATE President and Chief Operating Officer - ----------------------------------------------------- of the IRI Division and Director Gary W. Stratulate
II-4 117
SIGNATURE TITLE --------- ----- /s/ RICHARD D. HIGGINBOTHAM President and Chief Operating Officer - ----------------------------------------------------- of the Bowen Tools Division and Director Richard D. Higginbotham /s/ ARTHUR C. TEICHGRAEBER President and Chief Operating Officer - ----------------------------------------------------- of Cardwell International, Ltd. and Director Arthur C. Teichgraeber /s/ NINA ANSARY Director - ----------------------------------------------------- Nina Ansary /s/ FRANK C. CARLUCCI Director - ----------------------------------------------------- Frank C. Carlucci /s/ PHILIP DAVID Director - ----------------------------------------------------- Philip David /s/ JOHN D. MACOMBER Director - ----------------------------------------------------- John D. Macomber /s/ EDWARD L. PALMER Director - ----------------------------------------------------- Edward L. Palmer /s/ STEPHEN J. SOLARZ Director - ----------------------------------------------------- Stephen J. Solarz /s/ ALEXANDER B. TROWBRIDGE Director - ----------------------------------------------------- Alexander B. Trowbridge /s/ J. ROBINSON WEST Director - ----------------------------------------------------- J. Robinson West
II-5 118 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION ------- ----------- *1.1 Form of Underwriting Agreement. 3.1 Certificate of Incorporation of the Company dated July 30, 1985. 3.2 Certificate of Amendment of Certificate of Incorporation dated September 1, 1996. *3.3 Certificate of Merger of ESI with the Company dated , 1997. 3.4 Form of Certificate of Amendment of Certificate of Incorporation of the Company. 3.5 Form of Amended and Restated By-Laws of the Company. *4.1 Specimen Common Stock Certificate. 4.2 Form of Registration Rights Agreement between the Company and its current stockholders. *5.1 Opinion of Jones, Day, Reavis & Pogue regarding the legality of issuance of the Common Stock being registered. 10.1 Form of Indemnification Agreement among the Company and its officers and directors. 10.2 Employment Agreement, dated as of April 17, 1997, between Cardwell and A.C. Teichgraeber and joined by the Company. 10.3 Credit Agreement, dated as of March 31, 1997, among ESI, the Company, the several lenders from time to time parties thereto, Credit Lyonnais New York Branch and Lehman Commercial Paper Inc. (the "Credit Agreement"). *10.3A Amendment No. 1 to the Credit Agreement. 10.4 Senior Subordinated Increasing Rate Note Purchase Agreement, dated as of March 31, 1997, the Company, Energy Services International Limited and Strategic Resource Partners Fund. 10.5 Asset Purchase Agreement, dated as of January 20, 1997, by and among Bowen Tools, Inc.-Delaware, Bowen, Air Liquide and the Company. *10.6 Acquisition Agreement, dated as of March 20, 1997, by and among A.C. Teichgraeber, Teichgraeber Family Limited Partnership, L.P., Arthur C. Teichgraeber Charitable Remainder Trust, Greenwood Pipe and Threading Company, EDCO Drilling Company Inc. and the Company. 10.7 Equity Incentive Plan of the Company 10.8 Form of Nonqualified Stock Option Agreement 21 List of Subsidiaries of the Company. 23.1 Consent of KPMG Peat Marwick LLP. *23.2 Consent of Jones, Day, Reavis & Pogue (included in Exhibit 5.1).
- --------------- * To be filed by amendment. EX-3.1 2 CERTIFICATE OF INCORPORATION 1 CERTIFICATE OF INCORPORATION OF IRI INTERNATIONAL CORPORATION The undersigned, in order to form a corporation for the purpose hereinafter stated, under and pursuant to the provisions of the Delaware General Corporation Law, hereby certifies that: FIRST: The name of the Corporation is IRI International Corporation (hereinafter referred to as the "Corporation"). SECOND: The registered office and registered agent of the Corporation is The Prentice-Hall Corporation System, Inc., 229 South Street, Dover, Kent County, Delaware. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The total number of shares of all classes of stock that the Corporation is authorized to issue is 1,080,000 shares, consisting of 1,000,000 shares of Common Stock, par value $1.00 each (hereinafter referred to as the "Common Stock"), and 80,000 shares of Preferred Stock, par value $1.00 each (herein after referred to as the "Preferred Stock"). I. Preferred Stock 1. Dividends 1.A. General Dividend Obligation. When and as declared by the Board of Directors of the Corporation, the Corporation shall pay to the holders of Preferred Stock, out of the assets of the Corporation available for the payment of dividends, cumulative, preferential cash dividends at the rates and times provided for in this Paragraph 1. 1.B. Payment of Dividends. Dividends shall be payable on each outstanding share of Preferred Stock at the rate of $10 per annum, payable quarterly on each Dividend Payment Date to the holders of record on the respective dates fixed for such purposes by the Board of Directors in advance of each Dividend Payment Date, provided, however, that the holder of record of shares of Preferred Stock on the date such Preferred Stock is transferred to the Corporation in payment of the exercise price of Warrants in accordance with the Warrant Certificate (as defined in Section 6 of Article II of this Certificate of Incorporation), shall be 2 entitled to any accrued and unpaid dividends on such shares of Preferred Stock to the date of such transfer, when such dividends are declared and paid. The initial dividend on the outstanding shares of Preferred Stock shall be prorated from the date of issuance to the first Dividend Payment Date. Such dividends shall be cumulative, whether or not such dividends shall have been declared and whether or not there shall be (at the time such dividend shall become payable or at any other time) surplus, net profits or other assets of the Corporation legally available for the payment of dividends. 1.C. Dividend Preference. So long as any shares of Preferred Stock shall remain outstanding, no Junior Securities shall be acquired or redeemed by the Corporation or any Subsidiary, except, in the case of the Corporation, for shares of Common Stock pursuant to Section 4 or Section 6 of a Stock Transfer and Repurchase Agreement dated as of July 31, 1985 among the Corporation and the certain stockholders named therein, nor shall any dividend be declared or paid upon, nor shall any distribution be made upon, any Junior Securities by the Corporation, if at any time any dividend which shall have become payable on any share of Preferred Stock shall remain unpaid. A conversion of a convertible security, or the exercise of a right to acquire a security, by the holder thereof shall not for this purpose be deemed an acquisition or redemption of the security so converted. 2. Liquidation Preference. Upon any liquidation, dissolution or winding up of the Corporation, or any similar distribution of its assets to its stockholders which results in a return of capital, whether voluntary or involuntary, the holders of the Preferred Stock shall be entitled, before any distribution or payment is made upon any Junior Securities, to be paid out of the assets of the Corporation available for distribution to its stockholders (whether from capital, surplus or earnings) $100 in cash for each share of Preferred Stock outstanding, plus full accrued, unpaid, cumulative dividends (whether or not earned or declared) to the date of payment. If, upon any liquidation, dissolution or winding up of the Corporation, or any similar distribution of assets to its stockholders which results in a return of capital, whether voluntary or involuntary, the amounts payable with respect to Preferred Stock and any other shares of capital stock of the Corporation ranking as to such distribution on a parity with Preferred Stock are not paid in full, holders of Preferred Stock and of such other capital stock will share ratably in any such distribution of assets of the Corporation in accordance with the sums which would be payable in respect of such shares if all sums payable were discharged in full. After payment to the holders of the Preferred Stock of the full preferential amounts to which they are entitled, the holders of Preferred Stock will not be entitled to any further participation in and distribution of assets of the Corporation. Neither the -2- 3 consolidation or merger of the Corporation into or with any other corporation or corporations, nor the sale or transfer by the Corporation of all or any part of its assets, nor the reduction of the capital stock of the Corporation, shall be deemed to be a liquidation, dissolution, winding up or similar distribution of the Corporation within the meaning of any of the provisions of this Paragraph 2, provided that such transaction does not effect a return of capital to the Corporation's stockholders. 3. Voting Rights. Except as otherwise provided by law, holders of shares of Preferred Stock shall not be entitled to vote on any matter relating to the business or affairs of the Corporation or for any other purpose. 4. Redemption. 4.A. Optional Redemptions. The Corporation may, at its option, purchase or redeem shares of Preferred Stock in the manner, upon the notice and with the effect specified in paragraph 4A hereof from time to time after July 31, 1990, either in whole or in such portions as from time to time the Board of Directors of the Corporation may determine in accordance with the By-laws of the Corporation. 4.B. Redemption Price. For each share of Preferred Stock which is to be redeemed by the Corporation at any time in a redemption pursuant to this Paragraph 4, the Corporation shall be obligated on the Redemption Date to pay to the holder thereof (upon surrender by such holder at the Corporation's principal office of the certificate representing such share of Preferred Stock duly endorsed in blank or accompanied by an appropriate form of assignment) an amount (the "Redemption Price") equal to $100 per share, plus the sum of money equivalent to all accrued and unpaid dividends (whether or not earned or declared) thereon to and including the Redemption Date. 4.C. Redeemed or Otherwise Acquired Shares to be Cancelled. Any shares of Preferred Stock redeemed pursuant to this Paragraph 4 or otherwise acquired by the Corporation in any manner whatsoever shall be cancelled and shall not under any circumstances be reissued, sold or transferred; and the Corporation shall from time to time take such appropriate action as may be necessary to reduce the authorized number of shares of Preferred Stock accordingly. 4.D. Determination of Number of Each Holder's Shares to be Redeemed. The number of shares of Preferred Stock to be redeemed from each holder thereof in redemptions under this Paragraph 4 shall be determined by the Board of Directors in accordance with the By-laws of the Corporation. In case less than all the shares represented by any share certificate are -3- 4 redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the holder thereof. 4.E. Notice of Redemption. Notice of any redemption of Preferred Stock, specifying the time and place of redemption an the Redemption Price shall be mailed by certified or registered mail, return receipt requested, to each holder of record of the shares of Preferred Stock to be redeemed, at the address for such holder shown on the Corporation's records, not more than sixty (60) nor less than twenty (20) days prior to the date on which such redemption is to be made; if less than all the shares of the Preferred Stock owned by such holder are then to be redeemed, the notice shall also specify the number of shares and the certificate numbers thereof which are to be redeemed. Upon mailing any such notice of redemption, the Corporation shall become obligated to redeem at the time of redemption specified therein all of the shares of Preferred Stock therein specified. 4.F. Dividends After Redemption Date. No share of Preferred Stock shall be entitled to any dividend payable after its Redemption Date, and no such Redemption Date all rights of the holder of such share, as a shareholder of the Corporation by reason of the ownership of such share, shall cases, except the right to receive the Redemption Price of such share upon presentation and surrender of the certificate representing such share, and such share shall not be deemed to be outstanding after such Redemption Date. The occurrence of such Redemption Date shall not, however, affect the obligation of the Corporation to pay dividends theretofore payable on such share but not paid prior to such Redemption Date, as provided in paragraph 4B. 4.G. Limitations. The Corporation shall not redeem any shares of Preferred Stock at any time outstanding unless all dividends theretofore payable on the Preferred Stock through the Dividend Payment Date next preceding or coinciding with the Redemption Date shall have been paid. 5. Conversion. Shares of Preferred Stock shall not be convertible into shares of any other class of stock of the Corporation. 6. Registration of Transfer. The Corporation shall keep at its principal office (or such other place as the Corporation reasonably designates) a register for registration shares of Preferred Stock. Upon the surrender of any certificate representing Preferred Stock at such place, the Corporation shall, at the request of the registered holder of such certificate, execute and deliver (at the Corporation's expense) a new certificate or certificates in exchange therefor representing in the aggregate the number of shares represented by the surrendered certificate, subject to the requirements of applicable securities laws. Each such new certificate shall be -4- 5 registered in such name and shall represent such number of shares as shall be requested by the holder of the surrendered certificate, shall be substantially identical in form to be surrendered certificate, and the holders of the shares represented by such new certificate shall be entitled to receive all theretofore payable but unpaid dividend payments on the shares represented by the surrendered certificate. 7. Replacement. (i) Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing one or more shares of the Preferred Stock and, in the case of any such loss, theft, destruction or mutilation, upon receipt of indemnity reasonably satisfactory to the Corporation or, in the case of any such mutilation, upon surrender of such certificate, the Corporation shall (at its expenses) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of shares represented by such lost, stolen, destroyed or mutilated certificate, and the holders of the shares represented by such new certificate shall be entitled to receive all theretofore payable but unpaid dividend payments on the shares represented by the lost, stolen, destroyed or mutilated certificate. (ii) The term "outstanding" when used in this Certificate of Incorporation with reference to shares of Preferred Stock as of any particular time shall not include any shares represented by any certificate in lieu of which is new certificate has been executed and delivered by the Corporation in accordance with Paragraph 6 or this Paragraph 7, but shall include only those shares represented such new certificate. 8. Definitions. The following terms shall have the following meanings, which meanings shall be equally applicable to the singular and plural forms of such terms: (i) "Dividend Payment Date" means each February 1, May 1, August 1 and November 1 in each year, commencing with November 1, 1985. (ii) "Junior Security" means the Common Stock, and any other equity security of any kind which the Corporation or any Subsidiary shall at any time issue or be authorized to issue as to which the Preferred Stock has preference over with respect to the payment of dividends or rights upon the dissolution, liquidation or winding up of the Corporation or the distribution of assets to its stockholders by way of return of capital. -5- 6 (iii) "Person" means and includes an individual, a partnership, a corporation, a trust, a joint Venture, an unincorporated organization and a government or any department or agency thereof. (iv) "Redemption Date" means as to any share of Preferred Stock redeemed pursuant to Paragraph 4 hereof the date specified in the notice of redemption, provided that for purposes of Paragraph 4F, no such date shall be a Redemption Date unless the applicable Redemption Price is actually paid or tendered on such date. (v) "Subsidiary" means any corporation at least 50% of the voting stock of every class of which shall, at the time as of which any determination is being made, be owned by the Corporation either directly or through one or more Subsidiaries. II. Common Stock 1. Dividends. Holders of Common Stock shall be paid dividends when and as declared by the Board of Directors of the Corporation out of the assets of the Corporation available for the payment of dividends. 2. Registration of Transfer. The Corporation shall keep at its principal office (or such other place as the Corporation reasonably designates) a register for the registration of shares of Common Stock. Upon the surrender of any certificate representing shares of Common Stock at such place, the Corporation shall, at the request of the registered holder of such certificate, execute and deliver (at the Corporation's expense) a new certificate or certificates in exchange therefor representing in the aggregate the number of shares of such class represented by the surrendered certificate, subject to the requirements of applicable securities laws. Each such new certificate shall be registered in such name and shall represent such number of shares of such class as shall be requested by the holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate. 3. Replacement. (i) Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered holder shall be satisfactory) of the ownership and the loss, theft, destruction, or mutilation of any certificate evidencing one or more shares of Common Stock and, in the case of any loss, theft, destruction or mutilation, upon receipt of indemnity reasonably satisfactory to the Corporation or, in the case of any such mutilation, upon surrender of such certificate, the Corporation shall (at its expense) execute and deliver in lieu of such -6- 7 certificate a new certificate of like kind representing the number of shares of such class represented by such lost, stolen, destroyed, or mutilated certificate and dated the date of such lost, stolen, destroyed, or mutilated certificate, and the holders of the shares represented by such new certificate shall be entitled to receive all theretofore payable but unpaid dividend payments on the shares represented by the lost, stolen, destroyed, or mutilated certificate. (ii) The term "outstanding" when used in this subdivision with reference to the shares of Common Stock as of any particular time shall not include any such shares represented by any certificate in lieu of which a new certificate has been executed and delivered by the Corporation in accordance with Paragraph 2 or this Paragraph 3, but shall include only those shares represented by such new certificate. 4. Voting Rights. Except as otherwise provided by law, holders of Common Stock shall be entitled to one vote per share on all matters to be voted on by the stockholders of the Corporation. 5. Preemption. Holders of shares of Common Stock shall not, as such, have preemptive or other right to subscribe for or purchase any shares of capital stock of the Corporation of any class now or hereafter authorized or issued by the Corporation. 6. Warrants. 6.A. General. Except as expressly provided otherwise in the Warrant Certificate (as defined below), each certificate representing a share of Common Stock issued pursuant to the Stockholder Agreement dated as of July 30, 1985 among Ingersoll- Rand Company, Ingersoll-Rand Oilfield Products Company and Dresser Industries, Inc. (the "Stockholder Agreement") shall have attached thereto a warrant certificate (a "Warrant Certificate") substantially in the form of Exhibit 2.1 to the Stockholder Agreement certificating that the holder thereof is the registered holder of warrants ("Warrants") to purchase, on the terms and subject to the conditions contained therein, Common Stock. The number of Warrants represented by a Warrant Certificate initially shall equal four times the number of shares of Common Stock represented by the Common Stock certificate to which such Warrant Certificate is attached No Warrant Certificate may be detached from its Common Stock certificate, and Warrants shall not be transferrable except by and in connection with the transfer of the shares of Common Stock represented by the Common Stock certificate to which the Warrant Certificate evidencing such Warrants is attached. The Warrants, on the terms and subject to the conditions contained in the Warrant Certificate evidencing such Warrants, shall entitle the holders thereof to purchase -7- 8 fully paid and non-assessable whole shares of Common Stock. Such right to purchase Common Stock, as to any particular Warrant, shall not be exercisable on or before July 31, 990 and shall terminate at 5:00 P.M., Pampa, Texas time, on July 31, 1995. 6.B. Reservation and Availability of Common Stock. The Corporation will at all times reserve and keep available out of its authorized and unissued shares of Common Stock, free from preemptive rights, solely for the purpose of issue upon exercise of Warrants, such number of shares of Common Stock as shall then be issuable upon exercise of all Warrants then outstanding. The Corporation covenants that all shares of Common Stock issued upon due exercise of Warrants shall, when issued, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens, charges and security interests with respect to the issues thereof. The Corporation will not take any action which results in any adjustment of the number of shares of Common Stock, issuable upon exercise of all of the Warrants then outstanding, together with the total number of shares of Common Stock reserved for any purpose other than issuance upon due exercise of Warrants, would exceed the total number of shares of Common Stock then authorized by this Certificate of Incorporation. If any shares of Common Stock required hereby to be reserved for the purpose of issue upon due exercise of Warrants require registration with, or approval of, any governmental authority under any federal or state law (other than any registration under the Securities Act of 1933 or any state securities law) before such shares may be issued upon such exercise, the Corporation will, at its expense and as expeditiously as possible, use its best efforts to cause such shares to be duly registered. 6.C. Stock Transfer Books. The Corporation will not close its books against the transfer of any share of Common Stock in any manner which interferes with the timely exercise of a Warrant. FIFTH: The name and address of the incorporator are R.G. Dickerson 229 South State Street, Dover, Delaware 19901 SIXTH: The Board of Directors of the Corporation, acting by the affirmative vote of not less than all of the Directors of the Corporation, and the stockholders of the Corporation, acting by the affirmative vote (by written consent or otherwise) of (a) holders of record of not less than 90% of the issued and outstanding shares of Common Stock are held by Unaffiliated Stockholders as of the applicable date for the determination of stockholders entitled to vote thereon or consent thereto, Unaffiliated Stockholders who or which are holders of record of not less than a majority of the total number of issued and outstanding shares of Common Stock held by all Unaffiliated Stockholders, each may alter, amend or repeal any provision of -8- 9 the By-Laws of the Corporation. For purpose of this Article SIXTH, an "Unaffiliated Stockholder" shall mean any individual, partnership, corporation or other entity (a "person") who or which, as of the date on which such determination is made; (a) is not the beneficial owner, directly or indirectly, of more than 35% of the issued and outstanding shares of Common Stock; or (b) does not directly or indirectly, control such a beneficial owner of Common Stock or is not, directly or indirectly, controlled by, or under common control with, such a beneficial owner of Common Stock. SEVENTH: This Certificate of Incorporation may be amended, and a provision hereof may be modified or repealed, only by the stockholders of the Corporation, acting by the affirmative vote (by written consent or otherwise) of (a) holders of record of not less than 90% of the issued and outstanding shares of Common Stock and (b) if 4% or more of the total number of issued and outstanding shares of Common Stock are held by Unaffiliated Stockholders as of the applicable date for the determination of stockholders entitled to vote thereon or consent thereto, Unaffiliated Stockholders who or which are holders of record of not less than a majority of the total number of issued and outstanding shares of Common Stock held by all Unaffiliated Stockholders. For purpose of this Article SEVENTH, the term "Unaffiliated Stockholder" shall have the meaning ascribed to it in Article SIXTH. EIGHTH: Except as otherwise provided by law or by Article SIXTH or SEVENTH of this Certificate of Incorporation, all matters submitted to a meeting of stockholders shall be decided by vote of holders of record, present in person or by proxy, of not less than 90% of the issued and outstanding shares of Common Stock. At any meeting of stockholders, the holders of record, present in person or by proxy, of not less than 80% of the issued and outstanding shares of Common Stock shall constitute a quorum for the transaction of business. IN WITNESS WHEREOF, the undersigned has signed this Certificate of Incorporation on July 30, 1985. /s/R.G. Dickerson ------------------------------------ R.G. Dickerson Sole Incorporator -9- EX-3.2 3 CERTIFICATE OF AMEND. OF CERTIFICATE OF INCORP. 1 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF IRI INTERNATIONAL CORPORATION IRI International Corporation, a corporation duly organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), hereby certifies as follows: 1. The amendments to the Certificate of Incorporation set forth below have been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. 2. Article Fourth of the Corporation's Certificate of Incorporation is amended to read in its entirety as follows: FOURTH: The total number of shares of all classes of stock that the Corporation is authorized to issue is 108,000,000 shares, consisting of 100,000,000 shares of Common Stock, par value $.01 each (hereinafter referred to as the "Common Stock"), and 8,000,000 shares of Preferred Stock, par value $1.00 each (herein after referred to as the "Preferred Stock"). I. PREFERRED STOCK 1. Dividends 1A. General Dividend Obligation. When and as declared by the Board of Directors of the Corporation, the Corporation shall pay to the holders of Preferred Stock, out of the assets of the Corporation available for the payment of dividends, cumulative, preferential cash dividends at the rates and times provided for in this Paragraph 1. 1B. Payment of Dividends. Dividends shall be payable on each outstanding share of Preferred Stock at the rate of $10 per annum, payable quarterly on each Dividend Payment Date to the holders of record on the respective dates fixed for such purposes by the Board of Directors in advance of each Dividend Payment Date. The initial dividend on the outstanding shares of Preferred Stock shall be prorated from the date of issuance to the first Dividend Payment Date. Such dividends shall accrue from the date of issuance and, if not paid, shall be cumulative, whether or not such 2 dividends shall have been declared and whether or not there shall be (at the time such dividend shall become payable or at any other time) surplus, net profits or other assets of the Corporation legally available for the payment of dividends. 1C. Dividend Preference. So long as any shares of Preferred Stock shall remain outstanding, no Junior Securities shall be acquired or redeemed by the Corporation or any Subsidiary, nor shall any dividend be declared or paid upon, nor shall any distribution be made upon, any Junior Securities by the Corporation, if at any time any dividend which shall have unpaid. A conversion of a convertible security, or the exercise of a right to acquire a security, or the exercise of a right to acquire a security, by the holder thereof shall not for this purpose be deemed an acquisition or redemption of the security so converted. 2. Liquidation Preference. Upon any liquidation, dissolution or winding up of the Corporation, or any similar distribution of its assets to its stockholders which results in a return of capital, whether voluntary or involuntary, the holders of the Preferred Stock shall be entitled, before any distribution or payment is made upon any Junior Securities, to be paid out of the assets of the Corporation available for distribution to its stockholders (whether from capital, surplus or earnings) $100 in cash for each share of Preferred Stock outstanding, plus full accrued, unpaid, cumulative dividends (whether or not earned or declared) to the date of payment. If, upon any liquidation, dissolution or winding up of the Corporation, or any similar distribution of assets to its stockholders which results in a return of capital, whether voluntary or involuntary, the amounts payable with respect to Preferred Stock and any other shares of capital stock of the Corporation ranking as to such distribution on a parity with Preferred Stock are not paid in full, holders of Preferred Stock and of such other capital stock will share ratably in any such distribution of assets of the Corporation in accordance with the sums which would be payable in respect of such shares if all sums payable were discharged in full. After payment to the holders of Preferred Stock of the full preferential amounts to which they are entitled, the holders of Preferred Stock will not be entitled to any further participation in and distribution of assets of the corporation. Neither the consolidation or merger of the Corporation into or with any other corporation or corporations, nor the sale assets, nor the reduction of the capital stock of the Corporation, shall be deemed to be a liquidation, dissolution, winding up or similar distribution of the Corporation within the meaning of any of the provisions of this Paragraph 2, provided that such transaction does not effect a return of capital to the Corporation's stockholders. -2- 3 3. Voting Rights. Except as otherwise provided by law, holders of shares of Preferred Stock shall not be entitled to vote on any matter relating to the business or affairs of the Corporation or for any other purpose. 4. Redemption. 4A. Optional redemptions. The Corporation may, at its option, purchase or redeem shares of Preferred Stock in the manner, upon the notice and with the effect specified in paragraph 4E hereof from time to time after July 31, 1990, either in whole or in such portions as from time to time the Board of Directors of the Corporation may determine in accordance with the By-laws of the Corporation. 4B. Redemption Price. For each share of Preferred Stock which is to be redeemed by the Corporation at any time in a redemption pursuant to this Paragraph 4, the Corporation shall be obligated on the Redemption Date to pay to the holder thereof (upon surrender by such holder at the Corporation's principal office of the certificate representing such share of Preferred Stock duly endorsed in blank or accompanies by an appropriate form of assignment) an amount (the "Redemption Price") equal to $100 per share, plus the sum of money equivalent to all accrued and unpaid dividends (whether or not earned or declared) thereon to and including the Redemption Date. 4C. Determination of Number of Each Holder's Shares to be Redeemed. The number of shares of Preferred Stock to be redeemed from each holder thereof in redemptions under this Paragraph 4 shall be determined by the Board of Directors in accordance with the By-laws of the Corporation. In case less than all the shares represented by any share certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the holder thereof. 4D. Notice of Redemption. Notice of any redemption of Preferred Stock, specifying the time and place of redemption and the Redemption Price shall be mailed by certified or registered mail, return receipt requested, to each holder of record of the shares of Preferred Stock to be redeemed, at the address for such holder shown on the Corporation's records, not more than sixty (60) nor less than twenty (20) days prior to the date on which such redemption is to be made; if less than all the shares of the Preferred Stock owned by such holder are then to be redeemed, the notice shall also specify the number of shares and the certificate numbers thereof which are to be redeemed. Upon mailing any such notice of redemption, the Corporation shall become obligated to redeem at the time of redemption specified therein all of the shares of Preferred Stock therein specified. -3- 4 4E. Dividends After Redemption Date. No share of Preferred Stock shall be entitled to any dividend payable after its Redemption Date, and on such Redemption Date all rights of the holder of such share, as a shareholder of the Corporation by reason of the ownership of such share, shall cease, except the right to receive the Redemption Price of such share upon presentation and surrender of the certificate representing such share, and such share shall not be deemed to be outstanding after such Redemption Date. The occurrence of such Redemption Date shall not, however, affect the obligation of the Corporation to pay dividends theretofore payable on such share but not paid prior to such Redemption Date, as provided in paragraph 4B. 4F. Limitations. The Corporation shall not redeem any shares of Preferred Stock at any time outstanding unless all dividends theretofore payable on the Preferred Stock through the Dividend Payment Date next proceeding or coinciding with the Redemption Date shall have been paid. 5. Conversion. Shares of Preferred Stock shall not be convertible into shares of any other class of stock of the Corporation. 6. Registration of Transfer. The Corporation shall keep at its principal office (or such other place as the Corporation reasonably designates) a register for registration of shares of Preferred Stock. Upon the surrender of any certificate representing Preferred Stock at such place, the Corporation shall, at the request of the registered holder of such certificate, execute and deliver (at the Corporation's expense) a new certificate of certificates in exchange therefor representing in the aggregate the number of shares represented by the surrendered certificate, subject to the requirements of applicable securities laws. Each such new certificate shall be registered in such name and shall represent such number of shares as shall be requested by the holder of the surrendered certificate, shall be substantially identical in form to the surrendered certificate, and the holders of the shares represented by such new certificate shall be entitled to receive all theretofore payable but unpaid dividend payments on the shares represented by the surrendered certificate. 7. Replacement. (i) Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing one or more shares of the Preferred Stock and, in the case of any such loss, theft, destruction or mutilation, upon receipt of indemnity reasonably satisfactory to the -4- 5 Corporation or, in the case of any such mutilation, upon surrender of such certificate, the Corporation shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of shares represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate, and the holders of the shares represented by such new certificate shall be entitled to receive all theretofore payable but unpaid dividend payments on the shares represented by the lost, stolen, destroyed or mutilated certificate. (ii) The term "outstanding" when used in this Certificate of Incorporation with reference to shares of Preferred Stock as of any particular time shall not include any shares represented by any certificate in lieu of which a new certificate has been executed and delivered by the Corporation in accordance with Paragraph 6 or this Paragraph 7, but shall include only those shares represented such new certificate. 8. Definitions. The following terms shall have the following meanings, which meanings shall be equally applicable to the singular and plural forms of such terms: (i) "Dividend Payment Date" means each February 1, May 1, August 1 and November 1 in each year, commencing with November 1, 1985. (ii) "Junior Security" means the Common Stock, and any other equity security of any kind which the Corporation or any Subsidiary shall at any time issue or be authorized to issue as to which the Preferred Stock has preference over with respect to the payment of dividends or rights upon the dissolution, liquidation or winding up of the Corporation or the distribution of assets to its stockholders by way of return of capital. (iii) "Person" means and includes an individual, a partnership, a corporation, a trust, a joint venture, an unincorporated organization and a government or any department or agency thereof. (iv) "Redemption Date" means as to any share of Preferred Stock redeemed pursuant to Paragraph 4 hereof the date specified in the notice of redemption, provided that for purposes of Paragraph 4E, no such date shall be a Redemption Date unless the applicable Redemption Price is actually paid or tendered on such date. (v) "Subsidiary" means any corporation at least 50% of the voting stock of every class of which shall, at the time as of which any determination is being made, be owned by the -5- 6 Corporation either directly or through one or more Subsidiaries. II. COMMON STOCK 1. Dividends. Holders of Common Stock shall be paid dividends when and as declared by the Board of Directors of the Corporation out of the assets of the Corporation available for the payment of dividends. 2. Registration of Transfer. The Corporation shall keep at its principal office (or such other place as the Corporation reasonably designates) a register for the registration of shares of Common Stock. Upon the surrender of any certificate representing shares of Common Stock at such place, the Corporation shall, at the request of the registered holder of such certificate, execute and deliver (at the Corporation's expense) a new certificate of certificates in exchange therefor representing in the aggregate the number of shares of such class represented by the surrendered certificate, subject to the requirements of applicable securities laws. Each such new certificate shall be registered in such name and shall represent such number of shares of such class as shall be requested by the holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate. 3. Replacement. (i) Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered holder shall be satisfactory) of the Ownership and the loss, theft, destruction or mutilation of any certificate evidencing one or more shares of Common Stock and, in the case of any such loss, theft, destruction or mutilation, upon receipt of indemnity reasonably satisfactory to the Corporation or, in the case of any such mutilation, upon surrender of such certificate, the Corporation shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of shares of such class represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate, and the holders of the shares represented by such new certificate shall be entitled to receive all theretofore payable but unpaid dividend payments on the shares represented by the lost, stolen, destroyed or mutilated certificate. (ii) The term "outstanding" when used in this subdivision with reference to the shares of Common Stock as of any particular time shall not include any such shares represented by any certificate in lieu of which a new certificate has been executed and delivered by the -6- 7 Corporation in accordance with Paragraph 2 or this Paragraph 3, but shall include only those shares represented by such new certificate. 4. Voting Rights. Except as otherwise provided by law, holders of Common Stock shall be entitled to one vote per share on all matters to be voted on by the stockholders of the Corporation. 5. Preemption. Holders of shares of Common Stock shall not, as such, have any preemptive or other right to subscribe for or purchase any shares of capital stock of the Corporation of any class now or hereafter authorized or issued by the Corporation. 3. Article Sixth of the Corporation's Certificate of Incorporation is deleted and replaced with the following: SIXTH: The Board of Directors of the Corporation, acting by the affirmative vote of not less than all of the Directors of the Corporation, and the stockholders of the Corporation, acting by the affirmative vote (by written consent or otherwise) of holders of not less than 90% of the issued and outstanding shares of Common Stock each may alter, amend or repeal any provision of the By-Laws of the Corporation. 4. Article Seventh of the Corporation's Certificate of Incorporation is deleted and replaced with the following: SEVENTH: This Certificate of Incorporation may be amended, and a provision hereof may be modified or repealed, only by stockholders of the Corporation, acting by the affirmative vote (by written consent or otherwise) of holders of not less than 90% of the issued and outstanding shares of Common Stock. 5. Article Eighth of the Corporation's Certificate of Incorporation is deleted and replaced with the following: EIGHTH: Except as otherwise provided by law or this Certificate of Incorporation, all matters submitted to a meeting of stockholders shall be decided by vote of holders of record, present in person or by proxy, of not less than 80% of the issued and outstanding shares of stock. At any meeting of stockholders, the holders of record, present in person or by proxy, of not less than 80% of the issued and outstanding shares of Common Stock shall constitute a quorum for the transaction of business. 6. The Corporation's Certificate of Incorporation is further amended to include a new Article Ninth which reads in its entirety as follows: -7- 8 NINTH: Each person who is or was or had agreed to become a director or officer of the Corporation, or each such person who is or was serving or who had agreed to serve at the request of the Board of Directors or an officer of the Corporation as an employee or agent of the Corporation or as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (including the heirs, executors, administrators or estate of such person), shall be indemnified by the Corporation to the full extent permitted by the General Corporation Law of the State of Delaware or any other applicable laws as presently or hereafter in effect. Without limiting the generality or the effect of the foregoing, the Corporation may enter into one or more agreements with any person which provide for indemnification greater or different than that provided in this Article. Any repeal or modification of this Article Ninth shall not adversely affect any right or protection existing hereunder immediately prior to such repeal or modification. 7. The Corporation's Certificate of Incorporation is further amended to include a new Article Tenth which reads in its entirety as follows: TENTH: To the full extent permitted by the General Corporation Law of the State of Delaware or any other applicable laws presently or hereafter in effect, no Director of the Corporation shall be personally liable to the Corporation or its stockholders for or with respect to any acts or omissions in the performance of his or her duties as a Director of the Corporation. Any repeal or modification of this Article Tenth will not adversely affect any right or protection of a Director of the Corporation existing prior to such repeal or modification. -8- 9 IN WITNESS WHEREOF, the undersigned has executed this Certificate of Amendment this 19th day of September, 1996. By: /s/ Hushang Ansary -------------------------------- Name: Hushang Ansary Title: Chairman -9- EX-3.3 4 FORM OF CERTIFICATE OF AMEND. OF CERT. OF INCORP. 1 CERTIFICATE OF AMENDMENT of CERTIFICATE OF INCORPORATION of IRI INTERNATIONAL CORPORATION IRI International Corporation, a corporation duly organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), hereby certifies as follows: 1. The amendments to the Certificate of Incorporation set forth below have been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. 2. Article Fourth of the Corporation's Certificate of Incorporation is amended and restated to read in its entirety as follows: FOURTH: The total number of shares of all classes of stock that the Corporation is authorized to issue is 125,000,000 shares, consisting of 100,000,000 shares of Common Stock, par value $.01 each (hereinafter referred to as the "Common Stock"), and 25,000,000 shares of Preferred Stock, par value $1.00 each (hereinafter referred to as the "Preferred Stock"). I. PREFERRED STOCK The Preferred Stock may be issued in one or more series. The Board of Directors of the Company (the "Board"), with the approval of the holders of a majority of the outstanding shares of the Company's Common Stock, is hereby authorized to authorize the issuance of shares of Preferred Stock in such series and to fix from time to time before issuance the number of shares to be included in any such series and the designation, relative powers, preferences, and rights and qualifications, limitations, or restrictions of all shares of such series. The authority of the Board with respect to each such series will include, without limiting the generality of the foregoing, the determination of any or all of the following: 2 (a) the number of shares of any series and the designation to distinguish the shares of such series from the shares of all other series; (b) the voting powers, if any, and whether such voting powers are full or limited in such series; (c) the redemption provisions, if any, applicable to such series, including the redemption price or prices to be paid; (d) whether dividends, if any, will be cumulative or noncumulative, the dividend rate of such series, and the dates and preferences of dividends on such series; (e) the rights of such series upon the voluntary or involuntary dissolution of, or upon any distribution of the assets of, the Company; (f) the provisions, if any, pursuant to which the shares of such series are convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock, or any other security, of the Company or any other corporation or other entity, and the price or prices or the rates of exchange applicable thereto; (g) the right, if any, to subscribe for or to purchase any securities of the Company or any other corporation or other entity; (h) the provisions, if any, of a sinking fund applicable to such series; and (i) any other relative, participating, optional, or other special powers, preferences, rights, qualifications, limitations, or restrictions thereof; all as may be determined from time to time by the Board and stated in the resolution or resolutions providing for the issuance of such Preferred Stock (collectively, a "Preferred Stock Designation"). II. COMMON STOCK Except as may otherwise be provided in a Preferred Stock Designation, the holders of Common Stock will be entitled to one vote on each matter submitted to a vote at a meeting of stockholders for each share of Common Stock held of record by such holder as of the record date for such meeting. 3. Article Sixth of the Corporation's Certificate of Incorporation is deleted in its entirety. 4. Article Seventh of the Corporation's Certificate of Incorporation is deleted in its entirety. -2- 3 5. Article Eighth of the Corporation's Certificate of Incorporation is deleted in its entirety. IN WITNESS WHEREOF, the undersigned has executed this Certificate of Amendment this __ day of __________, 1997. By: ------------------------------- Name: Title: -3- EX-3.4 5 FORM OF AMENDED AND RESTATED BY-LAWS 1 IRI INTERNATIONAL CORPORATION AMENDED AND RESTATED BYLAWS As Adopted and in Effect as of June 17, 1997 2 IRI INTERNATIONAL CORPORATION AMENDED AND RESTATED BYLAWS TABLE OF CONTENTS Page MEETING OF STOCKHOLDERS................................................... 1 1. Place of Meeting................................................ 1 2. Annual Meetings................................................. 1 3. Special Meetings................................................ 1 4. Notice.......................................................... 1 5. Inspectors...................................................... 2 6. Quorum.......................................................... 2 7. Voting.......................................................... 2 8. Order of Business............................................... 2 9. Written Action.................................................. 3 DIRECTORS................................................................. 3 10. Function........................................................ 3 11. Number, Election and Removal of Directors....................... 3 12. Vacancies and New Directorships................................. 3 13. Resignation..................................................... 4 14. Regular Meetings................................................ 4 15. Special Meetings................................................ 4 16. Quorum.......................................................... 4 17. Written Action.................................................. 4 18. Participation in Meetings by Telephone Conference............... 4 19. Committees...................................................... 4 20. Compensation.................................................... 5 21. Rules........................................................... 5 NOTICES................................................................... 6 22. Generally....................................................... 6 23. Waivers......................................................... 6 OFFICERS.................................................................. 6 24. Generally....................................................... 6 25. Compensation.................................................... 6 26. Succession...................................................... 6 27. Authority and Duties............................................ 6 STOCK..................................................................... 6 28. Certificates.................................................... 6 29. Classes of Stock................................................ 7 30. Transfers....................................................... 7 3 30. Lost, Stolen, or Destroyed Certificates......................... 7 31. Record Dates.................................................... 7 INDEMNIFICATION........................................................... 8 32. Damages and Expenses............................................ 8 33. Insurance, Contracts, and Funding............................... 11 GENERAL................................................................... 12 34. Fiscal Year..................................................... 12 35. Seal............................................................ 12 36. Reliance upon Books, Reports, and Records....................... 12 37. Time Periods.................................................... 12 38. Amendments...................................................... 12 39. Certain Defined Terms........................................... 12 4 MEETING OF STOCKHOLDERS 1. Place of Meeting. Meetings of the stockholders of the Corporation shall be held in Houston, Texas, or at such place either within or without the State of Delaware as the Board (the "Board") may determine. 2. Annual Meetings. Annual meetings of stockholders, commencing with year 1998, shall be held on the fourth Tuesday in May if not a legal holiday, and if a legal holiday, then on the next business day following, at 10:00 a.m., or at such other date and time as shall be designated from time to time by the Board, to elect a Board by plurality vote and to transact such other business as may properly come before the meeting. 3. Special Meetings. (a) Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by law or by the Certificate of Incorporation, may be called only by (i) the Chairman of the Board or, if there shall then be no elected and acting Chairman of the Board, the Chief Executive Officer, (ii) the holders of a majority of the outstanding shares of the Company's Common Stock, or (iii) the Secretary within 10 calendar days after receipt of the written request of a majority of the Board. Any such request by a majority of the Board must be sent to the Chairman and the Secretary and must state the purpose or purposes of the proposed meeting. Special meetings of holders of the outstanding Preferred Stock, if any, may be called in the manner and for the purposes provided in the applicable Preferred Stock Designation. (b) Upon the receipt by the Company of a written request executed by the holders of not less than a majority of the outstanding Common Stock (a "Meeting Request"), the Board will (i) call a special meeting of the stockholders for any lawful purpose (which may not, however, include the election of Directors) and (ii) fix a record date for the determination of stockholders entitled to notice of and to vote at such meeting, which record date will not be later than 60 calendar days after the date of receipt by the Company of the Meeting Notice; provided, however, that no separate special meeting of stockholders requested pursuant to a Meeting Request will be required to be convened if (A) the Board calls an annual or special meeting of stockholders to be held not later than 90 calendar days after receipt of such Meeting Request and (B) the purposes of such annual or special meeting include (among any other matters properly brought before the meeting) the purposes specified in such Meeting Request. Notwithstanding any provision of the Certificate of Incorporation or these Bylaws to the contrary, this Bylaw 3(b) may not be amended or repealed by the Board, and no provision inconsistent therewith may be adopted by the Board, without the affirmative vote of the holders of a majority of the Common Stock present or represented by proxy and entitled to vote at any annual or special meeting of stockholders at which such vote is to be taken. 4. Notice. Written notice of every meeting of the stockholders, stating the place, date, and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, will be given not less than 10 nor more than 60 calendar days before the date of the meeting to each stockholder of record entitled to vote at such meeting, except as otherwise provided herein or by law. When a meeting is adjourned to another place, date, or time, written notice need not be given of the adjourned meeting if the place, date, and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the adjournment is for more than 30 calendar days, or if after the adjournment a new record date is fixed for the adjourned meeting, written notice of the place, date, and time of the adjourned meeting must be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. 1 5 5. Inspectors. The Board may appoint one or more inspectors of election to act as judges of the voting and to determine those entitled to vote at any meeting of the stockholders, or any adjournment thereof, in advance of such meeting. The Board may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the presiding officer of the meeting may appoint one or more substitute inspectors. 6. Quorum. Except as otherwise provided by law or in a Preferred Stock Designation, the holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, will constitute a quorum at all meetings of the stockholders for the transaction of business thereat. If, however, such quorum is not present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, will have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At any meeting of the stockholders that has been adjourned three times, the holders of stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, will constitute a quorum for the transaction of business at such third adjourned meeting. 7. Voting. Except as otherwise provided by law or in a Preferred Stock Designation, each stockholder will be entitled at every meeting of the stockholders to one vote for each share of stock having voting power standing in the name of such stockholder on the books of the Company on the record date for the meeting and such votes may be cast either in person or by written proxy. Every proxy must be duly executed and filed with the Secretary. A stockholder may revoke any proxy that is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or another duly executed proxy bearing a later date with the Secretary. The vote upon any question brought before a meeting of the stockholders may be by voice vote, unless otherwise required by these Bylaws or unless the Chairman or the holders of a majority of the outstanding shares of all classes of stock entitled to vote thereon present in person or by proxy at such meeting otherwise determine. Every vote taken by written ballot will be counted by the inspectors of election. When a quorum is present at any meeting, the vote of the holders of a majority of the stock which has voting power present in person or represented by proxy and which has actually voted will decide any question properly brought before such meeting, unless the question is one upon which by express provision of law, the Certificate of Incorporation, a Preferred Stock Designation, or these Bylaws, a different vote is required, in which case such express provision will govern and control the decision of such question. 8. Order of Business. (a) The Chairman, or if there shall then be no elected and acting Chairman, the Chief Executive Officer, will call meetings of the stockholders to order and will act as presiding officer thereof. Unless otherwise determined by the Board prior to the meeting, the presiding officer of the meeting of the stockholders will also determine the order of business and have the authority in his sole discretion to regulate the conduct of any such meeting, including without limitation by imposing restrictions on the persons (other than stockholders of the Company or their duly appointed proxies) who may attend any such stockholders' meeting, by ascertaining whether any stockholder or his proxy may be excluded from any meeting of the stockholders based upon any determination by the presiding officer, in his sole discretion, that any such person has unduly disrupted or is likely to disrupt the proceedings thereat, and by determining the circumstances in which any person may make a statement or ask questions at any meeting of the stockholders. (b) At an annual meeting of the stockholders, only such business will be conducted or considered as is properly brought before the meeting. To be properly brought before an 2 6 annual meeting, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board in accordance with Bylaw 4, (ii) otherwise properly brought before the meeting by the presiding officer, or (iii) otherwise properly requested to be brought before the meeting by a stockholder of the Company. (c) At a special meeting of stockholders, only such business may be conducted or considered as is properly brought before the meeting. To be properly brought before a special meeting, business must be (i) specified in the notice of the meeting (or any supplement thereto) given in accordance with Bylaw 4 or (ii) otherwise properly brought before the meeting by the presiding officer. (d) The determination of whether any business sought to be brought before any annual or special meeting of the stockholders is properly brought before such meeting in accordance with this Bylaw 8 will be made by the presiding officer of such meeting. If the presiding officer determines that any business is not properly brought before such meeting, he will so declare to the meeting and any such business will not be conducted or considered. 9. Written Action. Any Action required or permitted to be taken at any meeting of stockholders may be taken without a meeting if the holders of the required number of outstanding shares of Common Stock consent thereto in writing, such writing or writings are delivered to the Secretary by hand or registered mail, return receipt requested and, in the case of the taking of corporate action without a meeting by less than unanimous written consent, notice of such action is delivered promptly to those stockholders who did not consent in writing and who, if the action had been taken at a meeting would have been entitled to notice of the meeting if the record date for such meeting had been the date that written consents were delivered to the Corporation. DIRECTORS 10. Function. The business and affairs of the Company will be managed under the direction of the Board. The Directors may, but need not, elect from among themselves a Chairman and one or more Vice-Chairmen. 11. Number, Election and Removal of Directors. Subject to the rights, if any, of the holders of any series of Preferred Stock to elect additional Directors under circumstances specified in a Preferred Stock Designation, the number of the Directors of the Company that shall constitute the Board will not be less than three nor more than seventeen and will be fixed from time to time in the manner described in the By-Laws of the Company. At each annual meeting of the stockholders of the Company, Directors will be elected by plurality vote of all votes cast at such meeting to hold office for a term expiring at the next annual meeting of stockholders, or if later until their successors are elected and qualified. Subject to the rights, if any, of the holders of any series of Preferred Stock to elect additional Directors under circumstances specified in a Preferred Stock Designation, Directors may be elected by the stockholders only at an annual meeting of stockholders. Election of Directors of the Company need not be by written ballot unless requested by the presiding officer or by the holders of a majority of the stock which has voting power present in person or represented by proxy at a meeting of the stockholders at which Directors are to be elected. 12. Vacancies and New Directorships. Subject to the rights, if any, of the holders of any series of Preferred Stock to elect additional Directors under circumstances specified in a Preferred Stock Designation, additional directorships may be created, the number of Directors may be 3 7 decreased, and vacancies and newly created directorships resulting from any increase in the number of Directors may be filled by the affirmative vote of holders of records of a majority of the Corporation's issued and outstanding Common Stock. Any Director elected in accordance with the preceding sentence will hold office for the remainder of the full term of the Directors then elected and acting, or until such Director's successor has been elected and qualified. Subject to the rights, if any, of the holders of any series of Preferred Stock in respect of the election additional Directors under circumstances specified in a Preferred Stock Designation, any Director may be removed with or without cause by the affirmative vote of holders of a majority of the Corporation's issued and outstanding shares of Common Stock. 13. Resignation. Any Director may resign at any time by giving written notice of his resignation to the Chairman or the Secretary. Any resignation will be effective upon actual receipt by any such person or, if later, as of the date and time specified in such written notice. 14. Regular Meetings. Regular meetings of the Board shall be held immediately after the annual meeting of the stockholders, at least quarterly, unless the Board shall otherwise determine, and at such other times and places as may from time to time be determined by the Board. Notice of regular meetings of the Board need not be given. 15. Special Meetings. Special meetings of the Board may be called by the Chairman or if there shall then be no elected and acting Chairman, the Chief Executive Officer, on one day's notice to each Director by whom such notice is not waived, given either personally or by mail, telephone, telegram, telex, facsimile, or similar medium of communication, and will be called by the Chairman or the Chief Executive Officer in like manner and on like notice on the written request of two or more Directors. Special meetings of the Board may be held at such time and place either within or without the State of Delaware as is determined by the Board or specified in the notice of any such meeting. 16. Quorum. At all meetings of the Board, a majority of the total number of Directors then in office will constitute a quorum for the transaction of business. Except for the designation of committees as hereinafter provided and except for actions required by these Bylaws or the Certificate of Incorporation to be taken by a different vote of the Board, the act of a majority of the Directors present at any meeting at which there is a quorum will be the act of the Board. If a quorum is not present at any meeting of the Board, the Directors present thereat may adjourn the meeting from time to time to another place, time, or date, without notice other than announcement at the meeting, until a quorum is present. 17. Written Action. Any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting if the required members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes or proceedings of the Board or committee. 18. Participation in Meetings by Telephone Conference. Members of the Board, or any committee designated by the Board, may participate in a meeting of the Board, or any such committee, by means of telephone conference or similar means by which all persons participating in the meeting can hear each other, and such participation in a meeting will constitute presence in person at the meeting. 19. Committees. (a) The Board, by resolution passed by a majority of the Board, including the affirmative vote of the Chairman, will designate an executive committee (the "Executive 4 8 Committee") of not less than three and not more than five members of the Board. The Executive Committee will have and may exercise the powers of the Board, except as otherwise provided by law. Unless otherwise provided in the resolution designating the Executive Committee, sixty percent (60%) of the members of the Executive Committee will constitute a quorum for the transaction of business, and the act of sixty percent (60%) of the members of the Executive Committee will constitute the act of such committee. (b) The Board, by resolution passed by a majority of the Board, including the affirmative vote of the Chairman, may designate one or more additional committees, each such committee to consist of one or more Directors and each to have such lawfully delegable powers and duties as the Board may confer. (c) The Executive Committee and each other committee of the Board will serve at the pleasure of the Board or as may be specified in any resolution from time to time adopted by the Board. The Board may designate one or more Directors as alternate members of any such committee, who may replace any absent or disqualified member at any meeting of such committee. (d) Except as otherwise provided in these Bylaws or by law, any committee of the Board, to the extent provided in Paragraph (a) of this Bylaw or, if applicable, in the resolution of the Board designating such committee, will have and may exercise all the powers and authority of the Board in the direction of the management of the business and affairs of the Company. Any such committee designated by the Board will have such name as may be determined from time to time by resolution adopted by the Board. Except as provided in Paragraph (a) of this Bylaw 18 or in the resolution of the Board designating such committee, a majority of the members of any committee of the Board will constitute a quorum for the transaction of business, and the act of a majority of the members will be the act of such committee. Each committee of the Board may prescribe its own rules for calling and holding meetings and its method of procedure, subject to any rules prescribed by the Board, and will keep a written record of all actions taken by it. (e) All of the members of any committee the primary responsibilities of which include reviewing the professional services to be provided by the Company's independent auditors and the independence of such firm from the Company's management, reviewing financial statements with management or independent auditors, and/or reviewing internal accounting controls, will be directors who are not employees of the Company, or any affiliate thereof. Notwithstanding any provision of the Certificate of Incorporation or these Bylaws to the contrary, this Bylaw 18(e) may not be amended or repealed by the Board, and no provision inconsistent therewith may be adopted by the Board, without the affirmative vote of the holders of a majority of the stock which has voting power present or represented by proxy and entitled to vote at any annual or special meeting of stockholders at which such vote is to be taken. 20. Compensation. The Board, with the approval of the holders of a majority of the shares of Common Stock issued and outstanding, may establish such compensation for, and reimbursement of the expenses of, Directors for membership on the Board and on committees of the Board, attendance at meetings of the Board or committees of the Board, or for other services by Directors to the Company or any of its majority-owned subsidiaries, as the Board may determine. 21. Rules. The Board may adopt rules and regulations for the conduct of its meetings and the management of the affairs of the Company. 5 9 NOTICES 22. Generally. Whenever by law or under the provisions of the Certificate of Incorporation or these Bylaws, notice is required to be given to any Director or stockholder, such notice may be given in writing, by mail, addressed to such Director or stockholder, at his, her, or its address as it appears on the records of the Company, with postage thereon prepaid, and such notice will be deemed to be given three business days after the same is deposited in the United States mail. Notice to Directors may also be given by telephone, telegram, telex, facsimile, or similar medium of communication or as may otherwise be permitted by these Bylaws, and shall be effective upon actual receipt thereof. 23. Waivers. Whenever any notice is required to be given by law or under the provisions of the Certificate of Incorporation or these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time of the event for which notice is to be given, will be deemed equivalent to such notice. Attendance of a person at a meeting will constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. OFFICERS 24. Generally. The officers of the Company will be elected by the Board and will consist of a Chief Executive Officer, and such other officers as the Board may from time to time deem necessary and appropriate, including but not limited to, a President, a Secretary, a Treasurer, one or more Vice Presidents and such other officers as the Board may from time to time determine. Any number of offices may be held by the same person. Any of the offices may be left vacant from time to time as the Board may determine. In the case of the absence or disability of any officer of the Company or for any other reason deemed sufficient by a majority of the Board, the Board may delegate the absent or disabled officer's powers or duties to any other officer or to any Director. 25. Compensation. The compensation of all officers and agents of the Company who are also Directors of the Company will be fixed by the Board or by a committee of the Board. The Board may fix, or delegate the power to fix, the compensation of other officers and agents of the Company to an officer of the Company. 26. Succession. The officers of the Company will hold office until their successors are elected and qualified. Any officer may be removed at any time by the affirmative vote of a majority of the Board. Any vacancy occurring in any office of the Company may be filled by the Board as provided in Bylaw 23. 27. Authority and Duties. Each of the officers of the Company will have such authority and will perform such duties as are customarily incident to their respective offices or as may be specified from time to time by the Chief Executive Officer. STOCK 28. Certificates. Certificates representing shares of stock of the Company will be in such form as is determined by the Board or an authorized committee thereof, subject to applicable 6 10 legal requirements. Each such certificate will be numbered and its issuance recorded in the books of the Company, and such certificate will exhibit the holder's name and the number of shares and will be signed by, or in the name of, the Company by the Chairman or a Vice Chairman or the Chief Executive Officer and the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and will also be signed by, or bear the facsimile signature of, any properly designated transfer agent of the Company. Any or all of the signatures and the seal of the Company, if any, upon such certificates may be facsimiles, engraved, or printed. Such certificates may be issued and delivered notwithstanding that the person whose facsimile signature appears thereon may have ceased to be such officer at the time certificates are issued and delivered. 29. Classes of Stock. The designations, preferences, and relative participating, optional, or other special rights of the various classes of stock or series thereof, and the qualifications, limitations, or restrictions thereof, will be set forth in full or summarized on the face or back of the certificates which the Company issues to represent its stock or, in lieu thereof, such certificates will set forth the office of the Company from which the holders of certificates may obtain a copy of such information. 30. Transfers. Upon surrender to the Company or the transfer agent of the Company of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment, or authority to transfer, it will be the duty of the Company to issue, or cause its transfer agent to issue, a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction upon its books. 31. Lost, Stolen, or Destroyed Certificates. The Secretary may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Company alleged to have been lost, stolen, or destroyed upon the making of an affidavit of that fact, satisfactory to the Secretary, by the person claiming the certificate of stock to be lost, stolen, or destroyed. As a condition precedent to the issuance of a new certificate or certificates, the Secretary may require the owners of such lost, stolen, or destroyed certificate or certificates to give the Company a bond in such sum and with such surety or sureties as the Secretary may direct as indemnity against any claims that may be made against the Company with respect to the certificate alleged to have been lost, stolen, or destroyed or the issuance of the new certificate. 32. Record Dates. (a) In order that the Company may determine the stockholders entitled to notice of or to vote at any meeting of stockholder or any adjournment thereof, the Board may fix a record date, which will not be more than 60 nor less than 10 calendar days before the date of such meeting. If no record date is fixed by the Board, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders will be at the close of business on the calendar day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the calendar next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of the stockholders will apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. (b) In order that the Company may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion, or exchange of stock, or for the purpose of any other lawful action, the Board may fix a record date, which record date will not be more than 60 calendar days prior to such action. If no record date is fixed, the record date for determining 7 11 stockholders for any such purpose will be at the close of business on the calendar day on which the Board adopts the resolution relating thereto. (c) The Company will be entitled to treat the person in whose name any share of its stock is registered as the owner thereof for all purposes, and will not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any other person, whether or not the Company has notice thereof, except as expressly provided by applicable law. INDEMNIFICATION 33. Damages and Expenses. (a) Without limiting the generality or effect of any provision of the Certificate of Incorporation, the Company will to the fullest extent permitted by applicable law as then in effect indemnify any person (an "Indemnitee") who is or was involved in any manner (including without limitation as a party or a witness) or is threatened to be made so involved in any threatened, pending, or completed investigation, claim, action, suit, or proceeding, whether civil, criminal, administrative, or investigative (including without limitation any action, suit, or proceeding by or in the right of the Company to procure a judgment in its favor) (a "Proceeding") by reason of the fact that such person is or was or had agreed to be a Director, officer, employee, or agent of the Company, or is or was serving at the request of the Board or an officer of the Company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other entity, whether or not for profit (including the heirs, executors, administrators, or estate of such person), or anything done or not done by such person in any such capacity, against all expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by such person in connection with such Proceeding. Such indemnification will be a contract right and will include the right to receive payment in advance of any expenses incurred by an Indemnitee in connection with such Proceeding, consistent with the provisions of applicable law as then in effect. (b) The right of indemnification provided in this Bylaw 32 will not be exclusive of any other rights to which any person seeking indemnification may otherwise be entitled, and will be applicable to Proceedings commenced or continuing after the adoption of this Bylaw 32, whether arising from acts or omissions occurring before or after such adoption. (c) In furtherance, but not in limitation of the foregoing provisions, the following procedures, presumptions, and remedies will apply with respect to advancement of expenses and the right to indemnification under this Bylaw 32: (i) All reasonable expenses incurred by or on behalf of an Indemnitee in connection with any Proceeding will be advanced to the Indemnitee by the Company within 30 calendar days after the receipt by the Company of a statement or statements from the Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements will reasonably evidence the expenses incurred by the Indemnitee and, if and to the extent required by law at the time of such advance, will include or be accompanied by an undertaking by or on behalf of the Indemnitee to repay such amounts advanced as to which it may ultimately be determined that the Indemnitee is not entitled. If such an undertaking is required by law at the time of an advance, no security will be required for such undertaking and such undertaking will be accepted without reference to the recipient's financial ability to make repayment. 8 12 (ii) To obtain indemnification under this Bylaw 32, the Indemnitee will submit to the Secretary a written request, including such documentation supporting the claim as is reasonably available to the Indemnitee and is reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification (the "Supporting Documentation"). The determination of the Indemnitee's entitlement to indemnification will be made not less than 60 calendar days after receipt by the Company of the written request for indemnification together with the Supporting Documentation. The Secretary will promptly upon receipt of such a request for indemnification advise the Board in writing that the Indemnitee has requested indemnification. The Indemnitee's entitlement to indemnification under this Bylaw 32 will be determined in one of the following ways: (A) by a majority vote of the Disinterested Directors (as hereinafter defined), if they constitute a quorum of the Board, or, in the case of an Indemnitee that is not a present or former officer of the Company, by any committee of the Board or committee of officers or agents of the Company designated for such purpose by a majority of the Board; (B) by a written opinion of Independent Counsel (as hereinafter defined) if (1) a Change of Control (as hereinafter defined) has occurred and the Indemnitee so requests or (2) in the case of an Indemnitee that is a present or former officer of the Company, a quorum of the Board consisting of Disinterested Directors is not obtainable or, even if obtainable, a majority of such Disinterested Directors so directs; (C) by the stockholders (but only if a majority of the Disinterested Directors, if they constitute a quorum of the Board, presents the issue of entitlement to indemnification to the stockholders for their determination); or (D) as provided in subparagraph (iii) below. In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to clause (B) above, a majority of the Disinterested Directors will select the Independent Counsel, but only an Independent Counsel to which the Indemnitee does not reasonably object; provided, however, that if a Change of Control has occurred, the Indemnitee will select such Independent Counsel, but only an Independent Counsel to which the Board does not reasonably object. (iii) Except as otherwise expressly provided in this Bylaw 32, the Indemnitee will be presumed to be entitled to indemnification under this Bylaw 32 upon submission of a request for indemnification together with the Supporting Documentation in accordance with subparagraph (c)(ii) above, and thereafter the Company will have the burden of proof to overcome that presumption in reaching a contrary determination. In any event, if the person or persons empowered under subparagraph (c)(ii) to determine entitlement to indemnification has not been appointed or has not made a determination within 60 calendar days after receipt by the Company of the request therefor together with the Supporting Documentation, the Indemnitee will be deemed to be entitled to indemnification and the Indemnitee will be entitled to such indemnification unless (A) the Indemnitee misrepresented or failed to disclose a material fact in making the request for indemnification or in the Supporting Documentation or (B) such indemnification is prohibited by law. The termination of any Proceeding described in paragraph (a) of this Bylaw 32, or of any claim, issue, or matter therein, by judgment, order, settlement, or conviction, or upon a plea of nolo contendere or its equivalent, will not, in and of itself, adversely affect the right of the Indemnitee to indemnification or create a presumption that the Indemnitee did not act in good faith and in a manner which the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that the Indemnitee had reasonable cause to believe that his or her conduct was unlawful. (iv) (A) In the event that a determination is made pursuant to subparagraph (c)(ii) that the Indemnitee is not entitled to indemnification under this Bylaw 32, (1) the Indemnitee will be entitled to seek an adjudication of his entitlement to such indemnification either, at the 9 13 Indemnitee's sole option, in (x) an appropriate court of the State of Delaware or any other court of competent jurisdiction or (y) an arbitration to be conducted by a single arbitrator pursuant to the rules of the American Arbitration Association, (2) any such judicial proceeding or arbitration will be de novo and the Indemnitee will not be prejudiced by reason of such adverse determination, and (3) in any such judicial proceeding or arbitration the Company will have the burden of proving that the Indemnitee is not entitled to indemnification under this Bylaw 32. (B) If a determination is made or deemed to have been made, pursuant to subparagraph (c)(ii) or (iii) of this Bylaw 32 that the Indemnitee is entitled to indemnification, the Company will be obligated to pay the amounts constituting such indemnification within five business days after such determination has been made or deemed to have been made and will be conclusively bound by such determination unless (1) the Indemnitee misrepresented or failed to disclose a material fact in making the request for indemnification or in the Supporting Documentation or (2) such indemnification is prohibited by law. In the event that advancement of expenses is not timely made pursuant to subparagraph (c)(i) of this Bylaw 32 or payment of indemnification is not made within five business days after a determination of entitlement to indemnification has been made or deemed to have been made pursuant to subparagraph (c)(ii) or (iii) of this Bylaw 32, the Indemnitee will be entitled to seek judicial enforcement of the Company's obligation to pay to the Indemnitee such advancement of expenses or indemnification. Notwithstanding the foregoing, the Company may bring an action, in an appropriate court in the State of Delaware or any other court of competent jurisdiction, contesting the right of the Indemnitee to receive indemnification hereunder due to the occurrence of any event described in subclause (1) or (2) of this clause (C) (a "Disqualifying Event"); provided, however, that in any such action the Company will have the burden of proving the occurrence of such Disqualifying Event. (C) The Company will be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to the provisions of this subparagraph (c)(iv) that the procedures and presumptions of this Bylaw 32 are not valid, binding, and enforceable and will stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Bylaw 32. (D) In the event that the Indemnitee, pursuant to the provisions of this subparagraph (c)(iv), seeks a judicial adjudication of, or an award in arbitration to, enforce his or her rights under, or to recover damages for breach of, this Bylaw 32, the Indemnitee will be entitled to recover from the Company, and will be indemnified by the Company against, any expenses actually and reasonably incurred by the Indemnitee if the Indemnitee prevails in such judicial adjudication or arbitration. If it is determined in such judicial adjudication or arbitration that the Indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses sought, the expenses incurred by the Indemnitee in connection with such judicial adjudication or arbitration will be prorated accordingly. (iv) For purposes of this paragraph (c): (A) "Change in Control" means the occurrence of any of the following events: (1) The Company is merged, consolidated, or reorganized into or with another corporation or other legal entity, and as a result of such merger, consolidation, or reorganization less than a majority of the combined voting power of the then-outstanding securities of such corporation or entity 10 14 immediately after such transaction are held in the aggregate by the holders of the then-outstanding securities entitled to vote generally in the election of directors ("Voting Stock") of the Company immediately prior to such transaction; (2) The Company sells or otherwise transfers all or substantially all of its assets to another corporation or other legal entity and, as a result of such sale or transfer, less than a majority of the combined voting power of the then-outstanding securities of such other corporation or entity immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale or transfer; (3) If, during any period of two consecutive years, individuals who at the beginning of any such period constitute the Directors cease for any reason to constitute at least a majority thereof; provided, however, that for purposes of this clause (3) each Director who is first elected as provided in Bylaw 10 or Bylaw 11, then still in office who were Directors at the beginning of any such period will be deemed to have been a Director at the beginning of such period. (B) "Disinterested Director" means a Director of the Company who is not or was not a party to the Proceeding in respect of which indemnification is sought by the Indemnitee. (C) "Independent Counsel" means a law firm or a member of a law firm that neither presently is, nor in the past five years has been, retained to represent (1) the Company or the Indemnitee in any matter material to either such party or (2) any other party to the Proceeding giving rise to a claim for indemnification under this Bylaw 32. Notwithstanding the foregoing, the term "Independent Counsel" will not include any person who, under the applicable standards of professional conduct then prevailing under the law of the State of Delaware, would be precluded from representing either the Company or the Indemnitee in an action to determine the Indemnitee's rights under this Bylaw 32. (d) If any provision or provisions of this Bylaw 32 are held to be invalid, illegal, or unenforceable for any reason whatsoever: (i) the validity, legality, and enforceability of the remaining provisions of this Bylaw 32 (including without limitation all portions of any paragraph of this Bylaw 32 containing any such provision held to be invalid, illegal, or unenforceable, that are not themselves invalid, illegal, or unenforceable) will not in any way be affected or impaired thereby and (ii) to the fullest extent possible, the provisions of this Bylaw 32 (including without limitation all portions of any paragraph of this Bylaw 32 containing any such provision held to be invalid, illegal, or unenforceable, that are not themselves invalid, illegal, or unenforceable) will be construed so as to give effect to the intent manifested by the provision held invalid, illegal, or unenforceable. 34. Insurance, Contracts, and Funding. The Company may purchase and maintain insurance to protect itself and any Indemnitee against any expenses, judgments, fines, and amounts paid in settlement or incurred by any Indemnitee in connection with any Proceeding referred to in Bylaw 32 or otherwise, to the fullest extent permitted by applicable law as then in effect. The Company may enter into contracts with any person entitled to indemnification under Bylaw 32 or otherwise, and may create a trust fund, grant a security interest, or use other means (including without limitation a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in Bylaw 32. Notwithstanding anything to the contrary contained in Bylaw 32, in the event that the Company enters into a contract with any person providing for 11 15 indemnification of such person, the provisions of such contract will exclusively govern the Company's obligations in respect of indemnification for or advancement of fees or disbursements of such person's counsel or any other professional engaged by such person. GENERAL 35. Fiscal Year. The fiscal year of the Company will be fixed from time to time by the Board. 36. Seal. The Board may adopt a corporate seal and use the same by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. 37. Reliance upon Books, Reports, and Records. Each Director, each member of a committee designated by the Board, and each officer of the Company will, in the performance of his or her duties, be fully protected in relying in good faith upon the records of the Company and upon such information, opinions, reports, or statements presented to the Company by any of the Company's officers or employees, or committees of the Board, or by any other person or entity as to matters the Director, committee member, or officer believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Company. 38. Time Periods. In applying any provision of these Bylaws that requires that an act be done or not be done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days will be used unless otherwise specified, the day of the doing of the act will be excluded and the day of the event will be included. 39. Amendments. These Bylaws or any of them may be amended in any respect or repealed at any time, only at a meeting of stockholders or by written consent in lieu thereof, provided that any amendment or supplement proposed to be acted upon at any such meeting or any other such action has been described or referred to in the notice of such meeting. 40. Certain Defined Terms. Terms used herein with initial capital letters that are defined in the Certificate of Incorporation are used herein as so defined. 12 EX-4.2 6 FORM OF REGISTRATION RIGHTS AGREEMENT 1 ==================================== REGISTRATION RIGHTS AGREEMENT between IRI International Corporation and Energy Services International Ltd. ==================================== 2 TABLE OF CONTENTS PAGE Recitals.................................................................. 1 Article 1. Definitions and Incorporations by Reference.................. 1 Section 1.1 Definitions.......................................... 1 Section 1.2 Rules of Construction................................ 3 Article 2. Registrations................................................ 4 Section 2.1 Piggy-Back Registration.............................. 4 Section 2.2 Demand Registration.................................. 5 Article 3. Indemnification.............................................. 6 Section 3.1 Indemnification by the Company....................... 6 Section 3.2 Indemnification by Participating Holders............. 7 Section 3.3 Indemnity from Underwriters, etc..................... 8 Section 3.4 Contribution......................................... 8 Section 3.5 Notices of Claims, Etc............................... 8 Article 4. Holdback Agreements.......................................... 9 Section 4.1 Obligations of Holders............................... 9 Section 4.2 Obligations of the Company........................... 9 Article 5. Rule 144 Reporting; Rule 144A................................ 9 Section 5.1 Rule 144 Reporting, Rule 144A........................ 9 Article 6. Registration Procedures...................................... 10 Section 6.1 Procedures........................................... 10 Section 6.2 Obligations of Participating Holders................. 13 Section 6.3 Conditions on Registration........................... 13 Article 7. Miscellaneous................................................ 14 Section 7.1 Acknowledgment and Consent of Significant Holders.... 14 Section 7.2 Remedies............................................. 15 Section 7.3 Amendments and Waivers............................... 15 Section 7.4 Notices.............................................. 15 Section 7.5 Headings............................................. 16 Section 7.6 Governing Law........................................ 16 Section 7.7 Severability......................................... 16 Section 7.8 Entire Agreement..................................... 16 Section 7.9 Transfers............................................ 16 Section 7.10 Counterparts......................................... 16 3 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (together with all amendments and supplements hereto, this "Agreement") dated as of ______________, 1997, is by and among IRI INTERNATIONAL CORPORATION, a corporation incorporated under the laws of Delaware (together with its successors and assigns, the "Company"), and Energy Services International Ltd., a corporation incorporated under the laws of Delaware (the "Initial Significant Holder"). RECITALS In order to facilitate an initial public offering by the Company of its Shares, the Company has agreed to provide registration rights to the Initial Significant Holder and each other Significant Holder with respect to its Shares as set forth in this Agreement. NOW THEREFORE, in consideration of the premises, intending to be legally bound hereby, the Company agrees as follows: ARTICLE 1. DEFINITIONS AND INCORPORATIONS BY REFERENCE Section 1.1 Definitions. For all purposes of this Agreement, the following definitions shall apply: "Affiliate" means with respect to any Person, any other Person directly or indirectly controlling or controlled by or under common control with such Person. For purposes of this definition the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through ownership of voting securities, by contract or otherwise. "Agreement" has the meaning set forth in the preamble hereof. "Company" has the meaning set forth in the preamble hereof. "Designated Transferee" means, with respect to the Initial Significant Holder, any Person who receives Registrable Securities in a transfer from the Initial Significant Holder pursuant to which the Initial Significant Holder transfers to such Person all of its rights to require the Company to file a registration statement hereunder in respect of such Registrable Securities, or as a result of a merger or consolidation of the Company and the Initial Significant Holder. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor statute. "Indemnified Party" has the meaning set forth in Section 3.4 hereof. "Indemnifying Party" has the meaning set forth in Section 3.5 hereof. 4 "Initial Significant Holder" has the meaning set forth in the preamble hereof. "Inspectors" has the meaning set forth in Section 6.1(xi) hereof. "Participating Holder" means any Significant Holder which has Registrable Securities registered for sale pursuant to a Registration Statement. "Person" means any individual, corporation, limited liability company, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, government (or any agency or political subdivision thereof) or other entity of any kind. "Prospectus" means the prospectus included in a Registration Statement, including any and all post-effective amendments and material incorporated by reference. "Public Securities" means Securities of the Company which (a) have been sold pursuant to an effective Registration Statement, or (b) due to the passage of time, method of transfer (including transfers pursuant to Rule 144) or other circumstances can be sold publicly without registration under the Securities Act. "Records" has the meaning set forth in Section 6.1(xi) hereof. "Registrable Securities" means Securities of the Company owned by a Significant Holder which are not Public Securities. "Registration Expenses" means, all expenses of the Company or the Participating Holders, as the case may be, incident to the performance of or compliance with Sections 2.1 and 2.2, respectively, including, without limitation all SEC and any registration and filing fees and expenses; fees and expenses of compliance with securities and blue sky laws (including reasonable fees and disbursements of counsel for the underwriters, if any, in connection with Blue Sky qualifications of the Registrable Securities and the preparation of legal investment surveys, if any) and listing on any national securities exchange or exchanges on which listing may be sought; document and security certificate preparation and printing expenses, messenger and delivery expenses; fees and expenses of any escrow agent, trustee or custodian; any fees charged by securities rating services for rating Registrable Securities; internal expenses of the Company (including, without limitation, all salaries and expenses of the Company's officers and employees performing legal or accounting duties); fees and disbursements of counsel and independent certified public accountants of the Company (including the expenses of any special audit or "cold comfort" letters required by or incident to such performance and compliance); and fees and expenses of any other persons, including special experts, retained by the Company. "Registration Period" has the meaning set forth in Section 6.1(i) hereof. "Registration Statement" means any registration statement of the Company provided for in this Agreement, including the Prospectus and any and all post-effective amendments and material incorporated by reference. 