-----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, K2WpZl90vOl3CRZ1oXum3rAN+VzqvupZmlPab3kgA0+JOIHlYGQPm1ibGeC33JYD +JlutgbeYytmE2wDpA7CLg== 0000318996-97-000010.txt : 19970927 0000318996-97-000010.hdr.sgml : 19970927 ACCESSION NUMBER: 0000318996-97-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970919 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEY ENERGY GROUP INC CENTRAL INDEX KEY: 0000318996 STANDARD INDUSTRIAL CLASSIFICATION: DRILLING OIL & GAS WELLS [1381] IRS NUMBER: 042648081 STATE OF INCORPORATION: MD FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22665 FILM NUMBER: 97682920 BUSINESS ADDRESS: STREET 1: TWO TOWER CTR TENTH FLOOR CITY: EAST BRUNSWICK STATE: NJ ZIP: 08816 BUSINESS PHONE: 9155705721 MAIL ADDRESS: STREET 1: P O BOX 10627 CITY: MIDLAND STATE: TX ZIP: 79702 FORMER COMPANY: FORMER CONFORMED NAME: YANKEE COMPANIES INC DATE OF NAME CHANGE: 19891012 FORMER COMPANY: FORMER CONFORMED NAME: YANKEE OIL & GAS INC DATE OF NAME CHANGE: 19841122 10-K 1 FORM 10-K KEY ENERGY GROUP, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-8038 KEY ENERGY GROUP, INC. (Exact name of registrant as specified in its charter) Maryland 04-2648081 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No. Two Tower Center, Tenth Floor, East Brunswick, NJ 08816 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (908) 247-4822 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of Each Class Name of Each Exchange on Which Registered Common Stock, $.10 par value American Stock Exchange 7% Convertible Subordinated None Debentures Due 2003 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the Common Shares held by nonaffiliates of the Registrant as of September 11, 1997 was approximately $366,091,543. Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No Common Shares outstanding at September 11, 1997: 16,459,894 DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement with respect to the Annual Meeting of Shareholders are incorporated by reference in Part III of this report. Key Energy Group, Inc. and Subsidiaries INDEX PART I. Item 1. Business 3 Item 2. Properties. 8 Item 3. Legal Proceedings. 9 Item 4. Submission of Matters to a Vote of Security Holders. 9 PART II. Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. 10 Item 6. Selected Financial Data. 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. 12 Item 8. Financial Statements and Supplementary Data. 19 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. 52 PART III. Item 10. Directors and Executive Officers of the Registrant. 52 Item 11. Executive Compensation. 52 Item 12. Security Ownership of Certain Beneficial Owners and Management. 52 Item 13. Certain Relationships and Related Transactions. 52 PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 53 - 2 - Key Energy Group, Inc. and Subsidiaries PART I. ITEM 1. BUSINESS. The Company Key Energy Group, Inc. (the "Company" or "Key") is a leading provider of well services in the United States and in Argentina. As of June 30, 1997, the Company operated a fleet of 523 well service rigs, 437 fluid hauling and other trucks, and nine drilling rigs (including 16 workover rigs, six trucks, and 3 drilling rigs in Argentina). As of June 30, 1997, Key's well service and workover rig fleet and fluid hauling and other truck fleet were the second largest and largest fleets, respectively, onshore the continental United States. The Company operates in Texas, New Mexico, Oklahoma, Michigan, the Appalachian Basin and Argentina. The Company generally provides a full range of maintenance and workover services to major and independent oil and gas companies in all of its operating regions. In addition to maintenance and workover services, Key also provides services which include the completion of newly drilled wells, the recompletion of existing wells (including horizontal recompletions) and the plugging and abandonment of wells at the end of their useful lives. Other services include oil field fluid transportation, storage and disposal services, frac tank rentals, fishing and rental tools, wireline services, air drilling and hot oiling. In addition, the Company is engaged in contract drilling in West Texas and Argentina and owns and produces oil and natural gas in the Permian Basin. The Company conducts operations through four wholly-owned subsidiaries: Yale E. Key, Inc. ("Yale E. Key"); WellTech Eastern, Inc. ("WellTech Eastern"); Odessa Exploration Incorporated ("Odessa Exploration"); and Key Energy Drilling, Inc. d/b/a Clint Hurt Drilling ("Clint Hurt"). In addition, Key operates in Argentina through its 63% ownership (wholly- owned as of July 1, 1997) of Servicios WellTech, S.A. ("Servicios"). WellTech Eastern operates through two divisions: WellTech Mid-Continent Division and WellTech Eastern Division. Yale E. Key, WellTech Eastern and Servicios provide oil and gas well services, and Servicios owns contract drilling rigs. Odessa Exploration is engaged in the production of oil and natural gas and Clint Hurt provides contract oil and gas well drilling services in the Permian Basin of West Texas. Subsequent Events Subsequent to June 30, 1997, the Company purchased the remaining 37% interest in Servicios and completed the acquisition of four well servicing companies which collectively operate 83 well service and workover rigs (including six in Argentina), three drilling rigs in Argentina, and 75 fluid hauling and other trucks. The Company has also announced, subsequent to June 30, 1997, five acquisitions of well service companies and one acquisition of a drilling company which collectively operate 153 well service rigs, 11 drilling rigs, 91 fluid hauling and other trucks and a fishing and rental tool business. These six announced acquisitions are currently pending and assuming their completion, the Company will have expanded its operating presence into markets it previously did not serve, including the Rocky Mountains, the Four Corners area, the Hugoton Basin, Northern Louisiana and Arkansas. Upon completion of these pending acquisitions, Key's operations will include 764 well service and workover rigs, 603 fluid hauling and other trucks, 23 drilling rigs and numerous ancillary operations. Following the closing of these acquisitions, the Company believes that, based upon the number of active well service rigs and fluid hauling and other trucks, that it would operate at that time, it will be the largest well service provider onshore the continental United States and the second largest well service provider in Argentina. Growth Strategy The domestic well service rig and production service industry has historically been highly fragmented, characterized by a large number of smaller companies which have competed effectively on a local basis in - 3 - terms of pricing and the quality of services offered. In recent years, many major and independent oil and gas companies have placed increasing emphasis upon not only pricing, but also on safety records and quality management systems of, and the breadth of services offered by, their vendors, including well servicing contractors. This market environment, which requires significant expenditures by smaller companies to meet these increasingly rigorous standards, has forced many smaller well servicing companies to sell their operations to larger competitors. As a result, the industry has seen high levels of consolidation among the competing contractors. Over the past eighteen months, Key has been a the leading consolidator of this industry, completing twenty-three acquisitions of well servicing operations (twenty-eight including pending transactions). This consolidation has led to reduced fragmentation in the market and has led to more predictable demand for well services for the Company and its competitors. Key's management structure is decentralized, which allows for rapid integration of acquisitions and the retention of strong local identities of many of the acquired businesses. As a result of these and other factors, the Company has developed a growth strategy to: (i) identify, negotiate and consummate additional acquisitions of complementary well servicing operations, including rigs, trucking and other ancillary services; (ii) fully-integrate acquisitions into the Company's decentralized organizational structure and thereby attempt to maximize operating margins; (iii) expand business lines and services offered by the Company in existing areas of operations; and (iv) extend the geographic scope and operating environments for the Company's operations. Oil Field Services The Company provides a full range of well service rig services, oil field liquid services and other production services necessary to maintain and workover producing oil and gas wells through its wholly-owned subsidiaries, Yale E. Key and WellTech Eastern. These services also include the completion of newly drilled wells, the recompletion of existing wells (including horizontal recompletions) and the plugging and abandonment of wells at the end of their useful lives. Other services include oil field fluid transportation, storage and disposal services, frac tank rentals, fishing and rental tools, wireline services, air drilling and hot oiling. The Company has more than 750 customers which are either major oil and gas companies or independent producers seeking to optimize performance of oil and gas wells. Although the mix of oil and gas wells serviced varies by particular markets, approximately two-thirds of the Company's overall business is attributable to oil wells. As of June 30, 1997, of the Company's 523 well service and workover rigs, 273 operate in West Texas and New Mexico, 161 in Oklahoma and East Texas, 79 in Michigan and the Appalachian Basin, and ten in Argentina. Well Service Rig Services. The Company utilizes its fleet to perform four major categories of service to oil and gas operators including: Maintenance Services. Maintenance services are required on producing oil and gas wells to ensure efficient and continuous operation. These services consist of routine mechanical repairs necessary to maintain production from the well, such as repairing parted sucker rods or defective down-hole pumps in an oil well, or replacing defective tubing in an oil or gas well. The Company provides the well service rigs, equipment and crews for these maintenance services. Many of these well service rigs also have pumps and tanks (a workover package) that can be used for circulating fluids into and out of the well. Maintenance jobs are often performed on a series of wells in proximity to each other and typically take less than 48 hours per well. Maintenance services are generally required throughout the life of a well. The need for these services does not directly depend on the level of drilling activity and is generally independent of short-term fluctuations - 4 - in oil and gas prices. Accordingly, maintenance services are generally the most stable type of well service rig activity. The general level of maintenance, however, is affected by changes in the total number of producing oil and gas wells in the Company's geographic service areas. Workover Services. In addition to periodic maintenance, producing oil and gas wells occasionally require major repairs or modifications, called "workovers." Workover services include extensions of existing wells to drain new formations either through deepening well bores or through drilling of horizontal laterals. In less extensive workovers, the Company's rigs are used to seal off depleted zones in existing well bores and access previously bypassed productive zones. The Company's workover rigs are also used to convert producing wells to injection wells for enhanced recovery operations. Workover services include major subsurface repairs such as casing repair or replacement, recovery of tubing and removal of foreign objects in the well bore. These extensive workover operations are normally performed by a well service rig with a workover package , which may include rotary drilling equipment, mud pumps, mud tanks and blowout preventers depending upon the particular type of workover operation. Most of the Company's well service rigs are designed for and can be equipped to perform complex workover operations. A workover may last from a few days to several weeks. The demand for workover services is more sensitive to expectations relating to and changes in oil and gas prices than the demand for maintenance services, but not as sensitive as the demand for completion services. When oil and gas prices are low, there is little incentive to perform workovers on wells to increase production and well operators tend to defer such expenditures. As oil and gas prices increase, the level of workover activity tends to increase as operators seek to increase production by enhancing the efficiency of their wells. Completion Services. Completion services prepare a newly drilled well for production. The completion process may involve selectively perforating the well casing to access producing zones, stimulating and testing these zones and installing downhole equipment. The Company provides a well service and workover package rig to assist in this completion process. Newly drilled wells are frequently completed by a well service rig so that an operator can minimize the use of a higher cost drilling rig. The completion process typically requires a few days to several weeks, depending on the nature and type of the completion, and generally requires additional auxiliary equipment which the Company provides for an additional fee. The demand for well completion services is directly related to drilling activity levels, which are highly sensitive to expectations relating to and changes in oil and gas prices. During periods of weak drilling demand, drilling contractors frequently price well completion work competitively compared to a well service rig so that the drilling rig stays on the job. Thus, excess drilling capacity will serve to reduce the amount of completion work available to the well servicing industry. Plugging and Abandonment Services. Well service rigs and workover equipment are also used in the plugging and abandonment of oil and gas wells no longer capable of producing in economic quantities. The demand for oil and gas does not significantly affect the demand for well plugging services. Liquid Services. The Company provides vacuum truck services, frac tank rentals and salt water disposal services which together provide an integrated mix of liquid services to well site customers. Other Production Services. The Company provides production services, which include hot oiler unit services, pipeline installation and testing services, slickline wire-line services and fishing and rental tool services. - 5 - Shallow Contract Drilling Services The Company, through Clint Hurt, owns and operates six drilling rigs and provides contract drilling services for major and independent oil companies, primarily in West Texas. On August 4, 1997, the Company announced it had signed a letter of intent to acquire BRW Drilling, Inc. ("BRW") for approximately $15.0 million in cash. BRW operates 7 drilling rigs and related equipment in the Permian Basin of West Texas. The closing of the BRW acquisition is expected upon negotiation of a definitive agreement, completion of the Company's standard due diligence and receipt of regulatory clearances, if any are required. Upon completion, the BRW acquisition will be combined with Clint Hurt's drilling operations in the Permian Basin of West Texas to form a thirteen rig shallow drilling operation. The Company entered the land drilling business in March 1995 with the acquisition of four drilling rigs from an independent third party and, as the result of the WellTech merger, acquired two additional land drilling rigs. The rigs are capable of drilling up to 10,000 feet. Production The Company is engaged in the production of oil and natural gas in the Permian Basin area of West Texas through its wholly-owned subsidiary, Odessa Exploration. Odessa Exploration acquires and manages interests in producing oil and gas properties for its own account and for drilling partnerships it sponsors. Odessa Exploration acquires producing oil and gas wells and related properties from major and independent producers and, subsequently, either reworks the acquired wells to increase production or forms drilling ventures for additional development wells. Odessa Exploration operates oil and gas wells on behalf of over 250 working interest owners as well as for its own account. Foreign Operations The Company provides oil field services in Argentina through its 63% ownership (wholly-owned as of July 1, 1997) of Servicios. As of June 30, 1997, Servicios owned and operated ten well servicing rigs and three drilling rigs in Argentina (which are currently idle and undergoing refurbishment). On August 1, 1997, the Company completed the acquisition of Kenting Holdings (Argentina) S.A. ("Kenting") for $10.1 million in cash. The Kenting assets included six oilwell service rigs, three drilling rigs and related equipment in Argentina. The Kenting assets are being operated by Servicios and are expected to more than double the size of Servicios' operations based on revenues. COMPETITION AND OTHER EXTERNAL FACTORS Despite a significant amount of consolidation having occurred, the domestic well service rig and production service industry is still highly fragmented and includes a number of companies that are capable of competing effectively in all or part of the Company's well servicing markets. Nonetheless, the Company believes that it is competitive in terms of pricing, performance, equipment, safety, availability of equipment to meet customer needs and availability of experienced, skilled personnel in those regions in which it operates. In the well servicing market, an important competitive factor in establishing and maintaining long-term customer relationships is having an experienced, skilled and well trained work force. In recent years, many of the Company's larger customers have placed emphasis not only on pricing, but also on safety records and quality management systems of contractors. The Company believes that such factors will be of increased importance in the future. The Company has directed substantial resources toward employee safety and training programs, as well as its employee review process. While the Company's efforts in these areas are not unique, many competitors, particularly small contractors, have not undertaken similar training programs for their employees. Management believes that the Company's safety record and reputation for quality equipment and service are among the best in the industry. - 6 - The Company acquires oil and gas properties from independent and major oil companies and competes with other independent and integrated oil companies for the acquisition of these properties. The Company also competes with other local oil and gas drilling contractors, as well as national oil and gas drilling companies. As with oil field services, the need for drilling oil and gas wells fluctuates, in part, based on the price of, and demand for, oil and natural gas. The Company serves over 750 customers in West Texas, East Texas, New Mexico, Oklahoma, Michigan, the Appalachian Basin and Argentina with its two largest customers providing 13% and 7%, of total Company revenue during fiscal 1997. The need for oilfield services fluctuates, in part, in relation to the demand for oil and natural gas. As demand for those commodities increases, service and maintenance requirements increase as oil and natural gas producers attempt to maximize the producing efficiency of their wells in a higher priced environment. EMPLOYEES As of June 30, 1997, the Company employed 3,175 persons (3,047 in well service operations, 12 in oil and gas production, 105 in contract drilling operations and 11 in corporate). None of the Company's employees are represented by a labor union or collective bargaining agent. The Company has experienced no work stoppages associated with labor disputes or grievances and considers its relations with its employees to be satisfactory. REGULATIONS The oilfield service operations and the oil and gas production and drilling activities of the Company are subject to various local, state and federal laws and regulations intended to protect the environment. The Company's operations routinely involve the handling of waste materials, some of which are classified as hazardous substances. Consequently, the regulations applicable to the Company's operations include those with respect to containment, disposal and controlling the discharge of any hazardous oil field waste and other non-hazardous waste material into the environment, requiring removal and cleanup under certain circumstances, or otherwise relating to the protection of the environment. Laws and regulations protecting the environment have become more stringent in recent years, and may in certain circumstances impose "strict liability," rendering a party liable for environmental damage without regard to negligence or fault on the part of such party. Such laws and regulations may expose the Company to liability for the conduct of, or conditions caused by, others, or for acts of the Company which were in compliance with all applicable laws at the times such acts were performed. Management of the Company believes that it is in substantial compliance with all material federal, state and local regulations as they relate to the environment. Although the Company has incurred certain costs in complying with environmental laws and regulations, such amounts have not been material to the Company's financial condition during the three past fiscal years. Management believes that the Company is in substantial compliance with all known material local, state and federal safety guidelines and regulations. In order to comply with such safety guidelines and regulations and increase employee awareness of on-the-job safety, the Company employs eight safety officers. The Company also has a safety training and education center which is used by it for continued safety training and awareness. - 7 - ITEM 2. PROPERTIES. The Company's corporate offices are located in East Brunswick, New Jersey where the Company leases office space from an independent third party. Oil Field Services The following table sets forth the type, number and location of the major equipment owned and operated by the Company's oil field service subsidiaries as of June 30, 1997: Well Service/ Fluid Hauling and Company Workover Rigs Other Trucks Domestic: Yale E. Key (West Texas and New Mexico) 273 82 Mid-Continent Division of WellTech Eastern (Texas and Oklahoma) 161 105 Eastern Division of WellTech Eastern (Michigan and Appalachian Basin) 79 244 International: Servicios (Argentina) 10 6 ----- ----- TOTAL 523 437 ===== ===== Yale E. Key owns ten and leases six office and yard locations. The Mid-Continent Division of WellTech Eastern owns seven and leases five office and yard locations. The Eastern Division of WellTech Eastern owns four and leases twelve office and yard locations. In Argentina, Servicios leases two office and yard locations. All operating facilities are metal one story office and/or shop buildings. All buildings are occupied and considered to be in satisfactory condition. Production Odessa Exploration's properties consist primarily of oil and gas leases. At June 30, 1997, Odessa Exploration operated and/or owned interests in 467 wells. Odessa Exploration's major proved producing properties are located primarily in the Permian Basin area of West Texas. Odessa Exploration leases office space in Odessa, Texas. As of June 30, 1997, the Company had interests in 446 gross (127 net) oil wells and 21 gross (10 net) gas wells. As of such date, the Company owned 71,360 gross (19,980 net) acres of developed acreage and no undeveloped acreage. The Company had working interests in 13 gross (12.5 net) development wells as of the same date. During the fiscal year ended June 30, 1997, the Company produced 178,121 bbls. of oil at an average sales price of $22.19 per bbls., and 1.23 Mcf of gas at an average sales price of $2.74 per Mcf. Average production (lifting) costs were $7.89 per equivalent bbls. of oil. - 8 - ITEM 3. LEGAL PROCEEDINGS AND OTHER ACTIONS. See Item 7, Note 4 to the Consolidated Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. - 9 - PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock is traded on the American Stock Exchange, under the symbol "KEG". As of June 30, 1997, there were 498 holders of record of 12,297,752 shares of common stock. The following table sets forth for the periods indicated the high and low closing prices of the Company's common stock on the American Stock Exchange, as derived from published sources. High Low Fiscal Year Ending 1997: First Quarter $ 8 3/4 $ 7 1/2 Second Quarter 12 1/4 8 3/8 Third Quarter 14 7/8 11 3/8 Fourth Quarter 17 13/16 12 7/8 Fiscal Year Ending 1996: First Quarter $ 4 3/4 $ 5 1/2 Second Quarter 4 15/16 6 7/16 Third Quarter 5 7/8 7 9/16 Fourth Quarter 7 1/16 8 1/2 There were no dividends paid on the Company's common stock during the fiscal years ended June 30, 1997, 1996 or 1995. The Company does not intend, for the foreseeable future, to pay dividends on its common stock. Recent Sales of Unregistered Securities: The Company effected the following unregistered sales of its securities during the three months ended June 30, 1997. Each of the following issuances by the Company of the securities sold in the transactions referred to below were not registered under the Securities Act of 1933, as amended, pursuant to the exemption provided under Section 4 (2) thereof for transactions not involving a public offering: Effective as of June 25, 1997, the Company issued 240,000 shares of the Company's common stock to certain selling shareholders as partial consideration for the acquisition of all of the capital stock of Well-Co Oil Service, Inc. The Company issued, pursuant to the Company's 1995 Employee Stock Option Plan, various options to purchase shares of the Company's common stock. - 10 - Item 6. Selected Financial Data.
Five Fiscal Year Fiscal Year(1) Fiscal Year Fiscal Year Seven Months Months (2) Ended Ended Ended Ended Ended Ended June 30, June 30, June 30, June 30, June 30, November 30, (in thousands) 1997 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------------- OPERATING DATA: - ------------------------------------------- Revenues $163,630 $66,478 $44,689 $34,621 $14,256 $10,433 Operating costs: Direct costs 111,551 47,117 32,793 26,585 10,863 7,947 Depreciation, depletion and amortization 11,420 4,701 2,738 1,371 406 505 General and administrative 18,522 6,608 4,352 3,540 1,587 1,117 Interest 7,535 2,477 1,478 830 276 464 Income before income taxes, minority interest, reorganization items and extraordinary items 14,602 5,575 3,328 2,295 1,124 400 Net income 9,098 3,586 2,178 1,345 711 4,986 Income per common share: Primary: Net income $0.75 $0.45 $0.33 $0.26 $0.14 $0.28 Fully-diluted: Net income $0.65 $0.44 $0.33 $0.25 $0.14 $0.03 Average common shares outstanding: Primary 12,205 7,941 6,647 5,274 5,124 17,942 Assuming full dilution 17,963 8,114 6,647 5,288 5,138 176,508 Common shares outstanding at period end 12,298 10,414 6,914 5,274 5,124 17,942 Market price per common share at period end $17.81 $8.19 $5.06 $4.67 $3.67 n/a Cash dividends paid on common shares $ - $ - $ - $ - $ - $ - BALANCE SHEET DATA: - ------------------------------------------- Cash $41,704 $4,211 $1,275 $1,173 $623 * Current assets 93,333 27,481 11,290 9,167 4,922 * Property and equipment 227,255 96,127 36,336 18,935 10,093 * Property and equipment, net 208,186 87,207 31,942 17,159 9,688 * Total assets 320,095 121,722 45,243 28,095 15,906 * Current liabilities 33,142 24,339 9,228 8,383 4,113 * Long-term debt, including current portion 174,167 46,825 15,949 11,501 5,374 * Stockholders' equity 73,179 41,624 20,111 9,263 7,280 * OTHER DATA: - ------------------------------------------- EBITDA (3) 33,557 12,752 7,544 4,496 1,806 * Net cash (used) provided by: Operating activities 1,306 7,121 3,258 1,842 (123) * Investing activities (82,062) (13,551) (7,154) (5,608) (1,284) * Financing activities 118,249 9,366 3,998 4,316 (73) * Working capital 60,191 3,142 2,062 784 809 * Book value per common share (4) $5.95 $4.00 $2.91 $1.76 $1.42 * Ratio of earnings to fixed charges (5) $2.61 $2.77 $2.54 $2.65 $2.91 *
* - Not applicable due to the Company's 1992 Reorganization Plan. (1) Financial data for the year ended June 30, 1996 includes the allocated purchase price of WellTech Eastern and the results of their operations, beginning March 26, 1996. (2) Financial Data for the five months ended November 30, 1992 and prior periods reflect the previous capital structure of Key Energy Group, Inc. (previously "National Environmental Group, Inc.") before the Company's 1992 Reorganization Plan and are not always comparable to subsequent periods. (3) Net income before interest exp., income taxes, depreciation, depletion and amortization. EBITDA is presented because of its wide acceptance as a financial indicators of a company's ability to service or incur debt. EBITDA should not be considered as an alternative to operating net income, as defined by generally accepted accounting principals, as indicators of the Company's financial performance or to cash flow as a measure of liquidity. (4) Book value per common share are stockholders' equity at end of period divided by the number of outstanding shares at period end. (5) For purposes of computing the ratios of earnings to fixed charges, earnings consist of income from continuing operations before income taxes and fixed charges. Fixed charges consist of interest expenses, amortization of debt issuance expenses and the portions of rentals and lease obligations representative of the interest factor. - 11 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION. The following discussion provides information to assist in the understanding of the Company's financial condition and results of operations. It should be read in conjunction with the financial statements and related notes appearing elsewhere in this report. Overview The Company experienced its most successful year during fiscal 1997. All regions have increased equipment use because of higher oil and gas prices, increased emphasis on horizontal drilling, lower production costs for major and independent oil and gas producers, renewed focus on domestic production and the effects of several new alliances the Company entered into with its customers. Fluctuations in well servicing activity have had a strong correlation with fluctuations in oil and gas prices. If oil and gas prices were to drop significantly from current levels, the Company would expect a decrease in demand for drilling and services which would negatively affect the Company's operating performance. The Company seeks to minimize the effects of such fluctuations on its operations and financial condition through diversification of services, entry into new markets and customer alliances. FISCAL YEAR ENDED JUNE 30, 1997 VERSUS FISCAL YEAR ENDED JUNE 30, 1996 Results of Operations Operating Income The Company Revenues for the year ended June 30, 1997 increased $97,152,000, or 146%, from $66,478,000 in fiscal 1996 to $163,630,000 in fiscal 1997, while net income for fiscal 1997 increased $5,512,000, or 154% , from $3,586,000 in fiscal 1996 to $9,098,000 in fiscal 1997. The increase was primarily due to oilwell service acquisitions throughout the year, increased oil and gas revenues from Odessa Exploration, and increased oil and gas drilling revenues. Oilfield Services Oilfield service revenues for the year ended June 30, 1997 increased $88,452,000, or 158%, from $55,933,000 for the year ended June 30, 1996 to $144,385,000 for the year ended June 30, 1997. The increase is primarily attributable to acquisitions throughout the year and higher equipment use resulting from an increase in demand for oilfield services. Oil and Natural Gas Exploration and Production Revenues from oil and gas activities increased $4,005,000, or 96%, from $4,175,000 during the year ended June 30, 1996 to $8,180,000 for the current year. The increase was primarily the result of increased production of oil and natural gas from several wells that were drilled and began production during fiscal 1997, higher oil and natural gas prices for fiscal 1997, and the April 1996 purchase of $6.9 million of oil and gas properties from an unrelated third party. Of the total $8,180,000 of revenues for the year ended June 30, 1997, approximately $6,975,000 was from the sale of oil and gas and $1,205,000 represented primarily administrative fee income. - 12 - Oil and Natural Gas Well Drilling Revenues from oil and gas well drilling activities increased $3,768,000, or 61%, from $6,188,000 during the year ended June 30, 1996 to $9,956,000 for the year ended June 30, 1997. The increase was primarily the result of increased oilwell drilling activity and an increase in the Company's pricing structure. Operating Expenses Oilfield Services Oilfield service expenses for the year ended June 30, 1997 increased $59,629,000, or 146%, from $40,737,000 for the year ended June 30, 1996 to $100,366,000 for the year ended June 30, 1997. The increase was due primarily to acquisitions made throughout the fiscal year and the increased demand for oilfield services. In addition, the Company has continued to expand its services, offering fishing tools, blow-out preventers and oilwell frac tanks. Oil and Natural Gas Exploration and Production Expenses related to oil and gas activities increased $1,680,000, or 124%, from $1,350,000 for the year ended June 30, 1996 to $3,030,000 for the year ended June 30, 1997. The increase was primarily the result costs associated with several oil and natural gas wells that were drilled and began producting during fiscal 1997 and the April 1996 purchase of $6.9 million in oil and gas properties. Oil and Natural Gas Well Drilling Expenses related to oil and gas well drilling activities increased $3,125,000, or 62%, from $5,030,000 for the year ended June 30, 1996 to $8,155,000 for the year ended June 30, 1997. The increase was primarily the result of increased revenues. Depreciation and Depletion Expense Depreciation, depletion and amortization expense increased $6,719,000, or 143%, from $4,701,000 for fiscal 1996 to $11,420,000 for fiscal 1997. The increase is primarily due to oilfield service depreciation expense, which is the result of increased oilfield service capital expenditures for the current period versus the prior period and the acquisitions completed throughout fiscal 1997. In addition, depletion expense increased for the period due to the increase in the production of oil and natural gas. General and Administrative Expenses General and administrative expenses increased $11,914,000, or 180%, from $6,608,000 for the year ended June 30, 1996 to $18,522,000 for the year ended June 30, 1997. The increase was primarily attributable to oilfield service acquisitions throughout the fiscal year. Interest Expense Interest expense increased $5,058,000, or 204%, from $2,477,000 for fiscal 1996 to $7,535,000 in fiscal 1997. The increase was primarily the result of debt incurred in connection with acquisitions completed throughout fiscal 1997. - 13 - Income Taxes Income tax expense increased $3,612,000, or 191%, from $1,888,000 in income tax expense for fiscal 1996 to $5,500,000 for fiscal 1997. The increase in income taxes is primarily due to the increase in operating income. However, the Company does not expect to be required to remit a significant amount of the $5,500,000 in total federal income taxes for fiscal year 1997 because of the availability of net operating loss carryforwards, accelerated depreciation and drilling tax credits. Cash Flow Net cash provided by operating activities decreased $4,965,000, or 70%, from $7,121,000 during fiscal 1996 to $2,156,000 for fiscal 1997. The decrease is attributable primarily to increases in accounts receivable, decreases in accounts payable and accrued expenses, but was partially offset by increases in depreciation and net income. Net cash used in investing activities increased $68,511,000, or 506%, from $13,551,000 for fiscal 1996 to $82,062,000 for fiscal 1997. The increase is primarily the result of increased capital expenditures for oilwell service operations and oilwell service acquisitions. Net cash provided by financing activities was $117,399,000 for fiscal 1997 as compared to $9,366,000 for fiscal 1996, which represents an increase of $108,033,000, or 1,153%. The increase, which is partially offset by repayments of long-term debt, is primarily the result of proceeds from the existing Debentures and commercial paper during the current fiscal year. - 14 - FISCAL YEAR ENDED JUNE 30, 1996 VERSUS FISCAL YEAR ENDED JUNE 30, 1995 Operating Income The Company Revenues for the year ended June 30, 1996 increased $21,789,000, or 49%, from $44,689,000 for the year ended June 30, 1995 to $66,478,000 for the year ended June 30, 1996, while net income increased $1,408,000, or 65%, from $2,178,000 in fiscal 1995 to $3,586,000 in fiscal 1996. The increase in revenues was primarily due to the acquisition of