2 5 "SEC" means the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act or the Exchange Act. "Securities" means (i) any Shares and (ii) any securities issued or issuable in respect of or in exchange for Shares by way of split, dividend or other distribution, or any securities issued pursuant to any pro rata distribution with respect to the Shares in connection with a combination of Shares, recapitalization, reclassification, merger, consolidation or exchange offer or other, similar transaction. "Securities Act" means the Securities Act of 1933, as amended, or any successor statute. "Shares" means shares of common stock of the Company, par value $.01 per share. "Significant Holder" means each Person owning Securities of record if such Person executes and delivers to the Company a completed counterpart signature page of this Agreement and is (a) an Affiliate of the Company or (b) owns Securities possessing ten (10) percent or more of the total voting power of an outstanding class of Securities. Section 1.2 Rules of Construction. Unless the context otherwise requires: (a) whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms; (b) the words "include," "includes" and "including" shall be deemed to be followed by the phrase "without limitation"; (c) all terms used in Article 9 of the Uniform Commercial Code as in effect in the State of New York that are used but not defined herein shall have the meaning assigned to such terms therein; (d) references to documents, contracts or agreements shall include any and all supplements and amendments thereto; (e) references to a specific Person shall include the successors and assigns of such Person; (f) references to "applicable laws" shall include statutes, ordinances, rules, regulations, court and administrative decisions and conditions, restrictions and limitations in licenses, permits, approvals and authorizations issued or granted by federal, state or local United States or foreign governmental bodies and agencies; (g) unless otherwise specified in the computation of a period of time from a specified date to a later specified date, the word "from" means "from and including," and the words "to" and "until" each mean "to but excluding"; (h) words in the singular include the plural, and words in the plural include the singular; 3 6 (i) provisions apply to successive events and transactions; and (j) "herein," "hereof" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subsection. ARTICLE 2. REGISTRATIONS Section 2.1 Piggy-Back Registration. (a) If at any time the Company determines to register any Securities for its own account or for the account of any other Person, the Company shall: (i) give each Significant Holder thirty (30) days' written notice thereof (which notice shall include, to the extent available, a list of the jurisdictions in which the Company intends to attempt to qualify such Securities under applicable blue sky or other state securities laws); and (ii) use its reasonable efforts to include in any such registration all Registrable Securities which the Significant Holders, within twenty (20) days of receipt of such notice, request in writing to be registered. The Company shall not be required to comply with any of the provisions of this Section 2.1, however, if a registration will be (i) made pursuant to a registration statement on either Form S-4 or Form S-8 (or any successor forms then in effect), (ii) filed in connection with an exchange offer or a transaction pursuant to Rule 145 of the Securities Act, or (iii) filed after the tenth (10th) anniversary of the date hereof. (b) If the registration of which the Company gives notice is for a public offering involving an underwriting, the Company shall so advise the Significant Holders as a part of the written notice given pursuant to Section 2.1(a) hereof. In such event, any Significant Holder desiring to exercise its right to registration pursuant to this Section 2.1 shall include within its registration request a statement as to whether such Significant Holder desires to (i) participate in such underwriting. All Significant Holders proposing to distribute their Registrable Securities through such underwriting shall (together with the Company and the other Persons distributing their Securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. (c) Notwithstanding any other provision of this Section 2.1, if the managing underwriter or underwriters determine that marketing factors require a limitation on the amount of Securities to be underwritten and so advise the Company in writing, the amount of Securities included in the underwriting shall be that amount, if any, which such underwriters determine can be sold, allocated as follows: (i) first, all of the Securities the Company proposed to sell for its own account, and second, the Securities requested to be registered by Significant Holders and other Persons, which shall be ratably reduced to the extent required by the underwriter's marketing limitation. If any Significant Holder disapproves of the terms 4 7 of any such underwriting, it may elect to withdraw therefrom by written notice to the Company and the managing underwriter or underwriters. (d) The Company shall pay all Registration Expenses in connection with each registration pursuant to this Section 2.1; provided, however, that the Participating Holders who include Registrable Securities in a registration pursuant to this Section 2.1 shall bear the cost of any underwriters' discount or commission relating to such Registrable Securities which are sold. (e) The Company shall not be required by this Section 2.1 to file a registration statement at any time or to prosecute a filing to effectiveness. Section 2.2 Demand Registration. (a) At any time after an initial public offering of Securities by the Company, any one or more Significant Holders may request in writing that the Company effect a registration of Registrable Securities held by such Significant Holder or Significant Holders, so long as at least ten (10) percent of the number of shares of Registrable Securities or aggregate principal amount of Registrable Securities outstanding at such time is requested to be registered by the Significant Holder or Significant Holders. Upon receipt of any such written request, the Company shall: (i) promptly give written notice of the proposed registration to all other Significant Holders; and (ii) use its reasonable efforts to effect as soon as practicable the registration of the Registrable Securities which (x) the Significant Holder or Significant Holders have requested to be registered and (y) the other Significant Holders have, within twenty (20) days of such notice, requested in writing to be registered. The Company may include Securities for its own account or Securities for the account of other Persons having rights to participate in the Company's registrations in any registration and underwriting pursuant to this Section 2.2. (b) Notwithstanding Section 2.2(a) hereof, the Company shall not be required to file a Registration Statement thereunder unless the request is made more than six (6) months after the most recent date on which there was an effective Registration Statement in which Significant Holders were permitted to include Registrable Securities. The Company also shall not be required to file a Registration Statement under Section 2.2(a) if the request is made after the tenth (10th) anniversary of the date of the initial public offering by Securities. In addition, the Company shall not be required to effect more than a total of ten registrations of Securities at the request of a Significant Holder or Significant Holders pursuant to this Section 2.2; provided that in the event a registration requested pursuant to this Section 2.2 fails to become effective (other than as a result of revocation by the Significant Holder or Significant Holders), the request for registration shall be deemed not to have been made for purposes of this Section 2.2. (c) If the registration of which the Significant Holder or Significant Holders give notice is for a public offering involving an underwriting, the Company shall so advise the other Significant Holders as a part of the written notice given pursuant to Section 2.2(a) hereof. In such event, any Significant Holder desiring to exercise its right to registration 5 8 pursuant to this Section 2.2 shall include within its registration request a statement as to whether such Significant Holder desires to participate in such underwriting. All Significant Holders proposing to distribute their Registrable Securities through such underwriting shall (together with the Company and any other Persons distributing their Securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. If the Company will include Securities in such underwriting, the underwriter shall be selected by the Company. If the Company will not include Securities in such underwriting, the underwriter shall be selected by the Significant Holders of a majority of the number of shares of Registrable Securities or aggregate principal amount of Registrable Securities with the consent of the Company, which consent shall not be unreasonably withheld. (d) Notwithstanding any other provision of this Section 2.2, if the managing underwriter or underwriters determine that marketing factors require a limitation on the amount of Securities to be underwritten and so advise the Company in writing, the amount of Securities included in the underwriting shall be that number, if any, which such underwriters determine can be sold, allocated in proportion to the amount of Securities the Significant Holders, the other Persons and the Company requested to be registered. (e) The Company shall pay all Registration Expenses in connection with any registration pursuant to this Section 2.2; provided, however, that the Significant Holders who include Registrable Securities in a registration pursuant to this Section 2.2 shall bear the cost of any underwriters' discount or commission relating to such Registrable Securities which are sold. ARTICLE 3. INDEMNIFICATION Section 3.1 Indemnification by the Company. The Company will indemnify each Participating Holder with respect to whose shares registration has been effected pursuant to Article 2, its agents, each of their respective directors, officers and partners, each underwriter, if any, of the Company's Securities covered by such a registration statement and each Person who controls such Participating Holder or such underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on (i) any untrue statement (or alleged untrue statement) of a material fact contained in any Registration Statement, Prospectus (including without limitation preliminary and supplemental Prospectuses), offering circular or other similar document, or based on 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 in light of the circumstances under which they are made, or (ii) any violation by the Company of any federal, state or common law rule or regulation applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, and will reimburse (an "Expense Reimbursement") each such Participating Holder, its agents, each of their respective directors, officers and partners, and each Person controlling such Participating Holder, each such underwriter, and each Person who controls any such underwriter, for any legal and any 6 9 other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action; provided, however, that the Company 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 on any untrue statement or omission made in a Registration Statement, Prospectus, offering circular or other document in reliance upon and in conformity with information furnished to the Company in writing by such Participating Holder or underwriter specifically for use therein; and provided, further, that, with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary Prospectus, the Company will not be liable to any Participating Holder to the extent that any loss, claim, damage, liability or expense results from the fact that a current copy of the Prospectus was not sent or given to the Person asserting any such loss, claim, damage, liability or expense at or prior to the written confirmation of the sale of the Securities concerned to such Person if it is determined that it was the responsibility of such Participating Holder to provide such Person with a current copy of the Prospectus and such current copy of the Prospectus would have cured the defect giving rise to such loss, claim, damage, liability or expense. The Company shall make such Expense Reimbursements as are periodically requested by a Participating Holder; provided that the Company shall not be required to make such Expense Reimbursements more frequently than once every month; and provided, further, that by accepting such Expense Reimbursements, such Participating Holder agrees to repay the amount of such Expense Reimbursements to the Company if it is finally determined that such Participating Holder is not entitled to indemnification hereunder. Section 3.2 Indemnification by Participating Holders. Each Participating Holder will, if Securities held by such Participating Holder are included in the Securities as to which such registration, qualification or compliance is being effected, indemnify the Company, its agents, each of its directors and officers, each underwriter, if any, of the Company's Securities covered by such a registration statement, each Person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, and each other such Participating Holder, each of its directors, officers and partners and each Person who controls such other Participating Holder, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such Registration Statement, Prospectus (including without limitation preliminary and supplemental Prospectuses), offering circular or other similar document, or based on 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 in light of the circumstances under which they are made, and will reimburse the Company, each such other Participating Holder, its agents, each of their respective directors, officers and partners, and each Person controlling such Participating Holder, each such underwriter, and each Person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such Registration Statement, Prospectus, offering circular or other document in reliance upon and in conformity with information furnished to the Company in writing by such Participating Holder specifically for use therein; provided, however, that, with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary Prospectus, the indemnity agreement contained in this Section 3.2 shall not apply to the extent that any loss, claim, damage, liability or expense 7 10 results from the fact that a current copy of the Prospectus was not sent or given to the Person asserting any such loss, claim, damage, liability or expense at or prior to the written confirmation of the sale of the Securities concerned to such Person if it is determined that it was the responsibility of the Company or other Participating Holder, its agents, any of its directors, officers or partners, or any underwriter to provide such Person with a current copy of the Prospectus and such current copy of the Prospectus would have cured the defect giving rise to such loss, claim, damage, liability or expense. Section 3.3 Indemnity from Underwriters, etc. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above with respect to information so furnished in writing by such Persons specifically for inclusion in any prospectus or registration statement or any amendment or supplement thereto, or any preliminary prospectus. Section 3.4 Contribution. To the extent that the undertaking to indemnify, pay and hold harmless set forth in Sections 3.1 and 3.2 hereof may be unenforceable because it is violative of any law or public policy, each party that would have been required to provide the indemnity shall contribute the maximum portion which it is permitted to pay and satisfy under applicable law, to the payment and satisfaction of all indemnified liabilities incurred by each party entitled to indemnification under this Article 3 (the "Indemnified Party") or any of them; provided that in no event shall a Participating Holder be required to contribute an amount greater than the dollar amount of net proceeds received by such Participating Holder with respect to the sale of any Registrable Securities. Section 3.5 Notices of Claims, Etc. Each Indemnified Party shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided, further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Article 3 unless such failure to give notice shall materially adversely affect the Indemnifying Party in the defense of any such claim or any such litigation. With respect to any claim or litigation being conducted by the Indemnifying Party, no Indemnified Party shall, except with the consent of such Indemnifying Party, consent to entry of any judgment or enter into any settlement of any claim as to which indemnity may be sought. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. 8 11 ARTICLE 4. HOLDBACK AGREEMENTS Section 4.1 Obligations of Holders. If any registration of Registrable Securities shall be in connection with an underwritten public offering, each Participating Holder of Registrable Securities agrees not to effect any public sale or distribution, including any sale pursuant to Rule 144 under the Securities Act, of any Registrable Securities (other than as part of such underwritten public offering), during the fifteen (15) days prior to, and during the ninety (90) day period (or such other period as each Participating Holder agrees with the underwriter of such offering) beginning on, the effective date of such Registration Statement (except as part of such registration), provided that each Participating Holder of Registrable Securities has received written notice of such registration at least fifteen (15) days prior to such effective date. Section 4.2 Obligations of the Company. If any registration of Registrable Securities shall be in connection with an underwritten public offering, the Company agrees (i) not to effect any public sale or distribution of any of its Securities (other than any such sale or distribution of such Securities in connection with any merger or consolidation by the Company or any subsidiary of the Company or the acquisition by the Company or a subsidiary of the Company of the capital stock or substantially all the assets of any other Person or in connection with an employee stock option or other benefit plan) during the fifteen (15) days prior to, and during the ninety (90) day period (or such other period as the underwriters retained by the Company may reasonably request) beginning on, the effective date of such Registration Statement (except as part of such registration) and (ii) that any agreement entered into after the date of this Agreement pursuant to which the Company issues or agrees to issue any privately placed Securities shall contain a provision under which holders of such Securities agree not to effect any public sale or distribution of any such Securities during the period referred to in the foregoing clause (i), including any sale pursuant to Rule 144 under the Securities Act (except as part of such registration, if permitted). ARTICLE 5. RULE 144 REPORTING; RULE 144A Section 5.1 Rule 144 Reporting, Rule 144A. (a) Commencing the date on which and for so long as the Company is subject to the reporting requirements under the Exchange Act and with a view to making available to the Significant Holders the benefits of certain rules and regulations of the SEC which may permit the sale of Securities to the public without registration, the Company agrees, as follows: (i) The Company will make and keep public information available as those terms are understood and defined in Rule 144 under the Securities Act; 9 12 (ii) The Company will file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (iii) The Company will furnish to the Significant Holders forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of Rule 144 under the Securities Act, and of the Securities Act and the Exchange Act, a copy of the most recent annual or quarterly report of the Company filed with the SEC, if any, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as the Significant Holders, or any of them, may reasonably request in availing themselves of any rule or regulation of the SEC allowing the Significant Holders to sell Securities without registration. (b) Commencing the date on which and for so long as the Company is subject to the reporting requirements under the Exchange Act, the Company shall make available to the Significant Holders, from time to time as reasonably requested in order to qualify for the safe harbor exemption of Rule 144A and if not previously made public, such information as is required for such holders to qualify a disposition of Shares for the exemption from registration provided by Rule 144A under the Securities Act. ARTICLE 6. REGISTRATION PROCEDURES Section 6.1 Procedures. If and whenever the Company is required to use its reasonable efforts to effect or cause the registration of any Registrable Securities under Article 2, the Company will as promptly as practicable: (i) With respect to any registration requested pursuant to Section 2.2 hereof, prepare and file with the SEC within a period (the "Registration Period") which, except as provided in Section 6.3 hereof, shall be a ninety (90) day period, after receipt of a request for registration pursuant to Section 2.2 hereof, a Registration Statement on any form for which the Company then qualifies or which counsel for the Company shall deem appropriate, and which form shall be available for the sale of Registrable Securities in accordance with the intended methods of distribution thereof, and use its reasonable efforts to cause such Registration Statement to become and remain effective; (ii) Before filing with the SEC a Registration Statement or Prospectus or any amendments or supplements thereto, the Company will (a) furnish to each Significant Holder of Registrable Securities covered by such Registration Statement copies of all such documents proposed to be filed, and (b) notify each Significant Holder holding Registrable Securities covered by such Registration Statement of any stop order issued or threatened by the SEC and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered; 10 13 (iii) Prepare and file with the SEC such amendments and supplements to such Registration Statement and the Prospectus used in connection therewith as may be necessary to keep such Registration Statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such Registration Statement during the applicable period in accordance with the intended methods of disposition by the Participating Holders thereof set forth in such Registration Statement, but, with respect to registrations effected pursuant to Section 2.2 hereof, in no event for a period of more than five months after such Registration Statement becomes effective; (iv) Furnish to each Significant Holder of Registrable Securities covered by such Registration Statement such reasonable number of copies of such Registration Statement and of each such amendment and supplement thereto (in each case including all exhibits), such reasonable number of copies of the Prospectus included in such Registration Statement (including each preliminary prospectus), in conformity with the requirements of the Securities Act and such other documents, as such Significant Holder may reasonably request in order to facilitate the deposition of the Registrable Securities owned by such Significant Holder; (v) Use its reasonable efforts to register or qualify such Registrable Securities covered by such Registration Statement under such other securities or blue sky laws of such jurisdictions within the United States (including territories and commonwealths thereof) as each Significant Holder of Registrable Securities covered by such Registration Statement shall reasonably request, and do any and all other acts and things which may be reasonably necessary or advisable to enable such Significant Holder or Significant Holders to consummate the disposition in such jurisdictions of the Securities owned by such Significant Holder or Significant Holders, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it is not so qualified, to subject itself to taxation in any such jurisdiction, or to consent to general service of process in any such jurisdiction; (vi) Notify each Significant Holder of Registrable Securities covered by such Registration Statement, at any time when a Prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the Prospectus included in such Registration Statement (including any documents incorporated by reference) as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and at the request of any such Significant Holder prepare and furnish to such Significant Holder a reasonable number of copies of a supplement to or an amendment of such Prospectus as may be necessary; (vii) Advise each Significant Holder of Registrable Securities covered by such Registration Statement, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the SEC suspending the effectiveness of such Registration Statement or the initiation or threatening of any proceeding for that purpose; 11 14 (viii) Otherwise use its reasonable efforts to comply with all applicable rules and regulations of the SEC, and make generally available to the Significant Holders of any Registrable Securities covered by such Registration Statement, earnings statements satisfying the provisions of Section 11(a) of the Securities Act, no later than forty-five (45) days after the end of any twelve (12) month period (or ninety (90) days, if such period is a fiscal year) (a) commencing at the end of any fiscal quarter in which Securities are sold to underwriters in an underwritten offering, or (b) if not sold to underwriters in such an offering, beginning with the first day of the month of the Company's first fiscal quarter commencing after the effective date of a Registration Statement; (ix) Permit any Significant Holder holding Registrable Securities covered by such Registration Statement or Prospectus to withdraw their Securities from such Registration Statement or Prospectus if such Significant Holder has informed the Company that it believes that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or the rules and regulations thereunder, after having been furnished with a copy thereof at least five (5) business days prior to the filing thereof; (x) Enter into such customary agreements (including an underwriting agreement in customary form) and take all such other actions as Significant Holders of a majority in number of shares of Registrable Securities or aggregate principal amount of Registrable Securities being sold or the underwriters retained by such Significant Holders, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Securities, including customary opinions and indemnification; (xi) Make available for inspection by any Significant Holder of any Registrable Securities covered by such Registration Statement, any underwriter participating in any disposition pursuant to such Registration Statement, and any attorney, accountant or other agent retained by any such Significant Holder or underwriter (collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries (collectively, the "Records"), if any, as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's and its subsidiaries' directors, officers and employees to supply all information and respond to all inquiries reasonably requested by any such Inspector in connection with such Registration Statement. Significant Holders of Registrable Securities agree that Records and other information which the Company determines in good faith to be confidential, and of which determination the Inspectors and Significant Holders are so notified, shall not be disclosed by the Inspectors or the Significant Holders unless (a) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in the Registration Statement or (b) the release of such Records is required pursuant to a subpoena or court order. Significant Holders of Registrable Securities agree that they will, upon learning that disclosure of the Records is being sought in a court of competent jurisdiction or by a government agency, give prompt notice to the Company and allow the Company to undertake appropriate action to prevent disclosure of the Records deemed confidential; 12 15 (xii) If requested by the managing underwriters or a Significant Holder of Registrable Securities being sold in connection with an underwritten offering, promptly incorporate in a Prospectus supplement or post-effective amendment such information as the managing underwriters and the Significant Holders of a majority in number of shares of Registrable Securities or aggregate principal amount of Registrable Securities being sold agree should be included therein relating to the plan of distribution with respect to such Registrable Securities including, without limitation, information with respect to the Securities being sold to such underwriters, the purchase price being paid therefor by such underwriters and with respect to any other terms of the underwritten offering of the Registrable Securities to be sold in such offering; and make all required filings of such Prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment. Section 6.2 Obligations of Participating Holders. The Company may require and each Participating Holder of any Securities as to which any registration is being effected agrees to: (i) (a) Furnish promptly to the Company such information regarding such seller and its ownership of Registrable Securities and the distribution of such Securities as the Company may from time to time reasonably request or as shall be required by law in connection therewith and (b) otherwise cooperate with the Company as necessary to enable the Company to comply with the provisions of this Agreement; (ii) Upon receipt of any notice from the Company of the happening of any event of the kind described in Section 6.1(vi) hereof, forthwith discontinue disposition of Securities pursuant to the Registration Statement covering such Securities until such Significant Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 6.1(vi) hereof, and, if so directed by the Company, such Significant Holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such Significant Holder's possession, of the Prospectus covering such Securities current at the time of receipt of such notice; and (iii) (a) Sell such Person's securities on the basis provided in any underwriting arrangements approved by the underwriters and other Persons entitled hereunder to approve such arrangements and (b) complete and execute all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. Section 6.3 Conditions on Registration. The provisions of Section 6.1(i) hereof shall be subject to the following additional conditions, qualifications and limitations: (i) Financial Statement Requirements. If the Company would be required under the Securities Act to include in an applicable form of Registration Statement being filed pursuant to Section 2.2 hereof audited financial statements, other than the Company's fiscal year-end financial statements for its three full fiscal years (or such other number of fiscal years as may then be ordinarily required under SEC 13 16 regulations for registration statements on Form S-1 or its equivalent) immediately preceding the date of such filing (or, if fewer, the number of fiscal years that have elapsed from the date of the Company's inception through the date of such filing), together with any schedules with respect to such financial statements as may be required to be included in the registration statement, the Registration Period shall be a period not to exceed one hundred and fifty (150) days. (ii) Year End Filing. If the Registration Period (as defined in Section 6.1(i)) would otherwise expire within one hundred and twenty (120) days after the beginning of any fiscal year, then the Company may, at its option, defer the filing of a Registration Statement pursuant to Section 6.1(i) hereof to the closest subsequent date which is not less than one hundred and twenty (120) days after the beginning of a fiscal year. (iii) Adverse Impact on the Company. If the Board of Directors of the Company determines that the filing of a Registration Statement pursuant to Section 2.2 would adversely affect the Company, the Company may defer preparing and filing a Registration Statement with the SEC for a period of up to one hundred and twenty (120) days after the date filing would otherwise be required hereunder. (iv) Notice of Deferral; Limitation. In the event of any deferral of registration or other increase in the length of the Registration Period pursuant to this Section 6.3, the Company will promptly give written notice of such deferral, specifying the basis therefor and the anticipated duration thereof, to each Significant Holder whose Securities are covered by or included in such Registration Statement. Notwithstanding the occurrence of any one or more of the events described in this Section 6.3, and notwithstanding anything herein to the contrary, the Registration Period shall not under any circumstances exceed two hundred and ten (210) days. ARTICLE 7. MISCELLANEOUS Section 7.1 Acknowledgment and Consent of Significant Holders. (a) Each Significant Holder hereby acknowledges (i) its Registrable Securities have not been registered under the Securities Act and (ii) its Registrable Securities may not be disposed of unless such disposition is either registered under the Securities Act or is exempt from registration under the Securities Act and other applicable securities laws. (b) Until registered under the Securities Act, all certificates evidencing Shares shall bear a legend in the form substantially as follows: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND ANY SECURITIES THAT MAY BE ISSUED IN RESPECT OF OR IN EXCHANGE FOR SUCH SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER ANY STATE SECURITIES LAWS. 14 17 THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE PROVISIONS OF A SHAREHOLDERS' AGREEMENT DATED AS OF ____________ __, 1997 AND MAY NOT BE TRANSFERRED, SOLD, HYPOTHECATED, PLEDGED, ASSIGNED OR OTHERWISE DISPOSED OF EXCEPT AS THEREIN PROVIDED UNLESS THE SAME IS REGISTERED UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE AND THE COMPANY SHALL HAVE RECEIVED, AT THE EXPENSE OF THE HOLDER HEREOF, EVIDENCE OF SUCH EXEMPTION REASONABLY SATISFACTORY TO THE COMPANY (WHICH MAY INCLUDE, AMONG OTHER THINGS, AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY)." Section 7.2 Remedies. Each Significant Holder of Registrable Securities, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by the Company of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. Section 7.3 Amendments and Waivers. Except as otherwise provided herein, the provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of Significant Holders of at least a majority of the Registrable Securities then outstanding affected by such amendment, modification, supplement, waiver or departure. Section 7.4 Notices. All notices and other communications provided for or permitted hereunder shall be made by hand-delivery or registered first-class mail: (i) if to a Significant Holder of Registrable Securities, at the most current address, and with a copy to be sent to each additional address given by such holder to the Company and the transfer agent for the Registrable Securities; and (ii) if to the Company, at: IRI International Corporation _____________________________ _____________________________ Attention: __________________ 15 18 With a copy to: Jones, Day, Reavis & Pogue 599 Lexington Avenue New York, New York 10022 Attention: William F. Henze II All such notices and communications shall be deemed to have been duly given when delivered by hand, if personally delivered, or two business days after being deposited in the mail, postage prepaid, if mailed. Section 7.5 Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. Section 7.6 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN THAT STATE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. Section 7.7 Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the Significant Holders shall be enforceable to the fullest extent permitted by law. Section 7.8 Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. Section 7.9 Transfers. If an Initial Significant Holder transfers any Registrable Securities to a Designated Transferee, such transferee receiving Registrable Securities in such transfer shall be entitled to execute this Agreement, and upon such execution, shall become, and thereafter shall have the rights and obligations of, a Significant Holder hereunder. Section 7.10 Counterparts. The Registration Rights Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall be deemed to constitute one and the same agreement. 16 19 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. IRI INTERNATIONAL CORPORATION By: _______________________________ Its: ENERGY SERVICES INTERNATIONAL LTD. By: _______________________________ Name: _________________________ Title: ________________________ 17 EX-10.1 7 FORM OF INDEMNIFICATION AGREEMENT 1 INDEMNIFICATION AGREEMENT This Indemnification Agreement ("Agreement") is made as of the ___ day of ______________,199_, by and between IRI International Corporation, a Delaware corporation (the "Company"), and _________________, a director and/or officer of the Company (the "Indemnitee"). In consideration of the mutual agreements herein set forth, the Company and the Indemnitee agree as follows: 1. Certain Definitions. (a) "Board" means the Board of Directors of the Company. (b) "Change in Control" means the occurrence of any of the following events: (i) The Company is merged, consolidated or reorganized into or with another corporation or other entity, and as a result of such merger, consolidation or reorganization less than a majority of the combined voting power of the then-outstanding securities of such corporation or entity immediately after such transaction are held in the aggregate by the holders of Voting Stock immediately prior to such transaction; (ii) The Company sells or otherwise transfers all or substantially all of its assets to another corporation or other entity and, as a result of such sale or transfer, less than a majority of the combined voting power of the then-outstanding securities of such other corporation or entity immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock immediately prior to such sale or transfer; (iii) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report or item therein), each as promulgated pursuant to the Exchange Act, disclosing that any Person, other than an Existing Shareholder, has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 15% or more of the combined voting power of the Voting Stock; or (iv) If, during any period of two consecutive years, individuals who at the beginning of any such period constitute the Board cease for any reason to constitute at least a majority thereof; provided, however, that for purposes of this clause (iv) each Director of the Company who is first elected, or first nominated for election by the Company's stockholders, by a vote of at least majority of the Directors of the Company (or a committee of the Board) then still in office who were Directors of the 2 Company at the beginning of any such period shall be deemed to have been a Director of the Company at the beginning of such period; notwithstanding the provisions of clauses (iii) or (iv) above, unless otherwise determined in a specific case by majority vote of the Board, a Change in Control shall not be deemed to have occurred for purposes of such clauses (iii) or (iv) solely because the Company, any Subsidiary or any employee stock ownership plan or any other employee benefit plan of the Company or any Subsidiary either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act disclosing beneficial ownership by it of shares of Voting Stock, whether in excess of 15% or otherwise, or because the Company reports that a change in control of the Company has occurred or will occur in the future by reason of such beneficial ownership. (c) "DGCL" means the General Corporation Law of the State of Delaware. (d) "Disinterested Director" means a Director of the Company who is not or was not a party to the Proceeding in respect of which indemnification is sought by the Indemnitee. (e) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (f) "Existing Shareholder" shall mean any Person who is the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 15% or more of the combined voting power of the Voting Stock as of the date hereof. (g) "Expense Request" shall have the meaning ascribed thereto in Section 4(e) hereof. (h) "Indemnification Statement" means a sworn statement of request for indemnification substantially in the form of Exhibit 1 attached hereto and made a part hereof. (i) "Independent Counsel" means a law firm or a member of a law firm that neither at the time in question, nor in the five years immediately preceding such time has been, retained to represent (i) the Company or the Indemnitee in any matter material to either such party or (ii) any other party to the Proceeding giving rise to a claim for indemnification under this Agreement. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing under the law of the State of ___________, would be precluded from representing either the Company or the Indemnitee in an action to determine the Indemnitee's rights under this Agreement. (j) "Person" means any "person" as used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act). 2 3 (k) "Proceeding" means any pending, threatened or completed investigation, claim, action, suit or proceeding, whether civil, administrative, investigative or criminal, and any appeals therefrom. (l) "Subsidiary" means any entity in which the Company, directly or indirectly, beneficially owns 50% or more of the voting securities. (m) "Supporting Documentation" shall have the meaning ascribed thereto in Section 4(a) hereof. (n) "Undertaking" means a sworn statement of request for advancement of expenses substantially in the form of Exhibit 2 attached hereto and made a part hereof. (o) "Voting Stock" means stock of the Company of any class or series entitled to vote generally in the election of Directors. 2. Initial Indemnity. (a) The Company shall indemnify the Indemnitee when he or she was or is involved in any manner (including without limitation as a party or as a deponent or witness) or is threatened to be made so involved in any Proceeding (other than a Proceeding by or in the name of the Company), by reason of the fact that he or she is or was or had agreed to become a director or officer of the Company, or is or was serving or had agreed to serve at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or entity, or by reason of any action alleged to have been taken or omitted in such capacity, against any and all costs, charges and expenses, including without limitation attorneys' and others' fees and expenses, actually incurred by the Indemnitee in connection with the defense or settlement thereof or appeal therefrom if the Indemnitee acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or Proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any Proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendre or its equivalent shall not, of itself, adversely affect the right of the Indemnitee to indemnification or create a presumption that the Indemnitee did not satisfy the foregoing standard of conduct to the extent applicable thereto. (b) The Company shall indemnify the Indemnitee when he or she was or is involved in any manner (including without limitation as a party or as a witness) or is threatened to be made so involved in any Proceeding by or in the name of the Company to procure a judgment in its favor by reason of the fact that he or she is or was or had agreed to become a director or officer of the Company, or is or was serving or had agreed to serve at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or entity against any and all costs, charges and expenses, including without limitation attorneys' and others' fees and expenses, actually incurred by the Indemnitee in connection with the defense or settlement thereof or any appeal therefrom if the Indemnitee acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company and except that no indemnification shall be made in respect of any claim, issue or matter as to which the Indemnitee shall have been adjudged to be liable to the Company unless and only to the 3 4 extent that the Court of Chancery or the court in which such Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, the Indemnitee is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that the Indemnitee has been successful on the merits or otherwise, including without limitation the dismissal of a Proceeding without prejudice, in defense of any Proceeding referred to in Sections 2(a) or 2(b) hereof or in defense of any claim, issue or matter therein, he or she shall be indemnified against any and all costs, charges and expenses, including without limitation attorneys' and others' fees and expenses, actually incurred by him in connection therewith. (d) Any indemnification under Sections 2(a) or 2(b) (unless ordered by a court) shall be made by the Company only as authorized in the specific case upon a determination in accordance with Section 4 hereof or any applicable provision of the Certificate of Incorporation of the Company (the "Certificate of Incorporation"), By-Laws of the Company (the "Bylaws"), other agreement, resolution or otherwise. (e) Any and all costs, charges and expenses, including without limitation attorneys' and others' fees and expenses, incurred by the Indemnitee in his or her capacity as a director or officer of the Company in defending a Proceeding shall be paid by the Company in advance of the final disposition of such Proceeding in the manner prescribed by Section 4(e) hereof. (f) Notwithstanding anything in this Agreement to the contrary, the Indemnitee shall not be entitled to indemnification pursuant hereto in connection with any Proceeding initiated by the Indemnitee against the Company or any director or officer of the Company (except for any Proceeding initiated by the Indemnitee pursuant to Section 6 hereof) unless the Company has joined in or consented to the initiation of such Proceeding. (g) The provisions of this Section 2 shall not affect the rights or obligations of the parties under Section 3 hereof. 3. Additional Indemnification. (a) Pursuant to Section 145(f) of the DGCL, without limiting any right which the Indemnitee may have pursuant to Section 2 hereof, the Certificate of Incorporation, the By-Laws, the DGCL, any policy of insurance or otherwise, but subject to the limitations set forth in Section 2(f) hereof and to any maximum permissible indemnity which may exist under applicable law at the time of any request for indemnity hereunder determined as contemplated by this Section 3(a), the Company shall indemnify the Indemnitee against any amount which he or she is or becomes legally obligated to pay relating to or arising out of any claim made against the Indemnitee because of any act, failure to act or neglect or breach of duty, including any actual or alleged error, misstatement or misleading statement, which he or she commits, suffers, permits or acquiesces in while acting in his or her capacity as a director and/or officer of the Company, or, at the request of the Company, as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or entity. The payments which the Company is obligated to make pursuant to this Section 3 shall include without limitation 4 5 damages, judgments, settlements and charges, costs, expenses, expenses of investigation and expenses of defense of Proceedings, and expenses of appeal, attachment or similar bonds; provided, however, that the Company shall not be obligated under this Section 3(a) to make any payment in connection with any claim against the Indemnitee: (i) to the extent of any fine or similar governmental imposition which the Company is prohibited by applicable law from paying which results in a final, nonappealable order; or (ii) to the extent based upon or attributable to the Indemnitee gaining in fact a personal profit to which he or she was not legally entitled, including without limitation profits made from the purchase and sale by the Indemnitee of equity securities of the Company which are recoverable by the Company pursuant to Section 16(b) of the Exchange Act and profits arising from transactions in publicly traded securities of the Company which were effected by the Indemnitee in violation of Section 10(b) of the Exchange Act, including Rule l0b-5 promulgated thereunder. The determination of whether the Indemnitee shall be entitled to indemnification under this Section 3(a) may be, but shall not be required to be, made in accordance with Section 4 hereof. If that determination is so made, it shall be binding upon the Company and the Indemnitee for all purposes. (b) Expenses, including without limitation attorneys' and others' fees and expenses, incurred by Indemnitee in connection with any claim for which the Indemnitee may be entitled to indemnification pursuant to Section 3(a) hereof shall be paid by the Company in advance of the final disposition thereof as authorized in accordance with Section 4(e) hereof. 4. Certain Procedures Relating to Indemnification and Advancement of Expenses. (a) Except as otherwise permitted or required by the DGCL, for purposes of pursuing his or her rights to indemnification under Sections 2(a), 2(b) or 3(a) hereof, as the case may be, the Indemnitee, may, but shall not be required to, submit an Indemnification Statement to the Company, to the attention of the Secretary, stating that he or she is entitled to indemnification hereunder, together with such documents supporting the request as are reasonably available to the Indemnitee and are reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification hereunder (the "Supporting Documentation"). The Company shall promptly upon receipt of any Indemnification Statement advise the Board in writing that the Indemnitee has requested indemnification. (b) The Indemnitee's entitlement to indemnification under Sections 2(a), 2(b) or 3(a), as the case may be, shall be determined not less than 30 calendar days after receipt by the Company of an Indemnification Statement and Supporting Documentation and shall be made in one of the following ways: (i) by a majority vote of the Disinterested Directors, if they constitute a quorum of the Board, or, in the case of an Indemnitee that is not a present or former officer of the Company, by any committee of the Board or committee of officers or agents of the Company designated for such purpose by a majority of the Board; (ii) by a written opinion of Independent Counsel if (A) a Change of Control has occurred and the Indemnitee so requests or (B) in the case of an Indemnitee that is a present or former officer of the Company, a quorum of the Board consisting of Disinterested Directors is not 5 6 obtainable or, even if obtainable, a majority of such Disinterested Directors so directs; (iii) by the stockholders of the Company (but only if a majority of the Disinterested Directors, if they constitute a quorum of the Board, presents the issue of entitlement to indemnification to the stockholders of the Company for their determination); or (iv) as deemed to have been determined in accordance with Section 4(c) hereof. In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to clause (ii) above, a majority of the Disinterested Directors shall select the Independent Counsel, but only an Independent Counsel to which the Indemnitee does not reasonably object; provided, however, that if a Change of Control has occurred, the Indemnitee shall select such Independent Counsel, but only an Independent Counsel to which the Board does not reasonably object. (c) Submission of an Indemnification Statement and Supporting Documentation to the Company pursuant to Section 4(b) hereof shall create a presumption that the Indemnitee is entitled to indemnification under Sections 2(a), 2(b) or 3(a) hereof, as the case may be, and thereafter the Company shall have the burden of proof to overcome that presumption in reaching a contrary determination. In any event, if the Person empowered under Section 4(b) hereof to determine the Indemnitee's entitlement to indemnification has not been appointed or has not made a determination within 30 calendar days after receipt by the Company of such Indemnification Statement and Supporting Documentation, the Indemnitee shall be deemed to be entitled to indemnification unless within such 30-calendar day period the Person empowered under Section 4(b) hereof to determine entitlement to indemnification has made a determination, based upon clear and convincing evidence (sufficient to rebut the foregoing presumption), that the Indemnitee is not entitled to such indemnification and the Indemnitee shall have received notice within such period in writing of such determination, which notice shall (i) disclose with particularity the evidence in support of such determination and (ii) be sworn to by all Persons who participated in the determination and voted to deny indemnification. The provisions of this Section 4(c) are intended to be procedural only and shall not affect the right of the Indemnitee to indemnification under this Agreement and any determination that the Indemnitee is not entitled to indemnification and any failure to make the payments requested in the Indemnification Statement shall be subject to review as provided in Section 6 hereof. (d) If a determination is made or deemed to have been made pursuant to this Section 4 that the Indemnitee is entitled to indemnification, the Company shall pay to the Indemnitee the amounts to which the Indemnitee is entitled within two business days after such determination of entitlement to indemnification has been made or deemed to have been made. (e) For purposes of determining whether to authorize advancement of expenses pursuant to Section 2(e) hereof, the Indemnitee shall submit an Undertaking to the Company, stating that (i) he or she has incurred or will incur actual expenses in defending a Proceeding and (ii) if and to the extent required by law at the time of such advance, he or she undertakes to repay such amounts advanced as to which it may ultimately be determined that the Indemnitee is not entitled. For purposes of requesting advancement of expenses pursuant to Section 3(b) hereof, the Indemnitee may, but shall not be required to, submit an Undertaking or such other form of request as he or she determines to be appropriate (an "Expense Request"). Upon receipt of an Undertaking or Expense Request, as the case may be, the 6 7 Company shall within 30 calendar days make payment of the expenses stated in the Undertaking or Expense Request. No security shall be required in connection with any Undertaking or Expense Request and any Undertaking or Expense Request shall be accepted without reference to the Indemnitee's ability to make repayment. 5. Subrogation; Duplication of Payments. (a) In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. (b) The Company shall not be liable under this Agreement to make any payment in connection with any claim made against the Indemnitee to the extent the Indemnitee has actually received payment (under any insurance policy, the Certificate of Incorporation, the By-Laws or otherwise) of the amounts otherwise payable hereunder. 6. Enforcement. (a) If a claim for indemnification or advancement of expenses made to the Company pursuant to Section 4 hereof is not timely paid in full by the Company as required by Section 4 hereof, the Indemnitee shall be entitled to seek judicial enforcement of the Company's obligations to make such payment. In the event that a determination is made pursuant to Section 4(c) hereof that the Indemnitee is not entitled to indemnification hereunder, (i) the Indemnitee may at any time thereafter seek an adjudication of his or her entitlement to such indemnification or advancement either, at the Indemnitee's sole option, in (A) an appropriate court of the State of Delaware or any other court of competent jurisdiction or (B) an arbitration to be conducted by a single arbitrator pursuant to the rules of the American Arbitration Association; (ii) any such judicial proceeding or arbitration shall be de novo and the Indemnitee shall not be prejudiced by reason of such adverse determination; and (iii) in any such judicial proceeding or arbitration the Company shall have the burden of proving that the Indemnitee is not entitled to indemnification under this Agreement. (b) The Company shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to the provisions of Section 6(a) that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement. (c) In any action brought under Section 6(a) hereof, it shall be a defense to a claim for indemnification pursuant to Sections 2(a) or 2(b) hereof (other than an action brought to enforce a claim for expenses incurred in defending any Proceeding in advance of its final disposition where the Undertaking, if any is required, has been tendered to the Company) that the Indemnitee has not met the standards of conduct which make it permissible under the DGCL for the Company to indemnify the Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Company. Neither the failure of the Company (including any Person empowered under Section 4(b) hereof to determine the Indemnitee's entitlement to indemnification) to have made a determination prior to commencement of such action that indemnification of the Indemnitee is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the 7 8 DGCL, nor an actual determination by the Company (including any person or persons empowered under Section 4(b) hereof to determine the Indemnitee's entitlement to indemnification) that the Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Indemnitee has not met the applicable standard of conduct. (d) It is the intent of the Company that the Indemnitee not be required to incur the expenses associated with the enforcement of his or her rights under this Agreement by litigation or other legal action because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Indemnitee hereunder. Accordingly, if it should appear to the Indemnitee that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any action, suit or proceeding designed (or having the effect of being designed) to deny, or to recover from, the Indemnitee the benefits intended to be provided to the Indemnitee hereunder, the Company irrevocably authorizes the Indemnitee from time to time to retain counsel of his or her choice, at the expense of the Company as hereafter provided, to represent the Indemnitee in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company or any director, officer, stockholder or other Person affiliated with the Company, in any jurisdiction. Regardless of the outcome thereof, the Company shall pay and be solely responsible for any and all costs, charges and expenses, including without limitation attorneys' and others' fees and expenses, incurred by the Indemnitee (i) as a result of the Company's failure to perform this Agreement or any provision thereof or (ii) as a result of the Company or any Person contesting the validity or enforceability of this Agreement or any provision thereof as aforesaid. 7. Liability Insurance and Funding. To the extent the Company maintains an insurance policy or policies providing directors' and officers' liability insurance, the Indemnitee shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any Director or officer of the Company. The Company may, but shall not be required to, create a trust fund, grant a security interest or use other means (including without limitation a letter of credit) to ensure the payment of such amounts as may be necessary to satisfy its obligations to indemnify and advance expenses pursuant to this Agreement. 8. Merger or Consolidation. In the event that the Company shall be a constituent corporation in a merger, consolidation or other reorganization, the Company shall require as a condition thereto, (a) if it shall not be the surviving, resulting or other corporation therein, the surviving, resulting or acquiring corporation to agree to indemnify the Indemnitee to the full extent provided herein, and (b) whether or not the Company is the surviving, resulting or acquiring corporation therein, the Indemnitee shall also stand in the same position under this Agreement with respect to the surviving, resulting or acquiring corporation as he or she would have with respect to the Company if its separate existence had continued. 9. Nonexclusivity and Severability. (a) The right to indemnification and advancement of expenses provided by this Agreement shall not be exclusive of any other rights to which the Indemnitee may be entitled under the Certificate of Incorporation, 8 9 By-Laws, the DGCL, any other statute, insurance policy, agreement, vote of stockholders of the Company or of the Board or otherwise, both as to actions in his or her official capacity and as to actions in another capacity while holding such office, and shall continue after the Indemnitee has ceased to be a director, officer, employee or agent of the Company and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that to the extent the Indemnitee otherwise would have any greater right to indemnification and/or advancement of expenses under any provision of the Certificate of Incorporation or the By-Laws as in effect on the date hereof, the Indemnitee shall be deemed to have such greater right pursuant to this Agreement; and, provided further, that to the extent that any change is made to the DGCL (whether by legislative action or judicial decision), the Certificate of Incorporation and/or the By-Laws that permits any greater right to indemnification and/or advancement of expenses than that provided under this Agreement as of the date hereof, the Indemnitee shall be deemed to have such greater right pursuant to this Agreement. (b) The Company shall not adopt any amendment to the Certificate of Incorporation or By-Laws the effect of which would be to deny, diminish or encumber the Indemnitee's rights to indemnity pursuant to the Certificate of Incorporation, By-Laws, the DGCL or any other applicable law as applied to any act or failure to act occurring in whole or in part prior to the date upon which the amendment was approved by the Board or the Company's stockholders, as the case may be. Notwithstanding the foregoing, in the event that the Company shall adopt any amendment to the Certificate of Incorporation or By-Laws the effect of which is to so deny, diminish or encumber the Indemnitee's rights to such indemnity, such amendment shall apply only to acts or failures to act occurring entirely after the effective date thereof. (c) If any provision or provisions of this Agreement are held to be invalid, illegal or unenforceable for any reason whatsoever: (i) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal, or unenforceable, that are not themselves invalid, illegal, or unenforceable) shall not in any way be affected or impaired thereby and (ii) to the fullest extent possible, the provisions of this Agreement (including without limitation all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 10. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the principles of conflict of laws thereof. 11. Modification; Survival. This Agreement contains the entire agreement of the parties relating to the subject matter hereof. This Agreement may be modified only by an instrument in writing signed by both parties hereto. The provisions of this Agreement shall survive the death, disability or incapacity of the Indemnitee or the termination of the Indemnitee's service as a director of the Company and shall inure to the benefit of the Indemnitee's heirs, executors and administrators. 9 10 12. Certain Interpretations. For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to any employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, the Indemnitee with respect to an employee benefit plan, its participants or beneficiaries; references to the masculine shall include the feminine; references to the singular shall include the plural and vice versa; and if the Indemnitee acted in good faith and in a manner he or she reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan he or she shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to herein. 10 11 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. IRI INTERNATIONAL CORPORATION By__________________________________ [Name] [Title] [INDEMNITEE] ____________________________________ [Name] 11 12 Exhibit 1 INDEMNIFICATION STATEMENT STATE OF _________________) ) SS COUNTY OF ________________) I, ____________________ , being first duly sworn, do depose and say as follows: 1. This Indemnification Statement is submitted pursuant to the Indemnification Agreement, dated as of ________________, 19 __, between ______________ (the Company"), a Delaware corporation, and the undersigned. 2. I am requesting indemnification against charges, costs, expenses, including without limitation attorneys' and others' fees and expenses, judgments, fines and amounts paid in settlement, all of which (collectively, "Liabilities") have been or will be incurred by me in connection with an actual or threatened action, suit, proceeding or claim to which I am a party or am threatened to be made a party. 3. With respect to all matters related to any such action, suit, proceeding or claim, I am entitled to be indemnified as herein contemplated pursuant to the aforesaid Indemnification Agreement. 12 13 4. Without limiting any other rights which I have or may have, I am requesting indemnification against Liabilities which have or may arise out of ________________________________________________________________________________ ___________________________________________. ____________________ Subscribed and sworn to before me, a Notary Public in and for said County and State, this day of , 19 . ____________________ [Seal] My commission expires the ______ day of _____________, 19____. 13 14 Exhibit 2 UNDERTAKING STATE OF _________________) ) SS COUNTY OF ________________) I, ____________________ , being first duly sworn, do depose and say as follows: 1. This Undertaking is submitted pursuant to the Indemnification Agreement, dated as of ________________, 199_, between _________________, (the "Company"), a Delaware corporation, and the undersigned. 2. I am requesting advancement of certain costs, charges and expenses which I have incurred or will incur in defending an actual or pending civil or criminal action, suit, proceeding or claim. 3. I hereby undertake to repay this advancement of expenses if it shall ultimately be determined that I am not entitled to be indemnified by the Company under the aforesaid Indemnification Agreement or otherwise. 4. The costs, charges and expenses for which advancement is requested are, in general, all expenses related to _______________________________________ ________________________________________________________________________________ ______________________________. ____________________ Subscribed and sworn to before me, a Notary Public in and for said County and State, this day of , 19 . ____________________ [Seal] My commission expires the _____ day of _______________, 19__. 14 EX-10.2 8 EMPLOYMENT AGREEMENT - A.C. TEICHGRAEBER 1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement"), dated as of April 17, 1997, is made and entered into by and between Cardwell International Ltd., a Kansas corporation (the "Company"), and A.C. Teichgraeber (the "Executive") and joined in to the extent set forth in the Joinder below by IRI International Corporation, a Delaware corporation ("IRI"). RECITALS A. The Company desires to retain the services of the Executive as a senior executive of the Company; B. Concurrently herewith, the Company, the Executive, IRI and certain other parties have entered into an Acquisition Agreement (the "Acquisition Agreement") pursuant to which, among other things, (1) IRI will acquire all of the issued and outstanding shares of the Company, and (2) the Executive will sell (or cause entities controlled by him to sell) certain property to IRI for cash, subject to the terms and conditions of such Acquisition Agreement; and C. The Executive desires to continue to provide his services to the Company on the terms and conditions herein provided. NOW, THEREFORE, the parties agree as follows: 1. DEFINITIONS. In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters: (a) " AFFILIATE" means IRI and any entity controlling, controlled by or under common control with, IRI. (b) "BASE PAY" means the salary provided for in Section 4(a), as such amount may be adjusted hereunder. (c) "BOARD" means the Board of Directors of the Company or an authorized committee thereof. (d) "CAUSE" means that the Executive shall have committed: (i) an intentional act of fraud, embezzlement or theft in connection with his duties or in the course of his employment with the Company or any Affiliate; (ii) any intentional wrongful damage to property of the Company or any Affiliate; 2 (iii) intentional Unauthorized Disclosure, Use or Solicitation; (iv) intentional wrongful engagement in any Competitive Activity; or (v) any violation of IRI's ethics policy, a copy of which is attached hereto; and any such act shall have been materially harmful to the Company or any Affiliate. (e) "CHANGE IN CONTROL" means the occurrence of any event that causes any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) other than Energy Services International Limited, a Delaware corporation, or any of its Affiliates, individually or in the aggregate, to become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 50% or more of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors of IRI. (f) "COMPETITIVE ACTIVITY" means any act by the Executive that is prohibited under Section 6(a). (g) "DISABILITY" means the Executive's inability, as a result of mental or physical illness, injury or disease, substantially to perform his material duties and responsibilities under this Agreement for a period of 180 consecutive calendar days within any 12-month period. (h) "GOOD REASON" means that, during the Term of Employment, the Company shall have (i) assigned to the Executive any duties or responsibilities materially inconsistent with his position and title or otherwise breached any material provision of this Agreement, and (ii) failed to correct such condition promptly after receipt by the Board of written notice from the Executive requesting correction. (i) "TERM OF EMPLOYMENT" means the period specified in Section 2. (j) "UNAUTHORIZED DISCLOSURE, USE OR SOLICITATION" means any violation or breach by the Executive of any provision of Section 7. 2. TERM OF EMPLOYMENT. The Company hereby continues the employment of the Executive and the Executive hereby accepts such continued employment, effective as of April 17, 1997 and ending on April 16, 2002. The Executive will devote his full time and attention to the business and affairs of the Company and its Affiliates (excluding reasonable amounts of time devoted to - 2 - 3 charitable purposes, other investments and periods in which he is physically or mentally ill, injured or otherwise disabled). 3. TITLE, DUTIES AND RESPONSIBILITIES. During the Term of Employment, the Executive will (a) have the title of President of the Cardwell Division, (b) have and perform such duties and responsibilities substantially similar to those that the Executive had and performed prior to the date of this Agreement and such other duties and responsibilities as may be assigned to him from time to time by the Board, and (c) report directly to the Board. The Executive shall be invited to join the Board of Directors of IRI. 4. COMPENSATION AND BENEFITS. (a) BASE PAY. During the Term of Employment, the Executive will receive Base Pay of $250,000 per year, subject to review by the Company for increases (but not decreases) at the end of each fiscal year during the Term of Employment. Such Base Pay will be payable by the Company in accordance with its regular compensation practices and policies applicable to senior executives of the Company, which practices and policies shall be substantially similar to the practices and policies of IRI applicable to senior executives of IRI. (b) ANNUAL PERFORMANCE BONUS. For each fiscal year of the Company during the Term of Employment, commencing with the fiscal year ending March 31, 1998, the Executive will be eligible to receive an annual performance bonus of up to $600,000, which bonus, if any, shall be determined by the Company, in its sole discretion. Such bonus, if any, will be payable by the Company in cash in accordance with its regular compensation practices and policies applicable to its senior executives, which practices and policies shall be substantially similar to the practices and policies of IRI applicable to senior executives of IRI. (c) SPECIAL BONUS. If a Change in Control occurs during the Term of Employment and while the Executive is still employed hereunder, the Executive may be eligible to receive a special change in control bonus, which bonus, if any, shall be determined by the Company, in its sole discretion. Such bonus, if any, will be payable by the Company in cash in accordance with its regular compensation practices and policies applicable to its senior executives, which practices and policies shall be substantially similar to the practices and policies of IRI applicable to senior executives of IRI. (d) EMPLOYEE BENEFITS. During the Term of Employment, the Executive will be entitled to (i) participate in all employee benefit plans, programs, policies and arrangements sponsored, maintained or contributed to by the Company, subject to and in accordance with the terms and conditions of such plans, programs, policies and arrangements as they relate to similarly situated senior executives of the Company, which plans, programs, policies and arrangements shall be substantially similar to those of IRI - 3 - 4 applicable to senior executives of IRI, and (ii) receive all other benefits and perquisites provided or made available by the Company to its senior executives, subject to and in accordance with the terms and conditions of such benefits and perquisites as they relate to senior executives of the Company, which other benefits and perquisites shall be substantially similar to those of IRI applicable to senior executives of IRI. (e) EXPENSES. During the Term of Employment, the Executive will be entitled to reimbursement of all documented reasonable travel and entertainment expenses incurred by him on behalf of the Company in the course of the performance of his duties hereunder, subject to and in accordance with the terms and conditions of the Company's expense reimbursement policies as they relate to senior executives of the Company, which terms and conditions shall be substantially similar to those of IRI applicable to senior executives of IRI. (f) VACATION. During the Term of Employment, the Executive will be entitled to vacation, in addition to paid public holidays as observed by the Company from year to year, subject to and in conformity with the Company's regular compensation practices and policies as they relate to its senior executives, which vacation practices and policies shall be substantially similar to those of IRI applicable to senior executives of IRI. (g) OTHER AGREEMENTS. The rights and obligations of the parties under the Acquisition Agreement will be governed by the terms and conditions of each such agreement and will not be enlarged or affected hereby. 5. TERMINATION OF EMPLOYMENT. Subject to the provisions of this Section 5, the Executive's employment hereunder will be for the Term of Employment specified in Section 2. (a) TERMINATION FOR ANY REASON OTHER THAN GOOD REASON OR TERMINATION FOR CAUSE. The Company may, with or without notice, terminate the Executive's employment hereunder for Cause. If the Executive's employment is terminated effective during the Term of Employment by the Executive for any reason other than Good Reason or by the Company for Cause, the Executive will thereupon no longer be entitled to any compensation or benefits provided herein, and nothing herein will limit the Company's rights against the Executive or the rights and obligations of the parties under Sections 6 and 7. (b) TERMINATION FOR ANY REASON OTHER THAN CAUSE OR DISABILITY. The Company may terminate the Executive's employment hereunder for any reason or for no reason. If the Executive's employment is terminated effective during the Term of Employment by the Executive for Good Reason or by the Company for any reason other than Cause or the Executive's Disability, the Executive will be entitled to receive payments equal to his Base Pay (at - 4 - 5 the rate in effect on the effective date of his termination of employment) for the remainder of the Term of Employment, payable in a single lump sum on the effective date of such termination in accordance with the Company's regular compensation practices and policies applicable to senior executives of the Company, which practices and policies shall be substantially similar to those of IRI applicable to senior executives of IRI. (c) DEATH OR DISABILITY. If the Executive's employment is terminated effective during the Term of Employment as a result of his death or by the Company as a result of his Disability, the Executive (or, in the event of his death, his designated beneficiary) will be entitled to receive payments equal to his Base Pay (at the rate in effect on the effective date of his termination of employment) for a period of six (6) months following such effective date, payable in accordance with the Company's regular compensation practices and policies applicable to senior executives, which practices and policies shall be substantially similar to those of IRI applicable to senior executives of IRI, but less any amounts paid to the Executive under any long-term disability plan, program, policy or arrangement of the Company or any Affiliate. (d) COMPENSATION AND BENEFITS ON TERMINATION. Except as otherwise provided in Section 5(b) and (c), all compensation and benefits payable to the Executive pursuant to Section 4 (other than compensation and benefits previously earned and, if applicable, vested under the terms of this Agreement or any other applicable employee benefit plan, program, policy, arrangement or agreement) will terminate as of the effective date of the Executive's termination of employment, and the Executive hereby waives any claims for damages arising in connection with his termination of employment pursuant to this Agreement. 6. COMPETITIVE ACTIVITY. (a) During the period ending on the later of (i) the effective date of the Executive's termination of employment, and (ii) the last day of the Term of Employment, the Executive will not: (i) enter into or engage in any business which competes with the business of the Company or any Affiliate within the Restricted Territory (as defined below); or (ii) solicit customers, business patronage or orders for, or sell, any product or products, or service or services, in competition with, or for any business, wherever located, that competes with the business of the Company or any Affiliate within the Restricted Territory; or (iii) divert, entice or otherwise take away any customers, business or patronage or orders of - 5 - 6 the Company or any Affiliate within the Restricted Territory, or attempt to do so; or (iv) promote or assist, financially or otherwise, any firm, person, association, partnership, corporation or other entity engaged in any business which competes with the business of the Company or any Affiliate within the Restricted Territory. (b) For the purposes of this Section 6, the Restricted Territory will be defined as and limited to: (i) the geographic areas within a 50 mile radius of any and all Company and/or Affiliate locations in, to or for which the Executive worked, was assigned or had any responsibility (either direct or supervisory) at the time of the termination of his employment or at any time during the two year period prior to such termination; (ii) any customer, whether within or outside of the geographic area described in paragraph (i) above, for or to which the Executive worked, was assigned or had any direct responsibility at the time of the termination of his employment or at any time during the two year period prior to such termination; or (iii) the following pipe, threading, drilling and/or equipment companies and their subsidiaries and affiliates, whether within or outside of the geographic area described in paragraph (i) above: Dreco, Inc.; National-Oilwell L.P.; and Continental Emsco Co. 7. UNAUTHORIZED DISCLOSURE, USE OR SOLICITATION. (a) The Executive will keep in strict confidence, and will not, directly or indirectly, at any time during or after his employment with the Company, disclose, furnish, disseminate, make available or, except in the course of performing his duties of employment hereunder, use any trade secrets or confidential business and technical information of the Company or its customers, vendors, employees or Affiliates, without limitation as to when or how Executive may have acquired such information. Such confidential information will include, without limitation, the Company's products, designs, processes, methods and techniques, management, training, marketing and selling manuals, promotional materials, training courses and other training and instructional materials, vendor, product and service information, customer lists, other customer information and other trade information. Executive specifically acknowledges that all such confidential information - 6 - 7 including, without limitation, customer lists, other customer information and other trade information, whether reduced to writing, maintained on any form of electronic media, or maintained in the mind or memory of Executive and whether compiled by the Company, any Affiliate and/or Executive, derives independent economic value from not being readily known to or ascertainable by proper means by others who can obtain economic value from its disclosure or use, that reasonable efforts have been made by the Company and its Affiliates to maintain the secrecy of such information, that such information is the sole property of the Company and that any retention and use of such information by Executive during his employment with the Company (except in the course of performing his duties and obligations hereunder) or after the termination of his employment will constitute a misappropriation of the trade secrets of the Company or any Affiliate. (b) Executive agrees that upon termination of Executive's employment with the Company, for any reason, Executive will return to the Company, in good condition, all property of the Company, including without limitation, the originals and all copies of all product, design, process, management, training, marketing and selling manuals, promotional materials, other training and instructional materials, vendor, product and service information, customer lists, other customer information and all other selling, service and trade information and equipment. In the event that such items are not so returned, the Company will have the right to charge Executive for all reasonable damages, costs, attorneys' fees and other expenses incurred in searching for, taking, removing and/or recovering such property. (c) Executive acknowledges that to the extent permitted by law, all work papers, reports, documentation, drawing, photographs, negatives, tapes and masters therefor, prototypes and other materials (hereinafter, "items"), including, without limitation, any and all such items generated and maintained on any form of electronic media, generated by Executive during his employment with the Company will be considered a "work made for hire" and that ownership of any and all copyrights in any and all such items will belong to the Company (other than any such items generated by the Executive solely for Cardwell Concrete Systems, Inc.). The item will recognize the Company as the copyright owner, will contain all proper copyright notices, e.g., "(year of creation) Cardwell International Ltd. All rights reserved," and will be in condition to be registered or otherwise placed in compliance with registration or other statutory requirements throughout the world. (d) Executive hereby assigns and agrees to assign to the Company, its successors, assigns or nominees, all of his rights to any discoveries, inventions and improvements, whether patentable or not, made, conceived or suggested, either solely or - 7 - 8 jointly with others, by Executive while in the Company's employ, whether or not made, conceived or suggested in the course of his employment with the use of the Company's time, materials or facilities or in any way within or related to the existing or contemplated scope of the Company's business (other than any discoveries, inventions or improvements made, conceived or suggested by Executive while in the employ or service of Cardwell Concrete Systems, Inc.). Any discovery, invention or improvement relating to any subject matter with which the Company was concerned during Executive's employment and made, conceived or suggested by Executive, either solely or jointly with others, within one year following termination of Executive's employment under this Agreement or any successor agreements will be irrebuttably presumed to have been so made, conceived or suggested in the course of such employment with the use of the Company's time, materials or facilities. Upon request by the Company with respect to any such discoveries, inventions or improvements, Executive will execute and deliver to the Company, at any time during or after his employment, all appropriate documents for use in applying for, obtaining and maintaining such domestic and foreign patents as the Company may desire, and all proper assignments therefor, when so requested, at the expense of the Company, but without further or additional consideration. (e) Executive may use the Company's trade names, trademarks and/or service marks in connection with the sale of the Company's products and services, but only in such manner and for such purposes as may be authorized by the Company. Upon any termination of this Agreement, Executive immediately will cease the use of such trade names, trademarks and/or service marks and eliminate them wherever they have been used or incorporated by Executive. (f) During the period ending on the later of (i) the effective date of the Executive's termination of employment, and (ii) the last day of the Term of Employment, the Executive will not directly or indirectly solicit or endeavor to cause any employee of the Company or any Affiliate to leave his employment or induce or attempt to induce any such employee to breach any employment agreement with the Company or any Affiliate or otherwise interfere with the employment of any such employee, other than in the course of performing his duties and obligations hereunder. 8. SUCCESSORS AND BINDING AGREEMENT. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance reasonably satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, - 8 - 9 including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor will thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (c) This Agreement is personal in nature and neither of the parties hereto will, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 8(a) and (b). Without limiting the generality or effect of the foregoing, the Executive's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Executive's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 8(c), the Company will have no liability to pay any amount so attempted to be assigned, transferred or delegated. 9. ADDITIONAL REMEDIES. Notwithstanding any other remedy herein provided for or available, if the Executive should be in breach of any of the provisions of Section 6 or 7, the Executive expressly acknowledges and agrees that the Company will be entitled to injunctive relief or specific performance, without the necessity of proving damages, in addition to any other remedies it may have. 10. REPRESENTATION. Each party represents and warrants that it is fully authorized and empowered to enter into this Agreement and that the performance of its obligations under this Agreement will not violate any agreement between it and any other person or entity. 11. SEVERABILITY. In the event that any provision or portion of this Agreement is determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement will be unaffected thereby and will remain in full force and effect to the fullest extent permitted by law. 12. NOTICES. For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five - 9 - 10 business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or three business days after having been sent by a nationally recognized overnight courier service such as Federal Express or UPS, addressed to the Company (to the attention of the Secretary of the Company) at its principal executive office and to the Executive at his principal residence (with a copy to any counsel designated by the Executive), or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address will be effective only upon receipt. 13. DISCLOSURE. During the Term of Employment and for one year thereafter, Executive will communicate the contents of this Agreement to any person, firm, association, partnership, corporation or other entity which he or she intends to be employed by, associated with, or represent and which is engaged in a business that is competitive to the business of the Company. 14. MODIFICATIONS AND WAIVERS. No provision of this Agreement may be modified or discharged unless such modification or discharge is authorized by the Board and is agreed to in writing, signed by the Executive and by an officer of the Company duly authorized by the Board. No waiver by either party hereto of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the time or at any prior or subsequent time. 15. ENTIRE AGREEMENT. This Agreement constitutes the entire understanding of the parties hereto with respect to its subject matter, except as such parties may otherwise agree in a writing which specifies that it is an exception to the foregoing. This Agreement supersedes all prior agreements between the parties hereto with respect to its subject matter and, notwithstanding any other provision hereof, will become effective upon the execution of this Agreement by the parties. 16. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Kansas, without giving effect to the principles of conflict of laws of such State. 17. COUNTERPARTS. This Agreement may be executed simultaneously in one or more counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same instrument. 18. HEADINGS, ETC. The section headings contained in this Agreement are for convenience of reference only and will not be deemed to control or affect the meaning or construction of any provision of this Agreement. References to Sections are to Sections in this Agreement. - 10 - 11 19. ARBITRATION; EXCLUSIVE REMEDY. Any and all claims, disputes or controversies involving the Executive and the Company arising under or in connection with this Agreement (except those arising under Sections 6 and 7 hereof) which cannot be resolved amicably by the Company and the Executive shall be submitted to and finally settled by arbitration as provided in this Section 19. There shall be one arbitrator who shall be selected from a list of five arbitrators who are experienced in the oil field servicing and drilling manufacturing industries, two of whom shall be chosen by the Company, two of whom shall be chosen by the Executive and one of whom shall be chosen by the American Arbitration Association. The arbitrator shall be selected from this list pursuant to the following procedure: the Executive and the Company shall each alternately strike one person's name off the list until there is only one person's name remaining, which person shall be the arbitrator. The location of any such arbitration proceedings shall be in the city where the arbitrator's office is located, and such proceedings shall be conducted in accordance with the Arbitration Rules of the American Arbitration Association currently in effect unless the Executive and the Company mutually agree otherwise. The award rendered by the arbitrator shall be final. An action or proceeding to enforce such award may be brought in any court of competent jurisdiction. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. Cardwell International Ltd. By: ____________________________________ Its: ______________________________ _________________________________________ A.C. Teichgraeber - 11 - 12 JOINDER IRI hereby unconditionally and absolutely guarantees the due and punctual performance by the Company of its payment obligations under this Agreement. IRI hereby represents and warrants to the Executive that it is authorized and empowered to enter into this guarantee and that the performance of its obligations under this guarantee will not violate any agreement between it and any other person or entity. IRI INTERNATIONAL CORPORATION By:_____________________________ Name: Munawar H. Hidayatallah Title: Executive President - Corporate Development - 12 - EX-10.3 9 CREDIT AGREEMENT DATED MARCH 31, 1997 1 ================================================================================ CREDIT AGREEMENT AMONG ENERGY SERVICES INTERNATIONAL LTD., IRI INTERNATIONAL CORPORATION, THE SEVERAL LENDERS FROM TIME TO TIME PARTIES HERETO, CREDIT LYONNAIS NEW YORK BRANCH, AS ADMINISTRATIVE AGENT AND LEHMAN COMMERCIAL PAPER INC., AS ADVISOR, ARRANGER AND SYNDICATION AGENT DATED AS OF MARCH 31, 1997 ================================================================================ 2 TABLE OF CONTENTS Page ---- SECTION 1. DEFINITIONS.................................................. 2 1.1 Defined Terms................................................ 2 1.2 Other Definitional Provisions................................ 23 SECTION 2. AMOUNT AND TERMS OF COMMITMENTS.............................. 23 2.1 Tranche A Term Loans......................................... 23 2.2 Procedure for Tranche A Term Loan Borrowing.................. 23 2.3 Tranche B Term Loans......................................... 24 2.4 Procedure for Tranche B Term Loan Borrowing.................. 24 2.5 Revolving Credit Commitments................................. 25 2.6 Procedure for Revolving Credit Borrowing..................... 25 2.7 Commitment Fees, etc. ....................................... 26 2.8 Repayment of Loans; Evidence of Debt......................... 26 2.9 Optional Termination or Reduction of Commitments............. 27 2.10 Optional Prepayments......................................... 28 2.11 Mandatory Prepayments and Commitment Reductions.............. 28 2.12 Conversion and Continuation Options.......................... 30 2.13 Minimum Amounts and Maximum Number of Eurodollar Tranches.... 31 2.14 Interest Rates and Payment Dates............................. 31 2.15 Computation of Interest and Fees............................. 31 2.16 Inability to Determine Interest Rate......................... 32 2.17 Pro Rata Treatment and Payments; Use of Proceeds............. 32 2.18 Illegality................................................... 33 2.19 Requirements of Law.......................................... 34 2.20 Taxes........................................................ 35 2.21 Indemnity.................................................... 37 2.22 Change of Lending Office..................................... 38 SECTION 3. LETTERS OF CREDIT............................................ 38 3.1 L/C Commitment............................................... 38 3.2 Procedure for Issuance of Letter of Credit................... 38 3.3 Fees, Commissions and Other Charges.......................... 39 3.4 L/C Participations........................................... 39 3.5 Reimbursement Obligation of the Borrower..................... 40 3.6 Obligations Absolute......................................... 41 3.7 Letter of Credit Payments.................................... 41 3.8 Applications................................................. 41 SECTION 4. REPRESENTATIONS AND WARRANTIES............................... 41 4.1 Financial Condition.......................................... 42 4.2 No Change.................................................... 44 -i- 3 Page ---- 4.3 Corporate Existence; Compliance with Law..................... 44 4.4 Corporate Power; Authorization; Enforceable Obligations...... 44 4.5 No Legal Bar................................................. 45 4.6 No Material Litigation....................................... 45 4.7 No Default................................................... 45 4.8 Ownership of Property; Liens................................. 45 4.9 Intellectual Property........................................ 45 4.10 No Burdensome Restrictions................................... 45 4.11 Taxes........................................................ 45 4.12 Federal Regulations.......................................... 46 4.13 ERISA........................................................ 46 4.14 Investment Company Act; Other Regulations.................... 46 4.15 Subsidiaries................................................. 47 4.16 Purpose of Loans; Limitations on Use......................... 47 4.17 Environmental Matters. ...................................... 47 4.18 Accuracy of Information...................................... 48 4.19 Security Documents........................................... 49 4.20 Solvency..................................................... 50 4.21 Acquisition Documents........................................ 50 4.22 Labor Matters................................................ 50 SECTION 5. CONDITIONS PRECEDENT......................................... 50 5.1 Conditions to Initial Extension of Credit.................... 50 5.2 Conditions to Tranche B Term Loans........................... 55 5.3 Conditions to Each Extension of Credit....................... 56 SECTION 6. AFFIRMATIVE COVENANTS........................................ 57 6.1 Financial Statements......................................... 57 6.2 Certificates; Other Information.............................. 58 6.3 Payment of Obligations....................................... 59 6.4 Conduct of Business and Maintenance of Existence, etc. ...... 59 6.5 Maintenance of Property; Insurance........................... 59 6.6 Inspection of Property; Books and Records; Discussions....... 59 6.7 Notices...................................................... 60 6.8 Environmental Laws........................................... 60 6.9 Interest Rate Protection..................................... 61 6.10 Further Assurances........................................... 61 6.11 Additional Collateral........................................ 61 6.12 Construction Credit Support Policy........................... 63 SECTION 7. NEGATIVE COVENANTS........................................... 63 7.1 Financial Condition Covenants................................ 63 7.2 Limitation on Indebtedness................................... 65 7.3 Limitation on Liens.......................................... 66 7.4 Limitation on Guarantee Obligations.......................... 67 -ii- 4 Page ---- 7.5 Limitation on Fundamental Changes............................ 68 7.6 Limitation on Sale of Assets................................. 68 7.7 Limitation on Restricted Payments............................ 69 7.8 Limitation on Capital Expenditures........................... 69 7.9 Limitation on Investments, Loans and Advances................ 70 7.10 Limitation on Optional Payments and Modifications of Debt Instruments and Organizational Documentation, etc.......... 70 7.11 Limitation on Transactions with Affiliates................... 71 7.12 Limitation on Sales and Leasebacks........................... 71 7.13 Limitation on Changes in Fiscal Year......................... 71 7.14 Limitation on Negative Pledge Clauses........................ 71 7.15 Limitation on Lines of Business.............................. 72 7.16 Limitation on Consolidated Lease Expense..................... 72 7.17 Limitation on Activities of the Parent....................... 72 7.18 Limitation on Foreign Subsidiaries........................... 72 SECTION 8. EVENTS OF DEFAULT............................................ 72 SECTION 9. THE ARRANGER; THE ADMINISTRATIVE AGENT AND THE SYNDICATION AGENT................. 76 9.1 Appointment.................................................. 76 9.2 Delegation of Duties......................................... 76 9.3 Exculpatory Provisions....................................... 76 9.4 Reliance by Arranger and Administrative Agent................ 77 9.5 Notice of Default............................................ 77 9.6 Non-Reliance on Arranger, Administrative Agent and Other Lenders.................................................... 78 9.7 Indemnification.............................................. 78 9.8 Arranger and Administrative Agent in Their Individual Capacities................................................. 79 9.9 Successor Administrative Agent............................... 79 9.10 The Syndication Agent........................................ 79 SECTION 10. MISCELLANEOUS................................................ 80 10.1 Amendments and Waivers....................................... 80 10.2 Notices...................................................... 81 10.3 No Waiver; Cumulative Remedies............................... 82 10.4 Survival..................................................... 82 10.5 Payment of Expenses and Taxes................................ 82 10.6 Successors and Assigns; Participations and Assignments....... 83 10.7 Adjustments; Set-off......................................... 86 10.8 Counterparts................................................. 87 10.9 Severability................................................. 87 10.10 Integration.................................................. 87 10.11 GOVERNING LAW................................................ 87 10.12 Submission To Jurisdiction; Waivers.......................... 87 10.13 Acknowledgements............................................. 88 -iii- 5 Page ---- 10.14 WAIVERS OF JURY TRIAL........................................ 88 10.15 Confidentiality.............................................. 88 -iv- 6 Page ---- SCHEDULES: 1.1A Commitments and Addresses of Lenders 1.1B Mortgaged Property 1.1C Tranche A Term Loan Amortization Schedule 1.1D Tranche B Term Loan Amortization Schedule 4.15 Subsidiaries 4.16 Refinanced Indebtedness 4.17 Environmental Matters 4.19(b) UCC Filing Jurisdictions 4.19(c) Mortgage Filing Jurisdictions 7.3 Liens EXHIBITS: A Form of Master Guarantee and Collateral Agreement B Form of Mortgage C-1 Form of Revolving Credit Note C-2 Form of Tranche A Term Note C-3 Form of Tranche B Term Note D Form of Closing Certificate E Legal Opinion of Jones, Day, Reavis & Pogue F Form of Exemption Certificate G Form of Assignment and Acceptance H Form of Cash Collateral Agreement -v- 7 CREDIT AGREEMENT, dated as of March 31, 1997, among ENERGY SERVICES INTERNATIONAL LTD., a Delaware corporation (the "Parent"), IRI INTERNATIONAL CORPORATION, a Delaware corporation (the "Borrower"), the several banks and other financial institutions or entities from time to time parties to this Agreement (the "Lenders"), CREDIT LYONNAIS NEW YORK BRANCH, as Administrative Agent for the Lenders hereunder (in such capacity, the "Administrative Agent"), LEHMAN COMMERCIAL PAPER INC., as advisor and arranger with respect to the credit facilities contained herein (the "Arranger") and LEHMAN COMMERCIAL PAPER INC., as syndication agent with respect to the credit facilities contained herein (the "Syndication Agent"). W I T N E S S E T H WHEREAS, the Borrower, which is a wholly owned subsidiary of the Parent, intends to acquire substantially all of the assets of Bowen Tools Inc. ("Bowen") and its affiliates (the "Bowen Acquisition"), all of the capital stock of Cardwell International Ltd. ("Cardwell"; together with Bowen, the "Acquired Companies") and certain assets related to Cardwell's business which are owned by affiliates of Cardwell (the "Cardwell Acquisition"; and together with the Bowen Acquisition, the "Acquisitions"); WHEREAS, the Acquisitions will be financed, in part, with the proceeds of senior subordinated notes in the aggregate principal amount of $31,000,000 to be issued by the Borrower (the "Interim Notes") and, in part, with the proceeds of the credit facilities provided for herein; WHEREAS, pending the consummation of the Cardwell Acquisition and the satisfaction of certain conditions precedent related thereto, proceeds of certain of the Tranche A Term Loans borrowed by the Borrower on the Closing Date will be held by the Administrative Agent in the Cash Collateral Account (as defined herein); and WHEREAS, all the obligations of the Borrower and the other Loan Parties (as defined herein) under the Loan Documents (as defined herein) (a) will be secured by, among other things, (i) a security interest in certain assets and property of the Loan Parties and (ii) a pledge of all the issued and outstanding capital stock of each of the Borrower's direct and indirect Subsidiaries, and (b) will be unconditionally guaranteed by the Parent and each of the Parent's direct and indirect Subsidiaries; NOW, THEREFORE, the parties hereto hereby agree as follows: 8 SECTION 1. DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Acquired Companies": as defined in the recitals hereto. "Acquisitions": as defined in the recitals hereto. "Acquisition Agreements": collectively (a) the Bowen Asset Purchase Agreement and (b) the Cardwell Acquisition Agreement. "Acquisition Documents": as defined in Section 4.21. "Administrative Agent": as defined in the preamble hereto. "Affiliate": as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" of a Person means the power, directly or indirectly, either to (a) vote 10% or more of the securities having ordinary voting power for the election of directors of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. "Aggregate Outstanding Revolving Extensions of Credit": as to any Revolving Credit Lender at any time, an amount equal to the sum of (a) the aggregate principal amount of all Revolving Credit Loans made by such Lender then outstanding and (b) such Lender's Revolving Credit Percentage of the L/C Obligations then outstanding. "Agreement": this Credit Agreement, as amended, supplemented or otherwise modified from time to time. "Applicable Margin": for each Type of Loan, the rate per annum set forth under the relevant column heading below:
Eurodollar Base Rate Loans Loans --------------- ---------- Revolving Credit Loans 1% 2-3/4% Term Loans 1-1/2% 3-1/4%
provided that if (a) on May 31, 1997, the Eligible Backlog (as certified to the Lenders pursuant to Section 6.2(f)) is less than the Backlog Threshold or (b) on May 31, 1997, such certificate is not provided to the Lenders in accordance with Section 6.2(f), then 9 each of the foregoing Applicable Margins shall be increased by .50% effective May 31, 1997. "Application": an application, in such form as the Issuing Lender may specify from time to time, requesting the Issuing Lender to issue a Letter of Credit. "Arranger": as defined in the preamble hereto. "Asset Sale": any sale or other disposition by the Parent, the Borrower or any of their Subsidiaries of any asset or assets of the Parent, the Borrower or such Subsidiary (including any sale and leaseback of assets and any mortgage of real property other than pursuant to a Mortgage); provided that any sale of assets expressly permitted by clauses (a), (c) or (d) of Section 7.6 shall not constitute an "Asset Sale" hereunder. "Assignee": as defined in Section 10.6(c). "Available Revolving Credit Commitment": as to any Lender at any time, an amount equal to the excess, if any, of (a) such Lender's Revolving Credit Commitment over (b) such Lender's Aggregate Outstanding Revolving Extensions of Credit. "Backlog Threshold": (i) $70,000,000 less (ii) the amount of Rig Orders constituting Eligible Backlog on the Closing Date but not constituting Eligible Backlog on May 31, 1997 solely because performance has commenced under such rig orders during such period. "Base Rate": for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. For purposes hereof: "Prime Rate" shall mean the rate of interest per annum established from time to time by the Administrative Agent as its prime rate in effect at its principal office in New York City (the Prime Rate not being intended to be the lowest rate of interest charged by the Administrative Agent in connection with extensions of credit to debtors); "Base CD Rate" shall mean the sum of (a) the product of (i) the Three-Month Secondary CD Rate and (ii) a fraction, the numerator of which is one and the denominator of which is one minus the C/D Reserve Percentage and (b) the C/D Assessment Rate; "Three-Month Secondary CD Rate" shall mean, for any day, the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day shall not be a Business Day, the next preceding Business Day) by the Board through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Board, be published in Federal Reserve Statistical Release H.15(519) during the week following such day), or, if such rate shall not be so reported on such day or such next preceding Business Day, the average of the 10 secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 A.M., New York City time, on such day (or, if such day shall not be a Business Day, on the next preceding Business Day) by the Administrative Agent from three New York City negotiable certificate of deposit dealers of recognized standing selected by it; and "Federal Funds Effective Rate" shall mean, for any day, the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by it. Any change in the Base Rate due to a change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate shall be effective as of the opening of business on the effective day of such change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate, respectively. "Base Rate Loans": Loans the rate of interest applicable to which is based upon the Base Rate. "Board": the Board of Governors of the Federal Reserve System of the United States (or any successor). "Borrower": as defined in the preamble hereto. "Borrowing Date": any Business Day specified in a notice pursuant to Section 2.4 or 2.6 as a date on which the Borrower requests the Lenders to make Loans hereunder. "Bowen": as defined in the recitals hereto. "Bowen Asset Purchase Agreement": the Asset Purchase Agreement by and among the Bowen Sellers and the Borrower dated as of January 20, 1997, and all agreements, assignments, schedules, instruments and other documents executed in connection therewith, together with such amendments, waivers, supplements and other modifications thereto as shall be reasonably satisfactory to the Arranger, the Administrative Agent and the Lenders. "Bowen Sellers": collectively, Bowen Tools, Inc. - Delaware, Bowen and Air Liquide America Corporation. "Business": as defined in Section 4.17(b). "Business Day": (i) for all purposes other than as covered by clause (ii) below, a day other than a Saturday, Sunday or other day on which commercial banks in New 11 York City are authorized or required by law to close and (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, any day which is a Business Day described in clause (i) and which is also a day for trading by and between banks in Dollar deposits in the interbank eurodollar market. "Capital Expenditures": for any period, with respect to any Person, the aggregate of all expenditures by such Person and its Subsidiaries for the acquisition or leasing (pursuant to a Financing Lease) of fixed or capital assets or additions to equipment (including replacements, capitalized repairs and improvements during such period) which should be capitalized under GAAP on a consolidated balance sheet of such Person and its Subsidiaries. "Capital Lease Obligations": as to any Person, the obligations of such Person to pay rent or other amounts under any Financing Lease and, for the purposes of this Agreement, the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP. "Capital Stock": any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants, rights or options to purchase any of the foregoing. "Cardwell": as defined in the recitals hereto. "Cardwell Acquisition Agreement": the Acquisition Agreement dated as of March 20, 1997 by and among the Cardwell Sellers and the Borrower, and all agreements, assignments, schedules, instruments and other documents executed in connection therewith (including any material employment agreements), together with such amendments, waivers, supplements and other modifications thereto as shall be reasonably satisfactory to the Arranger, the Administrative Agent and the Lenders. "Cardwell Deposit Amount": as defined in Section 2.2. "Cardwell Purchase Price": the "Purchase Price" as defined in the Cardwell Acquisition Agreement. "Cardwell Sellers": collectively, the Teichgraeber Family Limited Partnership, L.P., the Arthur C. Teichgraeber Charitable Remainder Trust, A.C. Teichgraeber, Greenwood Pipe and Threading Company and Edco Drilling Company Inc. "Cash Collateral Account": as defined in the Cash Collateral Agreement. 12 "Cash Collateral Agreement": the Cash Collateral Agreement to be executed and delivered by the Borrower, substantially in the form of Exhibit H, as the same may be amended, supplemented or otherwise modified from time to time. "Cash Equivalents": (a) marketable direct obligations issued by, or unconditionally guaranteed by, the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition; (b) certificates of deposit, time deposits, eurodollar time deposits or overnight bank deposits having maturities of six months or less from the date of acquisition issued by any Lender or by any commercial bank organized under the laws of the United States or any state thereof having combined capital and surplus of not less than $250,000,000; and (c) commercial paper of (i) an issuer rated at least A-1 by Standard & Poor's Ratings Services or P-1 by Moody's Investors Service, Inc., or carrying an equivalent rating by a nationally recognized rating agency, if both of the two named rating agencies cease publishing ratings of commercial paper issuers generally or (ii) the holding company of any Lender, and, in either case, maturing within six months from the date of acquisition. "C/D Assessment Rate": for any day as applied to any Base Rate Loan, the annual assessment rate in effect on such day which is payable by a member of the Bank Insurance Fund maintained by the Federal Deposit Insurance Corporation (the "FDIC") classified as well-capitalized and within supervisory subgroup "B" (or a comparable successor assessment risk classification) within the meaning of 12 C.F.R. Section 327.3(d) (or any successor provision) to the FDIC (or any successor) for the FDIC's (or such successor's) insuring time deposits at offices of such institution in the United States. "C/D Reserve Percentage": for any day as applied to any Base Rate Loan, that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board, for determining the maximum reserve requirement for a Depositary Institution (as defined in Regulation D of the Board as in effect from time to time) in respect of new non-personal time deposits in Dollars having a maturity of 30 days or more. "Closing Date": the date on which the conditions precedent set forth in Section 5.1 shall be satisfied. "Code": the Internal Revenue Code of 1986, as amended. "Collateral": all assets of the Loan Parties, now owned or hereafter acquired, upon which a Lien is purported to be created by any Security Document. "Commercial Letter of Credit": as defined in Section 3.1(a). 13 "Commitment": as to any Lender, the sum of the Tranche A Term Loan Commitment, the Tranche B Term Loan Commitment and the Revolving Credit Commitment of such Lender. "Commonly Controlled Entity": an entity, whether or not incorporated, which is under common control with the Borrower within the meaning of Section 4001 of ERISA or is part of a group which includes the Borrower and which is treated as a single employer under Section 414 of the Code. "Confidential Information Memorandum": the Confidential Information Memorandum dated as of February, 1997 with respect to the Borrower and the credit facilities provided for herein. "Consolidated Current Assets": at a particular date, all amounts (other than cash and Cash Equivalents) which would, in conformity with GAAP, be set forth opposite the caption "total current assets" (or any like caption) on a consolidated balance sheet of the Borrower and its Subsidiaries at such date. "Consolidated Current Liabilities": at a particular date, all amounts which would, in conformity with GAAP, be set forth opposite the caption "total current liabilities" (or any like caption) on a consolidated balance sheet of the Borrower and its Subsidiaries at such date, but excluding (a) the current portion of any Funded Debt of the Borrower and its Subsidiaries and (b) without duplication of clause (a) above, all Indebtedness consisting of Revolving Credit Loans to the extent otherwise included therein. "Consolidated Debt": at any date, the aggregate principal amount of all Indebtedness of the Borrower and its Subsidiaries at such date, determined on a consolidated basis in accordance with GAAP. "Consolidated EBITDA": for any period, Consolidated Net Income for such period plus, without duplication and to the extent reflected as a charge in the statement of such Consolidated Net Income for such period, the sum of (a) total income tax expense, (b) interest expense, amortization or writeoff of debt discount and debt issuance costs and commissions, discounts and other fees and charges associated with Indebtedness (including the Loans), (c) depreciation and amortization expense, (d) amortization of intangibles (including, but not limited to, goodwill) and organization costs, (e) any extraordinary expenses or losses (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, losses on sales of assets outside of the ordinary course of business), (f) any other noncash charges, (g) if applicable, restructuring charges, write-off of goodwill and licensing agreements and (h) all non-recurring fees and expenses incurred or paid by the Borrower in connection with the Acquisitions, the transactions contemplated by this Agreement, the issuance of the Interim Notes and the Permanent Notes and the 14 other transactions contemplated by the Interim Note Documentation and the Permanent Note Documentation and minus, to the extent included in the statement of such Consolidated Net Income for such period, the sum of (a) interest income, (b) any extraordinary income or gains (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, gains on the sales of assets outside of the ordinary course of business) and (c) any other noncash income, all as determined on a consolidated basis; provided that with respect to any calculation of Consolidated EBITDA for purposes of Section 7.1 for the four fiscal quarters ending on the following dates the following amounts (the "Added EBITDA Amount") shall be added to Consolidated EBITDA on such dates: (A) June 30, 1997 - $5,500,000; (B) September 30, 1997 - $4,100,000; (C) December 31, 1997 - $2,800,000 and (D) March 31, 1998 - $1,400,000; and, provided, further, that, for purposes of clarifying the preceding proviso, it is understood that on any date specified in such proviso for which Consolidated EBITDA is determined with respect to a period of four fiscal quarters only the Added EBITDA Amount in respect of such date shall be added to the calculation of Consolidated EBITDA and not the Added EBITDA Amount with respect to a prior date within such period of four fiscal quarters. "Consolidated Fixed Charge Coverage Ratio": as of the last day of any period, the ratio of (a) Consolidated EBITDA for such period to (b) the sum of (without duplication) (i) income tax expense actually paid in cash during such period, (ii) Capital Expenditures actually paid in cash for such period, excluding Capital Expenditures financed with the proceeds of Indebtedness permitted to be incurred under Section 7.2(c) and Capital Expenditures paid for with the proceeds of any Reinvestment Deferred Amount, (iii) Consolidated Interest Expense for such period, (iv) scheduled payments required to have been made during such period on account of principal of Indebtedness of the Borrower or any of its Subsidiaries (including the Loans but excluding optional principal prepayments in respect of Revolving Credit Loans) and (v) Consolidated Lease Expense. "Consolidated Interest Coverage Ratio": for any period, the ratio of (a) Consolidated EBITDA for such period to (b) Consolidated Interest Expense for such period. "Consolidated Interest Expense": for any period, total interest expense (including that attributable to Capital Lease Obligations), both expensed and capitalized, of the Borrower and its Subsidiaries for such period with respect to all outstanding Indebtedness of the Borrower and its Subsidiaries (including, without limitation, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs under Interest Rate Protection Agreements to the extent such net costs are allocable to such period in accordance with GAAP), determined on a consolidated basis in accordance with GAAP, net of interest income of the Borrowers and its Subsidiaries for such period (determined on a consolidated basis in accordance with GAAP). 15 "Consolidated Lease Expense": for any period, the aggregate amount of fixed and contingent rentals payable by the Borrower and its Subsidiaries, determined on a consolidated basis in accordance with GAAP, for such period with respect to leases of real and personal property; provided that amounts included in Capital Lease Obligations shall be excluded from Consolidated Lease Expense. "Consolidated Leverage Ratio": as of the last day of any period, the ratio of (a) Consolidated Debt as of such day to (b) Consolidated EBITDA for such period. "Consolidated Net Income": for any period, the consolidated net income (or loss) of the Borrower and its Subsidiaries, determined on a consolidated basis in accordance with GAAP; provided that there shall be excluded (a) the income (or deficit) of any Person accrued prior to the date it becomes a Subsidiary of the Borrower or is merged into or combined with the Borrower or any of its Subsidiaries, (b) the income (or deficit) of any Person (other than a Subsidiary of the Borrower) in which the Borrower or any of its Subsidiaries has an ownership interest, except to the extent that any such income is actually received by the Borrower or such Subsidiary in the form of dividends or similar distributions and (c) the undistributed earnings of any Subsidiary of the Borrower to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary is not at the time permitted by the terms of any Contractual Obligation (other than under any Loan Document) or Requirement of Law applicable to such Subsidiary. "Consolidated Net Worth": at a particular date, all amounts which would, in conformity with GAAP, be included on a consolidated balance sheet of the Borrower and its Subsidiaries under stockholders' equity as of such date. "Consolidated Working Capital": the excess, if any, of Consolidated Current Assets over Consolidated Current Liabilities. "Contractual Obligation": as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "Default": any of the events specified in Section 8, whether or not any requirement for the giving of notice, the lapse of time, or both, has been satisfied. "Dollars" and "$": dollars in lawful currency of the United States. "Domestic Subsidiary": any Subsidiary of the Parent or the Borrower organized under the laws of any jurisdiction within the United States. "Eligible Backlog": the aggregate contract value (determined in accordance with the Borrower's prior practices) of the Rig Orders (i) for which the Borrower or 16 any of its Subsidiaries has entered into a definitive binding contract, (ii) under which the Borrower or any of its Subsidiaries has not commenced to perform and (iii) which are supported by all required documentation (including standby letters of credit) satisfactory to the Lenders. "Environmental Laws": any and all foreign, Federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any Governmental Authority or other Requirements of Law (including common law) regulating, relating to or imposing liability or standards of conduct concerning the protection of human health or the environment, as now or may at any time hereafter be in effect. "ERISA": the Employee Retirement Income Security Act of 1974, as amended from time to time. "Eurocurrency Reserve Requirements": for any day as applied to a Eurodollar Loan, the aggregate (without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Board) maintained by a member bank of the Federal Reserve System. "Eurodollar Base Rate": with respect to each day during each Interest Period pertaining to a Eurodollar Loan, the rate per annum of interest determined on the basis of the rate for deposits in Dollars for a period equal to such Interest Period commencing on the first day of such Interest Period appearing on Page 3750 of the Telerate screen as of 11:00 A.M., London time, two Business Days prior to the beginning of such Interest Period. In the event that such rate does not appear on Page 3750 of the Telerate Service (or otherwise on such service), the "Eurodollar Base Rate" for purposes of this definition shall be determined by reference to such other comparable publicly available service for displaying eurodollar rates as may be selected by the Administrative Agent or, in the absence of such availability, by reference to the rate at which the Administrative Agent is offered Dollar deposits at or about 11:00 A.M., New York City time, two Business Days prior to the beginning of such Interest Period in the interbank eurodollar market where its eurodollar and foreign currency and exchange operations are then being conducted for delivery on the first day of such Interest Period for the number of days comprised therein. "Eurodollar Loans": Loans the rate of interest applicable to which is based upon the Eurodollar Rate. 17 "Eurodollar Rate": with respect to each day during each Interest Period pertaining to a Eurodollar Loan, a rate per annum determined for such day in accordance with the following formula (rounded upward to the nearest 1/100th of 1%): Eurodollar Base Rate ---------------------------------------- 1.00 - Eurocurrency Reserve Requirements "Eurodollar Tranche": the collective reference to Eurodollar Loans that are Tranche A Term Loans, Tranche B Term Loans or Revolving Credit Loans, as the case may be, the then current Interest Periods with respect to all of which begin on the same date and end on the same later date (whether or not such Loans shall originally have been made on the same day). "Event of Default": any of the events specified in Section 8, provided that any requirement for the giving of notice, the lapse of time, or both, has been satisfied. "Excess Cash Flow": for any fiscal year of the Borrower, the excess of (a) the sum, without duplication, of (i) Consolidated Net Income for such fiscal year, (ii) the net decrease, if any, in Consolidated Working Capital during such fiscal year and (iii) to the extent deducted in computing such Consolidated Net Income, (A) non-cash interest expense, depreciation and amortization, (B) extraordinary non-cash losses, (C) deferred income tax expense, (D) non-cash losses in connection with asset dispositions whether or not constituting extraordinary losses, and (E) non-cash ordinary losses over (b) the sum, without duplication, of (i) the aggregate amount of permitted cash Consolidated Capital Expenditures during such fiscal year, (ii) the net increase, if any, in Consolidated Working Capital during such fiscal year, (iii) the aggregate amount of payments of principal in respect of any Indebtedness not prohibited hereunder during such fiscal year (other than (x) prepayments of Revolving Credit Loans not accompanied by reductions of the Revolving Credit Commitments, (y) mandatory prepayments pursuant to Section 2.11 and (z) payments in respect of short-term Indebtedness) and (iv) to the extent added in computing such Consolidated Net Income, (A) deferred income tax credit, (B) extraordinary non-cash gains, (C) non-cash gains in connection with asset dispositions whether or not constituting extraordinary gains and (D) non-cash ordinary gains. "Excess Cash Flow Application Date": as defined in Section 2.11(d). "Financing Lease": any lease (or other arrangement conveying the right to use) of property, real or personal, the obligations of the lessee in respect of which are required in accordance with GAAP to be capitalized on a balance sheet of the lessee. "Foreign Subsidiary": any Subsidiary of the Parent or the Borrower organized under the laws of any jurisdiction outside the United States. 18 "Funded Debt": as to any Person, all Indebtedness of such Person that matures more than one year from the date of its creation or matures within one year from such date but is renewable or extendible, at the option of such Person, to a date more than one year from such date or arises under a revolving credit or similar agreement that obligates the lender or lenders to extend credit during a period of more than one year from such date, including, without limitation, all current maturities and current sinking fund payments in respect of such Indebtedness whether or not required to be paid within one year from the date of its creation and, in the case of the Borrower, all current maturities in respect of the Loans. "GAAP": generally accepted accounting principles in the United States in effect from time to time. "Governmental Authority": any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantee Obligation": as to any Person (the "guaranteeing person"), any obligation of (a) the guaranteeing person or (b) another Person (including, without limitation, any bank under any letter of credit) to induce the creation of which the guaranteeing person has issued a reimbursement, counterindemnity or similar obligation, in either case guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations (the "primary obligations") of any other third Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of the guaranteeing person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; provided, however, that the term Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lower of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing person's maximum reasonably anticipated liability in respect thereof as determined by the Borrower in good faith. 19 "Hedge Obligations": as defined in the Master Guarantee and Collateral Agreement. "Indebtedness": of any Person at any date, without duplication, (a) all indebtedness of such Person for borrowed money, (b) all obligations of such Person for the deferred purchase price of property or services (other than current trade payables and accrued expenses incurred in the ordinary course of such Person's business), (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person, (e) all Capital Lease Obligations of such Person, (f) all obligations, contingent or otherwise, of such Person as an account party under acceptance, letter of credit or similar facilities (other than obligations in respect of undrawn letters of credit securing current trade payables or performance obligations incurred in the ordinary course of business), (g) all obligations of such Person to purchase, redeem, retire or otherwise acquire for value any Capital Stock of such Person, (h) all Guarantee Obligations of such Person in respect of Indebtedness of others, (i) all net payment obligations, contingent or otherwise, of such Person in respect of Hedge Obligations and (j) all obligations of the kind referred to in clauses (a) through (i) above secured by any Lien on property (including, without limitation, accounts and contract rights) owned by such Person, whether or not such Person has assumed or become liable for the payment of such obligation (but if not so assumed, the amount of such obligation shall be deemed not to exceed the fair market value of the property subject to the Lien). "Insolvency": with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA. "Insolvent": pertaining to a condition of Insolvency. "Insurance Policies": (i) the insurance policies the Borrower is required to maintain pursuant to Section 6.5 and (ii) the insurance policies the Borrower is required to maintain pursuant to Section 5.3 of the Master Guarantee and Collateral Agreement. "Interest Payment Date": (a) as to any Base Rate Loan, the last day of each March, June, September and December to occur while such Loan is outstanding, (b) as to any Eurodollar Loan having an Interest Period of three months or less, the last day of such Interest Period, (c) as to any Eurodollar Loan having an Interest Period longer than three months, each day which is three months, or a whole multiple thereof, after the first day of such Interest Period and the last day of such Interest Period. "Interest Period": as to any Eurodollar Loan, (a) initially, the period commencing on the borrowing or conversion date, as the case may be, with respect to such Eurodollar Loan and ending one, two, three or six months thereafter, as selected by the Borrower in its notice of borrowing or notice of conversion, as the case may be, 20 given with respect thereto; and (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Loan and ending one, two, three or six months thereafter, as selected by the Borrower by irrevocable notice to the Administrative Agent not less than three Business Days prior to the last day of the then current Interest Period with respect thereto; provided that all of the foregoing provisions relating to Interest Periods are subject to the following: (i) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period that would otherwise extend beyond the Revolving Credit Termination Date (in the case of Revolving Credit Loans) or beyond the Term Loan Termination Date (in the case of the Term Loans) shall end on the Revolving Credit Termination Date or the Term Loan Termination Date, as applicable; (iii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month; and (iv) the Borrower shall select Interest Periods so as not to require a payment or prepayment of any Eurodollar Loan during an Interest Period for such Loan. "Interest Rate Protection Agreement": any interest rate protection agreement, interest rate futures contract, interest rate option, interest rate cap or other interest rate hedge arrangement, to or under which the Borrower or any Subsidiary is a party or a beneficiary on the date hereof or becomes a party or a beneficiary after the date hereof. "Interest Rate Protection Agreement Obligation": in respect of any Loan Party, the obligation of such Loan Party under an Interest Rate Protection Agreement to make a payment to the counterparty thereto in the event of a termination event or similar occurrence thereunder. "Interim Note Documentation": collectively (a) the Senior Subordinated Increasing Rate Note Purchase Agreement dated as of March 31, 1997 among the Borrower, the Parent, certain Subsidiaries, Strategic Resource Partners Fund, a Delaware statutory business trust, and certain financial institutions party thereto as lenders and (b) all other agreements, schedules, certificates and other documents executed in connection therewith, including, but not limited to, any guarantees of the Interim Notes, as the same may be entered into, modified, amended or supplemented from time to time in accordance with the terms hereof and thereof. 21 "Interim Notes": as defined in the recitals hereto. "Issuing Lender": Credit Lyonnais New York Branch, in its capacity as issuer of any Letter of Credit and any other Lender designated as "Issuing Lender" hereunder by the Borrower with the consent of the Arranger, the Administrative Agent and such Lender. "L/C Commitment": $20,000,000. "L/C Fee Payment Date": the last day of each March, June, September and December and the last day of the Revolving Credit Commitment Period. "L/C Obligations": at any time, an amount equal to the sum of (a) the aggregate then undrawn and unexpired amount of the then outstanding Letters of Credit and (b) the aggregate amount of drawings under Letters of Credit which have not then been reimbursed pursuant to Section 3.5. "L/C Participants": the collective reference to all the Revolving Credit Lenders other than the Issuing Lender. "Lenders": as defined in the preamble hereto (which shall include the Issuing Lender). "Letters of Credit": as defined in Section 3.1(a). "Lien": any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge or other security interest or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement and any capital lease having substantially the same economic effect as any of the foregoing) and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction. "Loan": any loan made by any Lender pursuant to this Agreement. "Loan Documents": this Agreement, the Notes, the Applications and the Security Documents. "Loan Parties": the Parent, the Borrower and each Subsidiary of the Parent or the Borrower which is, or is required by the terms hereof to be, a party to a Loan Document. 22 "Master Guarantee and Collateral Agreement": the Master Guarantee and Collateral Agreement to be executed and delivered by the Parent, the Borrower and each of their Subsidiaries, substantially in the form of Exhibit A, as the same may be amended, supplemented or otherwise modified from time to time. "Material Adverse Effect": a material adverse effect on (a) the consummation of either of the Acquisitions in accordance with the applicable Acquisition Documents, (b) the business, assets, results of operations, condition (financial or otherwise) or prospects (provided that the Term "prospects" shall not be deemed to be included in this definition when the term "Material Adverse Effect" is used in Section 4) of the Borrower and its Subsidiaries taken as a whole (prior to and after giving effect to the Acquisitions) or (c) the validity or enforceability of this Agreement or any of the other Loan Documents or the rights or remedies of the Administrative Agent, the Arranger or the Lenders hereunder or thereunder. "Material Environmental Amount": an amount payable by the Parent, the Borrower and/or their Subsidiaries in excess of $500,000 for remedial costs, compliance costs, compensatory damages, punitive damages, fines, penalties or any combination thereof. "Materials of Environmental Concern": any gasoline or petroleum (including crude oil or any fraction thereof) or petroleum products or any hazardous or toxic substances, materials or wastes, defined or regulated as such in or under any Environmental Law, including, without limitation, asbestos, polychlorinated biphenyls and urea-formaldehyde insulation. "Mortgage": the mortgage or deed of trust made by the appropriate Loan Party in favor of, or for the benefit of, the Administrative Agent for the benefit of the Lenders, substantially in the form of Exhibit B (with such changes thereto as shall be advisable under the law of the jurisdiction in which such mortgage or deed of trust is to be recorded), as the same may be amended, supplemented or otherwise modified from time to time. "Mortgaged Property": the real property listed on Schedule 1.1B, as to which the Administrative Agent for the benefit of the Lenders shall be granted a Lien pursuant to each Mortgage. "Multiemployer Plan": a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Net Cash Proceeds": (a) in connection with any Asset Sale or any Recovery Event, the proceeds thereof in the form of cash and Cash Equivalents (including any such proceeds received by way of deferred payment of principal pursuant to a note or installment receivable or purchase price adjustment receivable or otherwise, but only as 23 and when received) of such Asset Sale or Recovery Event, net of attorneys' fees, accountants' fees, investment banking fees, brokers' and underwriters' commissions paid to third parties, amounts required to be applied to the repayment of Indebtedness secured by a Lien expressly permitted hereunder on any asset which is the subject of such Asset Sale or Recovery Event (other than any Lien in favor of the Administrative Agent for the benefit of the Lenders), the aggregate amount of reserves required in the reasonable judgment of the Borrower to pay contingent liabilities with respect to such Asset Sale (provided that amounts deducted from aggregate proceeds pursuant to this clause and not actually paid by the Borrower or any of its Subsidiaries in liquidation of such contingent liabilities shall be deemed to be Net Cash Proceeds and shall be applied in accordance with Section 2.11(c) at such time as the Borrower shall reasonably determine that such amounts are not required to pay contingent liabilities with respect to such Asset Sale) and other customary fees and expenses actually incurred in connection therewith and net of taxes paid or reasonably estimated to be payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements) and (b) in connection with any issuance or sale of Capital Stock or debt securities or instruments or the incurrence of Indebtedness, the cash proceeds received from such issuance or incurrence, net of attorneys' fees, investment banking fees, accountants' fees, underwriting discounts and commissions and other customary fees and expenses actually incurred in connection therewith. "Non-Excluded Taxes": as defined in Section 2.20(a). "Non-U.S. Lender": as defined in Section 2.20(b). "Notes": the collective reference to the Tranche A Term Notes, the Tranche B Term Notes and the Revolving Credit Notes. "Obligations": the unpaid principal of and interest on (including, without limitation, interest accruing after the maturity of the Loans and Reimbursement Obligations and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Notes and all other obligations and liabilities of the Borrower to the Arranger, the Administrative Agent or to any Lender, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, any other Loan Document, the Letters of Credit, any Interest Rate Protection Agreement entered into with any Lender or any other document made, delivered or given in connection herewith or therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all fees, charges and disbursements of counsel to the Arranger, the Administrative Agent or to any Lender that are required to be paid by the Borrower pursuant hereto). 24 "Parent": as defined in the preamble hereto. "Participant": as defined in Section 10.6(b). "PBGC": the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA (or any successor). "Permanent Note Documentation": collectively (a) one or more note purchase agreements or Indentures entered into by a Loan Party with respect to the issuance of Permanent Notes in the form referred to in, or having the terms permitted by, Section 7.2(e) and (b) all other agreements, schedules, certificates and other documents executed in connection therewith, including, but not limited to, any guarantees of the Permanent Notes, as the same may be entered into, modified, amended or supplemented from time to time in accordance with the terms hereof and thereof. "Permanent Notes": senior subordinated notes issued in accordance with Section 7.2(e), including, but not limited to, the Rollover Notes. "Person": an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature. "Plan": at a particular time, any employee benefit plan which is covered by ERISA and in respect of which the Borrower or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Pledged Notes", "Pledged Securities" and "Pledged Stock": each as defined in the Master Guarantee and Collateral Agreement. "Pro Forma Balance Sheet": as defined in Section 4.1(a)(i). "Pro Forma Income Statement": as defined in Section 4.1(a)(ii). "Projections": as defined in Section 6.2(c). "Properties": the collective reference to the real property owned, leased or operated by the Parent, the Borrower or any of their Subsidiaries. "Recovery Event": any settlement of or payment in respect of a property or casualty insurance claim relating to any asset of the Parent, the Borrower or any of their Subsidiaries. "Register": as defined in Section 10.6(e). 25 "Reimbursement Obligation": the obligation of the Borrower to reimburse the Issuing Lender pursuant to Section 3.5 for amounts drawn under Letters of Credit. "Reinvestment Deferred Amount": with respect to any Reinvestment Event, the aggregate Net Cash Proceeds received by the Parent, the Borrower or any of their Subsidiaries in connection therewith which are not applied to prepay the Term Loans or reduce the Revolving Credit Commitments pursuant to Section 2.11(c) as a result of the delivery of a Reinvestment Notice. "Reinvestment Event": any Recovery Event in respect of which the Borrower has delivered a Reinvestment Notice. "Reinvestment Notice": a written notice executed by a Responsible Officer of the Borrower to the Administrative Agent within 30 days of the Reinvestment Event to which it relates stating that no Event of Default has occurred and is continuing and that the Borrower (directly or indirectly through another Subsidiary), in good faith, intends and expects to use all or a specified portion of the Net Cash Proceeds of a Recovery Event to restore or replace the assets in respect of which such Recovery Event occurred within twelve months from the date of receipt of such Net Cash Proceeds (provided that if the affected assets constituted Collateral, such restored or replacement assets shall also constitute Collateral). "Reinvestment Prepayment Amount": with respect to any Reinvestment Event, the Reinvestment Deferred Amount relating thereto less any amount expended prior to the relevant Reinvestment Prepayment Date to restore or replace the assets in respect of which a Recovery Event has occurred. "Reinvestment Prepayment Date": with respect to any Reinvestment Event, the earliest of (a) the first date occurring after such Reinvestment Event on which a Default or an Event of Default shall have occurred, (b) the date occurring twelve months after such Reinvestment Event and (c) the date on which the Borrower shall have determined not to, or shall have otherwise ceased to, restore or replace the assets in respect of which a Recovery Event has occurred. "Reorganization": with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA. "Reportable Event": any of the events set forth in Section 4043(c) of ERISA, other than those events as to which the thirty day notice period is waived under subsection .13, .14, .16, .18, .19 or .20 of PBGC Reg. Section 2615. "Required Lenders": at any date shall mean the holders of more than 50% of (a) until the Closing Date, the Commitments and (b) thereafter, the sum of (i) the aggregate unpaid principal amount of the Term Loans (or if Tranche B Term Loans 26 have not been borrowed, the sum of (A) the aggregate unpaid principal of the Tranche A Term Loans and (B) the Tranche B Term Loan Commitments, if any) and (ii) the aggregate Revolving Credit Commitments, or, if the Revolving Credit Commitments have been terminated, the Aggregate Outstanding Revolving Extensions of Credit of the Revolving Credit Lenders. "Requirement of Law": as to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Responsible Officer": the chief executive officer, president or chief financial officer of the Parent or the Borrower, as the case may be, but in any event, with respect to financial matters, the chief financial officer of the Parent or the Borrower, as the case may be. "Revolving Credit Commitment": as to any Lender, the obligation of such Lender, if any, to make Revolving Credit Loans to and/or issue or participate in Letters of Credit issued on behalf of the Borrower hereunder in an aggregate principal and/or face amount not to exceed the amount set forth under the heading "Revolving Credit Commitment" opposite such Lender's name on Schedule 1.1A, as the same may be changed from time to time pursuant to the terms hereof. "Revolving Credit Commitment Period": the period from and including the Closing Date to but not including the Revolving Credit Termination Date, or such earlier date on which the Revolving Credit Commitments shall have been terminated. "Revolving Credit Lender": each Lender which has a Revolving Credit Commitment or which has made Revolving Credit Loans. "Revolving Credit Loans": as defined in Section 2.5(a). "Revolving Credit Note": as defined in Section 2.8(e). "Revolving Credit Percentage": as to any Revolving Credit Lender at any time, the percentage which such Lender's Revolving Credit Commitment then constitutes of the aggregate Revolving Credit Commitments (or, at any time after the Revolving Credit Commitments shall have expired or terminated, the percentage which the aggregate principal amount of such Lender's Revolving Credit Loans then outstanding constitutes of the aggregate principal amount of the Revolving Credit Loans then outstanding). "Revolving Credit Termination Date": March 31, 2000. 27 "Rig Orders": contracts under which the Borrower or one or more of its Subsidiaries is to build, repair or modify drill rigs. "Rollover Note Indenture": the Indenture dated as of March 31, 1997 among IRI International Corporation, as issuer, Energy Services International Ltd., as guarantor, and The Bank of New York, as trustee, as amended, supplemented or otherwise modified from time to time in accordance with the terms thereof and hereof. "Rollover Notes": senior subordinated increasing rate rollover notes issued pursuant to the Rollover Note Indenture. "Security Documents": the collective reference to each Mortgage, the Master Guarantee and Collateral Agreement, the Cash Collateral Agreement and all other security documents hereafter delivered to the Administrative Agent granting a Lien on any asset or assets of any Person to secure the obligations and liabilities of the Borrower hereunder and/or under any of the other Loan Documents or to secure any guarantee of any such obligations and liabilities. "Sellers": collectively, the Bowen Sellers and the Cardwell Sellers. "Single Employer Plan": any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan. "Solvent": when used with respect to any Person, means that, as of any date of determination, (a) the amount of the "present fair saleable value" of the assets of such Person will, as of such date, exceed the amount of all "liabilities of such Person, contingent or otherwise", as of such date, as such quoted terms are determined in accordance with applicable federal and state laws governing determinations of the insolvency of debtors, (b) the present fair saleable value of the assets of such Person will, as of such date, be greater than the amount that will be required to pay the liability of such Person on its debts as such debts become absolute and matured, (c) such Person will not have, as of such date, an unreasonably small amount of capital with which to conduct its business, and (d) such Person will be able to pay its debts as they mature. For purposes of this definition, (i) "debt" means liability on a "claim", and (ii) "claim" means any (x) right to payment, whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured or (y) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured or unmatured, disputed, undisputed, secured or unsecured. "Standby Letter of Credit": as defined in Section 3.1(a). 28 "Subsidiary": as to any Person, a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Parent. "Subsidiary Guarantor": each of the Subsidiaries of the Parent which is a party to the Master Guarantee and Collateral Agreement. "Syndication Agent": as defined in the preamble hereto. "Term Loan Lenders": the collective reference to the Tranche A Term Loan Lenders and the Tranche B Term Loan Lenders. "Term Loans": the collective reference to the Tranche A Term Loans and Tranche B Term Loans. "Term Loan Termination Date": March 31, 2002. "Tranche A Term Loan": as defined in Section 2.1. "Tranche A Term Loan Commitment": as to any Lender, the obligation of such Lender, if any, to make a Tranche A Term Loan to the Borrower hereunder in a principal amount not to exceed the amount set forth under the heading "Tranche A Term Loan Commitment" opposite such Lender's name on Schedule 1.1A. "Tranche A Term Loan Lender": each Lender which has a Tranche A Term Loan Commitment or which has made a Tranche A Term Loan. "Tranche A Term Loan Percentage": as to any Tranche A Term Loan Lender at any time, the percentage which such Lender's Tranche A Term Loan Commitment then constitutes of the aggregate Tranche A Term Loan Commitments (or, at any time after the Closing Date, the percentage which the aggregate principal amount of such Lender's Tranche A Term Loan then outstanding constitutes of the aggregate principal amount of the Tranche A Term Loans then outstanding). "Tranche A Term Note": as defined in Section 2.8(e). 29 "Tranche B Commitment Period": the period from and including the Closing Date to but not including the first anniversary of the Closing Date, or such earlier date on which the Tranche B Term Loan Commitments shall have been terminated. "Tranche B Term Loan": as defined in Section 2.3. "Tranche B Term Loan Commitment": as to any Tranche B Term Loan Lender, the obligation of such Lender, if any, to make a Tranche B Term Loan to the Borrower hereunder in a principal amount not to exceed the amount set forth under the heading "Tranche B Term Loan Commitment" opposite such Lender's name on Schedule 1.1A. "Tranche B Term Loan Lender": each Lender which has a Tranche B Term Loan Commitment or which has made a Tranche B Term Loan. "Tranche B Term Loan Percentage": as to any Lender at any time, the percentage which such Lender's Tranche B Term Loan Commitment then constitutes of the aggregate Tranche B Term Loan Commitments (or, at any time after the Borrower borrows Tranche B Term Loans, the percentage which the aggregate principal amount of such Lender's Tranche B Term Loan then outstanding constitutes of the aggregate principal amount of the Tranche B Term Loans then outstanding). "Tranche B Term Note": as defined in Section 2.8(e). "Transferee": as defined in Section 10.6(g). "Type": as to any Loan, its nature as a Base Rate Loan or a Eurodollar Loan. "Uniform Customs": the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500, as the same may be amended from time to time. "United States": the United States of America. "Warrant Agreement": the Warrant Agreement dated as of March 31, 1997 between the Parent and The Bank of New York, as warrant agent. "Warrants": the warrants to purchase up to 10% of the fully diluted common stock of the Parent pursuant to the Warrant Agreement. "Wholly Owned Subsidiary": as to any Person, any other Person all of the Capital Stock of which (other than directors' qualifying shares required by law) is owned by such Person directly and/or through other Wholly Owned Subsidiaries. 30 1.2 Other Definitional Provisions. (a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in the other Loan Documents or any certificate or other document made or delivered pursuant hereto or thereto. (b) As used herein and in the other Loan Documents, and any certificate or other document made or delivered pursuant hereto or thereto, accounting terms relating to the Parent, the Borrower and their Subsidiaries not defined in Section 1.1 and accounting terms partly defined in Section 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP. (c) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, Schedule and Exhibit references are to this Agreement unless otherwise specified. (d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. SECTION 2. AMOUNT AND TERMS OF COMMITMENTS 2.1 Tranche A Term Loans. Subject to the terms and conditions hereof, each Tranche A Term Loan Lender severally agrees to make a term loan (a "Tranche A Term Loan") to the Borrower on the Closing Date in an amount not to exceed the amount of the Tranche A Term Loan Commitment of such Lender. The Tranche A Term Loans may from time to time be (a) Eurodollar Loans, (b) Base Rate Loans or (c) a combination thereof, as determined by the Borrower and notified to the Administrative Agent in accordance with Sections 2.2 and 2.12. 2.2 Procedure for Tranche A Term Loan Borrowing. The Borrower shall give the Administrative Agent irrevocable notice (which notice must be received by the Administrative Agent prior to 10:00 A.M., New York City time, one Business Day prior to the anticipated Closing Date) requesting that the Tranche A Term Loan Lenders make Tranche A Term Loans on the Closing Date and specifying (a) the amount to be borrowed and (b) the Closing Date. The Tranche A Term Loans made on the Closing Date shall initially be Base Rate Loans, no Tranche A Term Loan may be converted into a Eurodollar Loan prior to the date which is 3 Business Days after the Closing Date and (except with the prior written consent of the Arranger) no Tranche A Term Loan may be made, converted into or continued as a Eurodollar Loan having an Interest Period in excess of one month prior to the date which is 60 days after the Closing Date. Upon receipt of such notice, the Administrative Agent shall promptly notify each Tranche A Term Loan Lender thereof. Not later than 12:00 Noon, New York City time, on the Closing Date, each Tranche A Term Loan Lender shall make available to the Administrative Agent at its office specified in Section 10.2 an amount in immediately available funds equal to the Tranche A Term Loan to be made by such Lender. The Administrative Agent shall on such date by 2:00 P.M., New York City time, (i) make 31 available to the Borrower, in accordance with the instructions of the Borrower, in like funds as received by the Administrative Agent, $50,000,000, and (ii) deposit in the Cash Collateral Account the remainder of all such amounts made available to the Administrative Agent by the Tranche A Term Loan Lenders (the "Cardwell Deposit Amount"). The Cardwell Deposit Amount shall be held by the Administrative Agent as security for the Obligations on the terms and conditions set forth in the Cash Collateral Agreement. Notwithstanding any other provisions of this Agreement, the portion of the Tranche A Term Loans equal to the Cardwell Deposit Amount shall at all times be Base Rate Loans. 2.3 Tranche B Term Loans. Subject to the terms and conditions hereof, each Tranche B Term Loan Lender severally agrees to make a term loan (a "Tranche B Term Loan") to the Borrower in a single drawing on or prior to the date which is twelve months after the Closing Date (the "Tranche B Closing Date") in an amount not to exceed the amount of the Tranche B Term Loan Commitment of such Lender then in effect. The Tranche B Term Loans may from time to time be (a) Eurodollar Loans, (b) Base Rate Loans or (c) a combination thereof, as determined by the Borrower and notified to the Administrative Agent in accordance with Sections 2.4 and 2.12. The Tranche B Term Loan Commitments shall terminate immediately subsequent to any drawing on the Tranche B Closing Date. 2.4 Procedure for Tranche B Term Loan Borrowing. The Borrower shall give the Administrative Agent irrevocable notice (which notice must be received by the Administrative Agent prior to 10:00 A.M., New York City time, one Business Day prior to the requested Borrowing Date) requesting that the Tranche B Term Loan Lenders make the Tranche B Term Loans on the requested Borrowing Date and specifying (a) the amount to be borrowed and (b) the requested Borrowing Date. If the Borrower requests that the Borrowing Date with respect to the Tranche B Term Loans be a date within 3 Business Days of the Closing Date, then the Tranche B Term Loans shall initially be Base Rate Loans. No Tranche B Term Loan may be converted into or continued as a Eurodollar Loan prior to the date which is 3 Business Days after the Closing Date. Upon receipt of such notice, the Administrative Agent shall promptly notify each Tranche B Term Loan Lender thereof. Not later than 12:00 Noon, New York City time, on the requested Borrowing Date, each Tranche B Term Loan Lender shall make available to the Administrative Agent at its office specified in Section 10.2 an amount in immediately available funds equal to the Tranche B Term Loan to be made by such Lender. The Administrative Agent shall on such date by 2:00 P.M., New York City time, deposit to the designated account, in accordance with the instructions of the Borrower, the aggregate of the amounts made available to the Administrative Agent by the Tranche B Term Loan Lenders in immediately available funds. 2.5 Revolving Credit Commitments. (a) Subject to the terms and conditions hereof, each Revolving Credit Lender severally agrees to make revolving credit loans ("Revolving Credit Loans") to the Borrower from time to time during the Revolving Credit Commitment Period in an aggregate principal amount at any one time outstanding which, when added to such Lender's Revolving Credit Percentage of the L/C Obligations then outstanding, does not exceed the amount of such Lender's Revolving Credit Commitment. 32 During the Revolving Credit Commitment Period, the Borrower may use the Revolving Credit Commitments by borrowing, prepaying the Revolving Credit Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof. (b) The Revolving Credit Loans may from time to time be (i) Eurodollar Loans, (ii) Base Rate Loans or (iii) a combination thereof, as determined by the Borrower and notified to the Administrative Agent in accordance with Sections 2.6 and 2.12, provided that no Revolving Credit Loan shall be made as a Eurodollar Loan after the day that is one month prior to the Revolving Credit Termination Date. 2.6 Procedure for Revolving Credit Borrowing. The Borrower may borrow under the Revolving Credit Commitments during the Revolving Credit Commitment Period on any Business Day, provided that the Borrower shall give the Administrative Agent irrevocable notice (which notice must be received by the Administrative Agent prior to 12:00 Noon, New York City time, (a) three Business Days prior to the requested Borrowing Date, if all or any part of the requested Revolving Credit Loans are to be Eurodollar Loans or (b) one Business Day prior to the requested Borrowing Date, otherwise), specifying (i) the amount to be borrowed, (ii) the requested Borrowing Date, (iii) whether the borrowing is to be of Eurodollar Loans, Base Rate Loans, or a combination thereof and (iv) if the borrowing is to be entirely or partly of Eurodollar Loans, the respective amounts of each such Type of Loan and the respective lengths of the initial Interest Periods therefor; provided that prior to the date which is 5 Business Days after the Closing Date no Revolving Credit Loan may be made as or converted into a Eurodollar Loan and (except with the prior written consent of the Arranger) no Revolving Credit Loan may be made, converted into or continued as a Eurodollar Loan having an Interest Period in excess of one month prior to the date which is 60 days after the Closing Date. Each borrowing under the Revolving Credit Commitments shall be in an amount equal to (x) in the case of Base Rate Loans, $1,000,000 or a whole multiple thereof (or, if the then Available Revolving Credit Commitments are less than $1,000,000, such lesser amount) and (y) in the case of Eurodollar Loans, $1,000,000 or a whole multiple of $1,000,000 in excess thereof. Upon receipt of any such notice from the Borrower, the Administrative Agent shall promptly notify each Revolving Credit Lender thereof. Each Revolving Credit Lender will make the amount of its pro rata share of each borrowing available to the Administrative Agent for the account of the Borrower at the office of the Administrative Agent specified in Section 10.2 prior to 11:00 A.M., New York City time, on the Borrowing Date requested by the Borrower in funds immediately available to the Administrative Agent. The aggregate of the amounts made available to the Administrative Agent by the Revolving Credit Lenders will then be made available to the Borrower by the Administrative Agent in accordance with the instructions of the Borrower in like funds as received by the Administrative Agent. 2.7 Commitment Fees, etc. (a) The Borrower agrees to pay to the Administrative Agent for the account of each Revolving Credit Lender a commitment fee for the period from and including the Closing Date to the last day of the Revolving Credit Commitment Period, computed at the rate of 1/2 of 1% per annum on the average daily 33 amount of the Available Revolving Credit Commitment of such Lender during the period for which payment is made, payable quarterly in arrears on the last day of each March, June, September and December and on the last day of the Revolving Credit Commitment Period, commencing on the first of such dates to occur after the date hereof. (b) The Borrower agrees to pay to the Administrative Agent for the account of each Tranche B Term Loan Lender a commitment fee for the period from and including the Closing Date to the last day of the Tranche B Commitment Period, computed at the rate of 1/2 of 1% per annum on the average daily amount of the undrawn Tranche B Term Loan Commitment of such Lender during the period for which payment is made, payable quarterly in arrears on the last day of each March, June, September and December and on the last day of the Tranche B Commitment Period, commencing on the first of such dates to occur after the date hereof. (c) The Borrower agrees to pay to the Arranger the fees and other compensation in the amounts and on the dates previously agreed to in writing by the Borrower and the Arranger. (d) The Borrower agrees to pay to the Administrative Agent the fees in the amounts and on the dates agreed to in writing from time to time by the Borrower and the Administrative Agent. 2.8 Repayment of Loans; Evidence of Debt. (a) The Borrower hereby unconditionally promises to pay to the Administrative Agent for the account of the appropriate Lender (i) the then unpaid principal amount of each Revolving Credit Loan of such Revolving Credit Lender on the last day of the Revolving Credit Commitment Period (or such earlier date on which the Revolving Credit Loans become due and payable pursuant to Section 8), (ii) the principal amount of the Tranche A Term Loans of such Tranche A Term Loan Lender, in 20 consecutive quarterly installments, according to the amortization schedule set forth on Schedule 1.1C, commencing on June 30, 1997 (or on such earlier date on which the then unpaid principal amount of the Tranche A Term Loans become due and payable pursuant to Section 8) and (iii) the principal amount of the Tranche B Term Loans of such Tranche B Term Loan Lender, in 5 consecutive annual installments, according to the amortization schedule set forth on Schedule 1.1D, commencing on March 31, 1998 (or on such earlier date on which the then unpaid principal amount of such Tranche B Term Loans become due and payable pursuant to Section 8). The Borrower hereby further agrees to pay interest on the unpaid principal amount of the Loans from time to time outstanding from the date hereof until payment in full thereof at the rates per annum, and on the dates, set forth in Section 2.14. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing indebtedness of the Borrower to such Lender resulting from each Loan of such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time under this Agreement. 34 (c) The Administrative Agent, on behalf of the Borrower, shall maintain the Register pursuant to Section 10.6(e) and a subaccount therein for each Lender, in which shall be recorded (i) the amount of each Revolving Credit Loan, Tranche A Term Loan and Tranche B Term Loan made hereunder, the Type thereof and each Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) both the amount of any sum received by the Administrative Agent hereunder from the Borrower and each Lender's share thereof. (d) The entries made in the Register and the accounts of each Lender maintained pursuant to Section 2.8(b) shall, to the extent permitted by applicable law, be prima facie evidence of the existence and amounts of the obligations of the Borrower therein recorded; provided, however, that the failure of any Lender or the Administrative Agent to maintain the Register or any such account, or any error therein, shall not in any manner affect the obligation of the Borrower to repay (with applicable interest) the Loans made to such Borrower by such Lender in accordance with the terms of this Agreement. (e) The Borrower agrees that, upon the request to the Administrative Agent by any Lender, the Borrower will execute and deliver to such Lender (i) a promissory note of the Borrower evidencing any Revolving Credit Loans of such Lender, substantially in the form of Exhibit C-1 with appropriate insertions as to date and principal amount (a "Revolving Credit Note"), and/or (ii) a promissory note of the Borrower evidencing any Tranche A Term Loan of such Lender, substantially in the form of Exhibit C-2 with appropriate insertions as to date and principal amount (a "Tranche A Term Note") and/or (iii) a promissory note of the Borrower evidencing any Tranche B Term Loan of such Lender, substantially in the form of Exhibit C-3 with appropriate insertions as to date and principal amount (a "Tranche B Term Note"). A Note and the Obligation evidenced thereby may be assigned or otherwise transferred in whole or in part only by registration of such assignment or transfer of such Note and the Obligation evidenced thereby in the Register (and each Note shall expressly so provide). Any assignment or transfer of all or part of an Obligation evidenced by a Note shall be registered in the Register only upon surrender for registration of assignment or transfer of the Note evidencing such Obligation, accompanied by an Assignment and Acceptance substantially in the form of Exhibit G duly executed by the Assignor thereof, and thereupon one or more new Notes shall be issued to the designated Assignee and the old Note shall be returned by the Administrative Agent to the Borrower marked "cancelled." No assignment of a Note and the Obligation evidenced thereby shall be effective unless it shall have been recorded in the Register by the Administrative Agent as provided in this Section 2.8(e). 2.9 Optional Termination or Reduction of Commitments. The Borrower shall have the right, upon not less than three Business Days' notice to the Administrative Agent, to terminate the Revolving Credit Commitments or the Tranche B Term Loan Commitments or, from time to time, to reduce the amount of the Revolving Credit Commitments or the Tranche B Term Loan Commitments; provided that no such termination or reduction of Revolving Credit Commitments shall be permitted if, after giving effect thereto and to any prepayments of the Revolving Credit Loans made on the effective date thereof, the sum of the Aggregate 35 Outstanding Revolving Extensions of Credit of all Revolving Credit Lenders would exceed the Revolving Credit Commitments then in effect. Any such reduction shall be in an amount equal to $1,000,000, or a whole multiple thereof, and shall reduce permanently the Revolving Credit Commitments or the Tranche B Term Loan Commitments, as the case may be, then in effect. 2.10 Optional Prepayments. The Borrower may at any time and from time to time prepay the Loans, in whole or in part, without premium or penalty, upon at least three Business Days' irrevocable notice to the Administrative Agent by the Borrower, specifying the date and amount of prepayment and whether the prepayment is of Eurodollar Loans, Base Rate Loans or a combination thereof, and, if of a combination thereof, the amount allocable to each, provided that if a Eurodollar Loan is prepaid on any day other than the last day of the Interest Period applicable thereto the Borrower shall also pay any amounts owing pursuant to Section 2.21. Upon receipt of any such notice, the Administrative Agent shall promptly notify each Lender thereof. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with accrued interest to such date on the amount prepaid. Partial prepayments of the Term Loans shall be applied pro rata to the Tranche A Term Loans and the Tranche B Term Loans and to the remaining installments of principal thereof in the inverse order of maturity. Notwithstanding the foregoing, so long as any Tranche B Term Loans are outstanding, each Tranche A Term Loan Lender shall have the right to refuse all or any portion of any prepayment pursuant to this Section 2.10 allocable to such Lender's Tranche A Term Loans, and the amount so refused shall be applied to prepay the Tranche B Term Loans in accordance with the preceding sentence. Amounts prepaid on account of the Term Loans may not be reborrowed. Partial prepayments of Term Loans and Revolving Credit Loans shall be in an aggregate principal amount of $1,000,000 or a whole multiple thereof. 2.11 Mandatory Prepayments and Commitment Reductions. (a) If any debt securities or instruments of the Parent, the Borrower or any of their Subsidiaries shall be issued or sold or the Parent, the Borrower or any of their Subsidiaries shall incur any Indebtedness (except any debt securities or instruments issued or Indebtedness incurred in accordance with Section 7.2 (other than Net Cash Proceeds not required to be prepaid pursuant to the proviso in Section 7.2(e))) an amount equal to 100% of the Net Cash Proceeds thereof shall be applied on the date of such issuance or incurrence toward the prepayment of the Term Loans and the reduction of the Revolving Credit Commitments as set forth in paragraph (e) of this Section 2.11. Nothing in this paragraph (a) shall be deemed to permit the incurrence of Indebtedness not permitted by Section 7.2. (b) If any Capital Stock of the Parent, the Borrower or any of their Subsidiaries shall be issued or sold (except (i) any Capital Stock the proceeds of which are used solely to refinance the Interim Notes or the Rollover Notes in accordance with the second paragraph of Section 7.10, (ii) the Warrants and (iii) any Capital Stock issued upon exercise of the Warrants) an amount equal to 100% of the first $25,000,000 of Net Cash Proceeds thereof and 50% of the Net Cash Proceeds thereof in excess of $25,000,000 shall be applied on the date of 36 such issuance or incurrence toward the prepayment of the Term Loans and the reduction of the Revolving Credit Commitments as set forth in paragraph (e) of this Section 2.11. (c) If on any date the Parent, the Borrower or any of their Subsidiaries shall receive Net Cash Proceeds from any Asset Sale or from any Recovery Event (other than, if no Default or Event of Default shall have occurred and be continuing, to the extent that such Net Cash Proceeds are to be used to restore or replace the assets in respect of which such Recovery Event occurred within twelve months from the date of such Recovery Event, as certified by a Responsible Officer of the Borrower pursuant to a Reinvestment Notice; provided that if such Net Cash Proceeds exceed $5,000,000, the Borrower shall deposit such Net Cash Proceeds in a cash collateral account under the exclusive dominion and control of the Administrative Agent as security for the Obligations in accordance with terms and conditions reasonably satisfactory to the Administrative Agent), such Net Cash Proceeds shall be applied on such date toward the prepayment of the Term Loans and the reduction of the Revolving Credit Commitments as set forth in paragraph (e) of this Section 2.11; provided that, notwithstanding the foregoing, on each Reinvestment Prepayment Date, an amount equal to the Reinvestment Prepayment Amount with respect to the relevant Reinvestment Event shall be applied toward the prepayment of the Term Loans and the reduction of the Revolving Credit Commitments as set forth in paragraph (e) of this Section 2.11. (d) If, for any fiscal year of the Borrower ending after the Closing Date, there shall be Excess Cash Flow, the Borrower shall, on the relevant Excess Cash Flow Application Date, apply toward the prepayment of the Term Loans and the reduction of the Revolving Credit Commitments as set forth in paragraph (e) of this Section 2.11 a percentage of such Excess Cash Flow equal to 75%. Each such prepayment and commitment reduction shall be made on a date (an "Excess Cash Flow Application Date") no later than five days after the earlier of (i) the date on which the financial statements of the Borrower referred to in Section 6.1(a) for the fiscal year with respect to which such prepayment is made are required to be delivered to the Lenders and (ii) the date such financial statements are actually delivered. (e) Amounts to be applied in connection with prepayments and Commitment reductions made pursuant to this Section 2.11 shall be applied first to the prepayment of the Term Loans and second to reduce permanently the Revolving Credit Commitments. Any such reduction of the Revolving Credit Commitments shall be accompanied by prepayment of the Revolving Credit Loans to the extent, if any, that the sum of the Aggregate Outstanding Revolving Extensions of Credit of all Revolving Credit Lenders exceeds the amount of the aggregate Revolving Credit Commitments as so reduced, provided that if the aggregate principal amount of Revolving Credit Loans then outstanding is less than the amount of such excess (because L/C Obligations constitute a portion thereof), the Borrower shall, to the extent of the balance of such excess, replace outstanding Letters of Credit and/or deposit an amount in cash in a cash collateral account established with the Administrative Agent for the benefit of the Lenders on terms and conditions satisfactory to the Administrative Agent. The application of any prepayment pursuant to this Section 2.11 shall be made, within each category of Loans to be prepaid as provided above, first to Base Rate Loans and second to Eurodollar Loans. 37 Each prepayment of the Loans under this Section 2.11 shall be accompanied by accrued interest to the date of such prepayment on the amount prepaid. All prepayments of the Term Loans pursuant to this Section 2.11 shall be applied pro rata to the Tranche A Term Loans and the Tranche B Term Loans and to the remaining installments of principal thereof in the inverse order of scheduled maturity. Notwithstanding the foregoing, so long as any Tranche B Term Loans are outstanding, each Tranche A Term Loan Lender shall have the right to refuse all or any portion of any prepayment pursuant to this Section 2.11 allocable to such Lender's Tranche A Term Loans and the amount so refused shall be applied first pro rata to prepay the Tranche B Term Loans and second to reduce permanently the Revolving Credit Commitments as provided above. Amounts prepaid on account of the Term Loans may not be reborrowed. 2.12 Conversion and Continuation Options. (a) The Borrower may elect from time to time to convert Eurodollar Loans to Base Rate Loans by giving the Administrative Agent at least two Business Days' prior irrevocable notice of such election, provided that any such conversion of Eurodollar Loans may only be made on the last day of an Interest Period with respect thereto. The Borrower may elect from time to time to convert Base Rate Loans to Eurodollar Loans by giving the Administrative Agent at least three Business Days' prior irrevocable notice of such election. Any such notice of conversion to Eurodollar Loans shall specify the length of the initial Interest Period therefor. Upon receipt of any such notice, the Administrative Agent shall promptly notify each Lender thereof. All or any part of outstanding Eurodollar Loans and Base Rate Loans may be converted as provided herein, provided that (i) no Loan may be converted into a Eurodollar Loan (A) when any Event of Default has occurred and is continuing and the Administrative Agent has or the Required Lenders have determined in its or their sole discretion not to permit such a conversion or (B) having an Interest Period in excess of one month prior to the date which is 60 days after the Closing Date and (ii) no Loan may be converted into a Eurodollar Loan after the date that is one month prior to (y) the Revolving Credit Termination Date, with respect to Revolving Credit Loans and (z) the Term Loan Termination Date, with respect to Term Loans. (b) Any Eurodollar Loans may be continued as such upon the expiration of the then current Interest Period with respect thereto by the Borrower giving irrevocable notice to the Administrative Agent, in accordance with the applicable provisions of the term "Interest Period" set forth in Section 1.1, of the length of the next Interest Period to be applicable to such Loans, provided that no Eurodollar Loan may be continued as such (i) when any Event of Default has occurred and is continuing and the Administrative Agent has or the Required Lenders have determined in its or their sole discretion not to permit such a continuation or (ii) after the date that is one month prior to (A) the Revolving Credit Termination Date, with respect to the Revolving Credit Loans or (B) the Term Loan Termination Date, with respect to Term Loans, and provided, further, that if the Borrower shall fail to give any required notice as described above in this paragraph or if such continuation is not permitted pursuant to the preceding proviso such Loans shall be automatically converted to Base Rate Loans on the last day of such then expiring Interest Period. 38 2.13 Minimum Amounts and Maximum Number of Eurodollar Tranches. Notwithstanding anything to the contrary in this Agreement, all borrowings, conversions, continuations and optional prepayments of Loans hereunder and all selections of Interest Periods hereunder shall be in such amounts and be made pursuant to such elections so that, (a) after giving effect thereto, the aggregate principal amount of the Loans comprising each Eurodollar Tranche shall be equal to $1,000,000 or a whole multiple of $1,000,000 in excess thereof, (b) no more than four Eurodollar Tranches in respect of the Revolving Credit Loans shall be outstanding at any one time and (c) no more than eight Eurodollar Tranches in respect of all Loans (including the Revolving Credit Loans) shall be outstanding at any one time. 2.14 Interest Rates and Payment Dates. (a) Each Eurodollar Loan shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the Eurodollar Rate determined for such day plus the Applicable Margin. (b) Each Base Rate Loan shall bear interest at a rate per annum equal to the Base Rate plus the Applicable Margin. (c) If all or a portion of (i) any principal of any Loan or Reimbursement Obligations, (ii) any interest payable thereon, (iii) any commitment fee or (iv) any other amount payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), the principal of the Loans and Reimbursement Obligations and any such overdue interest, commitment fee or other amount shall bear interest at a rate per annum which is the highest rate applicable to Term Loans provided for herein on such nonpayment date plus 2%, in each case from the date of such non-payment until such overdue principal, interest, commitment fee or other amount is paid in full (as well after as before judgment). (d) Interest shall be payable in arrears on each Interest Payment Date, provided that interest accruing pursuant to paragraph (c) of this Section 2.14 shall be payable from time to time on demand. 2.15 Computation of Interest and Fees. (a) Interest on Loans and Reimbursement Obligations, commitment fees, letter of credit commissions and interest on overdue interest, commitment fees and other amounts payable hereunder shall be calculated on the basis of a 360-day year for the actual days elapsed, except that, with respect to Base Rate Loans the rate of interest on which is calculated on the basis of the Prime Rate, the interest thereon shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed. The Administrative Agent shall as soon as practicable notify the Borrower and the Lenders of each determination of a Eurodollar Rate. Any change in the interest rate on a Loan resulting from a change in the Base Rate or the Eurocurrency Reserve Requirements shall become effective as of the opening of business on the day on which such change becomes effective. The Administrative Agent shall as soon as practicable notify the Borrower and the Lenders of the effective date and the amount of each such change in interest rate. 39 (b) Each determination of an interest rate by the Administrative Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower and the Lenders in the absence of manifest error. The Administrative Agent shall, at the request of the Borrower, deliver to the Borrower a statement showing the quotations used by the Administrative Agent in determining any interest rate pursuant to Section 2.15(a). 2.16 Inability to Determine Interest Rate. If prior to the first day of any Interest Period: (a) the Administrative Agent shall have determined (which determination shall be conclusive and binding upon the Borrower) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period, or (b) the Administrative Agent shall have received notice from the Required Lenders that the Eurodollar Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the cost to such Lenders (as conclusively certified by such Lenders) of making or maintaining their affected Loans during such Interest Period, the Administrative Agent shall give telecopy or telephonic notice thereof to the Borrower and the Lenders as soon as practicable thereafter. If such notice is given (x) any Eurodollar Loans requested to be made on the first day of such Interest Period shall be made as Base Rate Loans, (y) any Loans that were to have been converted on the first day of such Interest Period to Eurodollar Loans shall be continued as Base Rate Loans and (z) any outstanding Eurodollar Loans that were to be continued on the first day of such Interest Period as Eurodollar Loans shall be converted, on the first day of such Interest Period, to Base Rate Loans. Until such notice has been withdrawn by the Administrative Agent, no further Eurodollar Loans shall be made or continued as such, nor shall the Borrower have the right to convert Loans to Eurodollar Loans. 2.17 Pro Rata Treatment and Payments; Use of Proceeds. (a) Each borrowing by the Borrower from the Lenders hereunder, each payment by the Borrower on account of any commitment fee and any reduction of the Commitments of the Lenders shall be made pro rata according to the respective Tranche A Term Loan Percentages, Tranche B Term Loan Percentages or Revolving Credit Percentages, as the case may be, of the relevant Lenders. Except as provided in Section 2.10 and 2.11, each payment (including each prepayment) by the Borrower on account of principal of and interest on the Term Loans shall be made pro rata according to the respective outstanding principal amounts of the Term Loans then held by the Term Loan Lenders (or, in the case of installment payments made pursuant to Section 2.8 or payments of accrued interest in respect thereof, the affected Term Loans then held by the relevant Term Loan Lenders). Each payment (including each prepayment) by the Borrower on account of principal of and interest on the Revolving Credit Loans shall be made pro rata according to the respective outstanding principal amounts of the Revolving Credit Loans then 40 held by the Revolving Credit Lenders. All payments (including prepayments) to be made by the Borrower hereunder and under the Notes, whether on account of principal, interest, fees or otherwise, shall be made without setoff or counterclaim and shall be made prior to 12:00 Noon, New York City time, on the due date thereof to the Administrative Agent, for the account of the Lenders, at the Administrative Agent's office specified in Section 10.2, in Dollars and in immediately available funds. The Administrative Agent shall distribute such payments to the Lenders promptly upon receipt in like funds as received. If any payment hereunder (other than payments on the Eurodollar Loans) becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day. If any payment on a Eurodollar Loan becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day unless the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Business Day. In the case of any extension of any payment of principal pursuant to the preceding two sentences, interest thereon shall be payable at the then applicable rate during such extension. (b) Unless the Administrative Agent shall have been notified in writing by any Lender prior to a borrowing that such Lender will not make the amount that would constitute its share of such borrowing available to the Administrative Agent, the Administrative Agent may assume that such Lender is making such amount available to the Administrative Agent, and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower a corresponding amount. If such amount is not made available to the Administrative Agent by the required time on the Borrowing Date therefor, such Lender shall pay to the Administrative Agent, on demand, such amount with interest thereon at a rate equal to the daily average Federal Funds Effective Rate for the period until such Lender makes such amount immediately available to the Administrative Agent. A certificate of the Administrative Agent submitted to any Lender with respect to any amounts owing under this Section 2.17(b) shall be conclusive in the absence of manifest error. If such Lender's share of such borrowing is not made available to the Administrative Agent by such Lender within three Business Days of such Borrowing Date, the Administrative Agent shall also be entitled to recover such amount with interest thereon at the rate per annum applicable to Base Rate Loans hereunder, on demand, from the Borrower (together with any amounts due under Section 2.21). (c) The Borrower shall use the proceeds of the Loans only in the manner expressly contemplated by Section 4.16. 2.18 Illegality. Notwithstanding any other provision herein, if the adoption of or any change in any Requirement of Law or in the interpretation or application thereof shall make it unlawful for any Lender to make or maintain Eurodollar Loans as contemplated by this Agreement, (a) the commitment of such Lender hereunder to make Eurodollar Loans, continue Eurodollar Loans as such and convert Base Rate Loans to Eurodollar Loans shall forthwith be cancelled and (b) such Lender's Loans then outstanding as Eurodollar Loans, if any, shall be converted automatically to Base Rate Loans on the respective last days of the then current Interest Periods with respect to such Loans or within such earlier period as required by law. If 41 any such conversion of a Eurodollar Loan occurs on a day which is not the last day of the then current Interest Period with respect thereto, the Borrower shall pay to such Lender such amounts, if any, as may be required pursuant to Section 2.21. 2.19 Requirements of Law. (a) If the adoption of or any change in any Requirement of Law or in the interpretation or application thereof or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof: (i) shall subject any Lender to any tax of any kind whatsoever with respect to this Agreement, any Note, any Letter of Credit, any Application or any Eurodollar Loan made by it, or change the basis of taxation of payments to such Lender in respect thereof (except for taxes covered by Section 2.20 and changes in the rate of tax on the overall net income of such Lender); (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender which is not otherwise included in the determination of the Eurodollar Rate hereunder; or (iii) shall impose on such Lender any other condition; and the result of any of the foregoing is to increase the cost to such Lender, by an amount which such Lender deems to be material, of making, converting into, continuing or maintaining Eurodollar Loans or issuing or participating in Letters of Credit, or to reduce any amount receivable hereunder in respect thereof, then, in any such case, the Borrower shall promptly pay such Lender, upon its demand, any additional amounts necessary to compensate such Lender for such increased cost or reduced amount receivable. If any Lender becomes entitled to claim any additional amounts pursuant to this Section 2.19, it shall promptly notify the Borrower (with a copy to the Administrative Agent) of the event by reason of which it has become so entitled. (b) If any Lender shall have determined that the adoption of or any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof shall have the effect of reducing the rate of return on such Lender's or such corporation's capital as a consequence of its obligations hereunder or under or in respect of any Letter of Credit to a level below that which such Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Lender's or such corporation's policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, after submission by such Lender to the Borrower (with a copy to the Administrative 42 Agent) of a written request therefor, the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender for such reduction. (c) If any Lender becomes entitled to claim any additional amounts pursuant to this subsection, it shall promptly notify the Borrower (with a copy to the Administrative Agent) of the event by reason of which it has become so entitled. A certificate as to any additional amounts payable pursuant to this Section 2.19, together with a calculation thereof in reasonable detail, shall be submitted by the affected Lender to the Borrower (with a copy to the Administrative Agent) and such certificate shall be conclusive in the absence of manifest error. The obligations of the Borrower pursuant to this Section 2.19 shall survive the termination of this Agreement and the payment of the Notes and all other amounts payable hereunder. (d) In the event any Lender delivers a certificate requesting compensation pursuant to this Section 2.19, the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to transfer and assign, without recourse (in accordance with and subject to the restrictions contained in Section 10.6), all of its interests, rights and obligations under this Agreement and the other Loan Documents to an assignee which shall assume such assigned obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided, however, that (x) such assignment shall not conflict with any law, rule or regulation or order of any court or other Governmental Authority having jurisdiction, (y) the Borrower shall have received the prior written consent to such assignment of the Administrative Agent, which consent shall not unreasonably be delayed or withheld and (z) the Borrower or such assignee shall have paid to the affected Lender in immediately available funds an amount equal to the sum of the principal of the outstanding Loans of such Lender plus all interest, fees and other amounts accrued and unpaid for the account of such Lender hereunder (including any amounts under this Section 2.19); provided, further, that if prior to any such transfer and assignment the circumstances or event that resulted in such Lender's claim for compensation under this Section 2.19 cease to cause such Lender to suffer increased costs or reductions in amounts received or receivable or reduction in return on capital (including as a result of any action taken by such Lender pursuant to Section 2.22), or if such Lender shall waive its right to claim further compensation under this Section 2.19 in respect of such circumstances or event, then such Lender shall not thereafter be required to make any such transfer and assignment hereunder. 2.20 Taxes. (a) All payments made by the Borrower under this Agreement and the Notes shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding net income taxes and franchise taxes (imposed in lieu of net income taxes) imposed on the Administrative Agent or any Lender as a result of a present or former connection between the Administrative Agent or such Lender and the jurisdiction of the Governmental Authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely 43 from the Administrative Agent or such Lender having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement or any other Loan Document). If any such non-excluded taxes, levies, imposts, duties, charges, fees, deductions or withholdings ("Non-Excluded Taxes") are required to be withheld from any amounts payable to the Administrative Agent or any Lender hereunder or under the Notes, the amounts so payable to the Administrative Agent or such Lender shall be increased to the extent necessary to yield to the Administrative Agent or such Lender (after payment of all Non-Excluded Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement and the Notes, provided, however, that the Borrower shall make payments net of and after deduction for Non-Excluded Taxes and shall not be required to increase any such amounts payable to any Non-U.S. Lender (as defined below) that fails to comply with Section 2.20(b). Whenever any Non-Excluded Taxes are payable by the Borrower, as promptly as possible thereafter the Borrower shall send to the Administrative Agent for its own account or for the account of such Lender, as the case may be, a certified copy of an original official receipt received by the Borrower showing payment thereof. If the Borrower fails to pay any Non-Excluded Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, the Borrower shall indemnify the Administrative Agent and the Lenders for any Non-Excluded Taxes, incremental taxes, interest or penalties that may become payable by the Administrative Agent or any Lender as a result of any such failure. The agreements in this Section 2.20 shall survive the termination of this Agreement and the payment of the Notes and all other amounts payable hereunder. (b) Each Lender (or Transferee) that is not a corporation or partnership created or organized in or under the laws of the United States, any estate that is subject to federal income taxation regardless of the source of its income or any trust which is subject to the supervision of a court within the United States and the control of a United States fiduciary as described in section 7701(a)(30) of the Code (a "Non-U.S. Lender") shall deliver to the Borrower and the Administrative Agent (or, in the case of a Participant, to the Lender from which the related participation shall have been purchased) on or before the date on which it becomes a party to this Agreement (or, in the case of a Participant, on or before the date on which such Participant purchases the related participation) either: (A) (x) two duly completed and signed copies of either Internal Revenue Service Form 1001 (relating to such Non-U.S. Lender and entitling it to a complete exemption from withholding of U.S. Taxes on all amounts to be received by such Non-U.S. Lender pursuant to this Agreement and the other Loan Documents) or Form 4224 (relating to all amounts to be received by such Non-U.S. Lender pursuant to this Agreement and the other Loan Documents), or successor and related applicable forms, as the case may be, and (y) two duly completed and signed copies of Internal Revenue Service Form W-8 or W-9, or successor and related applicable forms, as the case may be; or 44 (B) in the case of a Non-U.S. Lender that is not a "bank" within the meaning of Section 881(c)(3)(A) of the Code and that does not comply with the requirements of clause (A) hereof, (x) a statement in the form of Exhibit F (or such other form of statement as shall be reasonably requested by the Borrower or the Administrative Agent from time to time) to the effect that such Non-U.S. Lender is eligible for a complete exemption from withholding of U.S. Taxes under Code Section 871(h) or 881(c), and (y) two duly completed and signed copies of Internal Revenue Service Form W-8 or successor and related applicable form. Further, each Non-U.S. Lender agrees to deliver to the Borrower and the Administrative Agent, and if applicable, the assigning Lender (or, in the case of a Participant, to the Lender from which the related participation shall have been purchased) two further duly completed and signed copies of such Forms 1001, 4224, W-8 or W-9, as the case may be, or successor and related applicable forms, on or before the date that any such form expires or becomes obsolete and promptly after the occurrence of any event requiring a change from the most recent form(s) previously delivered by it to the Borrower or the Administrative Agent (or, in the case of a Participant, to the Lender from which the related participation shall have been purchased) in accordance with applicable United States laws and regulations; unless, in any such case, any change in law or regulation has occurred subsequent to the date such Lender became a party to this Agreement (or in the case of a Participant, the date on which such Participant purchased the related participation) which renders all such forms inapplicable or which would prevent such Lender (or Participant) from properly completing and executing any such form with respect to it and such Lender promptly notifies the Borrower and the Administrative Agent (or, in the case of a Participant, the Lender from which the related participation shall have been purchased) if it is no longer able to deliver, or if it is required to withdraw or cancel, any form or statement previously delivered by it pursuant to this Section 2.20(b). A Non-U.S. Lender shall not be required to deliver any form or statement pursuant to the immediately preceding sentences in this Section 2.20(b) that such Non-U.S. Lender is not legally able to deliver (it being understood and agreed that the Borrower shall withhold or deduct such amounts from any payments made to such Non-U.S. Lender that the Borrower reasonably determines are required by law and that payments resulting from a failure to comply with this paragraph (b) shall not be subject to payment or indemnity by the Borrower pursuant to Section 2.20(a)). 