Clint Hurt Drilling in March 1995, whose operations were only included for one quarter in the 1995 year-end results, increased oil and gas revenues from Odessa Exploration and increased oilwell service equipment use and the acquisition of WellTech. The increase in fiscal year 1996 net income over fiscal year 1995 net income was partially attributable to the inclusion of Clint Hurt Drilling and the acquisition of WellTech Eastern, but also was a result of an increase in oilwell service equipment use and a decrease in total consolidated Company costs and expenses as a percentage of total revenues. Oilfield Services Oilfield service revenues for the year ended June 30, 1996 increased $15,828,000, or 40%, from $40,105,000 for the year ended June 30, 1995 to $55,933,000 for the year ended June 30, 1996. The increase in revenues was primarily attributable to higher equipment use resulting from an increase in demand for oilfield services and the acquisition of WellTech Eastern, whose operating results were included for the period of March 26, 1996 to June 30, 1996. Oil and Natural Gas Exploration and Production Revenues from oil and gas activities increased $1,841,000, or 79%, from $2,334,000 during the year ended June 30, 1995 to $4,175,000 for the year ended June 30, 1996. The increase in revenues was primarily the result of increased production of oil and natural gas from several wells that were drilled during 1996, higher oil and natural gas prices during 1995 and the April 1996 purchase of $6.9 million of oil and gas properties from an unrelated third party. Of the total $4,175,000 of revenues for the year ended June 30, 1996, approximately $3,554,000 was from the sale of oil and gas and the remaining $621,000 was attributable primarily to administrative fee income and other miscellaneous income. Oil and Natural Gas Well Drilling Oil and natural gas well drilling operations are performed by Clint Hurt Drilling which was acquired in March 1995. Comparable numbers for the prior year are, therefore, not available. Revenues for the year ended June 30, 1996 were $6,188,000. Operating Expenses Oilfield Services Oilfield service expenses for the year ended June 30, 1996 increased $10,145,000, or 33%, from $30,592,000 for the year ended June 30, 1995 to $40,737,000 for the year ended June 30, 1996. The increase was due primarily to the acquisition of WellTech Eastern on March 26, 1996, and an increased demand for oilfield services. - 15 - Oil and Natural Gas Exploration and Production Expenses related to oil and gas activities increased $593,000, or 78%, from $757,000 for the year ended June 30, 1995 to $1,350,000 for the year ended June 30, 1996. The increase was primarily the result of increased production of oil and natural gas from several wells that were drilled during fiscal 1996 and the April 1996 purchase of $6.9 million in oil and gas properties. Oil and Natural Gas Well Drilling Clint Hurt Drilling was acquired in March 1995. Comparable numbers for the prior year are, therefore, not available. Expenses for the year ended June 30, 1996 were $5,030,000. Depreciation and Depletion Expense Depreciation, depletion and amortization expense increased $1,963,000, or 72%, from $2,738,000 for fiscal 1995 to $4,701,000 for fiscal 1996. The increase was primarily due to oilfield service depreciation expense, which resulted from an increase in oilfield service capital expenditures for the 1996 period versus the prior period and the acquisition of WellTech and Clint Hurt. In addition, depletion expense increased for the period due to the increase in the production of oil and natural gas. General and Administrative Expenses General and administrative expenses increased $2,256,000, or 52%, from $4,352,000 for the year ended June 30, 1995 to $6,608,000 for the year ended June 30, 1996. The increase was primarily attributable to the acquisition of contract drilling assets, the subsequent inclusion of general and administrative expenses related to contract drilling operations and the acquisition of WellTech Eastern. Interest Expense Interest expense increased $999,000, or 68%, from $1,478,000 for fiscal 1995 to $2,477,000 for fiscal 1996. The increase was primarily the result of acquisitions and the addition of certain oil and gas properties that were financed with proceeds from borrowings. Income Taxes Income tax expense for fiscal 1996 increased $738,000, or 64%, from $1,150,000 in fiscal 1995 to $1,888,000 in fiscal 1996. The increase was primarily due to an increase in operating income. However, the Company was not required to remit a significant amount of the $1,888,000 in total federal income taxes for fiscal year 1996 because of the availability of net operating loss carryforwards, accelerated depreciation and drilling tax credits. Cash Flow Net cash provided by operating activities increased $3,863,000, or 119%, from $3,258,000 during fiscal 1995 to $7,121,000 for fiscal 1996. The increase was attributable primarily to increases in net income. Net cash used in investing activities increased $6,397,000, or 89%, from $7,154,000 for fiscal 1995 to $13,551,000 for fiscal 1996. The increase was primarily the result of increased capital expenditures for oil and gas properties and costs associated with the acquisition of WellTech. This increase was partially offset by a decrease in oilfield service capital expenditures. - 16 - Net cash provided by financing activities increased $5,368,000, or 134%, from $3,998,000 in fiscal 1995 to $9,366,000 in fiscal 1996. The increase is primarily the result of increased principal payments during fiscal 1996. This increase in principal payments was somewhat offset by an increase in proceeds from long-term debt during fiscal 1996 as the result of the purchase of oil and gas properties by Odessa Exploration and the acquisition of WellTech. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents increased by $37.5 million for the year ended June 30, 1997 from $4.2 million as of June 30, 1996 to $41.7 million as of June 30, 1997. This increase was primarily the result of proceeds from the Bank Credit Agreement. The Company has projected $20 million for oilfield service capital expenditures for fiscal 1998 as compared to $15.1 million and $5.2 million in fiscal 1997 and 1996, respectively. Odessa Exploration has projected outlays of approximately $10 million in development costs for fiscal 1998, as compared to $8.2 million and $9.8 million in fiscal 1997 and 1996, respectively. Clint Hurt Drilling has forecast approximately $2 million for oil and gas drilling capital expenditures for fiscal 1998, primarily for improvements to existing equipment and machinery, as compared to $1.5 million for fiscal 1997 and $598,000 in fiscal 1996. The Company expects to finance these capital expenditures and development costs using cash flows from operations and available credit. The Company believes that its cash flows and, to the extent required, borrowings under the Bank Credit Agreement, will be sufficient to fund such expenditures. Debt In June 1997, the Company entered into the Credit Agreement (the "Bank Credit Agreement") with PNC Bank, N.A. ("PNC"), as administrative agent, Norwest Bank Texas, N.A., as collateral agent, Lehman Commercial Paper, Inc., as advisor, arranger and syndication agent and the lenders named therein pursuant to which the lenders agreed to make available to the Compaany a five-year revolving credit facilty in the amount of $135 million and a seven-year term loan facility in the amount of $120 million. Up to $10 million of letters of credit may be issued pursuant to the Bank Credit Agreement. The amount of letters of credit outstanding from time to time reduces the amount of revolving credit loans which may be outstanding. Revolving credit loans incurred pursuant to the Bank Credit Agreement will bear interest, at the Company's option, at PNC's base rate plus 1.00% or LIBOR plus 2.25% and term loans will bear interest, at the Company's option, at PNC's base rate plus 1.75% or LIBOR plus 2.75%. After September 30, 1997, the margin applicable to revolving credit loans will fluctuate from time to time between 0.25% and 1.25% with respect to base rate loans and between 1.50% and 2.50% for LIBOR based loans. Such fluctuations will be based on the Company's ratio of consolidated total debt (net of cash in excess of $5 million) to a pro forma calculation of consolidated earnings before interest expense, taxes and depreciation, depletion and amortization. The Company used the proceeds from the Bank Credit Agreement to: (i) repay existing debt; (ii) make additional acquisitions and capital expenditures; and (iii) provide working capital. Long-term debt that was repaid with proceeds from the Bank Credit Agreement in June 1997 included all debt with CIT Group/Credit Finance, Inc. of approximately $54.3 million and all bank debt associated with Odessa Exploration, previously with Norwest Bank Texas, N.A., of approximately $2.1 million. - 17 - Impact of SFAS 121 As of July 1, 1996, the Company adopted the provisions of Statement of Financial Accounting Standards No. 121 - Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"). Consequently, the Company reviews its long-lived assets to be held and used, including oil and gas properties accounted for under the successful efforts method of accounting, whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. Long-lived assets to be disposed of are to be accounted for at the lower of carrying amount or fair value less cost to sell when management has committed to a plan to dispose of the assets. All companies, including successful efforts oil and gas companies, are required to adopt SFAS 121 for fiscal years beginning after December 15, 1995. In order to determine whether an impairment had occurred, the Company estimated the expected future cash flows of its income producing equipment and oil and gas properties and compared such future cash flows to the carrying amount of the asset to determine if the carrying amount was recoverable. Based on this process, no writedown in the carrying amount of the Company's property was necessary at June 30, 1997. Impact of Recently Issued Accounting Standards The Financial Accounting Standards Board has recently issued the following accounting standards which will be adopted by the Company in the future. Statement of Financial Accounting Standards No. 128 ("SFAS 128") - Earnings per Share, is effective for periods ending on or after December 15, 1997. FAS 128 replaces the presentation of primary earnings per share ("EPS") with the presentation of basic EPS, which excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. SFAS 128 also requires dual presentation of basic EPS and diluted EPS on the face of the income statement and requires a reconciliation of the numerators and denominators of basic EPS and diluted EPS.The Company will adopt SFAS 128 for the quarter ended December 31, 1997. Statement of Financial Accounting Standards No. 130 ("SFAS 130") - Reporting Comprehensive Income, is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company will adopt SFAS 130 for the fiscal year ended June 30, 1999. Statement of Financial Accounting Standards No. 131 ("SFAS 131") - Disclosures about Segments of an Enterprise and Related Information, is effective for financial statements for periods beginning after December 15, 1997. SFAS 131 need not be applied to interim financial statements in the initial year of its application. However, comparative information for interim periods in the initial year of application is to be reported in the financial statements for interim periods in the second year of application. The Company will adopt SFAS 131 for the fiscal year ended June 30, 1999. Management believes the adoption of SFAS 128, SFAS 130 and SFAS 131 will not have a material effect on its financial position or results of operations of the Company. Impact of Inflation on Operations Management is of the opinion that inflation has not had a significant impact on the Company's business. - 18 - ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Presented herein are the consolidated financial statements of Key Energy Group, Inc. and Subsidiaries as of June 30, 1997 and 1996 and the years ended June 30, 1997, 1996 and 1995. Also, included is the report of KPMG Peat Marwick LLP, independent certified public accountants, on such consolidated financial statements as of June 30, 1997 and 1996 and for the years ended June 30, 1997, 1996 and 1995. INDEX TO FINANCIAL STATEMENTS Page Consolidated Balance Sheets................................ 20 Consolidated Statements of Operations ..................... 21 Consolidated Statements of Cash Flows ..................... 22 Consolidated Statements of Stockholders' Equity ........... 23 Notes to Consolidated Financial Statements ................ 24 Independent Auditors' Report ................................ 51 - 19 - Key Energy Group, Inc. and Subsidiaries Consolidated Balance Sheets
June 30, June 30, (Thousands, except share and per share data) 1997 1996 ------------------------------------------------------------------------------ ASSETS Current Assets: Cash $41,704 $ 4,211 Accounts receivable, net of allowance for doubtful accounts ($1,552 - 1997, $992 - 1996) 45,230 20,570 Inventories 5,171 1,957 Prepaid expenses and other current assets 1,228 743 ------------------------------------------------------------------------------ Total Current Assets 93,333 27,481 ------------------------------------------------------------------------------ Property and Equipment: Oilfield service equipment 176,326 66,432 Oil and gas well drilling equipment 6,319 4,862 Motor vehicles 10,569 1,159 Oil and gas properties and other related equipment, successful efforts method 23,622 17,663 Furniture and equipment 1,661 716 Buildings and land 8,758 5,295 ------------------------------------------------------------------------------ 227,255 96,127 Accumulated depreciation & depletion (19,069) (8,920) ------------------------------------------------------------------------------ Net Property and Equipment 208,186 87,207 ------------------------------------------------------------------------------ Other Assets 18,576 7,034 ------------------------------------------------------------------------------ Total Assets $320,095 $121,722 ============================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $15,339 $11,086 Other accrued liabilities 12,507 11,002 Accrued interest 2,102 417 Accrued income taxes 1,664 53 Deferred tax liability 126 310 Current portion of long-term debt 1,404 1,471 - ------------------------------------------------------------------------------- Total Current Liabilities 33,142 24,339 - ------------------------------------------------------------------------------- Long-term debt, less current portion 172,763 45,354 Non-current accrued expenses 4,017 4,909 Deferred tax liability 35,738 4,244 Minority interest 1,256 1,252 Commitments and contingencies Stockholders' equity: Common stock, $.10 par value; 25,000,000 shares authorized, 12,297,752 and 10,413,513 sharesissued and outstanding at June 30, 1997 and 1996, respectively 1,230 1,041 Additional paid-in capital 55,031 32,763 Retained earnings 16,918 7,820 - ------------------------------------------------------------------------------- Total Stockholders' Equity 73,179 41,624 - ------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $320,095 $121,722 ===============================================================================
See the accompanying notes which are an integral part of these consolidated financial statements. - 20 - Key Energy Group, Inc. and Subsidiaries Consolidated Statements of Operations
Year Ended Year Ended Year Ended (Thousands, except per share data) June 30, 1997 June 30, 1996 June 30, 1995 - --------------------------------------------------------------------------------------------------------------------------------- REVENUES: Oilfield services $144,385 $55,933 $40,105 Oil and gas 8,180 4,175 2,334 Oil and gas well drilling 9,956 6,188 1,932 Other, net 1,109 182 318 - --------------------------------------------------------------------------------------------------------------------------------- 163,630 66,478 44,689 - --------------------------------------------------------------------------------------------------------------------------------- COSTS AND EXPENSES: Oilfield services 100,366 40,737 30,592 Oil and gas 3,030 1,350 757 Oil and gas well drilling 8,155 5,030 1,444 Depreciation, depletion and amortization 11,420 4,701 2,738 General and administrative 18,522 6,608 4,352 Interest 7,535 2,477 1,478 - --------------------------------------------------------------------------------------------------------------------------------- 149,028 60,903 41,361 - --------------------------------------------------------------------------------------------------------------------------------- Income before income taxes and minority interest 14,602 5,575 3,328 Income tax expense 5,500 1,888 1,150 Minority interest in net income 4 101 - - --------------------------------------------------------------------------------------------------------------------------------- NET INCOME $9,098 $3,586 $2,178 ================================================================================================================================= EARNINGS PER SHARE : Primary: Net income $0.75 $0.45 $0.33 Assuming full dilution: Net income $0.65 $0.44 $0.33 ================================================================================================================================= WEIGHTED AVERAGE OUTSTANDING: Primary 12,205 7,941 6,647 Assuming full dilution 17,963 8,114 6,647 =================================================================================================================================
See the accompanying notes which are an integral part of these consolidated financial statements. - 21 - Key Energy Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows
Year Ended June 30, --------------------------------------- (Thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $9,098 $3,586 $2,178 Adjustments to reconcile income from operations to net cash provided by operations: Depreciation, depletion and amortization 11,420 4,701 2,738 Deferred income taxes 3,836 1,618 1,370 Minority interest in net income 4 101 - Gain on sale of assets (235) (186) - Other non-cash items - 6 (312) Change in assets and liabilities net of effects from the acquisitions: Increase in accounts receivable (14,904) (2,180) (1,327) Increase (decrease) in other current assets (2,811) 765 (940) Decrease in accounts payable and accrued expenses (5,565) (1,293) (154) Other assets and liabilities 1,313 3 (295) - -------------------------------------------------------------------------------------------------- Net cash provided by operating activities 2,156 7,121 3,258 - -------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures - Oilwell service operations (15,084) (5,188) (2,839) Capital expenditures - Oil and gas operations (8,188) (1,879) (2,823) Capital expenditures - Oil and gas well drilling operations (1,483) (598) (143) Proceeds from sale of fixed assets 3,159 574 - Cash received in acquisitions 2,342 1,168 - Acquisitions - oil and gas operations - (7,895) (1,348) Acquisitions - oilwell service operations, net of cash acquired (62,808) - - Redemption (purchase) of restricted marketable securities - 267 (1) - -------------------------------------------------------------------------------------------------- Net cash used in investing activities (82,062) (13,551) (7,154) - -------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on debt (1,772) (2,601) (2,148) Repayment of long-term debt (47,815) - - Borrowings (payments) under line-of-credit - 1,100 (605) Proceeds from stock options exercised 141 - - Proceeds from warrants exercised 1,362 - - Proceeds from convertible subordinated debentures - net of debt issuance costs 49,590 - - Proceeds from long-term commercial paper debt - net of debt issuance costs 115,021 - - Proceeds from other long-term debt 872 10,867 6,751 - -------------------------------------------------------------------------------------------------- Net cash provided by financing activities 117,399 9,366 3,998 - -------------------------------------------------------------------------------------------------- Net increase in cash 37,493 2,936 102 Cash at beginning of period 4,211 1,275 1,173 - -------------------------------------------------------------------------------------------------- Cash at end of period $41,704 $4,211 $1,275 ==================================================================================================
See the accompanying notes which are an integral part of these consolidated financial statements. - 22 - Key Energy Group, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity
Common Stock -------------------------------- Number of Additional Shares Amount Paid-in Retained (Thousands) Outstanding at par Capital Earnings Total - ------------------------------------------------------------------------------- --------------- ------------------ ------------ Balance at June 30, 1994 5,274 $527 $6,680 $2,056 $9,263 - -------------------------------------------------------------------------------- --------------- ------------------ ------------ Issuance of common stock for WellTech West Texas assets 1,635 164 8,420 - 8,584 Issuance of warrants for WellTech West Texas assets - - 63 - 63 Issuance of common stock for Clint Hurt Drilling assets 5 - 23 - 23 Net income - - - 2,178 2,178 - -------------------------------------------------------------------------------- --------------- ------------------ ------------ Balance at June 30, 1995 6,914 $691 $15,186 $4,234 $20,111 - -------------------------------------------------------------------------------- --------------- ------------------ ------------ Issuance of common stock for WellTech Merger 3,500 350 17,577 - 17,927 Net income - - - 3,586 3,586 - -------------------------------------------------------------------------------- --------------- ------------------ ------------ Balance at June 30, 1996 10,414 $1,041 $32,763 $7,820 $41,624 - -------------------------------------------------------------------------------- --------------- ------------------ ------------ Issuance of common stock for Brownlee Well Service stock 61 6 665 - 671 Issuance of common stock for Woodward Well Service stock 75 8 555 - 563 Issuance of common stock for Brooks Well Service stock 918 92 11,033 - 11,125 Issuance of common stock for Enerair Oilwell Service assets 4 - 48 - 48 Issuance of common stock for Cobra Well Service stock 175 18 2,368 - 2,386 Issuance of common stock for Tri-State Well Service assets 84 8 992 - 1,000 Issuance of common stock for Kal-Con Well Service assets and stock 78 8 1,103 - 1,111 Issuance of common stock for Well-Co Well Service stock 240 24 4,026 - 4,050 Exercise of warrants 221 22 1,340 - 1,362 Exercise of options 28 3 138 - 141 Net income - - - 9,098 9,098 - -------------------------------------------------------------------------------- --------------- ------------------ ------------ Balance at June 30, 1997 12,298 $1,230 $55,031 $16,918 $73,179 ================================================================================ =============== ================== ============
See the accompanying notes which are an integral part of these consolidated financial statements. - 23 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997, 1996 and 1995 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company Key Energy Group, Inc. herein after referred to as the "Company" or "Key", was organized in April 1977, and commenced operations in July 1978. Results of operations for the twelve months ended June 30, 1997, 1996 and 1995 include the Company's oilfield service operations conducted by its wholly-owned subsidiary, Yale E. Key, Inc., ("Yale E. Key"), the Company's oil and gas exploration and production wholly-owned subsidiary, Odessa Exploration Incorporated ("Odessa Exploration"), and the Company's oil and gas well drilling operations conducted by the Company's wholly-owned subsidiary, Key Energy Drilling, Inc. d/b/a Clint Hurt Drilling ("Clint Hurt Drilling"). Clint Hurt Drilling was acquired in March of 1995. Also included in the results of operations for the fiscal year ended June 30, 1997 and approximately three months for the fiscal year ended June 30, 1996 are those operating results from the Company's wholly-owned subsidiary; WellTech Eastern, Inc. ("WellTech Eastern") which currently holds the assets acquired in the merger with WellTech, Inc. ("WellTech"), on March 26, 1996 (see Note 2). WellTech Eastern operates through two divisions; the WellTech Mid-Continent Division and the WellTech Eastern Division. In addition, as a result of the Welltech acquisition, the Company acquired a 63% ownership in Servicios WellTech, S.A. ("Servicios"), an Argentinean corporation. Servicios conducts oilfield services operations in Argentina and is accounted for using the consolidation with a minority interest method. Basis of Presentation The Company's consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated. The accounting policies presented below have been followed in preparing the accompanying consolidated financial statements. The Company's ownership of less than 50% owned entities are accounted for by the cost or equity methods, depending on the Company's ownership percentage. Estimates and Uncertainties Preparation of the accompanying consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures 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. Inventories Inventories, which consist primarily of oilwell service parts and supplies, are held for use in the operations of Key and are valued at the lower of average cost or market. Property and Equipment The Company provides for depreciation and amortization of non-oil and gas properties using the straight-line method over the following estimated useful lives of the assets: (table follows on next page) - 24 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Description Years --------------------------------------------------------------------- Oilfield service equipment 3 - 20 Oil and gas well drilling equipment 3 - 15 Motor vehicles 3 - 7 Furniture and equipment 3 - 10 Buildings and improvements 10 - 40 Gas processing facilities 10 --------------------------------------------------------------------- Upon disposition or retirement of property and equipment, the cost and related accumulated depreciation are removed from the accounts and the gain or loss thereon, if any, is included in the results of operations. Odessa Exploration utilizes the successful efforts method of accounting for its oil and gas properties. Under this method, all costs associated with productive wells and nonproductive development wells are capitalized, while nonproductive exploration costs and geological and geophysical costs (if any), are expensed. Capitalized costs relating to proved properties are depleted using the unit-of-production method. Upon disposition, the carrying amounts of properties sold or otherwise disposed of and the related allowance for depletion are eliminated from the accounts and any gain/loss is included in results of operations. Gas Balancing Deferred income associated with gas balancing is accounted for on the entitlements method and represents amounts received for gas sold under gas balancing arrangements in excess of Odessa Exploration's interest in properties covered by such agreements. Odessa Exploration had deferred income associated with gas balancing of approximately $155,000, $198,000 and $253,000 as of June 30, 1997, 1996 and 1995, respectively. Environmental The Company is subject to extensive federal, state and local environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a noncapital nature are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated. Other Assets and Goodwill At June 30, 1997, 1996 and 1995, other assets consisted primarily of goodwill, capitalized debt issuance costs and security and escrow deposits from Key's workers' compensation retrospective insurance program, in addition to an interest, (approximately 13%), in an insurance company (the insurance company is affiliated with Key's workers' compensation carrier). - 25 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) At June 30, 1997, 1996 and 1995, the Company classified as goodwill the cost in excess of fair value of the net tangible assets acquired in purchase transactions. Goodwill is being amortized on a straight-line basis over ten to twenty-five years. Management continually evaluates whether events or circumstances have occurred that indicate the remaining useful life of goodwill may warrant revision or the remaining balance of goodwill may not be recoverable. Goodwill amortization expense totaled $622,000 for fiscal 1997 and $100,000 for fiscal 1996 and $100,000 for fiscal 1995. Debt issuance cost amortization expense totaled $344,000 for the year ended June 30, 1997 and is amortized over the term of the applicable debt. Earnings per Share Primary earnings per common share are determined by dividing net earnings applicable to common stock by the weighted average number of common shares actually outstanding during the year and common equivalent shares resulting from the assumed exercise of stock options and warrants (if any) using the treasury stock method, except in periods with reported losses as the inclusion of common stock equivalents would be antidilutive. Fully diluted earnings per common share are based on the increased number of shares that would be outstanding assuming conversion of dilutive outstanding convertible securities using the "as if converted" method. Income Taxes The Company accounts for income taxes based upon Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, 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. 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 rate is recognized in income in the period that includes the enactment date. A valuation allowance for deferred tax assets is recognized when it is "more likely than not" that the benefit of deferred tax assets will not be realized. The Company and its eligible subsidiaries file a consolidated U. S. federal income tax return. Certain subsidiaries that are consolidated for financial reporting purposes are not eligible to be included in the consolidated U. S. federal income tax return and separate provisions for income taxes have been determined for these entities or groups of entities. Concentration of Credit Risk Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of temporary cash investments and trade receivables. The Company restricts investment of temporary cash investments to financial institutions with high credit standing and by policy limits the amount of credit exposure to any one financial institution. The Company's customer base consists primarily of multi-national, foreign national and independent oil and natural gas producers. See Note 12 for additional information regarding customers which accounted for more than 10% of consolidated revenues. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on its trade receivables. Such credit risk is considered by management to be limited due to the large number of customers comprising the Company's customer base. The Company maintains reserves for potential credit losses, and such losses have been within management's expectations. - 26 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Impact of SFAS 121 On July 1, 1996, the Company adopted the provisions of Statement of Financial Accounting Standards No. 121 - Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"). This Statement 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. Adoption of this Statement did not have an impact on the Company's financial position, results of operations, or liquidity. Stock-based Compensation The Company accounts for employee stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). Accordingly, the company has only adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). See Note 8 for the pro forma disclosures of compensation expense determined under the fair-value provisions of SFAS 123. Cash Flows For cash flow purposes, the Company considers all unrestricted highly liquid investments with less than a three month maturity when purchased as cash equivalents. Reclassifications Certain reclassifications have been made to the fiscal 1996 and 1995 consolidated financial statements to conform to the fiscal 1997 presentation. Impact of Recently Issued Accounting Standards The Financial Accounting Standards Board has recently issued the following accounting standards which will be adopted by the Company in the future. Statement of Financial Accounting Standards No. 128 ("SFAS 128") - Earnings per Share, is effective for periods ending on or after December 15, 1997. FAS 128 replaces the presentation of primary earnings per share ("EPS") with the presentation of basic EPS, which excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. SFAS 128 also requires dual presentation of basic EPS and diluted EPS on the face of the income statement and requires a reconciliation of the numerators and denominators of basic EPS and diluted EPS.The Company will adopt SFAS 128 for the quarter ended December 31, 1997. Statement of Financial Accounting Standards No. 130 ("SFAS 130") - Reporting Comprehensive Income, is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company will adopt SFAS 130 for the fiscal year ended June 30, 1999. Statement of Financial Accounting Standards No. 131 ("SFAS 131") - Disclosures about Segments of an Enterprise and Related Information, is effective for financial statements for periods beginning after December 15, 1997. SFAS 131 need not be applied to interim financial statements in the initial year of its application. However, comparative information for interim periods in the initial year of application is to be reported in the financial statements for interim periods in the second year of application. The Company will adopt SFAS 131 for the fiscal year ended June 30, 1999. - 27 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Management believes the adoption of SFAS 128, SFAS 130 and SFAS 131 will not have a material effect on its financial position or results of operations of the Company. Impact of Inflation on Operations Although in our complex environment it is extremely difficult to make an accurate assessment of the impact of inflation on the Company's operations, management is of the opinion that inflation has not had a significant impact on its business. 2. BUSINESS AND PROPERTY ACQUISITIONS The following described acquisitions have been completed during the current year and are included in the Company's results of operations for the twelve months ended June 30, 1997. Well-Co Oil Service. Inc. On June 26, 1997, the Company completed its acquisition of Well-Co Oil Service, Inc. ("Well-Co") which operates 79 oilwell service rigs and related equipment in west Texas. Well-Co was acquired for $17.5 million in cash and 240,000 shares of the Company's common stock. Well-Co will be operated by the Company's west Texas subsidiary of Yale E. Key. The results of operations of Well-Co are included in the Company's results of operations effective June 26, 1997. The acquisition was accounted for using the purchase method. Phoenix Well Service, Inc. On June 10, 1997, the Company completed its acquisition of Phoenix Well Service, Inc. ("Phoenix") which operates 11 oilwell service rigs and related equipment in west Texas. Phoenix was acquired for $2.3 million in cash. Phoenix will be operated by the Company's west Texas subsidiary of Yale E. Key. The results of operations of Phoenix are included in the Company's results of operations effective June 26, 1997. The acquisition was accounted for using the purchase method. Southwest Oilfield Services, Inc. On June 10, 1997, the Company completed its acquisition of Southwest Oilfield Services, Inc. ("Southwest") which operates 3 oilwell service rigs and related equipment in western Oklahoma. Southwest was acquired for $455,000 in cash. Southwest will be operated by the WellTech Mid-Con Division of WellTech Eastern, Inc. The results of operations of Southwest are included in the Company's results of operations effective June 10, 1997. The acquisition was accounted for using the purchase method. Wireline and Excavation Assets On May 1, 1997, the Company completed an acquisition of ten wireline units and related equipment for approximately $600,000 in cash. These assets will be operated in West Virginia by the WellTech Eastern Division of WellTech Eastern. On May 5, 1997, the Company completed its acquisition of several dump trucks and related excavation equipment for $410,000 in cash. These assets will be operated in Michigan by the WellTech Eastern Division of WellTech Eastern. The results of operations of these assets are included in the Company's results of operations effective May 1, 1997. The acquisition was accounted for using the purchase method. Shreve's Well Service On April 18, 1997, the Company completed its acquisition of the assets of Shreve's Well Service, Inc. ("Shreve's") which operated in West Virginia. Shreve's assets were acquired for $550,000 in cash and included five well service rigs and related equipment. The Shreve's assets will be operated by the WellTech Eastern Division of WellTech - 28 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Eastern. The results of operations of Shreve's are included in the Company's results of operations effective May 1, 1997. The acquisition was accounted for using the purchase method. Argentine Drilling Rigs On April 16, 1997, the Company acquired three drilling rigs and related equipment in Argentina from Drillers, Inc. for $1.5 million in cash. The drilling rigs will be operated by WellTech Servicios, the Company's Argentine subsidiary. Diamond Well Service On April 3, 1997, the Company completed the acquisition of the assets of Diamond Well Service, Inc. ("Diamond") for $675,000 in cash. The Diamond assets included four oilwell service rigs and related equipment in Oklahoma. The Diamond assets will be operated by the WellTech Mid-Continent Division of WellTech Eastern. The results of operations of Diamond are included in the Company's results of operations effective April 1, 1997. The acquisition was accounted for using the purchase method. Kalkaska Construction Service, Inc. ,Kalkaska Oilfield Service, Inc. and Elder Well Service, Inc. On March 31, 1997, the Company completed the acquisition of the assets of Kalkaska Construction Service, Inc., Kalkaska Oilfield Service, Inc. ("KalCon") and Elder Well Service, Inc. ("Elder"), both based in Michigan. The KalCon assets included 40 vacuum (fluid transport) trucks, 40 trucks used in oilfield equipment hauling, seven saltwater disposal wells and other oilfield related equipment, and were acquired for approximately $8.5 million in cash and 77,998 shares of the Company's common stock. The Elder assets included six oilwell service rigs and related equipment and were acquired for $609,000 in cash. Both the KalCon and Elder assets will be operated by the WellTech Eastern Division of WellTech Eastern. The operating results of KalCon and Elder are included in the Company's results of operations effective April 1, 1997. The acquisition was accounted for using the purchase method. T.S.T. Paraffin Service Co., Inc. On March 27, 1997, the Company completed the acquisition of T.S.T. Paraffin Service Co., Inc. ("TST") for $8.7 million in cash. TST operates approximately 61 trucks, 22 hot oil units and other related equipment in west Texas. TST will be operated by the Company's west Texas subsidiary: Yale E. Key, Inc. The operating results of TST are included in the Company's results of operations effective April 1, 1997. The acquisition was accounted for using the purchase method. Tri-State Wellhead & Valve, Inc. The Company completed its acquisition of the assets of Tri-State Wellhead & Valve, Inc. ("Tri-State") on March 17, 1997 for $550,000 in cash and 83,770 shares of the Company's common stock. The Tri-State assets consisted of a wellhead equipment rental business and five oilwell service rigs. These assets will be operated by the WellTech Mid-Continent Division of WellTech Eastern. The operating results from these assets are included in the Company's results of operations effective April 1, 1997. The acquisition was accounted for using the purchase method. Cobra Industries, Inc. Effective as of January 13, 1997, the Company completed the purchase of Cobra Industries, Inc. ("Cobra") for $5 million in cash and 175,000 shares of the Company's common stock. Cobra operates 26 oilwell service rigs in southeastern New Mexico. The operating results from Cobra are included in the Company's results of operations effective February 1, 1997. The acquisition was accounted for using the purchase method. - 29 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Talon Trucking Co. Effective as of January 7, 1997, the Company completed the acquisition of the assets of Talon Trucking Co. ("Talon") for $2.7 million in cash. Talon operated three oilwell service rigs, 21 trucks and related fluid transportation and disposal assets in Oklahoma, which assets are currently operated by the WellTech Mid-Continent Division of WellTech Eastern. The operating results from these assets are included in the Company's results of operations effective January 7, 1997. The acquisition was accounted for using the purchase method. B&L Hotshot, Inc. Effective as of December 13, 1996, the Company completed the acquisition of B&L Hotshot, Inc. and affiliated entities ("B&L) for $4.9 million in cash. B&L provides trucking and related services for oil and natural gas wells in Michigan, which operations are currently conducted by the WellTech Eastern Division of WellTech Eastern. The operating results from B&L are included in the Company's results of operations effective January 1, 1997. The acquisition was accounted for using the purchase method. Brooks Well Servicing, Inc. Effective as of December 1, 1996, the Company completed the acquisition of Brooks Well Servicing, Inc. ("Brooks") for 917,500 shares of the Company's common stock. Brooks was a wholly-owned subsidiary of Hunt Oil Company and operated 32 oilwell service rigs and ancillary equipment in east Texas, which operations are currently conducted by the WellTech Mid-Continent Division of WellTech Eastern. The operating results from Brooks are included in the Company's results of operations effective December 1, 1996. The acquisition was accounted for using the purchase method. Hitwell Surveys, Inc. Effective as of December 2, 1996, the Company completed the purchase of Hitwell Surveys, Inc. ("Hitwell") for approximately $1.3 million in cash. Hitwell operates eight oilwell logging and perforating trucks in the Appalachian Basin and Michigan. The operating results from Hitwell are included in the Company's results of operations effective December 1, 1996. The acquisition was accounted for using the purchase method. Energy Air Drilling Services Co. Effective as of November 1, 1996, the Company completed the acquisition of certain assets of Energy Air Drilling Services Co. ("Energy Air") for $500,000 in cash and 4,386 shares of the Company's common stock. Energy Air operated four air drilling packages in west Texas, which operations are currently conducted by Yale E. Key. The acquisition was accounted for using the purchase method. Brownlee Well Service Inc. Effective as of October 24, 1996, the Company completed the purchase of Brownlee Well Service, Inc. ("Brownlee") and Integrity Fishing and Rental Tools Inc., ("Integrity"). Consideration for the acquisition was $6.5 million in cash and 61,069 shares of the Company's common stock. Brownlee and Integrity operate 16 oilwell service rigs with ancillary equipment and a variety of oilfield fishing tools in west Texas. The operating results from Brownlee are included in the Company's results of operations effective November 1, 1996. The acquisition was accounted for using the purchase method. - 30 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Woodward Well Service, Inc Effective as of October 1, 1996, the Company completed the acquisition of Woodward Well Service, Inc. ("Woodward") for 75,000 shares of the Company's common stock and approximately $100,000 in cash, most of which is payable over a four-year period. Woodward operated five oilwell service units in Oklahoma, which operations are currently conducted by the WellTech Mid-Continent Division of Welltech Eastern. The operating results from Woodward are included in the Company's results of operations effective October 1, 1996. The acquisition was accounted for using the purchase method. Acquisitions Completed Prior to June 30, 1996 Odessa Exploration Properties In April of 1996, Odessa Exploration purchased approximately $6.9 million in cash of oil and gas producing properties from an unrelated company using proceeds from bank borrowings, which indebtedness was subsequently repaid (see Note 5). The acquisition was accounted for using the purchase method. WellTech, Inc. On March 26, 1996, the Company completed the merger of WellTech, Inc. ("WellTech") into the Company. The net consideration for the merger was 3,500,000 shares of the Company's common stock and warrants to purchase 500,000 additional shares of Common Stock at an exercise price of $6.75 per share. WellTech conducted oil and gas well servicing operations in the Mid-Continent and Northeast areas of the United States and in Argentina. The acquisition was accounted for using the purchase method. Pro Forma Results of Operations--(unaudited) The following unaudited pro forma results of operations have been prepared as though WellTech Eastern, Well-Co, Cobra and T.S.T. had been acquired on July 1, 1995. Pro-forma amounts are not necessarily indicative of the results that may be reported in the future. Year Ended (Thousands, except per share data) June 30, 1997 June 30, 1996 - ------------------------------------------------------------------------------- Revenues $ 198,088 $162,988 Net income 11,591 8,964 Earnings per share $ 0.92 $ 0.76 3. OTHER ASSETS Other assets consist of the following: June 30, (Thousands) 1997 1996 --------------------------------------------------------------------------- Investment in insurance company - common stock * $ 368 $ 368 Workers compensation security premiums 1,817 1,117 Debt issuance costs (net of amortization; 1997 - $344) 7,045 - Goodwill (net of amortization: 1997 - $822, 1996 - $200) 9,256 5,400 Other 90 149 --------------------------------------------------------------------------- $18,576 $ 7,034 =========================================================================== * - Represents approximately 13% ownership. - 31 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 4. COMMITMENTS AND CONTINGENCIES Various suits and claims arising in the ordinary course of business are pending against the Company. Management does not believe that the disposition of any of these items will result in a material adverse impact to the consolidated financial position of the Company. As of June 30, 1997, the Company had reserved $133,000 for potential suits and claims. During 1995, the Company entered into employment agreements with certain of its officers. These employment agreements generally run to June 30, 1997, but will automatically be extended on a yearly basis unless terminated by the Company or the applicable officer. In addition to providing a base salary for each officer, the employment agreements provide for severance payments for each officer varying from 12 to 24 months of the officers base salary. The current annual base salaries for the officers covered under such employment agreements total approximately $800,000. 5. LONG-TERM DEBT On June 6, 1997, the Company entered into an agreement (the "Bank Credit Agreement") with PNC Bank, N.A., as administrative agent, Norwest Bank Texas, N.A., as collateral agent. Lehman Commercial Paper, Inc., as advisor, arranger and syndication agent and the lenders named thereas pursuant to which the lenders provided a $255 million credit facility, consisting of a $120 million seven-year term loan and a $135 million five-year revolver. The interest rate, on the term loan, is LIBOR plus 2.75 percent and the interest rate on the revolver varies based on the LIBOR and the level of the Company's indebtedness and is currently LIBOR plus 2.25 percent. The Company used the proceeds from the facility to: (i) repay existing bank debt; (ii) make additional acquisitions and capital expenditures; and (iii) provide working capital. In addition, the credit facility provides, under certain conditions, for the repurchase of a portion of the Company's outstanding common stock in the open market from time to time. In connection with the credit facility, the company incurred and capitalized $4,979,000 of debt issuance costs. These costs are being amortized over the life of the credit facility. The credit facility contains certain restrictive covenants and requires certain financial ratios. Long-term debt which was repaid with proceeds from the Agreement in June 1997 included all debt with CIT Group/Credit Finance, Inc. ("CIT") of approximately $54.3 million and all bank debt associated with Odessa Exploration, previously with Norwest Bank Texas, N.A. ("Norwest") of approximately $2.1 million. In July 1996, the Company completed the offering of $52,000,000 7% convertible subordinated debentures due 2003 (the "Debentures"). In August 1996, the interest rate on the Debentures was increased to 7 1/2%. As the result of the Company's purchase of the remaining 37% ownership in Servicios, the interest rate was reduced to 7% in July of 1997. The offering was a private offering pursuant to Rule 144A under the Securities Act of 1933. Proceeds from the offering were used to substantially repay existing long-term debt (approximately $35.2 million). In connection with the offering of the Debentures, the Company capitalized and incurred $2,410,000 of debt issuance costs. These costs are being amortized over the life of the Debentures. The Debenture contains certain restrictive covenants and requires certain financial ratios. The Debentures mature on July 1, 2003 and are convertible at any time after November 1, 1996 and before maturity, unless previously redeemed, into shares of the Company's common stock at a conversion price of $9 3/4 per share, subject to adjustment in certain events. In addition, holders of the Debentures who convert prior to July 1, 1999 will receive, in addition to the Company's common stock, a payment generally equal to 50% of the interest otherwise payable on the converted Debentures from the date of conversion through July 1, 1999, payable in cash or common stock, at the Company's option. Interest on the Debentures is payable semi-annually on January 1 and July 1 of each year, commencing January 1, 1997. In August, 1996, the interest rate was increased from 7% to 7 1/2% due to certain modifications in the Debenture indenture involving a certain subsidiary's - 32 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) inability to guarantee the obligations under the indenture, relating to the Debentures (the "Prospectus"), (specifically, Servicios). As the result of the Company's purchase of the remaining 37% ownership in Servicios, the interest rate was reduced to 7% in July of 1997. The Debentures will not be redeemable by the Company before July 15, 1999. Thereafter, the Debentures will be redeemable at the option of the Company in whole or part, at the declining redemption prices set forth in the original Prospectus, together with accrued and unpaid interest thereon.(see Note 17, for further discussion.) In January 1996, prior to the consummation of the Bank Credit Agreement and offering described above, the Company, Yale E. Key, Clint Hurt and WellTech entered into separate credit facilities with CIT totaling approximately $35 million (the combined maximum credit limit). The credit facilities were combined into one facility after the consummation of the Welltech merger. As a result of the separate credit facilities, the interest rate for Yale E. Key was lowered from two and one-half to one and one-quarter percent over the stated prime rate (8.25% at June 30, 1996). Each of the CIT term notes required principal and interest payments, due the first day of each month beginning February 1, 1996, plus a final payment of the unpaid balance of the note due December 31, 1998. The expiration of each of the lines of credit was December 31, 1998. The components of long-term debt are as follows: June 30, (Thousands) 1997 1996 Term Note (i) $120,000 $ - Subordinated Debentures (ii) 52,000 - Term Note(s) - CIT, interest and principal payable monthly (iii) - 21,062 Revolving Line(s) of Credit - CIT, interest payable monthly (iii) - 9,910 Revolver Note - Norwest, interest payable monthly (iv) - 6,300 Term Note(s) - Norwest, interest and principal payable monthly (v) - 7,000 Other notes payable 2,167 2,553 174,167 46,825 Less current portion 1,404 1,471 ----------------------------------------------------------------------- Long-term debt $172,763 $ 45,354 ======================================================================= (i). Under the Bank Credit Agreement, the term loan of $120 million requires interest payments at the termination of the LIBOR interest period. The term loan is seven years and the interest rate is LIBOR plus 2.75 percent. Principal payments are $500,000 at June 30, 1998, $125,000 at the end of each quarter beginning September 30, 1998 through June 30, 2002, $8,750,000 at the end of each quarter beginning September 30, 2002 through June 30, 2003 and $20,625,000 beginning September 30, 2003 with a final payment of $20,625,000 on June 30, 2004. The Company used the proceeds from the facility to: (i) repay existing bank debt; (ii) make additional acquisitions and capital expenditures; and (iii) provide working capital. In addition, the credit facility, of $135 million, provides, under certain conditions, for the repurchase of a portion of the Company's outstanding common stock in the open market from time to time. At June 30, 1997, there was $135 million available on the credit facility. Under the credit facility the Company may be obligated to pay certain fees including a commitment fee which ranges from .25% to .375% based on the unused portion of the credit facility. - 33 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) (ii). The Debentures mature on July 1, 2003 and are convertible at any time after November 1, 1996 and before maturity, unless previously redeemed, into shares of the Company's common stock at a conversion price of $9 3/4 per share, subject to adjustment in certain events. In addition, holders of the Debentures who convert prior to July 1, 1999 will receive, in addition to the Company's common stock, a payment generally equal to 50% of the interest otherwise payable on the converted Debentures from the date of conversion through July 1, 1999, payable in cash or common stock, at the Company's option. Interest on the Debentures is payable semi-annually on January 1 and July 1 of each year, commencing January 1, 1997. In August, 1996, the interest rate was increased from 7% to 7 1/2% due to certain modifications in the Debenture indenture involving a certain subsidiary's inability to guarantee the obligations under the indenture, relating to the Debentures (the "Prospectus"), (specifically, Servicios). As the result of the Company's purchase of the remaining 37% ownership in Servicios, the interest rate was reduced to 7% in July of 1997. (iii). The CIT term note, as amended, required principal payments of approximately $275,000, plus interest, due the first day of each month plus a final payment of the unpaid balance of the note due December 31, 1998. The interest rate was one and one-quarter percent above the stated prime rate of 8.25% at June 30, 1996. The note was collateralized by all of the assets (including equipment and inventory) of Yale E. Key, Clint Hurt and WellTech Eastern. The CIT line of credit, as amended, required monthly payments of interest at one and one-quarter percent above the stated prime rate of 8.25% at June 30, 1996. The line of credit was collateralized by the accounts receivable of Yale E. Key, Clint Hurt and WellTech Eastern. The agreement with CIT included certain restrictive covenants, the most restrictive of which prohibited the Company from making distributions and declaring dividends on its common stock. (iv). Prior to the Agreement and Offering described above, Odessa Exploration had a loan agreement, as amended, with Norwest. The loan agreement provided for a $7.5 million revolving line of credit note subject to a borrowing base limitation (approximately $6.3 million at June 30, 1996). The borrowing base was redetermined on at least a semi-annual basis. The borrowing base was reduced by approximately $100,000 per month through October 1997; the maturity of the note. The note's interest rate was one-half of one percent over Norwest's prime rate of 8.25% at June 30, 1996. The note was secured by substantially all of the oil and gas properties of Odessa Exploration. The loan agreement had contained various restrictive covenants and compliance requirements, which included (a) prohibits Odessa Exploration from declaring or paying dividends on Odessa Exploration's common stock, (b) limiting the incurrence of additional indebtedness by Odessa Exploration, (c) the limitation on the disposition of assets and (d) various financial covenants. (v). In April, 1996, as the result of the acquisition of certain properties by Odessa Exploration, but prior to the Offering described above, Odessa Exploration entered into a loan agreement with Norwest. The loan agreement provided for a term loan of $9.3 million to be reduced by $2.4 million in principal amount after the consummation of the acquisition of certain properties by Odessa Exploration. The note's interest rate was one-half of one percent over Norwest's prime rate of 8.25% at June 30, 1996. The note required interest payments beginning June 1, 1996. The note was secured by substantially all of the oil and gas properties of Odessa Exploration. Presented below is a schedule of the repayment requirements of long-term debt for each of the next five years and thereafter as of June 30, 1997: - 34 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) (in thousands) Fiscal year Principal Ended Amount --------------------------------------------------------- 1998 $ 1,404 1999 1,392 2000 701 2001 637 2002 533 Thereafter 169,500 ------- $ 174,167 ========================================================= 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, other current assets and other current liabilities approximates fair value because of the short maturity of these instruments. Based on the borrowing rates currently estimated to be available to the Company for loans with similar terms, the fair value of long-term debt approximates the carrying amount as of June 30, 1997 and 1996, except for the subordinated convertible debentures which have a carrying value of $52 million and a fair value of approximately $98.9 million at June 30, 1997. 7. OTHER ACCRUED LIABILITIES Other accrued liabilities consist of the following: June 30, (Thousands) 1997 1996 --------------------------------------------------------------------------- Accrued payroll and taxes $ 6,674 $2,614 Group medical insurance 891 1,536 Workers compensation 1,683 1,067 State sales and use taxes 247 414 Gas imbalance - deferred income 155 198 Revenue distribution 145 437 Acquisition and reorganization accrual 838 3,720 Other 1,874 1,016 ----------------------- Total $ 12,507 $11,002 =========================================================================== 8. STOCKHOLDERS' EQUITY The 1995 Stock Option Plan On March 26, 1996, a Stock Option Plan (the "1995 Plan") was approved by the Company's stockholders. The Plan became effective July 1, 1995, and , unless terminated earlier, will terminate July 1, 2005. The 1995 Plan is administered by a committee (the "Committee") consisting of at least three directors of Key, each of whom is a "disinterested person" within the meaning of rule 16b-3 under the Exchange Act and an "outside director" within the meaning of Section 162(m) of the Code. - 35 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued The total number of shares of the Company's common stock that may be subject to options under the 1995 Plan may not exceed 1,800,000 in the aggregate. The total amount of common stock with respect to which options may be granted over the life of the 1995 Plan to any single employee shall not exceed 500,000 shares in the aggregate. Options which are canceled, forfeited or have expired or expire by their terms without being exercised shall be available for future grants under the 1995 Plan. The Committee may determine which key employees of the Company or any subsidiary or other persons shall be granted options under the 1995 Plan, the terms of the options and the number of shares which may be purchased under the option. The individuals eligible to receive options under the 1995 Plan consist of key employees (including officers who may be members of the Board), directors who are neither employees nor members of the Committee and other individuals who render services of special importance to the management, operation or development of Key or any subsidiary, and who have contributed or may be expected to contribute materially to the success of Key or a subsidiary, provided, however, that only key employees are eligible to receive options. The price at which shares of common stock may be purchased upon exercise of an option will be specified by the Committee at the time the option is granted, but in the case of an individual stock option, except under certain conditions, may not be less than the fair market value of the common stock on the date of grant. The duration of any option is determined by the Committee in its discretion and shall be specified in the option agreement. No individual stock option may be exercisable after the expiration of ten years. The 1995 Outside Directors Stock Option Plan On March 26, 1996, an Outside Directors Stock Option Plan was approved by the Company's Shareholder's (the "Directors Plan"). Individuals who are "Outside Directors" are eligible to participate in the Directors Plan. An "Outside Director" is defined as a member of the Board of Directors who is not an employee of the Company or any of its subsidiaries. Under the Directors Plan, Outside Directors are divided into three groups dependent upon certain dates and length of service on the Board. Only nonqualified stock options ("NSO's") may be granted under the Directors Plan. An NSO granted under the Directors Plan shall expire ten years after the date of the grant. An NSO may not be granted under the Directors Plan after July 1, 1998. The Directors Plan provides for the issuance of an aggregate of 400,000 shares of common stock, which may be authorized but unissued shares, treasury shares, or shares purchased on the open market. The exercise price of the NSO shall be the fair market value on the date of the grant. The following table summarizes the stock option activity related to the Company's plans: Price Shares Per Share ----------------------------------------------------------------------- Outstanding, July 1, 1995 Granted 1,075,000 $ 5.00 --------- Outstanding, June 30, 1996 1,075,000 --------- Granted 175,000 $ 7.50 175,000 $8.313 50,000 $8.375 25,000 $8.50 25,000 $11.125 535,000 $13.25 25,000 $14.50 - 36 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Price Shares Per Share 50,000 $16.875 Canceled 26,668 $5.00 Exercised 28,332 $5.00 ---------- Outstanding, June 30, 1997 2,080,000 ========== Exercisable, June 30, 1997 810,417 The Company applies APB 25 and related Interpretations in accounting for its stock option awards. Accordingly, no compensation expense has been recognized for its stock option awards. If compensation expense for the stock option awards had been determined consistent with SFAS 123, the Company's net income and net income per share, for the years ended June 30, 1997 and 1996 would have been adjusted to the following pro forma amounts: (unaudited) Year Ended June 30, 1997 1996 ---- ---- Net income (in thousands) $8,680 $2,945 Primary net income per share $ 0.71 $ 0.37 Fully-diluted net income per share $ 0.61 $ 0.35 The pro forma net income and pro forma net income per share amounts noted above are not likely to be representative of the pro forma amounts to be reported in future years. Pro forma adjustments in future years will include compensation expense associated with the options granted in fiscal year 1996 and 1997 plus compensation expense associated with any options awarded in future years. As a result, such pro forma compensation expense is likely to be higher than the levels reflected for 1996 and 1997 if any options are awarded in future years. Under SFAS 123, the fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grant in 1997 and 1996: 1997 1996 ---- ---- Risk-free interest rate 6.59% 6.54% Expected life 5 years 5 years Expected volatility 28% 29% Expected dividend yield 0% 0% The total fair value of options granted at June 30, 1997 is $6,541,000. - 37 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 9. INCOME TAXES Components of income tax expense (benefit) are as follows: Fiscal Year Ended June 30, (Thousands) 1997 1996 1995 ----------------------------------------------------------------------- Federal and State: Current $ 1,664 $ 270 $ (220) Deferred 3,836 1,618 1,370 --------------------------------------- $ 5,500 $ 1,888 $1,150 ====================================================================== Income tax expense (benefit) differs from amounts computed by applying the statutory federal rate as follows: Fiscal Year Ended June 30, (Thousands) 1997 1996 1995 ----------------------------------------------------------------------- Income tax computed at Statutory rate 35.0% 34.0% 34.0% Amortization of goodwill disallowance 1.5 - - Meals and entertainment disallowance 0.8 1.7 2.2 Accrual to return adjustments 0.3 (1.5) (1.0) Other 0.1 (0.3) (0.7) _______________________________________________________________________ 37.7% 33.9% 34.5% ======================================================================= Deferred tax assets (liabilities) are comprised of the following : Fiscal Year Ended June 30, (Thousands) 1997 1996 1995 ----------------------------------------------------------------------- Net operating loss carry-forwards $ 4,628 $ 6,293 $ 1,140 Property and equipment (40,410) (10,942) (3,437) Other (82) 95 (25) ----------------------------------------------------------------------- Net deferred tax liability $ (35,864) $ (4,554) $ (2,322) ======================================================================= A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Based on expectations for the future, management has determined that taxable income of the Company will more likely than not be sufficient to fully utilize available carryforwards prior to their ultimate expiration. The Company estimates that as of June 30, 1997, the Company will have available approximately $148,414,060 of net operating loss carryforwards (which begin to expire in 2001). The net operating loss carryforwards are subject to an annual limitation of approximately $940,000, under Sections 382 and 383 of the Internal Revenue Code. - 38 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 10. LEASING ARRANGEMENTS Among other leases, the Company (primarily its subsidiaries), lease certain automotive equipment under non-cancelable operating leases which expire at various dates through 2002. The term of the operating leases generally run from 36 to 60 months with varying payment dates throughout each month. In addition, in the case of Yale E. Key, each lease includes an option to purchase the equipment and an excess mileage charge as defined in the leases. As of June 30, 1997, the future minimum lease payments under non-cancelable operating leases, in thousands, are as follows: Fiscal Year Lease Ending June 30, Payments 1998 $ 4,348 1999 3,433 2000 2,044 2001 1,122 2002 391 --------- $11,338 ========= Operating lease expense was approximately $5,299,000, $2,897,000, and $1,930,000, for the fiscal years ended June 30, 1997, 1996 and 1995, respectively. 11. EMPLOYEE BENEFIT PLANS At June 30, 1997, as the result of the WellTech merger (Note 2), the Company maintains two 401-(k) plans (the "Plans") for its employees. Employees of WellTech Eastern are eligible for participation in one Plan (the "WellTech 401-(k) Plan"), while all other employees are eligible for participation in the other Plan (the "Key 401-(k) Plan"). The Company intends to merge the two Plans at January 1, 1998. The 401-(k) plans cover substantially all employees of the Company. The Company matches employees' contributions up to 10% of the employees' contribution to the Key 401-(k) Plan. These contributions totaled approximately $35,000, $19,000 and $20,000 for the years ended June 30, 1997, 1996 and 1995, respectively. Additionally, the Company contributed $300,000 and $37,000 into the WellTech 401-(k) Plan for the year ended June 30, 1997 and the period of March 26, 1996 (the date of the WellTech merger) to June 30, 1996, respectively . The Company agreed to match employee contributions up to 50% (to a maximum of $1,000 per employee) of the employees' contributions to the WellTech 401-(k) Plan. 12. MAJOR CUSTOMERS Sales to customers representing 10% or more of consolidated revenues for the years ended June 30, 1997, 1996 and 1995 were as follows: Fiscal Year Ended June 30, 1997 1996 1995 Customer A 13% 20% 18% Customer B 7% 11% 10% - 39 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 13. TRANSACTIONS WITH RELATED PARTIES WellTech Eastern paid $78,000 and $18,000 for the year ended June 30, 1997 and for the period March 26, 1996 (the date of the Welltech merger) to June 30, 1996, respectively, for office/yard rental expense in which an officer of the Company and WellTech Eastern has an interest. In the opinion of the Board of Directors of the Company, based on the Board's review of competitive bids, this transaction was on terms at least as favorable to the Company as could have been obtained from a third party. In connection with the Odessa Exploration acquisition, (see Note 2) the Company granted D. Kirk Edwards (President of Odessa Exploration) a percentage reversionary working interest in five deep gas wells located in West Texas upon repayment of $1,622,000 of the bank debt assumed by the Company in the acquisition from the Company's earnings from the five wells. The percentage reversionary working interest decreases based on the date of repayment of the assumed bank debt and ranges from 20% of the earnings from the five wells if repayment occurs on or prior to July 7, 1995, to 5% of the earnings from the five wells if repayment occurs after July 7, 1996. Key leases automotive equipment from an independent third party (see Note 10). The independent third party purchases the automotive equipment from an automobile dealership in which a former officer owns a majority interest. Net proceeds to the automobile dealership totaled $399,000 for the year ended June 30, 1995. The leases are considered operating leases. In the opinion of the Board of Directors of the Company, the net proceeds from automotive equipment were on terms at least as favorable to the Company as could have been obtained from a third party. This opinion is based on information provided by a third party leasing company, that is not affiliated with the former officer or the Company, to the Board of Directors regarding purchase prices and equipment lease rentals offered by third parties. Space left blank intentionally - 40 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 14. CONCENTRATIONS OF CREDIT RISK The Company has a concentration of customers in the oil and gas industry. Substantially all of the Company's customers are major integrated oil companies, major independent producers of oil and gas and smaller independent producers. This may affect the Company's overall exposure to credit risk either positively or negatively, in as much as its customers are effected by economic conditions in the oil and gas industry, which has historically been cyclical. However, accounts receivable are well diversified among many customers and a significant portion of the receivables are from major oil companies, which management believes minimizes potential credit risk. Historically, credit losses have been insignificant. Receivables are generally not collateralized, although the Company may generally secure a receivable at any time by filing a mechanic's and material-mans' lien on the well serviced. 