2.21 Indemnity. The Borrower agrees to indemnify each Lender and to hold each Lender harmless from any loss or expense which such Lender may sustain or incur as a consequence of (a) default by the Borrower in making a borrowing of, conversion into or continuation of Eurodollar Loans after the Borrower has given a notice requesting the same in accordance with the provisions of this Agreement, (b) default by the Borrower in making any prepayment after the Borrower has given a notice thereof in accordance with the provisions of this Agreement or (c) the making of a prepayment of Eurodollar Loans on a day which is not the last day of an Interest Period with respect thereto. Such indemnification may include an amount equal to the excess, if any, of (i) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, converted or continued, for the period from the 45 date of such prepayment or of such failure to borrow, convert or continue to the last day of such Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Loans provided for herein (excluding, however, the Applicable Margin included therein, if any) over (ii) the amount of interest (as reasonably determined by such Lender) which would have accrued to such Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank eurodollar market. A certificate as to any amounts payable pursuant to this Section 2.21, together with a calculation thereof in reasonable detail, shall be submitted to the Borrower by any affected Lender and such certificate shall be conclusive in the absence of manifest error. This covenant shall survive the termination of this Agreement and the payment of the Notes and all other amounts payable hereunder. 2.22 Change of Lending Office. Each Lender agrees that, upon the occurrence of any event giving rise to the operation of Section 2.18, 2.19(a) or 2.20 with respect to such Lender, it will, if requested by the Borrower, use reasonable efforts (subject to overall policy considerations of such Lender) to designate another lending office for any Loans affected by such event with the object of avoiding the consequences of such event; provided that such designation is made on terms that, in the sole judgment of such Lender, cause such Lender and its lending office(s) to suffer no material economic, legal or regulatory disadvantage, and provided, further, that nothing in this Section 2.22 shall affect or postpone any of the obligations of the Borrower or the rights of any Lender pursuant to Section 2.18, 2.19(a) or 2.20. SECTION 3. LETTERS OF CREDIT 3.1 L/C Commitment. (a) Subject to the terms and conditions hereof, the Issuing Lender, in reliance on the agreements of the other Revolving Credit Lenders set forth in Section 3.4(a), agrees to issue letters of credit ("Letters of Credit") for the account of the Borrower on any Business Day during the Revolving Credit Commitment Period in such form as may be approved from time to time by the Issuing Lender; provided that the Issuing Lender shall have no obligation to issue any Letter of Credit if, after giving effect to such issuance, (i) the L/C Obligations would exceed the L/C Commitment or (ii) the Aggregate Outstanding Revolving Extensions of Credit would exceed the aggregate Revolving Credit Commitments. Each Letter of Credit shall (i) be denominated in Dollars, (ii) be either (x) a standby letter of credit issued to support (I) obligations of the Borrower or any of its Subsidiaries, contingent or otherwise, which finance the working capital and business needs of the Borrower or its Subsidiaries or (II) performance obligations of the Borrower and its Subsidiaries, in each case, incurred in the ordinary course of business (a "Standby Letter of Credit"), or (y) a commercial letter of credit in respect of the purchase of goods or services by the Borrower or any of its Subsidiaries in the ordinary course of business (a "Commercial Letter of Credit"), (iii) expire no later than five Business Days prior to the Revolving Credit Termination Date and (iv) expire no later than 365 days after its date of issuance, provided that any Letter of Credit with a 365-day duration may provide for the renewal thereof at the election of the Borrower (in 46 accordance with procedures to be established by the Issuing Lender) for additional 365-day periods (which shall not expire later than five Business Days prior to the Revolving Credit Termination Date). (b) Each Letter of Credit shall be subject to the Uniform Customs and, to the extent not inconsistent therewith, the laws of the State of New York. (c) The Issuing Lender shall not at any time be obligated to issue any Letter of Credit hereunder if such issuance would conflict with, or cause the Issuing Lender or any L/C Participant to exceed any limits imposed by, any applicable Requirement of Law. 3.2 Procedure for Issuance of Letter of Credit. The Borrower may from time to time request that the Issuing Lender issue a Letter of Credit by delivering to the Issuing Lender at its address for notices specified herein an Application therefor, completed to the satisfaction of the Issuing Lender, and such other certificates, documents and other papers and information as the Issuing Lender may request. Upon receipt of any Application, the Issuing Lender will process such Application and the certificates, documents and other papers and information delivered to it in connection therewith in accordance with its customary procedures and shall promptly issue the Letter of Credit requested thereby (but in no event shall the Issuing Lender be required to issue any Letter of Credit earlier than three Business Days after its receipt of the Application therefor and all such other certificates, documents and other papers and information relating thereto) by issuing the original of such Letter of Credit to the beneficiary thereof or as otherwise may be agreed to by the Issuing Lender and the Borrower. The Issuing Lender shall furnish a copy of such Letter of Credit to the Borrower promptly following the issuance thereof. The Issuing Lender shall promptly furnish to the Administrative Agent, which shall in turn promptly furnish to the Lenders, notice of the issuance of each Standby Letter of Credit (including the amount thereof). On each L/C Fee Payment Date, the Issuing Lender shall promptly furnish to the Administrative Agent, which shall in turn promptly furnish to the Lenders, notice of the aggregate face amount of the Commercial Letters of Credit outstanding on such date. 3.3 Fees, Commissions and Other Charges. (a) The Borrower agrees that it will pay a commission on all outstanding Standby Letters of Credit at a rate per annum equal to 1/8 of 1% above the Applicable Margin then in effect with respect to Revolving Credit Loans that are Eurodollar Loans of the face amount of each such Letter of Credit, of which 1/8 of 1% per annum will be a fronting fee for the account of the Issuing Lender, and the remainder will be shared ratably among the Revolving Credit Lenders in accordance with their Revolving Credit Percentages, payable quarterly in arrears on each L/C Fee Payment Date after the issuance date. The Borrower agrees that it will pay a commission on all outstanding Commercial Letters of Credit at a rate per annum equal to 1/8 of 1% above the Applicable Margin then in effect with respect to Revolving Credit Loans that are Eurodollar Loans of the average daily face amount of such Letters of Credit during the period for which such payment is made, of which 1/8 of 1% per annum will be a fronting fee for the account of the Issuing Lender, and the remainder will be shared ratably among the Revolving Credit Lenders in 47 accordance with the Revolving Credit Percentage, payable quarterly in arrears on each L/C Fee Payment Date. (b) In addition to the foregoing fees and commissions, the Borrower agrees that it shall pay or reimburse the Issuing Lender promptly upon demand for such normal and customary costs and expenses as are incurred or charged by the Issuing Lender in issuing, negotiating, effecting payment under, amending or otherwise administering any Letter of Credit. (c) The Administrative Agent shall, promptly following its receipt thereof, distribute to the Issuing Lender and the L/C Participants all fees and commissions received by the Administrative Agent for their respective accounts pursuant to this Section. 3.4 L/C Participations. (a) The Issuing Lender irrevocably agrees to grant and hereby grants to each L/C Participant, and, to induce the Issuing Lender to issue Letters of Credit hereunder, each L/C Participant irrevocably agrees to accept and purchase and hereby accepts and purchases from the Issuing Lender, on the terms and conditions hereinafter stated, for such L/C Participant's own account and risk an undivided interest equal to such L/C Participant's Revolving Credit Percentage in the Issuing Lender's obligations and rights under each Letter of Credit issued hereunder and the amount of each draft paid by the Issuing Lender thereunder. Each L/C Participant unconditionally and irrevocably agrees with the Issuing Lender that, if a draft is paid under any Letter of Credit for which the Issuing Lender is not reimbursed in full by the Borrower in accordance with the terms of this Agreement, such L/C Participant shall pay to the Issuing Lender upon demand at the Issuing Lender's address for notices specified herein an amount equal to such L/C Participant's Revolving Credit Percentage of the amount of such draft, or any part thereof, which is not so reimbursed. (b) If any amount required to be paid by any L/C Participant to the Issuing Lender pursuant to Section 3.4(a) in respect of any unreimbursed portion of any payment made by the Issuing Lender under any Letter of Credit is paid to the Issuing Lender within three Business Days after the date such payment is due, such L/C Participant shall pay to the Issuing Lender on demand an amount equal to the product of (i) such amount, times (ii) the daily average Federal Funds Effective Rate during the period from and including the date such payment is required to the date on which such payment is immediately available to the Issuing Lender, times (iii) a fraction the numerator of which is the number of days that elapse during such period and the denominator of which is 360. If any such amount required to be paid by any L/C Participant pursuant to Section 3.4(a) is not made available to the Issuing Lender by such L/C Participant within three Business Days after the date such payment is due, the Issuing Lender shall be entitled to recover from such L/C Participant, on demand, such amount with interest thereon calculated from such due date at the rate per annum applicable to Base Rate Loans hereunder. A certificate of the Issuing Lender submitted to any L/C Participant with respect to any amounts owing under this Section shall be conclusive in the absence of manifest error. 48 (c) Whenever, at any time after the Issuing Lender has made payment under any Letter of Credit and has received from any L/C Participant its pro rata share of such payment in accordance with Section 3.4(a), the Issuing Lender receives any payment related to such Letter of Credit (whether directly from the Borrower or otherwise, including proceeds of collateral applied thereto by the Issuing Lender), or any payment of interest on account thereof, the Issuing Lender will distribute to such L/C Participant its pro rata share thereof; provided that in the event that any such payment received by the Issuing Lender shall be required to be returned by the Issuing Lender, such L/C Participant shall return to the Issuing Lender the portion thereof previously distributed by the Issuing Lender to it. 3.5 Reimbursement Obligation of the Borrower. The Borrower agrees to reimburse the Issuing Lender on each date on which the Issuing Lender notifies the Borrower of the date and amount of a draft presented under any Letter of Credit and paid by the Issuing Lender for the amount of (a) such draft so paid and (b) any taxes, fees, charges or other costs or expenses incurred by the Issuing Lender in connection with such payment. Each such payment shall be made to the Issuing Lender at its address for notices specified herein in lawful money of the United States and in immediately available funds. Interest shall be payable on any and all amounts remaining unpaid by the Borrower under this Section from the date such amounts become payable (whether at stated maturity, by acceleration or otherwise) until payment in full at the rate set forth in Section 2.14(c). Each drawing under any Letter of Credit shall constitute a request by the Borrower to the Administrative Agent for a borrowing pursuant to Section 2.6 of Base Rate Loans in the amount of such drawing, the proceeds of such Loans to be applied to reimburse such drawing. The Borrowing Date with respect to such borrowing shall be the date of such drawing. 3.6 Obligations Absolute. The Borrower's obligations under this Section 3 shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower may have or have had against the Issuing Lender, any beneficiary of a Letter of Credit or any other Person. The Borrower also agrees with the Issuing Lender that the Issuing Lender shall not be responsible for, and the Borrower's Reimbursement Obligations under Section 3.5 shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even though such documents shall in fact prove to be invalid, fraudulent or forged, or any dispute between or among the Borrower and any beneficiary of any Letter of Credit or any other party to which such Letter of Credit may be transferred or any claims whatsoever of the Borrower against any beneficiary of such Letter of Credit or any such transferee. The Issuing Lender shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit, except for errors or omissions found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the Issuing Lender. The Borrower agrees that any action taken or omitted by the Issuing Lender under or in connection with any Letter of Credit or the related drafts or documents, if done in the absence of gross negligence or willful misconduct and in accordance with the standards or care specified in the Uniform Commercial Code of the State of New York, shall 49 be binding on the Borrower and shall not result in any liability of the Issuing Lender to the Borrower. 3.7 Letter of Credit Payments. If any draft shall be presented for payment under any Letter of Credit, the Issuing Lender shall promptly notify the Borrower of the date and amount thereof. The responsibility of the Issuing Lender to the Borrower in connection with any draft presented for payment under any Letter of Credit shall, in addition to any payment obligation expressly provided for in such Letter of Credit, be limited to determining that the documents (including each draft) delivered under such Letter of Credit in connection with such presentment are substantially in conformity with such Letter of Credit. 3.8 Applications. To the extent that any provision of any Application related to any Letter of Credit is inconsistent with the provisions of this Section 3, the provisions of this Section 3 shall apply. SECTION 4. REPRESENTATIONS AND WARRANTIES To induce the Arranger, the Administrative Agent and the Lenders to enter into this Agreement and to make the Loans and issue or participate in the Letters of Credit, the Parent and the Borrower hereby represent and warrant to the Administrative Agent and each Lender that: 4.1 Financial Condition. (a)(i) The unaudited pro forma consolidated balance sheet of the Borrower as at December 31, 1996 (including the notes thereto) (the "Pro Forma Balance Sheet"), copies of which have heretofore been furnished to each Lender, has been prepared giving effect (as if such events had occurred on such date) to (A) the Acquisitions and the other transactions contemplated by the Acquisition Documents, (B) the borrowings under this Agreement contemplated to be made on the Closing Date (including all borrowings to be held by the Administrative Agent pursuant to the Cash Collateral Agreement) and the use of proceeds thereof, (C) the issuance of the Interim Notes and (D) the payment of fees and expenses in connection with the foregoing. The Pro Forma Balance Sheet has been prepared based on the best information available to the Borrower as of the date of delivery thereof and presents fairly on a pro forma basis the estimated consolidated financial position of the Borrower as of December 31, 1996, assuming that the events specified in the preceding sentence had actually occurred at such date. (ii) The unaudited pro forma consolidated income statement of the Borrower for the period of four consecutive fiscal quarters ended as of December 31, 1996 (including the notes thereto) (the "Pro Forma Income Statement"), copies of which have heretofore been furnished to each Lender, has been prepared giving effect (as if such events had occurred on the first day of such period) to (A) the Acquisitions and the other transactions contemplated by the Acquisition Documents, (B) the borrowings under this Agreement contemplated to be made on the Closing Date (including all borrowings to be held by the Administrative Agent pursuant 50 to the Cash Collateral Agreement) and the use of proceeds thereof, (C) the issuance of the Interim Notes and (D) the payment of fees and expenses in connection with the foregoing. The Pro Forma Income Statement has been prepared based on the best information available to the Borrower as of the date of delivery thereof and presents fairly on a pro forma basis the estimated consolidated results of operations of the Borrower for the period of four consecutive fiscal quarters ended as of December 31, 1996, assuming that the events specified in the preceding sentence had actually occurred on the first day of such period. The Pro Forma Income Statement presents Consolidated EBITDA for the Borrower for such period of not less than $27,200,000. (b) (i) The consolidated balance sheets of the Borrower as at March 31, 1996 and March 31, 1995 and the related consolidated statements of income and of cash flows for the fiscal years ended on such dates, reported on by KPMG Peat Marwick L.P., copies of which have heretofore been furnished to each Lender, are complete and correct and present fairly in all material respects the consolidated financial condition of the Borrower as at such dates, and the consolidated results of operations and consolidated cash flows for the fiscal years then ended. The unaudited consolidated balance sheet of the Borrower as at February 28, 1997 and the related unaudited consolidated statements of income and of cash flows for the eleven-month period ended on such date, certified by a Responsible Officer of the Borrower, copies of which have heretofore been furnished to each Lender, are complete and correct and present fairly in all material respects the consolidated financial condition of the Borrower as at such date, and the consolidated results of operations and consolidated cash flows for the eleven-month period then ended (subject to normal year-end audit adjustments). (ii) The audited consolidated and combined balance sheet of Bowen as at September 30, 1996 and the related unaudited statement of income for the nine-month period ended on such date, reported on, in the case of such balance sheet, by Ernst & Young LLP, copies of which have heretofore been furnished to each Lender, are complete and correct and present fairly in all material respects the consolidated financial condition of Bowen as at such date. The unaudited consolidated and combined balance sheets of Bowen as at December 31, 1995 and December 31, 1996 and the related unaudited statements of income and of cash flows (in the case of December 31, 1995) for the fiscal years ended on such dates, certified by the chief financial officer of Bowen, copies of which have heretofore been furnished to each Lender, are complete and correct and present fairly in all material respects the consolidated financial condition of Bowen as at such dates, and the results of operations and consolidated cash flows for the fiscal years then ended. (iii) The consolidated balance sheets of Cardwell as at December 31, 1995 and October 31, 1996 and the related consolidated statements of income and of cash flows for the fiscal year and ten-month period, respectively, ended on such dates, reported on by Grant Thornton in the case of the December 31, 1995 financial statements and by KPMG Peat Marwick L.P. in the case of the October 31, 1996 financial statements, copies of which have heretofore been furnished to each Lender, are complete and correct and present fairly in all material respects the consolidated financial condition of Cardwell as at such dates, and the 51 consolidated results of operations and consolidated cash flows for the fiscal year and ten-month period, respectively, then ended. The unaudited consolidated balance sheets of Cardwell as at December 31, 1996 and January 31, 1997 and the related unaudited consolidated statement of income for the fiscal year ended on December 31, 1996, certified by the chief financial officer of Cardwell, copies of which have heretofore been furnished to each Lender, are complete and correct and present fairly the consolidated financial condition of Cardwell as at such dates, and the consolidated results of operations for the fiscal year ended on December 31, 1996 (subject to normal year-end audit adjustments in the case of the January 31, 1997 financial statements). All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by such accountants and as disclosed therein). Neither the Borrower nor any of the Acquired Companies had at the date of the most recent balance sheet referred to above any undisclosed liabilities, any material Guarantee Obligation, contingent liability or liability for taxes, or any long-term lease or unusual forward or long-term commitment, including, without limitation, any interest rate or foreign currency swap or exchange transaction, which is not reflected in the foregoing statements or in the notes thereto and not required to be disclosed by GAAP except, in the case of Bowen, matters expressly identified or referred to in any exhibit or schedule to the Bowen Asset Purchase Agreement or matters which are not required to be expressly so identified or referred to in any such exhibit or schedule by reason of any express limitation or exclusion in any representation, warranty, covenant, agreement or undertaking contained in the Bowen Asset Purchase Agreement. During the period from March 31, 1996 to and including the date hereof there has been no sale, transfer or other disposition by the Borrower or any of its consolidated Subsidiaries or by any of the Acquired Companies or any of their consolidated Subsidiaries of any material part of their business or property and no purchase or other acquisition of any business or property (including any Capital Stock of any other Person) material in relation to the consolidated financial condition of the Borrower or the Acquired Companies, in each case, at March 31, 1996, other than pursuant to the Acquisition Documents. 4.2 No Change. (a) Since March 31, 1996, there has been no development or event which has had or could reasonably be expected to have a Material Adverse Effect, and (b) during the period from March 31, 1996 to and including the date hereof no dividends or other distributions have been declared, paid or made upon the Capital Stock of the Parent or the Borrower nor has any of the Capital Stock of the Parent or the Borrower been redeemed, retired, purchased or otherwise acquired for value by the Parent or the Borrower. 4.3 Corporate Existence; Compliance with Law. Each of the Parent, the Borrower and their Subsidiaries (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has the power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification, except where the failure to be so 52 qualified could not reasonably be expected to have a Material Adverse Effect and (d) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 4.4 Corporate Power; Authorization; Enforceable Obligations. Each Loan Party has the power and authority, and the legal right, to make, deliver and perform each Loan Document to which it is a party and, in the case of the Borrower, to borrow hereunder. Each Loan Party has taken all necessary action to authorize the execution, delivery and performance of the Loan Documents to which it is a party and, in the case of the Borrower, to authorize the borrowings on the terms and conditions of this Agreement and the Notes. No material consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person is required in connection with the Acquisitions and the other transactions contemplated hereby, the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of this Agreement or any of the Loan Documents, except the filings referred to in Section 4.19(b) and (c). Each Loan Document has been duly executed and delivered on behalf of each Loan Party thereto. This Agreement constitutes, and each other Loan Document upon execution will constitute, a legal, valid and binding obligation of each Loan Party thereto, enforceable against each such Loan Party in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 4.5 No Legal Bar. The execution, delivery and performance of this Agreement and the other Loan Documents, the issuance of Letters of Credit, the borrowings hereunder, the use of the proceeds thereof and the consummation of the Acquisitions will not violate any Requirement of Law or Contractual Obligation of the Parent, the Borrower or of any of their Subsidiaries and will not result in, or require, the creation or imposition of any Lien on any of their respective properties or revenues pursuant to any such Requirement of Law or Contractual Obligation (other than the Liens created by the Security Documents). 4.6 No Material Litigation. No litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Parent or the Borrower, threatened by or against the Parent, the Borrower or any of their Subsidiaries or against any of its or their respective properties or revenues (a) with respect to any of the Loan Documents or any of the transactions contemplated hereby or thereby or (b) which could reasonably be expected to have a Material Adverse Effect. 4.7 No Default. Neither the Parent, the Borrower nor any of their Subsidiaries is in default under or with respect to any of its Contractual Obligations in any respect which could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. 53 4.8 Ownership of Property; Liens. Each of the Parent, the Borrower and their Subsidiaries has title in fee simple to, or a valid leasehold interest in, all its real property, and good title to, or a valid leasehold interest in, all its other property, and none of such property is subject to any Lien except as permitted by Section 7.3. The Borrower and its Subsidiaries have title in fee simple to no real property other than the Mortgaged Property and any real property the fair market value of which the Borrower reasonably believes is less than $75,000. 4.9 Intellectual Property. The Parent, the Borrower and each of their Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, technology, know-how and processes necessary for the conduct of its business as currently conducted, except for those the failure to own or license which could not reasonably be expected to have a Material Adverse Effect (collectively, the "Intellectual Property"). No material claim has been asserted and is pending by any Person challenging or questioning the use of any Intellectual Property or the validity or effectiveness of any Intellectual Property, nor does the Parent or the Borrower know of any valid basis for any such claim. The use of Intellectual Property by the Parent, the Borrower and their Subsidiaries does not infringe on the rights of any Person in any material respect. 4.10 No Burdensome Restrictions. No Requirement of Law or Contractual Obligation of the Parent, the Borrower or any of their Subsidiaries could reasonably be expected to have a Material Adverse Effect. 4.11 Taxes. Each of the Parent, the Borrower and their Subsidiaries has filed or caused to be filed all Federal, state and other material tax returns which are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than any the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of the Borrower); no tax Lien has been filed, and, to the knowledge of the Parent and the Borrower, no claim is being asserted, with respect to any such tax, fee or other charge. 4.12 Federal Regulations. No part of the proceeds of any Loans will be used for "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation G or Regulation U of the Board as now and from time to time hereafter in effect or for any purpose which violates the provisions of the Regulations of the Board. If requested by any Lender or the Administrative Agent, the Borrower will furnish to the Administrative Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form G-1 or FR Form U-1 referred to in said Regulation G or Regulation U, as the case may be. 4.13 ERISA. Neither a Reportable Event nor an "accumulated funding deficiency" (within the meaning of Section 412 of the Code or Section 302 of ERISA) has occurred during the five-year period prior to the date on which this representation is made or 54 deemed made with respect to any Plan, and each Plan has complied in all material respects with the applicable provisions of ERISA and the Code. No termination of a Single Employer Plan has occurred, and no Lien in favor of the PBGC or a Plan has arisen, during such five-year period. The present value of all accrued benefits under each Single Employer Plan (based on those assumptions used to fund such Plans) did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the value of the assets of such Plan allocable to such accrued benefits by a material amount. Neither the Borrower nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan which has resulted or could reasonably be expected to result in a material liability under ERISA, and neither the Borrower nor any Commonly Controlled Entity would become subject to any material liability under ERISA if the Borrower or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made. To the knowledge of the Borrower and the Commonly Controlled Entities, no such Multiemployer Plan is in Reorganization or Insolvent. The present value (determined using actuarial and other assumptions which are reasonable in respect of the benefits provided and the employees participating) of the liability of the Borrower and each Commonly Controlled Entity for post retirement benefits to be provided to their current and former employees under Plans which are welfare benefit plans (as defined in Section 3(1) of ERISA) does not, in the aggregate, exceed the assets under all such Plans allocable to such benefits by an amount in excess of $100,000. 4.14 Investment Company Act; Other Regulations. No Loan Party is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. No Loan Party is subject to regulation under any Federal or State statute or regulation (other than Regulation X of the Board) which limits its ability to incur Indebtedness. 4.15 Subsidiaries. The Subsidiaries listed on Schedule 4.15 constitute all the direct or indirect Subsidiaries of the Parent and the Borrower and Schedule 4.15 shows, as to each such Subsidiary, its jurisdiction of its incorporation, its authorized capitalization and the ownership of Capital Stock of such Subsidiary. The Parent has no direct Subsidiaries other than the Borrower. 4.16 Purpose of Loans; Limitations on Use. The proceeds of the Tranche A Term Loans shall be used to finance the Acquisitions and to pay related fees and expenses. The proceeds of the Tranche B Term Loans shall be used to repay a portion of the Interim Notes. The Revolving Credit Loans shall be used to refinance certain existing indebtedness of the Borrower and the Acquired Companies as described on Schedule 4.16 and to finance the working capital needs and other general corporate purposes of the Borrower and its Subsidiaries in the ordinary course of business. 55 4.17 Environmental Matters. Except as set forth on Schedule 4.17: (a) The Properties do not contain, and have not previously contained, any Materials of Environmental Concern in amounts or concentrations or under circumstances which (i) constitute or constituted a violation of, or (ii) could give rise to liability under, any Environmental Law, except in either case insofar as such violation or liability, or any aggregation thereof, could not reasonably be expected to result in the payment of a Material Environmental Amount. (b) The Properties and all operations at the Properties are in material compliance, and have in the last five years been in material compliance, with all applicable Environmental Laws, and there is no contamination at, under or about the Properties or violation of any Environmental Law with respect to the Properties or the business operated by the Parent, the Borrower or any of their Subsidiaries (the "Business") which could reasonably be expected to materially interfere with the continued operation of the Properties. Neither the Parent, the Borrower nor any of their Subsidiaries has assumed any liability of any other Person under Environmental Laws. (c) Neither the Parent, the Borrower nor any of their Subsidiaries has received or is aware of any notice of violation, alleged violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of the Properties or the Business, nor does the Parent, the Borrower or any of their Subsidiaries have knowledge or reason to believe that any such notice will be received or is being threatened, except insofar as such notice or threatened notice, or any aggregation thereof, does not involve a matter or matters that could reasonably be expected to result in the payment of a Material Environmental Amount. (d) Materials of Environmental Concern have not been transported or disposed of from the Properties in violation of, or in a manner or to a location which could reasonably be expected to give rise to liability under, any Environmental Law, nor have any Materials of Environmental Concern been generated, treated, stored or disposed of at, on or under any of the Properties in violation of, or in a manner that could give rise to liability under, any applicable Environmental Law, except insofar as any such violation or liability referred to in this paragraph, or any aggregation thereof, could not reasonably be expected to result in the payment of a Material Environmental Amount. (e) No judicial proceeding or governmental or administrative action is pending or, to the knowledge of the Parent, the Borrower or any of their Subsidiaries, threatened, under any Environmental Law to which the Parent, the Borrower or any of their Subsidiaries is or will be named as a party with respect to the Properties or the Business, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements 56 outstanding under any Environmental Law with respect to the Properties or the Business, except insofar as such proceeding, action, decree, order or other requirement, or any aggregation thereof, could not reasonably be expected to result in the payment of a Material Adverse Amount. (f) There has been no release or threat of release of Materials of Environmental Concern at or from the Properties, or arising from or related to the operations of the Parent, the Borrower or any of their Subsidiaries in connection with the Properties or otherwise in connection with the Business, in violation of or in amounts or in a manner that could give rise to liability under Environmental Laws, except insofar as any such violation or liability referred to in this paragraph, or any aggregation thereof, could not reasonably be expected to result in the payment of a Material Environmental Amount. 4.18 Accuracy of Information. No statement or information contained in this Agreement, any other Loan Document, the Confidential Information Memorandum or any other document, certificate or statement furnished to the Arranger, the Administrative Agent or the Lenders, by or on behalf of any Loan Party for use in connection with the transactions contemplated by this Agreement or the other Loan Documents, contained as of the date such statement, information, document or certificate was so furnished any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements contained herein or therein not misleading. It is understood that no representation or warranty is made concerning the forecasts, estimates, pro forma information, projections and statements as to anticipated future performance or conditions, and the assumptions on which they were based contained in any such information, reports, financial statements, exhibits or schedules, except that as of the date such forecasts, estimates, pro forma information, projections and statements were generated, such forecasts, estimates, pro forma information, projections and statements were based upon good faith estimates and assumptions believed by management of the Parent, the Borrower and their Subsidiaries to be reasonable at such time. Such forecasts, estimates, pro forma information and statements, and the assumptions on which they were based, may or may not prove to be correct. There is no fact known to the Parent, the Borrower or any of their Subsidiaries that could reasonably be expected to have a Material Adverse Effect that has not been expressly disclosed herein, in the other Loan Documents, or in such other documents, certificates and statements furnished to the Administrative Agent and the Lenders for use in connection with the transactions contemplated hereby and by the other Loan Documents. 4.19 Security Documents. (a) The Master Guarantee and Collateral Agreement is effective to create in favor of the Administrative Agent, for the benefit of the Lenders, a legal, valid and enforceable security interest in the Pledged Securities described therein and proceeds thereof and, when the Pledged Notes and the stock certificates representing the Pledged Stock described therein are delivered to the Administrative Agent, the Master Guarantee and Collateral Agreement shall constitute a fully perfected first priority Lien on, and security interest in, all right, title and interest of the relevant pledgor in such Pledged Securities and the proceeds thereof, as security for the Obligations (as defined in the Master 57 Guarantee and Collateral Agreement), in each case prior and superior in right to any other Person. (b) The Master Guarantee and Collateral Agreement is effective to create in favor of the Administrative Agent, for the benefit of the Lenders, a legal, valid and enforceable security interest in the Collateral described therein (other than the Pledged Securities) and proceeds thereof, and when financing statements in appropriate form are filed in the offices specified on Schedule 4.19(b), the Master Guarantee and Collateral Agreement shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the Loan Parties in such Collateral (other than the Pledged Securities) and the proceeds thereof, as security for the Obligations (as defined in the Master Guarantee and Collateral Agreement), in each case prior and superior in right to any other Person, other than with respect to Liens expressly permitted by Section 7.3. (c) Each Mortgage, when executed and delivered by the relevant Loan Party, shall be effective to create in favor of the Administrative Agent, for the benefit of the Lenders, a legal, valid and enforceable Lien on the Mortgaged Property described therein and proceeds thereof, and when each Mortgage is filed in the office(s) specified on Schedule 4.19(c), each Mortgage shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the Loan Parties in the Mortgaged Property and the proceeds thereof, as security for the Obligations (as defined in the relevant Mortgage), in each case prior and superior in right to any other Person, other than with respect to Liens expressly permitted by Section 7.3. (d) The Cash Collateral Agreement is effective to create in favor of the Administrative Agent, for the benefit of the Lenders, a legal, valid and enforceable security interest in the Collateral described therein and proceeds thereof and the Cash Collateral Agreement shall constitute a fully perfected first priority Lien on, and security interest in, all right, title and interest of the Borrower in such Collateral and the proceeds thereof, as security for the Obligations (as defined herein), in each case prior and superior in right to any other Person. 4.20 Solvency. Each Loan Party is, and after giving effect to the consummation of the Acquisitions and the incurrence of all Indebtedness and obligations being incurred in connection herewith and therewith will be and will continue to be, Solvent. 4.21 Acquisition Documents. The Borrower has heretofore furnished to each Lender a true, complete and correct copy of the Acquisition Agreements and all schedules, exhibits, annexes and amendments thereto and all side letters or agreements affecting the terms thereof (collectively, the ("Acquisition Documents"). The Acquisition Documents have not been amended, supplemented or otherwise modified; none of the provisions thereof has been waived; to the knowledge of each of the Parent and the Borrower, each of the parties thereto is in material compliance with its covenants and agreements contained therein; each of the representations and warranties contained therein is true and correct in all material respects as of the time made or deemed made; and the Acquisition Documents constitute the complete 58 understanding among the Sellers and the Borrower relating to the Acquisitions. The Acquisition Documents have been duly authorized, executed and delivered by the Borrower, and, to the best knowledge of the Borrower, the Acquisition Documents have been duly authorized, executed and delivered by the other parties thereto. The Acquisition Documents are in full force and effect and constitute the legal, valid and binding obligation of the Borrower and the other parties thereto enforceable against each such party in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). Except as specified in the Acquisition Documents, no consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person is required in connection with the Acquisitions or with the execution, delivery, performance, validity or enforceability of the Acquisition Documents. 4.22 Labor Matters. There are no strikes pending or, to the knowledge of each of the Parent and the Borrower, threatened against the Parent, the Borrower or any of their Subsidiaries which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. The hours worked and payments made to employees of the Parent, the Borrower and each of their Subsidiaries have not been in violation of the Fair Labor Standards Act or any other applicable Requirement of Law, except to the extent such violations could not, individually or in the aggregate, be reasonably expected to have a Material Adverse Effect. All material payments due from the Parent, the Borrower or any of their Subsidiaries on account of wages and employee health and welfare insurance and other benefits have been paid or accrued as a liability on the books of the Parent, the Borrower or such Subsidiary. SECTION 5. CONDITIONS PRECEDENT 5.1 Conditions to Initial Extension of Credit. The agreement of each Lender to make the initial extension of credit requested to be made by it is subject to the satisfaction, prior to or concurrently with the making of such extension of credit on the Closing Date (which Closing Date shall occur on or before March 31, 1997), of the following conditions precedent: (a) Loan Documents. The Arranger shall have received (i) this Agreement, executed and delivered by a duly authorized officer of the Parent and the Borrower, with a counterpart or a conformed copy for each Lender, (ii) for the account of any Lender requesting Notes in accordance with Section 2.8(e), Notes conforming to the requirements hereof and executed and delivered by a duly authorized officer of the Borrower, (iii) the Master Guarantee and Collateral Agreement, executed and delivered by a duly authorized officer of each party thereto, with a counterpart or a conformed copy for each Lender, (iv) the Cash Collateral Agreement, executed and delivered by a duly authorized officer of the Borrower, with a counterpart or conformed copy for each 59 Lender and (v) each Mortgage, executed and delivered by a duly authorized officer of each party thereto, with a counterpart for each Lender. (b) Bowen Acquisition. The Bowen Acquisition shall have been consummated for an aggregate purchase price not exceeding $75,000,000, subject to any purchase price adjustments. The Bowen Acquisition and the other transactions described in the Bowen Asset Purchase Agreement which were to occur on or prior to the Closing Date shall have been consummated in all material respects in accordance with the terms and provisions thereof, no material provisions of the Bowen Asset Purchase Agreement shall have been amended, supplemented or otherwise modified or waived without the prior written consent of the Arranger, and the Arranger shall have received a certificate of the Borrower signed by a duly authorized officer of the Borrower to such effect and to the effect that the only condition to the consummation of such Acquisition remaining to be satisfied under the Bowen Asset Purchase Agreement (which condition shall be satisfied simultaneously with the making of the initial extension of credit hereunder) is the delivery of funds sufficient to pay the amounts required to be paid under the Bowen Asset Purchase Agreement. Prior to or simultaneously with the making of the initial extension of credit hereunder, the Arranger shall have received (i) evidence satisfactory to it that ownership of the fee and leasehold interests in the real property purchased in such Acquisition shall have been transferred to the Borrower or a Subsidiary Guarantor and all other rights and assets acquired by the Borrower pursuant to the Bowen Asset Purchase Agreement shall have been transferred to the Borrower or a Subsidiary Guarantor and (ii) a true, correct, complete and fully executed copy of the Bowen Asset Purchase Agreement and all schedules and material documents executed or delivered in connection therewith, accompanied by a certificate of a duly authorized officer of the Borrower to such effect, all of which shall be in form and substance reasonably satisfactory to the Arranger. (c) Related Agreements. The Arranger shall have received, in form and substance reasonably satisfactory to it, with a copy for each Lender, true and correct copies, certified as to authenticity by the Borrower of (i) the Interim Note Documentation and (ii) the Permanent Note Documentation, to the extent agreed to on or prior to the Closing Date. The Arranger shall have received (in a form reasonably satisfactory to the Arranger), with a copy for each Lender, true and correct copies, certified as to authenticity by the Borrower, of the Insurance Policies (or certificates evidencing the effectiveness of such Insurance Policies and the material terms thereof) and such other documents or instruments as may be reasonably requested by the Arranger, including, without limitation, a copy of any other debt instrument, security agreement or other material contract to which the Loan Parties may be a party. (d) Capitalization; Capital Structure. The Borrower shall have received at least $31,000,000 in net cash proceeds from the issuance of the Interim Notes pursuant to the Interim Note Documentation, the terms and conditions (including without limitation the subordination provisions applicable thereto) of which shall be satisfactory to the 60 Arranger in all material respects. The capital structure of the Parent, the Borrower and each of their Subsidiaries after the Acquisitions and the financings contemplated hereby shall be satisfactory to the Arranger and the Lenders in all respects. (e) Pro Forma Financial Statements; Interim Financial Statements. The Lenders shall have received (i) the Pro Forma Balance Sheet, which Pro Forma Balance Sheet shall be in form and substance reasonably satisfactory to the Lenders, (ii) the Pro Forma Income Statement, which Pro Forma Income Statement shall be in form and substance reasonably satisfactory to the Lenders and (iii) satisfactory unaudited interim consolidated financial statements of the Borrower and each of the Acquired Companies for each fiscal month ended in the 1997 fiscal year as to which such financial statements are available prior to the Closing Date and such financial statements shall not reflect any material adverse change in the consolidated financial condition of such reporting entity as reflected in the financial statements previously delivered to the Lenders. The Pro Forma Income Statement presents Consolidated EBITDA for the Borrower for such period of not less than $27,200,000. (f) Approvals. All governmental and third party approvals (including landlords' and other consents) necessary or, in the reasonable discretion of the Arranger, advisable in connection with the Bowen Acquisition, the financings contemplated hereby and the continuing operations of the Borrower and its Subsidiaries shall have been obtained and be in full force and effect, and all applicable waiting periods shall have expired without any action being taken or threatened by any competent authority which would restrain, prevent or otherwise impose adverse conditions on the Bowen Acquisition, the financing thereof or the continuing operations of the Borrower. (g) Business Plan. The Lenders shall have received a detailed business plan of the Borrower for fiscal years 1997 - 2003 and a written analysis of the business and prospects of the Borrower and its Subsidiaries for the period from the Closing Date through the final maturity of the Term Loans, in each case, (i) on a pro forma basis reflecting the Acquisitions and the other transactions contemplated hereby and (ii) reasonably satisfactory to the Lenders. (h) Lien Searches. The Arranger shall have received the results of a recent search by a Person satisfactory to the Arranger, of the Uniform Commercial Code, judgment and tax lien filings in each of the relevant jurisdictions where assets of the Loan Parties (prior and subsequent to the Bowen Acquisition) are located, and such search shall reveal no liens on any of such assets except for liens permitted by Section 7.3 or liens to be discharged on or prior to the Closing Date pursuant to documentation satisfactory to the Arranger. 61 (i) Expenses. The fees and expenses incurred or to be incurred in connection with the Acquisitions and the financing thereof, excluding the refinancing of the Interim Notes, shall not exceed $6,500,000 in the aggregate. (j) Environmental. The Lenders shall have received such environmental information with respect to the real property owned or leased by the Loan Parties or to be acquired pursuant to the Acquisitions as such Lenders may reasonably request and such information shall be provided by a firm satisfactory to the Arranger and in form and substance satisfactory to the Lenders. (k) Closing Certificate. The Arranger shall have received, with a counterpart for each Lender, a certificate of each Loan Party, dated the Closing Date, substantially in the form of Exhibit D, with appropriate insertions and attachments, executed by the President or any Vice President and the Secretary or any Assistant Secretary of such Loan Party. (l) Corporate Proceedings of Loan Parties. The Arranger shall have received, with a counterpart for each Lender, a copy of the resolutions of the Board of Directors of each Loan Party authorizing (i) the execution, delivery and performance of the Loan Documents to which it is a party (including, but not limited to, the granting of any Liens provided for therein), and (ii) in the case of the Borrower, the borrowings contemplated hereunder. (m) Fees. The Arranger and the Administrative Agent shall have received all fees required to be paid, and all expenses for which invoices have been presented, on or before the Closing Date. (n) Legal Opinions. The Arranger shall have received, with a counterpart for each Lender, (i) the following executed legal opinions: (1) the executed legal opinion of Jones, Day, Reavis & Pogue, counsel to the Loan Parties, substantially in the form of Exhibit E; and (2) such legal opinions in respect of the filing of the Mortgages as may be reasonably requested by the Arranger, from local counsel; (ii) a reliance letter or reliance letters permitting the Administrative Agent and the Lenders to rely on all of the opinions of counsel rendered in connection with the Interim Notes and the Bowen Acquisition. Each such legal opinion shall be in form and substance satisfactory to the Lenders and shall cover such matters incident to the transactions contemplated by this Agreement as the Arranger may reasonably require. 62 (o) Pledged Securities; Stock Powers. The Administrative Agent shall have received the Pledged Notes (duly indorsed to the bearer) and the certificates representing the shares pledged pursuant to the Master Guarantee and Collateral Agreement, together with an undated stock power for each such certificate executed in blank by a duly authorized officer of the pledgor thereof. (p) Filings, Registrations and Recordings. Each document (including, without limitation, any Uniform Commercial Code financing statement) required by the Security Documents or under law or reasonably requested by the Arranger to be filed, registered or recorded in order to create in favor of the Administrative Agent, for the benefit of the Lenders, a perfected Lien on the Collateral described therein, prior and superior in right to any other Person (other than with respect to Liens expressly permitted by Section 7.3), shall be in proper form for filing, registration or recordation in each jurisdiction in which the filing, registration or recordation thereof is so required or requested. (q) Surveys. The Arranger shall have received, and the title insurance company issuing the policy referred to in Section 5.1(r) (the "Title Insurance Company") shall have received, maps or plats of an as-built survey of the sites of the property covered by each Mortgage (except as otherwise agreed to by the Arranger) certified to the Administrative Agent and the Title Insurance Company in a manner satisfactory to them, dated a date satisfactory to the Arranger and the Title Insurance Company by an independent professional licensed land surveyor satisfactory to the Arranger and the Title Insurance Company, which maps or plats and the surveys on which they are based shall be made in accordance with the Minimum Standard Detail Requirements for Land Title Surveys jointly established and adopted by the American Land Title Association and the American Congress on Surveying and Mapping in 1992, and, without limiting the generality of the foregoing, there shall be surveyed and shown on such maps, plats or surveys the following: (i) the locations on such sites of all the buildings, structures and other improvements and the established building setback lines; (ii) the lines of streets abutting the sites and width thereof; (iii) all access and other easements appurtenant to the sites or necessary or desirable to use the sites; (iv) all roadways, paths, driveways, easements, encroachments and overhanging projections and similar encumbrances affecting the site, whether recorded, apparent from a physical inspection of the sites or otherwise known to the surveyor; (v) any encroachments on any adjoining property by the building structures and improvements on the sites; and (vi) if the site is described as being on a filed map, a legend relating the survey to said map. (r) Title Insurance Policy. The Arranger shall have received in respect of each parcel covered by each Mortgage a mortgagee's title policy (or policies) or marked up unconditional binder for such insurance dated the Closing Date. Each such policy shall (i) be in an amount satisfactory to the Arranger; (ii) be issued at ordinary rates; (iii) insure that the Mortgage insured thereby creates a valid first Lien on such parcel free 63 and clear of all defects and encumbrances, except such as may be approved by the Arranger; (iv) name the Administrative Agent for the benefit of the Lenders as the insured thereunder; (v) be in the form of ALTA Loan Policy - 1992; (vi) contain such endorsements and affirmative coverage as the Arranger may request; and (vii) be issued by title companies satisfactory to the Arranger (including any such title companies acting as co-insurers or reinsurers, at the option of the Arranger). The Arranger shall have received evidence satisfactory to it that all premiums in respect of each such policy, and all charges for mortgage recording tax, if any, have been paid. (s) Flood Insurance. If requested by the Arranger, the Arranger shall have received (i) a policy of flood insurance which (A) covers any parcel of improved real property which is encumbered by any Mortgage, (B) is written in an amount not less than the outstanding principal amount of the indebtedness secured by such Mortgage which is reasonably allocable to such real property or the maximum limit of coverage made available with respect to the particular type of property under the National Flood Insurance Act of 1968, whichever is less, and (C) has a term ending not earlier than the maturity of the indebtedness secured by such Mortgage and (ii) confirmation that the Company has received the notice requirement pursuant to Section 208(e)(3) of Regulation H of the Board. (t) Copies of Documents. The Arranger shall have received a copy of all recorded documents referred to, or listed as exceptions to title in, the title policy or policies referred to in Section 5.1(r) and a copy, certified by such parties as the Arranger may deem appropriate, of all other documents affecting the property covered by each Mortgage. (u) Solvency Analysis. The Lenders shall have received an analysis from the chief financial officer of the Borrower documenting the solvency of the Borrower and its Subsidiaries after giving effect to the Acquisitions, the financings and the other transactions contemplated hereby. (v) Borrowing Notice. The Administrative Agent shall have received notice pursuant to Section 2.2 requesting the Tranche A Term Loan Lenders to make Tranche A Term Loans in an amount sufficient to consummate the Acquisitions and to pay related fees and expenses. 5.2 Conditions to Tranche B Term Loans. The agreement of each Tranche B Term Loan Lender to make any Tranche B Term Loan requested to be made by it on any date is subject to the satisfaction of the following conditions precedent: (a) Issuance of Common Stock. The Parent shall have issued common stock on terms satisfactory to the Lenders, received net cash proceeds thereof of at least $15,500,000 and contributed such net proceeds to the Borrower in a manner reasonably satisfactory to the Lenders, and the Borrower shall have applied the proceeds thereof to 64 repay the portion of the Interim Notes not to be repaid with the proceeds of the Tranche B Term Loans; and (b) Consolidated EBITDA. The Consolidated EBITDA of the Borrower and its Subsidiaries shall have been at least $30,000,000 for the four consecutive fiscal quarters most recently ended prior to the date of borrowing the Tranche B Term Loans. For purposes of this test, Consolidated EBITDA shall be determined in the same manner as set forth in the Pro Forma Income Statement. 5.3 Conditions to Each Extension of Credit. The agreement of each Lender to make any extension of credit requested to be made by it on any date (including, without limitation, its initial extension of credit) is subject to the satisfaction of the following conditions precedent: (a) Representations and Warranties. Each of the representations and warranties made by any Loan Party in or pursuant to the Loan Documents shall be true and correct in all material respects on and as of such date as if made on and as of such date. (b) No Default. No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the extensions of credit requested to be made on such date. (c) Additional Matters. All proceedings, and all documents, instruments and other legal matters in connection with the transactions contemplated by this Agreement, the other Loan Documents and the Acquisitions shall be reasonably satisfactory in form and substance to the Administrative Agent, and the Administrative Agent shall have received such other documents and legal opinions in respect of any aspect or consequence of the transactions contemplated hereby or thereby as it shall reasonably request. (d) Borrowing Notice. The Borrower shall have delivered to the Administrative Agent the applicable borrowing notice in accordance with the relevant subsection of Section 2. Each borrowing by and issuance of a Letter of Credit on behalf of the Borrower hereunder shall constitute a representation and warranty by the Borrower as of the date of such extension of credit that the conditions contained in this Section 5.3 have been satisfied. SECTION 6. AFFIRMATIVE COVENANTS The Parent and the Borrower hereby jointly and severally agree that, so long as the Commitments remain in effect, any Note or Letter of Credit remains outstanding and unpaid or any other amount is owing to any Lender, the Arranger or the Administrative Agent 65 hereunder, the Parent and the Borrower shall and shall cause each of their respective Subsidiaries to: 6.1 Financial Statements. Furnish to the Administrative Agent for distribution to each Lender: (a) as soon as available, but in any event within 90 days after the end of each fiscal year of the Borrower, a copy of the consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such year and the related consolidated statements of income and retained earnings and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year, reported on without a "going concern" or like qualification or exception, or qualification arising out of the scope of the audit, by KPMG Peat Marwick L.P. or other independent certified public accountants of nationally recognized standing; (b) as soon as available, but in any event not later than 45 days after the end of each of the first three quarterly periods of each fiscal year of the Borrower, the unaudited consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such quarter and the related unaudited consolidated statements of income and retained earnings and of cash flows of the Borrower and its Subsidiaries for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the previous year, certified by a Responsible Officer of the Borrower as being fairly stated in all material respects (subject to normal year-end audit adjustments); and (c) as soon as available, but in any event not later than 45 days after the end of each month occurring during each fiscal year of the Borrower (other than the third, sixth, ninth and twelfth such month), the unaudited consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such month and the related unaudited consolidated statements of income and retained earnings and of cash flows of the Borrower and its Subsidiaries for such month and the portion of the fiscal year through the end of such month, setting forth in each case in comparative form the figures for the previous year; all such financial statements shall be complete and correct in all material respects and shall be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods. 6.2 Certificates; Other Information. Furnish to each Lender: (a) concurrently with the delivery of the financial statements referred to in Section 6.1(a), (i) a certificate of the independent certified public accountants reporting on such financial statements stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default, except as specified in 66 such certificate and (ii) copies of all reports or written communications providing advice, recommendations or analysis to the management of the Parent or the Borrower, as the case may be, from such independent certified public accountants with regard to their audit of the financial statements referred to in Sections 6.1(a) and (c) or the internal financial controls and systems of the Parent or the Borrower; (b) concurrently with the delivery of any financial statement pursuant to Section 6.1, (x) a certificate of a Responsible Officer of each of the Parent and the Borrower stating that, to the best of each such Responsible Officer's knowledge, during such period (i) no Subsidiary has been formed or acquired (or, if any such Subsidiary has been formed or acquired, the Loan Parties have complied with the requirements of Section 6.11 with respect thereto), (ii) neither the Parent, the Borrower nor any of their Subsidiaries has changed its name, its principal place of business, its chief executive office or the location of any material item of tangible Collateral without complying with the requirements of this Agreement and the Security Documents with respect thereto, (iii) the Parent has observed and performed and is in compliance with Section 7.17 and (iv) each Loan Party has observed or performed all of its covenants and other agreements, and satisfied every condition, contained in this Agreement and the other Loan Documents to which it is a party to be observed, performed or satisfied by it, and that such Responsible Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate, (y) in the case of quarterly or annual financial statements, a certificate containing all information reasonably necessary for determining compliance by the Parent, the Borrower and their Subsidiaries with the provisions of this Agreement (including but not limited to Sections 2.11 and 7.1) as of the last day of such fiscal quarter or fiscal year of the Parent or the Borrower, as the case may be and (z) a certificate of a Responsible Officer of the Borrower stating that to the best of such Responsible Officer's knowledge, the Eligible Backlog of the Borrower and its Subsidiaries is as specified in such certificate; (c) as soon as available, and in any event no later than 30 days after the end of each fiscal year of the Borrower, a projected consolidated balance sheet of the Borrower as of the end of the following fiscal year, and the related consolidated statements of projected cash flow, projected changes in financial position and projected income for the following fiscal year, together with an operating budget with respect to the following fiscal year, and, as soon as available, significant revisions, if any, of such projections with respect to such fiscal year (collectively, the "Borrower Projections"), which Borrower Projections shall in each case be accompanied by a certificate of a Responsible Officer of the Borrower stating that such Borrower Projections are based on reasonable estimates, information and assumptions believed by such Responsible Officer to be reasonable and that such Responsible Officer has no reason to believe that such Borrower Projections are incorrect or misleading in any material respect; 67 (d) within 45 days after the end of each fiscal quarter of each fiscal year of the Borrower, a narrative discussion and analysis of the financial condition and results of operations of the Borrower and its Subsidiaries for such fiscal quarter and for the period from the beginning of the then current fiscal year to the end of such fiscal quarter, as compared to the portion of the Borrower Projections, as applicable, covering such periods and to the comparable periods of the previous year; (e) within five days after the same are filed, copies of all financial statements and reports which the Parent, the Borrower or any of their Subsidiaries may make to, or file with, the Securities and Exchange Commission or any successor or analogous Governmental Authority; and (f) promptly, such additional financial and other information as any Lender may from time to time reasonably request. 6.3 Payment of Obligations. Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its material obligations of whatever nature, except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the Parent, the Borrower or their Subsidiaries, as the case may be. 6.4 Conduct of Business and Maintenance of Existence, etc. (a) Continue to engage in business of the same general type as now conducted by it, (b) preserve, renew and keep in full force and effect its existence and (c) take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business, except, in each case, as otherwise permitted pursuant to Section 7.5 and except, in the case of clause (c) above, to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect; and (d) comply with all Contractual Obligations and Requirements of Law except to the extent that failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 6.5 Maintenance of Property; Insurance. (a) Keep all material property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted; (b) maintain with financially sound and reputable insurance companies insurance on all its property in at least such amounts and against at least such risks (but including in any event public liability, product liability and business interruption) as are usually insured against in the same general area by companies engaged in the same or a similar business; and (c) furnish to each Lender, upon written request, full information as to the insurance carried. 6.6 Inspection of Property; Books and Records; Discussions. Keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities; and upon reasonable notice permit representatives of any Lender upon 68 reasonable notice to visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of the Parent, the Borrower and their Subsidiaries with senior officers of the Parent, the Borrower and their Subsidiaries and with its independent certified public accountants. 6.7 Notices. Promptly give notice to the Administrative Agent of: (a) the occurrence of any Default or Event of Default; (b) any (i) default or event of default under any Contractual Obligation of the Parent, the Borrower or any of their Subsidiaries or (ii) litigation, investigation or proceeding which may exist at any time between the Parent, the Borrower or any of their Subsidiaries and any Governmental Authority, which in either case, if not cured or if adversely determined, as the case may be, could reasonably be expected to have a Material Adverse Effect; (c) any litigation or proceeding affecting the Parent, the Borrower or any of their Subsidiaries in which the amount involved is $250,000 or more and not covered by insurance or in which injunctive or similar relief is sought; (d) the following events, as soon as possible and in any event within 30 days after the Parent, the Borrower or any of their Subsidiaries knows or has reason to know thereof: (i) the occurrence or expected occurrence of any Reportable Event with respect to any Plan, a failure to make any required contribution to a Plan, the creation of any Lien in favor of the PBGC or a Plan or any withdrawal from, or the termination, Reorganization or Insolvency of, any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC or the Borrower or any Commonly Controlled Entity or any Multiemployer Plan with respect to the withdrawal from, or the terminating, Reorganization or Insolvency of, any Plan; and (e) any development or event which could reasonably be expected to have a Material Adverse Effect. Each notice pursuant to this Section 6.7 shall be accompanied by a statement of a Responsible Officer of the Borrower setting forth details of the occurrence referred to therein and stating what action the Parent, the Borrower or the relevant Subsidiary proposes to take with respect thereto. 6.8 Environmental Laws. (a) Comply in all material respects with, and take all reasonable efforts to ensure compliance in all material respects by all tenants and subtenants, if any, with, all applicable Environmental Laws, except to the extent that the same are being contested in good faith by appropriate proceedings and the pendency of such 69 proceedings could not reasonably be expected to have a Material Adverse Effect, and obtain and comply in all material respects with and maintain, and take all reasonable efforts to ensure that all tenants and subtenants obtain and comply in all material respects with and maintain, any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws insofar as any failure to so comply, obtain or maintain reasonably could be expected to have a Material Adverse Effect. (b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities regarding Environmental Laws, except to the extent that the same are being contested in good faith by appropriate proceedings and the pendency of such proceedings could not reasonably be expected to have a Material Adverse Effect. 6.9 Interest Rate Protection. In the case of the Borrower, within 30 days after the Closing Date, enter into Interest Rate Protection Agreements with one or more of the Lenders providing interest rate protection with respect to at least $35,000,000 of the Term Loans for a period of at least 24 months such that the Eurodollar Base Rate for determining the interest rate thereon shall not be higher than 1% above the Eurodollar Base Rate that would be applicable to a six-month Interest Period commencing on the Closing Date. 6.10 Further Assurances. Promptly perform or cause to be performed any and all acts and execute or cause to be executed any and all documents (including, without limitation, financing statements and continuation statements) for filing under the provisions of the Uniform Commercial Code or any other Requirement of Law which are necessary or advisable to maintain in favor of the Administrative Agent, for the benefit of the Lenders, Liens on the Collateral that are duly perfected in accordance with all applicable Requirements of Law. 6.11 Additional Collateral. (a) With respect to any assets acquired after the Closing Date by the Parent, the Borrower or any of their Domestic Subsidiaries that are intended to be subject to the Lien created by any of the Security Documents but which are not so subject (other than any assets described in paragraph (b), (c) or (d) of this Section), promptly (and in any event within 30 days after the acquisition or creation thereof): (i) execute and deliver to the Administrative Agent such amendments to the Master Guarantee and Collateral Agreement or such other documents as the Administrative Agent shall deem necessary or advisable to grant to the Administrative Agent, for the benefit of the Lenders, a Lien on such assets, (ii) take all actions necessary or advisable to cause such Lien to be duly perfected in accordance with all applicable Requirements of Law, including, without limitation, the filing of Uniform Commercial Code financing statements in such jurisdictions as may be requested by the Administrative Agent, and (iii) if requested by the Administrative Agent, deliver to the Administrative Agent legal opinions relating to the matters described in clauses (i) and (ii) immediately preceding, which opinions shall be in form and substance and from counsel reasonably satisfactory to the Administrative Agent. 70 (b) With respect to any Person that, subsequent to the Closing Date, becomes a Subsidiary of the Parent or the Borrower (other than a Foreign Subsidiary), promptly: (i) execute and deliver to the Administrative Agent, for the benefit of the Lenders, such amendments to the Master Guarantee and Collateral Agreement as the Administrative Agent shall deem necessary or advisable to grant to the Administrative Agent, for the benefit of the Lenders, a Lien on the Capital Stock of such Subsidiary which is owned by the Parent, the Borrower or any of their Subsidiaries, (ii) deliver to the Administrative Agent the certificates representing such Capital Stock, together with undated stock powers duly executed and delivered in blank, (iii) cause such new Subsidiary (A) to become a party to the Master Guarantee and Collateral Agreement, pursuant to documentation which is in form and substance satisfactory to the Administrative Agent, and (B) to take all actions necessary or advisable to cause the Lien created by such security agreement to be duly perfected in accordance with all applicable Requirements of Law, including, without limitation, the filing of Uniform Commercial Code financing statements in such jurisdictions as may be requested by the Administrative Agent and (iv) if requested by the Administrative Agent, deliver to the Administrative Agent legal opinions relating to the matters described in clauses (i), (ii) and (iii) immediately preceding, which opinions shall be in form and substance and from counsel reasonably satisfactory to the Administrative Agent. (c) With respect to any fee interest in any real estate having a value (together with improvements thereof) of at least $100,000, in each case acquired after the Closing Date by the Parent, the Borrower or any of their Domestic Subsidiaries, or, in the case of any real property encumbered by any mortgage or deed of trust on the Closing Date, promptly after the Indebtedness secured thereby shall have been paid in full (other than with the proceeds of permitted Indebtedness incurred to refinance such secured Indebtedness), promptly (i) execute and deliver a first priority mortgage or deed of trust, as the case may be (subordinate only to such mortgages or deeds of trust as are necessary to permit the Borrower or such Subsidiary to purchase such real estate), in favor of the Administrative Agent, for the benefit of the Lenders, covering such real estate, in form and substance reasonably satisfactory to the Administrative Agent, (ii) if requested by the Administrative Agent, provide the Lenders with (x) title and extended coverage insurance covering such real estate in an amount at least equal to the purchase price of such real estate (or such other amount as shall be reasonably specified by the Administrative Agent) as well as a current ALTA survey thereof, together with a surveyor's certificate and (y) any consents or estoppels deemed necessary or advisable by the Administrative Agent in connection with such mortgage or deed of trust, each of the foregoing in form and substance reasonably satisfactory to the Administrative Agent and (iii) if requested by the Administrative Agent, deliver to the Administrative Agent legal opinions relating to the matters described in the preceding clauses (i) and (ii), which opinions shall be in form and substance and from counsel reasonably satisfactory to the Administrative Agent. (d) With respect to any new Foreign Subsidiary created or acquired after the Closing Date by the Parent, the Borrower or any of their Domestic Subsidiaries (the creation or acquisition of which shall not be permitted hereunder except in accordance with the terms of Section 7.18), promptly (i) execute and deliver to the Administrative Agent such amendments 71 to the Master Guarantee and Collateral Agreement (or comparable documentation) as the Administrative Agent deems necessary or advisable in order to grant to the Administrative Agent, for the benefit of the Lenders, a perfected first priority security interest in the Capital Stock of such new Subsidiary which is owned by the Parent, the Borrower or any of their Subsidiaries (provided that in no event shall more than 65% of the Capital Stock of any such new Subsidiary be required to be so pledged), (ii) deliver to the Administrative Agent the certificates representing such Capital Stock, together with undated stock powers, in blank, executed and delivered by a duly authorized officer of the Parent, the Borrower or such Subsidiary, as the case may be, and (iii) if requested by the Administrative Agent, deliver to the Administrative Agent legal opinions relating to the matters described in the preceding clauses (i) and (ii), which opinions shall be in form and substance and from counsel reasonably satisfactory to the Administrative Agent. (e) Within 60 days of the Closing Date, if reasonably requested by the Administrative Agent, provide the Administrative Agent with the surveys described in Section 5.1(q) with respect to certain Mortgaged Properties for which surveys were not provided on or prior to the Closing Date. 6.12 Construction Credit Support Policy. Maintain its current policy of requiring non-U.S. customers to provide an irrevocable letter of credit to support the portion of any material equipment sale not paid for in advance in cash. SECTION 7. NEGATIVE COVENANTS The Parent and the Borrower hereby jointly and severally agree that, so long as the Commitments remain in effect, any Note or Letter of Credit remains outstanding and unpaid or any other amount is owing to any Lender, the Arranger or the Administrative Agent hereunder, the Parent and the Borrower shall not, and shall not permit any of their respective Subsidiaries to, directly or indirectly: 7.1 Financial Condition Covenants. (a) Consolidated Leverage Ratio. Permit the Consolidated Leverage Ratio of the Borrower and its Subsidiaries for any period of four consecutive fiscal quarters of the Borrower ending on any date set forth below to exceed the ratio set forth below opposite such date: 72
Consolidated Fiscal Quarter Ending Leverage Ratio June 30, 1997 4.00 to 1.0 September 30, 1997 4.00 to 1.0 December 31, 1997 4.00 to 1.0 March 31, 1998 4.00 to 1.0 June 30, 1998 3.50 to 1.0 September 30, 1998 3.50 to 1.0 December 31, 1998 3.50 to 1.0 March 31, 1999 3.00 to 1.0 June 30, 1999 3.00 to 1.0 September 30, 1999 3.00 to 1.0 December 31, 1999 3.00 to 1.0 March 31, 2000 2.50 to 1.0 June 30, 2000 2.50 to 1.0 September 30, 2000 2.50 to 1.0 December 31, 2000 2.50 to 1.0 March 31, 2001 and thereafter 2.00 to 1.0
(b) Consolidated EBITDA. Permit Consolidated EBITDA of the Borrower and its Subsidiaries for any period of four consecutive fiscal quarters of the Borrower ending with any fiscal quarter set forth below to be less than the amount set forth below opposite such date:
Consolidated Fiscal Quarter Ending EBITDA December 31, 1997 $25,000,000 March 31, 1998 28,000,000 June 30, 1998 28,000,000 September 30, 1998 28,000,000 December 31, 1998 28,000,000 March 31, 1999 35,000,000 June 30, 1999 35,000,000 September 30, 1999 35,000,000 December 31, 1999 35,000,000 March 31, 2000 40,000,000 June 30, 2000 40,000,000 September 30, 2000 40,000,000 December 31, 2000 40,000,000 March 31, 2001 and thereafter 50,000,000
73 (c) Consolidated Interest Coverage Ratio. Permit the Consolidated Interest Coverage Ratio of the Borrower and its Subsidiaries for any period of four consecutive fiscal quarters of the Borrower ending with any fiscal quarter set forth below to be less than the ratio set forth below opposite such fiscal quarter:
Consolidated Interest Fiscal Quarter Ending Coverage Ratio June 30, 1997 2.5 to 1.0 September 30, 1997 2.5 to 1.0 December 31, 1997 2.5 to 1.0 March 31, 1998 2.75 to 1.0 June 30, 1998 2.75 to 1.0 September 30, 1998 3.0 to 1.0 December 31, 1998 3.0 to 1.0 March 31, 1999 3.25 to 1.0 June 30, 1999 3.25 to 1.0 September 30, 1999 3.50 to 1.0 Thereafter 3.50 to 1.0
(d) Consolidated Fixed Charge Coverage Ratio. Permit the Consolidated Fixed Charge Coverage Ratio of the Borrower and its Subsidiaries for any period of four consecutive fiscal quarters of the Borrower to be less than 1.05 to 1.00 on any date during the period from March 31, 1998 through March 30, 1999 or be less than 1.10 to 1.0 on any date from March 31, 1999 and thereafter. 7.2 Limitation on Indebtedness. Create, incur, assume or suffer to exist any Indebtedness, except: (a) Indebtedness of the Borrower under the Loan Documents; (b) Indebtedness (i) of the Borrower to a Wholly Owned Subsidiary, (ii) of a Domestic Wholly Owned Subsidiary to the Borrower or any other Subsidiary and (iii) of any Foreign Subsidiary to the Borrower or any Subsidiary in an aggregate principal amount at any time outstanding (with respect to all Foreign Subsidiaries of the Parent) not to exceed $1,000,000, provided that such Indebtedness referred to in this clause (iii), if to the Borrower or any Domestic Subsidiary, is evidenced by a promissory note or promissory notes which has or have been pledged to the Administrative Agent on terms and conditions satisfactory to the Administrative Agent; (c) Indebtedness of the Borrower or any Subsidiary incurred to finance the acquisition or construction of fixed or capital assets (whether pursuant to a loan, a 74 Financing Lease or otherwise) in an aggregate principal amount not exceeding as to the Borrower and its Subsidiaries $5,000,000 at any time outstanding; (d) (i) Interim Notes in an aggregate principal amount not to exceed $31,000,000 and (ii) Interim Notes issued in lieu of cash interest on other Interim Notes in accordance with the Interim Note Documentation; and (e) Indebtedness of any of the Loan Parties incurred to prepay, redeem, retire or repurchase in full the Interim Notes or the Rollover Notes, as the case may be, pursuant to Permanent Note Documentation so long as (i) the terms and conditions thereof are reasonably satisfactory to the Arranger and the Required Lenders (provided that the Rollover Indenture as entered into on the Closing Date shall be deemed to be reasonably satisfactory to the Arranger and the Required Lenders) and (ii) the aggregate principal amount of such Indebtedness shall not exceed the sum (the "Interim Note Principal Amount") of $31,000,000 plus the amount of additional Interim Notes or the Rollover Notes, as the case may be, issued to pay interest in lieu of payment of interest in cash; provided that to the extent such Indebtedness consists of "High Yield Notes" (as defined in the Interim Note Documentation) issued pursuant to the Interim Note Documentation the aggregate principal amount of such Indebtedness may exceed the Interim Note Principal Amount to the extent the Net Cash Proceeds thereof in excess of the amount required to pay in full the aggregate principal amount of the Interim Notes or the Rollover Notes, as the case may be (which aggregate principal amount shall not exceed the Interim Note Principal Amount) plus any accrued and unpaid interest and fees due in accordance with the Interim Note Documentation or the Rollover Indenture, as the case may be, are applied pursuant to Section 2.11(a) to the prepayment of the Term Loans and to reduce permanently the Revolving Credit Commitments. 7.3 Limitation on Liens. Create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, except for: (a) Liens for taxes not yet due or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect thereto are maintained on the books of the Parent, the Borrower or their Subsidiaries, as the case may be, in conformity with GAAP; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's, landlord's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 60 days or which are being contested in good faith by appropriate proceedings; (c) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation; 75 (d) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (e) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount and which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of the Borrower or any Subsidiary; (f) Liens securing Indebtedness of the Borrower or any Subsidiary incurred to finance the acquisition or construction of fixed or capital assets, provided that (i) such Liens shall be created substantially simultaneously with the acquisition or construction of such fixed or capital assets, (ii) such Liens do not at any time encumber any property other than the property financed by such Indebtedness, (iii) the amount of Indebtedness secured thereby is not increased and (iv) the proceeds of the Indebtedness secured by any such Lien shall at no time exceed 100% of the original purchase price of such property; (g) Liens created pursuant to the Security Documents; (h) Liens in favor of customs and revenue authorities to secure payment of customs duties in connection with the importation of goods in the ordinary course of business and other similar Liens arising in the ordinary course of business; (i) Liens existing on the Closing Date and listed on Schedule 7.3; (j) leases or subleases granted to third Persons not interfering with the ordinary course of business of the Parent, the Borrower or any of their Subsidiaries; (k) Permitted Exceptions (as defined in the Mortgages); and (l) Liens created under Environmental Laws that are being contested in good faith and as to which adequate reserves have been established to the extent required by GAAP and secure obligations not in excess of $500,000; provided that the Borrower and its Subsidiaries shall take all reasonable actions to terminate such Liens. 7.4 Limitation on Guarantee Obligations. Create, incur, assume or suffer to exist any Guarantee Obligation except: (a) Guarantee Obligations of the Loan Parties in respect of the Interim Notes or the Permanent Notes in accordance with the Interim Note Documentation or the Permanent Note Documentation, respectively; 76 (b) Guarantee Obligations made in the ordinary course of its business by the Borrower of obligations of any of its Subsidiaries (provided that the Guarantee Obligations by the Borrower in respect of the obligations of any and all Foreign Subsidiaries shall not exceed $1,000,000) which obligations are otherwise permitted under this Agreement; (c) Guarantee Obligations in respect of Standby Letters of Credit; and (d) the Guarantee Obligations of the Loan Parties pursuant to the Master Guarantee and Collateral Agreement. 7.5 Limitation on Fundamental Changes. Enter into any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer or otherwise dispose of, all or substantially all of its property, business or assets, or make any material change in its present method of conducting business, except: (a) any Wholly Owned Subsidiary of the Parent or the Borrower may be merged or combined with or into the Borrower (provided that the Borrower shall be the continuing or surviving corporation) or with or into any one or more Domestic Wholly Owned Subsidiaries of the Borrower (provided that the Domestic Wholly Owned Subsidiary or Subsidiaries shall be the continuing or surviving corporation); and (b) any Wholly Owned Subsidiary may sell, lease, transfer or otherwise dispose of any or all of its assets (upon voluntary liquidation or otherwise) to Borrower or any Domestic Wholly Owned Subsidiary of the Borrower. 7.6 Limitation on Sale of Assets. Convey, sell, lease, assign, transfer or otherwise dispose of any of its property, business or assets (including, without limitation, receivables and leasehold interests), whether now owned or hereafter acquired, or, in the case of any Subsidiary of the Parent or the Borrower, issue or sell any shares of such Subsidiary's Capital Stock to any Person other than the Borrower or any Domestic Wholly Owned Subsidiary of the Borrower, except: (a) the sale or other disposition of obsolete or worn out property in the ordinary course of business having a fair market value not to exceed, in the aggregate, $500,000 in any period of twelve consecutive months; (b) the sale or other disposition of any property in the ordinary course of business, provided that (other than inventory) the aggregate book value of all assets so sold or disposed of in any period of twelve consecutive months shall not exceed $500,000; (c) the sale of inventory in the ordinary course of business; and 77 (d) as permitted by Section 7.5(b). To the extent the Required Lenders waive the provisions of this Section 7.6 with respect to the sale of any Collateral, or any Collateral is sold as permitted by this Section 7.6, such Collateral in each case shall be sold free and clear of the Liens in favor of the Administrative Agent created by the Security Documents and the Administrative Agent shall take such actions as it deems appropriate in connection therewith or may be reasonably requested by the Borrower to evidence such Lien release, in each case at the Borrower's expense. 7.7 Limitation on Restricted Payments. Declare or pay any dividend (other than dividends payable solely in common stock of the Person making such dividend) on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of Capital Stock (including but not limited to in respect of any preferred Capital Stock outstanding or dividends accumulated thereon on the Closing Date) of the Parent or the Borrower or any of their Subsidiaries or any warrants or options to purchase any such Capital Stock, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of the Parent, the Borrower or any Subsidiary, except the issuance of the Warrants and Capital Stock in respect of the Warrants pursuant to the terms of the Warrant Agreement. Notwithstanding the foregoing, (A) provided that no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof, the Borrower may pay dividends to the Parent for the purpose of (i) permitting the Parent to satisfy its federal, state and local income tax obligations to the extent such obligations are actually due and owing and are a direct result of the net income of the Borrower being included on a consolidated, combined or unitary income tax return filed by the Parent or otherwise being attributed to the Parent for tax purposes (provided that the Parent shall promptly pay such tax obligations); (ii) permitting the Parent to pay the necessary fees and expenses to maintain its corporate existence and good standing (in an aggregate amount not to exceed $50,000 per annum); and (iii) permitting the Parent to comply with the Interim Note Documentation (in an aggregate amount not to exceed $50,000 per annum) and (B) any Subsidiary of the Borrower may pay dividends to Borrower. 7.8 Limitation on Capital Expenditures. (a) Make or commit to make (by way of the acquisition of securities of a Person or otherwise) any Capital Expenditure except for expenditures in the ordinary course of business not exceeding, in the aggregate for the Borrower and its Subsidiaries during any of the fiscal years of the Borrower set forth below, the amount set forth opposite such fiscal year: 78
Fiscal Year Amount 1997 $10,000,000 1998 10,000,000 1999 10,000,000 2000 10,000,000 2001 10,000,000 2002 10,000,000