15. BUSINESS SEGMENT INFORMATION Information about the Company's operations by business segment is as follows: Year Ended June 30, (Thousands) 1997 1996 1995 ---------------------------------------------------------------------------- Revenues: Oil and gas $ 8,180 $ 4,175 $ 2,334 Oilfield services 144,385 55,933 40,105 Oil and gas well drilling services 9,956 6,188 1,932 Other 1,109 182 318 ---------------------------------------------------------------------------- $163,630 $ 66,478 $44,689 ============================================================================ Income before minority interest and and income taxes: Oil and gas $ 3,719 $ 1,596 $ 941 Oilfield services 20,639 6,482 4,105 Oil and gas well drilling services 1,036 639 367 Interest expense (7,535) (2,477) (1,478) General corporate (3,257) (665) (607) ---------------------------------------------------------------------------- $ 14,602 $ 5,575 $ 3,328 ============================================================================ Identifiable assets: Oil and gas $ 23,544 $18,170 $ 8,289 Oilfield services 242,001 94,962 33,516 Oil and gas well drilling services 8,365 5,583 3,160 General corporate 46,185 3,007 278 ---------------------------------------------------------------------------- $320,095 $121,722 $45,243 ============================================================================ - 41 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Year Ended June 30, -------------------------- (Thousands) 1997 1996 1995 ---------------------------------------------------------------------------- Capital expenditures (excluding acquisitions): Oil and gas $ 8,188 $ 1,879 $ 2,823 Oilfield services 15,084 5,188 2,839 Oil and gas well drilling services 1,483 598 143 --------------------------------------------------------------------------- $ 24,755 $ 7,665 $ 5,805 =========================================================================== Depreciation, depletion and amortization: Oil and gas $ 870 $ 618 $ 426 Oifield services 9,198 3,862 2,279 Oil and gas well drilling services 436 221 33 General corporate 916 - - --------------------------------------------------------------------------- $ 11,420 $ 4,701 $ 2,738 =========================================================================== Key operates a variety of oilfield service equipment including workover rigs, hot oil units, transports and various other oilfield servicing equipment. In addition, Key performs a variety of other oilfield services including fishing tools, frac tanks and blow-out preventers. Oil and gas production is conducted by Odessa Exploration. Odessa Exploration acquires and manages interests in producing oil and gas properties for its own account and for its sponsored investors. Odessa Exploration is engaged in the drilling and production of oil and natural gas in the United States. Odessa Exploration acquires producing oil and gas properties from major and independent producers. After acquisition, Odessa Exploration may either rework the acquired wells to increase production and/or form drilling partnerships for additional development wells. Oil and gas well drilling services are conducted by Clint Hurt Drilling. Clint Hurt Drilling operates six drilling rigs which drill for oil and gas in the West Texas area. 16. DERIVATIVE FINANCIAL INSTRUMENTS The Company utilizes derivative financial instruments to manage well-defined commodity price risks. The Company is exposed to credit losses in the event of nonperformance by the counterparties to its commodity hedges. The Company anticipates, however, that such counterparties will be able to fully satisfy their obligations under the contracts. The Company does not obtain collateral or other security to support financial instruments subject to credit risk but monitors the credit standing of the counterparties. The Company utilizes option contracts to hedge the effect of price changes on future oil and gas production. If market prices of oil and gas exceed the strike price of put options, the options will expire unexercised, therefore reducing the effective price received for oil and gas sales by the cost of the related option. As of June 30, 1996, Odessa Exploration had 6,000 Bbls of oil per month hedged with a strike price of $19.50 per Bbl., from the period of July 1, 1996 through December 31, 1996. Premiums paid for commodity options contracts are amortized to oil and gas sales over the terms of the agreements. Unamortized premiums of $91,789 and $0 are included in other current assets in the consolidated balance sheet at June 30, 1996 and 1997, respectively. Amounts receivable, if any, under commodity option contracts are accrued as an increase in oil and gas sales for the applicable periods. - 42 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 17. SUBSEQUENT EVENTS. Acquisitions Announced but not yet Completed after June 30, 1997 The following described acquisitions that have been announced but not yet completed after June 30, 1997 and are not included in the Company's results of operations for the twelve months ended June 30, 1997. BRW Drilling, Inc. On August 4, 1997, the Company announced it had signed a letter of intent to acquire BRW Drilling, Inc. ("BRW") for approximately $15.0 million in cash. BRW operates 7 drilling rigs and related equipment in the Permian Basin of West Texas. The closing of the BRW acquisition is expected upon negotiation of a definitive agreement, completion of the Company's standard due diligence and receipt of regulatory clearances, if any are required. Upon completion, the BRW acquisition will be combined with Clint Hurt's drilling operations in the Permian Basin of West Texas to form a thirteen rig shallow drilling operation. Frontier Well Service, Inc. On August 21, 1997, the Company announced a definitive agreement for the acquisition of Frontier Well Service, Inc. ("Frontier") for approximately $3.5 million in cash. Frontier operates 12 oilwell service rigs and related equipment in Wyoming. The closing of the Frontier acquisition is expected upon negotiation of a definitive agreement, completion of the Company's standard due diligence and receipt of regulatory clearances, if any are required. Dunbar Well Service, Inc. On August 4, 1997, the Company announced it had signed a letter of intent to acquire Dunbar Well Service, Inc. ("Dunbar") for approximately $11.8 million in cash. Dunbar operates 38 oilwell service rigs and related equipment in Wyoming. The closing of the Dunbar acquisition is expected upon negotiation of a definitive agreement, completion of the Company's standard due diligence and receipt of regulatory clearances, if any are required. J.W. Gibson Well Service Company On August 4, 1997, the Company announced a definitive agreement for the acquisition of J.W. Gibson Well Service Company ("Gibson") for cash, stock and warrants with an estimated value of approximately $25.0 million. Gibson operates 74 oilwell service rigs and related equipment in eight western states. The closing of the Gibson acquisition is expected in October 1997. The Company will manage the operations of Gibson during the interim period. The acquired Rocky Mountain operations of Gibson, together with the acquired Dunbar and Frontier operations, will operate as a separate subsidiary of Key Energy. Big A Well Service Co., Sunco Trucking Co. and Justis Supply Co. On July 21, 1997, the Company announced it had signed a letter of intent to acquire Big A Well Service Co., Sunco Trucking Co. and Justis Supply Co. (collectively, "Big A/Sunco") for cash and stock with an estimated value of approximately $31.0 million. Big A/Sunco operates 29 oilwell service rigs, four drilling rigs, 75 fluid hauling and other trucks, a machine shop/supply store and related equipment in the Four Corners region of the Southwestern United States. The closing of the Big A/Sunco acquisition is expected upon negotiation of a definitive agreement, completion of the Company's standard due diligence and receipt of regulatory clearances, if any are required. The acquired Big A/Sunco operations will operate as a separate subsidiary of Key Energy. - 43 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Acquisitions Completed after June 30, 1997 The following described acquisitions were completed after June 30, 1997 and are not included in the Company's results of operations for the twelve months ended June 30, 1997. Landmark Fishing & Rental, Inc. On September 16, 1997, the Company closed the acquisition of Landmark Fishing & Rental, Inc. ("Landmark") for approximately $3.3 million in cash. Landmark operates a rental tool business in Western Oklahoma and the Texas Panhandle. Landmark will be operated by WellTech Mid-Continent Division of WellTech Eastern. The operating results of Landmark will be included in the Company's results of operations effective September 16, 1997. Ram Oil Well Service, Inc. and Rowland Trucking Co., Inc. On September 1, 1997, the Company completed the acquisition of Ram Oil Well Service, Inc. and Rowland Trucking Co., Inc. ("Ram/Rowland") for $21.5 million in cash. Ram/Rowland operates approximately 17 oilwell service rigs, 93 fluid hauling and other trucks, 290 frac tanks, three disposal and brine wells, and dirt construction equipment in West Texas and Southeast New Mexico. Ram/Rowland will be operated by the Company's west Texas subsidiary: Yale E. Key, Inc. The operating results of Ram/Rowland will be included in the Company's results of operations effective September 1, 1997. Mosley Well Service, Inc. On August 22, 1997, the Company completed the acquisition of Mosley Well Service, Inc., ("Mosley") which operates in East Texas, Northern Louisiana and Arkansas. Mosley was acquired for approximately $16.2 million in cash and included thirty-six well service rigs and related equipment. Moseley will be integrated with the Brooks Division of WellTech Eastern. The operating results of Mosley will be included in the Company's results of operations effective September 1, 1997. Kenting Holdings (Argentina) S.A. On July 30, 1997, the Company completed the acquisition of the assets of Kenting Holdings (Argentina) S.A. ("Kenting") for $10.1 million in cash. The Kenting assets included six oilwell service rigs, three drilling rigs and related equipment in Argentina. The Kenting assets will be operated by Servicios. Patrick Well Service, Inc. On July 17, 1997, the Company completed the acquisition of the assets of Patrick Well Service, Inc. ("Patrick") for $7.0 million in cash. The Patrick assets included 29 oilwell service rigs and related equipment located in Southwest Kansas, Oklahoma and Southeast Colorado. The Patrick assets will be operated by the WellTech Mid-Continent Division of WellTech Eastern. - 44 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Servicios WellTech, S.A. Minority Interest Effective July 1, 1997, the Company purchased the remaining 37% interest in Servicios from two unrelated parties for $3.4 million in cash. As a result of the purchase, the Company will now own 100% of Servicios. Conversion of Convertible Subordinated Debentures As of September 11, 1997, $33,245,000 in principal amount of the Company's Debentures had converted into the Company's common stock. The conversion was at the option of the holders. The Debentures converted into 3,552,539 shares of the Company's common stock. The conversion included 188,488 shares, in addition to the conversion of shares at $9.75 per share. Such additional consideration will be accounted for as an increase to the Company's Equity. However, the proportional amount of debt issuance costs associated with the converted Debentures will be expensed as an extraordinary item in the period in which it occurs. 18. QUARTERLY RESULTS OF OPERATIONS (Unaudited) Summarized quarterly financial data for 1997 and 1996 are as follows:
First Second Third Fourth (in thousands, except per share amounts) Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------------------------------------------- 1997 Revenues . . . . . . . . . . . . . . . . . . . . . $31,462 $36,197 $43,050 $52,921 Earnings from operations . . . . . . . . . . . . . 2,396 3,022 3,563 5,621 Net earnings . . . . . . . . . . . . . . . . . . . 1,554 2,043 2,365 3,136 Earnings per share . . . . . . . . . . . . . . . . .14 .18 .19 .24 Weighted average common shares and equivalents outstanding. . . . . . . . . . . 10,894 11,634 12,572 13,294 1996 Revenues . . . . . . . . . . . . . . . . . . . . . $12,398 $12,394 $14,302 $27,384 Earnings from operations . . . . . . . . . . . . . 3,522 3,763 4,180 7,895 Net earnings . . . . . . . . . . . . . . . . . . . 726 768 827 1,265 Earnings per share . . . . . . . . . . . . . . . . .11 .11 .12 .16 Weighted average common shares and equivalents outstanding. . . . . . . . . . . 6,914 6,914 6,981 7,941
The fourth quarter of fiscal 1997 includes an adjustment of $2 million for previously unrecorded inventory. - 45 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 19. SUPPLEMENTAL INFORMATION ON OIL AND GAS ACTIVITIES (unaudited) CAPITALIZED COSTS: June 30, (in thousands) 1997 1996 Oil and Gas Properties: Proved properties $ 23,402 $ 17,290 Unproved properties - - Less accumulated depletion (1,868) (1,364) ------------------------------------------------------------------------- Net capitalized costs $ 21,534 $ 15,926 ========================================================================= COSTS INCURRED: June 30, (in thousands) 1997 1996 1995 ------------------------------------------------------------------------- Proved property acquisition costs $ - $ 7,786 $ 1,054 Development costs 8,188 1,848 2,581 ------------------------------------------------------------------------- Total costs incurred $ 8,188 $ 9,634 $ 3,635 ========================================================================= RESULTS OF OPERATIONS: June 30, (in thousands) 1997 1996 1995 ------------------------------------------------------------------------- Oil and gas sales $ 6,975 $ 3,555 $ 1,793 Production costs, including production taxes (3,030) (1,350) (756) Depletion (835) (598) (398) Income taxes * (1,057) (546) (217) ------------------------------------------------------------------------- Results of operations for oil and gas producing activities ** $ 2,053 $ 1,061 $ 422 ========================================================================= * - computed at the statutory rate of 35%. ** - excludes corporate overhead and financing costs. Oil and Gas Reserve Information Estimates of Odessa Exploration's proved oil and gas reserves as of June 30, 1997, 1996 and 1995 were prepared by the Company and reviewed by an independent petroleum reservoir engineering firm. Estimates were made in accordance with guidelines established by the Securities and Exchange Commission. Proved oil and gas reserves are the estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic conditions, i.e. prices and costs as of the date the estimate is made. Prices utilized reflect consideration of changes in existing prices provided by contractual arrangements, if any, but not of escalations based upon future conditions. The reserve estimates are presented utilizing an average oil price of $21.00 Bbl and an average natural gas price of $2.20 Mcf as of June 30, 1997. - 47 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing equipment and operating methods. Proved undeveloped oil and gas reserves are proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion or secondary or tertiary recovery. Reserves assigned to undrilled acreage are limited to those drilling units that offset productive units reasonably certain of production when drilled. No major discovery or other favorable or adverse event has occurred since July 1, 1997 which is believed to have caused a significant change in the estimated proved oil and gas reserves of Odessa Exploration. Odessa Exploration's estimate of reserves has not been filed with or included in reports to any federal agency other than the Securities and Exchange Commission. Oil and gas reserve quantity estimates are subject to numerous uncertainties inherent in the estimation of quantities of proved reserves and in the projection of future rates of production and the timing of development expenditures. The accuracy of such estimates is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of subsequent drilling, testing and production may cause either upward or downward revision of previous estimates. Further, the volumes considered to be commercially recoverable fluctuate with changes in prices and operating costs. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of currently producing oil and gas properties. Accordingly, these estimates are expected to change as additional information becomes available in the future. Oil and Gas Producing Activities: Oil and Natural Condensate Gas (Bbls) (Mcf) Total Proved Reserves: Balance, June 30, 1994 114,908 6,785,661 ------------------------------------------------------------------------ Revisions of previous estimates 92,080 1,945,659 Purchases of minerals-in-place 1,515,559 6,036,937 Production (40,330) (770,197) Balance, June 30, 1995 1,682,217 13,998,060 ------------------------------------------------------------------------ Revisions of previous estimates 438,142 6,313,118 Purchases of minerals-in-place 3,162,099 16,456,993 Production (97,130) (1,026,577) Balance, June 30, 1996 5,185,328 35,741,594 ======================================================================== (table continued next page) - 47 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Oil and Natural Condensate Gas (Bbls) (Mcf) Proved Developed Reserves: June 30, 1995 750,604 11,203,232 ======================================================================== June 30, 1996 2,727,967 24,517,362 ======================================================================== Standardized Measure of Discounted Future Cash Flows The following schedules present estimates of the standardized measure of discounted future net cash flows from the Company's proved reserves as of June 30, 1996, and an analysis of the changes in these amounts for the years ended June 30, 1996 and 1995. June 30, 1997 information is not included, as during the current year oil and gas producing activities are no longer considered significant in accordance with reporting requirements under FAS 14 - Financial Reporting for Segments of a Business Enterprise. Estimated future cash flows are determined using year-end prices adjusted only for fixed and determinable increases for natural gas provided by contractual agreement (if any). Estimated future production and development costs are based on economic conditions at year-end. Future federal income taxes are computed by applying the statutory federal income tax rate of 34% to the difference between the future pretax net cash flows and the tax basis of proved oil and gas properties, after considering investment tax credits and net operating loss carry-forwards (if any), associated with these properties. Discounted future cash flow estimates like those shown below are not intended to represent estimates of the fair value of oil and gas properties. Estimates of fair value should also consider probable reserves, anticipated future oil and gas prices, interest rates, changes in development and production costs and risks associated with future production. Because of these and other considerations, any estimate of fair value is necessarily subjective and imprecise. (in thousands) June 30, 1996 June 30, 1995 Standardized Measure: Future cash inflows $ 171,000 $ 51,830 Future production costs (61,521) (11,852) Future development costs (15,495) (6,160) Future income taxes (12,092) (10,477) _______________________________________________________________________ Future after-tax net cash flows 81,892 23,341 10% annual discount (42,188) (8,183) ------------------------------------------------------------------------ Standardized Measure $ 39,704 $ 15,158 ======================================================================== (table continued next page) - 48 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Changes in Standardized Measure: Standardized Measure, June 30, 1994 $ 4,739 Oil and gas sales, net of production costs (1,037) Purchases of minerals in place 13,033 Net change in income taxes (5,881) Accretion of discount 512 Revision of quantity estimates 1,745 Change in future development costs 1,227 Net change in sales prices 79 Changes in production rates (timing) and other 741 ------------------------------------------------------------------ Standardized Measure, June 30, 1995 $ 15,158 Oil and gas sales, net of production costs (2,205) Purchases of minerals in place 24,216 Net change in income taxes 75 Accretion of discount 2,142 Revision of quantity estimates 6,189 Change in future development costs (982) Extensions and discoveries 2,952 Net change in sales prices 1,397 Changes in production rates (timing) and other (9,238) ------------------------------------------------------------------ Standardized Measure, June 30, 1996 $ 39,704 ================================================================== 20. CASH FLOW DISCLOSURES Supplemental cash flow disclosures for the years ended June 30, 1997, 1996 and 1995 are presented below: Year Ended June 30, (Thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- Interest paid $ 5,850 $ 2,205 $1,422 Taxes paid - 391 53 Supplemental schedule of non-cash investing and financing transactions for the years ended June 30, 1996 and 1995 are presented below: Year Ended June 30, (Thousands) 1996 1995 - -------------------------------------------------------------------------------- Fair value of Common Stock issued for Clint Hurt Drilling - 23 Fair value of Common Stock and Warrants issued for WellTech West Texas - 8,647 Capital lease obligation reduced for purchase of asset - 275 (table continued next page) - 49 - Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Proceeds on sale of assets not received - 132 Property and equipment additions and acquisition costs not paid as of June 30th - 1,015 Issuance of note payable in Clint Hurt Drilling acquisition - 725 Fair value of Common Stock issued for WellTech, Inc. 17,929 - Assumption of Welltech, Inc. Working capital deficit 1,734 - Assumption of Welltech, Inc. non-current liabilities and debt 27,570 - Acquisition of WellTech, Inc. property and equipment 47,455 - Supplemental schedule of non-cash investing and financing transactions for the year ended June 30, 1997 is presented below:
Fair Value Acquisition of Issued Assumption of Assumption of of Property Acquisition Common Stock (1) Debt Liabilities and Equipment - -------------------------------------------------------------------------------------------------------------------------- Brownlee Well Service Inc. $ 672 $ 1,948 $ 3,558 $ 11,234 Woodward Well Service, Inc. 562 80 771 1,351 Brooks Well Servicing, Inc. 11,125 - 6,291 16,935 Hitwell Surveys, Inc. - 176 1,425 2,655 B&L Hotshot, Inc. - - 175 4,575 Energy Air Drilling Services Co. 50 150 - 700 Talon Trucking Co. - - - 2,700 Cobra Industries, Inc. 2,384 625 3,867 10,171 T.S.T Paraffin Service Co., Inc. - 70 3,599 10,035 Tri-State Wellhead & Valve, Inc. 1,000 - - 1,339 Kalkaska Construction Service, Inc. 1,112 - 1,187 10,711 Well-Co Oilwell Co. 4,048 599 11,337 28,463 Shreve's Well Service - - 50 600 Youngs Wireline - - 225 744 Phoenix Well Service - 410 1,761 3,897 Elder Well Service, Inc. - - 40 649 Diamond Well Service, Inc. - - - 675 Southwest Oilfield Services, Inc. - - - 455 Edco Well Service - - 50 460
(1) - Fair value of issued common stock represents number of common shares issued at the market value of Company's common stock at acquisition date. - 50 - Independent Auditors' Report To The Board of Directors and Stockholders Key Energy Group, Inc. We have audited the accompanying consolidated balance sheets of Key Energy Group, Inc. and Subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 1997. 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 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Key Energy Group, Inc. and Subsidiaries as of June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1997, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Midland, Texas August 28, 1997 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III. ITEMS 10 - 13. Pursuant to Instruction G(3) to Form 10-K, the information required in Items 10-13 is incorporated by reference from the Company's definitive proxy statement, which will be filed with the Commission pursuant to Regulation 14A within 120 days of June 30, 1997. - 52 - PART IV. ITEM 14. EXHIBITS FINANCIAL STATEMENTS AND REPORTS ON FORM 10-K. (a) Index to Exhibits The following documents are filed as part of this report: (1) See Index to Financial Statements set forth in Item 8. (2) Financial Statements Schedules: [None] (3) Exhibits: Exhibit 2.1 Agreement and Plan o f Merger dated as of November 18, 1995, between Key and WellTech, as amended. (Incorporated by reference to the Company's Registration Statement Form S-4, Registration No.333-369). Exhibit 2.2 Joint Plan of Reorganization, dated as of October 20, 1992, of the Company, ESKEY Inc.and YFC International Finance N.V. and Order, dated December 4, 1992, of the United States Bankruptcy Court for the District of New Jersey, approving the Joint Plan of Reorganization (Incorporated by reference to Exhibits 2 (a) and 28 (a) of the Company's Report on Form 8-K dated December 14, 1992,File No. 1-8038). Exhibit 2.3 Agreement and Plan of Merger dated as of July 20, 1993, by and among the Company, OEI Acquisition Corp. and Odessa Exploration Incorporated. (Incorporated by reference to Exhibit 2(a) of the Company's Report on Form 8-K dated September 2, 1993, File No. 1-8038). Exhibit 2.4 Asset Purchase Agreement dated as of December 10,1993 between the Company and WellTech, Inc.(Incorporated by reference to exhibit 2(a) of the Company's report on form 8-K dated August 17, 1984,File No. 1-8038). Exhibit 3.1 Amended and Restated Articles of Incorporation of the Company (Incorporated by reference to the Company's Registration Statement on Form S-4,Registration No. 333-369). Exhibit 3.2 Amended and Restated By-Laws of the Company (Incorporated by reference to the Company's Registration Statement on Form S-4 dated March 8,1996, Registration No. 333-369). Exhibit 4.1 7% Convertible Subordinated Debenture of the Company due July 1, 2003. (Incorporated by reference to exhibit 4.1 of the Company's Report on Form 10-K dated June 30, 1996, File No. 1-8038). Exhibit 4.2 Indenture for the 7% Convertible Subordinated Debenture of the Company due July 1, 2003.(Incorporated by reference to exhibit 4.2 of the Company's Report on Form 10-K dated June 30, 1996, File No. 1-8038). Exhibit 4.3 Registration Rights Agreement among the Company, McMahan Securities Co., L.P. and Rausher Pierce Refsnes, Inc., dated as of July 3, 1996. (Incorporated by reference to exhibit 4.3 of the Company's Report on Form 10-K dated June 30, 1996, File No. 1-8038). Exhibit 4.4 Registration Rights Agreement between the Company and D. Kirk Edwards, dated as of July 20, 1993.(Incorporated by reference to Exhibit 10 ( c ) to the Company's Report on Form 8-K/A). - 53 - Exhibit 4.5 Registration Rights Agreement dated as of March 2, 1996 among the Company and certain of its stockholders. (Incorporated by reference to the Company's Registration Statement on Form S-4, Registration No. 353-369). Exhibit 4.6 Registration Rights Agreement dated as of March 30, 1995 between the Company, Clint Hurt and Associates, Inc. and Clint Hurt. (Incorporated by reference to Exhibit 10 (d) of the Company's Report on 10-KSB dated June 30, 1995, File No. 1-8038). Exhibit 4.7 Form of Common Stock Purchase Warrant to Purchase Key Common Stock issued in connection with the WellTech Merger.(Incorporated by reference to the Company's Registration Statement on Form S-4, Registration No. 353-369). Exhibit 10.1 * Employment Agreement between the Company and D. Kirk Edwards, dated as of July 1, 1996. Exhibit 10.2 Asset Purchase Agreement dated as of March 30, 1995 between the Company and Clint Hurt and Associates, Inc. (Incorporated by reference to the Company's Report on Form 10-KSB dated June 30, 1995, File No.1-8038). Exhibit 10.3 Non-Competition Agreement dated as of March 3, 1995 between the Company, Clint Hurt and Associates,Inc. and Clint Hurt. ( Incorporated by reference to Exhibit 10(f) of the Company's Report on Form 10-KSB dated June 30, 1995, File No. 1-8038). Exhibit 10.4 Employment Agreement between WellTech Eastern, Inc. and Kenneth Hill, dated as of March 29, 1996.(Incorporated by reference to Exhibit 10.4 to the Company's Report on Form 10-K dated June 30, 1996, File No. 1-8038). Exhibit 10.5 * Employment Agreement between the Company and Kenneth Huseman, dated as of August 3, 1996. Exhibit 10.6 Letter Agreement between Van Greenfield and the Company dated May 15, 1996. (Incorporated by reference to Exhibit 10.6 to the Company's Report on Form 10-K dated June 30, 1996, File No. 1-8038). Exhibit 10.7 Amendment No. 2 to the Company's Employment Agreement between Francis D. John and the Company, dated as of May 15, 1996. ( Incorporated by reference to Exhibit 10.7 to the Company's Report on Form 10-K dated June 30, 1996, File No. 1-8038). Exhibit 10.8 Letter Agreement between Morton Wolkowitz and the Company dated June 3, 1996. (Incorporated by reference to Exhibit 10.8 to the Company's Report on Form 10-K dated June 30, 1996, File No. 1-8038). Exhibit 10.9 Asset Purchase Agreement between Hardy Oil & Gas USA, Inc. and Arch Petroleum, Inc. dated as of April 1996. (Incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K dated June 30, 1996, File No. 1-8038). Exhibit 10.10 Asset Purchase Agreement between Arch Petroleum, Inc. and Odessa Exploration, Inc. dated as of April 18, 1996. (Incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K dated June 30, 1996, File No. 1-8038). Exhibit 10.11 General Conveyance by Arch Petroleum, Inc. to Odessa Exploration, Inc. dated as of January 1, 1996.(Incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K dated June 30,1996, File No. 1-8038). - 54 - Exhibit 10.12 The Company's 1995 Stock Option Plan. ( Incorporated by reference to the Company's Registration Statement on Form S-4, Registration No. 353-369). Exhibit 10.13 The Company's Outside Directors Stock Option Plan. (Incorporated by reference to the Company's Registration Statement on Form S-4, Registration No. 353-369). Exhibit 10.14 Plan and Agreement of Merger among Key Energy Group, Inc., WellTech Eastern, Inc. and Woodward Well Service, Inc. dated as of September 30, 1996. (Incorporated by reference to Exhibit 10 (a) to the Company's Quarterly Report on Form 10-Q dated December 31, 1996, File No. 1-8038). Exhibit 10.15 Stock Purchase Agreement among Key Energy Group, Inc., Reo Brownlee, Elvin Brownlee, Jr. And Elvin Brownlee III dated as of October 24, 1996.(Incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q dated December 31, 1996, File No. 1-8038). Exhibit 10.16 Asset Purchase Agreement among Yale E. Key, Inc., Key Energy Group, Inc., Energy Air Drilling Service Co.and Dale Rennels dated as of November 1, 1996. (Incorporated by reference to Exhibit 10( c ) to the Company's Quarterly Report on Form 10-Q dated December 31, 1996, File No. 1-8038). Exhibit 10.17 Stock Purchase Agreement among Key Energy Group, Inc., Ed Hitt, Helen Hitt, Michael E. Thompson and Edward Monroe, Jr. Dated as of December 2, 1996. (Incorporated by reference to Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q dated December 31 1996, File No. 1-8038). Exhibit 10.18 Plan and Agreement of Merger among Key Energy Group, Inc., WellTech Eastern, Inc., Hunt Oil Company and Brooks Well Servicing, Inc. dated as of November 22, 1996. (Incorporated by reference to Exhibit 10(e) to the Company's Quarterly Report on Form 10-Q dated December 31, 1996, File No. 1-8038). Exhibit 10.19 Asset Purchase Agreement among WellTech Eastern, Inc., B&L Hotshot, Inc., McDowell & Sons, Inc., 4 Star Trucking, Inc., R.B.R. Inc., Royce D. Thomas, John F. McDowell and John R. McDowell dated as of December 13, 1996. (Incorporated by reference to Exhibit 10(f) to the Company's Quarterly Report on Form 10-Q dated December 31, 1996, File No. 1-8038). Exhibit 10.20 Asset Purchase Agreement among WellTech Eastern, Inc., Talon Trucking company and Lomak Petroleum, Inc.dated as of December 31, 1996. (Incorporated by reference to Exhibit 10(g) to the Company's Quarterly Report on Form 10-Q dated December 31, 1996, File No. 1-8038). Exhibit 10.21 First Supplemental Indenture dated as of November 20, 1996 by and between Key Energy Group, Inc. and American Stock Transfer & Trust Company, as Trustee. (Incorporated by reference to Exhibit 10(i) to the Company's Quarterly Report on Form 10-Q dated December 31, 1996, File No. 1-8038). Exhibit 10.22 Stock Purchase Agreement among Key Energy Group, Inc., Michael and Georgia McDermett dated as of January 10, 1997. (Incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report onForm 10-Q dated March 31, 1997, File No. 1-8038). Exhibit 10.23 Asset Purchase Agreement among WellTech Eastern, Inc., Key Energy Group, Inc. Tri State Wellhead & Valve,Inc. and John C. Bozeman dated as of March 14, 1997. (Incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q dated March 31, 1997, File No. 1-8038). - 55 - Exhibit 10.24 Stock Purchase Agreement among Yale E. Key, Inc., Keith and Leslie Neill as of March 24, 1997.(Incorporated by reference to Exhibit 10( c ) to the Company's Quarterly Report on Form 10-Q dated March 31, 1997, File No. 1-8038). Exhibit 10.25 Asset Purchase Agreement among Key Energy Group, Inc., WellTech Eastern, Inc., Elder Well Service, Inc., Martha Elder, Kenneth L. Ward, Nona Faye Mugraur, Lela Gaye Biehl and Johnny Ray Johnson dated as of March 28, 1997.(Incorporated by reference to Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q dated March 31, 1997, File No. 1-8038). Exhibit 10.26 Asset Purchase Agreement #1 among WellTech Eastern, Inc., Key Energy Group, Inc., Kalkaska Construction Service, Inc., Dennis Hogerheide, LaWenda Hogerheide, David Hogerheide and Derek Hogerheide dated March 31, 1997. (Incorporated by reference to Exhibit 10(e) to the Company's Quarterly Report on Form 10-Q dated March 31,1997, File No. 1-8038). Exhibit 10.27 Asset Purchase Agreement #2 among WellTech Eastern, Inc., Key Energy Group, Inc., Kalkaska Construction Service, Inc., Dennis Hogerheide,LaWenda Hogerheide, David Hogerheide and Derek Hogerheide dated March 31, 1997. (Incorporated by reference to Exhibit 10(f) to the Company's Quarterly Report on Form 10-Q dated March 31, 1997, File No. 1-8038). Exhibit 10.28 Stock Purchase Agreement among WellTech Eastern, Inc., Dennis Hogerheide and LaWenda Hogerheide dated as of March 31, 1997.(Incorporated by reference to Exhibit 10(g) to the Company's Quarterly Report on Form 10-Q dated March 31, 1997, File No. 1-8038). Exhibit 10.29 Asset Purchase Agreement among WellTech Eastern, Inc., Diamond Well Service, Inc., John Scott and Dwayne Wardwell dated as of April 3,1997. (Incorporated by reference to Exhibit 10(h) to the Company's Quarterly Report on Form 10-Q dated March 31, 1997, File No. 1-8038). Exhibit 10.30 Asset Sale Agreement among WellTech Eastern, Inc. and Drillers, Inc. dated as of April 14, 1997.(Incorporated by reference to Exhibit 10(i) to the Company's Quarterly Report on Form 10-Q dated March 31, 1997, File No. 1-8038). Exhibit 10.31 Asset Purchase Agreement among WellTech Eastern, Inc., Shreve's Well Service, Inc. and William A. Shreve dated April 18, 1997. (Incorporated by reference to Exhibit 10(j) to the Company's Quarterly Report on Form 10-Q dated March 31, 1997, File No. 1-8038). Exhibit 10.32 Asset Purchase Agreement among WellTech Eastern, Inc. and Petro Equipment, Inc. and Donald E. Clark dated as of May 1, 1997. (Incorporated by reference to Exhibit 10(k) to the Company's Quarterly Report on Form 10-Q dated March 31, 1997, File No. 1-8038). Exhibit10.33 * Asset Purchase Agreement among WellTech Eastern, Inc., Southwest Oilfield Services,Inc., David Wright and Roy Wofford dated May 29,1997. Exhibit 10.34 *Stock Purchase Agreement among Yale E. Key, Inc. and Raleigh K. Turn and David Butts dated June 9, 1997. Exhibit 10.35 Stock Purchase Agreement among Key Energy Group, Inc. and Mark Duane Massingill and Claudia Lynn Massingill dated as of June 25, 1997. (Incorporated by reference to the Company's Report on Form 8-K dated July 9, 1997, File No. 1-8038). - 56 - Exhibit 10.36 *Stock Purchase Agreement among WellTech Eastern, Inc. between Monty D. Elmore dated as of July 17, 1997.