(b) Notwithstanding the foregoing, in the event that the amount of Capital Expenditures permitted to be made by the Borrower and its Subsidiaries pursuant to clause (a) above in any fiscal year (before giving effect to any increase in such permitted expenditure amount pursuant to this clause (b)) is greater than the amount of such Capital Expenditures made by the Borrower and its Subsidiaries during such fiscal year, such excess may be carried forward and utilized to make Capital Expenditures in the immediately succeeding fiscal year. (c) Notwithstanding the foregoing, the Borrower and its Subsidiaries may make Capital Expenditures (which Capital Expenditures will not be included in any determination under the foregoing clause (a)) with the proceeds of Indebtedness received by the Borrower or any of its Subsidiaries pursuant to Section 7.2(c). (d) Notwithstanding the foregoing, the Borrower and its Subsidiaries may make Capital Expenditures (which Capital Expenditures will not be included in any determination under the foregoing clause (a)) with any Reinvestment Deferred Amount. 7.9 Limitation on Investments, Loans and Advances. Make any advance, loan, extension of credit or capital contribution to, or purchase any stock, bonds, notes, debentures or other securities of or any assets constituting a business unit of, or make any other investment in, any Person, except: (a) extensions of trade credit in the ordinary course of business; (b) investments in Cash Equivalents; (c) loans and advances to employees of the Loan Parties for travel, entertainment and relocation expenses in the ordinary course of business in an aggregate amount for the Borrower and its Subsidiaries not to exceed $500,000 at any one time outstanding; (d) investments by the Borrower in a Domestic Wholly Owned Subsidiary and investments by any Subsidiary in the Borrower and in one or more Domestic Wholly Owned Subsidiaries; and 79 (e) additional investments in an aggregate amount, so long as at the time of such investment no Default or Event of Default shall have occurred and be continuing or would result therefrom, at any time not to exceed $1,000,000. 7.10 Limitation on Optional Payments and Modifications of Debt Instruments and Organizational Documentation, etc. (a) Make any optional payment or prepayment on or redemption or purchase of any material Indebtedness (other than the Loans) or preferred Capital Stock including, without limitation, the Interim Notes or the Permanent Notes, (b) amend, modify or change, or consent or agree to any amendment, modification or change to any of the terms of any such Indebtedness, including, without limitation, the provisions of the Interim Notes, the Rollover Notes or the Permanent Notes (other than any such amendment, modification or change which would extend the maturity or reduce the amount of any payment of principal thereof or which would reduce the rate or extend the date for payment of interest or dividends thereon) or (c) amend, modify or change in any material respect, or consent or agree to any amendment, modification, or change in any material respect to the terms of any of its capitalization or organizational documents (including but not limited to in respect of any preferred Capital Stock of any Loan Party) or, to the extent such amendment, modification or change could reasonably be expected to have a Material Adverse Effect, a material contract. Notwithstanding the foregoing, (a) the Interim Notes and the Rollover Notes may be refinanced with Permanent Notes in accordance with the provisions of Section 7.2(e) without limitation by this Section 7.10 and (b) so long as no Default or Event of Default exists or would result therefrom, the Interim Notes and the Rollover Notes and any accrued interest thereon may be repaid with the proceeds of the sale of Capital Stock of the Parent in accordance with the terms and conditions of the Interim Note Documentation or the Rollover Indenture, as the case may be. 7.11 Limitation on Transactions with Affiliates. Enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate (other than the Parent or the Borrower) unless such transaction (a) is otherwise permitted under this Agreement, (b) is in the ordinary course of business of the Parent, the Borrower or such Subsidiary, (c) is upon fair and reasonable terms no less favorable to the Parent, the Borrower or such Subsidiary, as the case may be, than it would obtain in a comparable arm's length transaction with a Person which is not an Affiliate and (d) with respect to any transaction or series of related transactions involving aggregate payments in excess of $100,000, is disclosed in writing to the Administrative Agent. 7.12 Limitation on Sales and Leasebacks. Enter into any arrangement with any Person providing for the leasing by the Parent, the Borrower or any of their Subsidiaries of real or personal property which has been or is to be sold or transferred by the Parent, the Borrower or such Subsidiary to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of the Parent, the Borrower or such Subsidiary. 80 7.13 Limitation on Changes in Fiscal Year. Permit the fiscal year of the Parent, the Borrower or any of their respective Subsidiaries to end on a day other than March 31. 7.14 Limitation on Negative Pledge Clauses. Enter into with any Person, or suffer to exist, any agreement, other than (a) this Agreement and the other Loan Documents, (b) the Interim Note Documentation, (c) the Permanent Note Documentation and (d) any industrial revenue bonds, purchase money mortgages or Financing Leases permitted by this Agreement (in which cases, any prohibition or limitation shall only be effective against the assets financed thereby) which prohibits or limits the ability of the Parent, the Borrower or any of their Subsidiaries to create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired. 7.15 Limitation on Lines of Business. Enter into any business, either directly or through any Subsidiary, except for those businesses in which the Borrower and its Subsidiaries are engaged on the date of this Agreement or which are directly related thereto. 7.16 Limitation on Consolidated Lease Expense. Permit Consolidated Lease Expense for any fiscal year of the Borrower and its Subsidiaries to exceed $1,000,000. 7.17 Limitation on Activities of the Parent. In the case of the Parent, notwithstanding anything to the contrary in this Agreement or any other Loan Document, (a) conduct, transact or otherwise engage in, or commit to conduct, transact or otherwise engage in, any business or operations other than those incidental to its ownership of the Capital Stock of the Borrower, (b) incur, create, assume or suffer to exist any Indebtedness or other liabilities or financial obligations, except (i) nonconsensual obligations imposed by operation of law, (ii) pursuant to the Loan Documents to which it is a party and (iii) obligations with respect to its Capital Stock (other than any such obligations constituting Indebtedness), (c) own, lease, manage or otherwise operate any properties or assets (including cash and cash equivalents) other than the ownership of shares of Capital Stock of the Borrower, (d) create or permit to exist any Subsidiary of the Parent or the Borrower other than a Wholly Owned Subsidiary or (e) directly or indirectly, convey, sell, transfer of otherwise dispose of, or create, assume, incur or permit to be created, assumed, incurred or to exist, any Lien of any kind upon, any Capital Stock of the Borrower owned by the Parent. 7.18 Limitation on Foreign Subsidiaries. Create or permit to exist any Foreign Subsidiary except with the prior written consent of the Arranger and the Required Lenders. 81 SECTION 8. EVENTS OF DEFAULT If any of the following events shall occur and be continuing: (a) The Borrower shall fail to pay any principal of any Loan or Reimbursement Obligation when due in accordance with the terms hereof; or the Borrower shall fail to pay any interest on any Loan or Reimbursement Obligation, or any other amount payable hereunder or under any other Loan Document, within five days after any such interest or other amount becomes due in accordance with the terms hereof; or (b) Any representation or warranty made or deemed made by the Parent, the Borrower or any other Loan Party herein or in any other Loan Document or which is contained in any certificate, document or financial or other statement furnished by it at any time under or in connection with this Agreement or any such other Loan Document or under or in connection with the Interim Note Documentation or Permanent Note Documentation shall prove to have been incorrect in any material respect on or as of the date made or deemed made; or (c) The Parent, the Borrower or any other Loan Party shall default in the observance or performance of any agreement contained in (i) Sections 6 (other than Sections 6.3, 6.4 and 6.5) or 7, (ii) Section 5.6 or 5.8(b) of the Master Guarantee and Collateral Agreement, (iii) Section 5, 6 or 7 of any Mortgage or (iv) Section 6 of the Cash Collateral Agreement; or (d) The Parent, the Borrower or any other Loan Party shall default in the observance or performance of any other agreement contained in this Agreement or any other Loan Document (other than as provided in paragraphs (a) through (c) of this Section), and such default shall continue unremedied for a period of 30 days; or (e) The Parent, the Borrower or any of their Subsidiaries shall (i) default in making any payment of any principal of any Indebtedness (including, without limitation, any Guarantee Obligation) or Interest Rate Protection Agreement Obligation on the scheduled or original due date with respect thereto; or (ii) default in making any payment of any interest on any such Indebtedness beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness or Interest Rate Protection Agreement Obligation was created; or (iii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or Interest Rate Protection Agreement Obligation or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or beneficiary of such Indebtedness (or a trustee or agent on behalf of such holder or beneficiary) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or (in the case of any such Indebtedness constituting a Guarantee Obligation or Interest Rate Protection Agreement 82 Obligation) to become payable; provided that a default, event or condition described in clause (i), (ii) or (iii) of this paragraph (e) shall not at any time constitute an Event of Default under this Agreement unless, at such time, one or more defaults, events or conditions of the type described in clauses (i), (ii) and (iii) of this paragraph (e) shall have occurred and be continuing with respect to Indebtedness and/or Guarantee Obligations and/or Interest Rate Protection Agreement Obligations of the Parent, the Borrower and their Subsidiaries the outstanding principal amount of which exceeds in the aggregate $1,000,000; or (f) (i) The Parent, the Borrower or any of their Subsidiaries shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or the Parent, the Borrower or any of their Subsidiaries shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Parent, the Borrower or any of their Subsidiaries any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against the Parent, the Borrower or any of their Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) the Parent, the Borrower or any of their Subsidiaries shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) the Parent, the Borrower or any of their Subsidiaries shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (g) (i) Any Person shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan or any Lien in favor of the PBGC or a Plan shall arise on the assets of any Loan Party or any Commonly Controlled Entity, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Required Lenders, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any 83 Single Employer Plan shall terminate for purposes of Title IV of ERISA, (v) any Loan Party or any Commonly Controlled Entity shall, or in the reasonable opinion of the Required Lenders is likely to, incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could, in the sole judgment of the Required Lenders, reasonably be expected to have a Material Adverse Effect; or (h) One or more judgments or decrees shall be entered against the Parent, the Borrower or any of their Subsidiaries involving in the aggregate a liability (not paid or fully covered by insurance) of $1,000,000 or more, and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 60 days from the entry thereof; or (i) Any of the Security Documents shall cease, for any reason, to be in full force and effect, or any Loan Party or any Affiliate of any Loan Party shall so assert, or any Lien created by any of the Security Documents shall cease to be enforceable and of the same effect and priority purported to be created thereby; or (j) (i) There shall be a direct or indirect holding company parent of the Borrower other than the Parent; (ii) the Parent shall cease to own and control, of record and beneficially, directly, 100% of each class of outstanding Capital Stock of the Borrower free and clear of all Liens; (iii) any Wholly Owned Subsidiary of the Borrower shall issue any Capital Stock (or any security convertible into any of its Capital Stock) which is not pledged to the Administrative Agent for the benefit of the Lenders; (iv) Hushang Ansary shall cease to own, directly or indirectly, Capital Stock of the Parent possessing the voting power, including in combination with any applicable stockholder agreements, to elect a majority of the Parent's directors; (v) any Person or "group" (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended) (other than Hushang Ansary) shall have beneficial ownership of more than 25% of the economic and or voting interest in the Parent's Capital Stock; or (vi) (A) prior to the date of an initial registered public offering by the Borrower or the Parent of its common Capital Stock, Hushang Ansary shall cease to own, directly or indirectly, on a fully diluted basis in the aggregate at least 66-2/3% of the economic and voting interest in the Capital Stock of the Borrower and the Parent free of Liens except Liens created by the Security Documents and (B) on or after the date of an initial registered public offering by the Borrower or the Parent of its common Capital Stock, Hushang Ansary shall cease to own, directly or indirectly, on a fully diluted basis in the aggregate at least 51% of the economic and voting interest in the Capital Stock of the Borrower and the Parent free of Liens except Liens created by the Security Documents; or 84 (k) the subordination provisions of the Interim Notes or the Permanent Notes shall cease, for any reason, to be valid or any Loan Party shall so assert in writing; then, and in any such event, (A) if such event is an Event of Default specified in clause (i) or (ii) of paragraph (f) above with respect to the Parent, the Borrower or any of their Subsidiaries, automatically the Commitments shall immediately terminate and the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and the other Loan Documents (including, without limitation, all amounts of L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) shall immediately become due and payable, and (B) if such event is any other Event of Default, either or both of the following actions may be taken: (i) with the consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall, by notice to the Borrower declare the Commitments to be terminated forthwith, whereupon the Commitments shall immediately terminate; and (ii) with the consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall, by notice to the Borrower, declare the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and the other Loan Documents (including, without limitation, all amounts of L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) to be due and payable forthwith, whereupon the same shall immediately become due and payable. With respect to all Letters of Credit with respect to which presentment for honor shall not have occurred at the time of an acceleration pursuant to this paragraph, the Borrower shall at such time deposit in a cash collateral account opened by the Administrative Agent an amount equal to the aggregate then undrawn and unexpired amount of such Letters of Credit. Amounts held in such cash collateral account shall be applied by the Administrative Agent to the payment of drafts drawn under such Letters of Credit, and the unused portion thereof after all such Letters of Credit shall have expired or been fully drawn upon, if any, shall be applied to repay other obligations of the Borrower hereunder and under the other Loan Documents. After all such Letters of Credit shall have expired or been fully drawn upon, all Reimbursement Obligations shall have been satisfied and all other obligations of the Borrower hereunder and under the other Loan Documents shall have been paid in full, the balance, if any, in such cash collateral account shall be returned to the Borrower (or such other Person as may be lawfully entitled thereto). Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived. SECTION 9. THE ARRANGER; THE ADMINISTRATIVE AGENT AND THE SYNDICATION AGENT 9.1 Appointment. Each Lender hereby irrevocably designates and appoints the Arranger as the arranger of such Lender under this Agreement and the other Loan Documents, and each Lender irrevocably authorizes the Arranger, in such capacity, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Arranger by the 85 terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Each Lender hereby irrevocably designates and appoints the Administrative Agent as the agent of such Lender under this Agreement and the other Loan Documents, and each Lender irrevocably authorizes the Administrative Agent, in such capacity, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, neither the Arranger nor the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Arranger or the Administrative Agent. 9.2 Delegation of Duties. The Arranger and the Administrative Agent may execute any of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Arranger and the Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys in-fact selected by it with reasonable care. 9.3 Exculpatory Provisions. Neither the Arranger, the Administrative Agent nor any of their officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Loan Document (except to the extent that any of the foregoing are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from its or such Person's own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by any Loan Party or any officer thereof contained in this Agreement or any other Loan Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Arranger or the Administrative Agent under or in connection with, this Agreement or any other Loan Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or the Notes or any other Loan Document or for any failure of any Loan Party a party thereto to perform its obligations hereunder or thereunder. The Arranger and the Administrative Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of any Loan Party. 9.4 Reliance by Arranger and Administrative Agent. The Arranger and the Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any Note, writing, resolution, notice, consent, certificate, affidavit, letter, telecopy, telex or 86 teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Parent or the Borrower), independent accountants and other experts selected by the Arranger or the Administrative Agent. The Administrative Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Administrative Agent. The Arranger and the Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Lenders (or, if so specified by this Agreement, all Lenders) as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action; provided that neither the Arranger nor the Administrative Agent shall fail or refuse to take any action under this Agreement or any other Loan Document as a result of a failure of the Lenders to indemnify them against liabilities or expenses resulting from their own gross negligence or willful misconduct. The Arranger and the Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request of the Required Lenders (or, if so specified by this Agreement, all Lenders), and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Notes. 9.5 Notice of Default. The Arranger and the Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Arranger or the Administrative Agent, as the case may be, has received written notice from a Lender, the Parent or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give notice thereof to the Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders (or, if so specified by this Agreement, all Lenders); provided that unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders. 9.6 Non-Reliance on Arranger, Administrative Agent and Other Lenders. Each Lender expressly acknowledges that neither the Arranger nor the Administrative Agent nor any of their officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Arranger or the Administrative Agent hereinafter taken, including any review of the affairs of a Loan Party or any Affiliate of a Loan Party, shall be deemed to constitute any representation or warranty by the Arranger or the Administrative Agent to any Lender. Each Lender represents to the Arranger and the Administrative Agent that it has, independently and without reliance upon the Arranger or the Administrative Agent or any other Lender, and based on such documents and information as it 87 has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Loan Parties and their Affiliates and made its own decision to make its Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Arranger or the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Loan Parties and their Affiliates. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Arranger or the Administrative Agent hereunder, the Arranger and the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of any Loan Party or any Affiliate of a Loan Party which may come into the possession of the Arranger or the Administrative Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates. 9.7 Indemnification. The Lenders agree to indemnify the Arranger and the Administrative Agent in its capacity as such (to the extent not reimbursed by the Parent or the Borrower and without limiting the obligation of the Parent or the Borrower to do so), ratably according to their respective Revolving Credit Percentages, Tranche A Term Loan Percentages and Tranche B Term Loan Percentages in effect on the date on which indemnification is sought under this Section 9.7, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Notes) be imposed on, incurred by or asserted against the Arranger or the Administrative Agent in any way relating to or arising out of, the Commitments, this Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Arranger or the Administrative Agent under or in connection with any of the foregoing; provided that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements which are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from the Arranger's or the Administrative Agent's gross negligence or willful misconduct. The agreements in this Section 9.7 shall survive the payment of the Notes and all other amounts payable hereunder. 9.8 Arranger and Administrative Agent in Their Individual Capacities. The Arranger and its Affiliates and the Administrative Agent and its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with any Loan Party as though the Arranger were not the Arranger and the Administrative Agent were not the Administrative Agent hereunder and under the other Loan Documents. With respect to its Loans made or renewed by it and any Note issued to it and with respect to any Letter of Credit 88 issued or participated in by it, the Arranger and the Administrative Agent shall have the same rights and powers under this Agreement and the other Loan Documents as any Lender and may exercise the same as though it were not the Arranger and the Administrative Agent, respectively, and the terms "Lender" and "Lenders" shall include the Arranger and the Administrative Agent in their individual capacities. 9.9 Successor Administrative Agent. The Administrative Agent may resign as Administrative Agent upon 10 days' notice to the Lenders. If the Administrative Agent shall resign as Administrative Agent under this Agreement and the other Loan Documents, then the Required Lenders shall appoint from among the Lenders a successor agent for the Lenders, which successor agent shall have been approved by the Borrower (which approval shall not be unreasonably withheld or delayed), whereupon such successor agent shall succeed to the rights, powers and duties of the Administrative Agent hereunder. Effective upon such appointment and approval, the term "Administrative Agent" shall mean such successor agent and the former Administrative Agent's rights, powers and duties as Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Agreement or any holders of the Notes. After any retiring Administrative Agent's resignation as Administrative Agent, the provisions of this Section 9 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement and the other Loan Documents. The Required Lenders, with the consent of the Borrower, may replace the Administrative Agent, provided that if a Default or an Event of Default shall occur and be continuing the consent of the Borrower shall not be required. 9.10 The Syndication Agent. The Syndication Agent, in its capacity as such, shall not have any duties or responsibilities hereunder or under any Loan Document nor any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities duties, obligations or liabilities shall be read into this Agreement or otherwise exist against the Syndication Agent in its capacity as such. SECTION 10. MISCELLANEOUS 10.1 Amendments and Waivers. Neither this Agreement, any other Loan Document, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this Section 10.1. The Required Lenders and each Loan Party to the relevant Loan Documents may, or, with the written consent of the Required Lenders, the Administrative Agent and each Loan Party to the relevant Loan Document may, from time to time, (a) enter into written amendments, supplements or modifications hereto and to the other Loan Documents for the purpose of adding any provisions to this Agreement or the other Loan Documents or changing in any manner the rights of the Lenders or of the Loan Parties hereunder or thereunder or (b) waive, on such terms and conditions as the Required Lenders or the Administrative Agent, as the case may be, may specify in such instrument, any of the requirements of this Agreement or the other Loan Documents or any Default or Event of 89 Default and its consequences; provided that no such waiver and no such amendment, supplement or modification shall (i) forgive the principal amount or extend the final scheduled date of maturity of any Note, or reduce the stated rate of any interest, fee or letter of credit commission payable hereunder or extend the scheduled date of any payment thereof or increase the amount or extend the expiration date of any Lender's Revolving Credit Commitment, or make any change in the application of any prepayment of the Loans specified in the first sentence of Section 2.11(e) or in Section 2.17(a), or the right to refuse prepayments set forth in the last sentence of Section 2.11(e), in each case without the consent of each Lender directly affected thereby, (ii) extend the scheduled date or change the amount of any amortization payment or waive or extend the date of any mandatory prepayment in respect of the Tranche A Term Loans referred to in Section 2.8 without the consent of each Lender affected thereby or extend the scheduled date or change the amount of any amortization payment or waive or extend the date of any mandatory prepayment in respect of the Tranche B Term Loans referred to in Section 2.8 without the consent of each Lender affected thereby, (iii) amend, modify or waive any provision of this Section 10.1 or reduce any percentage specified in the definition of Required Lenders, or consent to the assignment or transfer by any Loan Party of any of its rights and obligations under this Agreement and the other Loan Documents or release all or a substantial portion of the Collateral (other than in connection with any sale or other disposition of assets permitted by Section 7.6) or any guarantee of the Obligations, in each case, without the written consent of all the Lenders, (iv) amend, modify or waive any provision of Sections 9.1 through 9.9 without the written consent of the Arranger and the Administrative Agent, (v) amend, modify or waive any provision of Section 9.10 without the written consent of the Syndication Agent or (vi) amend, modify or waive any provision of Section 3 without the written consent of the Issuing Lender. Any such waiver and any such amendment, supplement or modification shall apply equally to each of the Lenders and shall be binding upon the Loan Parties, the Lenders, the Administrative Agent and all future holders of the Notes. In the case of any waiver, the Loan Parties, the Lenders and the Administrative Agent shall be restored to their former position and rights hereunder and under the other Loan Documents, and any Default or Event of Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon. 10.2 Notices. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by telecopy), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered, or three Business Days after being deposited in the mail, postage prepaid, or, in the case of telecopy notice, when received, addressed as follows in the case of the Parent, the Borrower, the Administrative Agent and the Arranger, and as set forth in Schedule 1.1B in the case of the Lenders, or to such other address as may be hereafter notified by the respective parties hereto and any future holders of the Notes: 90 The Parent: Energy Services International Ltd. First Interstate Bank Plaza 1000 Louisiana, Suite 5900 Houston, Texas 77002 Attention Mr. Munawar H. Hidayatallah Telecopy (713) 659-1526 Telephone:(713) 751-2717 The Borrower: IRI International Corporation First Interstate Bank Plaza 1000 Louisiana, Suite 5900 Houston, Texas 77002 Attention Mr. Munawar H. Hidayatallah Telecopy (713) 659-1526 Telephone:(713) 751-2717 The Administrative Agent: Credit Lyonnais New York Branch 1000 Louisiana, Suite 5360 Houston, Texas 77002 Attention Thomas Byargeon Telecopy (713) 751-0307 Telephone:(713) 751-0500 The Arranger: LEHMAN COMMERCIAL PAPER INC. 3 World Financial Center New York, New York 10285 Attention Michelle Swanson Telecopy (212) 528-0819 Telephone:(212) 526-0330 provided that any notice, request or demand to or upon the Administrative Agent or the Lenders pursuant to Section 2.2, 2.4, 2.6, 2.9, 2.10 or 2.12 shall not be effective until received. Any notice or delivery to or from or consent required of the Borrower hereunder or pursuant to any other Loan Document may be made to or by the Borrower. 10.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Administrative Agent or any Lender, any right, remedy, power 91 or privilege hereunder or under the other Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 10.4 Survival. All representations and warranties made hereunder, in the other Loan Documents and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the Notes and the making of the Loans hereunder. 10.5 Payment of Expenses and Taxes. The Borrower agrees (a) to pay or reimburse the Administrative Agent and the Arranger for all their reasonable out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement and the other Loan Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent, (b) to pay or reimburse each Lender and the Administrative Agent for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the other Loan Documents and any such other documents, including, without limitation, the fees and disbursements of counsel (including the allocated fees and expenses of in-house counsel) to each Lender and counsel to the Administrative Agent, (c) to pay, indemnify, and hold each Lender, the Administrative Agent, the Arranger and the Syndication Agent harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the other Loan Documents and any such other documents, and (d) to pay, indemnify, and hold each Lender and the Administrative Agent, the Arranger and the Syndication Agent and their respective officers, directors, trustees, employees, affiliates, agents and controlling persons (each, an "indemnitee") harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement, the other Loan Documents and any such other documents, including, without limitation, any of the foregoing relating to the use of proceeds of the Loans or the violation of, noncompliance with or liability under, any Environmental Law applicable to the operations of the Parent, the Borrower, any of their Subsidiaries or any of the Properties (all the foregoing in this clause (d), collectively, the "indemnified liabilities"), provided that the Borrower shall have no obligation hereunder to any indemnitee with respect to indemnified liabilities to the extent such indemnified liabilities are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such indemnitee. The agreements 92 in this Section 10.5 shall survive repayment of the Notes and all other amounts payable hereunder and the termination of the Commitments and, in the case of any Lender that may assign any interest in its Commitments, Loans or Letter of Credit Interest hereunder, shall survive the making of such assignment, notwithstanding that such assigning Lender may cease to be a "Lender" hereunder. 10.6 Successors and Assigns; Participations and Assignments. (a) This Agreement shall be binding upon and inure to the benefit of the Parent, the Borrower, the Lenders, the Administrative Agent, the Arranger, all future holders of the Notes and their respective successors and assigns, except that neither the Parent nor the Borrower may assign or transfer any of its rights or obligations under this Agreement without the prior written consent of each Lender. (b) Any Lender may, without the consent of the Borrower, in the ordinary course of its business and in accordance with applicable law, at any time sell to one or more banks or other entities (each, a "Participant") participating interests in any Loan owing to such Lender, any Note held by such Lender, any Commitment of such Lender or any other interest of such Lender hereunder and under the other Loan Documents. In the event of any such sale by a Lender of a participating interest to a Participant, such Lender's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Note for all purposes under this Agreement and the other Loan Documents, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and the other Loan Documents. In no event shall any Participant under any such participation have any right to approve any amendment or waiver of any provision of any Loan Document, or any consent to any departure by any Loan Party therefrom, except to the extent that such amendment, waiver or consent would reduce the principal of, or interest on, the Notes or any fees payable hereunder, postpone the date of the final maturity of the Notes, consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement and the other Loan Documents, release all or a substantial portion of the Collateral (other than in connection with any sale or other disposition of assets permitted by Section 7.6) or any guarantee of the Obligations, in each case to the extent subject to such participation. The Borrower agrees that if amounts outstanding under this Agreement and the Notes are due or unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall, to the maximum extent permitted by applicable law, be deemed to have the right of setoff in respect of its participating interest in amounts owing under this Agreement and any Note to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement or any Note, provided that, in purchasing such participating interest, such Participant shall be deemed to have agreed to share with the Lenders the proceeds thereof as provided in Section 10.7(a) as fully as if it were a Lender hereunder. The Borrower also agrees that each Participant shall be entitled to the benefits of Sections 2.19, 2.20 and 2.21 with respect to its participation in the Commitments and the Loans outstanding from time to time as if it was a Lender; provided 93 that, in the case of Section 2.20, such Participant shall have complied with the requirements of said Section and provided, further, that no Participant shall be entitled to receive any greater amount pursuant to any such Section than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such Participant had no such transfer occurred. (c) Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time and from time to time assign to any Lender or any affiliate thereof or any Person under common management with any such Lender or, with the consent of the Borrower, the Administrative Agent, the Arranger and, in the case of an assignment of Revolving Credit Commitments, the Issuing Lender (which, in each case, shall not be unreasonably withheld, delayed or conditioned) (provided that no such consent need be obtained by Lehman Commercial Paper Inc. for a period of 120 days following the Closing Date), to an additional bank, financial institution or other entity (an "Assignee") all or any part of its rights and obligations under this Agreement, the Letters of Credit and the Notes pursuant to an Assignment and Acceptance, substantially in the form of Exhibit G, executed by such Assignee, such assigning Lender (and, in the case of an Assignee that is not then a Lender or an affiliate thereof, by the Borrower, the Administrative Agent, the Arranger and, in the case of an assignment of Revolving Credit Commitments, the Issuing Lender) and delivered to the Administrative Agent for its acceptance and recording in the Register with a copy to the Arranger; provided that (except with the consent of the Borrower, the Administrative Agent and the Arranger) (i) no such assignment to an Assignee (other than any Lender or any affiliate thereof or any Person under common management with such Lender) shall be in an aggregate principal amount of less than $5,000,000 (other than in the case of an assignment of all of a Lender's interests under this Agreement and the Notes) and (ii) subsequent to any such assignment the assigning Lender shall not retain an aggregate principal amount of less than $5,000,000 in Commitments and Loans. Such assignment need not be ratable as among any Tranche A Term Loan Commitments and/or Tranche A Term Loans, Tranche B Term Loan Commitments and/or Tranche B Term Loans and Revolving Credit Commitments and/or Revolving Credit Loans of the assigning Lender. Upon such execution, delivery, acceptance and recording, from and after the effective date determined pursuant to such Assignment and Acceptance, (x) the Assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder with a Commitment as set forth therein, and (y) the assigning Lender thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such assigning Lender shall cease to be a party hereto). Notwithstanding any provision of this paragraph (c) and paragraph (e) of this Section 10.6, the consent of the Borrower shall not be required, and, unless requested by the Assignee and/or the assigning Lender, new Notes shall not be required to be executed and delivered by the Borrower, for any assignment which occurs at any time when any Event of Default shall have occurred and be continuing. 94 (d) A Note and the Obligation(s) evidenced thereby may be assigned or otherwise transferred in whole or in part only by registration of such assignment or transfer of such Note and the Obligation(s) evidenced thereby on the Register (and each Note shall expressly so provide). Any assignment or transfer of all or part of such Obligation(s) and the Note(s) evidencing the same shall be registered on the Register only upon surrender for registration of assignment or transfer of the Note(s) evidencing such Obligation(s), accompanied by an Assignment and Acceptance duly executed by the Noteholder thereof, and thereupon one or more new Note(s) in the same aggregate principal amount shall be issued to the designated Assignee(s) and the old Notes(s) shall be returned by the Administrative Agent to the Borrower marked "cancelled." No assignment of a Note and the Obligation(s) evidenced thereby shall be effective unless it has been recorded in the Register as provided in this Section 10.6(d). (e) The Administrative Agent shall maintain at its address referred to in Section 10.2 a copy of each Assignment and Acceptance delivered to it and a register (the "Register") for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Loans owing to, each Lender from time to time and the registered owners of the Obligation(s) evidenced by the Note(s). The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Administrative Agent and the Lenders shall treat each Person whose name is recorded in the Register as the owner of the Loan or the Obligation evidenced by a Note recorded therein for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (f) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an Assignee (and, in the case of an Assignee that is not then a Lender or an affiliate thereof, by the Borrower, the Administrative Agent, the Arranger and the Issuing Lender) together with payment to the Administrative Agent of a registration and processing fee of $2,000 (except that no such registration and processing fee shall be payable (y) by Lehman Commercial Paper Inc. for a period of 120 days following the Closing Date or (z) in the case of an Assignee which is already a Lender or is an affiliate of a Lender), the Administrative Agent shall (i) promptly accept such Assignment and Acceptance and (ii) on the effective date determined pursuant thereto record the information contained therein in the Register and give notice of such acceptance and recordation to the Lenders and the Borrower. On or prior to such effective date, the Borrower, at its own expense, upon request, shall execute and deliver to the Administrative Agent (in exchange for the Revolving Credit Note, Tranche A Term Note and/or Tranche B Term Note, as the case may be, of the assigning Lender) a new Revolving Credit Note, Tranche A Term Note and/or Tranche B Term Note, as the case may be, to the order of such Assignee in an amount equal to the Revolving Credit Commitment, Tranche A Term Loan and/or Tranche B Term Loan, as the case may be, assumed by it pursuant to such Assignment and Acceptance and, if the assigning Lender has retained a Revolving Credit Commitment, Tranche A Term Loan and/or Tranche B Term Loan, as the case may be, upon request, a new Revolving Credit Note, Tranche A Term Note and/or Tranche B Term Note, as the case may be, to the order of the assigning Lender in an amount 95 equal to the Revolving Credit Commitment, Tranche A Term Loan and/or Tranche B Term Loan, as the case may be, retained by it hereunder. Such new Notes shall be dated the Closing Date and shall otherwise be in the form of the Note replaced thereby. (g) Each of the Parent and the Borrower authorizes each Lender to disclose to any Participant or Assignee (each, a "Transferee") and any prospective Transferee any and all financial information in such Lender's possession concerning the Parent, the Borrower and their respective Affiliates which has been delivered to such Lender by or on behalf of the Parent or the Borrower pursuant to this Agreement or which has been delivered to such Lender by or on behalf of the Parent or the Borrower in connection with such Lender's credit evaluation of the Parent, the Borrower and their respective Affiliates prior to becoming a party to this Agreement. (h) Nothing herein shall prohibit or restrict any Lender from (i) pledging or assigning any Note to any Federal Reserve Bank in accordance with applicable law or (ii) with the prior consent of the Administrative Agent and the Borrower (which, in each case, shall not be unreasonably withheld or delayed or conditioned), pledging its rights in connection with any Loan or Note to any other Person. 10.7 Adjustments; Set-off. (a) If any Lender (a "Benefitted Lender") shall at any time receive any payment of all or part of its Loans or the Reimbursement Obligations owing to it, or interest thereon, or receive any collateral in respect thereof then due and owing to such Lender (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in Section 8(f), or otherwise), in a greater proportion than any such payment to or collateral received by any other Lender, if any, in respect of such other Lender's Loans or the Reimbursement Obligations then due and owing to such other Lender, or interest thereon, such Benefitted Lender shall purchase for cash from the other Lenders a participating (or, at the option of such Lender, a direct) interest in such portion of each such other Lender's Loan and/or of the Reimbursement Obligations owing to each such other Lender, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such Benefitted Lender to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders; provided that if all or any portion of such excess payment or benefits is thereafter recovered from such Benefitted Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. (b) In addition to any rights and remedies of the Lenders provided by law, each Lender shall have the right, without prior notice to the Parent or the Borrower, any such notice being expressly waived by the Parent and the Borrower to the extent permitted by applicable law, upon any amount becoming due and payable by the Parent or the Borrower hereunder or under the Notes (whether at the stated maturity, by acceleration or otherwise) to set off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or 96 unmatured, at any time held or owing by such Lender or any branch or agency thereof to or for the credit or the account of the Parent or the Borrower. Each Lender agrees promptly to notify the Parent, the Borrower and the Administrative Agent after any such setoff and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such setoff and application. 10.8 Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts (including by telecopy), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Agreement signed by all the parties shall be lodged with the Borrower and the Administrative Agent. 10.9 Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 10.10 Integration. This Agreement and the other Loan Documents represent the agreement of the Parent, the Borrower, the Administrative Agent, the Arranger and the Lenders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Administrative Agent, the Arranger or any Lender relative to subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents. 10.11 GOVERNING LAW. THIS AGREEMENT AND THE NOTES AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 10.12 Submission To Jurisdiction; Waivers. Each of the Parent and the Borrower hereby irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the Courts of the State of New York, the courts of the United States for the Southern District of New York, and appellate courts from any thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such 97 action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Parent or the Borrower, as the case may be at its address set forth in Section 10.2 or at such other address of which the Administrative Agent shall have been notified pursuant thereto; (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section 10.12 any special, exemplary, punitive or consequential damages. 10.13 Acknowledgements. Each of the Parent and the Borrower hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents; (b) neither the Administrative Agent, the Arranger nor any Lender has any fiduciary relationship with or duty to the Parent or the Borrower arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between Administrative Agent, the Arranger and Lenders, on one hand, and the Parent and the Borrower, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and (c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Lenders or among the Parent, the Borrower and the Lenders. 10.14 WAIVERS OF JURY TRIAL. THE PARENT, THE BORROWER, THE ADMINISTRATIVE AGENT, THE ARRANGER AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. 10.15 Confidentiality. Each of the Administrative Agent, the Arranger and each Lender agrees to keep confidential all non-public information provided to it by any Loan Party pursuant to this Agreement that is designated by such Loan Party as confidential; provided that nothing herein shall prevent the Administrative Agent, the Arranger or any 98 Lender from disclosing any such information (a) to the Administrative Agent, the Arranger any other Lender or any affiliate or investment advisor of any Lender, (b) to any Transferee or prospective Transferee which agrees to comply with the provisions of this Section 10.15, (c) to the employees, directors, agents, attorneys, accountants and other professional advisors of such Lender or its affiliates, (d) upon the request or demand of any Governmental Authority having jurisdiction over the Administrative Agent or such Lender, (e) in response to any order of any court or other Governmental Authority or as may otherwise be required pursuant to any Requirement of Law, (f) if requested or required to do so in connection with any litigation or similar proceeding, (g) which has been publicly disclosed other than in breach of this Section 10.15 or (h) in connection with the exercise of any remedy hereunder or under any other Loan Document. 99 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. ENERGY SERVICES INTERNATIONAL LTD. By: /s/ Munawar H. Hidayatallah ----------------------------------------------- Title: Executive Vice President- Corporate Development IRI INTERNATIONAL CORPORATION By: /s/ Munawar H. Hidayatallah ----------------------------------------------- Title: Executive Vice President- Corporate Development LEHMAN COMMERCIAL PAPER INC., as Arranger and as a Lender By: /s/ Dennis Dee ----------------------------------------------- Title: Authorized Signatory CREDIT LYONNAIS NEW YORK BRANCH, as Administrative Agent, Issuing Lender and as a Lender By: /s/ Mark Koneval ----------------------------------------------- Title: Vice President 100 BHF-BANK AKTIENGESELLSCHAFT, as a Lender By: /s/ Paul Travers --------------------------------------------------- Title: Vice President By: /s/ Thomas J. Scifo --------------------------------------------------- Title: Assistant Vice President CITIBANK, N.A., as a Lender By: /s/ Hans L. Christensen --------------------------------------------------- Title: Vice President PRIME INCOME TRUST, as a Lender By: /s/ Rafael Scolari --------------------------------------------------- Title: Vice President - Portfolio Manager SENIOR HIGH INCOME PORTFOLIO, as a Lender By: /s/ Gilles Marchand --------------------------------------------------- Title: Authorized Signatory MERRILL LYNCH SENIOR FLOATING RATE FUND, INC., as a Lender By: /s/ Gilles Marchand --------------------------------------------------- Title: Authorized Signatory 101 PILGRIM AMERICA PRIME RATE TRUST, as a Lender By: /s/ Thomas C. Hunt --------------------------------------------------- Title: Portfolio Analyst CRESCENT/MACH I PARTNERS, L.P. By: TCW Asset Management Company Its Investment Manager, as a Lender By: /s/ Justin Driscoll -------------------------------------------------- Title: Senior Vice President 102 COMMITMENTS; LENDING OFFICES AND ADDRESSES
REVOLVING CREDIT TRANCHE A TERM TRANCHE B TERM LENDER AND ADDRESS LOAN COMMITMENT LOAN COMMITMENT LOAN COMMITMENT TOTAL COMMITMENT BHF - BANK AKTIENGESELLSCHAFT $5,900,000 $1,425,000 $3,700,000 $11,025,000 590 Madison Avenue New York, NY 10022 Tel: (212) 756-5912 Fax: (212) 756-5536 Contact: Tom Scifo CREDIT LYONNAIS $9,550,000 $1,425,000 $5,900,000 $16,875,000 NEW YORK BRANCH 1301 Avenue of the Americas 18th Floor New York, NY 10019 Tel: (212) 261-7867 Fax: (212) 459-3176 Contact: Mark Koneval CITIBANK, N.A. $11,425,000 $11,425,000 399 Park Avenue 9th Floor (zone 8) New York, NY 10043 Tel: (212) 559-8785 Fax: (212) 793-1871 Contact: Ghazali Inam PRIME INCOME TRUST $11,425,000 $11,425,000 2 World Trade Center New York, NY 10048 Tel: (212) 392-5686 Fax: (212) 392-5345 Contact: Rafael Scolari
103
REVOLVING CREDIT TRANCHE A TERM TRANCHE B TERM LENDER AND ADDRESS LOAN COMMITMENT LOAN COMMITMENT LOAN COMMITMENT TOTAL COMMITMENT MERRILL LYNCH SENIOR FLOATING $11,425,000 $11,425,000 RATE FUND, INC. SENIOR HIGH INCOME PORTFOLIO 800 Scudders Mill Road Plainsborough, NJ 08536 Tel: (609) 282-3348 Fax: (609) 282-2757 Contact: Gilles Marchand PILGRIM AMERICA PRIME RATE $10,000,000 $10,000,000 TRUST Two Renaissance Square 40 North Central, Suite 1200 Phoenix, AZ 85004 Tel: (602) 417-8100 Fax: Contact: Tim Hunt CRESCENT/MACH I PARTNERS, L.P. $5,000,000 $5,000,000 BY: TCW ASSET MANAGEMENT COMPANY, ITS INVESTMENT MANAGER 200 Park Avenue Suite 2200 New York, NY 10166-0228 Tel: (212) 297-4138 Fax: (212) 297-4159 Contact: Mark L. Gold LEHMAN BROTHERS INC. $9,550,000 $12,875,000 $5,900,000 $28,325,000 3 World Financial Center 9th Floor New York, NY 10285 Tel: (212) 526-2204 Fax: (212) 526-4827 Contact: Jack Lucid
104 Schedule 1.1C TRANCHE A TERM LOAN AMORTIZATION SCHEDULE
Quarter Principal Amount June 30, 1997 $ 500,000 September 30, 1997 500,000 December 31, 1997 500,000 March 31, 1998 500,000 June 30, 1998 750,000 September 30, 1998 750,000 December 31, 1998 750,000 March 31, 1999 750,000 June 30, 1999 1,250,000 September 30, 1999 1,250,000 December 31, 1999 1,250,000 March 31, 2000 1,250,000 June 30, 2000 2,500,000 September 30, 2000 2,500,000 December 31, 2000 2,500,000 March 31, 2001 2,500,000 June 30, 2001 11,250,000 September 30, 2001 11,250,000 December 31, 2001 11,250,000 March 31, 2002 11,250,000
105 Schedule 1.1D TRANCHE B TERM LOAN AMORTIZATION SCHEDULE
Quarter Principal Amount March 31, 1998 $ 175,000 March 31, 1999 175,000 March 31, 2000 175,000 March 31, 2001 175,000 March 31, 2002 14,800,000
106 Schedule 4.15 SUBSIDIARIES Bowen Mexicana, S.A. De C.V. Bowen Tools, Ltd. EX-10.4 10 SENIOR SUBORDINATED INCREASING RATE NOTE PURCH. AG 1 ================================================================================ SENIOR SUBORDINATED INCREASING RATE NOTE PURCHASE AGREEMENT among IRI INTERNATIONAL CORPORATION ENERGY SERVICES INTERNATIONAL LIMITED and STRATEGIC RESOURCE PARTNERS FUND ----------------------------- Dated as of March 31, 1997 ----------------------------- $31,000,000 ================================================================================ 2
TABLE OF CONTENTS PAGE ---- ARTICLE I DEFINITIONS Section 1.1 Defined Terms.................................................................... 1 Section 1.2 Interpretation................................................................... 16 ARTICLE II REPRESENTATIONS AND WARRANTIES Section 2.1 Representations and Warranties in the Acquisition Agreements and the Senior Credit Facility....................................................... 16 Section 2.2 Organization; Good Standing...................................................... 16 Section 2.3 Due Authorization and Enforceability............................................. 17 Section 2.4 No Conflicts..................................................................... 17 Section 2.5 No Violations; Material Contracts................................................ 18 Section 2.6 Capital Stock; Subsidiaries...................................................... 18 Section 2.7 Senior Credit Facility; Liens.................................................... 19 Section 2.8 No Violation of Regulations of Board of Governors of Federal Reserve System................................................................... 19 Section 2.9 Governmental Regulations......................................................... 19 Section 2.10 Financial Statements; No Undisclosed Liabilities................................. 19 Section 2.11 Full Disclosure.................................................................. 20 Section 2.12 Private Offering; Rule 144A Matters.............................................. 20 Section 2.13 Proprietary Matter............................................................... 21 Section 2.14 Absence of Proceedings........................................................... 21 Section 2.15 Absence of Labor Disputes........................................................ 21 Section 2.16 Taxes............................................................................ 22 Section 2.17 Absence of Employment Law Violations, Etc........................................ 22 Section 2.18 Environmental Laws............................................................... 22 Section 2.19 Permits.......................................................................... 23 Section 2.20 Properties; Leases............................................................... 23 Section 2.21 Insurance........................................................................ 23 Section 2.22 Financial Condition; Solvency.................................................... 23 Section 2.23 Foreign Corrupt Practices Act.................................................... 24 Section 2.24 No Material Adverse Change....................................................... 24 Section 2.25 ERISA............................................................................ 24 ARTICLE III SALE AND REPAYMENT Section 3.1 Sale of the Interim Notes........................................................ 25 Section 3.2 Maturity......................................................................... 25 Section 3.3 Mandatory Exchange; Issuance of Rollover Notes and Warrants...................... 25 Section 3.4 Interest on the Interim Notes.................................................... 26 i
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PAGE ---- Section 3.5 Default Interest................................................................. 27 Section 3.6 Mandatory Redemption............................................................. 27 Section 3.7 Optional Prepayment.............................................................. 27 Section 3.8 Rollover Fee..................................................................... 28 Section 3.9 Indemnity........................................................................ 28 Section 3.10 Effect of Notice of Prepayment................................................... 28 Section 3.11 Method of Payment................................................................ 28 Section 3.12 Inability to Determine Interest Rate; Interest Periods Less Than Three Months..................................................................... 28 Section 3.13 Payment on Business Days......................................................... 29 Section 3.14 Partial Redemption............................................................... 29 ARTICLE IV COVENANTS Section 4.1 Use of Proceeds.................................................................. 29 Section 4.2 Notice of Default on Interim Notes and Related Matters........................... 29 Section 4.3 Offering......................................................................... 29 Section 4.4 Issuance of High Yield Notes and Warrants........................................ 30 Section 4.5 Additional Subsidiary Guarantees................................................. 31 Section 4.6 Merger and Sale.................................................................. 31 Section 4.7 Information; SEC Reports; Compliance Certificates................................ 32 Section 4.8 Authorizations and Approvals..................................................... 33 Section 4.9 Limitation on Incurrence of Additional Indebtedness and Issuance of Preferred Stock............................................................... 33 Section 4.10 Restricted Payments.............................................................. 34 Section 4.11 Limitation on Restrictions on Distributions from Subsidiaries.................... 35 Section 4.12 Limitation on Sales of Assets and Subsidiary Stock............................... 35 Section 4.13 Limitation on Transactions with Affiliates....................................... 35 Section 4.14 Line of Business................................................................. 36 Section 4.15 Capitalization; Restrictions on Certain Amendments............................... 36 Section 4.16 Liens............................................................................ 36 Section 4.17 No Senior Subordinated Indebtedness.............................................. 36 Section 4.18 Corporate Existence; Compliance with Laws; Taxes; Maintenance of Insurance..................................................................... 36 Section 4.19 Liquidation...................................................................... 37 Section 4.20 Stay, Extension and Usury Laws................................................... 37 Section 4.21 Change of Control................................................................ 37 ARTICLE V CONDITIONS TO THE INTERIM LENDERS' OBLIGATIONS Section 5.1 Closing.......................................................................... 38 Section 5.2 Conditions of the Interim Lenders' Obligations................................... 39 ii
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PAGE ---- ARTICLE VI TRANSFER OF THE INTERIM NOTES; REPRESENTATIONS OF INTERIM LENDERS Section 6.1 Transfer of the Interim Notes.................................................... 42 Section 6.2 Registration of Transfer or Exchange............................................. 43 Section 6.3 Register......................................................................... 43 ARTICLE VII EVENTS OF DEFAULT Section 7.1 Events of Default................................................................ 43 Section 7.2 Acceleration..................................................................... 45 Section 7.3 No Avoidance..................................................................... 45 Section 7.4 Rights and Remedies Cumulative................................................... 45 Section 7.5 Delay or Omission Not Waiver..................................................... 46 Section 7.6 Waiver of Past Defaults.......................................................... 46 Section 7.7 Rights of Holders To Receive Payment............................................. 46 ARTICLE VIII SUBORDINATION OF INTERIM NOTES Section 8.1 Agreement to Subordinate......................................................... 46 Section 8.2 Liquidation, Dissolution, Bankruptcy............................................. 46 Section 8.3 Default on Senior Credit Facility................................................ 46 Section 8.4 When Distribution Must Be Paid Over.............................................. 47 Section 8.5 Subrogation...................................................................... 47 Section 8.6 Relative Rights.................................................................. 47 Section 8.7 Subordination May Not Be Impaired by Company..................................... 48 Section 8.8 Distribution or Notice to Representative......................................... 48 Section 8.9 Holders Entitled to Rely......................................................... 48 Section 8.10 Acceleration of Interim Notes.................................................... 48 Section 8.11 Reliance by Holders of Senior Debt on Subordination Provisions................... 48 Section 8.12 Amendments....................................................................... 48 ARTICLE IX TERMINATION Section 9.1 Termination...................................................................... 49 Section 9.2 Liability........................................................................ 49 ARTICLE X RELATED PARTY GUARANTEES Section 10.1 Related Party Guarantees......................................................... 49 Section 10.2 Subordination of Related Party Guarantees........................................ 50 iii
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PAGE ---- Section 10.3 Limitation on Guarantor Liability................................................ 51 Section 10.4 Execution and Delivery of Related Party Guarantees............................... 51 Section 10.5 Stay of Acceleration............................................................. 51 Section 10.6 Consolidation or Merger of Guarantors............................................ 51 ARTICLE XI INDEMNITY Section 11.1 Indemnification.................................................................. 52 Section 11.2 Notice of Action................................................................. 52 Section 11.3 Indemnity not Available.......................................................... 53 Section 11.4 Indemnity for Taxes, Reserves and Expenses....................................... 53 Section 11.5 Indemnification for Underwriting Services........................................ 54 Section 11.6 Survivorship of Indemnification.................................................. 54 Section 11.7 Liability Not Exclusive; Payments................................................ 54 ARTICLE XII MISCELLANEOUS Section 12.1 Expenses; Documentary Taxes...................................................... 54 Section 12.2 Notices.......................................................................... 54 Section 12.3 Consent to Amendments and Waivers................................................ 55 Section 12.4 Statements Required in Officers' Certificate and Opinion......................... 56 Section 12.5 Parties.......................................................................... 56 Section 12.6 New York Law; Submission to Jurisdiction; Waiver of Jury Trial................... 56 Section 12.7 Replacement Interim Notes........................................................ 57 Section 12.8 Successors and Assigns........................................................... 57 Section 12.9 Severability Clause.............................................................. 57 Section 12.10 Representations, Warranties and Agreements To Survive Delivery................... 57 Section 12.11 No Adverse Interpretation of Other Agreements.................................... 57 iv
6 EXHIBITS Exhibit A - Form of Debt Registration Rights Agreement Exhibit B - Form of Equity Registration Rights Agreement Exhibit C - Form of Escrow Agreement Exhibit D - Form of Interim Note Exhibit E - Form of Rollover Note Indenture Exhibit F - Form of Stockholders Agreement Exhibit G - Form of Warrant Agreement Exhibit H - Form of Opinion of Counsel SCHEDULES Schedule 1E - Existing Debt Schedule 1P - Permitted Liens Schedule 2.5 - Material Contracts Schedule 2.6 - Subsidiaries; Percentage Ownership Schedule 2.10 - Financial Statements Schedule 2.13 - Intellectual Property Schedule 2.14 - Proceedings Schedule 2.18 - Environmental Schedule 2.25 - ERISA Schedule Schedule 5.2(l) - Additional Liabilities v 7 SENIOR SUBORDINATED INCREASING RATE NOTE PURCHASE AGREEMENT SENIOR SUBORDINATED INCREASING RATE NOTE PURCHASE AGREEMENT, dated as of March 31, 1997 (the "Agreement"), among IRI International Corporation, a Delaware corporation (the "Company"), Energy Services International Ltd., a Delaware corporation and the Company's direct parent (the "Parent"), and Strategic Resource Partners Fund, a Delaware statutory business trust managed by an affiliate of Lehman Brothers Inc. ("Strategic Resource Partners" and, together with any successors and assigns, the "Interim Lenders"). RECITALS The Company and the Parent have authorized the execution and issuance of $31,000,000 of Senior Subordinated Increasing Rate Notes dated March 31, 1997 (the "Interim Notes") to facilitate the financing of the Company's acquisition of the assets of Bowen Tools, Inc. - Delaware ("Bowen-Delaware"), a Delaware corporation, Bowen Tools, Inc., a Delaware corporation (Bowen Tools, Inc. and Bowen-Delaware together, "Bowen"), and all of the issued and outstanding capital stock and certain related assets of Cardwell International Ltd, a Kansas corporation ("Cardwell"). This Agreement sets forth the terms and conditions upon which the Interim Lenders will purchase the Interim Notes. AGREEMENT Accordingly, the parties agree as follows: ARTICLE I DEFINITIONS Section 1.1 Defined Terms. As used in this Agreement, the following terms shall have the meanings specified below: "Acquired Businesses" means Cardwell and Bowen. "Acquired Debt" means, with respect to any specified Person, (i) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person including, without limitation, Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person. "Acquisitions" means, collectively, the Bowen Acquisition and the Cardwell Acquisition. "Acquisition Agreements" means, collectively, the agreement entered into by the Company in connection with the Bowen Acquisition and the agreement entered into by the Company in connection with the Cardwell Acquisition. "Action" has the meaning specified in Section 11.2. 1 8 "Administrative Agent" means Credit Lyonnais, New York Branch, as Administrative Agent under the Senior Credit Facility, or any successor thereto. "Affected Party" means any Interim Lender or Holder, any beneficial owner of any Interim Lender or Holder and their respective successors and assigns. "Affiliate" means, with respect to any specified Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the voting securities of a Person shall be deemed to be control. Neither the Interim Lenders nor their Affiliates nor any Holder will be treated as an Affiliate of the Company for purposes of this Agreement. "Affiliate Transaction" has the meaning specified in Section 4.13. "Applicable LIBOR Rate" means, for each Interest Period, the quotient (rounded upwards, if necessary, to the nearest 1/100 of 1%) of (x) the rate for deposits in U.S. dollars for a period of three months commencing on the first day of such Interest Period which appear on Page 3750 of the Telerate Screen as of 11:00 a.m., London time, on the Determination Date for such Interest Period; provided, however, that if more than one rate appears on Page 3750 of the Telerate Screen, the rate for such Interest Period will be the arithmetic mean of such rates rounded upwards, if necessary, to the nearest 1/100 of 1%; provided, further, however, that if such rate is not available on any Determination Date for any Interest Period, then the Applicable LIBOR Rate for such Interest Period shall mean the arithmetic mean rounded upwards, if necessary, to the nearest 1/100 of 1%, of the interest rates per annum at which deposits in an amount comparable to the aggregate principal amount of the Interim Notes then outstanding in U.S. dollars are offered to Lehman Brothers by no less than three leading banks in the London Interbank market for a period of three months commencing on the first day of such Interest Period, as of 11:00 a.m., London time, on such Determination Date divided by (y) a number equal to 1.00 minus the Eurodollar Reserve Percentage. "Applicable Spread" means 650 basis points for each day on or prior to November 30, 1997 and increasing by 50 basis points on November 30, 1997 and increasing by 50 basis points on each three-month anniversary of November 30, 1997 for so long as the Interim Notes are outstanding. "Asset Sale" means (i) the sale, lease, conveyance or other disposition of any assets or rights (including, without limitation, by way of a sale and leaseback), other than in the ordinary course of business consistent with past practices and (ii) the issue or sale by any Person or any of its Subsidiaries of Equity Interests of any of such Person's Subsidiaries. Notwithstanding the foregoing: (i) a transfer of assets by a Wholly Owned Subsidiary to the Company or to another Wholly Owned Subsidiary that is a Guarantor and (ii) an issuance or sale of Equity Interests by a Subsidiary of the Parent or the Company to the Company or to a Wholly Owned Subsidiary that is a Guarantor will not be deemed to be Asset Sales. "Bankruptcy Law" means Title 11, United States Code, or any similar federal or state law for the relief of debtors. 2 9 "Base CD Rate" means, for any day, the sum of (a) the quotient of (i) the Three-Month Secondary CD Rate divided by (ii) a number equal to 1.0 minus the CD Reserve Percentage and (b) the CD Assessment Rate; "Base Rate" means, for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in the Base Rate due to a change in the Prime Rate, the Base CD Rate or the Federal Funds Effective Rate shall be effective as of the opening of business on the effective day of such change in the Prime Rate, the Base CD Rate or the Federal Funds Effective Rate, as the case may be. "beneficial owner" has the meaning as defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act. "Board" means the Board of Governors of the Federal Reserve System of the United States or any successor. "Bowen" has the meaning specified in the recitals to this Agreement. "Bowen Acquisition" means the acquisition of all of the assets of Bowen. "Bowen Mexicana" means Bowen Mexicana S.A. De C.V., a Mexican corporation. "Business Day" means each day other than a Saturday, a Sunday or any other day on which banking institutions in the City of New York are authorized by law, regulation or executive order to remain closed and, if such day relates to a payment or prepayment of principal of, or interest on, or an Interest Period for, the Interim Notes on which the interest rate is determined by the Applicable LIBOR Rate, any day which is also a day on which dealings in dollar deposits are carried out in the London interbank markets. "Businesses" has the meaning specified in Section 2.18. "Capital Lease Obligations" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Market Transaction" has the meaning specified in Section 3.6(a). "Capital Stock" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Cardwell" has the meaning specified in the recitals to this Agreement. "Cardwell Acquisition" means the acquisition of all of the issued and outstanding capital stock and certain related assets of Cardwell. 3 10 "Cardwell Employment Agreement" means the employment agreement dated as of March 31, 1997 between Cardwell and A.C. Teichgraeber (and joined by the Company as a guarantor) pursuant to which Cardwell has agreed to pay A.C. Teichgraeber an annual salary equal to $250,000 per year and, in the sole discretion of Cardwell, an annual bonus of up to $600,000, in each case, at such times and under the terms set forth therein. "Cash Equivalents" means (i) United States dollars, (ii) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof having maturities of not more than six months from the date of acquisition, (iii) certificates of deposit and eurodollar time deposits with maturities of not more than six months from the date of acquisition, bankers' acceptances with maturities of not more than six months from the date of acquisition and overnight bank deposits, in each case with any domestic commercial bank having capital and surplus in excess of $500.0 million and a Thompson Bank Watch Rating of "B" or better, (iv) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (ii) and (iii) above entered into with any financial institution meeting the qualifications specified in clause (iii) above and (v) commercial paper having the highest rating obtainable from Moody's Investors Service, Inc. or one of the two highest ratings from Standard & Poor's with maturities of not more than six months from the date of acquisition. "CD Assessment Rate" means, for the purpose of calculation of the Base CD Rate on any day, the annual assessment rate in effect on such day which is payable by a member of the C/D Bank Insurance Fund maintained by the Federal Deposit Insurance Corporation (the "FDIC") classified as well-capitalized and within supervisory subgroup "B" (or a comparable successor assessment risk classification) within the meaning of 12 C.F.R. Section 327.3(d) (or any successor provision) to the FDIC (or any successor) for the FDIC's (or such successor's) insuring time deposits at offices of such institution in the United States. "CD Reserve Percentage" means, for the purpose of calculation of the Base CD Rate on any day, that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board, for determining the maximum reserve requirement for a Depositary Institution (as defined in Regulation D of the Board as in effect from time to time) in respect of new non-personal time deposits in Dollars having a maturity of 30 days or more. "Change of Control" means the occurrence of any of the following: (i) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any Person, other than the Principal and his Related Parties, becomes the beneficial owner (except that a Person shall be deemed to have "beneficial ownership" of all securities that such Person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition), directly or indirectly, of more than 40% of the Voting Stock of the Parent (measured by voting power rather than number of shares), (ii) the first day on which a majority of the members of the board of directors of the Company or the Parent are not Continuing Directors, (iii) the first day on which the Parent ceases to own 100% of the outstanding Capital Stock and other Equity Interests of the Company, (iv) the Parent or the Company consolidates with, or merges with or into, any Person, or any Person consolidates with or merges with or into the Parent or the Company, in any such event pursuant to a transaction in which any of the outstanding Voting Stock of the Parent or the Company is converted into or exchanged for cash, securities or other property, other than any such transaction where the Voting Stock of the Parent or the Company outstanding immediately prior to such transaction is converted into or exchanged for Voting Stock of the surviving or transferee Person constituting a majority of the outstanding shares of such Voting Stock of such surviving or transferee Person (immediately after giving effect to such conversion or exchange) or (v) the Principal ceases to be 4 11 the beneficial owner of 51% or more of the total voting power of all classes of Voting Stock of the Parent calculated on a fully-diluted basis. "Change of Control Offer" has the meaning specified in Section 4.21. "Change of Control Payment" has the meaning specified in Section 4.21. "Change of Control Payment Date" has the meaning specified in Section 4.21. "Closing" has the meaning specified in Section 5.1. "Closing Date" has the meaning specified in Section 5.1. "Code" means the Internal Revenue Code of 1986, as amended, and any regulation promulgated thereunder. "Commitment Letter" means the commitment letter among Strategic Resources Partners, the Parent and the Company dated January 20, 1997. "Company" has the meaning specified in the preamble to this Agreement. "Consolidated Net Income" means, for any period, the net earnings (or loss) after taxes of the Company and its Subsidiaries on a consolidated basis, determined for such period in conformity with GAAP. "Consolidated Net Interest Expense" means, for any period, total interest expense (including the interest component of Capital Lease Obligations) of the Company and its Subsidiaries on a consolidated basis, determined for such period in conformity with GAAP, including, without limitation, all commissions, discounts and other fees and charges owed with respect to any financings or letters of credit and net costs under Hedging Obligations. "Continuing Director" means, as of any date of determination, any member of the board of directors of a Person who (i) was a member of such board of directors on the date of this Agreement or (ii) was nominated for election or elected to such board of directors with the approval of a majority of the members described in clause (i) of such board. "Custodian" means any receiver, trustee, assignee, liquidator, custodian or similar official under any Bankruptcy Law. "Debt Registration Rights Agreement" means the registration rights agreement among the Parent, the Company, the Guarantors and the Interim Lenders pursuant to which the Rollover Notes are required to be registered for public sale, in the form attached as Exhibit A. "Default" means any event that is, or after the passage of time or the giving of notice (or both) would be, an Event of Default. "Determination Date" means, with respect to any Interest Period, the day that is two Business Days prior to the first Business Day of such Interest Period. 5 12 "Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable at the option of the holder thereof), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the holder thereof, in whole or in part on, or prior to, the date that is 91 days after the maturity date of the Rollover Notes. "Domestic Subsidiary" means any Subsidiary of the Parent or the Company organized under the laws of any jurisdiction within the United States. "EBITDA" means, for any period, Consolidated Net Income for such period (excluding extraordinary gains and losses), plus (i) Consolidated Net Interest Expense, plus (ii) all charges in such period for income taxes, plus (iii) all charges in such period for amortization of intangibles, depletion and depreciation, in each case to the extent reflected in Consolidated Net Income, plus or minus, as the case may be, (iv) non-cash items decreasing or increasing such Consolidated Net Income for such period (including, without limitation, foreign exchange translation adjustments), plus (v) all non-recurring fees and expenses incurred or paid by the Company in connection with the Acquisitions and the transactions contemplated by the Transaction Documents, the Engagement Letter and the Senior Credit Facility. "Engagement Letter" means the engagement letter among Lehman Brothers, the Parent and the Company dated January 20, 1997. "Environmental Laws" means any and all foreign, federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any Governmental Entity or other requirements of law (including common law) regulating, relating to or imposing liability or standards of conduct concerning the protection of human health or the environment, as now or may at any time be in effect. "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Equity Registration Rights Agreement" means the registration rights agreement between the Parent and the Interim Lenders pursuant to which the Warrants and the Warrant Shares are required to be registered for public sale, in the form attached as Exhibit B. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and any regulation promulgated thereunder. "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with the Company or any Subsidiary of the Company within the meaning of Section 414(b), 414(c) or 414(m) of the Code. "ERISA Event" means (i) a Reportable Event with respect to a Qualified Plan or a Multiemployer Plan; (ii) a withdrawal by the Company or any ERISA Affiliate from a Qualified Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA); (iii) a complete or partial withdrawal by the Company or any ERISA Affiliate from a Multiemployer Plan; (iv) the filing of a notice of intent to terminate, the treatment of a plan amendment as a termination under Section 4041 or 4041A of ERISA or the commencement of proceedings by the PBGC to terminate a Qualified Plan or Multiemployer Plan subject to Title IV of ERISA; (v) a failure to make required contributions to a Qualified Plan or Multiemployer Plan; (vi) the 6 13 imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Company or any ERISA Affiliate; (vii) an application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code with respect to any Qualified Plan; (viii) the Company or ERISA Affiliate engages in a nonexempt prohibited transaction or otherwise become liable with respect to a nonexempt prohibited transaction, the consequences of which, in the aggregate, have a Material Adverse Effect; or (ix) a violation of the applicable requirements of Section 404 or 405 of ERISA or the exclusive benefit rule under Section 401(a) of the Code by the Company or any ERISA Affiliate with respect to any Qualified Plan for which the Company or any of its Subsidiaries may be liable, the consequences of which, in the aggregate, have a Material Adverse Effect. "ERISA Schedule" has the meaning specified in Section 2.25. "Escrow Agent" means The Bank of New York, a New York banking corporation. "Escrow Agreement" means the escrow agreement between the Parent, the Company and the Escrow Agent, in the form attached as Exhibit C. "Eurodollar Reserve Percentage" means the maximum percentage (expressed as a decimal) specified from time to time by the Board for determining the maximum reserve requirements (including, but not limited to, supplemental, marginal and emergency reserves) with respect to eurocurrency funding (currently referred to as "Eurocurrency Liabilities") of a member bank in the Federal Reserve System. The Applicable LIBOR Rate shall be adjusted on the effective date of any change in the Eurodollar Reserve Percentage, as of such effective date. "Event of Default" means any event specified in Section 7.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Existing Debt" means the Indebtedness identified on Schedule 1E of the Parent, the Company and each of their respective Subsidiaries. "Federal Funds Effective Rate" means, for any day, the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published, the average of the quotations for the day of such transactions received by Citibank N.A. from three federal funds brokers of recognized standing selected by it. "Financial Statements" has the meaning specified in Section 2.10. "Foreign Subsidiary" means any Subsidiary of the Parent or the Company organized under the laws of any jurisdiction outside the United States. "fully-diluted" means, with respect to any series of Capital Stock of a Person, all of the shares of such series of Capital Stock that have been issued or reserved for future issuance, calculated assuming that all Equity Interests and any other rights convertible or exchangeable into such Capital Stock or exercisable for such Capital Stock have been converted, exchanged or exercised, regardless of whether such Equity Interests and rights are then entitled to be or have been converted, exchanged or exercised, or are subject to a future contingency or the passage of time or any other condition that currently prevents or may in the future prevent such conversion, exchange or exercise. 7 14 "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, the statements and pronouncements of the Financial Accounting Standards Board and such other statements by such other entities as have been approved by a significant segment of the accounting profession, which are in effect from time to time. "Governmental Entity" means any government or political subdivision or any agency, authority, bureau, central bank, commission, department or instrumentality thereof, or any court, tribunal, grand jury or arbitrator, in each case whether foreign or domestic. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Guarantors" means the Parent and any Domestic Subsidiary of the Company that executes the Related Party Guarantee in accordance with the provisions of Section 10.4, and their respective successors and assigns. "Hazardous Material" means any gasoline or petroleum (including crude oil or any fraction thereof) or petroleum products or any hazardous or toxic substances, materials or wastes, defined or regulated as such in or under any Environmental Law, including, without limitation, asbestos, polychlorinated biphenyls and urea-formaldehyde insulation. "Hedging Obligations" means, with respect to any Person, the Obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates or currency exchange rates. "High Yield Notes" has the meaning specified in Section 4.4(b). "Holder" means each Interim Lender and each other Person, if any, in whose name an Interim Note is registered on the Note Register. "incur" has the meaning specified in Section 4.9. "Indebtedness" means, with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or banker's acceptances or representing Capital Lease Obligations or the balance deferred and unpaid of the purchase price of any property or representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable, if and to the extent any of the foregoing indebtedness (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all indebtedness of others secured by a Lien on any asset of such Person (whether or not such indebtedness is assumed by such Person) and, to the extent not otherwise included, the Guarantee by such Person of any indebtedness of any other Person. The amount of any Indebtedness outstanding as of any date shall be (i) the accreted value thereof, in the case of any Indebtedness that does not require current payments of interest, and (ii) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness. 8 15 "Indemnified Party" has the meaning specified in Section 11.1. "Indemnifying Party" has the meaning specified in Section 11.1 "Intellectual Property" has the meaning specified in Section 2.13. "Interest Payment Date" means the last day of each Interest Period, the Maturity Date and the date of any redemption or prepayment of the Interim Notes. "Interest Period" means, in the case of the first Interest Period, the date commencing on and including the Closing Date and ending on and including June 30, 1997, and, for each subsequent Interest Period, the date commencing on the last day of the preceding Interest Period and ending on the three-month anniversary of such date; provided, that if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended until the next succeeding Business Day unless the next Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day. Notwithstanding the foregoing, no Interest Period may extend beyond the Maturity Date and each Interest Period which would otherwise commence before and end after the Maturity Date shall end on the Maturity Date. "Interim Lenders" has the meaning specified in the preamble to this Agreement. "Interim Notes" has the meaning specified in the recitals to this Agreement. The form of Interim Note is attached as Exhibit D. "Investments" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the form of direct or indirect loans (including Guarantees of Indebtedness or other Obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. If the Parent, the Company or any of their respective Subsidiaries sells or otherwise disposes of any Equity Interests of any direct or indirect Subsidiary of the Parent or the Company such that, after giving effect to any such sale or disposition, such Person is no longer a direct or indirect Subsidiary of the Parent or the Company, the Parent or the Company, as the case may be, shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Subsidiary not sold or disposed of. "Lehman Brothers" means Lehman Brothers Inc., a Delaware corporation. "Lenders" means the banks and other lending institutions named in the Senior Credit Facility as lenders. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in any asset and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). 9 16 "Liquidated Damages" means any and all liquidated damages then owing pursuant to any of the Transaction Documents. "Material Contracts" has the meaning specified in Section 2.4. "Material Adverse Effect" means any circumstance or event that (i) has, or may be reasonably expected to have, any materially adverse effect upon the validity or enforceability of this Agreement or any of the other Transaction Documents (ii) is, or may be reasonably expected to be, materially adverse to the consolidated financial condition, business, operations, assets, liabilities, management, prospects or value of the Parent, the Company or the Acquired Businesses (including any event which, in the opinion of the Interim Lenders, is reasonably likely to result in such a material adverse change), (iii) materially impairs the ability of the Company to pay its Obligations under this Agreement or the Interim Notes or (iv) materially impairs the ability of any Guarantor to pay its Obligations under its Related Party Guarantee. "Maturity Date" has the meaning specified in Section 3.2. "Multiemployer Plan" means a "multiemployer plan" (within the meaning of Section 4001(a)(3) of ERISA) and to which the Company or any ERISA Affiliate makes, is making, or is obligated to make contributions or has made, or been obligated to make, contributions. "Net Cash Proceeds" means the aggregate cash proceeds received (including any cash payments received by way of deferred payment of principal pursuant to a promissory note or installment receivable or otherwise, but only as and when received) from any Capital Market Transaction, net of (i) all commissions (including any underwriter's discounts) and (ii) other ordinary and reasonable fees and expenses (including legal fees and expenses) incurred as a consequence of such Capital Market Transaction. "Note Register" means the register maintained by the Company pursuant to Section 6.3. "Obligations" means any principal, premium (if any), interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Parent, the Company or their Subsidiaries whether or not a claim for post-filing interest is allowed in such proceeding), penalties, fees, charges, expenses, indemnifications, reimbursement obligations, damages (including Liquidated Damages), guarantees and other liabilities or amounts payable under the documentation governing any Indebtedness or in respect thereof. "Offering Documents" means an offering memorandum or prospectus together with such other documents, instruments and agreements as Lehman Brothers may request in its sole discretion in connection with the issuance of High Yield Notes pursuant to Section 4.4. "Officer" means, with respect to any Person, the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary or any Vice-President of such Person. "Officers' Certificate" means a certificate signed on behalf of either the Parent or the Company by two Officers of the Parent or the Company, as the case may be, one of whom must be the principal executive officer, a vice chairman, the principal financial officer, the treasurer or the principal accounting officer of the Parent or the Company, as the case may be, that meets the requirements of Section 12.4. 10 17 "Opinion of Counsel" means an opinion from legal counsel of the Parent or the Company that is reasonably acceptable to the Interim Lenders that meets the requirements of Section 12.4. "Parent" has the meaning specified in the preamble to this Agreement. "Payment Blockage Notice" has the meaning specified in Section 8.3(b). "Payment Default" has the meaning specified in Section 7.1(g). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any of its functions under ERISA. "Permanent Securities" means securities issued by either the Parent or the Company that the Parent or the Company intends to either register with the SEC and sell pursuant to a registration statement in a public offering or privately place or otherwise sell in an offering exempt from registration with the SEC in connection with the mandatory redemption provisions of Sections 3.6 and 4.3. "Permits" has the meaning specified in Section 2.19. "Permitted Investments" means (i) any Investment in the Company or in a Wholly Owned Subsidiary of the Company that is a Guarantor, (ii) Investments in Foreign Subsidiaries of the Company not exceeding in the aggregate $1.0 million at any one time outstanding, (iii) any Investment in Cash Equivalents, (iv) extensions of trade credit in the ordinary course of business, and (v) loans and advances to employees of the Company and its Subsidiaries for travel, entertainment and relocation expenses in the ordinary course of business in an aggregate amount for the Company and its Subsidiaries not to exceed $500,000 at any one time outstanding. "Permitted Liens" means (i) Liens on assets of the Company or any of the Guarantors to secure Senior Debt permitted by this Agreement to be incurred; (ii) Liens on assets of the Company or any of the Guarantors to secure Hedging Obligations permitted by this Agreement to be incurred; (iii) Liens in favor of the Company; (iv) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds, deposits to secure the performance of bids, trade contracts, licenses or leases (other than financing leases) or other obligations of a like nature incurred in the ordinary course of business; (v) Liens existing on the Closing Date and listed on Schedule 1P; (vi) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently prosecuted, provided that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (vii) carriers', warehousemen's, mechanics', landlords', materialmen's, repairmen's or other like Liens arising in the ordinary course of business in respect of obligations not overdue for a period in excess of 60 days or which are being contested in good faith by appropriate proceedings promptly instituted and diligently prosecuted, provided that any reserve or other appropriate provision as shall be required in accordance with GAAP shall have been made therefor; (viii) easements, rights-of-way, zoning and similar restrictions and other similar encumbrances or title defects incurred, or leases or subleases granted to others, in the ordinary course of business, which do not in any case materially detract from the value of the property subject thereto or do not interfere with or adversely affect in any material respect the ordinary conduct of the business of the Company and its Subsidiaries taken as a whole; (ix) Liens upon real and/or tangible personal property acquired after the Closing Date (by purchase, construction or otherwise) by the Company or any of its Subsidiaries, each of which Liens was created solely for the purpose of securing Indebtedness representing, or incurred to finance, refinance or refund 100% of the cost (including the cost of construction) of such property to the extent such 11 18 Indebtedness is permitted by Section 4.9 (viii) and provided the Liens cover only such property so acquired or constructed and no other property and such Liens are created within three months after such acquisition or construction; (x) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation; (xi) Liens in favor of customs and revenue authorities to secure payment of customs duties in connection with the importation of goods in the ordinary course of business and other similar Liens arising in the ordinary course of business; (xii) permitted exception enumerated in the mortgages or deeds of trust by any Relevant Party in favor of, or for the benefit of the Administrative Agent for the benefit of the lenders under the Senior Credit Facility; and (xiii) Liens created under ERISA and under Environmental Laws that are being contested in good faith and as to which adequate reserves have been established to the extent required by GAAP and secure obligations not in excess of $500,000; provided that the Company and its Subsidiaries shall take all reasonable actions to terminate such Liens. "Permitted Refinancing Indebtedness" means any Indebtedness of the Parent, the Company or any of their Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund the Senior Credit Facility; provided that: (i) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount of (or accreted value, if applicable), plus accrued and unpaid interest on, the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus the amount of reasonable expenses incurred in connection therewith); (ii) such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded and (iii) such Indebtedness is incurred either by the Parent or the Company (and may be Guaranteed by a Subsidiary that is a Guarantor of the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded). "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or government or any agency or political subdivision thereof or any other entity. "Plan" means any "employee benefit plan" as defined in Section 3(3) of ERISA (A) which the Company or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or, within the five years prior to the Closing Date, maintained, administered, contributed to or was required to contribute to, or under which the Company or any ERISA Affiliate may incur any liability and (B) which covers any employee or former employee of the Company or any ERISA Affiliate (with respect to their relationship with such entities). "Prepayment Date" has the meaning specified in Section 3.10. "Prime Rate" means the rate of interest per annum publicly announced from time to time by Citibank N.A. as its prime rate in effect at its principal office in New York City (such rate of interest not necessarily the lowest rate of interest charged by Citibank N.A. in connection with extensions of credit). "Principal" means Hushang Ansary. "Properties" has the meaning specified in Section 2.18. 12 19 "Qualified Plan" means a pension plan (as defined in Section 3(2) of ERISA) intended to be tax-qualified under Section 401(a) of the Code and which the Company or any ERISA Affiliate sponsors, maintains, or to which it makes or is obligated to make contributions, or in the case of a multiple employer plan (as described in Section 4064(a) of ERISA) has made contributions at any time during the immediately preceding period covering at least five (5) plan years, but excluding any Multiemployer Plan. "Record Date" means the fifteenth day of the calendar month preceding an Interest Payment Date. "Related Documents" means the Rollover Notes, the Rollover Note Indenture, the Debt Registration Rights Agreement, the Escrow Agreement, the Warrant Agreement, the Equity Registration Rights Agreement, the Stockholders Agreement, the Engagement Letter and the documents contemplated in those agreements. "Related Party" means, with respect to the Principal, (A) any spouse or immediate family member (in the case of an individual) of such Principal or (B) a trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners or Persons beneficially holding an 80% or more controlling interest of which consist of such Principal and/or such other Persons referred to in the immediately preceding clause (A). "Related Party Guarantee" means the Guarantee by the Guarantors of the Interim Notes pursuant to Article X. "Relevant Parties" means the Parent, the Company, the Guarantors and each of their respective Subsidiaries. "Reportable Event" means any of the events set forth in Section 4043(b) of ERISA or the regulations thereunder, a withdrawal from a plan described in Section 4063 of ERISA or a cessation of operations described in Section 4062(e) of ERISA. "Representative" means the indenture trustee or other trustee, agent or representative designated as such in connection with the issuance of any Senior Debt. "Restricted Investment" means any Investment other than a Permitted Investment. "Restricted Payments" has the meaning specified in Section 4.10. "Rollover Fee" means a fee payable to each Holder on the Maturity Date equal to 3% of the aggregate principal amount of Interim Notes held by such Holder as of such date. "Rollover Note Indenture" means, with respect to the Rollover Notes, an indenture among the Parent, the Company, the Guarantors and The Bank of New York, as trustee, in the form attached as Exhibit E. "Rollover Notes" means the Senior Subordinated Rollover Notes of the Company placed into escrow on the Closing Date, to be issued in exchange for the Interim Notes pursuant to Section 3.3, in the form attached as an exhibit to the Rollover Note Indenture. "SEC" means the Securities and Exchange Commission. 13 20 "Securities Act" means the Securities Act of 1933, as amended. "Sellers" means Bowen, Teichgraeber Family Limited Partnership L.P., Arthur C. Teichgraeber Charitable Remainder Trust, A.C. Teichgraeber, Greenwood Pipe and Threading Company, and Edco Drilling Company Inc. "Senior Credit Facility" means the Credit Agreement dated as of March 31, 1997 among the Parent, the Company, the financial institutions named therein, the Administrative Agent and Lehman Commercial Paper Inc., as Advisor, Arranger and Syndication Agent, and any related notes, collateral documents, letters of credit and guarantees, including appendices, exhibits or schedules to any of the foregoing, as such agreements may be amended, modified, supplemented or restated from time to time thereafter, including any appendices, exhibits or schedules to any of the foregoing, as the same may be in effect at any time, in each case, as such agreements may be amended, modified, supplemented or restated from time to time, or refunded, refinanced, replaced, renewed or extended from time to time (whether with the original agents and lenders or other agents and lenders or otherwise, and whether provided under the original credit agreement or other credit agreements or otherwise), provided that such refunded, refinanced, replaced, renewed or extended agreements constitute Permitted Refinancing Indebtedness. "Senior Debt" means (i) all Indebtedness of the Company or any of the Guarantors outstanding at any time under or in respect of the Senior Credit Facility and all Hedging Obligations with respect thereto, and (ii) any other Indebtedness that is permitted to be incurred by the Company pursuant to this Agreement unless the instrument under which such Indebtedness is incurred expressly provides that it is on a parity with or subordinated in right of payment to the Interim Notes, and (iii) all Obligations of the Company or any of the Guarantors with respect to the foregoing. Without expanding the foregoing, Senior Debt will not include (v) any Obligation of the Company to any Subsidiary of the Company or any other Affiliates, (w) any liability for federal, state, local or other taxes owed or owing by the Company (other than such taxes owing or owed under the Senior Credit Facility), (x) any accounts payable or other liability to trade creditors arising in the ordinary course of business (including Guarantees thereof or instruments evidencing such liabilities), (y) any Obligations in respect of Capital Stock of the Company or (z) that portion of any Indebtedness which at the time of incurrence is incurred in violation of this Indenture. "Senior Guarantees" means the Guarantees issued by the Guarantors pursuant to the Senior Credit Facility. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation is in effect on the date hereof. "Solvent" means, with respect to the Parent or the Company on a pro forma basis immediately after the consummation of the Acquisitions, that (a) the fair value of each of the Parent's and the Company's assets exceeds its stated liabilities, including all contingent liabilities, (b) the present fair saleable value of each of the Parent's and the Company's assets exceeds that amount that will be required to pay its probable liability on its debts as they become absolute and mature, (c) neither the Parent nor the Company will have incurred debts beyond its ability to pay such debts as they mature, and (d) the then remaining assets of each of the Parent and the Company will not constitute an unreasonably small capital for the business in which each of the Parent and the Company is engaged. 14 21 "Stated Maturity" means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "Stockholders Agreement" means the stockholder agreement among the Interim Lenders, the Parent and each of the other parties listed therein, in the form attached as Exhibit F. "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person and (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or an entity described in clause (i) and related to such Person or (b) the only general partners of which are such Person or of one or more entities described in clause (i) and related to such Person (or any combination thereof). "Three-Month Secondary CD Rate" means, for any day, the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day shall not be a Business Day, the next preceding Business Day) by the Board through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Board, be published in Federal Reserve Statistical Release H.15(519) during the week following such day), or, if such rate shall not be so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 A.M., New York City time, on such day (or, if such day shall not be a Business Day, on the next preceding Business Day) by Citibank N.A. from three New York City negotiable certificate of deposit dealers of recognized standing selected by it. "Transaction Documents" means this Agreement, the Interim Notes and the Related Documents. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended. "Unfunded Pension Liabilities" means the excess of a Plan's accrued benefits, as defined in Section 3(23) of ERISA, over the current value of that Plan's assets, as defined in Section 3(26) of ERISA. "Voting Stock" means, with respect to any Person at any time, the Capital Stock of such Person that is at such time entitled to vote in the election of the board of directors of such Person. "Warrant Agent" means The Bank of New York, a New York banking corporation. "Warrant Agreement" means the warrant agreement between the Parent and the Warrant Agent, in the form attached as Exhibit G. "Warrant Shares" has the meaning specified in Section 4.4(a). "Warrants" means the warrants to purchase common stock of the Parent to be issued pursuant to the Warrant Agreement. 15 22 "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding principal amount of such Indebtedness. "Wholly Owned Subsidiary" means (i) a Subsidiary, 100 percent of the Capital Stock and other Equity Interests of which is owned directly or indirectly by the Company and (ii) Bowen Mexicana. "Withdrawal Liabilities" means, as of any determination date, the aggregate amount of the liabilities, if any, pursuant to Section 4201 of ERISA if the Company and each ERISA Affiliate made a complete withdrawal from all Multiemployer Plans and any increase in contributions pursuant to Section 4243 of ERISA. Section 1.2 Interpretation. In this Agreement, the singular includes the plural and the plural includes the singular; words implying any gender include the other genders; references to any section, exhibit or schedule are to sections, exhibits or schedules hereto unless otherwise indicated; references to statutes are to be construed as including all statutory provisions consolidating, amending or replacing the statute referred to; references to "writing" include printing, typing, lithography and other means of reproducing words in a visible form; "including" following a word or phrase shall not be construed to limit the generality of such word or phrase; and an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP as in effect from time to time. ARTICLE II REPRESENTATIONS AND WARRANTIES As of the date hereof and as of the Closing Date (after giving pro forma effect to the Acquisitions, the Senior Credit Facility, the Transaction Documents, the issuance of the Interim Notes and the application of the proceeds thereof, and the transactions contemplated hereby and thereby), the Parent and the Company hereby agree with, and represent and warrant to, the Interim Lenders and any subsequent Holder as follows: Section 2.1 Representations and Warranties in the Acquisition Agreements and the Senior Credit Facility. The representations and warranties of the Relevant Parties contained in the Senior Credit Facility and, to the best of the Parent's and Company's knowledge, representations and warranties of the Sellers contained in the Acquisition Agreements are true and correct in all material respects and are hereby incorporated herein by reference. Section 2.2 Organization; Good Standing. Each of the Relevant Parties has been duly incorporated, duly organized or duly constituted and is a validly existing corporation, limited partnership, or limited liability company in good standing under the laws of its jurisdiction of organization, with corporate, partnership or other necessary power and authority to own, lease and operate its properties and conduct its business as it is being conducted and is duly qualified to do business and is in good standing as a foreign corporation, limited partnership, or limited liability company in all jurisdictions in which it owns, leases or operates substantial properties or in which the conduct of its business requires such qualification except where the failure to so qualify will not cause a Material Adverse Effect. 16 23 Section 2.3 Due Authorization and Enforceability. (a) Each of the Acquisition Agreements, the Senior Credit Facility and the Transaction Documents (i) has been duly authorized, executed and delivered by each Relevant Party to the extent a party thereto and (ii) constitutes a valid and binding obligation of such Relevant Party enforceable against it in accordance with its terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting the enforceability of creditors' rights generally and by general principles of equity (whether arising under a proceeding at law or in equity). (b) The Interim Notes have been duly authorized by the Company and, when executed and delivered pursuant to the terms of this Agreement against payment thereof by the Interim Lenders, will be valid and binding obligations of the Company, enforceable against it in accordance with their terms, except as enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting the enforceability of creditors' rights generally and by general principles of equity (whether arising under a proceeding at law or in equity). (c) The Related Party Guarantee has been duly authorized by each of the Guarantors and, when the Interim Notes have been delivered pursuant to the terms of this Agreement against payment thereof by the Interim Lenders, the Related Party Guarantee will be a valid and binding obligation of each of the Guarantors, enforceable against each of them in accordance with its terms, except as enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting the enforceability of creditors' rights generally and by general principles of equity (whether arising under a proceeding at law or in equity). (d) The Warrants have been duly authorized by the Parent and, when executed and authenticated pursuant to the terms of the Warrant Agreement and delivered to the Escrow Agent pursuant to the provisions of this Agreement, will be valid and binding obligations of the Parent, enforceable against it in accordance with its terms, except as enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting the enforceability of creditors' rights generally and by general principles of equity (whether arising under a proceeding at law or in equity). (e) The Warrant Shares to be issued upon exercise of the Warrants have been duly authorized and reserved for issuance by the Parent and will be issued at the times and in the manner required by the Warrant Agreement and, upon due exercise of a Warrant, the Warrant Shares issued will be validly issued, fully paid and nonassessable. Section 2.4 No Conflicts. (a) Neither the execution and delivery of the Acquisition Agreements, the Senior Credit Facility or the Transaction Documents nor the consummation of any of the transactions contemplated hereby or thereby nor compliance with the terms and provisions hereof or thereof (i) violates or will violate any law or regulation or any order or decree of any court or Governmental Entity applicable to the Relevant Parties or by which any of their respective properties or assets may be bound, (ii) constitutes or will constitute a breach or a violation of, any of the terms or provisions of, or a default under, the organizational documents (including any certificate of incorporation or bylaws) or any other corporate restriction of any of the Relevant Parties or (iii) conflicts with or will result in the breach of, or constitutes a default under, any material contract, lease, indenture, loan agreement (including the Senior Credit Facility), mortgage, deed of trust or other agreement or instrument (each, a "Material Contract") to which a Relevant Party is a party or by which any of them or any of their respective assets may be bound. 17 24 (b) No consent, approval, authorization or order of, or any registration or filing with, any Governmental Entity is or will be required in connection with (i) the execution and delivery of the Acquisition Agreements, the Senior Credit Facility or the Transaction Documents by the Relevant Parties or the consummation of the transactions contemplated hereby or thereby, or (ii) the issuance and delivery of the Warrants or the Warrant Shares by the Parent, other than (A) such authorizations, approvals, consents, exemptions, registrations or filings as shall have been made or secured by the date hereof and as may be required in connection with registration of the Rollover Notes pursuant to the Debt Registration Rights Agreement and the registration of the Warrants and the Warrant Shares pursuant to the Equity Registration Rights Agreement, and approval of the Cardwell Acquisition by the U.S. Department of Justice under the Hart-Scott-Rodino Antitrust Act of 1976, (B) informational filings with the SEC and certain "blue sky" administrators which have no bearing on the validity or enforceability of the Warrants or the Warrant Shares and (C) such actions as may be required after the date hereof in connection with any transfer of the Warrants or the Warrant Shares. Section 2.5 No Violations; Material Contracts. (a) There does not currently exist with respect to any Relevant Party (i) any violation of any law or regulation or any order or decree of any court or Governmental Entity applicable to such Relevant Party or (ii) any conflict or violation of any terms or provisions of its organization documents (including any certificate of incorporation or bylaws) and any other corporate restriction. (b) None of the Relevant Parties is a party to any agreement or instrument or subject to any corporate or other restriction that, individually or in the aggregate, has had or could have a Material Adverse Effect. Each Material Contract to which a Relevant Party (except Cardwell) is a party or by which such Relevant Party or any of its properties or assets are or may be bound as of the Closing Date is listed on Schedule 2.5 and true and correct copies of all such Material Contracts have been delivered to the Interim Lenders and to Latham & Watkins, special counsel to the Interim Lenders. (c) As of the Closing Date, each Material Contract is in all material respects valid, binding and in full force and effect and is enforceable by each Relevant Party that is a party thereto in accordance with its terms. As of the Closing Date, each Relevant Party has performed in all material respects all obligations required to be performed by it to date under all of its Material Contracts and is not (with or without the lapse of time or the giving of notice, or both) in breach or default in any material respect thereunder and, to the knowledge of the Parent or the Company, no other party to any of the Material Contracts is (with or without the lapse of time or the giving of notice, or both) in breach or default or in any material respect thereunder. As of the Closing Date, neither the Parent nor the Company, nor, to the knowledge of the Parent or the Company, any other party to any Material Contract, has given notice of termination of, or taken any action inconsistent with the continuation of, any Material Contract. As of the Closing Date, none of such other parties has any presently exercisable or future right to terminate any Material Contract, including any right to terminate any Material Contract on account of the execution, delivery or performance of the Senior Credit Facility, the Acquisition Agreements, or the Transaction Documents. Section 2.6 Capital Stock; Subsidiaries. (a) All shares of Capital Stock and other Equity Interests of the Acquired Businesses after the Acquisitions will be duly authorized, validly issued, fully paid and non-assessable and owned by the Company or one of its Wholly Owned Domestic Subsidiaries (other than Bowen-Mexicana) beneficially and of record, free and clear of any Lien, other than under the Senior Credit Facility. After the Bowen Acquisition, 95% of the Capital Stock and other Equity Interests of Bowen-Mexicana will be owned by the Company beneficially and of record. All shares of Capital Stock and other Equity Interests of the Company are duly authorized, validly issued, fully paid and non-assessable and owned by the Parent beneficially and of record, free and clear of any Lien. All shares 18 25 of Capital Stock and other Equity Interests of the Parent are duly authorized, validly issued, fully paid and non-assessable, owned free and clear of any Lien. Ninety-one percent of the Capital Stock and other Equity Interests of the Parent is owned by Energy Services International Limited, a British Virgin Islands corporation ("BVI"), beneficially and of record. All shares of Capital Stock and other Equity Interests of BVI are duly authorized, validly issued, fully paid and non-assessable, owned free and clear of any Lien. One-hundred percent of the Capital Stock and other Equity Interests of BVI is owned by the Principal, his immediate family members (i.e. his spouse and his children) and trusts for the benefit of his immediate family members beneficially and of record. BVI has no significant liabilities of any kind and has no assets other than its interests in the Parent. (b) There are (i) no outstanding subscriptions, warrants, options, calls or commitments of any character related to or entitling any Person to purchase or otherwise acquire any shares of BVI's, the Parent's or the Company's Capital Stock or the Capital Stock of any Subsidiary of the Parent or the Company, (ii) no obligations or securities convertible into or exchangeable for shares of any Capital Stock of BVI, the Parent, the Company or any such Subsidiary or any commitments of any character relating to or entitling any Person to purchase or otherwise acquire any such obligations or securities, other than the Warrant Agreement and (iii) no preemptive or similar rights to subscribe for or to purchase any Capital Stock of BVI, the Parent, the Company or any such Subsidiary, except (A) those that are currently owned or that will be owned after the Acquisitions, beneficially and of record by the Company and (B) those contemplated by the Warrant Agreement. (c) Neither the Parent nor the Company owns, directly or indirectly, any stock, partnership interest, joint venture or other equity investment or interest in any other corporation, organization or entity other than the Subsidiaries set forth on Schedule 2.6. Schedule 2.6 is a true and complete list of the record and beneficial owners of all outstanding Capital Stock of, and other Equity Interests in, the Parent, the Company and each of their respective Subsidiaries listed by name, number of shares and percentage ownership. Section 2.7 Senior Credit Facility; Liens. At the Closing: (i) all Indebtedness represented by the Interim Notes will be subordinated in right of payment only to Indebtedness incurred pursuant to the Senior Credit Facility and (ii) there will be no Liens on any assets of the Parent or the Company or any of their respective Subsidiaries except Permitted Liens. Section 2.8 No Violation of Regulations of Board of Governors of Federal Reserve System. None of the transactions contemplated by this Agreement (including without limitation the use of the proceeds from the sale of the Interim Notes and the Permanent Securities) will violate or result in a violation of Section 7 of the Exchange Act, or any rule or regulation issued pursuant thereto, including, without limitation, Regulations G, T, U and X of the Board of Governors of the Federal Reserve System. Section 2.9 Governmental Regulations. None of the Relevant Parties is or will be subject to regulation under the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act of 1935, as amended, the Federal Power Act, the Interstate Commerce Act or to any other Federal or state statute or regulation limiting its ability to incur Indebtedness for borrowed money. Section 2.10 Financial Statements; No Undisclosed Liabilities. (a) The financial statements that have been delivered to the Interim Lenders pursuant to Sections 5.2(i) and (j) and attached as Schedule 2.10 (the "Financial Statements"), comply with the requirements of Sections 5.2(i) and (j). Except as set forth in the notes thereto, the Financial Statements have been prepared from, and are consistent with, the books and records of the Relevant Parties and fairly present the historical results of operations and financial position of the Relevant Parties for the periods and as of the dates set forth 19 26 therein, in each case in accordance with GAAP consistently applied during the periods involved (except as otherwise specifically indicated therein). The pro forma income statement delivered pursuant to Section 5.2(j) fairly presents the estimated consolidated income of the Company assuming the consummation of the Acquisitions and the financings contemplated hereby (including borrowings under the Senior Credit Facility) as if such transactions had occurred on the first day of such period, and the financial condition of the Company on the Closing Date does not differ in any material respect from the information therein set forth. (b) None of the Relevant Parties has any liability (absolute or contingent) except those shown on the Financial Statements or those incurred in the ordinary course of business since the date of the last Financial Statements that do not, in the aggregate, exceed 5% of the total assets of the Relevant Parties. (c) Each Relevant Party maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Section 2.11 Full Disclosure. No information, report, Financial Statement or certificate delivered or to be delivered to the Interim Lenders in connection with the Transaction Documents contains or will contain any untrue statement of material fact or omitted or omits or will omit to state a material fact necessary to make such statements not misleading in light of the circumstances in which such statements were made. It is understood, however, that to the extent any such information, report, Financial Statement or certificate includes projections, such projections are based upon good faith estimates and assumptions believed to be reasonable at the time made and are not to be viewed as facts. Actual results during the period or periods covered by such projections may differ from the projected results. Section 2.12 Private Offering; Rule 144A Matters. (a) Based in part on the accuracy of the representations of the Interim Lenders in Section 6.1, the sale of the Interim Notes hereunder and the issuance of the Rollover Notes and the Warrants are and will be exempt from the registration and prospectus delivery requirements of the Securities Act. Neither the Parent nor the Company has issued or sold Interim Notes, Rollover Notes or Warrants to anyone other than the Interim Lenders. No securities of the same class as the Interim Notes or the Warrants have been issued or sold by the Company or the Parent, as the case may be, within the six-month period immediately prior to the date hereof. The Parent and the Company agree that neither of them, nor anyone acting on their behalf, will offer the Interim Notes, the Rollover Notes or the Warrants so as to bring the issuance and/or sale of the Interim Notes, the Rollover Notes or Warrants within the provisions of Section 5 of the Securities Act nor offer any similar securities for issuance or sale to, or solicit any offer to acquire any of the same from, or otherwise approach or negotiate with respect thereto with, anyone if the issuance or sale of the Interim Notes, the Rollover Notes or the Warrants or any such securities would be integrated as a single offering for the purposes of the Securities Act, including without limitation, Regulation D thereunder. Each Interim Note, Rollover Note and Warrant shall have a legend setting forth the restrictions on transferability and sale imposed by Regulation D under the Securities Act for at least so long as such restrictions apply. (b) In the case of each offer, sale or issuance of the Interim Notes, Rollover Notes and Warrants, no form of general solicitation or general advertising was or will be used by the Parent or the 20 27 Company or their representatives, including, but not limited to, advertisements, articles, notices or other communications published in any newspaper, magazine or similar medium or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. (c) The Interim Notes, the Rollover Notes and the Warrants will be eligible for resale pursuant to Rule 144A under the Securities Act. When the Interim Notes, the Rollover Notes and the Warrants are issued and delivered pursuant to this Agreement, they will not be of the same class (within the meaning of Rule 144A(d)(3) under the Securities Act) as any security of the Parent or the Company that is listed on a national securities exchange registered under Section 6 of the Exchange Act or that is quoted in a United States automated interdealer quotation system. The issuance of the Interim Notes and the execution, delivery and performance of the Transaction Documents (other than the Debt Registration Rights Agreement) will not require the qualification of an indenture under the Trust Indenture Act of 1939, as amended. Section 2.13 Proprietary Matter. Each of the Relevant Parties owns, possesses or has the right to employ all patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names (collectively, the "Intellectual Property") now used or proposed to be used in connection with the businesses conducted by the Relevant Parties. No Relevant Party has received any notice of infringement of or conflict with asserted rights of others or of any challenge to the validity or effectiveness with respect to any of the foregoing. The use of the Intellectual Property in connection with the businesses and operations of each Relevant Party does not infringe on any rights of any person and the completion of the Acquisitions will not in any manner impair the ownership of (or the license to use, as the case may be) any of such Intellectual Property by any of the Relevant Parties. Schedule 2.13 sets forth a complete and correct list, as of the Closing Date, of: (i) all patented or registered Intellectual Property and pending patent applications or applications for registration of Intellectual Property owned or filed by or on behalf of any of the Relevant Parties, (ii) all trade names and unregistered trademarks or service marks owned by or used by any of the Relevant Parties, and (iii) all licenses of Intellectual Property to which any of the Relevant Parties is a party, either as licensee or licensor. Section 2.14 Absence of Proceedings. Except with respect to the matters disclosed in Schedule 2.14, there is not pending or threatened any action, suit or proceeding to which any Relevant Party is a party, before or by any court or Governmental Entity or body (domestic or foreign), that could reasonably be expected to cause a Material Adverse Effect. Section 2.15 Absence of Labor Disputes. (a) None of the Relevant Parties is involved in any material labor dispute nor is any material dispute threatened which, if such dispute were to occur, could reasonably be expected to have a Material Adverse Effect. (b) There is, as of the Closing Date (i) no unfair labor practice complaint pending against any of the Relevant Parties or threatened against any of them, before the National Labor Relations Board, (ii) no material grievance or arbitration proceeding arising out of or under any collective bargaining agreement pending against any of the Relevant Parties or threatened against any of them, (iii) no union representation question existing with respect to the employees of any of the Relevant Parties and (iv) no union organizing activities are taking place, except (with respect to any matter specified in clause (i) through (iii) above) such as could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 21 28 Section 2.16 Taxes. The Relevant Parties have duly and timely filed all required tax returns and reports and paid prior to delinquency all taxes, assessments, and governmental levies except those not in process of enforcement and being contested in good faith and by appropriate proceedings. Section 2.17 Absence of Employment Law Violations, Etc. None of the Relevant Parties has violated any safety or similar law applicable to its business, nor any federal, state or foreign law relating to discrimination in the hiring, promotion or pay of employees nor any applicable federal, state or foreign wages and hours laws, or the rules and regulations promulgated thereunder, which in each case could reasonably be expected to have a Material Adverse Effect. Section 2.18 Environmental Laws. Except as described on Schedule 2.18: (a) the real property owned, leased or operated by any of the Relevant Parties (collectively, the "Properties") do not contain any Hazardous Material in amounts or concentrations or under circumstances which (i) constitute or constituted a violation of, or (ii) could give rise to liability under, any Environmental Law, except in either case insofar as such violation or liability, or any aggregation thereof, could not reasonably be expected to have a Material Adverse Effect. (b) The Properties and all operations at the Properties are in material compliance, and have in the last five years been in material compliance, with all applicable Environmental Laws, and there is no contamination at, under or about the Properties or violation of any Environmental Law with respect to the Properties or the business operated or proposed to be operated by any of the Relevant Parties (the "Businesses") which could reasonably be expected to materially interfere with the continued operation of the Properties. None of the Relevant Parties has assumed any liability of any other Person under any of the Environmental Laws. (c) None of the Relevant Parties has received or is aware of any notice of violation, alleged violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of the Properties or the Businesses, nor does any of the Relevant Parties have knowledge or reason to believe that any such notice will be received or is being threatened, except insofar as such notice or threatened notice, or any aggregation thereof, does not involve a matter or matters that could reasonably be expected to have a Material Adverse Effect. (d) Hazardous Materials have not been transported or disposed of from the Properties in violation of, or in a manner or to a location which could reasonably be expected to give rise to liability under, any Environmental Law, nor have any Hazardous Materials been generated, treated, stored or disposed of at, on or under any of the Properties in violation of, or in a manner that could give rise to liability under, any applicable Environmental Law, except insofar as any such violation or liability referred to in this paragraph, or any aggregation thereof, could not reasonably be expected to have a Material Adverse Effect. (e) No judicial proceeding or governmental or administrative action is pending or, to the knowledge of the Parent or the Company, threatened, under any Environmental Law to which any of the Relevant Parties is or, to the knowledge of the Parent or the Company, will be named as a party with respect to the Properties or the Businesses, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to the Properties or the Businesses, except insofar as such proceeding, action, decree, order or other requirement, or any aggregation thereof, could not reasonably be expected to have a Material Adverse Effect. 22 29 (f) There has been no release or threat of release of Hazardous Materials at or from the Properties, or arising from or related to the operations of the Relevant Parties in connection with the Properties or otherwise in connection with the Businesses, in violation of or in amounts or in a manner that could give rise to liability under Environmental Laws, except insofar as any such violation or liability referred to in this paragraph, or any aggregation thereof, could not reasonably be expected to have a Material Adverse Effect. Section 2.19 Permits. Each of the Relevant Parties has such material permits, licenses, franchises, consents, approvals and authorizations of Governmental Entities ("Permits") as are necessary to own, lease and operate its respective properties and to conduct its business as presently conducted. Each of the Relevant Parties has fulfilled and performed all of its material obligations with respect to such Permits, and, to the best of their knowledge, no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination by the issuer thereof or which results in any other material impairment of the rights of any of such Relevant Parties with respect to any such Permits. Such Permits contain no restrictions that are materially burdensome to any of the Relevant Parties, and the Parent and the Company have no knowledge that any Governmental Entity is considering limiting, suspending or revoking any such Permit. Neither the Parent nor the Company has any knowledge of the facts or circumstances that would reasonably allow it to conclude that any Permit necessary in the future to conduct the businesses of the Relevant Parties will not be granted upon application. Section 2.20 Properties; Leases. The Relevant Parties have good and marketable title to their respective properties and assets, free and clear of all Liens, claims, encumbrances and restrictions, except Permitted Liens. All real property leases to which any Relevant Party is a party are valid and binding, and neither the Parent nor the Company has any knowledge of any facts or circumstances that would reasonably allow it to conclude that a default has occurred or is continuing thereunder. The Relevant Parties enjoy peaceful and undisturbed possession under all such leases to which any of them is a party as lessee with such exceptions as do not materially interfere with the use made by them. Section 2.21 Insurance. The Relevant Parties maintain commercially reasonable insurance for the businesses in which they are engaged. All such policies are in full force and effect, all premiums due and payable thereon have been paid and no notice of cancellation or termination has been received with respect to any such policy which has not been replaced. The activities and operations of the Relevant Parties have been conducted in a manner so as to conform in all material respects to the applicable provisions of such insurance policies. Section 2.22 Financial Condition; Solvency. (a) (i) The fair value of the assets of each Relevant Party will exceed the debts and liabilities, direct, subordinated, contingent or otherwise, of such Relevant Party; (ii) the present fair salable value of the property of such Relevant Party will be greater than the amount that will be required to satisfy any probable liability of such Relevant Party on its debts and other liabilities, direct, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured; (iii) such Relevant Party will be able to pay its debts and liabilities, direct, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; and (iv) such Relevant Party will not have unreasonably small capital with which to conduct the businesses in which it is engaged as such business is now conducted and is proposed to be conducted, in each case, following the Closing Date. (b) Each Relevant Party does not intend to incur debts beyond its ability to pay such debts as they mature, taking into account the timing and amounts of cash to be received by it and the timing and amounts of cash to be payable on or in respect of its Indebtedness. 23 30 Section 2.23 Foreign Corrupt Practices Act. None of the Relevant Parties, nor any director, officer, agent, employee or other person associated with or acting on behalf of any of the Relevant Parties, (i) has used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; (iii) violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977; or (iv) made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment. Section 2.24 No Material Adverse Change. There has been no material adverse change in the consolidated financial condition, business, operations, assets, liabilities, management, prospects or value of any of the Relevant Parties or, to the best of the Parents and the Company's knowledge, Cardwell or Bowen (including any event which, in the opinion of the Interim Lenders, is reasonably likely to result in such a material adverse change) since March 31, 1996. Section 2.25 ERISA. (a) Schedule 2.25 (the "ERISA Schedule") lists all Plans maintained or sponsored by the Company or to which the Company or any ERISA Affiliate is obligated to contribute, and separately identifies Plans intended to be Qualified Plans and Multiemployer Plans. (b) Each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and other applicable federal or state law. (c) Each Qualified Plan has been determined by the IRS to qualify under Section 401 of the Code, and the trusts created thereunder have been determined to be exempt from tax under the provisions of Section 501 of the Code, and to the best knowledge of the Company nothing has occurred which would cause the loss of such qualification or tax-exempt status. (d) Except as set forth in ERISA Schedule, there is no outstanding material liability under Title IV of ERISA with respect to any Plan maintained or sponsored by the Company or any ERISA Affiliate (as to which the Company is or may be liable), nor with respect to any Plan to which the Company or any ERISA Affiliate (wherein the Company is or may be liable) contributes or is obligated to contribute. (e) Except as set forth on ERISA Schedule, none of the Qualified Plans subject to Title IV of ERISA has any material Unfunded Pension Liability as to which the Company is or may be liable. (f) Except as set forth in ERISA Schedule, no Plan maintained or sponsored by the Company or any ERISA Affiliate provides medical or other welfare benefits or extends coverage relating to such benefits beyond the date of a participant's termination of employment with the Company or such ERISA Affiliate, except to the extent required by Section 4980B of the Code and at the sole expense of the participant or the beneficiary of the participant to the fullest extent permissible under such Section of the Code. The Company and each ERISA Affiliate have complied in all material respects with the notice and continuation coverage requirements of Section 4980B of the Code. (g) Except as set forth in ERISA Schedule, no ERISA Event has occurred or, to the best knowledge of the Company, is reasonably expected to occur with respect to any Plan maintained or sponsored by the Company or to which the Company or any ERISA Affiliate is obligated to contribute. (h) There are no pending or, to the best knowledge of the Company, threatened claims, actions or lawsuits, other than routine claims for benefits in the usual and ordinary course, asserted or instituted against (i) any Plan maintained or sponsored by the Company or any ERISA Affiliate, (ii) the Company or any ERISA Affiliate with respect to any Qualified Plan, or (iii) any other fiduciary with respect to any 24 31 Plan for which the Company may be directly or indirectly liable, through indemnification obligations or otherwise. (i) Except as set forth in ERISA Schedule, the Company has not incurred nor reasonably expects to incur (i) any material liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such material liability) under Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan or (ii) any material liability under Title IV of ERISA (other than premiums due and not delinquent under Section 4007 of ERISA) with respect to any Plan. (j) Except as set forth in ERISA Schedule, neither the Company nor any ERISA Affiliate has transferred any Unfunded Pension Liability to an entity other than an ERISA Affiliate or otherwise engaged in a transaction that could be subject to Section 4069 or 4212(c) of ERISA. (k) Neither the Company nor any ERISA Affiliate has engaged, directly or indirectly, in a prohibited transaction (as defined in Section 4975 of the Code or Section 406 of ERISA) for which no statutory or administrative exemption is applicable in connection with any Plan the consequences of which, in the aggregate, have a reasonable likelihood of having a Material Adverse Effect. ARTICLE III SALE AND REPAYMENT Section 3.1 Sale of the Interim Notes. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company agrees to sell to the Interim Lenders, and the Interim Lenders agree to purchase from the Company Interim Notes in an aggregate principal amount of $31.0 million, at an aggregate purchase price equal to 100% of such principal amount, payable by wire transfer on the Closing Date as provided in Section 5.1. Section 3.2 Maturity. Each Interim Note will mature on March 31, 1998, (the "Maturity Date"). Section 3.3 Mandatory Exchange; Issuance of Rollover Notes and Warrants. On the Maturity Date, (i) the Escrow Agent shall deliver to each Holder of Interim Notes, in such names and as such Holder shall request, such Holder's pro rata share of Warrants representing 5% of the fully-diluted common stock of the Parent, such pro rata share to be equal to such Holder's pro rata share of the aggregate principal amount of Interim Notes outstanding on such date and (ii) the Escrow Agent shall deliver to each Holder of Interim Notes, in exchange for such Interim Notes, a Rollover Note (or Rollover Notes), in such names as such Holder shall request, in an aggregate principal amount equal to the unpaid principal amount of the Interim Notes delivered by such Holder to the Escrow Agent; provided, however, that no Holder shall be required to accept Rollover Notes in exchange for Interim Notes (in which case the principal of, premium, if any, and accrued and unpaid interest on the Interim Notes shall be due and payable immediately) unless the following conditions shall have been satisfied (or are concurrently satisfied) as of the Maturity Date or waived by all the Holders: (i) no Default or Event of Default shall have occurred and be continuing under this Agreement and no payment default shall have occurred and be continuing under the Engagement Letter; 25 32 (ii) the Company shall have paid the Rollover Fee to each Holder in immediately available funds and shall have paid all accrued and unpaid interest with respect to the Interim Notes in accordance with the terms thereof; (iii) pursuant to the Debt Registration Rights Agreement, the Shelf Registration Statement (as defined in the Debt Registration Rights Agreement) with respect to the Rollover Notes shall have been declared effective by the SEC; and (iv) pursuant to the Equity Registration Rights Agreement, the Shelf Registration Statement (as defined in the Equity Registration Rights Agreement) with respect to the Warrants and the Warrant Shares shall have been declared effective by the SEC. Section 3.4 Interest on the Interim Notes. (a) Subject to Section 3.4(d), interest on each Interim Note shall be payable in cash by wire transfer pursuant to Section 3.11 on each Interest Payment Date for the Interest Period then ended. Subject to Sections 3.4(c) and 3.12, interest on the Interim Notes shall be calculated and shall accrue on a daily basis for each day during each Interest Period at a rate per annum equal to the Applicable LIBOR Rate for such Interest Period plus the Applicable Spread for such day. Accrued interest on each Interim Note for each Interest Period shall be calculated on the basis of the actual number of days elapsed and a 360-day year (or, in the case of interest accruing at the Base Rate determined by reference to the Prime Rate, a 365-day or 366-day year as appropriate). (b) Interest on the Interim Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the Closing Date. Interest shall accrue with respect to principal on each Interim Note to, but not including, the date of repayment of such principal; provided, however, that if such repayment occurs after 12:00 noon, New York City time, interest shall be deemed to accrue until the following Business Day. (c) Notwithstanding anything contained in this Agreement to the contrary, the interest rate on the Interim Notes for any Interest Period shall not exceed an annual rate equal to the lesser of (i) 18% and (ii) the maximum interest rate permitted by law. (d) To the extent that the interest rate on the Interim Notes for any Interest Period exceeds an annual rate equal to 14%, the Company shall have the option to pay to the Holders, pro rata, all incremental interest accruing during such Interest Period at a rate in excess of 14% per annum in the form of additional Interim Notes having a principal amount equal to the amount of such incremental interest provided, that such additional Interim Notes shall be in denominations of $1,000 and integral multiples thereof and that any difference between such incremental interest owing and such additional Interim Notes shall be paid in cash by wire transfer pursuant to Section 3.11. In the event that the Company elects to pay any interest in the form of additional Interim Notes, it will: (i) deliver by hand or by overnight courier to each Holder an additional authorized, executed and authenticated Interim Note in a principal amount equal to the amount of such incremental interest, payable to the order of such Holder, dated the date of the applicable Interest Payment Date, to the address of such Holder shown on the Note Register, (ii) deliver by hand or by overnight courier duly authorized, executed and authenticated Rollover Notes to the Escrow Agent, dated the Maturity Date, unregistered as to payee or registered in blank, in an aggregate principal amount equal to the aggregate principal amount of the Interim Notes so delivered in accordance with clause (i) above, and 26 33 (iii) deliver an Officers' Certificate setting forth the calculation of such incremental interest, resolutions of the board of directors of the Company, the Parent and the Guarantors authorizing, as appropriate, the issuance of such additional Interim Notes and Rollover Notes and each Related Party Guarantee with respect to such additional Interim Notes and Rollover Notes, and an Opinion of Counsel as to the validity and enforceability of such Interim Notes, Rollover Notes and Related Party Guarantees, each such Officer's Certificate, resolutions and Opinion of Counsel to be reasonably satisfactory to each of the Holders. Section 3.5 Default Interest. Interest will accrue on any overdue amount (whether interest or principal), to the extent lawful, at a rate per annum equal to 2% over the then current interest rate on the Interim Notes until such amount (plus all accrued and unpaid interest) is paid in full. The Company shall pay such default interest and all interest accruing on any overdue installment of interest or principal on demand from time to time. Section 3.6 Mandatory Redemption. (a) The Parent and the Company shall cause the Interim Notes to be redeemed with (i) the Net Cash Proceeds of (x) any direct or indirect public offering or private placement of High Yield Notes, subordinated debt or equity securities of the Company or the Parent or (y) the incurrence of any other Indebtedness by the Company, the Parent or any Subsidiary of the Parent or the Company (other than Indebtedness permitted to be incurred under Section 4.9) or (ii) any net proceeds from an Asset Sale by the Company, the Parent or any Subsidiary of the Parent or the Company (other than an Asset Sale permitted under Section 4.12) (each, a "Capital Market Transaction"), subject, in the case of clauses (i) (y) and (ii) only, to the required prior repayment of any amount outstanding under the Senior Credit Facility. The Company shall, not later than the second Business Day following any Capital Market Transaction, redeem Interim Notes pursuant to this Section 3.6 at a redemption price equal to 100% of the principal amount of the Interim Notes redeemed, plus accrued and unpaid interest to the date of the redemption, provided, however, that the Company shall redeem the Interim Notes at a redemption price equal to 103% of the principal amount of the Interim Notes redeemed, plus accrued and unpaid interest to the date of redemption, if the Interim Notes are redeemed with, or in anticipation of, proceeds from any transaction in which Lehman Brothers did not or will not act as exclusive placement agent or sole underwriter to the Parent or the Company or any of their respective Subsidiaries (unless it shall otherwise have agreed in writing prior to such repayment date not to so act) other than the proceeds of a borrowing under the Tranche B Term Loan (as such term is defined in the Senior Credit Facility) under the Senior Credit Facility. (b) Subject to and in accordance with Section 4.21, in the event of any Change of Control, the Company shall offer to repurchase Interim Notes pursuant to Section 4.21. Section 3.7 Optional Prepayment. The Company may, upon five Business Days' prior written notice to each of the Holders, redeem the Interim Notes at any time in whole or in part, on a pro rata basis, by paying to each Holder an amount equal to 100% of such Holder's pro rata share of the aggregate principal amount of Interim Notes to be redeemed, plus accrued and unpaid interest thereon to the Prepayment Date; provided, however, that the Company shall pay each Holder 103% of such Holder's pro rata share of the aggregate principal amount of Interim Notes to be redeemed, plus accrued and unpaid interest thereon to the Prepayment Date, if the Interim Notes are redeemed with, or in anticipation of, proceeds from any transaction in which Lehman Brothers did not or will not act as exclusive placement agent or sole underwriter to the Parent or the Company or a Subsidiary (unless it shall otherwise have agreed in writing prior to such repayment date not to so act) other than the proceeds of a borrowing under the Tranche B Term Loan under the Senior Credit Facility. The Interim Notes shall be presumed to be prepaid with cash flow from operations unless the Parent, the Company or one 27 34 of their Subsidiaries has recently or simultaneously completed a financial transaction generating at least the applicable amount of net proceeds. Section 3.8 Rollover Fee. On the Maturity Date the Company shall pay to the Holder of each Interim Note outstanding on the Maturity Date the Rollover Fee. Section 3.9 Indemnity. The Parent and the Company jointly and severally agree to indemnify each Holder and to hold each Holder harmless from any loss or expense which such Holder may sustain or incur as a consequence of (a) the failure by the Company to issue the Interim Notes on the Closing Date after the Company has given a notice with respect thereof in accordance with Section 5.1, (b) default by the Company in making any prepayment or redemption after the Company has given a notice thereof in accordance with the provisions of Section 3.10 or (c) the making of a prepayment or redemption of the Interim Notes on a day which is not the last day of an Interest Period. Such indemnification may include an amount equal to (a) such Affected Party's actual loss and expenses incurred (excluding lost profits) in connection with, or by reason of, any of the foregoing events and (b) the excess, if any, of (i) the amount of interest which would have accrued on the principal amount of Interim Notes not so issued or the principal amount of Interim Notes so prepaid or redeemed from the date of such proposed issuance or prepayment or redemption, as the case may be, in the case of a failure to issue Interim Notes, to the last day of the Interest Period that would have commenced on the proposed date of such issuance, or, in the case of any such prepayment or redemption, to the last day of the Interest Period in which such repayment or redemption occurred, in each case at the applicable rate of interest for such Interim Notes provided for herein (excluding, however, the Applicable Spread included therein, if any) over (ii) the amount of interest (as reasonably determined by such Holder) which would have accrued to such Holder on such amount by placing such amount on deposit for a period comparable to such Interest Period or remaining Interest Period in the case of prepayment or redemption with leading banks in the interbank eurodollar market. A certificate as to any amounts payable pursuant to this Section 3.9 submitted to the Company by any Holder shall be conclusive in the absence of manifest error. This covenant shall survive the termination of this Agreement and the payment of the Interim Notes and all other amounts payable hereunder. Section 3.10 Effect of Notice of Prepayment. The Company shall notify the Holders in writing at their addresses shown in the Note Register of any date set for redemption, prepayment or repurchase (each such day, a "Prepayment Date") of Interim Notes. Once such notice is sent or mailed, the Interim Notes called for redemption, prepayment or repurchase shall become due and payable on the Prepayment Date set forth in such notice. Such notice may not be conditional. Section 3.11 Method of Payment. Except as provided in Section 3.4(e) with respect to the payment of certain interest in the form of additional Interim Notes, the principal of, premium, if any, and interest on each Interim Note and all other Obligations arising under the Transaction Documents shall be payable by wire transfer in immediately available funds to the account of the Holder thereof, designated in a written notice to the Company at least three Business Days prior to the due date therefor. Section 3.12 Inability to Determine Interest Rate; Interest Periods Less Than Three Months. If prior to the first day of any Interest Period Lehman Brothers shall have determined (which determinations shall be conclusive and binding upon the Company and each of the Holders) that (a) by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Applicable LIBOR Rate for such Interest Period, or (b) the Applicable LIBOR Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the cost to a Holder of holding such Interim Note during such Interest Period, then Lehman Brothers shall give facsimile or telephone notice thereof to the Company and the Holders as soon as practicable thereafter. 28 35 If such notice is given, the interest rate on each Interim Note for such Interest Period and for each subsequent Interest Period until Lehman Brothers gives notice to the Holders and the Company otherwise shall equal the Base Rate plus the Applicable Spread. Except in the case of optional and mandatory prepayment or redemption pursuant to Sections 3.6 and 3.7, if any Interest Period will have a duration of less than three months, the interest rate for such Interest Period shall equal the Base Rate plus the Applicable Spread. Section 3.13 Payment on Business Days. If any payment to be made hereunder or under any Interim Note shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day (and such extension of time shall be included in computing interest in connection with such payment); provided, however, that if such succeeding Business Day could fall in the next calendar month, such payment shall be made on the next preceding Business Day. Section 3.14 Partial Redemption. In the event that less than all of the Interim Notes are to be repurchased or redeemed (including pursuant to an offer to repurchase), the Company shall redeem or repurchase (or offer to repurchase) a pro rata portion of the Interim Notes held by each Holder. ARTICLE IV COVENANTS So long as the principal of or interest on the Interim Notes or any other Obligation in respect of the Interim Notes shall be unpaid, the Parent and the Company and each of the Guarantors covenants and agrees with the Interim Lenders and each Holder as follows: Section 4.1 Use of Proceeds. The Parent and the Company shall use the proceeds received by the Company from the sale of the Interim Notes solely to finance the purchase price of the Acquisitions and to pay fees and expenses related thereto. Section 4.2 Notice of Default on Interim Notes and Related Matters. The Company shall furnish to the Holders written notice, promptly upon any Officer of the Parent or the Company becoming aware of the existence thereof, of: (a) any condition or event that constitutes a Default, specifying the nature and period of existence thereof and the action that the Company is taking or proposes to take with respect thereto; (b) the filing or commencement of, or any threat or notice of intention of any Person to file or commence, any action, suit or proceeding, whether at law or in equity or by or before any Governmental Entity, against or affecting the Parent, the Company or any of their respective Subsidiaries that, if adversely determined, would reasonably be expected to result in individually or in the aggregate, a Material Adverse Effect; and (c) any development that, individually or in the aggregate, has resulted in, or could reasonably be expected to have, a Material Adverse Effect. Section 4.3 Offering. (a) The Parent, the Company and the Guarantors shall use their best efforts to cause Permanent Securities to be issued and sold no later than the 270th day following the 29 36 Closing Date in such amounts as will yield Net Cash Proceeds sufficient to prepay in full the principal amount of the Interim Notes, all accrued and unpaid interest and premium, if any, thereon and all other Obligations incurred in connection with the Interim Notes and this Agreement. (b) The Parent and the Company have engaged Lehman Brothers as their exclusive placement agent or sole managing underwriter in connection with the private placement or public offering of the Permanent Securities in accordance with the provisions of the Engagement Letter. The Parent and the Company and each of the Guarantors hereby covenant, for the benefit of each of the Holders, to comply with each of its agreements set forth in the Engagement Letter. Section 4.4 Issuance of High Yield Notes and Warrants. (a) Escrow of Warrants. If the Interim Notes remain outstanding on December 26, 1997, the Parent shall, no later than the close of business in New York City on such date: (1) execute and deliver to the Escrow Agent fully authenticated Warrants, unregistered or registered in blank, representing the right to purchase at any time prior to March 31, 2007 10% of the fully-diluted common stock of the Parent (the "Warrant Shares"), calculated after giving effect to the issuance and exercise of such Warrants, at an exercise price of $.01 per share; and (2) deliver to the Holders an Opinion of Counsel addressed to them and dated the date the Warrants are issued, stating (i) that the Warrants have been duly authorized, executed and delivered and that they constitute valid and binding obligations of the Parent, enforceable against it in accordance with their terms and (ii) that the Warrant Shares have been duly authorized and reserved for issuance and (iii) as to such other matter as the Holders may reasonably request. (b) Issuance of High Yield Notes. If the Interim Notes remain outstanding on December 26, 1997, the Company shall be obligated to issue, and the Parent and the other Guarantors shall be obligated to guarantee, senior unsecured debt securities (the "High Yield Notes") having an aggregate principal amount of up to $100.0 million (as specified by Lehman Brothers in its sole discretion) with a fixed coupon (as specified by Lehman Brothers in its sole discretion) not exceeding the then prevailing interest rate on the Interim Notes and having such covenants, default and subordination provisions, registration rights and other terms as are customary for new issuances of high yield senior unsecured debt securities of this type, all as determined by Lehman Brothers, in its sole discretion. The High Yield Notes shall be unconditionally Guaranteed by the Parent and the other Guarantors on a senior unsecured basis (or subordinated basis in the event that the High Yield Notes are subordinated as contemplated by Section 4.4(d)). (c) The proceeds from the issuance of the High Yield Notes shall be used to prepay the Interim Notes pursuant to Section 3.6. Any remaining proceeds shall be applied to repay Senior Debt of the Company and for such other purposes as may be mutually agreed by Lehman Brothers and the Company. (d) To the extent that the Lenders under the Senior Credit Facility require, the High Yield Notes will be subordinated to borrowings under the Senior Credit Facility on terms substantially identical to the subordination provisions contained in the Rollover Note Indenture. (e) The Relevant Parties shall use their best efforts to do all things required in the opinion of Lehman Brothers, in its sole discretion, in connection with the sale of the High Yield Notes, including, but not limited to (i) no later than October 27, 1997, commencing the preparation of a Rule 144A 30 37 offering memorandum or registration statement under the Securities Act with respect to the High Yield Notes, and other documentation (including an indenture), all as deemed necessary by Lehman Brothers, in its sole discretion, to effect the offering of High Yield Notes, (ii) no later than October 27, 1997, delivering to Lehman Brothers such unaudited consolidated and pro forma financial information, projections as to future operations and such other financial information relating to the Parent, the Company, the Acquired Businesses, their Subsidiaries and all other completed or probable acquisitions, if any, as may be reasonably requested by Lehman Brothers, (iii) no later than November 27, 1997, finalizing the Offering Documents in form and substance satisfactory to Lehman Brothers, in its sole discretion including, if applicable, filings of a registration statement under the Securities Act, (iv) no later than December 19, 1997, making appropriate Officers of the Company and the Acquired Businesses available to Lehman Brothers for meetings with prospective purchasers of the High Yield Notes and preparing and presenting to potential investors road show material in a manner consistent with other new issuances of high yield debt securities and (v) executing an underwriting or purchase agreement substantially in the form of Lehman Brothers' standard underwriting or purchase agreement, as the case may be, modified as appropriate to reflect the terms of the transactions contemplated thereby and containing such terms, covenants, conditions, representations, warranties and indemnities as are customary in similar transactions and providing for the delivery of legal opinions, comfort letters, and Officers' Certificates, all in form and substance satisfactory to Lehman Brothers and its counsel, as well as such other terms and conditions as Lehman Brothers and its counsel may in their reasonable discretion consider appropriate in light of then prevailing market conditions applicable to similar financings or in light of any aspect of the transactions contemplated hereby that requires such other terms or conditions. (f) In connection with the issuance of the High Yield Notes, at the request of Lehman Brothers, the Parent will issue to the purchasers of the High Yield Notes, on the date of such sale and without additional charge, warrants to purchase the Capital Stock of the Parent pursuant to a warrant agreement in the form specified by Lehman Brothers (which form will be substantially identical to the Warrant Agreement attached as Exhibit G, which request Lehman Brothers may make if it determines that such issuance of Warrants is advisable or necessary in order for the Company to issue High Yield Notes). In connection therewith, the Parent covenants to do all things necessary or convenient in the opinion of Lehman Brothers, in its sole discretion, including, without limitation, executing such warrant agreement and an equity registration rights agreement and a stockholders agreement, in each case in form and substance satisfactory to Lehman Brothers, in its sole discretion. Each Person that purchases warrants privately shall become party to such equity registration rights agreement and such stockholders agreement by executing a joinder agreement. The total amount of warrants issued pursuant to this Section 4.4(f) shall not entitle the holders thereof to purchase more than an aggregate of 5% of the fully-diluted common stock of the Parent without the consent of the Parent. Section 4.5 Additional Subsidiary Guarantees. If the Parent, the Company or any of their respective Subsidiaries shall acquire or create a Domestic Subsidiary after the date of this Agreement, then such newly acquired or created Domestic Subsidiary shall become a party to this Agreement as a Guarantor by executing a joinder to this Agreement and shall deliver to each of the Holders an Opinion of Counsel, in a form reasonably satisfactory to the Holders. Upon execution of such joinder, such Domestic Subsidiary shall be bound by, and become a party to, this Agreement as a Guarantor and shall agree to perform each and every obligation and covenant of a Guarantor hereunder. Section 4.6 Merger and Sale. The Parent and the Company shall not, and shall not permit any of their respective Subsidiaries to, consolidate or merge with or into, or sell, convey or transfer or lease all or substantially all of its assets (in one or more related transactions, including by way of liquidation or dissolution), or assign any of its respective obligations under the Transaction Documents, 31 38 to another Person, except that any Subsidiary may merge with or into, or convey its assets to, the Company or another Wholly Owned Subsidiary that is a Guarantor. Section 4.7 Information; SEC Reports; Compliance Certificates. (a) The Parent and the Company shall, and shall cause each of their respective Subsidiaries to, promptly provide such information concerning the business, properties or financial condition of the Parent, the Company and such Subsidiaries as any Holder may from time to time reasonably request. The Parent and the Company shall, and shall cause each of their Subsidiaries to, keep proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities, and shall permit the Holders or their representatives to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective executive officers and, subject to the right of the Parent's, the Company's or any such Subsidiary's representatives to participate in any such discussion, independent public accountants, all upon reasonable notice and at such reasonable times and as often as may reasonably be desired. (b) The Parent and the Company shall furnish to the Holders (i) all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K if the Parent and the Company were required to file such financial information, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" that describes the financial condition and results of operations of the Parent and the Company and any consolidated Subsidiaries and, with respect to the annual information only, a report thereon by the Parent's and the Company's certified independent public accountants (who shall be firm(s) of established national reputation) and (ii) all current reports that would be required to be filed with the SEC on Form 8-K if the Company were required to file such reports. In addition, the Parent and the Company shall, and shall cause their Subsidiaries to, furnish to the Holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. All such information and reports shall be delivered to each Holder on or prior to the dates on which such filing would have been required to be made had the Parent and the Company been subject to the rules and regulations of the SEC. (c) The Parent and the Company shall deliver to the Holders, within 30 days after the end of each fiscal quarter of the Parent and the Company, an Officers' Certificate stating that a review of the activities of the Parent, the Company and their Subsidiaries during the preceding fiscal quarter has been performed with a view to determining whether the Parent and the Company and their respective Subsidiaries have kept, observed, performed and fulfilled their respective Obligations under this Agreement, and further stating that (i) the Parent and the Company and their respective Subsidiaries have kept, observed, performed and fulfilled each and every covenant contained in this Agreement and are not in default in the performance or observance of any of the terms, provisions or conditions hereof or under any other mortgage, indenture or debt instrument (or, if a Default, Event of Default or default under any such mortgage, indenture or debt instrument shall have occurred, describing all such Defaults, Events of Default or defaults and what action the Parent and the Company are taking or propose to take with respect thereto) and (ii) no event has occurred and remains in existence which prohibits the Company or any Guarantor to make payments on account of the principal of or interest, if any, on the Interim Notes and if such event has occurred, a description of the event and the action the Parent and the Company are taking or propose to take with respect thereto. (d) So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, the annual financial statements delivered pursuant to paragraph (b) above shall be accompanied by a written statement of the Parent's and the Company's certified independent 32 39 public accountants (who shall be from a firm of established national reputation reasonably satisfactory to the majority of the Holders) that, solely in making the examination necessary for certification of such financial statements and without independent investigation or inquiry, nothing has come to their attention that would lead them to believe that the Parent, the Company or any of their Subsidiaries has violated any provisions of Article IV of this Agreement or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation. Section 4.8 Authorizations and Approvals. The Parent and the Company shall, and shall cause each of their respective Subsidiaries to, promptly obtain, from time to time, all such Permits, consents and approvals as may be required to enable the Parent, the Company and each of such Subsidiaries to comply with their respective obligations under the Transaction Documents and the Interim Notes. Section 4.9 Limitation on Incurrence of Additional Indebtedness and Issuance of Preferred Stock. The Parent and the Company shall not, and shall not permit any of their respective Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Debt) or issue any shares of preferred stock except for: (i) the incurrence by the Company of revolving credit Indebtedness and indebtedness under letters of credit (with letters of credit being deemed to have a principal amount equal to the maximum potential liability of the Company and its Subsidiaries thereunder) under the Senior Credit Facility (and the Guarantees thereof by the Guarantors); provided that the aggregate principal amount of all revolving credit Indebtedness and letters of credit outstanding at any one time under the Senior Credit Facility after giving effect to such incurrence, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (i), does not exceed an amount equal to $25.0 million; (ii) the incurrence by the Company of term Indebtedness under the Senior Credit Facility (and the Guarantees thereof by the Guarantors); provided that the aggregate principal amount of all term Indebtedness outstanding under the Senior Credit Facility after giving effect to such incurrence, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (ii), does not exceed an amount equal to (a) $65.0 million or (b) $53.0 million if the Cardwell Acquisition is not completed on or prior to June 30, 1997, in each case, less the aggregate amount of all repayments, optional or mandatory, of the principal of any term Indebtedness under the Senior Credit Facility that have been made since the date of this Agreement; (iii) the Interim Notes and the incurrence of the Related Party Guarantees by the Guarantors; (iv) the issuance of the Rollover Notes to the Escrow Agent in accordance with Section 3.3; (v) Permitted Refinancing Indebtedness; (vi) the incurrence of Indebtedness (i) by the Company to a Wholly Owned Subsidiary that is a Guarantor (ii) by a Domestic Wholly Owned Subsidiary to the Company or any other Subsidiary that is a Guarantor and (iii) by any direct or indirect Foreign Subsidiary to the Company or any 33 40 Subsidiary that is a Guarantor in an aggregate principal amount at any time outstanding (with respect to all Foreign Subsidiaries) not to exceed $1.0 million; (vii) Indebtedness of the Parent, the Company or their respective Subsidiaries incurred in respect of Hedging Obligations entered into in order to fix or cap the interest rate on Indebtedness permitted to be incurred by this Agreement or to protect against loss from changes in currency exchange rates incurred pursuant to clauses (i) or (ii) of this Section 4.9; (viii) the incurrence by the Parent, the Company or any of their respective Subsidiaries of additional Indebtedness to finance the acquisition of fixed or capital assets (whether pursuant to a loan, a financing, lease or otherwise) in an aggregate principal amount at any time outstanding not to exceed $5.0 million; and (ix) Existing Debt. For purposes of determining compliance with this Section 4.9 accrual of interest, the accretion of accreted value and the payment of interest in the form of additional Indebtedness will not be deemed to be an incurrence of Indebtedness. Section 4.10 Restricted Payments. The Parent and the Company shall not, and shall not permit any of their respective Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make any other payment or distribution on account of their respective Equity Interests (including, without limitation, any payment in connection with any merger or consolidation involving the Parent or the Company) to the direct or indirect holders of any of their respective Equity Interests (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Parent or payable to the Company or a Wholly Owned Subsidiary of the Company); (ii) purchase, redeem or otherwise acquire or retire for value (including without limitation, in connection with any merger or consolidation involving the Parent or the Company) any Equity Interests of the Company or the Parent or any of their respective Affiliates (other than any such Equity Interests owned by the Company or any Wholly Owned Subsidiary of the Company); (iii) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness that is pari passu with or subordinated to the Interim Notes or any of the Related Party Guarantees, except a payment of interest or principal at Stated Maturity; or (iv) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (iv) above being collectively referred to as "Restricted Payments"). Notwithstanding the foregoing, provided that no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof, the Company may pay dividends to the Parent for the purpose of (i) permitting the Parent to satisfy its federal, state and local income tax obligations to the extent such obligations are actually due and owing and are a direct result of the net income of the Company being included on a consolidated, combined or unitary income tax return filed by the Parent or otherwise being attributed to the Parent for tax purposes; (ii) permitting the Parent to pay the necessary fees and expenses to maintain its corporate existence and good standing (in an aggregate amount not to exceed $250,000 per annum); and (iii) permitting the Parent to comply with the Transaction Documents (in an aggregate amount not to exceed $250,000 per annum). Not later than the date of making any Restricted Payment, the Company shall deliver to the Holders an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the amount of such Restricted Payment is derived. 34 41 Section 4.11 Limitation on Restrictions on Distributions from Subsidiaries. The Parent and the Company shall not, and shall not permit any of their respective Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Subsidiary of the Company to (i)(a) pay dividends or make any other distributions to the Company or any of its Subsidiaries (1) on its Capital Stock or other Equity Interests or (2) with respect to any other interest or participation in, or measured by, its profits, or (b) pay any Indebtedness owed to the Company or any of its Subsidiaries, (ii) make loans or advances to the Company or any of its Subsidiaries or (iii) transfer any of its properties or assets to the Company or any of its Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (a) this Agreement or the Senior Credit Facility as in effect on the date hereof, (b) the Interim Notes, (c) applicable law, (d) restrictions of the nature described in clause (iii) above by reason of customary non-assignment provisions in leases entered into in the ordinary course of business and consistent with past practices or (e) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (iii) above on the property so acquired. Section 4.12 Limitation on Sales of Assets and Subsidiary Stock. The Parent and the Company shall not, and shall not permit any of their respective Subsidiaries to, enter into an agreement with respect to or consummate any Asset Sale, except: (a) the sale or other disposition of obsolete or worn out property in the ordinary course of business having a fair market value not to exceed, in the aggregate, $1.0 million in any period of twelve consecutive months; (b) the sale or other disposition of any property (other than inventory and obsolete or worn out property) in the ordinary course of business, provided that the aggregate book value of all such property so sold or disposed of in any period of twelve consecutive months shall not exceed $1.0 million provided, further, that the net proceeds therefrom are applied within one Business Day of receipt to permanently repay Indebtedness under the Senior Credit Facility or to redeem or repurchase Interim Notes; and (c) the sale of inventory in the ordinary course of business. Section 4.13 Limitation on Transactions with Affiliates. The Parent and the Company shall not, and shall not permit any of their respective Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or Guarantee with, or for the benefit of, any Affiliate of any such Person (each of the foregoing, an "Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms that are no less favorable to the Parent, the Company or the relevant Subsidiary than those that would have been obtained in a comparable transaction by the Parent, the Company or such Subsidiary with an unrelated Person and (ii) the Parent or the Company, as the case may be, delivers to the Holders (a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $250,000, a resolution of its board of directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (i) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of its board of directors, and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $500,000, an opinion as to the fairness to the Holders of such Affiliate Transaction from a financial point of view issued by an investment banking firm (or, if an investment banking firm is generally not qualified to give such an opinion, by an appraisal firm) of national standing; provided that (x) any employment agreement entered into by the Parent, the Company or such Subsidiary in the ordinary course of business 35 42 and consistent with the past practices of the Parent, the Company or such Subsidiary, as the case may be, (y) transactions between or among any of the Parent, the Company and/or any Wholly Owned Subsidiary of the Company that is a Guarantor and (z) Restricted Payments that are permitted by Section 4.10 in each case, shall not be deemed Affiliate Transactions. Section 4.14 Line of Business. The Parent and the Company shall not, and shall not permit any of their respective Subsidiaries to, directly or indirectly, engage in any line of business other than the businesses conducted on the Closing Date and businesses reasonably related thereto. The Parent shall not create or acquire any direct or indirect Subsidiary and shall not engage in any activity other than the holding of the stock of the Company. The Parent shall own, directly, 100% of the issued and outstanding Voting Stock and other Equity Interests of the Company. Section 4.15 Capitalization; Restrictions on Certain Amendments. (a) The Company shall not, and shall not permit any of its Subsidiaries to, issue or agree to issue any Capital Stock (including treasury shares) or other Equity Interests except to the Company or a Wholly Owned Subsidiary of the Company that is a Guarantor. (b) The Parent and the Company shall not, and shall not permit any of their respective Subsidiaries to, amend, or suffer to be amended, their organizational documents (including any certificate of incorporation or bylaws) or any terms of their Capital Stock or any Material Contract (other than the Senior Credit Facility) to which it is a party if any such amendment could reasonably be expected to have a Material Adverse Effect. Section 4.16 Liens. The Parent and the Company shall not, and shall not permit any of their respective Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien on any asset now owned or hereafter acquired, or any income or profits therefrom or assign or convey any right to receive income therefrom, except Permitted Liens. Section 4.17 No Senior Subordinated Indebtedness. Notwithstanding any other provision hereof, (i) the Company will not incur, create, issue, assume, guarantee or otherwise become directly or indirectly liable for any Indebtedness that is subordinate or junior in right of payment to any Indebtedness under Senior Debt and senior in any respect in right of payment to the Interim Notes and (ii) no Guarantor will incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to the Senior Guarantee and senior in any respect in right of payment to any Related Party Guarantee. Section 4.18 Corporate Existence; Compliance with Laws; Taxes; Maintenance of Insurance. (a) The Parent and the Company shall, and shall cause each of their respective Subsidiaries to, do or cause to be done all things necessary to preserve and keep in full force and effect their respective corporate, partnership or other existence in accordance with their respective organizational documents and their respective rights (charter and statutory), licenses and franchises; provided, however, that neither the Parent nor the Company shall be required to preserve any such right, license or franchise, or such corporate, partnership or other existence of any of their respective Subsidiaries if the relevant board of directors shall determine that the preservation thereof is no longer desirable in the conduct of their respective businesses taken as a whole, and that the loss thereof could not reasonably be expected to have a Material Adverse Effect. (b) The Parent and the Company shall, and shall cause each of their respective Subsidiaries to, comply in all material respects with all statutes, laws, ordinances, or government rules and regulations to which it is subject. 36 43 (c) The Parent and the Company shall, and shall cause each of their respective Subsidiaries to, pay prior to delinquency all taxes, assessments, and governmental levies except those contested in good faith and by appropriate proceedings. (d) The Parent and the Company shall, and shall cause their respective Subsidiaries to, (a) keep insurable properties insured in accordance with industry standards at all times by financially sound and reputable insurers; (b) maintain such other insurance, to such extent and against such risks, including (i) fire and other risks insured against by extended coverage, as is customary with companies in the same or similar businesses operating in the same or similar location, (ii) public liability insurance against claims for personal injury or death or property damage occurring upon, in, about or in connection with the use of any properties owned, occupied or controlled by them and (iii) business interruption insurance; and (c) maintain such other insurance as may be required by law. Section 4.19 Liquidation. The Parent and the Company shall not, and shall not permit any of their respective Subsidiaries to, adopt a plan of liquidation or dissolution. Section 4.20 Stay, Extension and Usury Laws. The Parent and the Company covenant (to the extent that they may lawfully do so) that they shall not, and shall not permit any of their respective Subsidiaries to, at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that may affect the covenants in or the performance of this Agreement; and the Parent and the Company waive, and shall cause each of their respective Subsidiaries to waive (to the extent that they may lawfully do so), all benefit or advantage of any such law, and covenant that they shall not, and shall not permit their respective Subsidiaries to, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Holders, but shall suffer and permit, and shall cause their respective Subsidiaries to suffer and permit, the execution of every such power as though no such law has been enacted. Section 4.21 Change of Control. (a) Upon the occurrence of a Change of Control, each Holder will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Interim Notes pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damage thereon, if any, to the date of purchase (the "Change of Control Payment"). Within ten days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offer to repurchase Interim Notes on the date specified in such notice, which date shall be no earlier than 30 days and no later than 45 days from the date such notice is mailed (the "Change of Control Payment Date"), pursuant to the procedures set forth below. Prior to purchasing any Interim Notes in a Change of Control Offer, but in any event within 30 days following a Change of Control, the Company shall either repay all outstanding Senior Debt or obtain the requisite consents, if any, under all agreements governing outstanding Senior Debt to permit the repurchase of Interim Notes pursuant to this Section 4.21. (b) Notice of a Change of Control Offer shall be mailed by the Company to the Holders at their addresses set forth in the Note Register. The Change of Control Offer shall remain open from the time of mailing until the Change of Control Payment Date. The notice shall be accompanied by a copy of each of the most recent reports furnished pursuant to Section 4.7(b) (i) and (ii). The notice shall contain all instructions and materials necessary to enable such Holders to tender Interim Notes pursuant to the Change of Control Offer. The notice, which shall govern the terms of the Change of Control Offer, shall state: 37 44 (1) that the Change of Control Offer is being made pursuant to this Section 4.21, that Interim Notes may be surrendered in whole or in part (in denominations of $1,000 and integral multiples thereof), and that all Interim Notes will be accepted for payment; (2) the purchase price and the Change of Control Payment Date; (3) that any Interim Note not tendered will continue to accrue interest; (4) that any Interim Note (or part thereof) accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Payment Date; (5) that Holders electing to have an Interim Note purchased pursuant to a Change of Control Offer will be required to surrender the Interim Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Interim Note completed, to the Company at the address specified in the notice prior to 5:00 p.m., New York City time, on the Change of Control Payment Date; (6) that Holders will be entitled to withdraw their election if the Company receives not later than 5:00 p.m., New York City time, on the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of Interim Notes such Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Interim Notes purchased; and (7) that Holders whose Interim Notes are purchased only in part will be issued new Interim Notes equal in principal amount to the unpurchased portion of the corresponding Interim Notes surrendered. (c) On the Change of Control Payment Date, the Company shall accept for payment all Interim Notes or portions thereof properly tendered pursuant to the Change of Control Offer, pay the purchase price of each Interim Note surrendered for purchase to the related Holder and deliver to each Holder a new Interim Note equal in principal amount (excluding premiums, if any) to any unpurchased portion of the corresponding Interim Note surrendered. The Company will notify the remaining Holders of the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. (d) The Company shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Interim Notes as a result of a Change of Control. ARTICLE V CONDITIONS TO THE INTERIM LENDERS' OBLIGATIONS Section 5.1 Closing. Upon satisfaction of the conditions set forth herein, the Interim Lenders shall pay the purchase price set forth in Section 3.1 of the Interim Notes by wire transfer of immediately available funds to the account designated by the Company in New York, New York, against delivery to the Interim Lenders of Interim Notes in the names and denominations specified by the Interim Lenders (the "Closing"). The Company shall give the Interim Lenders at least two Business Days' notice of the 38 45 expected date of such Closing (the "Closing Date"). The Closing shall take place at such place as shall be agreed upon by the Interim Lenders and the Company. Section 5.2 Conditions of the Interim Lenders' Obligations. The obligation of the Interim Lenders to purchase and pay for the Interim Notes to be purchased by them hereunder on the Closing Date is several and not joint and is subject to the prior or concurrent satisfaction on the Closing Date of each of the following conditions: (a) Representations and Warranties; Agreements; No Default. The representations and warranties of the Parent and the Company set forth in or incorporated by reference in this Agreement shall be true and correct at and as if repeated on and as of the Closing Date after giving effect to the transactions occurring simultaneously with the Closing. The Company shall have performed all agreements on its part to be performed pursuant to this Agreement on or prior to the Closing Date and there shall exist no Default or Event of Default. (b) Fees. All fees and expenses due to any Interim Lender or Lehman Brothers on or before the Closing Date in connection with the Interim Notes, the Engagement Letter and the Commitment Letter or otherwise shall have been paid in full. (c) Opinions; Reliance Letters. The Interim Lenders shall have received (i) the legal opinion of Jones, Day, Reavis & Pogue, special counsel for the Parent and the Company, addressed to the Interim Lenders and dated as of the Closing Date, in the form attached as Exhibit H, and (ii) a reliance letter, or reliance letters permitting the Interim Lenders to rely on all of the opinions of counsel rendered in connection with the Senior Credit Facility and the Acquisition Agreements. (d) Closing Papers. The Interim Lenders shall have received the following, dated as of the Closing Date and in form and substance reasonably satisfactory to them and to their special counsel, Latham & Watkins: (i) a certificate of the Secretary of each Relevant Party certifying as to the attached copy of the resolutions adopted by the board of directors of such Relevant Party, authorizing, to the extent applicable, the execution, delivery and performance of each of this Agreement, the Senior Credit Facility, the Acquisition Agreements, the Related Documents and each of the other agreements, instruments and transactions contemplated hereby and thereby; (ii) a certificate of the Secretary of each Relevant Party certifying as to attached copies of the certificate of incorporation and by-laws of such Relevant Party, as in effect on the Closing Date; (iii) a certificate of the Secretary of each Relevant Party, dated the Closing Date, as to the incumbency and signatures of the Officers of such Relevant Party, authorized, to the extent applicable, to act with respect to this Agreement, the Senior Credit Facility, the Acquisition Agreements, the Related Documents and all instruments and agreements contemplated hereby and thereby; and (iv) an Officers' Certificate signed by the President and Chief Financial Officer of the Parent and the Company certifying as to the matters set forth in Sections 5.2(a) and 5.2(l). (e) Related Documents. The Interim Lenders shall have received executed copies of the Rollover Note Indenture, the Debt Registration Rights Agreement, the Equity Registration Rights 39 46 Agreement, the Warrant Agreement, the Stockholders Agreement and the Escrow Agreement. All such documents shall have been duly authorized, executed and delivered by each of the parties thereto, and the Interim Lenders shall have received a certificate from the Escrow Agent, satisfactory to the Interim Lenders in their sole discretion, to the effect that the Escrow Agent has received, and is holding in escrow for the benefit of the Holders, the Rollover Note Indenture and authenticated, executed and delivered Rollover Notes dated as of the Maturity Date in an aggregate principal amount equal to at least $31.0 million. (f) Concurrent Transactions. (i) Each of the Relevant Parties and each of the financial institutions party thereto shall have entered into the Senior Credit Facility. All conditions precedent to borrowings under the Senior Credit Facility shall have been satisfied or, with the prior approval of each of the Interim Lenders, waived and the Company shall have borrowed funds under the Senior Credit Facility, which, together with the proceeds from the sale of the Interim Notes will be sufficient to consummate the Acquisitions and pay all related fees and expenses. After giving effect to the consummation of the transaction contemplated hereby, the amount undrawn and available to the Company under the Senior Credit Facility shall be at least $10.0 million. (ii) The terms of the Senior Credit Facility and the Acquisition Agreements shall be satisfactory in all respects to each of the Interim Lenders and to their special counsel, Latham & Watkins. There shall not exist (pro forma for the Acquisitions and the financing thereof) any default or event of default under the Senior Credit Facility, the Interim Notes, this Agreement, or under any other material Indebtedness or agreement of the Parent, the Company or any of their Subsidiaries. (iii) The total purchase price for the Bowen Acquisition shall be approximately $75.0 million and the total purchase price for the Cardwell Acquisition (including the refinancing of all of the existing debt of Cardwell) shall be approximately $15.25 million. The Acquisitions shall be financed with (x) $65.0 million of borrowings by the Company under the Senior Credit Facility and (y) the issuance by the Company of $31.0 million in aggregate principal amount of Interim Notes to the Interim Lenders. (iv) The Bowen Acquisition shall have been consummated concurrently with or prior to the issuance of the Interim Notes pursuant to the provisions of the acquisition agreements related thereto in the forms previously delivered to Lehman Brothers and all conditions precedent to the consummation of the Bowen Acquisition set forth in the acquisition agreements related thereto shall have been satisfied or, with the prior approval of each of the Interim Lenders, waived. (v) The agreement entered into in connection with the Cardwell Acquisition shall have been executed by the appropriate parties in the forms previously delivered to Lehman Brothers. (g) Documentation, Legal Matters, etc. All matters relating to the transactions contemplated by this Agreement, the Related Documents, the Acquisition Agreements, the Senior Credit Facility and the transactions contemplated hereby and thereby shall be satisfactory to the Interim Lenders in their sole discretion, and the Interim Lenders shall have received such additional certificates, legal and other opinions (including with respect to solvency) and documentation as they shall request. (h) Solvency Matters. The Interim Lenders shall have received an Officer's Certificate from the President and the Chief Financial Officer of each of the Parent and the Company in form and 40 47 substance satisfactory to the Interim Lenders certifying that after giving effect to the Acquisitions and the transactions contemplated in this Agreement, the Parent and the Company are Solvent. (i) Financial Statements. The Interim Lenders shall have received all audited and unaudited historical financial statements of the Parent, the Company, the other Guarantors and Cardwell (including pro forma financial statements giving effect to all other completed or probable acquisitions) meeting the requirements of Regulations S-X for a Form S-1 registration statement, and all such financial statements shall be satisfactory in form and substance to the Interim Lenders. Such financial statement shall show actual consolidated EBITDA of the Company for the twelve-month period ended December 31, 1996 of not less than $22.1 million. The Interim Lenders shall have received all historical financial statements of Bowen that would be required under Regulation S-X for a Form S-1 registration statement (although such financial statements may be unaudited), which shall be satisfactory in form and substance to the Interim Lenders. (j) Pro Forma Financial Statements. The Interim Lenders shall have received a satisfactory pro forma consolidated income statement of the Company meeting the requirements of Regulation S-X for a Form S-1 registration statement for the period of four consecutive fiscal quarters most recently ended prior to the Closing Date, adjusted to give effect to the consummation of the Acquisitions, and the financings contemplated by this Agreement and the Senior Credit Facility as if such transactions had occurred on the first day of such period, and such pro forma consolidated income statement shall show consolidated EBITDA for such four-quarter period of not less than $27.2 million. (k) Absence of Certain Capital Market Events. There shall not have occurred and be continuing as of the Closing Date any of the following conditions: (i) trading on the New York Stock Exchange ("NYSE"), the NASDAQ National Market or the American Stock Exchange ("AMEX") shall have been wholly suspended; (ii) minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities other than in connection with program trading shall have been imposed, on the NYSE, the NASDAQ National Market or the AMEX or by order of the Commission or any other governmental authority having jurisdiction; (iii) a banking moratorium shall have been declared by federal or New York authorities; or (iv) an outbreak of major hostilities or other national or international calamity (financial or other) or any other material adverse change in the financial markets since the date hereof, or any event the effect of which, in the opinion of Lehman Brothers, is likely to be materially adverse to the financial markets or, in the opinion of Lehman Brothers, will make it impracticable or inadvisable to proceed with the marketing of the Permanent Securities or the High Yield Notes. (l) Absence of Certain Changes. No material adverse change in the consolidated financial condition, business, operations, assets, liabilities, management, prospects or value of the Parent, the Company or the Acquired Businesses (including any event which, in the opinion of the Interim Lenders, is reasonably likely to result in such a material adverse change) shall have occurred since March 31, 1996. Except as set forth on Schedule 5.2(l), the Parent, the Company and the Acquired Businesses shall have no liabilities (absolute or contingent) except those set forth on the Financial Statements, those incurred under the Senior Credit Facility and the Transaction Documents or those incurred in the ordinary course of business since the date of the last Financial Statements delivered pursuant to Section 5.2(i) that do not, in the aggregate, exceed 5% of their total assets. (m) Net Capital. There shall not have occurred any change in law, regulation or interpretation thereof that could result in any Interim Lender's commitment to provide, or any Interim Lender's providing, the financing contemplated by this Agreement being a charge to the net capital of any Affected Party. 