(Incorporated by reference to the Company's Report on Form 8-K dated July 9, 1997, File No. 1-8038). Exhibit 10.37 *Stock Purchase Agreement between WellTech Eastern, Inc. and Kenting Energy Services, Inc. dated as of July 30, 1997. Exhibit 10.38 *Stock Purchase Agreement between WellTech Eastern, Inc. and Robert E. Mosley, Jr. et al dated as of August 22, 1997. Exhibit 10.39 *Credit Agreement dated as of June 6, 1997 among Key Energy Group, Inc., several banks and other financial institutions or entities from time to time parties to the Agreement, PNC Bank, N.A,Norwest Bank of Texas, N.A., and Lehman Commercial Paper Inc. Exhibit 10.40 *Master Guarantee and Collateral Agreement made by Key Energy Group, Inc. and certain of its Subsidiaries in favor of Norwest Bank of Texas, N.A. dated as of June 6, 1997. Exhibit 11(a) *Statement - Computation of per share earnings. (Filed herewith as part of the Condensed Consolidated Financial Statements). Exhibit 22 *Subsidiaries of the Registrant. Exhibit 27(a) *Statement - Financial Data Schedule. (Filed herewith as part of the Condensed Consolidated Financial Statements). (b) Reports on Form 8-K The Company did not file a report on Form 8-K during the quarter ended June 30, 1997. ------------------------------------ *Filed herewith. - 57 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KEY ENERGY GROUP, INC. (Registrant) By /s/ Francis D. John Francis D. John President, Chief Executive Officer Dated: September 18, 1997 and Director By /s/ Stephen E. McGregor Stephen E. McGregor Dated: September 18, 1997 Chief Financial Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By /s/ Francis D. John Francis D. John President, Chief Executive and Chief Dated: September 18, 1997 Financial Officer and Director By /s/ Morton Wolkowitz Morton Wolkowitz Dated: September 18, 1997 Chairman of the Board and Director By /s/ Van Greenfield Van Greenfield Dated: September 18, 1997 Director By /s/ William Manly William Manly Dated: September 18, 1997 Director By /s/ Kevin P. Collins Kevin P. Collins Dated: September 18, 1997 Director By /s/ W. Phillip Marcum W. Phillip Marcum Dated: September 18, 1997 Director By /s/ Danny R. Evatt Danny R. Evatt Dated: September 18, 1997 Chief Accounting Officer - 58 - EX-10.1 2 D. KIRK EDWARDS EMPLOYMENT AGREEMENT Key Energy Group, Inc. Two Tower Center, 10th Floor East Brunswick, New Jersey July 1, 1996 Mr. D. Kirk Edwards c/o Odessa Exploration Incorporated 6010 Highway 191, Suite 210 Odessa, Texas 79762 EMPLOYMENT AGREEMENT (this "Agreement") Dear Mr. Edwards: Key Energy Group, Inc., a Maryland corporation (the "Company"), with its principal offices at the address set forth above, and you, an individual with your business address set forth above, agree as follows: 1. Employment; Term (a) The Company agrees to employ you, and you accept employment by the Company, as an Executive Vice President of the Company and the President and Chief Executive Officer of Odessa Exploration Incorporated, a Delaware corporation and wholly- owned subsidiary of the Company ("Odessa"). Your employment will commence effective as of July 1, 1996 (the "Commencement Date") and continue until the close of business on June 30, 1999, subject to extension as provided in this Section 1(a), unless sooner terminated in accordance with this Agreement (the "Initial Employment Period"). On each July 1, commencing with July 1, 1999, the term of your employment will be automatically extended for a period of twelve (12) months unless either you or the Company gives written notice to the other, no later than thirty (30) days prior to the relevant July 1, that such automatic extension shall not occur. The Initial Employment Period, together with any extensions, until termination in accordance herewith is referred to herein as the "Employment Period." (b) You will have the usual duties of an Executive Vice President and those duties of Vice President set forth in the Company's bylaws and will be responsible, subject to the further direction of the President and Chief Executive Officer of the Company and the Board of Directors of the Company (the "Board"), for participating in the management and direction of the Company's business and operations. You will, if C:\OLDSTU~1\GENERAL\EDWARDEM.05 1 elected, serve as a director of the Company and as an officer and/or director of the Company and its subsidiaries and perform all duties incident to such offices and such specific other tasks as may from time to time be assigned to you by the President and Chief Executive Officer of the Company or the Board. During the Employment Period, you will devote your full time and best efforts to the business and affairs of the Company and its subsidiaries. 2. Salary; Bonuses; Expenses (a) During the Employment Period, the Company will pay a salary to you at the annual rate of One Hundred Sixty-Five Thousand Dollars ($165,000) per year (the "Base Salary"), payable in substantially equal installments in accordance with the Company's existing payroll practices, but no less frequently than monthly. (b) For each fiscal year of the Company commencing after June 30, 1996, you shall be eligible to participate in an incentive plan for the Company's executives, key employees and other persons involved in the business of Key and its subsidiaries (the "Incentive Plan") and in the Key Energy Group, Inc. 1995 Stock Option Plan (the "1995 Stock Option Plan"). Under the Incentive Plan, you shall be eligible to earn a cash bonus, payable within ninety (90) days after each fiscal year end, of up to thirty percent (30%) of your Base Salary, such amount to be determined by the Board based upon the level of achievement of certain goals to be mutually established by you and the President of the Company (subject to Board approval). (c) You will be reimbursed by the Company for reasonable travel, lodging, meal and other expenses incurred by you in connection with performing your services hereunder in accordance with the Company's policies from time to time in effect. (d) Subject to the provisions of this Section 2(d), during the Employment Period in the event that Odessa organizes a drilling program, you shall be granted (i) a carried 4.5% net working interest after payout to investors in any properties utilized by such program which you have been actively involved in locating and (ii) a carried 4.5 % net working interest after payout to investors in any workover (that you were actively involved in identifying) of an existing well that was not previously producing that results in additional production from a new zone located as a result of the workover activities. Such grants shall be irrevocable notwithstanding your termination hereunder for any reason (including termination for Cause) and shall be effective, with respect to a specific well, as of the date on which the specific drilling program or workover activity, as the case may be, involving such well has been approved in writing by the Board or the President of the Company. (e) You shall be granted, effective as of January 1, 1997, a 10% working interest in the Acquired Wells (defined below), such grant to be irrevocable notwithstanding your C:\OLDSTU~1\GENERAL\EDWARDEM.05 2 termination hereunder for any reason (including termination for Cause). The term "Acquired Wells" means those five (5) deep gas wells located in West Texas in which an approximately 50% working interest was acquired by the predecessor of Odessa from Oryx Energy Company. 3. Stock Options. You have previously been granted options to acquire shares of the Common Stock, par value $.10 per share, of the Company (the "Common Stock") pursuant to the 1995 Stock Option Plan and subject to the terms and provisions (including vesting provisions) of the those certain Stock Option Agreements dated as of July 6, 1995 (the "Option Agreements") by and between you and the Company, which agreements and plan shall remain in full force and effect unaffected by the execution and delivery of this Agreement; provided, however, that the Option Agreements have been amended by that certain letter agreement executed and delivered in connection herewith, a copy of which is attached hereto as Exhibit A. 4. Benefit Plans; Vacations. You will be entitled during the Employment Period (and thereafter to the extent provided in Section 5(d) hereof) to the following: (i) not less than twenty (20) vacation days, (ii) a Company owned or leased automobile and payment of expenses associated therewith (such expenses, including insurance and amortized over 36 months, not to exceed $1,000 per month), (iii) payment by the Company of all costs (including all initiation and membership fees and all annual or other periodic fees) associated with maintaining a membership in one private country club, golf club, tennis club or similar club or association for business use selected by you and approved by the Board (such costs not to exceed $5,000 per year), (iv) a life insurance policy providing for the payment of $500,000 to your designated beneficiary, and (v) such other fringe benefits, including, without limitation, group medical and dental, life, executive life, accident and disability insurance, retirement plans and supplemental and excess retirement benefits as the Company may provide from time to time for its senior management. C:\OLDSTU~1\GENERAL\EDWARDEM.05 3 5. Termination (a) Termination upon Death; Termination by Company. If you should die during the Employment Period, the Company shall have no further obligations to your estate under this Agreement other than payment of the amounts, if any, owed to you under Section 2(a) and 2(c) hereof through the date of death. The Company shall have the right to terminate your employment under this Agreement for Cause (defined below) at any time without obligation to make any further payments to you hereunder (other than amounts owed under Section 2(a) and 2(c) hereunder through the date of termination). The Company shall have the right to terminate your employment for any reason other than for Cause (including for Disability as provided in Section 5(b) hereof) with no further obligations hereunder except as provided in Section 5(d) hereof. As used in this Agreement, the term"Cause" shall mean the willful and continued failure by you to substantially perform your duties hereunder (other than any such wilful or continued failure resulting from your incapacity due to physical or mental illness or physical injury), or the willful engaging by you in misconduct which is materially injurious to the Company, monetarily or otherwise, or your conviction of a felony by a court of competent jurisdiction. (b) Termination by the Company or the Employee for Disability. If you become totally and permanently disabled during the Employment Period so that you are unable to perform your obligations hereunder by reasons involving physical or mental illness or physical injury ("Disability"), then the term of your employment hereunder may be terminated by either you or the Company; provided, however, that in the event you elect to terminate your employment for Disability pursuant to this Section 5(b), the Company may require, before becoming subject to the obligations set forth in Section 5(d) hereof, that a physician mutually agreed to by you and the Company (such agreement not to be unreasonably withheld), based upon a physical and/or mental examination of you, concurs that a Disability exists pursuant to the terms of this Agreement and delivers a written opinion to the Company to such effect (such condition being referred to elsewhere herein as the "Examination Condition"). (c) Termination by the Employee. You may terminate your employment for Disability as provided in Section 5(b) hereof, in which event the Company shall have no further obligations to you hereunder except as provided in Section 5(d) hereof. Subject to the provisions of this Section 5(c), you may terminate your employment for Good Reason (defined below) at any time during the Employment Period by providing the Company with at least thirty (30) days' written notice, in which event the Company shall have no further obligations to you hereunder except as provided in Section 5(d) hereof. As used in this Agreement, the term "Good Reason" shall mean (i) a material adverse change in your functions, duties, authority and responsibilities as the President and Chief Executive Officer of Odessa; (ii) a material breach by the Company of its obligations under this Agreement, which breach has not been cured within fifteen (15) C:\OLDSTU~1\GENERAL\EDWARDEM.05 4 days following the Company's receipt of notice from you of such material breach; or (iii) a change of control (as defined in the 1995 Stock Option Plan) of the Company or Odessa (a "Change of Control"). Notwithstanding the foregoing provisions of this Section 5(c), you may terminate your employment for Good Reason pursuant to clause (iii) of the immediately preceding sentence only during the period beginning on the 12-month anniversary of the effective date of the Change of Control and ending on the 18-month anniversary of the effective date of such Change of Control. You may terminate your employment for any reason other than for Disability or Good Reason by providing the Company with at least thirty (30) days' written notice, in which event the Company shall have no further obligations to you under this Agreement other than payment of the amounts, if any, owed to you under Section 2(a) and 2(c) hereof through the date of termination. (d) Severance Compensation. In the event your employment hereunder is terminated (i) by you for Disability only if Examination Condition is met or waived, (ii) by you for Good Reason, (iii) by the Company other than for Cause or (iv) automatically as a result of the Company's providing notice to you that automatic extension of the Employment Period shall not occur, you will be entitled to: (1) receive severance compensation at your Base Salary at the monthly rate in effect on the termination date, payable in arrears, during the period expiring twenty-four (24) months after the termination date, commencing at the end of the calendar month in which the termination date occurs; and (2) receive the benefits specified in Section 4 hereof during the period expiring on the earlier of (i) twenty-four (24) months after the termination date and (ii) the date on which you commence full-time employment with another employer; provided, however, that (A) in the event your employment should be terminated by the Company other than for Cause following a Change of Control or in anticipation of a Change of Control, the severance compensation referred to in clause (1) above shall be paid in one lump sum on the date of such termination, and (B) in the event your employment should be terminated by the Company as a result of Disability in accordance with Section 5(b) above, then the severance compensation referred to in clause (1) above shall be reduced by the amount of any disability insurance proceeds actually paid to you or for your benefit during the said time period. 6. Limitation on Competition. During the Employment Period, and for such period thereafter as you are entitled to receive severance compensation under this Agreement (or if you are not entitled to receive severance compensation under this Agreement, for a period of one year after your termination; or if you are entitled to receive severance compensation in one lump sum payment, for a period of two years after your termination), you shall not, directly or C:\OLDSTU~1\GENERAL\EDWARDEM.05 5 indirectly, without the prior written consent of the Company, participate or engage in, whether as a director, officer, employee, advisor, consultant, stockholder, partner, joint venturer, owner or in any other capacity, any business engaged in the business of furnishing oilfield services (a "Competing Enterprise"); provided, however, that you shall not be deemed to be participating or engaging in any such business solely by virtue of your ownership of not more than five percent of any class of stock or other securities which is publicly traded on a national securities exchange or in a recognized over-the-counter market; and, for that same period of time, you shall not, directly or indirectly, solicit, raid, entice or otherwise induce any employee of the Company or any of its subsidiaries to be employed by a Competing Enterprise. 7. Termination of Prior Agreement. Effective as of the Commencement Date, that certain Employment Agreement dated July 20, 1993 (the "Prior Agreement") by and between you and the Company is terminated and of no further force or effect. You also acknowledge and consent to the termination of the Company's Stock Grant Plan adopted by the Board on September 27, 1993 (the "1993 Plan") and hereby waive, release and relinquish all rights, if any, to receive shares of Common Stock pursuant to the 1993 Plan. If this Agreement correctly sets forth your understanding of the agreement between the Company and you, please indicate your agreement hereto by signing this Agreement in the space for that purpose below. KEY ENERGY GROUP, INC. By: Francis D. John, President ACCEPTED AND AGREED: D. Kirk Edwards C:\OLDSTU~1\GENERAL\EDWARDEM.05 6 EX-10.5 3 K. HUSEMAN EMPLOYMENT AGREEMENT Key Energy Group, Inc. Two Tower Center, 10th Floor East Brunswick, New Jersey August 3, 1996 Mr. Kenneth V. Huseman c/o Key Energy Group, Inc. Two Tower Center, 10th Floor East Brunswick, New Jersey 08816 EMPLOYMENT AGREEMENT (this "Agreement") Dear Mr. Huseman: Key Energy Group, Inc., a Maryland corporation (the "Company"), with its principal offices at the address set forth above, and you, an individual with your business address set forth above, agree as follows: 1. Employment; Term (a) The Company agrees to employ you, and you accept employment by the Company, as the Chief Operating Officer and an Executive Vice President of the Company. Your employment will commence effective as of August 3, 1996 (the "Commencement Date") and continue until the close of business on August 2, 1999, subject to extension as provided in this Section 1(a), unless sooner terminated in accordance with this Agreement (the "Initial Employment Period"). On each August 3, commencing with August 3, 1999, the term of your employment will be automatically extended for a period of twelve (12) months unless either you or the Company gives written notice to the other, no later than thirty (30) days prior to the relevant August 3, that such automatic extension shall not occur. The Initial Employment Period, together with any extensions, until termination in accordance herewith is referred to herein as the "Employment Period." (b) You will have the usual duties of a Chief Operating Officer and an Executive Vice President and those duties of Chief Operating Officer and Vice President, if any, set forth in the Company's bylaws and will be responsible, subject to the further direction of the President and Chief Executive Officer of the Company and the Board of Directors of the Company (the "Board"), for participating in the management and direction of the Company's business and operations. You will, if elected, serve as a C:\OLDSTU~1\GENERAL\HUSEMEM.01 1 director of the Company and as an officer and/or director of the Company and its subsidiaries and perform all duties incident to such offices and such specific other tasks as may from time to time be assigned to you by the President and Chief Executive Officer of the Company or the Board. During the Employment Period, you will devote your full time and best efforts to the business and affairs of the Company and its subsidiaries. 2. Salary; Bonuses; Expenses (a) During the Employment Period, the Company will pay a salary to you at the annual rate of Two Hundred Thousand Dollars ($200,000) per year (the "Base Salary"), payable in substantially equal installments in accordance with the Company's existing payroll practices, but no less frequently than monthly. (b) For each fiscal year of the Company commencing after June 30, 1996, you shall be eligible to participate in an incentive plan for the Company's executives, key employees and other persons involved in the business of Key and its subsidiaries (the "Incentive Plan") and in the Key Energy Group, Inc. 1995 Stock Option Plan (the "1995 Stock Option Plan"). Under the Incentive Plan, you shall be eligible to earn a cash bonus, payable within ninety (90) days after each fiscal year end, of up to fifty percent (50%) of your Base Salary, such amount to be determined by the Board based upon the level of achievement of certain goals to be mutually established by you and the President of the Company (subject to Board approval). (c) You will be reimbursed by the Company for reasonable travel, lodging, meal and other expenses incurred by you in connection with performing your services hereunder in accordance with the Company's policies from time to time in effect. (d) You will be entitled to a $50,000 loan from the Company to assist you in your relocation to the New Jersey/Pennsylvania area, such loan to be amortized and the debt represented thereby to be forgiven over the three-year period beginning on the Commencement Date. 3. Stock Options. You have previously been granted options to acquire 100,000 shares of the Common Stock, par value $.10 per share, of the Company (the "Common Stock") pursuant to the 1995 Stock Option Plan and subject to the terms and provisions (including vesting provisions) of the those certain Stock Option Agreements dated as of March 29, 1996 (the "Option Agreements") by and between you and the Company, which agreements and plan shall remain in full force and effect unaffected by the execution and delivery of this Agreement. In addition , as performance-based incentive compensation to you in connection with your services hereunder, there shall be granted to you options (the "Options") to acquire Fifty Thousand (50,000) shares of Common Stock at an exercise price per share equal to the fair market value (as defined in the 1995 Stock Option Plan) of the Common Stock as of the C:\OLDSTU~1\GENERAL\HUSEMEM.01 2 date hereof, with such options to be granted pursuant to, and subject to the terms and provisions (including vesting provisions) of the 1995 Stock Option Plan and that certain Stock Option Agreement of even date herewith by and between you and the Company. 4. Benefit Plans; Vacations. You will be entitled during the Employment Period (and thereafter to the extent provided in Section 5(d) hereof) to the following: (i) not less than twenty (20) vacation days, (ii) a Company owned or leased automobile and payment of expenses associated therewith, and (iii) such other fringe benefits, including, without limitation, group medical and dental, life, executive life, accident and disability insurance, retirement plans and supplemental and excess retirement benefits as the Company may provide from time to time for its senior management. 5. Termination (a) Termination upon Death; Termination by Company. If you should die during the Employment Period, the Company shall have no further obligations to your estate under this Agreement other than payment of the amounts, if any, owed to you under Section 2(a) and 2(c) hereof through the date of death. The Company shall have the right to terminate your employment under this Agreement for Cause (defined below) at any time without obligation to make any further payments to you hereunder (other than amounts owed under Section 2(a) and 2(c) hereunder through the date of termination). The Company shall have the right to terminate your employment for any reason other than for Cause (including for Disability as provided in Section 5(b) hereof) with no further obligations hereunder except as provided in Section 5(d) hereof. As used in this Agreement, the term "Cause" shall mean the willful and continued failure by you to substantially perform your duties hereunder (other than any such wilful or continued failure resulting from your incapacity due to physical or mental illness or physical injury), or the willful engaging by you in misconduct which is materially injurious to the Company, monetarily or otherwise, or your conviction of a felony by a court of competent jurisdiction. (b) Termination by the Company or the Employee for Disability. If you become totally and permanently disabled during the Employment Period so that you are unable to perform your obligations hereunder by reasons involving physical or mental illness or physical injury ("Disability"), then the term of your employment hereunder may be terminated by either you or the Company; provided, however, that in the event you elect to terminate your employment for Disability pursuant to this Section 5(b), the Company may require, before becoming subject to the obligations set forth in Section 5(d) hereof, that a physician mutually agreed to by you and the Company (such agreement not to be unreasonably withheld), based upon a physical and/or mental examination of you, concurs that a Disability exists pursuant to the terms of this Agreement and delivers a written opinion to the Company to such effect (such condition being referred to elsewhere herein as the "Examination Condition"). C:\OLDSTU~1\GENERAL\HUSEMEM.01 3 (c) Termination by the Employee. You may terminate your employment for Disability as provided in Section 5(b) hereof, in which event the Company shall have no further obligations to you hereunder except as provided in Section 5(d) hereof. Subject to the provisions of this Section 5(c), you may terminate your employment for Good Reason (defined below) at any time during the Employment Period by providing the Company with at least thirty (30) days' written notice, in which event the Company shall have no further obligations to you hereunder except as provided in Section 5(d) hereof. As used in this Agreement, the term "Good Reason" shall mean (i) a material adverse change in your functions, duties, authority and responsibilities as the Chief Operating Officer and a Vice President of the Company; or (ii) a material breach by the Company of its obligations under this Agreement, which breach has not been cured within fifteen (15) days following the Company's receipt of notice from you of such material breach. You may terminate your employment for any reason other than for Disability or Good Reason by providing the Company with at least thirty (30) days' written notice, in which event the Company shall have no further obligations to you under this Agreement other than payment of the amounts, if any, owed to you under Section 2(a) and 2(c) hereof through the date of termination. (d) Severance Compensation. In the event your employment hereunder is terminated (i) by you for Disability only if Examination Condition is met or waived, (ii) by you for Good Reason, (iii) by the Company other than for Cause or (iv) automatically as a result of the Company's providing notice to you that automatic extension of the Employment Period shall not occur, you will be entitled to: (1) receive severance compensation at your Base Salary at the monthly rate in effect on the termination date, payable in arrears, during the period expiring twenty-four (24) months after the termination date, commencing at the end of the calendar month in which the termination date occurs; and (2) receive the benefits specified in Section 4 hereof during the period expiring on the earlier of (i) twenty-four (24) months after the termination date and (ii) the date on which you commence full-time employment with another employer; provided, however, that (A) in the event your employment should be terminated by the Company other than for Cause following a Change of Control (defined below) or in anticipation of a Change of Control, the severance compensation referred to in clause (1) above shall be paid in one lump sum on the date of such termination, and (B) in the event your employment should be terminated by the Company as a result of Disability in accordance with Section 5(b) above, then the severance compensation referred to in clause (1) above shall be reduced by the amount of any disability insurance proceeds actually paid to you or for your benefit during the said time period. As used in this Agreement, the term "Change of Control" shall have that meaning set forth in the 1995 Stock Option Plan. C:\OLDSTU~1\GENERAL\HUSEMEM.01 4 6. Limitation on Competition. During the Employment Period, and for such period thereafter as you are entitled to receive severance compensation under this Agreement (or if you are not entitled to receive severance compensation under this Agreement, for a period of one year after your termination; or if you are entitled to receive severance compensation in one lump sum payment, for a period of two years after your termination), you shall not, directly or indirectly, without the prior written consent of the Company, participate or engage in, whether as a director, officer, employee, advisor, consultant, stockholder, partner, joint venturer, owner or in any other capacity, any business engaged in the business of furnishing oilfield services (a "Competing Enterprise"); provided, however, that you shall not be deemed to be participating or engaging in any such business solely by virtue of your ownership of not more than five percent of any class of stock or other securities which is publicly traded on a national securities exchange or in a recognized over-the-counter market; and, for that same period of time, you shall not, directly or indirectly, solicit, raid, entice or otherwise induce any employee of the Company or any of its subsidiaries to be employed by a Competing Enterprise. 7. Termination of Prior Agreement. Except as otherwise provided herein, effective as of the Commencement Date, that certain Employment Agreement dated March 29, 1996 (the "Prior Agreement") by and between you and WellTech Eastern, Inc. is terminated and of no further force or effect. If this Agreement correctly sets forth your understanding of the agreement between the Company and you, please indicate your agreement hereto by signing this Agreement in the space for that purpose below. KEY ENERGY GROUP, INC. By: Francis D. John, President ACCEPTED AND AGREED: Kenneth V. Huseman C:\OLDSTU~1\GENERAL\HUSEMEM.01 5 EX-10.33 4 ASSET PURCHASE SOUTHWEST OILFIELD Asset Purchase Agreement among WellTech Eastern, Inc., Southwest Oilfield Service, Inc., David Wright and Roy Wofford May 29, 1997 2 ASSET PURCHASE AGREEMENT This Asset Purchase Agreement (this "Agreement") is entered into as of May 29, 1997 (the "Effective Date") among WellTech Eastern, Inc., a Delaware corporation ("Buyer"), Southwest Oilfield Service, Inc., an Oklahoma corporation ("Seller"), David Wright and Roy Wofford, owners of all of the issued and outstanding stock of the Seller (the "Shareholders"). WITNESSETH: WHEREAS, Seller desires to sell substantially all of Seller's assets used in or in connection with oilfield workover, completion. production maintenence service (workover rig service) and Buyer desires to purchase such assets. NOW, THEREFORE, in consideration of the premises and of the mutual representations, warranties, covenants, and agreements, and subject to the terms and conditions herein contained, the parties hereto hereby agree as follows: Article I Purchase and Sale of Assets 1.1 Purchase and Sale of the Assets.. Subject to the terms and conditions set forth in this Agreement, Seller hereby agrees to sell, convey, transfer, assign and deliver to Buyer, and Buyer hereby agrees to purchase from Seller, substantially all of the assets of Seller used or useful in the Workover Rig Service existing on the date hereof, whether personal, tangible, or intangible, including the following assets of Seller relating to or used or useful in the operation of the Workover Rig Service Business of Seller as conducted by Seller on and before the date hereof (the "Business") (all such assets being sold hereunder are referred to collectively herein as the "Assets"): (a) the tangible personal property of Selle used or useful in performing Workover Rig Sevicer (such as machinery, equipment, leasehold improvements, furniture and fixtures, and vehicles) which is more fully described on Schedule 1.1(a) hereto (collectively, the "Tangible Personal Property"); (b) certain of Seller's intangible assets (collectively, the "Intangibles"), including (i) all of Seller's rights to any patents, copyrights, trademarks, service marks, licenses or sublicenses, trade names, written know-how, trade secrets and all other similar proprietary data and the goodwill associated therewith (collectively, the "Intellectual Property") used or held in connection with the Workover Rig Service, including those specifically listed on Schedule 1.1(c) hereto (collectively, the "Seller Intellectual Property"), and (ii) all of Seller's rights in its sales and promotional literature, computer software, customer and supplier list in connection with Sellers Workover Rig Service Business (c) those leases, subleases, contracts, contract rights, and agreements, (collectively, the "Contracts") relating to the operation of the Workover Rig Service Business, specifically listed on Schedule 1.1(d) hereto (collectively, the Transferred "Contracts"); (d) to the extent transferrable, all permits, authorizations, certificates, approvals, registrations, variances, waivers, exemptions, rights-of-way, franchises, ordinances, licenses and other rights of every kind and character (collectively, the "Permits") of Seller obtained from governments and governmental agencies relating to including, without limitation, that which is more fully described on Schedule 1.1(e) hereto (collectively, the "Seller Permits"); and, (e) the goodwill and going concern value of the Workover Rig Service Business. The Assets shall not include the following (collectively, the "Excluded Assets"); (I) all of Seller's accounts receivable and all other rights of Seller to payment for services rendered by Seller prior to midnight of the date hereof (the "Seller Receivables"); (ii) all cash accounts, cash equivalents or similar investments of Seller and all petty cash of Seller kept on hand for use in the Workover Rig Service Business; (iii) all right, title and interest of Seller in and to all prepaid rentals, other prepaid expenses, prepaid taxes, bonds, deposits and financial assurance requirements, and other current assets relating to any of the Assets of the Business; (iv) the corporate charter, corporate seal, organizational documents and minute books of Seller; (v) all assets in possession of Seller but owned by third parties; (vi) all rights under the Contracts of Seller not specifically assigned to Buyer hereunder; and (viii) Seller's right, title and interest in and to this Agreement; (ix) the right to prosecute and collect claims relating to Workover Rig Service business of Seller prior to the date hereof. 1.2 Consideration for Assets. As consideration for the sale of the Assets to Buyer and for the other covenants and agreements of Seller contained herein, Buyer (I) agrees to pay to Seller, on the date hereof, the amount of $455,000 in the form of a cashier's check or bank check or wire transfer of immediately available funds to an account designated by Seller. 1.3 Assumed Liabilities. Buyer shall assume only those liabilities of Seller associated with Buyer's assumption of the Transferred Contracts. Seller shall be responsible for all other liabilities of Seller (collectively, the "Retained Liabilities"), including, without limitation all obligations and liabilities owed by Seller to the Employees (as defined in Section 2.1.10 hereof). Article II Representations and Warranties of Seller and the Shareholders 2.1 Representations and Warranties of Seller. Each of Seller and the Shareholders jointly and severally represent and warrant to Buyer as follows: 2.1.1. Organization and Good Standing. Seller is a corporation duly organized, validly existing and in good standing under the laws of the state of its organization, has full requisite corporate power and authority to carry on its business as it is currently conducted, and to own and operate the properties currently owned and operated by it, and is duly qualified or licensed to do business and is in good standing as a foreign corporation authorized to do business in all jurisdictions in which the character of the properties owned or the nature of the business conducted by it would make such qualification or licensing necessary, except where the failure to so qualify or be licensed would not have a material adverse effect on the Assets or theWorkover Rig Service Business. 2.1.2. Agreements Authorized and their Effect on Other Obligations. The execution and delivery of this Agreement and all other agreements executed by Seller or the Shareholders and delivered to Buyer in connection herewith (the "Seller Agreements") have been authorized by all necessary corporate action on the part of Seller, and this Agreement and the Seller Agreements are valid and binding obligations of Seller and Shareholders, as applicable, enforceable (subject to normal equitable principals) against such parties in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, debtor relief or similar laws affecting the rights of creditors generally. The execution, delivery and performance of this Agreement and the Seller Agreements and the consummation of the transaction contemplated hereby and thereby, will not conflict with or result in a violation or breach of any term or provision of, nor constitute a default under (I) the charter or bylaws of Seller, (ii) any obligation, indenture, mortgage, deed of trust, lease, contract or other agreement to which Seller or Shareholders is a party or by which Seller or Shareholders or their respective properties are bound; or (iii) any provision of any law, rule, regulation, order, permits, certificate, writ, judgment, injunction, decree, determination, award or other decision of any court, arbitrator, or other governmental authority to which Seller or Shareholders or any of their respective properties are subject. 2.1.3. Financial Statement; Absence of Certain Changes and Events. Seller has delivered to Buyer copies of certain unaudited financial statements of Seller. Such financial statements are attached hereto as Schedule 2.1.3 (collectively, the "Seller Financial Statements") and include Seller's Statement of Revenue and Expenses dated December 31, 1996 and March 31, 1997. The Seller Financial Statements present fairly and fully the financial condition of the Seller as at the dates and for the periods indicated thereon, subject, in the case of interim financial statements, to normal year end adjustments. Other than as a result of the transactions contemplated by this Agreement, since March 31, 1997, there has not been (whether as a result of a single event or in the aggregate): (a) Financial Change. Any material adverse change in the Assets, the Business or the financial condition, operations, liabilities or prospects of Seller; (b) Property Damage. Any material damage, destruction, or loss to any of the Assets or the Business (whether or not covered by insurance); (c) Waiver. Any waiver or release of a material right of or claim held by Seller; (d) Change in Assets. Any acquisition, disposition, transfer, encumbrance, mortgage, pledge or other encumbrance of any material asset of Seller other than in the ordinary course of business; (e) Labor Disputes. Any labor disputes between Seller and its employees; or (f) Other Changes. Any other event or condition known to either Seller or Shareholders that particularly pertains to and has or is likely to have a material adverse effect on the Assets, the operations and the Business or the financial condition or prospects of Seller. 2.1.4. Transferred Contracts. All of the Transferred Contracts are in full force and effect, and constitute valid and binding obligations of Seller. Seller is not, and no other party to any Transferred Contract is, in default thereunder, and no event has occurred which (with or without notice, lapse of time, or the happening of any other event) would constitute a default thereunder. No Transferred Contract has been entered into on terms which could reasonably be expected to have a material adverse effect on the use of the Assets by Buyer. Neither Seller nor the Shareholders has received any information which would cause such party to conclude that any customer of Seller will (or is likely to) cease doing business with Buyer, as successor the Business, as a result of the consummation of the transactions contemplated hereby. 2.1.5. Title to and Condition of Assets. Seller has good, indefeasible and marketable title to all of the Assets, free and clear of any Encumbrances (defined below). To the knowledge of either Seller or Shareholders, all of the Assets conform to all applicable laws governing their use. No notice of any violation of any law, statute, ordinance, or regulation relating to any of the Assets has been received by Seller or Shareholders, except such as have been fully complied with. The term "Encumbrances" means all liens, security interests, pledges, mortgages, deeds of trust, claims, rights of first refusal, options, charges, restrictions or conditions to transfer or assignment, liabilities, obligations, privileges, equities, easements, rights of way, limitations, reservations, restrictions, and other encumbrances of any kind or nature. 2.1.6. Licenses and Permits. Each of the Seller Permits and Seller's rights with respect thereto is valid and subsisting, in full force and effect, and enforceable by Seller subject to administrative powers of regulatory agencies having jurisdiction. Seller is in compliance in all material respects with the terms of each of the Seller Permits. None of the Seller Permits has been, or to the knowledge of Seller or Shareholders, are threatened to be, revoked, canceled, suspended or modified. Upon consummation of the transactions contemplated hereby, each of the Seller Permits shall have been validly assigned to Buyer, will be valid and subsisting in full force and effect, and will be enforceable by Buyer subject to administrative powers of regulatory agencies having jurisdiction. 2.1.7. Intellectual Property. The Seller Intellectual Property is owned or licensed by Seller free and clear of any Encumbrances. Seller has not granted to any other person any license to use any Seller Intellectual Property. Use of the Seller Intellectual Property by Buyer will not, and the use of the Seller Intellectual Property by Seller did not, infringe, misappropriate or conflict with the intellectual property rights of others. Neither Seller nor the Shareholders has received any notice of infringement, misappropriation, or conflict with the intellectual property rights of others in connection with the use by Seller of the Seller Intellectual Property. 2.1.8. Necessary Consents. Seller has obtained and delivered to Buyer all consents to assignment or waivers thereof required to be obtained from any governmental authority or from any other third party in order to validly transfer the Assets hereunder, including the assignment of the Seller Permits and the Transferred Contracts. 2.1.9. Employees. Schedule 2.1.10 hereto is a complete and accurate listing of all employees of Seller that are involved in the ownership, operation, maintenance or use of the Assets or the conduct of the Workover Rig Service Business (the "Employees"). Seller does not currently sponsor, maintain or contribute to, and has not at anytime sponsored, maintained or contributed to any employee benefit plan which is or was subject to any provisions of the Employee Retirement Income Security Act of 1974, as amended. No employee benefit plan of Seller will, by its terms or applicable law, become binding upon or an obligation of Buyer. Buyer has not engaged in any unfair labor practices which could reasonably be expected to result in a material adverse effect on the Assets or the Business. Seller does not have any dispute with any of its existing or former employees. There are no labor disputes or to the knowledge of Seller, any disputes threatened by current or former employees of Seller. 2.1.10. Investigations; Litigation. No investigation or review by any governmental entity with respect to Seller or any of the transactions contemplated by this Agreement or the Seller Agreements is pending or, to the best of Seller's knowledge, threatened, nor has any governmental entity indicated to Seller an intention to conduct the same. There is no suit, action, or legal, administrative, arbitration, or other proceeding or governmental investigation pending to which Seller is a party or, to the knowledge of Seller or Shareholders, to which might become a party, and which particularly affects the Assets or property being transferred to Seller. 2.1.11. Absence of Certain Business Practices. Neither Seller, the Shareholders nor any officer, employee or agent of Seller, nor any other person acting on its or his behalf, has, directly or indirectly, within the past five years, given or agreed to give any gift or similar benefit to any customer, supplier, government employee or other person who is or may be in a position to help or hinder the profitable use of the Assets or conduct of the Business (or to assist Seller in connection with any actual or proposed transaction) which if not given in the past, might have had a material adverse effect on the profitable use of the Assets or conduct of the Business , or if not continued in the future, might materially adversely effect the profitable use of the Assets or conduct of the Business. 2.1.12. Solvency. Seller is not now insolvent, nor will Seller be rendered insolvent by the occurrence of the transactions contemplated by this Agreement. The term "insolvent" means that the sum of the present fair and saleable value of Seller's assets does not and will not exceed its debts and other probable liabilities, and the term "debts" includes any legal liability whether matured or unmatured, liquidated or unliquidated, absolute fixed or contingent, disputed or undisputed or secured or unsecured. 2.1.13. Untrue Statements. Seller has made available to Buyer true, complete and correct copies of customers, and if required, Seller will make available records relating principally to the Assets and the business, and such information covers all commitments and liabilities of Seller relating principally to the Assets. This Agreement, the Seller Agreements and the other instruments executed by Seller or Shareholders and delivered to Buyer in connection herewith do not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements made herein and therein not misleading in any material respect. 2.1.14. Finder's Fee. All negotiations relative to this Agreement and the transactions contemplated hereby have been carried on by Seller, the Shareholders and their counsel directly with Buyer and its counsel, without the intervention of any other person in such manner as to give rise to any valid claim against any of the parties hereto for a brokerage commission, finder's fee or any similar payment. Article III Representations and Warranties of Buyer 3.1 Representations and Warranties of Buyer. Buyer represents and warrants to Seller and Shareholders as follows: 3.1.1. Organization and Standing. Buyer is a corporation duly organized, validly existing, and in good standing under the laws of Delaware, has full requisite corporate power and authority to carry on its business as it is currently conducted, and to own and operate the properties currently owned and operated by it, and is duly qualified or licensed to do business and is in good standing as a foreign corporation authorized to do business in all jurisdictions in which the character of the properties owned or the nature of the business conducted by it would make such qualification or licensing necessary, except where the failure to so qualify or be licensed would not have a material adverse effect on the business of Buyer. 3.1.2. Agreement Authorized and its Effect on Other Obligations. The execution and delivery of this Agreement and all other agreements executed by Buyer and delivered to Seller or Shareholders in connection herewith (the "Buyer Agreements") have been authorized by all necessary corporate action on the part of Buyer, and this Agreement and the Buyer Agreements are valid and binding obligations of Buyer, enforceable (subject to normal equitable principals) against Buyer in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, debtor relief or similar laws affecting the rights of creditors generally. The execution, delivery and performance of this Agreement and the Buyer Agreements and the consummation of the transactions contemplated hereby and thereby will not conflict with or result in a violation or breach of any term or provision of, nor constitute a default under (I) the charter or bylaws of Buyer; (ii) any obligation, indenture, mortgage, deed of trust, lease, contract or other agreement to which Buyer is a party or by which Buyer or its properties are bound; or (iii) any provision of any law, rule, regulation, order, permits, certificate, writ, judgment, injunction, decree, determination, award or other decision of any court, arbitrator or other governmental authority to which Buyer or any of its properties is subject. 3.1.3. Finder's Fee. All negotiations relative to this Agreement and the transactions contemplated hereby have been carried on by Buyer and its counsel directly with Seller, the Shareholders and their counsel, without the intervention of any other person as the result of any act of Buyer in such a manner as to give rise to any valid claim against any of the parties hereto for any brokerage commission, finder's fee or any similar payment. Article IV Additional Agreements 4.1 Noncompetition. Except as otherwise consented to or approved in writing by Buyer, each of Seller and the Shareholders agree that for a period of sixty (60) months following the Effective Date, they shall not, directly or indirectly, acting alone or as a member of a partnership or a holder of, or investor in as much as 5% of any security of any class of any corporation or other business entity (I) engage in any business providing workover or well services in Oklahoma (the "Territory"); (ii) request any present customers or suppliers of Seller to curtail or cancel their business with Buyer; (iii) disclose to any person, firm or corporation any trade, technical or technological secrets of Seller or Buyer or any details of their organization or business affairs or (iv) induce or actively attempt to influence any employee of Buyer to terminate his employment. Notwithstanding the foregoing, Seller's and Shareholders' non-competition obligations shall cease in the event that Buyer or its successors in interest, no longer engages in like business in the Territory. Seller agrees that if either the length of time or geographical area of the Territory is deemed too restrictive in any court proceeding, the court may reduce such restrictions to those which it deems reasonable under the circumstances. The obligations expressed in this Section 4.1 are in addition to any other obligations that Seller or the Shareholders may have under the laws of any state requiring a corporation who sells its assets (and the Shareholders of such corporation) to limit its activities so that the goodwill and business relations being transferred with such assets will not be materially impaired. Seller further agrees and acknowledge that Buyer does not have any adequate remedy at law for the breach or threatened breach by Seller of this covenant, and agree that Buyer may, in addition to the other remedies which may be available to it hereunder, file a suit in equity to enjoin Seller from such breach or threatened breach. If any provisions of this Section 4.1 are held to be invalid or against public policy, the remaining provisions shall not be affected thereby. Seller acknowledges that the covenants set forth in this Section 4.1 are being executed and delivered by Seller in consideration of the covenants of Buyer contained in this Agreement, and for other good and valuable consideration, receipt of which is hereby acknowledged. 4.2 Hiring Employees. Effective as of the date hereof, all of the Employees shall be terminated by Seller. Buyer may, but shall be under no obligation to, hire any of the Employees effective as of the date hereof. Except as provided in Section 1.4 hereof, Buyer shall have no liability or obligation with respect to any employee benefits of any Employee except those benefits that accrue pursuant to such Employees' employment with Buyer on or after the date hereof. Seller and the Shareholders shall cooperate with Buyer in connection with any offer of employment from Buyer to the Employees and use its best efforts to cause the acceptance of any and all such offers. All Employees hired by Buyer shall be at-will employees of Buyer. 4.3 Allocation of Purchase Price. The parties hereto agree to allocate the purchase price paid by Buyer for the Assets hereunder as set forth on Schedule 4.6 hereto, and shall report this transaction for federal income tax purposes in accordance with the allocation so agreed upon. The parties hereto for themselves and for their respective successors and assigns covenant and agree that they will file coordinating Form 8594's in accordance with Section 1060 of the Internal Revenue Code of 1986, as amended, with their respective income tax returns for the taxable year that includes the date hereof. 4.4 Collection of Receivables. Buyer shall cooperate with and assist Seller in collecting the Seller Receivables, which cooperation and assistance shall include promptly forwarding to Seller all payments received by Buyer that are made in respect of the Seller Receivables. Seller shall cooperate with and assist Buyer in collecting receivables of Buyer, which cooperation and assistance shall include promptly forwarding to Buyer all payments received by the Seller that are made in respect of Buyer's receivables. 4.5 Further Assurances. From time to time, as and when requested by any party hereto, any other party hereto shall execute and deliver, or cause to be executed and delivered, such documents and instruments and shall take, or cause to be taken, such further or other actions as may be reasonably necessary to effect the transactions contemplated hereby. 4.6 Closing Costs. Each party will bear the cost and expenses of performing the acts required of such party under this Agreement, including, without limitation, attorneys' fees and disbursements incurred by the respective parties in connection herewith; provided, however, the Buyer will pay all sales tax imposed by any governmental authority as a result of the sale of Assets and will prepare and file all sales tax reports and tax returns relating thereto. 4.7 Taxes. All federal, state and local taxes relating to the Property which accrued prior to the date hereof will be paid by the Seller. All such taxes incurred on or after the date hereof (including sales taxes arising from the sale of the Property) will be paid by the Buyer and the Buyer agrees to indemnify and hold the Seller and Shareholders harmless with respect thereto. 4.8 Insurance. All existing insurance policies maintained by the Seller will be terminated on the date hereof and the Buyer will be responsible for obtaining its own insurance subsequent thereto. 4.9 Possession; Risk of Loss. Possession of the Assets willpass from the seller to the buyer at midnight on the date hereof and the risk of loss will pass from the Seller to the Buyerat that time 4.10 Attorneys' Fees. If either party institutes an action or proceeding against the other relating to the provisions of this Agreement or any default hereunder, the prevailing party in such action or proceeding will be entitled to receive a reasonable attorneys' fee as a part of its costs incurred therein. Article V Indemnification 5.1 Indemnification by Seller and the Shareholders. In addition to any other remedies available to Buyer under this Agreement, or at law or in equity, each of Seller and Shareholders shall, jointly and severally, indemnify, defend and hold harmless Buyer, and its respective officers, directors, employees, agents and stockholders, against and with respect to any and all claims, costs, damages, losses, expenses, obligations, liabilities, recoveries, suits, causes of action and deficiencies, including interest, penalties and reasonable attorneys' fees and expenses (collectively, the "Damages") that such indemnitee shall incur or suffer, which arise, result from or relate to (I) any breach of, or failure by Seller or Shareholders to perform, their respective representations, warranties, covenants or agreements in this Agreement or in any schedule, certificate, exhibit or other instrument furnished or delivered to Buyer by Seller or the Shareholders under this Agreement and (ii) the Retained Liabilities. 5.2 Indemnification by Buyer. In addition to any other remedies available to Seller or Shareholders under this Agreement, or at law or in equity, Buyer shall, jointly and severally, indemnify, defend and hold harmless the Shareholders, Seller and its officers, directors, employees and agents against and with respect to any and all Damages that such indemnities shall incur or suffer, which arise, result from or relate to any breach of, or failure by Buyer to perform any of its representations, warranties, covenants or agreements in this Agreement or in any schedule, certificate, exhibit or other instrument furnished or delivered to Seller or the Shareholders by or on behalf of Buyer under this Agreement. 5.3 Indemnification Procedure. If any party hereto discovers or otherwise becomes aware of an indemnification claim arising under Section 5.1 or Section 5.2 of this Agreement, such indemnified party shall give written notice to the indemnifying party, specifying such claim, and may thereafter exercise any remedies available to such party under this Agreement provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of any obligations hereunder, to the extent the indemnifying party is not materially prejudiced thereby. Further, promptly after receipt by an indemnified party hereunder of written notice of the commencement of any action or proceeding with respect to which a claim for indemnification may be made pursuant to this Article 5, such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party, give written notice to the latter of the commencement of such action provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of any obligations hereunder, to the extent the indemnifying party is not materially prejudiced thereby. In case any such action is brought against an indemnified party, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after such notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof unless the indemnifying party has failed to assume the defense of such claim and to employ counsel reasonably satisfactory to such indemnified person. An indemnifying party who elects not to assume the defense of a claim shall not be liable for the fees and expenses of more than one counsel in any single jurisdiction for all parties indemnified by such indemnifying party with respect to such claim or with respect to claims separate but similar or related in the same jurisdiction arising out of the same general allegations. Notwithstanding any of the foregoing to the contrary, the indemnified party will be entitled to select its own counsel and assume the defense of any action brought against it if the indemnifying party fails to select counsel reasonably satisfactory to the indemnified party, the expenses of such defense to be paid by the indemnifying party. No indemnifying party shall consent to entry of any judgment or enter into any settlement with respect to a claim without the consent of the indemnified party, which consent shall not be unreasonably withheld, or unless such judgment or settlement includes as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability with respect to such claim. No indemnified party shall consent to entry of any judgment or enter into any settlement of any such action, the defense of which has been assumed by an indemnifying party, without the consent of such indemnifying party, which consent shall not be unreasonably withheld. Article VI Miscellaneous 6.1 Survival of Representations, Warranties and Covenants. All representations, warranties, covenants and agreements made by the parties hereto shall survive indefinitely without limitation, notwithstanding any investigation made by or on behalf of any of the parties hereto. All statements contained in any certificate, schedule, exhibit or other instrument delivered pursuant to this Agreement shall be deemed to have been representations and warranties by the respective party or parties, as the case may be, and shall also survive without limitation despite any investigation made by any party hereto or on its behalf. 6.2 Entirety. This Agreement embodies the entire agreement among the parties with respect to the subject matter hereof, and all prior agreements between the parties with respect thereto are hereby superseded in their entirety. 6.3 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall deemed to be an original instrument, but all of which together shall constitute one and the same instrument. 6.4 Notices and Waivers. Any notice or waiver to be given to any party hereto shall be in writing and shall be delivered by courier, sent by facsimile transmission or first class registered or certified mail, postage prepaid, return receipt requested. If to Buyer Addressed to: With Copy to: WellTech Eastern, Inc. William P. Parker, P. C. c/o Key Energy Group, Inc. Attorney at Law Two Tower Center, Tenth Floor 2212 N.W. 50th East Brunswick, NJ 08816 Suite 163 Attn: General Counsel Oklahoma City, OK 73112 Facsimile: (908) 247-5148 Telephone: (405) 840-1288 If to Seller or Shareholders Addressed to: With Copy to: Southwest Oilfield Service, Inc. Gary Millspaugh P.O. Box 1031 Attorney at Law Elk City, OK 73648 P.O. Box 131 Weatherford, OK 73096 Mr. David Wright Telephone: (405) 772-1111 Rt 4 Box 256 Elk City, OK 73644 Mr. Roy Wofford 1924 Green Meadows McAllister, OK 74501 Any communication so addressed and mailed by first-class registered or certified mail, postage prepaid, with return receipt requested, shall be deemed to be received on the third business day after so mailed, and if delivered by courier or facsimile to such address, upon delivery during normal business hours on any business day. 6.5 Captions. The captions contained in this Agreement are solely for convenient reference and shall not be deemed to affect the meaning or interpretation of any article, section, or paragraph hereof. 6.6 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of and be enforceable by the successors and assigns of the parties hereto. 6.7 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remainder of the terms, provisions, covenants and restrictions shall remain in full force and effect and shall in no way be affected, impaired or invalidated. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such which may be hereafter declared invalid, void or unenforceable. 6.8 Applicable Law. This Agreement shall be governed by and construed and enforced in accordance with the applicable laws of the State of Oklahoma. IN WITNESS WHEREOF, the Shareholders have executed this Agreement and the other parties hereto have caused this Agreement to be signed in their respective corporate names by their respective duly authorized representatives, all on this 3rd day of April, 1997 to be effective as of the Effective Date. WELLTECH EASTERN, INC. By: Name: Bill Bixler Title: Executive Vice-president SOUTHWEST OILFIELD SERVICE, INC. By: Name: Title: SHAREHOLDER: David Wright SHAREHOLDER: Roy Wofford SCHEDULE 1.1(a) - TANGIBLE PERSONAL PROPERTY SCHEDULE 1.1(c) - SELLER INTELLECTUAL PROPERTY (Patents, Copy Rights, Trademarks, Service Marks, Licenses and all applicable customer lists of Seller) Meridian - (Burlington Res.) Crosstimbers Bracken K. Stewart Nor. Am Wwallace Oil And Gas Crawley Petroleum EXOK Mulson Oil Company Progressive Res. DLB Energy Triple D Douglas Diets and Daily SCHEDULE 1.1(d) - CONTRACTS (Leases, Subleases, Contracts, Contract Rights and Agreements relating to ownership, operation or maintenance or use of Tangible Personal Property) NONE SCHEDULE 1.1(e) - SELLER PERMITS (Permits, Authorizations, Certificates, Approvals, Registrations, Variances, Waivers, Exemptions, Rights of Way, Franchises, Ordinances, Licenses and Rights obtained from governmental agencies relating to use, operation, maintenance or use of Tangible Personal Property) Permit(s) issued by agencies requesting size, weight and dimension of over the road transportation. SCHEDULE 2.1.3 - FINANCIAL STATEMENTS SCHEDULE 2.1.10 - EMPLOYEES Employee Social Security No. Schedule 4.6 - ALLOCATION OF PURCHASE PRICE Equipment $ 400,000 Goodwill $ 10,000 Covenant not to compete $ 45,000 Total $455,000 EX-10.34 5 STOCK PURCHASE AGREEMENT PHOENIX Stock Purchase Agreement among Yale e. Key, Inc. and RALEIGH K. TURN AND DAVID BUTTS Dated as of June 9, 1997 Stock Purchase Agreement This Stock Purchase Agreement (this "Agreement") is entered into as of June 9 ,1997 by and among Yale E. Key, Inc., a Texas corporation ("Key"), and Raleigh K. Turn ("Turn") and David Butts ("Butts") collectively as the "Shareholders". WITNESSETH : Whereas, Key is a corporation duly organized and validly existing under the laws of the State of Texas, with its principal executive offices at Two Tower Center, Tenth Floor, East Brunswick, New Jersey 08816; and Whereas, Phoenix Well Service, Inc. ("Phoenix") is a corporation duly organized and validly existing under the laws of the State of Texas, with its principal executive offices at 1306 West County Road 114, Midland, Texas 79706; (P.O. Box 108, Midland, Texas 79702); and Whereas, Turn and Butts own 165 shares and 135 shares (the "Phoenix Shares"), respectively, of common stock, par value $1.00 per share, of Phoenix ("Phoenix Common Stock"), which constitutes all of the issued and outstanding shares of capital stock of Phoenix; and Whereas, the Shareholders desire to sell to Key and Key desires to purchase from the Shareholders all of the issued and outstanding capital stock of Phoenix. Now, Therefore, in consideration of the premises and of the mutual covenants and agreements herein contained, the parties hereto hereby agree as follows: ARTICLE 1 Purchase and Sale 1.1. Purchase and Sale of Phoenix Shares. Subject to the terms and conditions of this Agreement, on the date hereof, (a) Turn agrees to sell and convey to Key 165 shares of Phoenix Common Stock and (b) Butts agrees to sell and convey 135 shares of Phoenix Common Stock to Key, all of which shall be free and clear of all Encumbrances (as defined in Section 2.1.8.1 hereof) (and which, collectively, shall represent the Phoenix Shares), and Key agrees to purchase and accept all of the Phoenix Shares from the Shareholders. Subject to the provisions of Section 1.3 hereof, in consideration of the sale of the Phoenix Shares, Key shall pay to Turn the sum of $1,265,000 and Butts the sum of $1,035,000 (a total of $2,300,000), on the date hereof, by wire transfer of immediately available funds. 1.2. Delivery of Phoenix Certificates. The Shareholders shall deliver to Key, on the date hereof, duly and validly issued certificates representing all of the Phoenix Shares, each such i certificate having been duly endorsed in blank and in good form for transfer or accompanied by stock powers duly executed in blank, sufficient and in good form to properly transfer such shares to Key. 1.3 Adjustment of Purchase Price. Key shall cause to be prepared and delivered to the Shareholders (i) a balance sheet of Phoenix as of the date hereof (the "Final Balance Sheet") within thirty (30) days after the date hereof. Key and the Shareholders shall jointly review the Final Balance Sheet, endeavor in good faith to resolve all disagreements regarding the entries thereon and reach a final determination thereof within 60 days from the date hereof. Within 10 days of reaching such final determination, the following adjusting payments shall be made: (a) If the Final Net Current Value of Phoenix (as defined in Schedule 1.3 hereto) exceeds the 4/30 Net Current Value of Phoenix (as defined in Schedule 1.3 hereto), Key shall pay to the Shareholders the amount of such excess. (b) If the Final Net Current Value of Phoenix is less than the 4/30 Net Current Value of Phoenix, the Shareholders shall pay to Key the amount of such difference. ARTICLE 2 Representations and Warranties 2.1. General Representations and Warranties of the Shareholders. Each of the Shareholders jointly and severally represents and warrants to Key as follows: 2.1.1. Organization and Standing. Phoenix is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas, has full requisite corporate power and authority to carry on its business as it is currently conducted, and to own and operate the properties currently owned and operated by it, and is duly qualified or licensed to do business and is in good standing as a foreign corporation authorized to do business in all jurisdictions in which the character of the properties owned or the nature of the business conducted by it would make such qualification or licensing necessary, except where the failure to be so qualified or licensed would not have a material adverse effect on its financial condition, properties or business. 2.1.2. Agreement Authorized and its Effect on Other Obligations. Each of the Shareholders is above the age of 18 years, and has the legal capacity and requisite power and authority to enter into, and perform his obligations under this Agreement. This Agreement is a valid and binding obligation of each of the Shareholders enforceable against each of the Shareholders (subject to normal equitable principles) in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, debtor relief or similar laws affecting the rights of creditors generally. The execution, delivery and 2 performance of this Agreement by the Shareholders will not conflict with or result in a violation or breach of any term or provision of, nor constitute a default under (a) the Articles of Incorporation or Bylaws of Phoenix or (b) any obligation, indenture, mortgage, deed of trust, lease, contract or other agreement to which Phoenix or any of the Shareholders is a party or by which Phoenix or either of the Shareholders or their respective properties are bound. 2.1.3. Capitalization. The authorized capitalization of Phoenix consists of 25,000 shares of Phoenix Common Stock, of which, as of the date hereof, 300 shares are issued and outstanding and held beneficially and of record by the Shareholders. On the date hereof, Phoenix does not have any outstanding options, warrants, calls or commitments of any character relating to any of its authorized but unissued shares of capital stock. All issued and outstanding shares of Phoenix Common Stock are validly issued, fully paid and non- assessable and are not subject to preemptive rights. None of the outstanding shares of Phoenix Common Stock is subject to any voting trusts, voting agreement or other agreement or understanding with respect to the voting thereof, nor is any proxy in existence with respect thereto. 2.1.4. Ownership of Phoenix Shares. Turn and Butts hold good and valid title to 165 shares and 135 shares, respectively, of the Phoenix Common Stock, free and clear of all Encumbrances which, in the aggregate, constitutes the Phoenix Shares. The Shareholders possess full authority and legal right to sell, transfer and assign to Key the Phoenix Shares, free and clear of all Encumbrances. Upon transfer to Key by the Shareholders of the Phoenix Shares, Key will own the Phoenix Shares free and clear of all Encumbrances. There are no claims pending or, to the knowledge of any of the Shareholders, threatened, against Phoenix or either of the Shareholders that concern or affect title to either the Phoenix Shares, or that seek to compel the issuance of capital stock or other securities of Phoenix. 2.1.5. No Subsidiaries. There is no corporation, partnership, joint venture, business trust or other legal entity in which Phoenix, either directly or indirectly through one or more intermediaries, owns or holds beneficial or record ownership of at least a majority of the outstanding voting securities. 2.1.6. Financial Statements. The Shareholders have delivered to Key copies of Phoenix's unaudited balance sheet and related statements of income, retained earnings and cash flows as at and for the 12 months ended December 31, 1996 (collectively the "12/31 Financial Statements") and copies of Phoenix's unaudited balance sheet (the "4/30 Balance Sheet"), and related statements of income, retained earnings and cash flows (collectively, the "4/30 Financial Statements"), for the four months ended April 30, 1997 (the "Balance Sheet Date"), copies of which are attached hereto as Schedule 2.1.6 The 12/31 Financial Statements and the 4/30 Financial Statements are complete in all material respects. The 12/31 Financial Statements and the 4/30 Financial Statements present fairly the financial condition of Phoenix as of the dates and for the periods indicated. The 12/31 Financial 3 Statements and the 4/30 Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis. The accounts receivable reflected in the 4/30 Balance Sheet, or which have been thereafter acquired by Phoenix, have been collected or are collectible at the aggregate recorded amounts thereof less applicable reserves, which reserves are adequate. The inventories of Phoenix reflected in the 4/30 Balance Sheet, or which have thereafter been acquired by it, consist of items of a quality usable and salable in the normal course of Phoenix's business, and the values at which inventories are carried are at the lower of cost or market. 