41 48 (n) Environmental Audit. The Interim Lenders shall have received satisfactory environmental information with respect to the real property owned or leased by the Parent, the Company, any of their respective Subsidiaries and the Acquired Businesses from a firm satisfactory to the Interim Lenders, in their sole respective discretion. (o) Capitalization; Corporate Structure. The capitalization and corporate and ownership structure of the Company before and after the transactions contemplated hereby and the financing thereof shall be satisfactory to the Interim Lenders in all material respects. (p) Approvals and Consents. All governmental, quasi-governmental, shareholder, and material third-party approvals and consents necessary or desirable in connection with the Acquisitions (except for approval of the Cardwell Acquisition by the U.S. Department of Justice under the Hart-Scott-Rodino Antitrust Act of 1976) and the transactions contemplated hereby and the financing thereof shall have been received and shall be in full force and effect. (q) Due Diligence. The Interim Lenders and their counsel shall have completed their due diligence review of the Parent and the Company and their respective operations (including the operations of the Acquired Businesses), and each of them shall be satisfied with the results thereof. Such review may include, among other things, an examination of (i) accounting, litigation, regulatory, tax, labor, insurance, pension and environmental liabilities, actual or contingent, (ii) material contracts, leases and debt agreements and (iii) the general business, operations, financial conditions, management, prospects and value of the Parent, the Company and the Acquired Businesses. (r) Litigation, etc. There shall not exist any action, suit, investigation, litigation or proceeding pending or threatened in any court or before any arbitrator or Governmental Entity that, in the opinion of any of the Interim Lenders, affects the transactions contemplated hereby, or that could reasonably be expected to have a Material Adverse Effect (including any such action, suit, investigations, litigation or proceeding which, in the reasonable opinion of any of the Interim Lenders is reasonably likely to result in such a Material Adverse Effect) or any of the transactions contemplated by any of the Transaction Documents. The sale of Interim Notes by the Company on the Closing Date shall constitute a representation and warranty by the Parent and the Company to the effect that the applicable conditions precedent set forth in this Article V are satisfied on the Closing Date. ARTICLE VI TRANSFER OF THE INTERIM NOTES; REPRESENTATIONS OF INTERIM LENDERS Section 6.1 Transfer of the Interim Notes. Each Interim Lender represents and agrees that it is purchasing Interim Notes for its own account or for the account of its beneficial owners and that it will not, directly or indirectly, transfer, sell, assign, pledge or otherwise dispose of the Interim Notes unless such transfer, sale, assignment, pledge or other disposition is made (i) pursuant to an effective registration statement under the Securities Act or (ii) pursuant to an available exemption from registration under, or otherwise in compliance with, the Securities Act. Each of the Interim Lenders also represents and warrants to the Company that it is an "accredited investor" (as that term is defined in Rule 501 of Regulation D under the Securities Act). Each of the Interim Lenders acknowledges that the Interim Notes will bear a legend restricting the transfer thereof for so long as may be required by the Securities Act. 42 49 Subject to the provisions of the previous paragraph, each of the Relevant Parties agrees that (i) each Interim Lender and each subsequent Holder will be free to sell or transfer all or any part of the Interim Notes to any third party and to pledge any or all of the Interim Notes to any commercial bank or other institutional lender, provided, however, that, in the case of such sale or transfer, each Holder shall first give the Company a one Business Day opportunity to purchase such Interim Notes on the same terms as are being offered by such third party and (ii) Strategic Resource Partners will be free to sell or transfer all or any part of the Interim Notes to any of its beneficial owners. Section 6.2 Registration of Transfer or Exchange. Upon surrender of any Interim Note by a Holder for registration of transfer or exchange, the Company will execute and deliver in exchange therefor a new Interim Note or Interim Notes of the same aggregate tenor and principal amount, registered in such names and in such denominations as such Holder may request. The Company may require certificates of transferors and transferees of Interim Notes, or an Opinion of Counsel, in order to establish compliance with the Securities Act. The Company may require payment by such Holder of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer. Section 6.3 Register. The Company shall maintain a register of the Holders of all the Interim Notes issued pursuant to this Agreement. The Company will allow any Holder of an Interim Note to inspect and copy such register at the Company's principal place of business during normal business hours. ARTICLE VII EVENTS OF DEFAULT Section 7.1 Events of Default. An "Event of Default" with respect to the Interim Notes occurs if: (a) any representation or warranty made or deemed made by the Parent or the Company or any of their Subsidiaries herein or in the Senior Credit Facility or that is contained in any certificate, document or financial or other statement furnished by any of them at any time under this Agreement or shall prove to have been incorrect in any material respect on or as of the date made or deemed made; provided that any incorrect statement made in Section 2.6 shall be material; (b) the Company defaults in the payment of the principal of or premium on any of the Interim Notes, when the same shall become due and payable, whether at stated maturity, upon acceleration, upon redemption, or otherwise, and whether or not such payment is prohibited by Article VIII; (c) the Company defaults in the payment of any interest upon any of the Interim Notes, when the same becomes due and payable, whether or not such payment is prohibited by Article VIII, and such default continues for five calendar days; (d) the Company defaults in the payment of any other amounts payable under this Agreement and such default continues for five calendar days; (e) the Parent, the Company or any of their respective Subsidiaries fails to observe or perform any of its covenants or agreements in Article IV (excluding Sections 4.8 and 4.18) or the Parent, the Company or any of their respective Subsidiaries fails to observe or perform any of its covenants or agreements contained in Section 4.8 or 4.18 and such failure continues for a period of 30 days. 43 50 (f) the Parent, the Company or any of their respective Subsidiaries fails to observe or perform any of its covenants or agreements (other than those set forth in clause (e) above) contained in any of the Transaction Documents or the Interim Notes, and such failure continues for a period of 20 Business Days following the earlier of (i) written notice to the Parent or the Company of such failure by any Holder of outstanding Interim Notes or (ii) the date on which such failure is discovered by the Parent, the Company or such Subsidiary; (g) a default occurs under any agreement, mortgage, indenture or instrument under which there is or may be issued or by which there is or may be secured or evidenced any Indebtedness for money borrowed by the Parent, the Company or any of their respective Subsidiaries (or the payment of which is Guaranteed by the Parent, the Company or any of their respective Subsidiaries), whether such Indebtedness or Guarantee now exists or shall be created hereafter, which default (i) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness or Guarantee prior to the expiration of the grace period provided in such Indebtedness or Guarantee (a "Payment Default") or (ii) results in the acceleration of such Indebtedness or Guarantee prior to its express maturity and, in each case, the principal amount of such Indebtedness or Guarantee, together with the principal amount of any other Indebtedness or Guarantee as to which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $1.0 million or more; (h) the Parent, the Company or any Subsidiary of the Parent or the Company pursuant to or within the meaning of any Bankruptcy Law: (i) commences a voluntary case; (ii) consents to the entry of an order for relief against it in an involuntary case; (iii) consents to the appointment of a Custodian of it or for any substantial part of its property; (iv) makes a general assignment for the benefit of its creditors; or (v) generally is not paying, or admits its inability to pay, its debts as the same become due; or takes any comparable action under foreign laws relating to insolvency; (i) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Parent, the Company or any Subsidiary of the Parent or the Company in an involuntary case or proceeding; (ii) appoints a Custodian of the Parent, the Company or any Subsidiary of the Parent or the Company or for all or substantially all of the property of the Parent, the Company or any such Subsidiary; or (iii) orders the winding up or liquidation of the Parent, the Company or any Subsidiary of the Parent or the Company; or any similar relief is granted under any foreign laws relating to insolvency, and such order, decree or similar relief remains unstayed and in effect for 60 days; 44 51 (j) a final judgment or final judgments for the payment of money are entered by a court or courts of competent jurisdiction against the Parent, the Company or any of their respective Subsidiaries and such judgment or judgments remain undischarged for a period (during which execution shall not be effectively stayed) of 60 days, if the aggregate of all such undischarged judgments exceeds $1.0 million; or (k) except as permitted by this Agreement, any Related Party Guarantee shall be held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect or any Guarantor, or any Person acting on behalf of any Guarantor, shall deny or disaffirm its obligations under its Related Party Guarantee; or (l) the Company or any ERISA Affiliate shall fail to pay when due, after the expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under a Multiemployer Plan; (ii) the Company or any ERISA Affiliate shall fail to satisfy its contribution requirements under Section 412(c)(11) of the Code, whether or not it has sought a waiver under Section 412(d) of the Code; (iii) in the case of an ERISA Event involving the withdrawal from a Plan of a "substantial employer" (as defined in Section 4001(a)(2) or Section 4062(e) of ERISA), the withdrawing employer's proportionate share of that Plan's Unfunded Pension Liabilities is more than $2,000,000; (iv) in the case of an ERISA Event involving the complete or partial withdrawal from a Multiemployer Plan, the withdrawing employer has incurred a withdrawal liability in an aggregate amount exceeding $2,000,000; (v) in the case of an ERISA Event not described in clause (iii) or (iv), the Unfunded Pension Liabilities of the relevant Plan or Plans exceed $2,000,000; (vi) a Plan that is intended to be qualified under Section 401(a) of the Code shall lose its qualification, and with respect to such loss of qualification, the Company or any ERISA Affiliate can reasonably be expected to be required to pay (for additional taxes, payments to or on behalf of Plan participants, or otherwise) an aggregate amount exceeding $2,000,000; or (vii) the occurrence of any combination of events listed in clauses (iii) through (vi) that involves a net increase in aggregate Unfunded Pension Liabilities and unfunded liabilities in excess of $5,000,000; Section 7.2 Acceleration. If an Event of Default (other than an Event of Default specified in Sections 7.1(h) and (i)) occurs and is continuing, the Holders of at least 25% in principal amount of the then outstanding Interim Notes by written notice to the Company may declare the unpaid principal of and any accrued interest on all the Interim Notes to be due and payable. Upon such declaration the principal and interest shall be due and payable immediately. If an Event of Default specified in Section 7.1(h) or (i) occurs, such an amount shall ipso facto become and be immediately due and payable without any declaration or other act on the part of any Holder. Section 7.3 No Avoidance. In the case of any Event of Default occurring by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Parent or the Company with the intention of avoiding payment of the premium that the Company would have had to pay upon redemption or prepayment of the Interim Notes pursuant to Section 3.6 or 3.7, an equivalent premium shall also become and be immediately due and payable to the extent permitted by law upon the acceleration of the Interim Notes in accordance with Section 7.2. Section 7.4 Rights and Remedies Cumulative. No right or remedy herein conferred upon or reserved to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent or subsequent assertion or employment of any other appropriate right or remedy. 45 52 Section 7.5 Delay or Omission Not Waiver. No delay or omission by any Holder to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Holders. Section 7.6 Waiver of Past Defaults. Subject to Section 12.3, the Holders of a majority in aggregate principal amount of the then outstanding Interim Notes by written notice to the Company may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default (except nonpayment of principal or interest that has become due solely because of the acceleration) have been cured or waived. Section 7.7 Rights of Holders To Receive Payment. Notwithstanding anything to the contrary contained in this Agreement, the right of any Holder to receive payment of principal of and interest on the Interim Notes held by such Holder, on or after the respective due dates expressed in the Interim Notes, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. ARTICLE VIII SUBORDINATION OF INTERIM NOTES Section 8.1 Agreement to Subordinate. The Company agrees, and each Holder by accepting an Interim Note agrees, that the Obligations with respect to the Interim Notes are subordinated in right of payment, to the extent and in the manner provided in this Article VIII, to the prior payment in full in cash, of all Obligations of the Company under the Senior Debt and that the Subordination is for the benefit of the holders of the Senior Debt. Section 8.2 Liquidation, Dissolution, Bankruptcy. Upon any distribution to creditors of the Company in a liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property, in an assignment for the benefit of creditors or any marshalling of the Company's assets and liabilities: (a) holders of Senior Debt shall be entitled to receive payment in full in cash of all Obligations due in respect of such Senior Debt (including interest after the commencement of any such proceeding at the rate specified in the applicable Senior Debt, whether or not an allowable claim) before the Holders shall be entitled to receive any payment with respect to the Interim Notes; and (b) until all Obligations with respect to Senior Debt (as provided in subsection (a) above) are paid in full in cash, any distribution to which the Holders would be entitled but for this Article VIII, shall be made to holders of Senior Debt, as their interests may appear. Section 8.3 Default on Senior Credit Facility. The Company may not make any payment or distribution to the Holders in respect of the Interim Notes or the Obligations related thereto and may not acquire from the Holders any Interim Notes for cash or property (other than Net Cash Proceeds) until all principal and other Obligations with respect to the Senior Debt have been paid in full if: 46 53 (a) a default in the payment of any principal or other Obligations with respect to the Senior Debt occurs or any other default on Senior Debt occurs and the maturity of such Senior Debt is accelerated in accordance with its terms; or (b) a default, other than a payment default, on the Senior Debt occurs and is continuing that then permits holders of Indebtedness under the Senior Debt to accelerate its maturity and the Holders receive a written notice of the default (a "Payment Blockage Notice"). If the Holders receive any such Payment Blockage Notice, no subsequent Payment Blockage Notice shall be effective for purposes of this Section 8.3 unless and until (i) at least 360 days shall have elapsed since the effectiveness of the immediately prior Payment Blockage Notice and (ii) all scheduled payments of principal, premium, if any, and interest on the Interim Notes that have come due have been paid in full in cash. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Company shall be, or be made, the basis for a subsequent Payment Blockage Notice. The Company may and shall resume payments on and distributions in respect of the Interim Notes and may acquire them upon the earlier of: (1) the date upon which the default under the Senior Debt is cured or waived and, in the case of Senior Debt that has been accelerated, such acceleration has been rescinded, or (2) in the case of a default referred to in Section 8.3(b) hereof, 179 days pass after a Payment Blockage Notice is received if the maturity of the Senior Debt has not been accelerated, if this Article VIII otherwise permits such payment, distribution or acquisition. Section 8.4 When Distribution Must Be Paid Over. In the event that any Holder receives any payment with respect to the Interim Notes or any Obligations related thereto that because of this Article VIII should not have been made to such Holder, such payment shall be held by such Holder in trust for the benefit of, and shall be paid forthwith over and delivered, upon written request, to, the holders of Senior Debt as their interests may appear or their Representative under the indenture or other agreement (if any) pursuant to which Senior Debt may have been issued, as their respective interests may appear, for application to the payment of all Obligations with respect to Senior Debt remaining unpaid to the extent necessary to pay such Obligations in full in accordance with their terms, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of Senior Debt. Section 8.5 Subrogation. After all Senior Debt is paid in full in cash, and until the Interim Notes are paid in full, the Holders shall be subrogated (equally and ratably with all other Indebtedness ranking pari passu with the Interim Notes) to the rights of holders of Senior Debt to receive distributions applicable to Senior Debt to the extent that distributions otherwise payable to the Holders have been applied to the payment of Senior Debt. A distribution made under this Article VIII to holders of Senior Debt that otherwise would have been made to the Holders is not, as between the Company and the Holders, a payment by the Company on the Senior Debt. Section 8.6 Relative Rights. This Article VIII defines the relative rights of the Holders and holders of Senior Debt. Nothing in this Agreement shall: (1) impair, as between the Company and the Holders, the obligation of the Company, which is absolute and unconditional, to pay principal of and premium and interest on the Interim Notes in accordance with their terms, 47 54 (2) affect the relative rights of Holders and other creditors of the Company other than the Holders' rights in relation to holders of Senior Debt, or (3) prevent any Holder from exercising its available remedies upon a Default, subject to the rights of holders of Senior Debt under this Article VIII to receive distributions and payments otherwise payable to the Holders. If the Company fails because of this Article VIII to pay principal of or interest on an Interim Note on the due date, such failure after any applicable grace period provided for in Section 7.1 is still an Event of Default. Section 8.7 Subordination May Not Be Impaired by Company. No right of any holder of Senior Debt to enforce the subordination of the Indebtedness evidenced by the Interim Notes shall be impaired by any act or failure to act by the Company or by its failure to comply with this Agreement. Section 8.8 Distribution or Notice to Representative. Whenever a distribution is to be made or a notice given to holders of Senior Debt, the distribution may be made and the notice given to the Administrative Agent or other Representative. Section 8.9 Holders Entitled to Rely. Upon any payment or distribution pursuant to this Article VIII, the Holders shall be entitled to rely (i) upon any order or decree of a court of competent jurisdiction and (ii) upon a certificate of the representative or of the liquidating trustee or agent or other Person making any distribution to the Holders for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior Debt and other Indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article VIII. Section 8.10 Acceleration of Interim Notes. If payment of the Interim Notes is accelerated because of an Event of Default, the Company shall promptly notify holders of Senior Debt of the acceleration. If any Senior Debt is outstanding, the Company may not make any payment in respect of the Interim Notes until five Business Days after the Administrative Agent receives such notice, and, thereafter, only if this Article VIII otherwise permits. Section 8.11 Reliance by Holders of Senior Debt on Subordination Provisions. Each Holder by accepting an Interim Note acknowledges and agrees that the foregoing subordination provisions are, and are intended to be, an inducement and a consideration to each holder of any Senior Debt, whether such Senior Debt was created or acquired before or after the issuance of the Interim Notes, to acquire and continue to hold such Senior Debt and such holder of Senior Debt shall be deemed conclusively to have relied on such subordination provisions in acquiring and continuing to hold such Senior Debt. Section 8.12 Amendments. The provisions of this Article VIII shall not be amended or modified without the written consent of the holders of Senior Debt. 48 55 ARTICLE IX TERMINATION Section 9.1 Termination. The Interim Lenders, by notice to the Company, may terminate this Agreement at any time after March 31, 1997 if the Closing has not occurred on or prior to such date. Section 9.2 Liability. If this Agreement is terminated pursuant to this Article IX, such termination shall be without liability of any party to any other party, except that, whether or not the transactions contemplated by this Agreement are consummated, (i) the Company shall reimburse the Interim Lenders for all their reasonable out-of-pocket expenses pursuant to Section 12.1 and the Engagement Letter and (ii) the indemnity provisions contained in Article XI shall remain operative and in full force and effect. ARTICLE X RELATED PARTY GUARANTEES Section 10.1 Related Party Guarantees. Each of the Guarantors jointly and severally unconditionally guarantees to each Holder irrespective of the validity and enforceability this Agreement, the Interim Notes and the obligations of the Company hereunder or thereunder that: (a) the principal of, premium, if any, and interest, if any, on the Interim Notes shall be promptly paid in full when due, whether at maturity, by acceleration, redemption or otherwise, and (to the extent permitted by law) interest on the overdue principal of, premium, if any, and interest, if any, on the Interim Notes (including all reasonable costs of collection and enforcement thereof and interest thereon which would be owing by the Company but for the effect of any Bankruptcy Law, if any, and all other Obligations of the Company to the Holders under this Agreement and the Interim Notes shall be promptly paid in full when due or performed, all in accordance with the terms of this Agreement and the Interim Notes; and (b) in case of any extension of time of payment or renewal of any Interim Notes, or the issuance of Rollover Notes or any of such other Obligations, that the same shall be promptly paid in full when due or performed in accordance with their terms whether at stated maturity, by acceleration, redemption or otherwise. Failing payment when due of any amount so guaranteed for whatever reason, the Guarantors shall be jointly and severally and unconditionally obligated to pay the same immediately whether or not such failure to pay has become an Event of Default which could cause acceleration pursuant to Section 7.2. Each Guarantor agrees that this is a continuing guarantee of payment and not merely a guarantee of collection. The Guarantors hereby agree that their obligations hereunder shall be unconditional and absolute and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: (i) any extension, renewal, settlement, compromise, waiver or release in respect of any Obligation of the Company under this Agreement or the Interim Notes, by operation of law or otherwise; (ii) any modification or amendment of or supplement to this Agreement, the Interim Notes or any of the Transaction Documents; (iii) any release, non-perfection or invalidity of any direct or indirect security for, or any other guarantee of, any of the Obligations guaranteed by this Article X; 49 56 (iv) any change in the corporate existence, structure or ownership of the Company, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting the Company or its assets or any resulting release or discharge of any Obligation of the Company contained in this Agreement or the Interim Notes; (v) the existence of any claim, set-off or other rights which any Guarantor may have at any time against the Company or any other Person, whether in connection herewith or with any unrelated transactions, provided that nothing herein shall prevent the assertion of any such claim by separate suit or compulsory counterclaim; (vi) any invalidity or unenforceability relating to or against the Company for any reason of this Agreement or the Interim Notes, or any provision of applicable law or regulation purporting to prohibit the payment by the Company of the principal of or interest on the Interim Notes or any other amount payable by it under this Agreement or the Interim Notes; (vii) any other act or omission to act or delay of any kind by the Company or any other Person or any other circumstance whatsoever which might, but for the provisions of this paragraph, constitute a legal or equitable discharge of any Guarantor's obligations hereunder; or (viii) any exchange of Interim Notes for Rollover Notes or any issuance of additional Interim Notes or Rollover Notes pursuant to Section 3.4. Each Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever and covenants that, subject to this Article X, this Related Party Guarantee shall not be discharged except by complete performance of all Obligations on and with respect to the Interim Notes and this Agreement. If any Holder is required by any court or otherwise to return to the Company or any of the Guarantors, or any custodian, trustee, liquidator or other similar official acting in relation to either the Company or any of the Guarantors, any amount paid to the Holder, this Related Party Guarantee, to the extent of the amount so returned, shall be reinstated in full force and effect. Each Guarantor agrees that it shall not be entitled to any right of subrogation in relation to the Holders in respect of any Obligations guaranteed hereby until payment in full of all Obligations guaranteed hereby. Each Guarantor further agrees that, as between the Guarantors, on the one hand, and the Holders, on the other hand, (x) the maturity of the Obligations guaranteed hereby may be accelerated as provided in Section 7.2 notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Obligations guaranteed hereby and (y) in the event of any declaration of acceleration of such Obligations as provided in Section 7.2, such Obligations (whether or not due and payable) shall forthwith become due and payable by the Guarantors for the purpose of this Related Party Guarantee. The Guarantors shall have the right to seek contribution from any non-paying Guarantor so long as the exercise of such right does not impair the rights of the Holders under this Related Party Guarantee. Section 10.2 Subordination of Related Party Guarantees. The Obligations of each Guarantor under its Related Party Guarantee pursuant to this Article X shall be junior and subordinated to the Senior Guarantee of such Guarantor on the same basis as the Interim Notes are junior and subordinated to Senior Debt of the Company under Article VIII hereof. 50 57 Section 10.3 Limitation on Guarantor Liability. Each Guarantor, and by its acceptance of Interim Notes, each Holder, hereby confirms that it is the intention of all such parties that this Related Party Guarantee not constitute a fraudulent transfer or conveyance for purposes of any Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law to the extent applicable to this Related Party Guarantee. To effectuate the foregoing intention, the Holders and the Guarantors hereby irrevocably agree that the obligations of each Guarantor under this Related Party Guarantee shall be limited to the maximum amount as will, after giving effect to such maximum amount and all other contingent and fixed liabilities of such Guarantor that are relevant under such laws, and after giving effect to any collections from, rights to receive contribution from or payments made by or on behalf of any other Guarantor in respect of the Obligations of such other Guarantor under this Related Party Guarantee, result in the Obligations of such Guarantor under the Related Party Guarantee not constituting a fraudulent transfer or conveyance. Section 10.4 Execution and Delivery of Related Party Guarantees. To further evidence this Related Party Guarantee, each Guarantor hereby agrees that a notation of such Related Party Guarantee shall be endorsed by an Officer of such Guarantor on each Interim Note and that this Agreement shall be executed on behalf of such Guarantor by a duly authorized Officer of such Guarantor. Each Guarantor hereby agrees that this Related Party Guarantee shall remain in full force and effect notwithstanding any failure to endorse on each Interim Note a notation of such Related Party Guarantee. If an Officer of any Guarantor who endorses a notation of this Related Party Guarantee on an Interim Note no longer holds that office after such Interim Note is issued, this Related Party Guarantee shall be valid nevertheless with respect to such Guarantor. The delivery of any Interim Note by the Company shall constitute due delivery of this Related Party Guarantee with respect to such Interim Note as set forth in this Agreement on behalf of the Guarantors. In the event that the Parent, the Company or any Subsidiary of the Parent or the Company creates or acquires a new Domestic Subsidiary subsequent to the date of this Agreement, the Parent, the Company or such Domestic Subsidiary, as the case may be, shall cause such new Domestic Subsidiary to execute this Related Party Guarantee by joining this Agreement as if it were an original party hereto and acknowledging its obligations under the Related Party Guarantee with respect to all outstanding Interim Notes. Section 10.5 Stay of Acceleration. In the event that acceleration of the time for payment of this Related Party Guarantee is stayed upon insolvency, bankruptcy or reorganization of the Company, all such amounts otherwise subject to acceleration under the terms of this Agreement and the Interim Notes shall nonetheless by payable by each Guarantor forthwith on demand by each Holder. Section 10.6 Consolidation or Merger of Guarantors. Without limiting the provisions of Section 4.6, no Guarantor may consolidate with or merge with or into (whether or not such Guarantor is the surviving Person) another corporation, Person or entity whether or not affiliated with such Guarantor unless such corporation, person or entity is a Guarantor. 51 58 ARTICLE XI INDEMNITY Section 11.1 Indemnification. The Parent, the Company and each Guarantor (each, an "Indemnifying Party" and, collectively, the "Indemnifying Parties") jointly and severally agree to indemnify and hold harmless Lehman Brothers, the Interim Lenders and the Holders, each of their respective controlling persons and each director, officer, employee, affiliate and agent thereof (each, an "Indemnified Party") from and against any and all losses, claims, damages and liabilities, joint or several, to which any Indemnified Party may become subject relating to or arising out of or in connection with the transactions contemplated by this Agreement (including the use of the proceeds from the sale of the Interim Notes) or any related transaction, and to reimburse each Indemnified Party, promptly upon demand, for expenses (including reasonable counsel fees and expenses) as they are incurred in connection with the investigation of, preparation for or defense of any pending or threatened loss, claim, damage or liability, or any litigation, proceeding or other action in respect thereof, including any amount paid in settlement of any litigation, proceeding or other action (commenced or threatened) to which the Indemnifying Parties shall have consented in writing (such consent not to be unreasonably withheld) whether or not any Indemnified Party is a party and whether or not liability resulted; provided, however, that the indemnity contained in this Article XI will not apply to any Indemnified Party with respect to losses, claims, damages, liabilities or related expenses arising from the willful misconduct or gross negligence of such Indemnified Party. Section 11.2 Notice of Action. (a) Promptly after receipt by an Indemnified Party of written notice with respect to the commencement of any investigation, claim, litigation, proceeding or other action (collectively, an "Action") with respect to which such Indemnified Party may seek indemnification hereunder, such Indemnified Party shall notify the Indemnifying Parties in writing of such Action; but the omission so to notify the Indemnifying Party shall not relieve the Indemnifying Parties from any liability that the Indemnifying Parties may have hereunder to such Indemnified Party, except to the extent that the Indemnifying Party shall have been materially prejudiced thereby. (b) Upon receipt of such notice by an Indemnifying Party, the Indemnifying Party will be entitled to participate in any Action and, to the extent it wishes, to assume the defense thereof, and after notice from the Indemnifying Party to such Indemnified Party of its election to assume the defense thereof, the Indemnifying Party will not be liable to such Indemnified Party under this indemnity for any legal expenses subsequently incurred by such Indemnified Party in connection with such defense; provided, however, that such Indemnified Party will have the right to employ its own counsel in any such Action, and the fees and expenses of such counsel will be at the expense of such Indemnified Party; provided, further, that if (i) the employment of such counsel has been authorized by such Indemnifying Party in connection with the defense of such Action, which authorization shall not be unreasonably withheld, or (ii) the named parties in any such Action (including any impleaded parties) include any Indemnified Party and such Indemnifying Party and such Indemnified Party will have been advised by such counsel that there may be one or more legal defenses available to such Indemnified Party which are different from or additional to those available to the Indemnifying Party (in which case the Indemnifying Party will not have the right to assume the defense of such Action on behalf of such Indemnified Party) or (iii) the Indemnifying Party shall not have assumed the defense of such Action and employed counsel therefor reasonably satisfactory to such Indemnified Party within a reasonable time after notice of commencement of such action, such fees and expenses will be borne by the Indemnifying Party, it being understood that the Indemnifying Party will not, in connection with any one such Action, be liable for the fees and expenses of more than one firm of attorneys in any one jurisdiction. 52 59 Section 11.3 Indemnity not Available. If indemnification were for reason of public policy not to be available, the Indemnifying Party and the Holders agree to contribute (in proportion to their respective commitments in the case of the Holders) to the losses, claims, damages, liabilities or expenses (or Actions in respect thereof) for which such indemnification is held unavailable in such proportion as is appropriate to reflect the relative benefits to the Indemnifying Party, on the one hand, and the Holders, on the other hand, in connection with the matter giving rise to such losses, claims, damages, liabilities or expenses (or actions in respect thereof). Section 11.4 Indemnity for Taxes, Reserves and Expenses. If after the date hereof, the adoption of any law or guideline or any amendment or change in the administration, interpretation or application of any existing or future law or guideline by any Governmental Entity charged with the administration, interpretation or application thereof, or the compliance with any request or directive of any Governmental Entity (whether or not having the force of law): (a) subjects an Affected Party to any tax or changes the basis of taxation with respect to this Agreement or the Interim Notes or payments of amounts due hereunder or thereunder or with respect to this Agreement or the Related Documents, (including, without limitation, any sales, gross receipts, general corporate, withholding, personal property, privilege or license taxes, and including claims, losses and liabilities arising from any failure to pay or delay in paying any such tax (unless such failure or delay results solely from such Affected Party's gross negligence or willful misconduct), but excluding federal, state or local taxes based on income or franchise taxes imposed in lieu of income taxes) incurred by such Affected Party arising out of or as a result of this Agreement, the Interim Notes or the Related Documents; (b) imposes, modifies or deems applicable any reserve (including, without limitation, any reserve imposed by the Board of Governors of the Federal Reserve System), special deposit or similar requirement against assets held by, credit extended by, deposits with or for the account of, or other acquisition of funds by, an Affected Party; (c) shall change the amount of capital maintained or requested or directed to be maintained by an Affected Party; or (d) imposes upon an Affected Party any other condition or expense (including, without limitation, (i) loss of margin and (ii) attorneys' fees and expenses, expenses incurred by officers or employees of an Affected Party (or any successor thereto) and expenses of litigation or preparation therefor in contesting any of the foregoing) with respect to this Agreement or the Related Documents or the purchase, maintenance or funding of the purchase of the Interim Notes by an Affected Party, and the result of any of the foregoing is to increase the cost to, reduce the income receivable by, reduce the rate of return on capital of, or impose any expense (including loss of margin) upon, an Affected Party with respect to this Agreement, the obligations hereunder, the Related Documents or the funding of the purchase of the Interim Notes hereunder, the Affected Party may notify the Indemnifying Party of the amount of such increase, reduction, or imposition, and the Indemnifying Parties shall pay to the Affected Party the amount the Affected Party deems necessary to compensate the Affected Party for such increase, reduction or imposition. Any Affected Party claiming additional compensation under this Section 11.4 shall deliver to the Company a certificate setting forth any additional amounts that such Affected Party is entitled to receive, including a calculation thereof in reasonable detail, such certificate to be conclusive absent manifest error. Such amounts shall be due and payable by the Indemnifying Parties 5 Business Days after such certificate is delivered. 53 60 Section 11.5 Indemnification for Underwriting Services. Each Indemnifying Party agrees that if such Indemnifying Party and Lehman Brothers execute an underwriting agreement or placement agreement relating to the Permanent Securities or the High Yield Notes, such agreement shall contain customary indemnification and contribution provisions. Section 11.6 Survivorship of Indemnification. The provisions contained in this Article XI shall remain in full force and effect whether or not any of the transactions contemplated hereby are consummated and notwithstanding the termination of this Agreement. The amounts payable by any Indemnifying Party under this Article XI shall be payable whether or not any of the transactions contemplated under this Agreement are consummated. Section 11.7 Liability Not Exclusive; Payments. The agreements of each Indemnifying Party in this Article XI shall be in addition to any liability that each may otherwise have. All amounts due under this Article XI shall be payable as incurred upon written demand therefor. ARTICLE XII MISCELLANEOUS Section 12.1 Expenses; Documentary Taxes. The Parent, the Company and the Guarantors jointly and severally agree to pay (a) all reasonable out-of-pocket expenses (including, without limitation, expenses incurred in connection with due diligence of the Interim Lenders) associated with the preparation, execution and delivery, administration, waiver, enforcement or modification and enforcement of the documentation contemplated hereby and (b) the reasonable fees and disbursements of legal counsel to the Interim Lenders in connection with the transactions contemplated herein; provided, however, legal fees in connection with the preparation of Commitment Letter and this Agreement shall not exceed $250,000 in the aggregate, plus reasonable disbursements, unless either the Parent or the Company shall agree to a higher amount. The Parent, the Company and the Guarantors jointly and severally agree to indemnify the Interim Lenders against any transfer taxes, documentary taxes, assessments or charges made by any Governmental Entity by reason of the execution and delivery, or the terms, of this Agreement or the Interim Notes. Section 12.2 Notices. All notices and other communications pertaining to this Agreement or any Interim Note shall be in writing and shall be delivered in person, with receipt acknowledged, or by facsimile and confirmed immediately in writing by a copy mailed by registered or certified mail, return receipt requested, postage prepaid, addressed as hereafter set forth, or mailed by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: (i) If to the Interim Lenders, to them at: Strategic Resource Partners Fund 3 World Financial Center New York, New York 10285 Attention: Michael Konigsberg Facsimile No.: (212) 526-4827 54 61 with a copy to: Lehman Brothers, Inc. 3 World Financial Center New York, New York 10285 Attention: Michael Konigsberg Facsimile No.: (212) 526-3738 with a copy to: Latham & Watkins 885 Third Avenue New York, New York 10022 Attention: Kirk A. Davenport, Esq. Facsimile No.: (212) 751-4864 (ii) If to the Company or the Parent, to it at: c/o IRI International Corporation First Interstate Bank Plaza Houston, Texas 77002 Attention: Chief Financial Officer Facsimile No.: (713) 659-1526 with a copy to: Jones, Day, Reavis & Pogue 599 Lexington Avenue New York, New York 10022 Attention: Michael R. Bassett Facsimile No.: (212) 755-7306 or to such other person or address as shall be furnished to the other party in compliance with this Section. Section 12.3 Consent to Amendments and Waivers. (a) Except as provided in Section 12.3(b), this Agreement and the Interim Notes may be amended or supplemented with the consent of the Parent, the Company, each of the Guarantors and the Holders of at least a majority in principal amount of the Interim Notes then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Interim Notes), and any existing default or compliance with any provision of this Agreement or the Interim Notes may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Interim Notes (including consents obtained in connection with a tender offer or exchange offer for Interim Notes). Interim Notes held by the Parent, the Company or any of their respective Affiliates will not be deemed to be outstanding for purposes of this Section 12.3. (b) Without the consent of the Parent, the Company, each Guarantor and each Holder affected, an amendment or waiver may not (with respect to any Interim Notes held by a non-consenting Holder): (i) reduce the principal amount of any Interim Note, (ii) change the fixed maturity of any Interim Note, (iii) reduce the rate of or change the time for payment of interest on any Interim Note, (iv) waive a Default or Event of Default in the payment of principal of or premium, if any, or interest or premium 55 62 on the Interim Notes (except a rescission of acceleration of the Interim Notes by the Holders of at least a majority in aggregate principal amount of the Interim Notes in accordance with Section 7.6 and a waiver of the payment default that resulted from such acceleration), (v) make any Interim Note payable in money other than that stated in the Interim Note, (vi) make any change in the provisions of this Agreement relating to the rights of Holders to receive payments of principal of or premium, if any, or interest on the Interim Notes, (vii) alter or amend the prepayment, repurchase or redemption provisions of this Agreement or any Interim Note or waive any prepayment, repurchase or redemption payment with respect to any Interim Note or (viii) make any change in the foregoing amendment and waiver provisions. Notwithstanding the foregoing, any amendment to the provisions of Sections 3.6 and 4.21 and Article VIII shall require the consent of the Holders of at least 75% in aggregate principal amount of the Interim Notes then outstanding if such amendment would adversely affect the rights of any Holder. (c) Neither the Parent, the Company nor any Guarantor shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder for or as an inducement to any consent, waiver or amendment permitted by Section 12.3(a) unless such consideration is offered to be paid or is paid to all Holders that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement. Section 12.4 Statements Required in Officers' Certificate and Opinion. Each Officers' Certificate and Opinion of Counsel with respect to compliance with a condition or covenant provided for in this Agreement shall include: (a) a statement that the Person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such Person, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in such Person's opinion, such condition or covenant has been complied with. Section 12.5 Parties. This Agreement shall inure to the benefit of and be binding upon the parties hereto and each subsequent Holder and each of their respective successors and assigns. Except as expressly provided in Article VIII or XI, nothing expressed or mentioned in this Agreement is intended or shall be construed to give any Person, other than Lehman Brothers, the parties hereto and their respective successors and assigns, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. Except as expressly provided in Article VIII or XI, this Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of Lehman Brothers, the parties hereto and the affiliates and beneficial owners of the Interim Lenders, and any subsequent Holder of a Interim Note and their respective successors and assigns, and for the benefit of no other person. Section 12.6 New York Law; Submission to Jurisdiction; Waiver of Jury Trial. THIS AGREEMENT AND THE INTERIM NOTES SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. EACH PARTY HERETO HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES 56 63 DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK CITY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THE INTERIM NOTES, THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY HERETO IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH PARTY HERETO IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THE INTERIM NOTES, THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. Section 12.7 Replacement Interim Notes. If any Interim Note becomes mutilated and is surrendered by the Holder thereof to the Company, or if the Holder thereof claims that any Interim Note has been lost, destroyed or wrongfully taken, the Company shall execute and deliver to such Holder a replacement Interim Note, upon the delivery by such Holder of an indemnity to the Company to save it and any agent of it harmless in respect of such loss, destruction or wrongful taking with respect to such Interim Note. Section 12.8 Successors and Assigns. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party; and all covenants and agreements of the Parent, the Company, the Guarantors, and the Interim Lenders and any subsequent Holder in this Agreement or any Interim Note shall bind their respective successors and assigns. Neither the Parent, the Company, nor any Guarantor may assign or transfer any of its rights or obligations hereunder (by operation of law or otherwise) without the prior written consent of the Holders of at least a majority in principal amount of Interim Notes then outstanding. Section 12.9 Severability Clause. In case any provision in this Agreement or any Interim Note shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and such provision shall be ineffective in such jurisdiction only to the extent of such invalidity, illegality or unenforceability. Section 12.10 Representations, Warranties and Agreements To Survive Delivery. All representations, warranties and agreements contained in or incorporated into this Agreement, or contained in Officers' Certificates submitted pursuant hereto, shall remain operative and in full force and effect until the Interim Notes have been repaid in full, regardless of any investigation made by or on behalf of the Interim Lenders or any controlling person of the Interim Lenders, or by or on behalf of the Parent or the Company, and shall survive delivery of the Interim Notes. Section 12.11 No Adverse Interpretation of Other Agreements. This Agreement may not be used to interpret another indenture, loan or debt agreement of the Parent, the Company or any of their respective Subsidiaries or any other Person. No such indenture, loan or debt agreement may be used to interpret this Agreement. Section 12.12 Limitation of Liability. Strategic Resource Partners is a Delaware business trust whose Certificate of Trust is on file with the Secretary of State of the State of Delaware. All persons dealing with Strategic Resource Partners, because it is a Delaware statutory business trust, must look solely to the series (within the meaning given to such term by Section 3806(b)(2) of the Delaware Business Trust Act) of ownership interests in Strategic Resource Partners evidencing ownership by 57 64 Strategic Resource Partners of Interim Notes for the enforcement of any claims against Strategic Resource Partners arising by reason of or in connection with such interest. None of the manager, the adviser, the trustee, the beneficial owners or other agents of Strategic Resource Partners assumes any personal liability in connection with the business of Strategic Resource Partners or for obligations entered into on behalf of Strategic Resource Partners. 58 65 IN WITNESS WHEREOF, the parties hereto have duly executed this Senior Subordinated Increasing Rate Note Purchase Agreement as of the date first above written. IRI INTERNATIONAL CORPORATION By:_________________________________ Name: Title: ENERGY SERVICES INTERNATIONAL LTD. By:_________________________________ Name: Title: STRATEGIC RESOURCE PARTNERS FUND By: LEHMAN BROTHERS TB INC. By:_______________________________ Name: Title: 59 66 SCHEDULE 1E EXISTING DEBT 60 67 SCHEDULE 1P PERMITTED LIENS 61 68 SCHEDULE 2.5 MATERIAL CONTRACTS 62 69 SCHEDULE 2.6 SUBSIDIARIES; PERCENTAGE OWNERSHIP 63 70 SCHEDULE 2.10 FINANCIAL STATEMENTS 64 71 SCHEDULE 2.13 INTELLECTUAL PROPERTY 65 72 SCHEDULE 2.14 PROCEEDINGS 66 73 SCHEDULE 2.18 ENVIRONMENTAL 67 74 SCHEDULE 2.25 ERISA SCHEDULE 68 75 SCHEDULE 5.2(l) ADDITIONAL LIABILITIES 69 EX-10.5 11 ASSET PURCHASE AGREEMENT DATED JANUARY 20, 1997 1 EXECUTION COPY ASSET PURCHASE AGREEMENT by and among BOWEN TOOLS, INC.-Delaware, BOWEN TOOLS, INC., AIR LIQUIDE AMERICA CORPORATION and IRI INTERNATIONAL CORPORATION Dated as of January 20, 1997 2 TABLE OF CONTENTS Section Page ARTICLE I PURCHASE AND SALE OF ASSETS; ASSUMPTION OF LIABILITIES........................... 1 1.1. Purchase of Assets....................................... 1 1.2. Payment of Purchase Price................................ 4 1.3. Closing Date Net Assets Schedule......................... 4 1.4. Assumption of Certain Liabilities........................ 6 1.5. Closing.................................................. 6 ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLERS AND ALAC................................. 7 2.1. Organization of Sellers, ALAC and the Subsidiaries....... 7 2.2. Ownership of Sellers' Shares............................. 7 2.3. Authorization, Etc....................................... 7 2.4. No Consent............................................... 8 2.5. No Violation............................................. 8 2.6. Subsidiaries............................................. 8 2.7. Financial Statements..................................... 9 2.8. No Undisclosed Liabilities, Etc.......................... 9 2.9. Absence of Certain Changes............................... 10 2.10. Taxes.................................................... 11 2.11. Title to Assets.......................................... 12 2.12. Properties............................................... 13 2.13. Patents, Trademarks, Etc................................. 13 2.14. Contracts, Etc........................................... 13 2.15. Employees and Employee Benefit Plans..................... 14 2.16. Litigation; Compliance with Laws......................... 16 2.17. Environmental and Safety Laws............................ 16 2.18. Finders.................................................. 18 2.19. Effect of Certain Representations........................ 18 ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER............. 19 3.1. Power and Authority...................................... 19 3.2. Governmental Consents.................................... 19 3.3. No Violation............................................. 19 3.4. Litigation............................................... 20 3.5. Finders.................................................. 20 ARTICLE IV COVENANTS................................................ 20 4.1. Preservation of the Business............................. 20 4.2. Sale or Encumbrance of Assets; Sellers' Shares........... 20 - i - 3 Section Page 4.3. Approvals and Consents................................... 21 4.4. Investigations........................................... 21 4.5. Books and Records; Personnel............................. 21 4.6. Excluded Liabilities..................................... 21 4.7. Employee Plans and Other Matters......................... 22 4.8. Insurance Policies....................................... 23 4.9. Prorations; Agreement as to Other Adjustments............ 24 4.10. Assignment of Name....................................... 24 4.11. Transfer Tax Obligations................................. 25 4.12. Buyer's Assumption of Liabilities........................ 25 4.13. Patent Assignment........................................ 25 4.14. Allocation of Purchase Price............................. 25 4.15. Best Efforts............................................. 25 4.16. ALAC Guarantee........................................... 26 4.17. Schedules and Exhibits................................... 26 ARTICLE V CONDITIONS TO OBLIGATIONS OF BUYER CONSUMMATE THE TRANSACTION.......................... 26 5.1. Accuracy of Representations and Warranties; Compliance with Covenants........................... 26 5.2. Financial Results........................................ 26 5.3. No Injunction............................................ 27 5.4. Opinion of Counsel....................................... 27 5.5. Consents................................................. 27 5.6. No Material Adverse Effect............................... 27 5.7. Resolutions of the Boards of Directors................... 27 5.8. Delivery of Bills of Sale................................ 27 5.9. Delivery of Real Property Deeds.......................... 27 5.10. Actual or Threatened Actions............................. 27 5.11. Insurable Title to Real Property......................... 27 5.12. Transfer Taxes........................................... 28 5.13. Assignment and Assumption of Agreements.................. 28 5.14. Allocation of Purchase Price............................. 28 5.15. Reliance Letters......................................... 28 ARTICLE VI CONDITIONS TO OBLIGATIONS OF SELLERS AND ALAC TO CONSUMMATE THE TRANSACTION.................. 28 6.1. Accuracy of Representations and Warranties; Compliance with Covenants........................... 28 6.2. No Injunction............................................ 28 6.3. Opinion of Counsel....................................... 29 6.4. Consents................................................. 29 - ii - 4 Section Page 6.5. Allocation of Purchase Price............................. 29 ARTICLE VII TERMINATION PRIOR TO CLOSING............................. 29 7.1. Termination.............................................. 29 ARTICLE VIII INDEMNIFICATION.......................................... 30 8.1. Scope of Indemnity....................................... 30 8.2. Claims and Litigation.................................... 31 8.3. Making of Claims......................................... 31 8.4. Attorneys' Fees, Interest, Penalties, Costs and Expenses............................................... 31 8.5. Survival of Representations and Warranties and Indemnities............................................ 31 8.6. General Provisions....................................... 32 8.7. Tax Treatment............................................ 32 ARTICLE IX MISCELLANEOUS............................................ 32 9.1. Entire Agreement......................................... 32 9.2. Successors and Assigns................................... 32 9.3. Identical Counterparts................................... 32 9.4. Headings................................................. 33 9.5. Use of Certain Terms..................................... 33 9.6. Modification and Waiver.................................. 33 9.7. Schedules, Etc........................................... 33 9.8. Notices.................................................. 33 9.9. Governing Law............................................ 34 9.10. Invalid Provisions....................................... 34 9.11. Expenses................................................. 34 9.12. Third Party Beneficiaries................................ 34 9.13. Exclusive Remedies....................................... 35 9.14. Number and Gender of Words............................... 35 9.15. Actions.................................................. 35 9.16. Nondisclosure............................................ 35 9.17. Acquisition Proposals.................................... 35 9.18. Tax Agreements........................................... 35 - iii - 5 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (the "Agreement") is made and entered into as of the 20th day of January, 1997 by and among Bowen Tools, Inc.-Delaware, a Delaware corporation (the "Parent Corporation"), Bowen Tools, Inc., a Delaware corporation and a wholly-owned subsidiary of the Parent Corporation (the "Operating Company" and, together with the Parent Corporation, "Sellers"), Air Liquide America Corporation, a Delaware corporation ("ALAC"), and IRI International Corporation, a Delaware corporation ("Buyer"). W I T N E S S E T H : WHEREAS, Sellers desire to sell to Buyer, and Buyer desires to purchase from Sellers, the business currently conducted by Sellers and the subsidiaries of the Operating Company other than Sanstorm, Inc. (the "Subsidiaries") as a going concern (the "Business"), including substantially all the property and assets of Sellers, on the terms and subject to the conditions set forth in this Agreement; and WHEREAS, ALAC, as the owner of all of the issued and outstanding capital stock of the Parent Corporation, desires to cause such purchase and sale to be effected, on the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements hereinafter set forth, the parties, intending to be legally bound hereby, agree as follows: ARTICLE I PURCHASE AND SALE OF ASSETS; ASSUMPTION OF LIABILITIES 1.1. Purchase of Assets. (a) On the terms and subject to the conditions set forth herein, at the Closing (as defined in Section 1.5 hereof) Sellers shall sell, transfer, convey, assign and deliver to Buyer all of Sellers' right, title and interest in and to all of the property and assets of Sellers used in the Business, including Sellers' right, title and interest in and to the properties and assets of every kind, nature and description, real, personal or mixed, tangible or intangible, and wherever situated, owned, possessed or held by Sellers on the Closing Date (as defined in Section 1.5 hereof), other than the Excluded Assets (as defined in Section 1.1(c) hereof) (collectively, the "Assets"). Without limiting the generality of the foregoing, and subject to Section 1.1(c) hereof, the Assets shall include all of the issued and outstanding shares of capital stock of each of the Subsidiaries, all accounts receivable, the name "Bowen Tools" or any variant thereof, all patents, - 1 - 6 trademarks, trade names, service marks, copyrights and logos, and all pending applications therefor and interests thereunder, all real estate and interests therein (including, but not limited to, fee interests, reversions and leaseholds), buildings, construction in progress, vehicles, machinery, equipment, computers and related software, inventories of raw materials, work in process, finished products on hand and in transit, fixtures, rights under contracts and agreements, purchase and sale contracts, financial and commercial books and records of Sellers and the Subsidiaries in any form, administrative guidelines, employee manuals, internal procedural guides and memoranda, personnel records, warranty records, purchase and supply forms, sales literature, customer lists and good will. In addition to the foregoing, the Assets shall include all of the right, title and interest of Big Three International, Inc., a corporation organized under the laws of the U.S. Virgin Islands (the "ALAC FSC"), in and to the trade receivables relating to the Business held by the ALAC FSC on the Closing Date (the "Trade Receivables") and, at the Closing, ALAC shall cause the ALAC FSC to sell, transfer, convey, assign and deliver to Buyer the Trade Receivables. (b) Each such sale, conveyance, assignment, transfer and delivery will be effected by delivery at the Closing by Sellers to Buyer of (i) a duly executed bill of sale in the form of Exhibit 1.1(b)(i) hereto, (ii) duly executed limited warranty deeds containing a covenant against grantor's acts (or substantially the equivalent thereof) in such form as may be appropriate for the jurisdiction in which the real properties constituting part of the Assets are located, (iii) certificates representing all of the issued and outstanding capital stock of the Subsidiaries, together with duly executed stock powers executed in blank in such form as may be appropriate for the jurisdiction in which each such Subsidiary is organized, and (iv) such other good and sufficient instruments of conveyance, transfer and assignment as shall be reasonably necessary to vest in Buyer all of Sellers' right, title and interest in and to the Assets to be purchased by Buyer from Sellers pursuant to this Agreement. (c) Notwithstanding anything herein to the contrary, Sellers are not selling to Buyer and Buyer is not purchasing from Sellers any of the assets set forth on Exhibit 1.1(c) hereto or any other assets of Sellers which are expressly excluded pursuant to the terms hereof (collectively, the "Excluded Assets"). In addition, to the extent that Buyer shall have provided notice to Sellers pursuant to Section 1.1(d) hereof on or before the date which is two business days prior to the Closing Date that Buyer has determined that any of the real properties set forth on Schedule 1.1(c) hereto (the "Post-Closing Properties") does not constitute an Approved Property (as defined in Section 1.1(e) hereof), Sellers shall hold, and shall not otherwise dispose of, such Post-Closing Property pending the possible subsequent sale to Buyer in accordance with Section 1.1(d) and, until such time, if any, as each such Post-Closing Property is sold by Sellers to Buyer in accordance with Section 1.1(d) hereof, such Post-Closing Property shall constitute an Excluded Asset and the liabilities associated therewith shall constitute Excluded Liabilities (as defined in Section 1.4(c) hereof). If, with respect to any Post-Closing Property, Buyer shall not have notified Sellers at least two business days prior to the Closing Date pursuant to Section 1.1(d) that Buyer has determined that such Post-Closing Property does not constitute an Approved Property, such Post-Closing Property shall constitute an Approved Property and shall be included in the Assets and shall be transferred to Buyer pursuant to Section 1.1(a) and 1.1(b) hereto. - 2 - 7 (d) During the period commencing on the date hereof and ending on the date which is two business days prior to the Closing Date, Buyer shall promptly identify to Sellers by notice in writing any Post-Closing Property which Buyer has determined does not constitute an Approved Property and Buyer shall include in such written notice Buyer's good faith basis for such determination. Any Post-Closing Property which has not been so identified to Sellers by Buyer prior to the date which is two business days prior to the Closing Date shall be deemed to be an Approved Property. Upon receipt by Sellers of any such written notice by Buyer that any Post-Closing Property does not constitute an Approved Property, Sellers shall use economically reasonable efforts, at Sellers' expense, to cause each such Post-Closing Property to become an Approved Property as promptly as practicable. (e) Within five business days of the date on which Buyer shall notify Sellers in writing that any Post-Closing Property has become an Approved Property, Sellers shall sell to Buyers, and Buyers shall purchase from Sellers, such Post-Closing Property at the purchase price set forth opposite the name of such Post-Closing Property on Schedule 1.1(c) hereto by delivery by Sellers to Buyer of a deed in accordance with the provisions of Section 1.1(b)(ii) hereof and by wire transfer of such purchase price in immediately available funds by Buyer to Sellers' account designated in writing to Buyer. If any Post-Closing Property shall not have become an Approved Property on or prior to June 30, 1997, Buyer shall have no further rights to purchase from Sellers, and Sellers shall have no further obligations to sell to Buyer, such Post-Closing Property. For purposes of this Agreement, an "Approved Property" shall mean any Post-Closing Property as to which Buyer determines, acting in good faith and in a commercially reasonable manner, that it has received (i) evidence reasonably satisfactory to it that a reputable title insurance company will issue at ordinary rates a title insurance policy insuring such title to such Post-Closing Property as may be reasonably acceptable to Buyer, and (ii) such reports from environmental consultants or engineers relating to such Post-Closing Property as may be reasonably acceptable to Buyer. (f) Subject to Buyer's rights under Article V hereof and subject to the provisions of Sections 1.1(d) and (e) hereof respecting the Post-Closing Properties, any property or asset of Sellers otherwise constituting an Asset and any contract, lease or other instrument, document or agreement to be assigned or otherwise transferred to Buyer hereunder, the assignment or other transfer or the attempted assignment or other transfer of which would be invalid or ineffective or would constitute a breach or default of an agreement or commitment to which either of Sellers is a party or is bound, unless the consent or approval of another person or entity to such assignment or other transfer shall have first been obtained, shall not be assigned or otherwise transferred under this Agreement, and the provisions of this Agreement shall not constitute an attempt to assign or transfer, unless and until such consents shall have been obtained; provided that each of Sellers shall use their respective best efforts to obtain such consents or approvals, and, until such consents or approvals shall have been obtained, such property, asset, contract, lease or other instrument, document or agreement, or the net proceeds thereof, shall be held and/or received by Sellers for the benefit and account of Buyer. Each of Sellers hereby designates Buyer to act as the attorney-in-fact and agent for Sellers, in the name of Sellers, or otherwise as Buyer deems appropriate, in order to obtain for Buyer the net benefits flowing from ownership of such - 3 - 8 property, asset, contract, lease or other instrument, document or agreement, and each of Sellers shall, without further consideration therefor, pay, assign and remit to Buyer promptly all monies, rights and other consideration received in respect thereof. Each of Sellers shall exercise or exploit the rights and options under each such property, asset, contract, lease or other instrument, document or agreement only as reasonably directed in writing by Buyer and at Buyer's sole expense and shall indemnify and hold harmless Buyer against any losses, claims, damages or expenses arising out of, resulting from, or relating to, any actions taken by Sellers in connection therewith which Buyer did not so direct. If and when any such consent shall be obtained or such property, asset, contract, lease or other instrument, document or agreement shall otherwise become assignable, each of Sellers shall promptly assign all its rights and obligations thereunder to Buyer without payment of further consideration and Buyer shall, without the payment of any further consideration therefor, assume such rights and obligations. Buyer agrees to reimburse Sellers for amounts paid by Sellers pursuant to the terms of any contract, lease or other instrument, document or agreement which relates to Sellers' ownership or other rights to such property, asset, contract, lease, or other instrument, document or agreement until such time as the same shall be properly transferred to Buyer in accordance with the terms of this Agreement. 1.2. Payment of Purchase Price. In consideration for the sale of the Assets, Buyer shall pay to Sellers on the Closing Date, in immediately available funds, by wire transfer to the account or accounts designated by Sellers not later than three days prior to the Closing Date, an aggregate of $75,000,000 less the aggregate of the purchase prices set forth opposite the name of each Post-Closing Property on Schedule 1.1(c) which, as of the Closing Date, does not constitute an Approved Property (the "Purchase Price"). To the extent that a portion of the Purchase Price is attributable to the Trade Receivables assigned to Buyer by the ALAC FSC, Sellers are authorized to receive such portion of the Purchase Price as custodian for the ALAC FSC. 1.3. Closing Date Net Assets Schedule. (a) Within thirty (30) days after the Closing Date, Sellers shall prepare and deliver to Buyer a schedule of the Assets and Assumed Liabilities as of the Closing Date, substantially in the form of Schedule 1.3(a) hereto (the "Closing Date Net Assets Schedule"). The Closing Date Net Assets Schedule shall be prepared by Sellers by utilizing the audited consolidated and combined balance sheet of Sellers, the Subsidiaries and Sellers' related portion of the ALAC FSC as of September 30, 1996 (the "September 30, 1996 Audited Balance Sheet") and (i) creating a schedule of Assets and Assumed Liabilities as of September 30, 1996 (the "September 30, 1996 Net Assets Schedule") by deleting therefrom the Excluded Assets and the Excluded Liabilities, including, without limitation, the liabilities identified with an asterisk (*) on Schedule 1.3(a) hereto, and including, without limitation, any amounts reflected on the September 30, 1996 Audited Balance Sheet in respect of shareholder's equity and (ii) reflecting all changes with respect to the Assets and Assumed Liabilities that have occurred since October 1, 1996 through the Closing Date on the Closing Date Net Assets Schedule, all in accordance with United States generally accepted accounting principles as applied consistently in the September 30, 1996 Audited Balance Sheet except that there will be no change from the September 30, 1996 Audited Balance - 4 - 9 Sheet in the last-in-first-out (LIFO) reserve for inventory for the period from October 1, 1996 through the Closing Date. (b) If Buyer disagrees with any of the items or amounts set forth on the Closing Date Net Assets Schedule, it may, within thirty (30) days after the delivery of the Closing Date Net Assets Schedule, deliver a notice to Sellers (the "Disagreement Notice"), specifying, in reasonable detail, those items or amounts set forth in the Closing Date Net Assets Schedule as to which Buyer disagrees and the reasons for such disagreement. Buyer shall be deemed to have agreed with all other items and amounts contained in the Closing Date Net Assets Schedule other than those specified in such Disagreement Notice. If Buyer does not file a Disagreement Notice with Sellers within such thirty (30)-day period, the Closing Date Net Assets Schedule shall become final and binding upon Buyer and Sellers for all purposes, including, without limitation, the determination of Net Assets (as defined below) and the Assumed Liabilities pursuant to this Section 1.3 and Section 1.4 hereof, respectively. (c) If a Disagreement Notice is delivered to Sellers pursuant to this Section 1.3, the parties shall use their best efforts to reach agreement on the disputed items or amounts, which in no event shall be more favorable to Sellers than reflected in the Closing Date Net Assets Schedule or more favorable to Buyer than reflected in the Disagreement Notice. If the parties do not resolve all disputed liabilities within twenty (20) business days after delivery of the Disagreement Notice, this Agreement and the disputed items or amounts will be submitted to an independent nationally recognized accounting firm without any material financial relationship to either Buyer or its Affiliates or Sellers or their respective Affiliates, as mutually selected by Sellers and Buyer (the "Independent Accountants") for resolution pursuant to this Section 1.3. The written report of the Independent Accountants (the "Report") shall be delivered to Sellers and Buyer promptly, but in no event later than thirty (30) days after such disputed items or amounts are submitted to the Independent Accountants, and shall be final, conclusive and binding upon the parties. The procedures for resolution of disputes concerning the Closing Date Net Assets Schedule set forth in Section 1.3(d) hereof and this Section 1.3(e) are intended to be final and exclusive of any other contest or appeal in relation thereto, so that if (i) Buyer shall have failed to give the Disagreement Notice or (ii) having given the Disagreement Notice, Buyer subsequently reaches agreement with Sellers on the disputed items or amounts or (iii) no such agreement is reached and the matter is submitted to the Independent Accountants and they issue the Report, then, in all such cases, neither party shall be entitled to subject such agreement or the Report, or any dispute relating thereto, to appeal to any court or tribunal. The fees and expenses of the Independent Accountants shall be borne equally by Sellers, on the one hand, and Buyer, on the other hand. Notwithstanding anything to the contrary contained herein, Buyer shall not have the right to dispute any item or amount set forth on the September 30, 1996 Balance Sheet. (d) From the Closing Date until the final determination by the Independent Accountants, Sellers and the Independent Accountants, if any, will have access to the Business, the respective books and records and the respective employees who are responsible for financial matters, at reasonable times and upon reasonable prior written notice, in order to assist in such determination. - 5 - 10 (e) If the Net Assets (defined as the Assets less the Assumed Liabilities) as set forth on the Closing Date Net Assets Schedule as finally determined pursuant to Sections 1.3(a), (b) and (c) hereof are: (i) less than the Net Assets as set forth on the September 30, 1996 Net Assets Schedule, Sellers will promptly deliver to Buyer a wire transfer of immediately available funds in an amount equal to the difference between the Net Assets set forth on the September 30, 1996 Net Assets Schedule and the Net Assets as set forth on the Closing Date Net Assets Schedule as an adjustment downwards to the Purchase Price paid at Closing; and (ii) more than the Net Assets set forth on the September 30, 1996 Net Assets Schedule, Buyer will promptly deliver to Sellers a wire transfer of immediately available funds in an amount equal to the difference between the Net Assets as set forth on the Closing Date Net Assets Schedule and the Net Assets as set forth on the September 30, 1996 Net Assets Schedule as an adjustment upwards to the Purchase Price paid at Closing. 1.4. Assumption of Certain Liabilities. (a) At the Closing, Buyer shall assume all of the liabilities of each of Sellers with respect to the Business of any nature whatsoever existing on the Closing Date; provided, however, that any liabilities of Sellers and the Subsidiaries which are (i) not reflected on the Closing Date Net Assets Schedule, (ii) otherwise expressly assumed pursuant to the terms hereof, or (iii) liabilities in respect of the Excluded Assets, shall not be assumed by Buyer but shall remain the obligation of Sellers and the Subsidiaries and any purported assignment or assumption of such liabilities shall be null and void ab initio (collectively, the "Assumed Liabilities"). Such assumption of the Assumed Liabilities will be effected by delivery at the Closing by Buyer to Sellers and ALAC of an undertaking in the form of Exhibit 1.4(a) hereto. (b) Notwithstanding the proviso in Section 1.4(a), the Assumed Liabilities shall include any liabilities in respect of the Assets or the Business (other than the Excluded Liabilities and liabilities in respect of the Excluded Assets) (i) first accruing or arising on or after the Closing Date including, without limitation, any such liabilities first arising under any contract, lease, commitment or other agreement which is being assigned to Buyer hereunder as part of the Assets and (ii) all liabilities of Sellers in the nature of accounts payable which are not reflected on the Closing Date Net Assets Schedule and which were incurred on or prior to the Closing in the ordinary course of the Business and which exist as of, or arise after, the Closing Date but only up to a maximum aggregate amount of all such liabilities of $75,000. (c) Notwithstanding anything herein to the contrary, except for the Assumed Liabilities, Buyer is not assuming any of the liabilities of Sellers or the Subsidiaries, including without limitation, liabilities with respect to the environmental condition of the Assets as of the Closing Date (collectively, the "Excluded Liabilities"). - 6 - 11 1.5. Closing. Subject to the conditions set forth in Articles V and VI hereof, the closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of ALAC, 2700 Post Oak Boulevard, Houston, Texas at 10:00 a.m. on the last business day of the calendar month in which any waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), shall have expired or been terminated, or on such other date as may be mutually agreed upon by the parties hereto (the "Closing Date"). ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLERS AND ALAC Each of Sellers and ALAC represents and warrants to Buyer as follows: 2.1. Organization of Sellers, ALAC and the Subsidiaries. Each of Sellers, ALAC and the Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation. Each of Sellers and the Subsidiaries has full corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Each of Sellers and the Subsidiaries is duly licensed or qualified to do business and in good standing in each jurisdiction in which the character of its properties or the nature of its business requires it to be so licensed or qualified, except where the failure to be so licensed or qualified would not have a material adverse effect on the financial condition, business or results of operations of the Business, taken as a whole, or on the ability of Sellers to consummate the transactions contemplated hereby (a "Material Adverse Effect"). Prior to the date of this Agreement, each of Sellers and the Subsidiaries has delivered to Buyer true, correct and complete copies of its Certificate of Incorporation and Bylaws as presently in effect and of the constitutive documents of the Subsidiaries as presently in effect. 2.2. Ownership of Sellers' Shares. ALAC owns, beneficially and of record, all of the issued and outstanding capital stock of the Parent Corporation; the Parent Corporation owns, beneficially and of record, all of the issued and outstanding capital stock of the Operating Company; and the Operating Company owns, beneficially and of record, all of the issued and outstanding shares of capital stock of the Subsidiaries. 2.3. Authorization, Etc. Each of Sellers and ALAC has the power and authority to enter into this Agreement and all other agreements or instruments executed and delivered or to be executed and delivered by any of them in connection with the transactions contemplated hereby (collectively, the "Collateral Agreements"), all of which are listed in Schedule 2.3 hereto, and to carry out the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Collateral Agreements and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the respective Boards of Directors of Sellers and by the Executive Committee of the Board of Directors of ALAC, and by ALAC and the Parent Corporation as the sole shareholder of the Parent Corporation and the Operating Company, - 7 - 12 respectively, in conformity with applicable law and their respective Certificates of Incorporation and Bylaws, and no other corporate proceedings on the part of any of Sellers or ALAC are necessary to authorize the execution or delivery of this Agreement or the Collateral Agreements or the consummation of the transactions contemplated hereby and thereby. This Agreement has been duly executed and delivered by each of Sellers and ALAC and is a valid and binding obligation of, and enforceable in accordance with its terms against, each of Sellers and ALAC, except as such enforceability may be limited by general principles of equity and subject to bankruptcy or other laws relating to or affecting the rights of creditors generally. Each of the Collateral Agreements to which any of Sellers or ALAC is or will be a party has been duly executed and delivered by each of Sellers and ALAC and is, or upon execution and delivery thereof will be, a valid and binding obligation of, and enforceable in accordance with its terms against, each of Sellers or ALAC, as the case may be, except as such enforceability may be limited by general principles of equity and subject to bankruptcy or other laws relating to or affecting the rights of creditors generally. 2.4. No Consent. Except for filings, if any, required under the HSR Act and except as set forth on Schedule 2.4 hereto, neither the execution, delivery or performance by Sellers or ALAC of this Agreement or any Collateral Agreement to which any of them is or will be a party, nor the consummation of the transactions contemplated hereby or thereby, will require any Permit (as defined in Section 2.16 hereof) or other order or action of, or notice to, or declaration, filing or registration with, any third party or any governmental body, or other regulatory or administrative authority, agency, bureau or commission, domestic or foreign ("Governmental Agency"). 2.5. No Violation. Neither the execution, delivery or performance by Sellers or ALAC of this Agreement or the Collateral Agreements to which any of them is or will be a party, nor the consummation of the transactions contemplated hereby and thereby, will (i) violate, conflict with or result in a breach of any provision of the Certificates of Incorporation or Bylaws of Sellers, the Subsidiaries or ALAC, or (ii) violate, breach or be in conflict with, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or permit the termination of, or accelerate the performance required by, or cause the acceleration of the maturity of any debt or obligation pursuant to, or result in the creation or imposition of any liens, mortgages, charges, security interests or encumbrances (collectively, "Liens") upon any property or assets of Sellers, the Subsidiaries or ALAC under, any contract, lease, sublease, loan agreement, note or other instrument or obligation, or any Permit, in each case to which any of Sellers, the Subsidiaries or ALAC is a party or by which any of Sellers, the Subsidiaries or ALAC or any Asset is bound, or (iii) violate any order, writ, injunction, decree, judgment, ruling, law, statute, rule or regulation of any Governmental Agency (collectively, "Laws"), applicable to the Business, Sellers, the Subsidiaries or ALAC or by which Sellers, the Subsidiaries or ALAC or any of Sellers', the Subsidiaries' or ALAC's properties or assets is bound, excluding from the foregoing clauses (ii) and (iii) violations, breaches, defaults, terminations, accelerations and creations which would not have a Material Adverse Effect. - 8 - 13 2.6. Subsidiaries. (a) Except for the direct or indirect ownership of the stock of the Subsidiaries listed on Schedule 2.6 hereto, neither of Sellers nor any of the Subsidiaries owns, directly or indirectly, any outstanding capital stock of, or other equity or ownership interest in, or securities convertible into or exchangeable for, or options, warrants or other rights to purchase or subscribe to, capital stock or other equity or ownership interests in, any firm, corporation, limited liability company, joint venture, general or limited partnership or other entity, and neither of Sellers nor any of the Subsidiaries has any contracts, commitments, agreements, understandings or arrangements of any kind relating to the acquisition or purchase of any such capital stock or other equity or ownership interest or any such convertible or exchangeable securities, or any such options, warrants or rights. Notwithstanding anything to the contrary contained herein, the parties agree that the shares of capital stock or other securities of Sanstorm, Inc., a Delaware corporation and a wholly-owned subsidiary of the Parent Corporation, shall be retained by the Parent Corporation and shall be an Excluded Asset for purposes of this Agreement and nothing contained in this Agreement shall be construed as affecting Sellers' or ALAC's rights or obligations in connection with the ownership of Sanstorm, Inc. in any manner whatsoever. (b) The ownership of the shares of the Subsidiaries listed on Schedule 2.6 hereto (the "Subsidiary Shares") is as set forth on Schedule 2.6 hereto. The Operating Company owns the Subsidiary Shares set forth on Schedule 2.6 hereto free and clear of any Liens. The Subsidiary Shares together constitute all of the issued and outstanding capital stock of the Subsidiaries. The Subsidiary Shares have been duly authorized and validly issued and are fully paid and non-assessable. There are no agreements or commitments by or with Sellers, any of the Subsidiaries or any third party for the repurchase, purchase or sale of any capital stock of any of the Subsidiaries, and there are no options, warrants or other rights to purchase any capital stock of any of the Subsidiaries or any securities convertible into such capital stock. 2.7. Financial Statements. Schedule 2.7 hereto sets forth the unaudited consolidated and combined balance sheet of Sellers and the Subsidiaries, and Sellers' related portion of the ALAC FSC, at December 31, 1995 ("Sellers' Balance Sheet"), and the related statements of income and cash flows for the year then ended (together with Sellers' Balance Sheet, "Sellers' Financial Statements"). Schedule 2.7 hereto also sets forth the audited consolidated and combined balance sheet and related footnotes at September 30, 1996 and the related unaudited statement of income for the nine months then ended (the "Interim Financial Statements") of Seller, the Subsidiaries and Sellers' related portion of the ALAC FSC. The Financial Statements and the Interim Financial Statements have been prepared from the books and records of Sellers, the Subsidiaries and Sellers' related portion of the ALAC FSC and present fairly the financial position, results of operations and cash flows for the periods indicated, in each case in accordance with United States generally accepted accounting principles consistently applied, during such periods except: (i) Sellers did not adopt Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("FAS 109"), which is required in order to conform with generally accepted accounting principles, (ii) the Financial Statements do not contain all financial statements or footnote disclosures required under generally accepted accounting principles and (iii) the above - 9 - 14 referenced unaudited statements of income have been prepared based on a first-in-first-out (FIFO) basis and do not include any adjustments under the last-in-first-out (LIFO) method of accounting for inventory while the above-referenced balance sheets have been prepared in accordance with the last-in-first-out (LIFO) method of accounting. Adjustments arising out of the preparation of the September 30, 1996 Audited Balance Sheet that do not relate to either the December 31, 1996 or September 30, 1996 income statement period are not included in such income statements. 2.8. No Undisclosed Liabilities, Etc. None of Sellers or any of the Subsidiaries has or will have any liabilities (whether absolute or contingent) which are not or will not be reflected in the Interim Financial Statements or the Closing Date Net Assets Schedule, as the case may be, except (i) matters expressly identified or referred to in any Exhibit or Schedule, (ii) matters which are not required to be expressly so identified or referred to in any such Exhibit or Schedule by reason of any express limitation or exclusion in any representation, warranty, covenant, agreement or undertaking contained in this Agreement, and (iii) contingent liabilities or obligations arising after September 30, 1996 in the ordinary course of business of the Business, and not required, in accordance with United States generally accepted accounting principles, to be reflected in the Interim Financial Statements or the Closing Date Net Assets Schedule. 2.9. Absence of Certain Changes. (a) Since September 30, 1996, (i) there has not been any material adverse change in any of the relations with any suppliers or customers of the Business, (ii) there has not been any change or event that would have a Material Adverse Effect, and (iii) Sellers have conducted the Business in the ordinary course consistent with past practice, including without limitation billing, shipping and collection practices, marketing and sales practices, inventory transactions and payment of accounts payable. (b) Without limiting the generality or effect of the foregoing, since September 30, 1996, neither of Sellers nor any Subsidiary has (i) declared, set aside or paid any dividend or made any distribution on or with respect to shares of its capital stock; (ii) made any cash payments to any of its affiliates or subsidiaries; (iii) entered into any agreement or letter of intent relating to any merger, consolidation, recapitalization or other business combination or reorganization; (iv) sold, transferred, licensed, failed to keep in effect or otherwise disposed of any intellectual property; (v) waived, released, granted or transferred any rights of material value or modified or changed in any material respect any existing contract or other agreement, other than in the ordinary course of business consistent with past practice; (vi) failed to continue its existing practices, or to change such practices if required to comply with applicable Law, relating to repair and maintenance of the assets owned, leased or otherwise held by Sellers or any Subsidiary; (vii) purchased, sold, leased or disposed of, or subjected to Lien, any assets owned, leased or otherwise held by Sellers or any Subsidiary other than in the ordinary course of business consistent with past practice; (viii) created, incurred or assumed any indebtedness for borrowed money; (ix) assumed, guaranteed, endorsed or otherwise become liable or responsible (whether directly, contingently or otherwise for the obligations or liabilities of any other person or entity in excess of $25,000, except for endorsements of negotiable instruments in the ordinary course - 10 - 15 of business consistent with past practice; (x) except as set forth in Schedule 2.9(b)(x) hereto, granted any severance or termination pay or benefit in excess of $5,000, other than in accordance with policies or agreements of Sellers or any of the Subsidiaries in effect on the date hereof; (xi) adopted, enacted, authorized, ratified, approved, caused or suffered to exist any material increase in the compensation or benefits of any employee, former employee, independent contractor, director or former director (other than normal periodic increases in the ordinary course of business that are made in accordance with established policies or as required pursuant to any contract or arrangement listed in Schedule 2.15(a) hereto and other than the contracts listed on Schedule 2.9(b)(xi) hereto); (xii) adopted, enacted, authorized, ratified, approved, caused or suffered to exist any material amendment, modification, implementation or termination of any Benefit Plan (as defined in Section 2.15(b) hereof) other than any such amendment, modification, implementation or termination required under applicable Law or the terms of a Benefit Plan or any collective bargaining agreement set forth on Schedule 2.15(a) hereto; (xiii) adopted, enacted, authorized, ratified, approved, caused or suffered to exist any material amendment, modification, implementation or termination of any collective bargaining agreement set forth in Schedule 2.15(a) hereto, other than any such amendment, modification, implementation or termination required under applicable Law or under the terms of any Benefit Plan or such collective bargaining agreement; (xiv) except as set forth in Schedule 2.9(b)(xiv) hereto, made commitments for any single capital project which would exceed $25,000 in capital expenditures; (xv) except as set forth in Schedule 2.9(b)(xv) hereto, entered into any employment contract with respect to the performance of personal services which is not terminable at will without liability or penalty; (xvi) received directly or indirectly any equity contribution; (xvii) entered into any contract with respect to any of the foregoing; or (xviii) undertaken any action or activity or failed to take any action which would result in any violation or breach of any representation, warranty or covenant of Sellers or ALAC contained herein. (c) Without limiting the generality or effect of the foregoing, since December 31, 1995, neither of Sellers has: (i) made any change in any method of accounting or accounting practice, except as may be required by Law or by United States generally accepted accounting principles; (ii) made, changed or revoked any election with respect to taxes except where the election does not affect Buyer; (iii) made any loans, advances or capital contributions to or investments in any person or entity, other than to any supplier or customer as an extension of credit in the ordinary course of business consistent with past practice; or (iv) entered into any contract or other agreement with respect to any of the foregoing. 2.10. Taxes. (a) Each of Sellers and the Subsidiaries, either on a separate basis or as a member of an affiliated group on a consolidated basis, has filed all Tax Returns (as defined below) required to be filed by it, such Tax Returns were correct and complete in all material respects and each of Sellers and the Subsidiaries has paid all Taxes (as defined below) shown to be due on such Tax Returns, except where the failure to file Tax Returns or to pay Taxes would not have a Material Adverse Effect. Except as described in Schedule 2.10(a) hereto, there are no material disputes, claims, actions or proceedings currently pending or threatened against any Asset or the - 11 - 16 Sellers or the Subsidiaries by any governmental authority for the assessment or collection of Taxes, no claim for the assessment or collection of Taxes has been asserted against Sellers or the Subsidiaries, and there are no audits of Sellers or the Subsidiaries by any governmental authority in respect of Taxes. Except as described in Schedule 2.10(a) hereto, there are no agreements by Sellers or the Subsidiaries for an extension of time for the assessment or payment of any Taxes or for the filing of any Tax Return, or waivers of a statute of limitations by Sellers or the Subsidiaries in respect of Taxes. (b) The term "Tax" and "Taxes" shall mean any federal, state, local, foreign or other taxes, assessments, deficiencies, fees, levies, social security obligations, withholdings, customs duties or other governmental charges, from time to time imposed by or required to be paid to any governmental authority (including penalties and additions to tax thereon, penalties for failure to file a return or report, and interest on any of the foregoing). (c) The term "Tax Return" shall mean any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto. (d) None of Sellers and the Subsidiaries has filed a consent under Section 341(f) of the Code concerning collapsible corporations. None of Sellers and the Subsidiaries has made any material payments, is obligated to make any material payments, or is a party to any agreement that under certain circumstances could obligate it to make any material payments that will not be deductible under Section 280G of the Code. None of Sellers and the Subsidiaries has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code. None of Sellers and the Subsidiaries is a party to any Tax allocation or sharing agreement other than those which are statutorily required. (e) The unpaid income taxes of Sellers and the Subsidiaries (including, but not limited to, any liability for Taxes of any person under Treas. Reg. Section 1.1502-6 (or any similar provision of state, local or foreign law) as transferee or successor by contract or otherwise) (A) did not, as of the most recent fiscal month end, exceed by any material amount the reserve for Tax liability (rather than any reserve for deferred Taxes established to reflect timing differences between book and tax income) set forth on the face of the Interim Balance Sheet (rather than in any notes thereto) and (B) will not exceed by any material amount such reserve as adjusted for operations and transactions through the Closing Date in accordance with the past custom and practice of Sellers and the Subsidiaries in filing their income Tax Returns. 2.11. Title to Assets. Each of Sellers and the Subsidiaries has good and marketable fee or leasehold title to, or a leasehold interest in, all of the Assets (in the case of Sellers) and the assets of the Subsidiaries (in the case of the Subsidiaries), free and clear of all Liens other than (i) mechanics', carriers', workers', repairmen's or other like Liens (inchoate or otherwise) arising or incurred in the ordinary course of business in respect of obligations which are not overdue; (ii) reservations, conditions, rights of way, covenants, restrictions and utility easements of record - 12 - 17 encumbering the real property constituting part of the Assets and the real property constituting part of the assets of the Subsidiaries which are not violated by the existing use thereof or the improvements thereon in any material respect; (iii) zoning ordinances which are not violated by the existing use thereof or the improvements thereon in any material respect; (iv) estimated ad valorem property taxes on the real property constituting part of the Assets and the real property constituting part of the assets of the Subsidiaries to become due for the year 1996, which taxes shall be prorated as of the Closing Date in accordance with Section 4.9 hereof; (v) any state of facts an accurate survey may show, provided same does not render title unmarketable in any material respect; and (vi) variations between record lines of title and fences, shrubs and other enclosures which are not material and do not impair the present use of the property (collectively, "Permitted Liens"). All of the assets leased by Sellers and the Subsidiaries are leased pursuant to leases set forth in Schedule 2.11 hereto. Each of Sellers agrees to use its best efforts to obtain the consent of all lessors under the leases set forth in Schedule 2.11 hereto to the consummation of the transactions contemplated by this Agreement without requiring modification in the rights or obligations of the lessee under such leases. 