2.1.7. Liabilities. Except as disclosed on Schedule 2.1.7 hereto, Phoenix does not have any liabilities or obligations, either accrued, absolute or contingent, nor does either of the Shareholders have any knowledge of any potential liabilities or obligations, which would materially adversely affect the value and conduct of the business of Phoenix, other than those (a) reflected or reserved against in the 4/30 Balance Sheet or (b) incurred in the ordinary course of business since the Balance Sheet Date. 2.1.8. Additional Phoenix Information. Attached as Schedule 2.1.8 hereto are true, complete and correct lists of the following items: 2.1.8.1. Real Estate. All real property and structures thereon owned, leased or subject to a contract of purchase and sale, or lease commitment, by Phoenix, with a description of the nature and amount of any Encumbrances (defined below) thereon. The term "Encumbrances" means all liens, security interests, pledges, mortgages, deed of trust, claims, rights of first refusal, options, charges, restrictions or conditions to transfer or assignment, liabilities, obligations, privileges, equities, easements, rights-of-way, limitations, reservations, restrictions and other encumbrances of any kind or nature; 2.1.8.2. Machinery and Equipment. All rigs, carriers, rig equipment, machinery, transportation equipment, tools, equipment, furnishings, and fixtures owned, leased or subject to a contract of purchase and sale, or lease commitment, by Phoenix with a description of the nature and amount of any Encumbrances thereon; 2.1.8.3. Inventory. All inventory items or groups of inventory items owned by Phoenix, excluding raw materials and work in process, which raw materials and work in process are valued on the 4/30 Balance Sheet, together with the amount of any Encumbrances thereon; 2.1.8.4. Receivables. All accounts and notes receivable of Phoenix, together with (a) aging schedules by invoice date and due date, (b) the amounts provided for as an allowance for bad debts, (c) the identity and location of any asset in which Phoenix holds a security interest to secure payment of the underlying indebtedness, 4 and (d) a description of the nature and amount of any Encumbrances on such accounts and notes receivable; 2.1.8.5. Payables. All accounts and notes payable of Phoenix, together with an appropriate aging schedule; 2.1.8.6. Insurance. All insurance policies or bonds currently maintained by Phoenix, including title insurance policies, including those covering Phoenix's properties, rigs, machinery, equipment, fixtures, employees and operations, as well as a listing of any premiums, audit adjustments or retroactive adjustments due or pending on such policies or any predecessor policies; 2.1.8.7. Contracts. All contracts, including leases under which Phoenix is lessor or lessee, which are to be performed in whole or in part after the date hereof; 2.1.8.8. Employee Compensation Plans. All bonus, incentive compensation, deferred compensation, profit-sharing, retirement, pension, welfare, group insurance, death benefit, or other employee benefit or fringe benefit plans, arrangements or trust agreements of Phoenix or any employee benefit plan maintained by Phoenix, together with copies of the most recent reports with respect to such plans, arrangements, or trust agreements filed with any governmental agency and all Internal Revenue Service determination letters and other correspondence from governmental entities that have been received with respect to such plans, arrangements or agreements (collectively, "Employee Plans"); 2.1.8.9. Certain Salaries. The names and salary rates of all present employees of Phoenix, and, to the extent existing on the date of this Agreement, all arrangements with respect to any bonuses to be paid to them from and after the date of this Agreement; 2.1.8.10. Bank Accounts. The name of each bank in which Phoenix has an account and the names of all persons authorized to draw thereon; 2.1.8.11. Employee Agreements. Any collective bargaining agreements of Phoenix with any labor union or other representative of employees, including amendments, supplements, and written or oral understandings, and all employment and consulting and severance agreements of Phoenix; 2.1.8.12. Intellectual Property. All patents, patent applications, trademarks and service marks (including registrations and applications therefor), trade names, copyrights and written know-how, trade secrets and all other similar proprietary data and the goodwill associated therewith (collectively, the "Intellectual Property") used by Phoenix; 5 2.1.8.13. Trade Names. All trade names, assumed names and fictitious names used or held by Phoenix, whether and where such names are registered and where used; 2.1.8.14. Promissory Notes. All long-term and short-term promissory notes, installment contracts, loan agreements, credit agreements, and any other agreements of Phoenix relating thereto or with respect to collateral securing the same; 2.1.8.15. Guaranties. All indebtedness, liabilities and commitments of others and as to which Phoenix is a guarantor, endorser, co-maker, surety, or accommodation maker, or is contingently liable therefor and all letters of credit, whether stand-by or documentary, issued by any third party; 2.1.8.16. Reserves and Accruals. All accounting reserves and accruals maintained in the 4/30 Balance Sheet; 2.1.8.17. Leases. All leases to which Phoenix is a party (as either lessor or lessee); and 2.1.8.18. Environment. All environmental permits, approvals, certifications, licenses, registrations, orders and decrees applicable to current operations conducted by Phoenix and all environmental audits, assessments, investigations and reviews conducted by Phoenix within the last five years or otherwise within the possession of Phoenix on any property owned or used by Phoenix, including, specifically, a Phase I Environmental Site Assessment (which shall have been conducted in conformance with the scope and limitations of the ASTM Standard E 1527 by an environmental consultant approved by Key) of any real property leased by Phoenix, the cost of which shall have been paid by the Shareholders and not by Phoenix. The Shareholders shall also cause a Phase II Environmental Site Assessment to be conducted on such property at their sole expense by an environmental consultant acceptable to Key, if deemed warranted by Key. 2.1.9. No Defaults. Phoenix is not a party to, or bound by, any contract or arrangement of any kind to be performed after the Effective Date, nor is Phoenix in default in any obligation or covenant on its part to be performed under any obligation, lease, contract, order, plan or other arrangement. 2.1.10. Absence of Certain Changes and Events. Other than as a result of the transactions contemplated by this Agreement, since the Balance Sheet Date, there has not been: 2.1.10.1. Financial Change. Any material adverse change in the financial condition, backlog, operations, assets, liabilities or business of Phoenix; 6 2.1.10.2. Property Damage. Any material damage, destruction, or loss to the business or properties of Phoenix (whether or not covered by insurance); 2.1.10.3. Dividends. Any declaration, setting aside, or payment of any dividend or other distribution in respect of the Phoenix Common Stock, or any direct or indirect redemption, purchase or any other acquisition by Phoenix of any such stock; 2.1.10.4. Capitalization Change. Any change in the capital stock or in the number of shares or classes of Phoenix's authorized or outstanding capital stock as described in Section 2.1.3 hereof; 2.1.10.5. Labor Disputes. Any labor or employment dispute of whatever nature; or 2.1.10.6. Other Material Changes. Any other event or condition known to either of the Shareholders particularly pertaining to and adversely affecting the operations, assets or business of Phoenix. 2.1.11. Taxes. All federal, state and local income, value added, sales, use, franchise, gross revenue, turnover, excise, payroll, property, employment, customs, duties and any and all other tax returns, reports, and estimates have been filed with appropriate governmental agencies, domestic and foreign, by Phoenix for each period for which any such returns, reports, or estimates were due (taking into account any extensions of time to file before the date hereof); all such returns are true and correct; Phoenix has only done business in the State of Texas; all taxes shown by such returns to be payable and any other taxes due and payable have been paid (other than those being contested in good faith by Phoenix); and the tax provision reflected in the 4/30 Balance Sheet is adequate, in accordance with generally accepted accounting principles, to cover liabilities of Phoenix at the date thereof for all taxes, including any assessed interest, assessed penalties and additions to taxes of any character whatsoever applicable to Phoenix or its assets or business. No waiver of any statute of limitations executed by Phoenix with respect to any income or other tax is in effect for any period. The income tax returns of Phoenix have never been examined by the Internal Revenue Service or the taxing authorities of any other jurisdiction. There are no tax liens on any assets of Phoenix except for taxes not yet currently due. Phoenix is not subject to any tax-sharing or allocation agreement. Phoenix is not, nor has it ever attempted to become a Subchapter S-Corporation under the Internal Revenue Code of 1986, as amended. Phoenix is not and never has been, a member of a consolidated group subject to Treasury Regulation 1.1502-6 or any similar provision. 2.1.12. Intellectual Property. Phoenix owns or possesses licenses to use all Intellectual Property that is either material to the business of Phoenix or that is necessary for the rendering of any services rendered by Phoenix and the use or sale of any equipment or 7 products used or sold by Phoenix (collectively, the "Phoenix Intellectual Property"), including all such Intellectual Property listed in Schedule 2.1.8 hereto. The Phoenix Intellectual Property is owned or licensed by Phoenix free and clear of any Encumbrance. Phoenix has not granted to any other person any license to use any Phoenix Intellectual Property. Phoenix has not received any notice of infringement, misappropriation, or conflict with, the intellectual property rights of others in connection with the use by Phoenix of the Phoenix Intellectual Property or otherwise in connection with Phoenix's operation of its business. 2.1.13. Title to and Condition of Assets. Phoenix has good, indefeasible and marketable title to all its properties, interests in properties and assets, real and personal, reflected in the 4/30 Balance Sheet or in Schedule 2.1.8 hereto, free and clear of any Encumbrance of any nature whatsoever, except (a) Encumbrances reflected in the 4/30 Balance Sheet or in Schedule 2.1.8 hereto, (b) liens for current taxes not yet due and payable, and (c) such imperfections of title, easements and Encumbrances, if any, as are not substantial in character, amount, or extent and do not and will not materially detract from the value, or interfere with the present use, of the property subject thereto or affected thereby, or otherwise materially impair the business operations of Phoenix. All leases pursuant to which Phoenix leases (whether as lessee or lessor) any substantial amount of real or personal property are in good standing, valid, and effective; and there is not, under any such leases, any existing default or event of default or event which with notice or lapse of time, or both, would constitute a default by Phoenix and in respect to which Phoenix has not taken adequate steps to prevent a default from occurring. The buildings and premises of Phoenix that are used in its business are in good operating condition and repair, subject only to ordinary wear and tear. All rigs, rig equipment, machinery, transportation equipment, tools and other major items of equipment of Phoenix are in good operating condition and in a state of reasonable maintenance and repair, ordinary wear and tear excepted, and are free from any known defects except as may be repaired by routine maintenance and such minor defects as to not substantially interfere with the continued use thereof in the conduct of normal operations. To the best of each Shareholder's knowledge, all such assets conform to all applicable laws governing their use. No notice of any violation of any law, statute, ordinance, or regulation relating to any such assets has been received by Phoenix or either of the Shareholders, except such as have been fully complied with. 2.1.14. Contracts. All contracts, leases, plans or other arrangements to which Phoenix is a party, by which it is bound or to which it or its assets are subject are in full force and effect, and constitute valid and binding obligations of Phoenix. Phoenix is not, and to the knowledge of either of the Shareholders, no other party to any such contract, lease, plan or other arrangement is, in default thereunder, and no event has occurred which (with or without notice, lapse of time, or the happening of any other event) would constitute a default thereunder. No contract has been entered into on terms which could reasonably be expected to have an adverse effect on Phoenix. Neither of the Shareholder has received any information which would cause such Shareholder to conclude that any customer of Phoenix 8 will (or is likely to) cease doing business with Phoenix (or its successors) as a result of the consummation of the transactions contemplated hereby. 2.1.15. Licenses and Permits. Phoenix possesses all permits, authorizations, certificates, approvals, registrations, variances, waivers, exemptions, rights-of-way, franchises, ordinances, licenses and other rights of every kind and character (collectively, the "Permits") necessary under law or otherwise for Phoenix to conduct its business as now being conducted and to construct, own, operate, maintain and use its assets in the manner in which they are now being constructed, operated, maintained and used (collectively, the "Phoenix Permits") including all such Permits listed in Schedule 2.1.15 hereto. Each of the Phoenix Permits and Phoenix's rights with respect thereto is valid and subsisting, in full force and effect, and enforceable by Phoenix subject to administrative powers of regulatory agencies having jurisdiction. Phoenix is in compliance in all material respects with the terms of each of the Phoenix Permits. None of the Phoenix Permits has been, or to the knowledge of any of the Shareholders, is threatened to be, revoked, canceled, suspended or modified. 2.1.16. Litigation. there is no suit, action, or legal, administrative, arbitration, or other proceeding or governmental investigation pending to which Phoenix is a party or, to the knowledge of either of the Shareholders, might become a party or which particularly affects Phoenix, nor is any change in the zoning or building ordinances directly affecting the real property or leasehold interests of Phoenix, pending or, to the knowledge of either of the Shareholders, threatened. 2.1.17. Environmental Compliance. 2.1.17.1. Environmental Conditions. There are no environmental conditions or circumstances, including, without limitation, the presence or release of any Substance of Environmental Concern (defined below), on any property presently or previously owned, leased or operated by Phoenix, or on any property to which Substance of Environmental Concern or waste generated by Phoenix's operations or use of its assets were disposed of, which would have a material adverse effect on the business or business prospects of Phoenix. The term "Substance of Environmental Concern" means (a) any gasoline, petroleum (including crude oil or any fraction thereof), petroleum product, polychlorinated biphenyls, urea-formaldehyde insulation, asbestos, pollutant, contaminant, radiation and any other substance of any kind, whether or not any such substance is defined as toxic or hazardous under any Environmental Law (defined below), that is regulated pursuant to or could give rise to liability under any Environmental Law; 2.1.17.2. Permits, etc. Phoenix has, and within the period of all applicable statutes of limitations has had, in full force and effect all environmental permits, licenses, approvals and other authorizations required to conduct its operations and is, 9 and within the period of all applicable statutes of limitations, has been operating in compliance thereunder; 2.1.17.3. Compliance. Phoenix's operations and use of its assets are, and within the period of all applicable statutes of limitations, have been in compliance with applicable Environmental Law. "Environmental Law" as used herein means any and all laws, rules, orders, regulations, statutes, ordinances, codes, decrees, and other legally enforceable requirements (including, without limitation, common law) of the United States, or any State, local, municipal or other governmental authority or quasi-governmental authority, regulating, relating to, or imposing liability or standards of conduct concerning protection of the environmental or of human health, or employee health and safety as from time to time has been or is now in effect. 2.1.17.4. Environmental Claims. No notice has been received by Phoenix or either of the Shareholders from any entity, governmental agency or individual regarding any existing, pending or threatened investigation, inquiry, enforcement action. litigation, or liability, including, without limitation any claim for remedial obligations, response costs or contribution, relating to any Environmental Law; 2.1.17.5. Enforcement. Phoenix, and to the Shareholders' knowledge, no predecessor of Phoenix or other party acting on behalf of Phoenix, has entered into or agreed to any consent, decree, order, settlement or other agreement, nor is subject to any judgment, decree, order or other agreement, in any judicial, administrative, arbitral, or other forum, relating to compliance with or liability under any Environmental Law; 2.1.17.6. Liabilities. Phoenix has not assumed or retained, by contract or operation of law, any liabilities of any kind, fixed or contingent, known or unknown, under any Environmental Law; 2.1.17.7. Renewals. Neither of the Shareholders knows of any reason Phoenix (or its successors) would not be able to renew without material expense any of the permits, licenses, or other authorizations required pursuant to any of the Environmental Law to conduct and use any of Phoenix's current or planned operations; and 2.1.17.8. Asbestos and PCBs. No material amounts of friable asbestos currently exist on any property owned or operated by Phoenix, nor do polychlorinated biphenyls exist in concentrations of 50 parts per million or more in electrical equipment owned or being used by Phoenix in its operations or on its properties. 2.1.18. Compliance with Other Laws. Phoenix is not in violation of or in default with respect to, or in alleged violation of or alleged default with respect to, the Occupational 10 Safety and Health Act (29 U.S.C. 651 et seq.) as amended, or any other applicable law or any applicable rule, regulation, or any writ or decree of any court or any governmental commission, board, bureau, agency, or instrumentality, or delinquent with respect to any report required to be filed with any governmental commission, board, bureau, agency or instrumentality. 2.1.19. No ERISA Plans or Labor Issues. Phoenix does not currently sponsor, maintain or contribute to and has not at any time sponsored, maintained or contributed to any employee benefit plan which is or was subject to any provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Phoenix does not maintain any plan, program, policy, contract or other arrangement that provides retirement, medical, dental, disability, life insurance or other benefits to any current or former employees of Phoenix, including any retired employees, or their beneficiaries or dependents. Phoenix is not obligated to pay any severance or benefits to any employee or former employee of Phoenix as the result of any change in the ownership or control of Phoenix ("Retained Employee Liabilities"). Phoenix shall be solely responsible for all wages, benefits, vacation pay, sick or disability pay, taxes and other compensation and payroll items, workers' compensation and other claims, damages, obligations, commitments and assessments with respect to its employees, and their dependents and beneficiaries, through the date of this Agreement. Phoenix has not engaged in any unfair labor practices which could reasonably be expected to result in a material adverse effect on its operations or assets. Phoenix does not have any dispute with any of its existing or former employees. There are no labor disputes or, to the knowledge of either of the Shareholders, any disputes threatened by current or former employees of Phoenix. 2.1.20. Investigations; Litigation. No investigation or review by any governmental entity with respect to Phoenix or any of the transactions contemplated by this Agreement is pending or, to the knowledge of either of the Shareholders, threatened, nor has any governmental entity indicated to Phoenix an intention to conduct the same, and there is no action, suit or proceeding pending or, to the knowledge of either of the Shareholders, threatened against or affecting Phoenix at law or in equity, or before any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, that either individually or in the aggregate, does or is likely to result in any material adverse change in the financial condition, properties or business of Phoenix. 2.1.21. Absence of Certain Business Practices. Neither Phoenix nor any officer, employee or agent of Phoenix, nor any other person acting on its behalf, has, directly or indirectly, within the past five years, given or agreed to give any gift or similar benefit to any customer, supplier, government employee or other person who is or may be in a position to help or hinder the business of Phoenix (or to assist Phoenix in connection with any actual or proposed transaction) which (a) might subject Phoenix to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (b) if not given in the past, might have had a material adverse effect on the assets, business or operations of Phoenix as reflected in the 11 12/31 Financial Statements and the 4/30 Financial Statements, or (c) if not continued in the future, might materially adversely effect the assets, business operations or prospects of Phoenix or which might subject Phoenix to suit or penalty in a private or governmental litigation or proceeding. 2.1.22. No Untrue Statements. Phoenix and each of the Shareholders have made available to Key true, complete and correct copies of all contracts, documents concerning all litigation and administrative proceedings, licenses, permits, insurance policies, lists of suppliers and customers, and records relating principally to Phoenix's assets and business, and such information covers all commitments and liabilities of Phoenix relating principally to its business or the assets. This Agreement and the agreements and instruments to be entered into in connection herewith do not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements made herein and therein not misleading in any material respect. 2.1.23. Consents and Approvals. No consent, approval or authorization of, or filing or registration with, any governmental or regulatory authority, or any other person or entity other than the Shareholders, is required to be made or obtained by Phoenix or either of the Shareholders in connection with the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated hereby. 2.1.24. Finder's Fee. All negotiations relative to this Agreement and the transactions contemplated hereby have been carried on by Phoenix and the Shareholders and their counsel directly with Key and its counsel, without the intervention of any other person in such manner as to give rise to any valid claim against any of the parties hereto for a brokerage commission, finder's fee or any similar payments. 2.2. General Representations of Key. Key represents and warrants to each of the Shareholders as follows 2.2.1. Organization and Good Standing. Key is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas, has full requisite corporate power and authority to carry on its business as it is currently conducted, and to own and operate the properties currently owned and operated by it, and is duly qualified or licensed to do business and is in good standing as a foreign corporation authorized to do business in all jurisdictions in which the character of the properties owned or the nature of the business conducted by it would make such qualification or licensing necessary, except where the failure to be so qualified or licensed would not have a material adverse effect on its financial condition, properties or business. 2.2.2. Agreement Authorized and its Effect on Other Obligations. The consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of Key, and this Agreement is a valid 12 and binding obligation of Key enforceable (subject to normal equitable principles) in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, debtor relief or similar laws affecting the rights of creditors generally. The execution, delivery and performance of this Agreement by Key will not conflict with or result in a violation or breach of any term or provision of, or constitute a default under (a) the Articles of Incorporation or Bylaws of Key or (b) any obligation, indenture, mortgage, deed of trust, lease, contract or other agreement to which Key or any of its property is bound. 2.2.3. Consents and Approvals. No consent, approval or authorization of, or filing of a registration with, any governmental or regulatory authority, or any other person or entity is required to be made or obtained by Key in connection with the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated hereby. 2.2.4. Finder's Fee. All negotiations relative to this Agreement and the transactions contemplated hereby have been carried on by Key and its counsel directly with Phoenix and the Shareholders and their counsel, without the intervention by any other person as the result of any act of Key in such a manner as to give rise to any valid claim against any of the parties hereto for any brokerage commission, finder's fee or any similar payments. ARTICLE 3 Additional Agreements 3.1. Noncompetition. Except as otherwise consented to or approved in writing by Key, each of the Shareholders agrees that for a period of 60 months following the date of execution hereof, such Shareholder will not, directly or indirectly, acting alone or as a member of a partnership or as an officer, director, employee, consultant, representative, holder of, or investor in as much as 5% of any security of any class of any corporation or other business entity (a) engage in competition with the business or businesses conducted by Phoenix, Key or any affiliate of Key, or in any service business the services of which are provided and marketed by Phoenix, Key or any affiliate of Key in the states of Texas, Oklahoma or New Mexico; (b) request any present customers or suppliers of Phoenix to curtail or cancel their business with Key or any affiliate of Key; (c) disclose to any person, firm or corporation any trade, technical or technological secrets of Phoenix, Key or any affiliate of Key or any details of their organization or business affairs or (d) induce or actively attempt to influence any employee of Key or any affiliate of Key to terminate his employment. Each of the Shareholders agrees that if either the length of time or geographical area set forth in this Section 3.1 is deemed too restrictive in any court proceeding, the court may reduce such restrictions to those which it deems reasonable under the circumstances. The obligations expressed in this Section 3.1 are in addition to any other obligations that the Shareholders may have under any 13 applicable laws requiring an employee of a business or a shareholder who sells his stock in a corporation (including a disposition in a merger) to limit his activities so that the goodwill and business relations of his employer and of the corporation whose stock he has sold (and any successor corporation) will not be materially impaired. Each of the Shareholders further agrees and acknowledges that Key and its affiliates do not have any adequate remedy at law for the breach or threatened breach by such Shareholder of this covenant, and agree that Key or Any affiliate of Key may, in addition to the other remedies which may be available to it hereunder, file a suit in equity to enjoin such Shareholder from such breach or threatened breach. If any provisions of this Section 3.1 are held to be invalid or against public policy, the remaining provisions shall not be affected thereby. Each of the Shareholders acknowledges that the covenants set forth in this Section 3.1 are being executed and delivered by such Shareholder in consideration of the covenants of Key contained in this Agreement, and for other good and valuable consideration, receipt of which is hereby acknowledged. 3.2. Employment Agreements. From the date hereof, Butts will be employed by Phoenix at a salary of $7,500 per month for a period of twenty-four (24) months following the date hereof, pursuant to an Employment Agreement executed and delivered in connection herewith. 3.3. Further Assurances. From time to time, as and when requested by any party hereto, any other party hereto shall execute and deliver, or cause to be executed and delivered, such documents and instruments and shall take, or cause to be taken, such further or other actions as may be reasonably necessary to effectuate the transactions contemplated hereby. ARTICLE 4 Indemnification 4.1. Indemnification by Shareholders. In addition to any other remedies available to Key under this Agreement, or at law or in equity, each of the Shareholders shall indemnify, defend and hold harmless Phoenix and Key and their representatives, officers, directors, employees, agents and stockholders, against and with respect to any and all claims, costs, damages, losses, expenses, obliga tions, liabilities, recoveries, suits, causes of action and deficiencies, including interest, penalties and reasonable attorneys', experts' and consultants' fees and expenses (collectively, the "Damages") that such indemnitees shall incur or suffer, which arise, result from or relate to (i) any breach by either of the Shareholders of (or the failure of either of the Shareholders to perform) their respective re presentations, warranties, covenants or agreements in this Agreement or in any schedule, certificate, exhibit or other instrument furnished or delivered to Key by either of the Shareholders under this Agreement or (ii) any Retained Employee Liabilities. 4.2. Indemnification by Key. In addition to any other remedies available to the Shareholders under this Agreement, or at law or in equity, Key shall indemnify, defend and hold harmless each of the Shareholders against and with respect to any and all Damages that such 14 indemnitees shall incur or suffer, which arise, result from or relate to any breach of, or failure by Key to perform, any of its representations, warranties, covenants or agreements in this Agreement or in any schedule, certificate, exhibit or other instrument furnished or delivered to Phoenix or either of the Shareholders by or on behalf of Key under this Agreement. 4.3. Indemnification Procedure. If any party hereto discovers or otherwise becomes aware of an indemnification claim arising under Sections 4.1 4.2, 4.4 or 4.5 of this Agreement, such indemnified party shall give written notice to the indemnifying party, specifying such claim, and may thereafter exercise any remedies available to such party under this Agreement; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of any obligations hereunder, to the extent the indemnifying party is not materially prejudiced thereby. Further, promptly after receipt by an indemnified party hereunder of written notice of the commencement of any action or proceeding with respect to which a claim for indemnification may be made pursuant to this Article 4, such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party, give written notice to the latter of the commencement of such action; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of any obligations hereunder, to the extent the indemnifying party is not materially prejudiced thereby. In case any such action is brought against an indemnified party, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after such notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof unless the indemnifying party has failed to assume the defense of such claim and to employ counsel reasonably satisfactory to such indemnified person. An indemnifying party who elects not to assume the defense of a claim shall not be liable for the fees and expenses of more than one counsel in any single jurisdiction for all parties indemnified by such indemnifying party with respect to such claim or with respect to claims separate but similar or related in the same jurisdiction arising out of the same general allegations. Notwithstanding any of the foregoing to the contrary, the indemnified party will be entitled to select its own counsel and assume the defense of any action brought against it if the indemnifying party fails to select counsel reasonably satisfactory to the indemnified party, the expenses of such defense to be paid by the indemnifying party. No indemnifying party shall consent to entry of any judgment or enter into any settlement with respect to a claim without the consent of the indemnified party, which consent shall not be unreasonably withheld, or unless such judgment or settlement includes as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability with respect to such claim. No indemnified party shall consent to entry of any judgment or enter into any settlement of any such action, the defense of which has been assumed by an indemnifying party, without the consent of such indemnifying party, which consent shall not be unreasonably withheld or delayed. 4.4. Litigation Indemnification by Shareholders. In addition to any other remedies available to Key under this Agreement, or at law or in equity, each of the Shareholders shall 15 indemnify, defend and hold harmless Phoenix and Key and their respective officers, directors, employees, agents and stockholders, against and with respect to any Damages that such indemnitees shall incur or suffer, which arise, result from or relate to or arise out of any matters arising out of or related to the Shareholder's or Phoenix's relationship to or dealings with Southwest Petroservices, Inc. 4.5. Indemnification of Turn and Butts by Key for Certain Phoenix Obligations. In addition to other remedies available to the Shareholders under this Agreement, or at law or in equity, Key shall indemnify, defend and hold harmless the Shareholders against and with respect to any personal liability they may incur as a result of having guaranteed the obligations of Phoenix listed on Schedule 4.5 hereto. ARTICLE 5 Miscellaneous 5.1. Survival of Representations, Warranties and Covenants. All representations, warranties, covenants and agreements made by the parties hereto shall survive indefinitely without limitation, notwithstanding any investigation made by or on behalf of any of the parties hereto. All statements contained in any certificate, schedule, exhibit or other instrument delivered pursuant to this Agreement shall be deemed to have been representations and warranties by the respective party or parties, as the case may be, and shall also survive indefinitely without limitation despite any investigation made by any party hereto or on its behalf. 5.2. Entirety. This Agreement embodies the entire agreement among the parties with respect to the subject matter hereof, and all prior agreements between the parties with respect thereto are hereby superseded in their entirety. 5.3. Counterparts. Any number of counterparts of this Agreement may be executed and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one instrument. 5.4. Notices and Waivers. Any notice or waiver to be given to any party hereto shall be in writing and shall be delivered by courier, sent by facsimile transmission or first class registered or certified mail, postage prepaid, return receipt requested: 16 If to Key Addressed to: With copies to: Yale E. Key, Inc. Yale E. Key, Inc. Two Tower Center, Tenth Floor P. O. Box 10627 East Brunswick, New Jersey 08816 Midland, Texas 79702 Attn: General Counsel Attn: President Facsimile: (908) 247-5148 Facsimile: (915) 570-8990 Lynch, Chappell & Alsup 300 N. Marienfeld, Suite 700 Midland, Texas 79701 Attn: James M. Alsup Facsimile: (915) 683-2587 If to either Shareholder Addressed to: With a copy to: Mr. David Butts McMahon, Tidwell, Hansen, Atkins P. O. Box 108 & Peacock Midland, Texas 79702 4001 E. 42nd, Suite 200 Facsimile: (915) __________ Odessa, Texas 79762 Attn: Michael G. Kelly Mr. Raleigh K. Turn Facsimile: (915) 363-9121 2617 Andrews Court Moore, Oklahoma 73160 Any communication so addressed and mailed by first-class registered or certified mail, postage prepaid, with return receipt requested, shall be deemed to be received on the third business day after so mailed, and if delivered by courier or facsimile to such address, upon delivery during normal business hours on any business day. 5.5. Table of Contents and Captions. The table of contents and captions contained in this Agreement are solely for convenient reference and shall not be deemed to affect the meaning or interpretation of any article, section, or paragraph hereof. 5.6. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of and be enforceable by the successors and assigns of the parties hereto. 5.7. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remainder of the terms, 17 provisions, covenants and restrictions shall remain in full force and effect and shall in no way be affected, impaired or invalidated. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such which may be hereafter declared invalid, void or unenforceable. 5.8. Applicable Law. This Agreement shall be governed by and construed and enforced in accordance with the applicable laws of the State of Texas IN WITNESS WHEREOF, the Shareholders have executed this Agreement and the other parties hereto have caused this Agreement to be signed in their respective corporate names by their respective duly authorized representatives, all as of the day and year first above written. YALE E. KEY, INC. By: C. Ron Laidley, President SHAREHOLDERS Raleigh K. Turn David Butts 18 SCHEDULE 1.3 PURCHASE PRICE ADJUSTMENT DEFINITIONS Final Net Current Value of Phoenix "Final Net Current Value of Phoenix" means the dollar amount by which the Final Total Current Assets exceed the Final Total Liabilities. "Final Total Current Assets" means the dollar amount specified for the "Total Current Assets" line item on the Final Balance Sheet. "Final Total Liabilities" means the dollar amount of the sum of (a) the Final Total Current Liabilities plus (b) the Final Total Long Term Liabilities. "Final Total Current Liabilities" means the dollar amount specified for the "Total Current Liabilities" line item on the Final Balance Sheet. "Final Total Long Term Liabilities" means the dollar amount specified for the "Total Long Term Liabilities" line item on the Final Balance Sheet. 