2.12. Properties. (a) The tangible personal property constituting a part of the Assets or assets of the Subsidiaries and, in each case, currently being actively used in the Business is in good working condition, normal wear and tear excepted, capable of being used safely and efficiently for its intended purpose. (b) Schedule 2.12(b) hereto sets forth an accurate list and summary description of all real property owned by either of Sellers or the Subsidiaries or otherwise used in the Business (the "Real Property"), a brief description of all plants located thereon, a list of all places of business maintained by either of Sellers or the Subsidiaries in connection with the Business, and a description of Sellers' or the relevant Subsidiary's right to occupy such places of business. Except as otherwise set forth herein, neither of Sellers nor ALAC makes any representation or warranty as to the condition of the Real Property, plants and places of business, and Buyer agrees to accept such real property, plants and places of business "as is." (c) Schedule 2.12(c) hereto sets forth an accurate list and summary description of all real property owned or operated by either of Sellers or the Subsidiaries since October 20, 1986 other than the Real Property listed in Schedule 2.12(b) hereto and a brief description of all plants or improvements located thereon. 2.13. Patents, Trademarks, Etc. Schedule 2.13 hereto sets forth all of the patents, trademarks, service marks, trademark registrations and applications therefor, trade names, copyrights, and copyright registrations and applications therefor owned by or registered in the name of either of Sellers or any of the Subsidiaries in the United States or in which any of Sellers or the Subsidiaries has any rights by license. Sellers or the Subsidiaries own, or are validly licensed under, all patents, trademarks, service marks, trade names and copyrights necessary for the conduct of the Business as now operated, without known conflict with the rights of others. - 13 - 18 Except as set forth on Schedule 2.13 hereto, each patent registration and trademark registration and each application therefor listed in Schedule 2.13 hereto is valid, subsisting and in proper form and those registrations material to the Business have been duly maintained, including by the submission of all necessary filings in accordance with the legal and administrative requirements of the jurisdiction of registration. Sellers have no knowledge of, and Sellers are not currently in receipt of any notice of, any conflict with the asserted rights of others in such patents, trademarks, service marks, trade names and copyrights. Sellers have no knowledge of, and Sellers are not currently in receipt of, any notice of infringement or other complaint that Sellers' or any of the Subsidiaries' operations traverse or infringe the rights of patents, trademarks, service marks, trade names or copyrights of others. 2.14. Contracts, Etc. All contracts and commitments of Sellers and each of the Subsidiaries providing for the payment by Sellers or any of the Subsidiaries or receipt by Sellers or any of the Subsidiaries of amounts in excess of $100,000, or with a term extending more than one year after the date hereof are, as of the date hereof, valid and in full force and effect. To the knowledge of Sellers, none of Sellers, the Subsidiaries or any other party is in default, and no event has occurred which, with notice and/or lapse of time, would constitute a default, under any such contract or commitment. Schedule 2.14 hereto lists all such contracts and commitments as in effect on the date hereof. 2.15. Employees and Employee Benefit Plans. (a) General. Schedule 2.15(a) hereto contains a true and complete list of all of Sellers' employees, whether full-time or part-time, (collectively, the "Employees"). Schedule 2.15(a) hereto also sets forth a complete and correct list of (i) each defined benefit and defined contribution plan which is maintained or contributed to by either of Sellers for the Employees, or to which either of Sellers is required to contribute, with respect to such Employees; (ii) collective bargaining agreements with labor or trade unions relating to the Employees; and (iii) except to the extent set forth or provided under any such collective bargaining agreement, all employment policies and arrangements, all written employment and consulting agreements to the extent not otherwise disclosed on a Schedule to this Agreement, written agreements with respect to leased or temporary employees, executive compensation plans, incentive compensation plans or arrangements, bonus plans, deferred compensation agreements, excess benefit plans, vacation plans, death benefit plans, sickness or disability plans, severance pay plans, educational assistance plans, employee stock option, stock ownership or stock purchase plans, group life, health and accident insurance and other plans, agreements, arrangements or commitments, whether or not legally binding, whether written or oral, and whether express or implied, of Sellers which benefit the Employees or former employees of Sellers ("Former Employees"), or their dependents, survivors or beneficiaries. All Employees and Former Employees will be fully paid through the last pay period ending on or prior to the Closing for services rendered and for ordinary expenses incurred through the Closing under their respective employment agreements, if any, or otherwise. (b) Employee Benefit Plans. Except as set forth in Schedule 2.15(b) hereto, there is no material "employee benefit plan" within the meaning of Section 3(3) of the Employee - 14 - 19 Retirement Income Security Act of 1974, as amended ("ERISA"), and (to the extent not otherwise included as an "employee benefit plan") no material stock ownership, non-cash compensation or other similar plan, program or arrangement maintained by or for either of Sellers under which either of Sellers has any material present or future obligation or liability (other than to make current wage or salary payments) with respect to Employees or Former Employees (all of which, together with the plans, policies and arrangements set forth in Schedule 2.15(a) hereto, are hereafter referred to as the "Benefit Plans"). (c) Employee Pension Benefit Plans. Each Benefit Plan which covers Employees generally and which is an "employee pension benefit plan" (as defined in Section 3(2) of ERISA) is intended to meet the requirements of Section 401(a) of the Code and the trust forming part of such plan is exempt from Federal income tax under Section 501(a) of the Code. A favorable determination letter has been issued by the Internal Revenue Service ("IRS") with respect to each such plan or trust and each amendment thereto. Each Benefit Plan has been administered to date substantially in accordance with the material provisions of ERISA, the Code, applicable law and the terms and provisions of all documents, agreements or contracts pursuant to which such plans are maintained. There have been no material "prohibited transactions" within the meaning of Section 4975 of the Code or Part 4 Subtitle B of Title I of ERISA. There is no material dispute, arbitration, claim, suit or grievance, pending or threatened involving a Benefit Plan and there is no basis for such a claim. None of the Benefit Plans and no fiduciary thereof have been the direct or indirect subject of an order or investigation or examination by a governmental or quasi-governmental agency, and there are no matters pending before the IRS, Department of Labor or Pension Benefit Guaranty Corporation ("PBGC") with respect to any Benefit Plan. Sellers have no liability or obligation to provide post-retirement group insurance benefits to Former Employees or Employees. (d) Title IV Plans. Neither of Sellers maintains or contributes to any "multiemployer plan," within the meaning of Section 3(37) of ERISA which benefits any Employees or Former Employees. Except as a result of the transactions contemplated by this Agreement, no Benefit Plan of Sellers which is subject to Title IV of ERISA has been partially or completely terminated. None of the Assets is subject to (i) any liability or Lien under any agreement imposing secondary liability on Sellers as sellers of the assets of a business in accordance with Section 4204 of ERISA or under any other provision of Title IV of ERISA, (ii) contingent liability under Title IV of ERISA to the PBGC or to any plan, (iii) a Lien under Section 4068 of ERISA, or (iv) any liability or Lien with respect to any "accumulated funding deficiency" (whether or not waived) within the meaning of Section 412 of the Code. The present value of all "benefit liabilities" (whether or not vested) (as defined in Section 4001(a)(16) of ERISA) under each single employer defined benefit plan of Sellers did not exceed as of the most recent plan actuarial valuation date, and will not exceed as of the Closing Date, the then current fair market value of the assets of such plan. For purposes of determining the present value of benefit liabilities under any such plan, the actuarial assumptions and methods used under such plan for the most recent plan actuarial valuation shall be used and all benefits provided under such plan shall be deemed to be fully vested. - 15 - 20 (e) Documents Provided. Sellers have heretofore delivered to Buyer true and correct copies of (i) each of the Benefit Plans listed on Schedule 2.15(b) hereto and all amendments thereto to the date hereof; (ii) each trust agreement and annuity contract (or any other funding instruments) pertaining to any of the Benefit Plans, including all amendments to such documents to the date hereof; (iii) the most recent determination letter issued by the IRS with respect to each of the employee pension benefit plans described in Section 2.15(c); (iv) the most recent actuarial valuation report for each of the current Benefit Plans for which an actuarial valuation report is required to be prepared; and (v) the most recent Annual Report (IRS Forms 5500 series), including Schedules A and B and plan audits, if applicable, required to be filed with respect to each of the Benefit Plans. (f) Labor Disputes. Except as provided in Schedule 2.15(f) hereto, no strikes, work stoppages or other labor disputes involving the Employees are pending or, to the knowledge of Sellers and ALAC, threatened which, either singly or in the aggregate, could have a Material Adverse Effect. Except as provided in Schedule 2.15(f), no Employees are represented by any labor or trade union and, to the knowledge of Sellers and ALAC, no movement to designate a collective bargaining agent to represent any of the Employees exists or is threatened. Each of Sellers (i) is in compliance with all applicable Laws respecting employment, employment practices, terms and conditions of employment and wages and hours (including, but not limited to, the Worker Adjustment Retraining Notification Act, the Americans with Disability Act of 1990 and the Family and Medical Leave Act of 1993 ("FMLA")), in each case, with respect to current and former officers, Employees, independent contractors and directors of Sellers and each of the Subsidiaries, (ii) has withheld all amounts required by Law or by agreement to be withheld from the wages, salaries and other payments to such officers, Employees, independent contractors and directors of Sellers, (iii) is not liable for any arrears of wages or any taxes or any penalty for failure to comply with any of the foregoing, and (iv) is not liable for any payment to any trust or other fund or to any Governmental Agency, with respect to unemployment compensation benefits, social security or other benefits for current and former officers, Employees, independent contractors or directors of each of Sellers and the Subsidiaries. Schedule 2.15(f) sets forth a list of all persons who are on leave as of the Closing Date and identifies which persons are on leave covered by the FMLA and which persons are on leave not covered by the FMLA. 2.16. Litigation; Compliance with Laws. (a) None of Sellers or the Subsidiaries is in violation of any applicable Law, or any permits, memberships, authorizations, consents, waivers, approvals, registrations, legal status, orders or other approvals and licenses (collectively, "Permits") held by or applicable to Sellers or any of the Subsidiaries under any Law or granted by any Governmental Agency, except for such violations which would not have a Material Adverse Effect. Sellers and the Subsidiaries have all Permits necessary to conduct the Business as heretofore conducted by Sellers and the Subsidiaries and a list of such Permits is set forth in Schedule 2.16(a) hereto. (b) Except as set forth in Schedule 2.16(b) hereto, there is no Litigation to which any of Sellers or the Subsidiaries is a party by or before any (i) court, (ii) Governmental - 16 - 21 Agency or (iii) arbitrator, in each case pending, or to the knowledge of Sellers and ALAC, threatened, concerning title to the Assets or which, if adversely determined, would have a Material Adverse Effect, or which questions the validity of this Agreement or the transactions contemplated hereby. For purposes of this Agreement, "Litigation" shall mean any action, suit, claim, proceeding, investigation or governmental inquiry. 2.17. Environmental and Safety Laws. (a) Except as described on Schedule 2.17, none of Sellers or the Subsidiaries has received any written notice of violation, hearing, correction order, cessation order, notice of fine or penalty, notice of proposed assessment or other written notice from any Governmental Authority that any of Sellers or the Subsidiaries is not in compliance with Environmental Laws (A) since January 1, 1991, or (B) which relates to any matters that are not, or have not been, resolved as of the date hereof. (b) Except as described in Schedule 2.17 hereto and to the knowledge of Sellers, there have been no releases (as defined under any applicable Environmental Laws), and there exists no threat of release of Hazardous Materials (defined below) ("Releases") (i) by any of Sellers or the Subsidiaries or (ii) by any other person or entity at, on, in, under, over or in any way affecting the Real Property, except as customarily occur in the normal course of the Business and in compliance with Environmental Laws. (c) Except as described in Schedule 2.17 hereto, none of the Assets or the assets of the Subsidiaries are being used, or to the knowledge of Sellers, have been used, to produce, manufacture, process, generate, store, use, handle, recycle, treat, dispose of, manage, ship or transport Hazardous Materials, other than as customary in the normal course of the Business and in compliance with Environmental Laws. (d) To the knowledge of Sellers, except as set forth in Schedule 2.17 hereto, there are now no above ground storage tanks as defined in applicable Environmental Laws, and no underground storage tanks which are subject to regulation under the underground storage tank regulations issued pursuant to the federal Resource Conservation and Recovery Act or comparable state law, located at, on or in, the Real Property. Schedule 2.17 includes a list of underground storage tanks subject to the underground storage tank regulations issued pursuant to the federal Resource Conservation and Recovery Act or comparable state law which have been removed from the ground since January 1, 1991, or the date when Sellers or the Subsidiary acquired title to any of the Real Property where any such underground storage tank was located, whichever is later. (e) No lien has been imposed on any Real Property by any Governmental Authority in connection with the presence on or off any Real Property of any Hazardous Materials. (f) Except as (x) set forth on Schedule 2.17 hereto and (y) may have an adverse effect of not more than $50,000 on the Business (unless the matter is outstanding and unresolved, - 17 - 22 in which case it is included on Schedule 2.17 unless it would have an adverse effect of not more than $5,000), none of Sellers or the Subsidiaries, or, to their knowledge, any other person or entity for whose conduct any of them is or may be held responsible, have: (i) entered into or been subject to any consent decree, compliance order, or administrative order or other order in connection with the Business with respect to any facilities or operations on or contemplated on the Real Property since January 1, 1991; (ii) received a written notice under a citizen suit provision of any Environmental Law in connection with the Business or any Real Property or any facilities or operations thereon which has not been concluded, settled, withdrawn or otherwise finally resolved; or (iii) received any request for information, notice, demand letter, administrative inquiry, or formal or informal complaint or claim with respect to any environmental condition relating to the Business or any Real Property or any facilities or operations thereon under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended; and neither of Sellers nor the Subsidiaries has any knowledge or information as of the date of this Agreement reasonably indicating that any of the above events will be forthcoming. (g) Except as set forth in Schedule 2.17 hereto and except for monitoring data required under any applicable permit or regulation, neither of Sellers nor the Subsidiaries have, since January 1, 1991, (i) reported a Release pursuant to an Environmental Law, or (ii) filed a notice pursuant to Environmental Law reporting a violation thereof. (h) Except as set forth on Schedule 2.17 and to the knowledge of Seller, there is not presently located at the Real Property (i) any polychlorinated biphenyl ("PCBs") (other than PCBs in equipment that is not regulated under the Toxic Substances Control Act) used in hydraulic oils, transformers or other equipment or substances, or (ii) friable asbestos containing material that is in need of removal, repair or encapsulation. (i) For purposes of Section 2.17 the following terms have the following meanings: (i) "Environmental Law" means any federal, state or local law, legislation, ordinance, regulation, rule, code, license, permit, authorization, judicial or administrative order or injunction of any Governmental Authority in effect on the Closing Date relating to (A) the protection, preservation or restoration of the environment (including but not limited to air, water vapor, surface water, groundwater, drinking water supply, stormwater runoff, surface land, subsurface land, plant and animal life or any other natural resource or environmental medium), or (B) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Hazardous Materials (defined below), including without limitation the Resource Conservation and Recovery Act, as amended, the Comprehensive Environmental Response, Compensation, and Liability Act, as amended, the Federal Clean Water Act, as amended, the Toxic Substances Control Act, as amended, the Hazardous Materials Transportation Act, as amended, the Occupational Safety and Health Act, as amended, or corresponding state statutes. - 18 - 23 (ii) "Hazardous material" means any substance presently listed, defined, designated, controlled or classified as a pollutant or as hazardous, toxic, radioactive or dangerous, under any Environmental Law applicable in the jurisdiction in which the substance is present. Hazardous Material includes, without limitation, any toxic waste, pollutant, contaminant, toxic substance, hazardous waste, petroleum or any derivative or by-product thereof, radon, radioactive material, asbestos containing material, urea formaldehyde foam insulation, lead and PCBs. 2.18. Finders. Neither Sellers nor ALAC has made any agreement with any person or taken any action which would cause any person to become entitled to any agent's, broker's or finder's fee or commission in connection with the transactions contemplated hereby, other than the fees payable by ALAC to J.P. Morgan & Co. Incorporated in connection herewith. 2.19. Effect of Certain Representations. For purposes of this Agreement, references to the "knowledge of" any of Sellers, ALAC or the Subsidiaries shall constitute only references to the actual knowledge of (i) any executive officer of Sellers, ALAC or the Subsidiaries, (ii) any of the employees of Sellers, ALAC or the Subsidiaries in charge of a principal business unit, division or function or (iii) any person within Sellers', ALAC's or the Subsidiaries' organization to whom such executive officer or employee directly reports. ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER Buyer hereby represents and warrants to Sellers and ALAC as follows: 3.1. Power and Authority. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has the corporate power and authority to enter into and perform this Agreement and the Collateral Agreements to which it is or will be a party and the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Collateral Agreements to which it is or will be a party and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the Board of Directors of Buyer, and no other corporate action by Buyer is necessary to authorize the execution and delivery of this Agreement or the Collateral Agreements to which it is or will be a party or the consummation of the transactions contemplated hereby or thereby. This Agreement, and the Collateral Agreements to which Buyer is or will be a party, constitute or, when executed and delivered, will constitute, the legal, valid and binding obligations of Buyer enforceable against Buyer in accordance with their respective terms, except as such enforceability may be limited by general principles of equity and subject to bankruptcy and other laws relating to or affecting the rights of creditors generally. 3.2. Governmental Consents. Except for filings, if any, required under the HSR Act, neither the execution, delivery or performance by Buyer of this Agreement or any Collateral Agreement to which it is or will be a party, nor the consummation of the transactions - 19 - 24 contemplated hereby or thereby, will require any Permit or other order or action of, or notice to, or declaration, filing or registration with, any third party or Governmental Agency. 3.3. No Violation. Neither the execution, delivery or performance by Buyer of this Agreement or the Collateral Agreements to which it is or will be a party, nor the consummation of the transactions contemplated hereby and thereby, will (i) violate, conflict with or result in a breach of any provision of the Certificate of Incorporation or Bylaws of Buyer, or (ii) violate, breach or be in conflict with, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or permit the termination of, or accelerate the performance required by, or cause the acceleration of the maturity of any debt or obligation pursuant to, or result in the creation or imposition of any Liens upon any property or assets of Buyer under, any contract, lease, sublease, loan agreement, note or other instrument or obligation, or any Permit, in each case to which Buyer is a party or by which Buyer is bound, or (iii) violate any Laws applicable to Buyer or by which Buyer or any of its properties or assets is bound, excluding from the foregoing clauses (ii) and (iii) violations, breaches, defaults, terminations, accelerations and creations which would not have any effect on the ability of Buyer to perform its obligations under this Agreement. 3.4. Litigation. There is no Litigation to which Buyer is a party by or before any (i) court, (ii) Governmental Agency or (iii) arbitrator, in each case pending or, to the knowledge of Buyer, threatened, which seeks to restrain, enjoin, prevent the consummation of, or otherwise challenge this Agreement, any of Collateral Agreements or any of the transactions contemplated hereby or thereby. 3.5. Finders. Buyer has not made any agreement with any person or taken any action which would cause any person to become entitled to an agent's, broker's or finder's fee or commission in connection with the transactions contemplated hereby, other than the fees payable by Buyer to Lehman Brothers in connection herewith. ARTICLE IV COVENANTS 4.1. Preservation of the Business. From the date hereof to the Closing Date, each of Sellers and ALAC will use its best efforts to cause Sellers and the Subsidiaries to conduct the Business only in the ordinary course (except as contemplated to the contrary by this Agreement or as agreed to by Buyer in writing) and, to the extent consistent with such operation, to use its best efforts to maintain and preserve Sellers' and the Subsidiaries' present business organizations intact, keep available the services of Sellers' and the Subsidiaries' present officers and employees, and preserve and maintain Sellers' and the Subsidiaries' present relationships with suppliers and customers and other persons having business dealings and relations with Sellers or any of the Subsidiaries, as applicable, to follow generally accepted accounting practices and methods, making ordinary accruals, incurring ordinary liabilities and expenditures and making ordinary contract - 20 - 25 commitments for capital additions and replacements, merchandise, insurance, rentals, research and development, and other ordinary expenses, only in the ordinary course, unless actions out of the ordinary course are expressly agreed to by Buyer in writing, and to refrain from any of the acts enumerated in Section 2.9 hereof. 4.2. Sale or Encumbrance of Assets; Sellers' Shares. (a) From the date hereof to the Closing Date, Sellers shall not directly or indirectly, (a) sell, pledge, dispose of or encumber any of the Assets except in the ordinary course of business and consistent with past practice, or (b) issue, grant or sell, or authorize or propose the issuance of, or split, combine, reclassify or redeem, purchase or otherwise acquire or propose the purchase of, any shares of any class of its capital stock or issue any securities convertible into, or rights to subscribe to, or warrants or options (including employee stock options) to acquire, or enter into any contract with respect to the issuance of, any such shares or other convertible securities, or make any such changes in its equity capital structure. (b) From the date hereof to the Closing Date, Sellers shall cause each of the Subsidiaries not to, directly or indirectly, (a) sell, pledge, dispose of or encumber any material assets owned by it except in the ordinary course of business and consistent with past practice, or (b) issue, grant or sell, or authorize or propose the issuance of, or split, combine, reclassify or redeem, purchase or otherwise acquire or propose the purchase of, any shares of any class of its capital stock or issue any securities convertible into, or rights to subscribe to, or warrants or options (including employee stock options) to acquire, or enter into any contract with respect to the issuance of, any such shares or other convertible securities, or make any such changes in its equity capital structure. 4.3. Approvals and Consents. Each of Sellers shall use its best efforts to promptly obtain and to comply with all requisite statutory or regulatory approvals, third party consents and other requirements necessary for the valid and legal consummation of the transactions contemplated hereby. 4.4. Investigations. Sellers shall provide Buyer and its attorneys, representatives, agents and consultants (including environmental consultants or engineers) with access to the books, records and properties of Sellers and the Subsidiaries and to furnish to Buyer such financial and operating data and other information with respect to the Business and the Assets and the assets of the Subsidiaries as Buyer shall from time to time reasonably request; provided, however, that any such investigation shall be conducted in such manner as not to interfere unreasonably with the operation of the Business. - 21 - 26 4.5. Books and Records; Personnel. (a) For a period of ten years after the Closing Date, Buyer shall not dispose of or destroy, or transfer to any place outside the United States, any of the existing business records and files of Sellers which are transferred in connection herewith without first offering to turn over possession thereof to ALAC by written notice to ALAC at least 30 days prior to the proposed date of such disposition or destruction. (b) Buyer shall allow ALAC and its agents access to all business records and files of Sellers which are transferred in connection herewith, during normal working hours at the principal places of business of Sellers or at any location where such records are stored, and ALAC shall have the right, at its own expense, to make copies of any such records and files; provided, however, that any such access or copying shall be had or done in such a manner so as not to interfere unreasonably with the normal conduct of the Business. (c) At ALAC's request and expense, including reasonable compensation for the time devoted by Buyer's employees, agents, officers or directors, Buyer shall provide reasonable assistance to Sellers and ALAC in resolving disputes with third parties relating to the Assets or the Business in respect of all periods prior to the Closing originating in, or with respect to, periods prior to the Closing. Such disputes could include, but would not be limited to, tax audits, environmental issues, commercial liability claims or similar controversies in which Buyer, or Sellers' former records, could be of assistance in reaching resolution. 4.6. Excluded Liabilities. Each of Sellers agrees that it will promptly pay and discharge when due the Excluded Liabilities retained by Sellers, provided that Sellers shall have the right to contest in good faith any of such Excluded Liabilities and to assert all rights, remedies and defenses it may have with respect to the Excluded Liabilities. Nothing contained in this Section 4.6 is intended or shall be construed as granting or creating any right or cause of action in any person or entity whatsoever that is not a party to this Agreement. 4.7. Employee Plans and Other Matters. (a) Buyer shall offer to employ each Employee who is actively at work (or on approved leave) or who has recall rights or rights to re-employment of any kind on the Closing Date (collectively, the "Transferred Employees") on terms and conditions which, for a period of ninety days following the Closing Date, shall be, in the aggregate, substantially similar to those which apply to such Employee's employment by Sellers immediately prior to the Closing Date; provided, however, that Buyer shall retain the right to terminate the employment of any Transferred Employee at any time, subject to the requirements of any applicable employment agreement, collective bargaining agreement or Law. Effective as of the Closing Date, Buyer will make arrangements for pension, retirement, insurance, health, welfare and other employee benefit plans, policies, programs and practices that provide benefits to the Transferred Employees and their covered dependents (collectively, the "Participants") which, for a period of ninety days following the Closing Date, shall be, in the aggregate, substantially similar to those provided by - 22 - 27 Sellers for the Participants immediately prior to the date hereof. Buyer shall take, or shall cause to be taken, all action necessary (including the adoption of plans, insurance contracts or board of directors resolutions) to provide such employee benefit plans and coverage for the Transferred Employees effective as of the Closing Date (the "Buyer Plans") as provided in this Section 4.7. Buyer shall credit such Transferred Employees under the Buyer Plans with all years of service with Sellers and any ERISA Affiliate to the extent and for the purposes such service was credited under each of the plans listed on Schedules 2.15(a) or (b) hereto (the "Seller Plans") prior to the date hereof, including without limitation, where applicable, for purposes of eligibility to participate in, vesting or accrual of benefits under any Buyer Plan except that Buyer shall not be required to credit such service for the accrual of benefits under any Buyer Plan which is an "employee pension benefit plan," as defined in Section 3(2) of ERISA. Without limiting the generality of the foregoing, Buyer shall give full credit to each Transferred Employee for all service with or recognized by Sellers and any ERISA Affiliate for all purposes (including, without limitation, the amount of benefits payable) under Buyer's (or its Affiliate's) vacation pay plan or policy and under the severance plan to be maintained by Buyer or its Affiliates in accordance with Section 4.7(b). Health benefits provided by Buyer pursuant to this Section 4.7(a) shall not be subject to any waiting period, insurability requirement or preexisting condition requirement. (b) In the event that any Transferred Employee, whose terms and conditions of employment are not governed by a collective bargaining agreement or employment contract, is discharged by Buyer within six (6) months after the Closing Date, Buyer shall make payments to such discharged Transferred Employee in a manner consistent with the level of severance and other benefits (if any) that would have been provided to such Person under the severance practices of Sellers and its ERISA Affiliates as set forth in Schedules 2.15(a) and (b), regardless of whether such plan becomes effective as a result of the transactions contemplated by this Agreement. (c) Each of Sellers agrees that, from and after the Closing, it shall retain responsibility for, and the term Excluded Liabilities shall include, all health, welfare and severance claims of the Participants under the Seller Plans, including (without limitation) all health and medical, short- and long-term disability, sick pay, life and accident insurance, severance and workers' compensation claims, incurred prior to the Closing Date under the Seller Plans or incurred at any time under any other compensation or benefit plan, program or statutory scheme not listed on Schedule 2.15(a) or 2.15(b) hereto. Buyer shall assume responsibility for, and the term Assumed Liabilities shall include, all health, welfare and severance claims incurred by the Participants, including (without limitation) all health, medical, short- and long-term disability, sick pay, life and accident insurance, severance and workers' compensation claims, incurred from and after the Closing under the Buyer Plans. (d) Effective as of the Closing Date, Buyer shall assume and discharge Sellers' liabilities and obligations under the collective bargaining agreements applicable to any Employee to the extent first arising on or after the Closing Date. (e) Buyer agrees to assume responsibility for, and the term Assumed Liabilities shall include, all obligations first arising from and after the Closing under the executive contracts - 23 - 28 listed on Schedule 4.7(e)(i) hereto. Seller agrees to retain responsibility for, and the term Excluded Liabilities shall include, all obligations under the retention bonus agreements listed on Schedule 4.7(e)(ii) hereto. (f) All assets of, under or associated with the Benefit Plans existing as of the Closing shall be Excluded Assets and all liabilities of, under or associated with the Benefit Plans existing as of the Closing shall be Excluded Liabilities. (g) If the Closing Date does not coincide with the last day of the pay period applicable to one or more Transferred Employees, (i) Buyer shall pay or cause to be paid (as a payroll agent for Sellers and not as an employer) all cash compensation payable by Sellers or the Subsidiaries to each such Transferred Employee for the partial pay period including the Closing Date, (ii) Buyer shall withhold, deduct or pay or cause to be paid (as a payroll agent for Sellers and not as an employer) all amounts required to be withheld from, deducted from or paid by an employer with respect to such cash compensation and (iii) the Purchase Price under Section 1.2 shall be reduced by the sum of all amounts paid or caused to be paid by Buyer pursuant to this Section 4.7(g). As soon as practicable after the Closing Date, Sellers shall provide Buyer all information necessary for Buyer properly to make all payments required pursuant to this Section 4.7(g). 4.8. Insurance Policies. (a) All insurance coverage respecting the Business and the Assets is maintained under insurance policies of ALAC and from and after the Closing the Business and the Assets will no longer be covered by such insurance policies and Buyer acknowledges and agrees that it shall have sole responsibility for obtaining appropriate insurance with respect to the Business and the Assets from and after the Closing. (b) From and after the Closing, to the extent any of the Assumed Liabilities assumed by Buyer pursuant to this Agreement is paid, discharged or otherwise provided for by Buyer, which liability is covered by any insurance contract or similar agreement to which ALAC is a party, ALAC shall make available to Buyer the benefits of ALAC's rights under any such contract or agreement, to the full extent permitted by such contract or agreement and funds received by ALAC in connection therewith shall be promptly paid over to Buyer in an amount not in excess of the amount of such liability that is paid, discharged or otherwise provided for by Buyer. 4.9. Prorations; Agreement as to Other Adjustments. Unless otherwise specified in this Agreement, all income, expenses and costs related to the real and personal property constituting part of the Assets (the "Property") shall be prorated, as follows: (a) All estimated ad valorem real property taxes on the Property to become due for the fiscal year 1997, regardless of the fiscal year of the taxes in question, shall be prorated on a calendar year basis. Sellers shall pay that fraction of such taxes the denominator of which shall - 24 - 29 be 365 and the numerator of which shall be the number of days in the current calendar year which shall have passed as of the midnight of the date immediately prior to the Closing Date, and Buyer shall pay the remaining portion of such taxes. Such taxes shall be estimated using the valuation for the property and the tax rate effective for the fiscal year beginning January 1, 1997. (b) All assessments or installments thereof due for the year 1997 shall be prorated on a calendar year basis in accordance with Section 4.9(a) hereof. All assessments or installments thereof which are attributable to periods following the Closing Date shall become a Lien on the Property at the Closing Date or thereafter shall be the responsibility of and be paid by Buyer. (c) To the extent that the amounts of any of the above items shall not be available for exact proration as of the Closing, they shall be computed and settled as part of the determination of any amounts owing between Buyer and Sellers pursuant to Section 1.3(e) hereof. (d) The parties hereto recognize that, in addition to the adjustments provided for elsewhere in this Agreement, there may well be other matters which should properly be adjusted or prorated as of the Closing Date. Accordingly, each of the parties hereto agrees to use its best efforts to work out any such matters and to resolve them in good faith consistent with the provisions of this Agreement. (e) Notwithstanding the foregoing, no prorations or adjustments shall be made under this Section 4.9 in respect of any of the Assumed Liabilities. 4.10. Assignment of Name. At the Closing, Sellers will deliver to Buyer a written assignment, in the form of Exhibit 4.10 hereto (the "Trademark Assignment"), evidencing their assignment to Buyer or to any parent, subsidiary, affiliate or associate of Buyer, or any successor or assign thereof, of all of Sellers' rights to the name "Bowen Tools", together with any trade marks, logos or any variants thereof, and such other names and marks relating to the operation of the Business or the Assets as are designated in Schedule 2.13 hereto (the "Trademarks"). Each of Sellers agrees that from and after the Closing Date, Sellers and their respective affiliates will not use or have the right to use Trademarks in the operation of any business in any geographic area. At or following the Closing, each of Sellers will execute such consents and waivers as may be necessary or appropriate in order that Buyer may qualify to do business in any state using Trademarks. Upon Closing, each of Sellers shall amend its Certificate of Incorporation to change its name to a name which does not include the name "Bowen Tools". 4.11. Transfer Tax Obligations. Sellers shall be responsible for payment of any Taxes imposed on or in connection with the transfer of the Assets to Buyer hereunder, including, without limitation, any such sales and use Taxes, value added Taxes, real property title transfer Taxes, securities transfer Taxes and stamp Taxes. Sellers agree to pay whatever such Taxes are ultimately determined to be due, and to indemnify Buyer for any liability for such Taxes (including penalties, additions to tax and interest thereon) imposed on or in connection with the transfer of the Assets to Buyer hereunder. At Sellers' request and expense, including reasonable compensation for the - 25 - 30 time devoted by Buyer's employees, agents, officers and directors, Buyer shall timely provide to Sellers all appropriate certificates evidencing exemption from sales, use or other similar transfer Taxes and take such other action as Sellers may reasonably request in order to utilize all available exemptions, deductions and credits that may be available to reduce the amount of such Taxes payable by Sellers. Schedule 4.11 hereto sets forth the jurisdictions in which Buyer or its affiliates shall be required to qualify as a foreign corporation authorized to do business in such jurisdictions or make such other filings as may be necessary to achieve the results set forth in the preceding sentence. Buyer shall indemnify and hold harmless Sellers and ALAC from any additional Taxes paid or other costs incurred by Sellers or ALAC solely as a result of the failure of Buyer or its affiliates to comply with its obligations under this Section 4.11. 4.12. Buyer's Assumption of Liabilities. Buyer agrees to pay and discharge the Assumed Liabilities and to assume and perform all of the obligations under the terms of any contract or agreement assigned to Buyer as part of the Assets in accordance with the terms and conditions of such contract or agreement, provided that Buyer shall be entitled to assert all rights, remedies and defenses that either of Sellers or Buyer may have with respect to the performance of such obligations. 4.13. Patent Assignment. Each of Sellers will execute and deliver to Buyer at the Closing a Patent Assignment in the form of Exhibit 4.13 hereto. 4.14. Allocation of Purchase Price. The parties agree that the consideration for the sale of the Assets, consisting of the Purchase Price to be paid in accordance with Section 1.2 hereof, the assumption of the Assumed Liabilities and all other capitalizable costs, shall be allocated in accordance with Section 1060 of the Code as agreed upon by the parties prior to the Closing. 4.15. Best Efforts. Upon the terms and subject to the conditions hereof, each of the parties hereto agrees to use its best efforts to take, or cause to be taken, all 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 shall use its best efforts to promptly obtain all waivers, permits, consents and approvals and to effect all registrations, fillings and notices with or to third parties or governmental or public bodies or authorities which are in the opinion of Sellers necessary or desirable in connection with the transactions contemplated by this Agreement, including, without limitation, filings to the extent required under the HSR Act. 4.16. ALAC Guarantee. ALAC will guarantee for the benefit of Buyer each of Sellers' obligations under this Agreement and the Collateral Agreements, such guaranty to be in the form attached hereto as Exhibit 4.16. 4.17. Schedules and Exhibits. From time to time prior to the Closing, Sellers will promptly supplement or amend the Schedules and Exhibits to this Agreement with respect to any matter hereafter arising which, if existing or occurring at the date of this Agreement, would have been required to be set forth or described in the Schedules or Exhibits to this Agreement. No such supplement or amendment of the Schedules or Exhibits to this Agreement made pursuant to this - 26 - 31 Section 4.17 which purports to correct any prior representation or cure the breach of any prior warranty made in this Agreement shall be deemed to correct such representation or cure the breach of such warranty for purposes of Section 5.1 and Article VIII of this Agreement, unless specifically agreed to in writing by the Buyer. ARTICLE V CONDITIONS TO OBLIGATIONS OF BUYER TO CONSUMMATE THE TRANSACTION The obligations of Buyer under this Agreement to be performed at the Closing shall be subject to the satisfaction, or the waiver in writing by Buyer, on or prior to the Closing Date of the following conditions: 5.1. Accuracy of Representations and Warranties; Compliance with Covenants. The representations and warranties of Sellers and ALAC contained in this Agreement shall be true and correct in all material respects on the Closing Date with the same force and effect as though such representations and warranties had been made on and as of the Closing Date and all of the agreements of Sellers to be performed on or before the Closing Date pursuant to the terms hereof shall have been performed in all material respects. Buyer shall have received a certificate, dated the Closing Date, signed by an appropriate officer of each of Sellers and of ALAC, certifying that the conditions specified in this Section 5.1 have been fulfilled. 5.2. Financial Results. Buyer shall have received Sellers' unaudited statement of income for the year ended December 31, 1996 accompanied by a certificate in the form attached hereto as Exhibit 5.2 dated as of the Closing Date and signed by an executive officer of each of Sellers and ALAC, and Sellers' earnings before interest, income taxes, depreciation and amortization for such calendar year as reflected in such income statement shall be equal to or greater than $5,040,000. 5.3. No Injunction. No judgment, order or decree shall have been rendered in any Litigation which has the effect of (a) enjoining, restraining or prohibiting the consummation of the transactions contemplated by this Agreement or any Collateral Agreement, or (b) enjoining, restraining or prohibiting the transfer of any of the Assets from Sellers to Buyer or requiring Buyer to hold any assets separately from other assets owned or operated by Buyer. 5.4. Opinion of Counsel. Buyer shall have received the favorable opinion of Coudert Brothers, counsel to Sellers and ALAC, dated the Closing Date, substantially in the form of Exhibit 5.4 hereto. 5.5. Consents. All consents and approvals necessary to the consummation of the transactions contemplated hereby shall have been obtained, and any waiting period (and any - 27 - 32 extension thereof) applicable to the consummation of the transactions contemplated hereby under the HSR Act shall have expired or been terminated. 5.6. No Material Adverse Effect. Except as described or contemplated herein or in the Schedules, there shall have been no uninsured damage or destruction to, or change in, the Assets or the Business since the date of the Interim Financial Statements which would have a Material Adverse Effect, other than as a result of general economic conditions or other conditions affecting the industry in which the Business operates. 5.7. Resolutions of the Boards of Directors. Buyer shall have received from each of Sellers and ALAC certified copies of the resolutions of their respective Boards of Directors (or, in the case of ALAC, the Executive Committee of its Board of Directors) approving this Agreement and the Collateral Agreements and authorizing the consummation of the transactions contemplated hereby and thereby. 5.8. Delivery of Bills of Sale. There shall have been delivered to Buyer by Sellers and the ALAC FSC bill(s) of sale, dated the Closing Date, sufficient to transfer to Buyer the Assets other than the portion thereof consisting of Real Property and in the form of Exhibit 1.1(b)(i) hereto. 5.9. Delivery of Real Property Deeds. There shall have been delivered to Buyer by the Operating Company deeds, each dated the Closing Date, in the form required by Section 1.1(b)(ii) hereof which shall be sufficient to transfer to Buyer the Real Property and shall be in recordable form reasonably acceptable to Buyer. 5.10. Actual or Threatened Actions. There shall not be any actual or threatened action or proceeding by or before any court or other individual, administrative or Governmental Entity which seeks to restrain, prohibit or invalidate the transactions contemplated by this Agreement, which could materially adversely affect the Business after the Closing Date, or which could deny Buyer any of the benefits of the transactions contemplated hereby. 5.11. Insurable Title to Real Property. Buyer will have received evidence reasonably satisfactory to it that a reputable title insurance company has issued at ordinary rates its title insurance policy effective the Closing Date with respect to the Real Property located in the United States and included in the Assets, insuring in the case of each such property such title as is reflected in the title reports referenced in Exhibit 5.11 hereto and previously delivered to Buyer, and subject to any existing or potential exceptions to such title as set forth in such title report provided such state of title does not render title to a particular property unmarketable in any material respect or prohibit or impair the present use of such property (the "Title Insurance"). 5.12. Transfer Taxes. Buyer shall have received properly completed all required real estate transfer tax returns duly executed by Sellers in form reasonably acceptable to Buyer (collectively, the "Transfer Tax Returns"); provided, however, that Buyer shall reasonably - 28 - 33 cooperate in the completion, execution and filing of such returns to the extent that such cooperation is necessary for such completion, execution and filing. 5.13. Assignment and Assumption of Agreements. Each of Sellers shall have executed and delivered to Buyer sufficient instruments of assignment respecting the agreements constituting part of the Assets to which Buyer is a party. 5.14. Allocation of Purchase Price. The parties shall have agreed upon an allocation of the Purchase Price in accordance with Section 4.14 hereof. 5.15. Reliance Letters. Sellers shall have requested and, if received by Sellers, Sellers shall have delivered to Buyer the reliance letters in the form set forth as Exhibit 5.15 hereto from the environmental consultants who have previously provided environmental assessment reports in connection with the Real Property constituting a part of the Assets. ARTICLE VI CONDITIONS TO OBLIGATIONS OF SELLERS AND ALAC TO CONSUMMATE THE TRANSACTION The obligations of each of Sellers and ALAC under this Agreement to be performed at the Closing shall be subject to the satisfaction, or the waiver in writing by Sellers and ALAC, on or prior to the Closing of the following conditions: 6.1. Accuracy of Representations and Warranties; Compliance with Covenants. The representations and warranties of Buyer contained in this Agreement shall be true and correct in all material respects on the Closing Date with the same force and effect as though such representations and warranties had been made on and as of the Closing Date and all of the agreements of Buyer to be performed on or before the Closing Date pursuant to the terms hereof shall have been performed in all material respects. Sellers and ALAC shall have received a certificate, dated the Closing Date, signed by an appropriate officer of Buyer, certifying that the conditions specified in this Section 6.1 have been fulfilled. 6.2. No Injunction. No judgment, order or decree shall have been rendered in any Litigation which has the effect of (a) enjoining the consummation of the transactions contemplated by this Agreement or any Collateral Agreement, or (b) enjoining the transfer of any of the Assets from Sellers to Buyer or requiring Sellers or ALAC to hold any Assets separately from other assets owned or operated by any such party. 6.3. Opinion of Counsel. Sellers and ALAC shall have received the favorable opinion of Jones, Day, Reavis & Pogue, counsel to Buyer, dated the Closing Date, substantially in the form of Exhibit 6.3 hereto. - 29 - 34 6.4. Consents. All consents and approvals necessary to the consummation of the transactions contemplated hereby shall have been obtained, and any waiting period (and any extension thereof) applicable to the consummation of the transactions contemplated hereby under the HSR Act shall have expired or been terminated. 6.5. Allocation of Purchase Price. The parties shall have agreed upon an allocation of the Purchase Price in accordance with Section 4.14 hereof. ARTICLE VII TERMINATION PRIOR TO CLOSING 7.1. Termination. This Agreement may be terminated and abandoned: (a) At any time prior to the Closing, by the mutual consent in writing of the parties hereto; (b) At any time prior to the Closing, by either Buyer, on the one hand, or ALAC and Sellers, on the other hand, by notice in writing to the other if the Closing shall not have occurred on or before March 31, 1997; (c) At any time prior to the Closing, by either Buyer, on the one hand, or ALAC and Sellers, on the other hand, by notice in writing to the other if any court of competent jurisdiction in the United States or other United States governmental body shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and nonappealable; or (d) By Buyer if, prior to 5:00 p.m., New York City time, on January 20, 1997, Buyer shall have notified Sellers and ALAC in writing that Buyer has not obtained sufficient financing, or commitments in respect thereof, to consummate the transactions contemplated hereby; provided, however, that it is acknowledged and agreed to by Buyer that the right to terminate this Agreement pursuant to this Section 7.1(d) shall expire and Buyer shall have no right to terminate this Agreement pursuant to this Section 7.1(d) if Buyer has not provided the written notice described in this Section 7.1(d) prior to 5:00 p.m., New York City time, on January 20, 1997. - 30 - 35 ARTICLE VIII INDEMNIFICATION 8.1. Scope of Indemnity. (a) Each of Sellers and ALAC will, and hereby does, jointly and severally, indemnify, defend and hold harmless Buyer and its affiliates and associates and the directors, officers, employees and agents of any of the foregoing (collectively, the "Buyer's Indemnified Parties") against and in respect of any liability, cost, expense, damage or deficiency sustained by any of the Buyer's Indemnified Parties, including without limitation, investigation, remediation and related expenses, as a result of any judgments or as the result of any other liabilities of, or claims made against, any of the Buyer's Indemnified Parties of any nature, whether accrued, absolute, contingent or otherwise, which (i) consist of or relate to the Excluded Liabilities or Taxes in respect of the Assets, the assets of the Subsidiaries or the Business for all periods prior to the Closing Date; (ii) arise out of (A) the breach of any representation or warranty of Sellers or ALAC herein or in any of the Collateral Agreements, other than the representations contained in Section 2.10 or (B) the non-fulfillment of any covenant or undertaking of Sellers or ALAC contained in this Agreement or any of the Collateral Agreements; or (iii) arise out of any failure to comply with any "bulk sales" laws of any state applicable to the transactions contemplated by this Agreement; provided, however, that (x) any claim by any of the Buyer's Indemnified Parties under Section 8.1(a)(ii)(A) shall be payable only in the event that the accumulated amount of claims of all of the Buyer's Indemnified Parties under Section 8.1(a)(ii)(A) shall exceed $250,000, (y) at such time as such aggregate shall exceed $250,000, Sellers and ALAC shall be liable hereunder only for such excess and (z) Sellers and ALAC collectively shall not be liable in the aggregate for any amounts in excess of $15,000,000 under Section 8.1(a)(ii)(A). (b) Buyer will, and hereby does indemnify, defend and hold harmless each of Sellers, ALAC and their respective affiliates and associates and the directors, officers, employees and agents of any of the foregoing (collectively, the "Sellers' Indemnified Parties", and together with the Buyer's Indemnified Parties, the "Indemnified Parties") against and in respect of any damage, liability, cost, expense or deficiency sustained by any of the Sellers' Indemnified Parties as the result of any judgments or as the result of any other liabilities of, or claims made against, any of the Sellers' Indemnified Parties of any nature, whether accrued, absolute, contingent or otherwise, which (i) consist of or relate to the Assumed Liabilities; or (ii) arise out of (A) the breach of any representation or warranty of Buyer herein or in any of the Collateral Agreements or (B) the non-fulfillment of any covenant or undertaking of Buyer contained in this Agreement or any of the Collateral Agreements; provided, however, that (x) any claim by any of the Sellers' Indemnified Parties under Section 8.1(b)(ii)(A) shall be payable only in the event that the accumulated amount of claims of all of the Sellers' Indemnified Parties under Section 8.1(b)(ii)(A) shall exceed $250,000, (y) at such time as such aggregate shall exceed $250,000, Buyer shall be liable hereunder only for such excess and (z) Buyer shall not be liable in the aggregate for any amounts in excess of $15,000,000 under Section 8.1(b)(ii)(A). - 31 - 36 8.2. Claims and Litigation. In the event that any person or entity not a party to this Agreement shall make any demand or claim, or file or threaten to file any lawsuit, which demand, claim or lawsuit may result in any liability, damage or loss to any of the Indemnified Parties for which such Indemnified Party may seek indemnity from the relevant indemnifying party hereunder, then, the Indemnified Party shall give prompt written notice to such indemnifying party of such demand, claim or lawsuit, and such indemnifying party shall have the option at its cost and expense, to join in the defense of any such demand, claim or lawsuit, and no such claim shall be settled or compromised without the consent of such indemnifying party, unless such indemnifying party shall fail to respond within ten (10) days after receipt of such notice of any such demand, claim or lawsuit, or shall notify the Indemnified Party that it does not intend to defend such demand, claim or lawsuit. Nothing contained in this Section 8.2 shall prevent any of the Indemnified Parties from taking such action as may be necessary prior to the end of the ten (10) day period provided for above to prevent a default judgment from being entered. 8.3. Making of Claims. A claim for indemnity pursuant to this Article VIII may only be made by an Indemnified Party by written notice to the relevant indemnifying party. Such written notice shall set forth in reasonable detail the basis upon which such claim for indemnity is made. 8.4. Attorneys' Fees, Interest, Penalties, Costs and Expenses. Each of the Indemnified Parties' right of indemnity hereunder shall extend to all interest, penalties, costs and expenses, including reasonable attorneys' fees, incident to any of the matters covered by Section 8.1 hereof, subject to the limitations on liability set forth in Section 8.1 hereof. 8.5. Survival of Representations and Warranties and Indemnities. The indemnification obligations and the covenants of Sellers and Buyer shall survive the Closing or any termination of this Agreement as set forth herein. The representations and warranties of Buyer and Sellers shall, notwithstanding any investigation heretofore or hereafter made by any party hereto, survive the Closing Date for a period of two (2) years from and after the Closing Date, except that (i) the representations and warranties contained in Section 2.10 shall survive for the applicable statute of limitations periods plus sixty (60) days and (ii) the representations and warranties contained in Section 2.11 and Section 2.17 shall survive for a period of five (5) years after the Closing Date. The indemnification obligations contained in this Article VIII shall survive the Closing for the applicable survival period associated with the representations and warranties related thereto, in the case of indemnification obligations with respect to Taxes or "bulk sales" laws, the applicable statute of limitations plus a period of six (6) months and the indemnification obligations with respect to the Excluded Liabilities, shall survive the Closing; provided, however, that in the event that an Indemnified Party learns of the failure of any of the representations and warranties or seeks indemnification pursuant to Section 8.1 and gives notice thereof to the relevant indemnifying party within the applicable survival period, such Indemnified Party shall be entitled to make its claim for indemnification hereunder at any time within six (6) months following the expiration of the applicable survival period. Notwithstanding anything else contained herein, any claim for indemnification asserted within such specified periods of survival shall be entitled to the indemnification obligations contained in this Article VIII. - 32 - 37 8.6. General Provisions. Any right to Indemnification under this Article VIII shall be (i) limited to the loss, liability or expenses (after giving effect to the present value, based on a discount rate equal to the short term applicable federal rate as determined by Section 1274(d) of the Code at that time, of any Tax benefit realized or unrealized by the Indemnified Party in connection with or as a result of the incurrence of the loss, liability or expense for which the indemnity payment is to be made) incurred or suffered and shall not include special, indirect, punitive or consequential damages incurred by the Indemnified Party, (ii) net of insurance proceeds actually received by the Indemnified Party and (iii) in the case of Buyer's Indemnified Parties, net of any reserves or provisions for loss, liability or expense on the Closing Date Balance Sheet applicable thereto. Any recovery, as limited by the preceding sentence, is further subject to the monetary limitations specified in Section 8.1. If the amount to be netted hereunder from any payment by the Indemnifying Party of any amount otherwise required to be paid pursuant to this Article VIII shall be undetermined, the Indemnified Party shall repay to the Indemnifying Party, promptly after such determination, any amount that the Indemnifying Party would not have had to pay pursuant to this Article VIII had such determination been made at the time of such payment. 8.7. Tax Treatment. Any indemnity payment by Buyer under this Agreement shall be treated as an increase in the Purchase Price for tax purposes. Any indemnity payment by Sellers under this Agreement shall be treated as a decrease in the Purchase Price for tax purposes. ARTICLE IX MISCELLANEOUS 9.1. Entire Agreement. This Agreement (including the Exhibits and Schedules hereto) and the Collateral Agreements shall supersede all prior agreements and understandings, both written and oral, between the parties hereto with respect to the subject matter hereof, and no party shall be liable or bound to the other in any manner by any warranties or representations not set forth herein or contemplated hereby. 9.2. Successors and Assigns. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties hereto. This Agreement may not be assigned by any party without the prior written consent of each other party hereto and any purported assignment in violation of this Section 9.2 shall be void. Notwithstanding the foregoing, the parties agree that Buyer may assign its rights hereunder to one or more wholly-owned subsidiaries of Buyer provided that Buyer shall remain fully and completely responsible for its obligations set forth herein notwithstanding any such assignment. 9.3. Identical Counterparts. This Agreement may be executed in two or more counterparts, each of which shall for all purposes be deemed to be an original and all of which shall constitute the same instrument. - 33 - 38 9.4. Headings. The headings of the Articles and Sections of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction hereof. 9.5. Use of Certain Terms. As used in this Agreement, the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section, paragraph or other subdivision. 9.6. Modification and Waiver. Any of the terms or conditions of this Agreement may be waived in writing at any time by the party which is entitled to the benefits thereof, and this Agreement may be modified or amended at any time by the parties hereto. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by all of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 9.7. Schedules, Etc. All Exhibits and Schedules hereto and the documents, certificates and instruments required to be delivered simultaneously herewith or at or prior to the Closing are expressly made a part of this Agreement as fully as though completely set forth herein, and all references to this Agreement herein or in any such Exhibits, Schedules, documents, certificates or other instruments shall be deemed to refer to and include all such Exhibits, Schedules, documents, certificates and instruments. 9.8. Notices. Any notice, request, instruction or other document to be given hereunder by any party hereto to any other party shall be in writing and delivered personally, sent by registered or certified mail (airmail if international), postage prepaid, or sent by internationally recognized air-courier service. If to Buyer, to: IRI International Corporation First Interstate Bank Plaza 1000 Louisiana, Suite 5900 Houston, Texas 77002 Attn: Munawar H. Hidayatallah, Executive Vice President -- Corporate Development with copies to: Jones, Day, Reavis & Pogue 599 Lexington Avenue New York, New York 10022 Attn: William F. Henze II, Esq. - 34 - 39 If to Sellers or ALAC at the following address: Air Liquide America Corporation 2700 Post Oak Boulevard Houston, Texas 77056 Attn: Vice President, Legal and Corporate Affairs with a copy to: Coudert Brothers 1114 Avenue of the Americas New York, New York 10036 Attn: Andrew S. Hedden, Esq. or at such other address for a party as shall be specified by like notice. Any notice which is delivered personally in the manner provided herein shall be deemed to have been duly given to the party to whom it is directed upon actual receipt by such party. Any notice which is addressed and mailed in the manner herein provided shall be conclusively presumed to have been given to the party to whom it is addressed at the close of business, local time of the recipient, on the third day after the day it is so placed in the mail. Any notice which is addressed and sent by internationally recognized air-courier in the manner herein provided shall be conclusively presumed to have been given to the party to whom it is addressed at the close of business, local time of the recipient, on the fourth day after the day it is delivered to such air-courier. 9.9. Governing Law. The parties hereby agree that this Agreement shall be construed, enforced and governed by the laws of the State of New York without regard to applicable principles of conflict of laws. 9.10. Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future Laws, such provision shall be fully severable, and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Agreement and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Agreement. 9.11. Expenses. Except as otherwise specifically provided herein, whether or not the transactions contemplated by this Agreement are consummated, all legal, accounting and other costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby, including without limitation amounts payable to any agents, brokers or finder and whether or not referred to in Section 2.18 or Section 3.5, shall be paid by the contracting party or parties incurring such expenses. - 35 - 40 9.12. Third Party Beneficiaries. No individual, firm, corporation, partnership or other entity shall be a third-party beneficiary of the representations, warranties, covenants, and agreements made by Buyer, ALAC and Sellers herein. 9.13. Exclusive Remedies. The parties hereto agree that the indemnification provisions contained in Article VIII hereof shall be the exclusive remedies of the parties with respect to any breach or violation of this Agreement other than any claim for actual fraud or intentional misrepresentation. 9.14. Number and Gender of Words. Whenever herein the singular number is used, the same shall include the plural where appropriate, and words of any gender shall include each other gender where appropriate. 9.15. Actions. Each of the parties hereto agrees that any action or dispute between them involving this Agreement and transactions contemplated hereby shall be asserted and maintained in any court of competent subject matter jurisdiction located in the State of New York. 9.16. Nondisclosure. Buyer and Sellers and ALAC agree that the Confidentiality Agreement previously executed by the parties shall continue in full force and effect, binding on all parties hereto, and shall survive the Closing or any termination of this Agreement. 9.17. Acquisition Proposals. During the period (the "Pre-Closing Covenant Period") between the date hereof and the earliest to occur of (a) the Closing and (b) the termination of this Agreement, Sellers and ALAC will not, and each of Sellers and ALAC will instruct their respective officers, directors, employees, agents, legal or financial advisors or other representatives not to, solicit, initiate or consider any proposals or offers from any person or entity relating to, or enter into (or continue) any discussions, or deliver any information, concerning any acquisition or purchase of all or a material amount of the assets of, or any securities of, or any merger, consolidation or other business combination with, any of the Assets (any such transaction, a "Competitive Transaction"). During the Pre-Closing Covenant Period, each of Sellers and ALAC will promptly notify Buyer in the event of any proposal or offer in respect of a Competitive Transaction. 9.18. Tax Agreements. All agreements, if any, between any of the Subsidiaries, on the one hand, and ALAC, Sellers or any of their affiliates, on the other hand, regarding the allocation or payment of Taxes or amounts in lieu of Taxes shall be deemed terminated at and as of the Closing. - 36 - 41 IN WITNESS WHEREOF, each of the parties hereto has signed this Agreement in counterparts all as of the date first above written. BOWEN TOOLS, INC.-DELAWARE By:__________________________________ Name: Title: BOWEN TOOLS, INC. By:__________________________________ Name: Title: AIR LIQUIDE AMERICA CORPORATION By:__________________________________ Name: Title: IRI INTERNATIONAL CORPORATION By:__________________________________ Name: Title: By:__________________________________ Name: Title: - 37 - 42 EXHIBIT 5.2 [Form of Certificate] CERTIFICATE The attached unaudited income statement for the year ended December 31, 1996 (the "Income Statement"), sets forth the accounts of Bowen Tools, Inc.-Delaware, its subsidiaries, and its portion of Big Three International, Inc. (a foreign sales corporation). To the best of our knowledge and belief, the Income Statement presents fairly the results of operations for the year ended December 31, 1996 in accordance with United States generally accepted accounting principles (GAAP) consistently applied except: (i) Bowen Tools, Inc.-Delaware did not adopt Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("FAS 109"), which is required in order to conform with GAAP, (ii) the Income Statement does not contain all financial statements or footnote disclosures required by GAAP and (iii) the Income Statement has been prepared based on a first-in-first-out (FIFO) basis and does not include any adjustments under the last-in-first-out (LIFO) method of accounting for inventory. Physical inventory observations have been conducted on a consistent basis as of September 30, 1995 and September 30, 1996. Adjustments arising out of the preparation of the September 30, 1996 audited balance sheet that do not relate to the Income Statement period are not included therein. BOWEN TOOLS, INC.-DELAWARE By:________________________________________ Name: Title: BOWEN TOOLS, INC. By:________________________________________ Name: Title: AIR LIQUIDE AMERICA CORPORATION (as 100% shareholder of Bowen Tools, Inc.- Delaware) By:________________________________________ Name: Title: - 38 - EX-10.7 12 EQUITY INCENTIVE PLAN 1 IRI INTERNATIONAL CORPORATION EQUITY INCENTIVE PLAN 1. PURPOSE. The purpose of this Plan is to attract and retain qualified officers, directors and other key employees of, and consultants to, IRI International Corporation (the "Corporation") and its Subsidiaries and to provide such persons with appropriate incentives. The Corporation has adopted the Plan effective as of June 17, 1997, subject to the approval of the Corporation's shareholders, and unless extended by amendment in accordance with the terms of the Plan, no Option Rights will be granted hereunder after the tenth anniversary of such effective date. 2. DEFINITIONS. As used in this Plan, "BOARD" means the Board of Directors of the Corporation. "CODE" means the Internal Revenue Code of 1986, as amended from time to time. "COMMITTEE" means the Compensation Committee of the Board of Directors, as described in Section 10(a) of this Plan. "COMMON SHARES" means (i) shares of the Common Stock of the Corporation and (ii) any security into which Common Shares may be converted by reason of any transaction or event of the type referred to in Section 6 of this Plan. "DATE OF GRANT" means the date specified by the Committee on which a grant of Option Rights shall become effective, which shall not be earlier than the date on which the Committee takes action with respect thereto. "INCENTIVE STOCK OPTION" means an Option Right that is intended to qualify as an "incentive stock option" under Section 422 of the Code or any successor provision thereto. "MARKET VALUE PER SHARE" means the fair market value of the Common Shares as determined by the Committee from time to time. "NONQUALIFIED OPTION" means an Option Right that is not intended to qualify as a Tax-qualified Option. "OPTIONEE" means the person so designated in an agreement evidencing an outstanding Option Right. "OPTION PRICE" means the purchase price payable upon the exercise of an Option Right. 2 "OPTION RIGHT" means the right to purchase Common Shares from the Corporation upon the exercise of a Nonqualified Option or a Tax-qualified Option granted pursuant to Section 4 of this Plan. "PARTICIPANT" means a person who is selected by the Committee to receive benefits under this Plan and (i) is at that time an officer, director, or other key employee of, or consultant to, the Corporation or any Subsidiary or (ii) has agreed to commence serving in any such capacity. "RELOAD OPTION RIGHTS" means additional Option Rights automatically granted to an Optionee upon the exercise of Option Rights pursuant to Section 4(f) of this Plan. "RULE 16b-3" means Rule 16b-3, as promulgated and amended from time to time by the Securities and Exchange Commission under the Securities Exchange Act of 1934, or any successor rule to the same effect. "SUBSIDIARY" means a corporation, partnership, joint venture, unincorporated association or other entity in which the Corporation has a direct or indirect ownership or other equity interest; provided, however, that for purposes of determining whether any person may be a Participant for purposes of any grant of Incentive Stock Options, "Subsidiary" means any corporation in which the Corporation owns or controls directly or indirectly more than 50% of the total combined voting power represented by all classes of stock issued by such corporation at the time of the grant. "TAX-QUALIFIED OPTION" means an Option Right that is intended to qualify under particular provisions of the Code, including without limitation an Incentive Stock Option. 3. SHARES AVAILABLE UNDER THE PLAN. (a) Subject to adjustment as provided in Section 6 of this Plan, the number of Common Shares which may be issued or transferred upon the exercise of Option Rights shall not in the aggregate exceed 4,000,000 Common Shares, which may be Common Shares of original issuance or Common Shares held in treasury or a combination thereof. For the purposes of this Section 3(a): (i) Upon payment in cash of the benefit provided by any award granted under this Plan, any Common Shares that were covered by that award shall again be available for issuance or transfer hereunder. (ii) Upon the full or partial payment of any Option Price by the transfer to the Company of Common Shares or upon satisfaction of tax withholding obligations in connection with any such exercise or any other payment made or benefit realized under this Plan by the transfer or relinquishment of Common Shares, there shall be deemed to have been issued or transferred under this Plan only the net number of Common Shares actually issued or transferred by the Corporation less the number of Common Shares so transferred or relinquished. (b) Notwithstanding anything in Section 3(a) hereof, or elsewhere in this Plan, to the contrary, the aggregate number of Common Shares actually issued or -2- 3 transferred by the Corporation upon the exercise of the Incentive Stock Options shall not exceed the total number of Common Shares first specified in Section 3(a) hereof. (c) Notwithstanding any other provision of this Plan to the contrary, no Participant shall be granted Option Rights for more than 3,000,000 Common Shares during any three consecutive calendar years, subject to adjustment as provided in Section 6 of this Plan. 4. OPTION RIGHTS. The Committee may from time to time authorize grants to Participants of options to purchase Common Shares upon such terms and conditions as the Committee may determine in accordance with the following provisions: (a) Each grant shall specify the number of Common Shares to which it pertains. (b) Each grant shall specify an Option Price per Common Share, which may be equal to or greater or less than the Market Value per Share on the Date of Grant. (c) Each grant shall specify the form of consideration to be paid in satisfaction of the Option Price and the manner of payment of such consideration, which may include (i) cash in the form of currency or check or other cash equivalent acceptable to the Corporation, (h) nonforfeitable, unrestricted Common Shares, which are already owned by the Optionee, (iii) any other legal consideration that the Committee may deem appropriate, including without limitation any form of consideration authorized under Section 4(d) below, on such basis as the Committee may determine in accordance with this Plan and (iv) any combination of the foregoing. (d) Any grant of a Nonqualified Option may provide that payment of the Option Price may also be made in whole or in part in the form of Common Shares that are subject to risk of forfeiture or restrictions on transfer. Unless otherwise determined by the Committee on or after the Date of Grant, whenever any Option Price is paid in whole or in part by means of any of the forms of consideration specified in this Section 4(d), the Common Shares received by the Optionee upon the exercise of the Nonqualified Option shall be subject to the same risks of forfeiture or restrictions on transfer as those that applied to the consideration surrendered by the Optionee; provided, however, that such risks of forfeiture and restrictions on transfer shall apply only to the same number of Common Shares received by the Optionee as applied to the forfeitable or restricted Common Shares surrendered by the Optionee. (e) Any grant may, if there is then a public market for the Common Shares, provide for deferred payment of the Option Price from the proceeds of sale through a broker of some or all of the Common Shares to which the exercise relates. (f) Any grant may provide for the automatic grant to the Optionee of Reload Option Rights upon the exercise of Option Rights, including Reload Option Rights, for Common Shares or any other noncash consideration authorized under Sections 4(c) and -3- 4 (d) above; provided, however, that the term of any Reload Option Right shall not extend beyond the term of the Option Right originally exercised. (g) Successive grants may be made to the same Optionee regardless of whether any Option Rights previously granted to the Optionee remain unexercised. (h) Each grant shall specify the period or periods of continuous employment, or continuous engagement of the consulting services, of the Optionee by the Corporation or any Subsidiary that are necessary before the Option Rights or installments thereof shall become exercisable, and any grant may provide for the earlier exercise of the Option Rights in the event of a change in control of the Corporation or other similar transaction or event. (i) Option Rights granted pursuant to this Section 4 may be Nonqualified Options or Tax-qualified Options or combinations thereof. (j) Any grant of an Option Right may provide for the payment to the Optionee of dividend equivalents thereon in cash or Common Shares on a current, deferred or contingent basis, or the Committee may provide that any dividend equivalents shall be credited against the Option Price. (k) No Option Right granted pursuant to this Section 4 may be exercised more than 10 years from the Date of Grant. (l) Each grant shall be evidenced by an agreement, which shall be executed on behalf of the Corporation by any officer thereof and delivered to and accepted by the Optionee and shall contain such terms and provisions as the Committee may determine consistent with this Plan. 5. TRANSFERABILITY. (a) No Option Right granted under this Plan may be transferred by a Participant except by will or the laws of descent and distribution. Option Rights granted under this Plan may not be exercised during a Participant's lifetime except by the Participant or, in the event of the Participant's legal incapacity, by his guardian or legal representative acting in a fiduciary capacity on behalf of the Participant under state law and court supervision. Notwithstanding the foregoing, the Committee, in its sole discretion, may provide for the transferability of particular awards under this Plan so long as such provisions will not disqualify the exemption for other awards under Rule 16b-3, if such Rule is then applicable to awards under the Plan. (b) Any grant made under this Plan may provide that all or any part of the Common Shares that are to be issued or transferred by the Corporation upon the exercise of Option Rights shall be subject to further restrictions upon transfer. 6. ADJUSTMENTS. (a) The Committee may make or provide for such adjustments in the number of Common Shares covered by outstanding Option Rights, the Option Prices per Common Share applicable to any such Option Rights, and the kind of shares (including shares of another issuer) covered thereby, as the Committee may in good faith determine -4- 5 to be equitably required in order to prevent dilution or expansion of the rights of Participants that otherwise would result from (i) any stock dividend, stock split, combination of shares, recapitalization or similar change in the capital structure of the Corporation or (ii) any merger, consolidation, spin-off, spin-out, split-off, split-up, reorganization, partial or complete liquidation or other distribution of assets, issuance of warrants or other rights to purchase securities or any other corporate transaction or event having an effect similar to any of the foregoing. In the event of any such transaction or event, the Committee may provide in substitution for any or all outstanding awards under this Plan such alternative consideration as it may in good faith determine to be equitable under the circumstances and may require in connection therewith the surrender of all awards so replaced. Moreover, the Committee may on or after the Date of Grant provide in the agreement evidencing any award under this Plan that the holder of the award may elect to receive an equivalent award in respect of securities of the surviving entity of any merger, consolidation or other transaction or event having a similar effect, or the Committee may provide that the holder will automatically be entitled to receive such an equivalent award. The Committee may also make or provide for such adjustments in the maximum numbers of Common Shares specified in Section 3 of this Plan as the Committee may in good faith determine to be appropriate in order to reflect any transaction or event described in this Section 6. (b) If another corporation is merged into the Corporation or the Corporation otherwise acquires another corporation, the Committee may elect to assume under this Plan any or all outstanding stock options or other awards granted by such corporation under any stock option or other plan adopted by it prior to such acquisition. Such assumptions shall be on such terms and conditions as the Committee may determine; provided, however, that the awards as so assumed do not contain any terms, conditions or rights that are inconsistent with the terms of this Plan. Unless otherwise determined by the Committee, such awards shall not be taken into account for purposes of the limitations contained in Section 3 of this Plan. 7. FRACTIONAL SHARES. The Corporation shall not be required to issue any fractional Common Shares pursuant to this Plan. The Committee may provide for the elimination of fractions or for the settlement thereof in cash. 8. WITHHOLDING TAXES. To the extent that the Corporation is required to withhold federal, state, local or foreign taxes in connection with any payment made or benefit realized by a Participant or other person under this Plan, and the amounts available to the Corporation for the withholding are insufficient, it shall be a condition to the receipt of any such payment or the realization of any such benefit that the Participant or such other person make arrangements satisfactory to the Corporation for payment of the balance of any taxes required to be withheld. At the discretion of the Committee, any such arrangements may without limitation include voluntary or mandatory relinquishment of a portion of any such payment or benefit or the surrender of outstanding Common Shares. The Corporation and any Participant or such other person may also make similar arrangements with respect to the payment of any taxes with respect to which withholding is not required. 9. CERTAIN TERMINATIONS OF EMPLOYMENT OR CONSULTING SERVICES, HARDSHIP, AND APPROVED LEAVES OF ABSENCE. Notwithstanding any other provision of this Plan to the -5- 6 contrary, in the event of termination of employment or consulting services by reason of death, disability, normal retirement, early retirement with the consent of the Corporation, termination of employment or consulting services to enter public or military service with the consent of the Corporation or leave of absence approved by the Corporation, or in the event of hardship or other special circumstances, of a Participant who holds an Option Right that is not immediately and fully exercisable, the Committee may take any action that it deems to be equitable under the circumstances or in the best interests of the Corporation, including without limitation waiving or modifying any limitation or requirement with respect to any award under this Plan. 10. ADMINISTRATION OF THE PLAN. (a) This Plan shall be administered by the Compensation Committee of the Board, which shall be composed of not less than two members of the Board. At any time that awards under the Plan are subject to Rule 16b-3, each member of the Compensation Committee shall be a "non-employee director" within the meaning of such Rule. In addition, at any time that the Corporation is subject to Section 162(m) of the Code, each member of the Compensation Committee shall be an "outside director" within the meaning of such Section. A majority of the Committee shall constitute a quorum, and the acts of the members of the Committee who are present at any meeting thereof at which a quorum is present, or acts unanimously approved by the members of the Committee in writing, shall be the acts of the Committee. (b) The interpretation and construction by the Committee of any provision of this Plan or any agreement, notification or document evidencing the grant of Option Rights, and any determination by the Committee pursuant to any provision of this Plan or any such agreement, notification or document, shall be final and conclusive. No member of the Committee shall be liable for any such action taken or determination made in good faith. 11. AMENDMENTS AND OTHER MATTERS. (a) This Plan may be amended from time to time by the Committee; provided, however, that except as expressly authorized by this Plan, no such amendment shall cause this Plan to cease to satisfy any applicable condition OF Rule 16b-3 or cause any award under the Plan to cease to qualify for any applicable exception to Section 162(m) of the Code, without the further approval of the stockholders OF the Corporation. (b) With the concurrence of the affected Participant, the Committee may cancel any agreement evidencing Option Rights granted under this Plan. In the event of any such cancellation, the Committee may authorize the granting of new Option Rights hereunder, which may or may not cover the same number of Common Shares as had been covered by the cancelled Option Rights, at such Option Price, in such manner and subject to such other terms, conditions and discretion as would have been permitted under this Plan had the cancelled Option Rights not been granted. (c) The Committee may condition the grant of any award or combination of awards authorized under this Plan on the surrender or deferral by the Participant of his or her right to receive a cash bonus or other compensation otherwise payable by the Corporation or a Subsidiary to the Participant. -6- 7 (d) This Plan shall not confer upon any Participant any right with respect to continuance of employment or other service with the Corporation or any Subsidiary and shall not interfere in any way with any right that the Corporation or any Subsidiary would otherwise have to terminate any Participant's employment or other service at any time. (e) To the extent that any provision of this Plan would prevent any Option Right that was intended to qualify as a Tax-qualified Option from so qualifying, any such provision shall be null and void with respect to any such Option Right; provided, however, that any such provision shall remain in effect with respect to other Option Rights, and there shall be no further effect on any provision of this Plan. (f) Any award that may be made pursuant to an amendment to this Plan that shall have been adopted without the approval of the stockholders of the Corporation shall be null and void if it is subsequently determined that such approval was required under the terms of the Plan or applicable law. (i) Unless otherwise determined by the Committee, this Plan is intended to comply with Rule 16b-3 at all times that awards hereunder are subject to such Rule. -7- EX-10.8 13 FORM OF NONQUALIFIED STOCK OPTION AGREEMENT 1 EXHIBIT 10.8 IRI INTERNATIONAL CORPORATION NONQUALIFIED STOCK OPTION AGREEMENT RECITALS A. [Outside Director] (the "Optionee") is an employee or director of, or consultant to, IRI International Corporation (the "Corporation"). B. The Optionee has been selected as a participant in the Corporation's Equity Incentive Plan (the "Plan"). C. The Board of Directors of the Corporation (the "Board") has on June 17, 1997 authorized the execution of a stock option agreement in the form hereof as of the date on which the Corporation's initial public offering of Common Shares is consummated (the "Date of Grant"). D. The option granted hereby is intended to be a nonqualified stock option and will not be treated as an "incentive stock option" within the meaning of that term under Section 422 of the Internal Revenue Code of 1986. NOW, THEREFORE, pursuant to the Plan and subject to the terms and conditions thereof and to the terms and conditions herein set forth, the Corporation hereby grants to the Optionee a Nonqualified Option (the "Option") to purchase 20,000 Common Shares (the "Option Shares") at an exercise price per Option Share equal to the offering price per share at the initial public offering of the Common Shares (the "Exercise Price"). 1. VESTING OF OPTION. (a) Unless terminated as hereinafter provided, (i) the Option will be exercisable cumulatively to the extent of one-half of the Option Shares on the Date of Grant, and (ii) the Option will become exercisable cumulatively to the extent of one-quarter of the Option Shares after each of the first two anniversaries of the Date of Grant for so long as the Optionee remains in continuous employment with or service as a director of or consultant to the Corporation or any Subsidiary. For the purposes of this Agreement, the continuous employment or service of the Optionee with the Corporation or any Subsidiary will not be deemed to have been interrupted, and the Optionee will not be deemed to have ceased to be an employee or director of, or a consultant to, the Corporation or any Subsidiary, by reason of the transfer of his or her services among the Corporation and its Subsidiaries or a leave of absence approved by the Board. (b) Notwithstanding the provisions of Section 1 (a) hereof, if the Optionee's employment or service with the Corporation and all Subsidiaries terminates prior to the second anniversary of the Date of Grant by reason of his or her death or disability, or if the Optionee's employment with the Corporation and all Subsidiaries is terminated by the 2 Corporation or any Subsidiary prior to the second anniversary of the Date of Grant for any reason other than Cause (as defined herein), the Option will become fully exercisable. (c) To the extent that the Option becomes exercisable in accordance with the terms of this Section 1, it may be exercised in whole or in part from time to time thereafter. 2. TERMINATION OF OPTION. The Option will terminate automatically and without further action on the earliest of the following dates: (a) the date of the voluntary termination by the Optionee of his or her employment or service with the Corporation and all Subsidiaries; (b) the date of the termination by the Corporation or any Subsidiary of the Optionee's employment or service for Cause; (c) 360 days after the termination of the Optionee's employment or service with the Corporation and all Subsidiaries by reason of his or her death; (d) 180 days after the termination of the Optionee's employment or service with the Corporation and all Subsidiaries by reason of his or her disability; (e) 30 days after the termination by the Corporation and all Subsidiaries of the Optionee's employment or service therewith for any reason other than disability or Cause; or (f) five years after the Date of Grant, if the Optionee remains in continuous employment or service with the Corporation or any Subsidiary during that five-year period. 3. PAYMENT OF EXERCISE PRICE. The Exercise Price may be paid (a) in cash or check or other cash equivalent acceptable to the Corporation, (b) by actual or constructive transfer to the Corporation of nonforfeitable, nonrestricted Common Shares owned by the Optionee, or (c) by any combination of the foregoing methods of payment. Nonforfeitable, nonrestricted Common Shares that are transferred by the Optionee in payment of all or any part of the Exercise Price will be valued on the basis of their fair market value as determined by the Committee from time to time. The requirement of payment in cash will be deemed satisfied if the Optionee makes arrangements that are satisfactory to the Corporation with a broker that is a member of the National Association of Securities Dealers, Inc. to sell a sufficient number of the Option Shares that are being purchased pursuant to the exercise so that the net proceeds of the sale transaction will at least equal the amount of the aggregate Exercise Price and pursuant to which the broker undertakes to deliver to the Corporation the amount of the aggregate Exercise Price not later than the date on which the sale transaction will settle in the ordinary course of business. - 2 - 3 4. COMPLIANCE WITH LAW. The Corporation will make reasonable efforts to comply with all applicable securities laws; provided, however, that notwithstanding any other provision of this agreement, the Option will not be exercisable if the exercise thereof would result in a violation of any such law. 5. RIGHT TO TERMINATE EMPLOYMENT OR SERVICE AND ADJUST COMPENSATION. No provision of this agreement will limit in any way whatsoever any right that the Corporation or any Subsidiary may otherwise have to terminate the employment or service or adjust the compensation of the Optionee, at any time. 6. RELATION TO OTHER BENEFITS. Any economic or other benefit to the Optionee under this agreement or the Plan will not be taken into account in determining any benefits to which the Optionee may be entitled under any profit-sharing, retirement or other benefit or compensation plan maintained by the Corporation or any Subsidiary and will not affect the amount of any life insurance coverage available to any beneficiary under any life insurance plan covering employees of the Corporation or any Subsidiary. 7. THE PLAN. The Option evidenced hereby will be subject to the provisions of the Plan, including without limitation the provisions thereof relating to the transferability and exercisability of Option Rights (including the Option), adjustments and withholding taxes, as the Plan may from time to time be amended, provided, however, that no such amendment shall adversely affect the rights of the Optionee hereunder without the Optionee's written consent thereto. 8. SEVERABILITY. In the event that one or more of the provisions of this Agreement may be invalidated for any reason by a court, any provision so invalidated will be deemed to be separable from the other provisions hereof, and the remaining provisions hereof will continue to be valid and fully enforceable. 9. GOVERNING LAW. This Agreement is made under, and will be construed in accordance with, the laws of the State of New York, without giving effect to the principle of conflict of laws of such State. 10. CERTAIN DEFINITIONS. (a) "Cause" means any act or omission by the Optionee that is materially inimical to the business or reputation of the Corporation or any Subsidiary, as determined by the Board in its sole discretion. (b) Any other terms used with initial capital letters and not defined herein shall have the meaning given to such terms in the Plan. This Agreement is executed by the Corporation on this __ day of _______, 1997, effective as of the Date of Grant. IRI INTERNATIONAL CORPORATION - 3 - 4 By: -------------------------- The undersigned Optionee hereby acknowledges receipt of an executed original of this Agreement and accepts the Option granted hereunder, subject to the terms and conditions of the Plan and the terms and conditions hereinabove set forth. ----------------------------- Optionee Date: ------------------------ - 4 - EX-21 14 LIST OF SUBSIDIARIES 1 List of Subsidiaries --------------------
Jurisdiction of Subsidiary Organization ---------- --------------- Cardwell International, Ltd. Kansas
EX-23.1 15 CONSENT OF KPMG PEAT MARWICK LLP 1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors IRI International Corporation: We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the prospectus. KPMG PEAT MARWICK LLP Dallas, Texas September 8, 1997 2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors IRI International Corporation: We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the prospectus. KPMG PEAT MARWICK LLP Houston, Texas September 8, 1997 EX-27 16 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1996 APR-01-1996 DEC-31-1996 8,635 0 8,072 (36) 37,995 55,646 2,566 (168) 58,671 16,988 0 0 80 2 24,821 58,671 62,298 62,298 44,968 9,110 635 0 0 8,475 98 8,377 0 (600) 0 7,777 47.54 47.54
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