4/30 Net Current Value of Phoenix "4/30 Net Current Value of Phoenix" means the dollar amount by which the 4/30 Total Current Assets exceed the 4/30 Total Liabilities. "4/30 Total Current Assets" means the dollar amount specified for the "Total Current Assets" line item on the 4/30 Balance Sheet. "4/30 Total Liabilities" means the dollar amount of the sum of (a) the 4/30 Total Current Liabilities plus (b) the 4/30 Eligible Long Term Liabilities. "4/30 Total Current Liabilities" means the dollar amount specified for the "Total Current Liabilities" line item on the 4/30 Balance Sheet. "4/30 Eligible Long Term Liabilities" means the dollar amount specified for the "Total Long Term Liabilities" line item on the 4/30 Balance Sheet less the dollar amount specified for the "Notes Payable Related Party" line item on the 4/30 Balance Sheet. 19 EX-10.36 6 STOCK PURCHASE AGREEMENT PATRICK C:\WELLTECH\STOCKPUR\PATRICK Stock Purchase Agreement among WellTech Eastern, Inc. between Monty D. Elmore Dated as of July 17, 1997 C:\WELLTECH\STOCKPUR\PATRICK 26 Stock Purchase Agreement This Stock Purchase Agreement (this "Agreement") is entered into as of July 17, 1997, by and among WellTech Eastern, Inc., a Delaware corporation ("Buyer"), and Monty D. Elmore (the "Shareholder"). WITNESSETH: Whereas, Buyer is a corporation duly organized and validly existing under the laws of the State of Delaware, with its principal executive offices at Two Tower Center, Tenth Floor, East Brunswick, New Jersey 08816; and Whereas, Patrick Well Service, Inc. (the "Company") is a corporation duly organized and validly existing under the laws of the State of Kansas, with its principal executive offices at 2007 W. 7th Street, Liberal, Kansas; and Whereas, the Shareholder owns 82 shares (the "Company Shares") of common stock, par value $10 per share, of the Company (the "Company Common Stock"), which constitutes all of the issued and outstanding shares of capital stock of the Company; and Whereas, the Shareholder desires to sell to Buyer, and Buyer desires to purchase from the Shareholder all of the issued and outstanding capital stock of the Company. Now, Therefore, in consideration of the premises and of the mutual covenants and agreements herein contained, the parties hereto hereby agree as follows: ARTICLE 1 Purchase and Sale 1.1. Purchase and Sale of the Company Shares. Subject to the terms and conditions of this Agreement, on the date hereof, the Shareholder agree to sell and convey to Buyer, free and clear of all Encumbrances (as defined in Section 2.1.8.1 hereof), and Buyer agrees to purchase and accept from the Shareholder, all of the Company Shares. In consideration of the sale of the Company Shares, Buyer shall pay to the Shareholder $7,000,000 in cash by wire transfer of immediately available funds, and the Cash Adjustment Payment (as defined in Section 1.3 hereof), if any, in accordance with Section 1.3 hereof. 1.2. Delivery of the Company Certificates. The Shareholder shall deliver to Buyer on the date hereof duly and validly issued certificate(s) representing all of the Company Shares, each such certificate having been duly endorsed in blank and in good form for transfer or accompanied by stock powers duly executed in blank, sufficient and in good form to properly transfer such shares to Buyer. 1.3. Adjustment of Purchase Price. Buyers shall cause to be prepared and delivered to the Shareholder a balance sheet of the Company in accordance with generally accepted accounting principles (except for use of accelerated depreciation method) as of the date hereof (the "Final Balance Sheet") within sixty (60) days after the date hereof . Buyer and the Shareholder shall jointly review the Final Balance Sheet and such supplemental report, endeavor in good faith to resolve all disagreements regarding the entries thereon and reach a final determination thereof within 90 days from the date hereof. Within 10 days of reaching such final determination, the following adjusting payments shall be made: (1) If the sum of (A) Final Net Current Value of the Company (defined below) plus (B) (the "Capital Expenditure Allowance"), which is the amount of approved capital equipment purchases since 3/31 shown on Schedule 2.1.3., exceeds the 3/31 Net Current Value of the Company (defined below) Buyer shall pay to the Shareholder the amount of such excess (the "Cash Adjustment Payment"). (2) If the sum of (A) the Final Net Current Value of the Company plus (B) the Capital Expenditure Allowance, is less than the 3/31 Net Current Value of the Company, the Shareholder shall pay to Buyer the amount of such difference. The term "Final Net Current Value of the Company" means the dollar value of the amount by which (i) the "Total Current Assets" plus the "Total Other Assets" as recorded on the Final Balance Sheet exceeds (ii) the "Total Liabilities" as recorded on the Final Balance Sheet. The term "3/31 Net Current Value of the Company" means the dollar value of the amount by which (i) the "Total Current Assets" plus the "Total Other Assets" as recorded on the 3/31 Balance Sheet (as defined in Section 2.1.6 hereof) exceeds (ii) the "Total Liabilities" as recorded on the 3/31 Balance Sheet. ARTICLE 2 Representations and Warranties 2.1. Representations and Warranties of the Shareholder. The Shareholder represents and warrants to Buyer as follows: 2.1.1. Organization and Standing. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Kansas, has full requisite corporate power and authority to carry on its business as it is currently conducted, and to own and operate the properties currently owned and operated by it, and is duly qualified or licensed to do business and is in good standing as a foreign corporation authorized to do business in all jurisdictions in which the character of the properties owned or the nature of the business conducted by it would make such qualification or licensing necessary, except where the failure to be so qualified or licensed would not have a material adverse effect on its financial condition, properties or business. 2.1.2. Agreement Authorized and its Effect on Other Obligations. The Shareholder is a resident of Kansas, above the age of 18 years, and has the legal capacity and requisite power and authority to enter into, and perform his or her obligations under this Agreement. This Agreement is a valid and binding obligation of the Shareholder enforceable against each of the Shareholder (subject to normal equitable principles) in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, debtor relief or similar laws affecting the rights of creditors generally. The execution, delivery and performance of this Agreement by the Shareholder will not conflict with or result in a violation or breach of any term or provision of, nor constitute a default under (i) the Certificate of Incorporation or Bylaws of the Company or (ii) any obligation, indenture, mortgage, deed of trust, lease, contract or other agreement to which the Company or the Shareholder is a party or by which the Company or any of the Shareholder or their respective properties are bound. 2.1.3. Capitalization. The authorized capitalization of the Company consists of 25,000 shares of Company Common Stock, of which, as of the date hereof, 82 shares were issued and outstanding and held beneficially and of record by the Shareholder. On the date hereof, the Company does not have any outstanding options, warrants, calls or commitments of any character relating to any of its authorized but unissued shares of capital stock. All issued and outstanding shares of Company Common Stock are validly issued, fully paid and non-assessable and are not subject to preemptive rights. None of the outstanding shares of Company Common Stock is subject to any voting trusts, voting agreement or other agreement or understanding with respect to the voting thereof, nor is any proxy in existence with respect thereto. 2.1.4. Ownership of the Company Shares. The Shareholder holds good and valid title to all of the Company Shares, free and clear of all Encumbrances. The Shareholder possesses full authority and legal right to sell, transfer and assign to Buyer the Company Shares, free and clear of all Encumbrances. Upon transfer to Buyer by the Shareholder of the Company Shares, Buyer will own the Company Shares free and clear of all Encumbrances. There are no claims pending or, to the knowledge of the Shareholder, threatened, against the Company or any of the Shareholder that concern or affect title to the Company Shares, or that seek to compel the issuance of capital stock or other securities of the Company. 2.1.5. No Subsidiaries. There is no corporation, partnership, joint venture, business trust or other legal entity in which the Company, either directly or indirectly through one or more intermediaries, owns or holds beneficial or record ownership of at least a majority of the outstanding voting securities. 2.1.6. Financial Statements. The Company has delivered to Buyer copies of the Company's unaudited balance sheet, a copy of which is attached hereto as Schedule 2.1.6 (the "3/31 Balance Sheet"), and related statements of income, retained earnings and cash flow (collectively, the "3/31 Financial Statements") as at and for the 3 months ended March 31, 1997 (the "Balance Sheet Date"). The 3/31 Financial Statements are complete in all material respects. The 3/31 Financial Statements presents fairly the financial condition of the Company as at the dates and for the periods indicated. The 3/31 Financial Statements have been prepared in accordance with generally accepted accounting principles (except for use of accelerated depreciation method) applied on a consistent basis. The accounts receivable reflected in the 3/31 Balance Sheet, or which have been thereafter acquired by the Company, have been collected or are believed to be collectible. 2.1.7. Liabilities. Except as disclosed on Schedule 2.1.7 hereto, the Shareholder has no knowledge of any liabilities or obligations or potential liabilities or obligations, other than those (i) reflected or reserved against in the 3/31 Balance Sheet, or (ii)incurred in the ordinary course of business since the Balance Sheet Date that would not materially adversely affect the value and conduct of the business of the Company. 2.1.8. Additional Company Information. Attached as Schedule 2.1.8 hereto are true, complete and correct lists to the best of Shareholder's knowledge of the following items: 2.1.8.1. Real Estate. All real property and structures thereon owned, leased or subject to a contract of purchase and sale, or lease commitment, by the Company, with a description of the nature and amount of any Encumbrances (defined below) thereon. The term "Encumbrances" means all liens, security interests, pledges, mortgages, deed of trust, claims, rights of first refusal, options, charges, restrictions or conditions to transfer or assignment, liabilities, obligations, privileges, equities, easements, rights-of-way, limitations, reservations, restrictions and other encumbrances of any kind or nature; 2.1.8.2. Machinery, Equipment and Supplies. All rigs, carriers, rig equipment, machinery, transportation equipment, supplies, tools, equipment, furnishings, and fixtures owned, leased or subject to a contract of purchase and sale, or lease commitment, by the Company with a description of the nature and amount of any Encumbrances thereon; 2.1.8.3. Receivables. All accounts and notes receivable of the Company. 2.1.8.4. Payables. All accounts payable of the Company; 2.1.8.5. Insurance. All insurance policies or bonds currently maintained by the Company, including title insurance policies, with respect to the Company, including those covering the Company's properties, rigs, machinery, equipment, fixtures, employees and operations, as well as a listing of any premiums, audit adjustments or retroactive adjustments due or pending on such policies or any predecessor policies; 2.1.8.6. Contracts. All contracts which are to be performed in whole or in part after the date hereof; 2.1.8.7. Employee Compensation Plans. All bonus, incentive compensation, deferred compensation, profit-sharing, retirement, pension, welfare, group insurance, death benefit, or other employee benefit or fringe benefit plans, arrangements or trust agreements of the Company or any employee benefit plan maintained by the Company (collectively, "Employee Plans"), together with copies of the most recent reports with respect to such Employee Plans, arrangements, or trust agreements filed with any governmental agency and all Internal Revenue Service determination letters and other correspondence from governmental entities that have been received with respect to such plans, arrangements or agreements. 2.1.8.8. Employee Lists and Salaries. The names and salary rates of all present employees of the Company, and, to the extent existing on the date of this Agreement, all arrangements with respect to any bonuses to be paid to them from and after the date of this Agreement; 2.1.8.9. Bank Accounts. The name of each bank in which The Company has an account and the names of all persons authorized to draw thereon; 2.1.8.10. Employee Agreements. Any collective bargaining agreements of the Company with any labor union or other representative of employees, including amendments, supplements, and written or oral understandings, and all employment and consulting and severance agreements of the Company; 2.1.8.11. Intellectual Property. All patents, patent applications, trademarks and service marks (including registrations and applications therefor), copyrights and written know-how, trade secrets and all other similar proprietary data and the goodwill associated therewith (collectively, the "Intellectual Property") used by the Company; 2.1.8.12. Trade Names. All trade names, assumed names and fictitious names used or held by the Company, whether and where such names are registered and where used; 2.1.8.13. Licenses and Permits. All permits, authorizations, certificates, approvals, registrations, variances, waivers, exemptions, rights-of-way, franchises, ordinances, licenses and other rights of every kind and character (collectively, the "Permits") of the Company under which it conducts its business. 2.1.8.14. Promissory Notes. All long-term and short-term promissory notes, installment contracts, loan agreements, credit agreements, and any other agreements of the Company relating thereto or with respect to collateral securing the same; 2.1.8.15. Guaranties. All indebtedness, liabilities and commitments of others and as to which the Company is a guarantor, endorser, co-maker, surety, or accommodation maker, or is contingently liable therefor (other than indemnification provisions in master service agreements) and all letters of credit, whether stand-by or documentary, issued by any third party; 2.1.8.16. Reserves and Accruals. All accounting reserves and accruals maintained in the 3/31 Balance Sheet; 2.1.8.17. Leases. All leases to which the Company is a party; 2.1.8.18. Environment. All environmental permits, approvals, certifications, licenses, registrations, orders and decrees applicable to current operations conducted by the Company and all environmental audits, assessments, investigations and reviews conducted by the Company within the last five years or otherwise in the Company's possession on any property owned, leased or used by the Company. 2.1.9. No Defaults. The Company is not in default in any obligation or covenant on its part to be performed under any obligation, lease, contract, order, plan or other arrangement to the best of Shareholder's knowledge. 2.1.10. Absence of Certain Changes and Events. Other than as a result of the transactions contemplated by this Agreement, since the Balance Sheet Date, there has not been to Shareholder's knowledge: 2.1.10.1. Financial Change. Any material adverse change in the financial condition, backlog, operations, assets, liabilities or business of the Company; 2.1.10.2. Property Damage. Any material damage, destruction, or loss to the business or properties of the Company (whether or not covered by insurance); 2.1.10.3. Dividends. Any declaration, setting aside, or payment of any dividend or other distribution in respect of the Company Common Stock, or any direct or indirect redemption, purchase or any other acquisition by the Company of any such stock; 2.1.10.4. Capitalization Change. Any change in the capital stock or in the number of shares or classes of the Company's authorized or outstanding capital stock as described in Section 2.1.3 hereof; 2.1.10.5. Labor Disputes. Any labor or employment dispute of whatever nature; or 2.1.10.6. Other Material Changes. Any other material event or condition known to the Shareholder particularly pertaining to and adversely affecting the operations, assets or business of the Company. 2.1.11. Taxes. All federal, state and local income, value added, sales, use, franchise, gross revenue, turnover, excise, payroll, property, employment, customs, duties and any and all other tax returns, reports, and estimates have been filed with appropriate governmental agencies, domestic and foreign, by the Company for each period for which any such returns, reports, or estimates were due (taking into account any extensions of time to file before the date hereof); all such returns are true and correct; the Company has only done business in Texas, Kansas, Oklahoma and Colorado; all taxes shown by such returns to be payable and any other taxes due and payable have been paid other than those being contested in good faith by the Company; and the tax provision reflected in the 3/31 Balance Sheet is adequate, in accordance with generally accepted accounting principles (except for use of accelerated depreciation method), to cover liabilities of the Company at the date thereof for all taxes, including any assessed interest, assessed penalties and additions to taxes of any character whatsoever applicable to the Company or its assets or business. No waiver of any statute of limitations executed by the Company with respect to any income or other tax is in effect for any period. Other than as disclosed on Schedule 2.1.11 hereto, the income tax returns of the Company have never been examined by the Internal Revenue Service or the taxing authority of any other jurisdiction. There are no tax liens on any assets of The Company except for taxes not yet currently due. The Company is not subject to any tax-sharing or allocation agreement. The Company is not, nor has it ever attempted to become a Subchapter S-Corporation under the Internal Revenue Code of 1986, as amended. The Company is not and never has been, a member of a consolidated group subject to Treasury Regulation 1.1502-6 or any similar provision. 2.1.12. Intellectual Property. The Company owns or possesses licenses to use all Intellectual Property that is either material to the business of the Company or that is necessary for the rendering of any services rendered by the Company and the use or sale of any equipment or products used or sold by the Company, including all such Intellectual Property listed in Schedule 2.1.8 hereto (the "Required Intellectual Property"). The Required Intellectual Property is owned or licensed by the Company free and clear of any Encumbrance. The Company has not granted to any other person any license to use any Required Intellectual Property. The Company has not received any notice of infringement, misappropriation, or conflict with, the Intellectual Property rights of others in connection with the use by the Company of the Required Intellectual Property or otherwise in connection with the Company's operation of its business. 2.1.13. Title to and Condition of Assets. Except as disclosed on Schedule 2.1.13 hereto, the Company has good, indefeasible and marketable title to all its properties, interests in properties and assets, real and personal, reflected in the 3/31 Balance Sheet or in Schedule 2.1.8 hereto, free and clear of any Encumbrance of any nature whatsoever, except (i) Encumbrances reflected in the 3/31 Balance Sheet or in Schedule 2.1.8 hereto, (ii) liens for current taxes not yet due and payable, and (iii) such imperfections of title, easements and Encumbrances, if any, as are not substantial in character, amount or extent and do not and will not materially detract from the value, or interfere with the present use, of the property subject thereto or affected thereby, or otherwise materially impair business operations. To Shareholder's knowledge, all leases pursuant to which the Company leases (whether as lessee or lessor) any substantial amount of real or personal property are in good standing, valid, and effective; and there is not, under any such leases, any existing default or event of default or event which with notice or lapse of time, or both, would constitute a default by the Company and in respect to which the Company has not taken adequate steps to prevent a default from occurring. To Shareholder's knowledge, the buildings and premises of the Company that are used in its business are in good operating condition and repair, subject only to ordinary wear and tear. To Shareholder's knowledge, all rigs, rig equipment, machinery, transportation equipment, tools and other major items of equipment of the Company are in good operating condition and in a state of reasonable maintenance and repair, ordinary wear and tear excepted, and are free from any known defects except as may be repaired by routine maintenance and such minor defects as to not substantially interfere with the continued use thereof in the conduct of normal operations. To Shareholder's knowledge, all such assets conform to all applicable laws governing their use. To Shareholder's knowledge, no notice of any violation of any law, statute, ordinance, or regulation relating to any such assets has been received by the Company or any of the Shareholder, except such as have been fully complied with. 2.1.14. Contracts. To Shareholder's knowledge, all contracts, leases, plans or other arrangements to which the Company is a party, by which it is bound or to which it or its assets are subject are in full force and effect, and constitute valid and binding obligations of the Company. To the knowledge of the Shareholder, no other party to any such contract, lease, plan or other arrangement is, in default thereunder, and no event has occurred which (with or without notice, lapse of time, or the happening of any other event) would constitute a default thereunder. No contract has been entered into on terms which Shareholder knows will have an adverse effect on the Company. The Shareholder has no knowledge that any customer of the Company is going to cease doing business with the Company (or its successors) as a result of the consummation of the transactions contemplated hereby. 2.1.15. Licenses and Permits. To Shareholder's knowledge, the Company possesses all Permits necessary under law or otherwise for the Company to conduct its business as now being conducted and to construct, own, operate, maintain and use its assets in the manner in which they are now being constructed, operated, maintained and used, including all such Permits listed in Schedule 2.1.8 hereto (collectively, the "Required Permits"); each of the Required Permits and the Company's rights with respect thereto is valid and subsisting, in full force and effect, and enforceable by the Company subject to administrative powers of regulatory agencies having jurisdiction; the Company is in compliance in all respects with the terms of each of the Required Permits; and none of the Required Permits have been, or to the knowledge the Shareholder, is threatened to be, revoked, canceled, suspended or modified. 2.1.16. Litigation. To Shareholder's knowledge, except as set forth in Schedule 2.1.16 hereto, there is no suit, action, or legal, administrative, arbitration, or other proceeding or governmental investigation pending or threatened to which the Company is a party which particularly affects the Company or its assets, nor is any change in the zoning or building ordinances directly affecting the real property or leasehold interests of the Company. 2.1.17. Environmental Compliance. 2.1.17.1. Environmental Conditions. There are no environmental conditions or circumstances, including, without limitation, the presence or release of any Substance of Environmental Concern, on any property presently or previously owned, leased or operated by the Company, or on any property to which any Substance of Environmental Concern or waste generated by the Company's operations or use of its assets were disposed of, which would have a result a material adverse effect on the business or business prospects of the Company. The term "Substance of Environmental Concern" means (a) any gasoline, petroleum (including crude oil or any fraction thereof), petroleum product, polychlorinated biphenyls, urea-formaldehyde insulation, asbestos, pollutant, contaminant, radiation and any other substance of any kind, whether or not any such substance is defined as toxic or hazardous under any Environmental Law (as defined in Section 2.1.17.3 hereof), that is regulated pursuant to or could give rise to liability under any Environmental Law; 2.1.17.2. Permits, etc. The Company has, and within the period of all applicable statute of limitations has had, in full force and effect all environmental Permits required to conduct its operations, and is, within the period of all applicable statutes of limitations has been, operating in compliance thereunder; 2.1.17.3. Compliance. The Company's operations and use of its assets are, and within the period of all applicable statutes of limitations, have been in compliance with applicable Environmental Law. "Environmental Law" as used herein means any and all laws, rules, orders, regulations, statutes, ordinances, codes, decrees, and other legally enforceable requirements (including, without limitation, common law) of the United States, or any State, local, municipal or other governmental authority or quasi-governmental authority, regulating, relating to, or imposing liability or standards of conduct concerning protection of the environmental or of human health, or employee health and safety as from time to time has been or is now in effect. 2.1.17.4. Environmental Claims. No notice has been received by the Company or the Shareholder from any entity, governmental agency or individual regarding any existing, pending or threatened investigation, inquiry, enforcement action. litigation, or liability, including, without limitation any claim for remedial obligations, response costs or contribution, relating to any Environmental Law; 2.1.17.5. Enforcement. Neither the Company nor any predecessor of the Company or other party acting on behalf of the Company, has entered into or agreed to any consent, decree, order, settlement or other agreement, nor is subject to any judgment, decree, order or other agreement, in any judicial, administrative, arbitral, or other forum, relating to compliance with or liability under any Environmental Law; 2.1.17.6. Liabilities. The Company has not assumed or retained, by contract or operation of law, any liabilities of any kind, fixed or contingent, known or unknown, under any Environmental Law, other than master service agreements, leases, or other contracts made available to Buyer. 2.1.17.7. Renewals. The Shareholder does not know of any reason the Company (or its successors) would not be able to renew without material expense any of the permits, licenses, or other authorizations required pursuant to any of the Environmental Law to conduct and use any of the Company's current or planned operations; and 2.1.17.8. Asbestos and PCBs. To Shareholder's knowledge, no material amounts of friable asbestos currently exist on any property owned or operated by the Company, nor do polychlorinated biphenyls exist in concentrations of 50 parts per million or more in electrical equipment owned or being used by the Company in its operations or on its properties. 2.1.18. Compliance with Other Laws. To Shareholder's knowledge, the Company is not in violation of or in default with respect to, or in alleged violation of or alleged default with respect to, the Occupational Safety and Health Act (29 U.S.C. 651 et seq.) as amended, or any other applicable law or any applicable rule, regulation, or any writ or decree of any court or any governmental commission, board, bureau, agency, or instrumentality, or delinquent with respect to any report required to be filed with any governmental commission, board, bureau, agency or instrumentality. 2.1.19. Employee Plans and Labor Issues. To Shareholder's knowledge, all Employee Plans (as defined in Section 2.1.8.7) covering active, former or retired employees of the Company are listed on Schedule 2.1.8.7. Solely for purposes of the representations in this Section 2.1.19, the term "Company" means Patrick Well Service, Inc., as well as any other entity which is considered one employer with Patrick Well Service, Inc., under Sections 414(b), (c), (m) and (o) of the Internal Revenue Code of 1986, as amended (the "Code"). The Company has made available to Buyer a copy of each Employee Plan, any related trust agreement and annuity or insurance contract, and each plan's most recent annual report (Form 5500 series) filed with the Internal Revenue Service, if applicable. The only Employee Plan that the Company maintains, or that the Company or any predecessor thereto has ever maintained, that is intended to be qualified under Section 401(a) of the Code is the Patrick Well Service, Inc., Profit Sharing Plan (the "Profit Sharing Plan") and, without limitation, no pension plan or multiemployer plan subject to Title IV (Plan Termination Insurance) of the Employee Retirement Income Security Act 1974, as amended ("ERISA") or the minimum funding requirements of Section 412 of the Code has ever been maintained. Each Employee Plan has been maintained and administered, in all material respects, in compliance with its terms and with the requirements prescribed by any applicable statutes, orders, rules and regulations, including the Code and ERISA, and (i) all required Forms 5500 for the Employee Plans have been timely filed with the Internal Revenue Service or an extension of the filing due date has been granted by the Internal Revenue Service; (ii) the Profit Sharing Plan has received a current favorable determination letter from the Internal Revenue Service to the effect that the Profit Sharing Plan is qualified under Section 401(a) of the Code, and nothing has occurred since the effective date of such determination letter to adversely affect, or cause the appropriate governmental agency or authority to revoke, such qualification or approval; (iii) there are no pending or anticipated claims against or otherwise involving any of the Employee Plans, and no suit, action or other litigation (excluding claims for benefits incurred in the ordinary course of Employee Plan activities) has been brought against or with respect to any Employee Plan; (iv) all contributions, reserves or premium payments required to be made to the Employee Plans have either been made or properly accrued on the Company's financial statements; (v) the Company does not have any obligations for retiree health and life benefits under any Employee Plan, (vi) there are no restrictions on the rights of the Company to amend or terminate any Employee Plan without incurring any liability thereunder; and (vii) none of the Employee Plans provide for additional or accelerated payments or benefits to employees or shareholders of the Company upon a change of control or ownership of the Company. The Company is not obligated to pay any severance or benefits to any employee or former employee of the Company as the result of any change in the ownership or control of the Company. The Company has not engaged in any unfair labor practices which could reasonably be expected to result in an adverse effect on its operations or assets. The Company does not have any dispute with any of its existing or former employees. There are no labor disputes or, to the knowledge of any of the Shareholder, any disputes threatened by current or former employees of the Company. 2.1.20. Investigations; Litigation. To Shareholder's knowledge, no investigation or review by any governmental entity with respect to the Company or any of the transactions contemplated by this Agreement is pending or threatened, nor has any governmental entity indicated to the Company an intention to conduct the same, and there is no action, suit or proceeding pending or, to the knowledge of the Shareholder, threatened against or affecting the Company at law or in equity, or before any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, that either individually or in the aggregate, does or is likely to result in any material adverse change in the financial condition, properties or business of the Company. 2.1.21. Absence of Certain Business Practices. To Shareholder's knowledge, neither the Company nor any officer, employee or agent of the Company, nor any other person acting on its behalf, has, directly or indirectly, within the past five years, given or agreed to give any gift or similar benefit to any customer, supplier, government employee or other person who is or may be in a position to help or hinder the business of the Company (or to assist the Company in connection with any actual or proposed transaction) which (i) might subject the Company to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (ii) if not given in the past, might have had a material adverse effect on the assets, business or operations of the Company as reflected in the 3/31 Financial Statements, or (iii) if not continued in the future, might materially adversely effect the assets, business operations or prospects of the Company or which might subject the Company to suit or penalty in a private or governmental litigation or proceeding. 2.1.22. Copies of Documents - No Untrue Statements. The Shareholder has made available to Buyer true, complete and correct copies of all contracts, documents concerning all litigation and administrative proceedings, licenses, permits, insurance policies, lists of suppliers and customers, and records relating principally to the Company's assets and business, and such information covers all commitments and liabilities of the Company relating to its business or the assets. This Agreement and the agreements and instruments to be entered into in connection herewith do not include any untrue statement of a material fact or omit to state any known material fact necessary to make the statements made herein and therein not misleading in any material respect. 2.1.23. Consents and Approvals. No consent, approval or authorization of, or filing or registration with, any governmental or regulatory authority, or any other person or entity other than the Shareholder, is required to be made or obtained by the Company or of the Shareholder in connection with the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated hereby. 2.1.24. Finder's Fee. All negotiations relative to this Agreement and the transactions contemplated hereby have been carried on by the Shareholder and their counsel directly with Buyer and its counsel, without the intervention of any other person in such manner as to give rise to any valid claim against any of the parties hereto for a brokerage commission, finder's fee or any similar payments. ARTICLE 3 Additional Agreements 3.1. Noncompetition. Except as otherwise consented to or approved in writing by Buyer, the Shareholder agrees that for a period of 60 months from the date hereof, such Shareholder will not, directly or indirectly, acting alone or as a member of a partnership or as an officer, director, employee, consultant, representative, holder of, or investor in as much as 5% of any security of any class of any corporation or other business entity (i) engage in competition with the well servicing business or businesses conducted by the Company, on the date hereof, or in any service business the services of which are provided and marketed by the Company, on the date hereof in any area of the state of the United States, or any foreign country in which the Company, transacts business on the date hereof; (ii) request any present customers or suppliers of the Company to curtail or cancel their business with Buyer or any affiliate of Buyer; (iii) disclose to any person, firm or corporation any trade, technical or technological secrets of the Company, Buyer or any affiliate of Buyer or any details of their organization or business affairs or (iv) induce or actively attempt to influence any employee of the Company, Buyer or any affiliate of Buyer to terminate his employment; provided, however, that the Shareholder shall be able to buy, sell, build and overhaul well servicing rigs, and to work on any rig on Shareholder's own production. Shareholder agrees that if either the length of time or geographical area set forth in this Section 3.1 is deemed too restrictive in any court proceeding, the court may reduce such restrictions to those which it deems reasonable under the circumstances. The obligations expressed in this Section 3.1 are in addition to any other obligations that the Shareholder may have under the laws of the states in which he does business requiring an employee of a business or a shareholder who sells his stock in a corporation (including a disposition in a merger) to limit his activities so that the goodwill and business relations of his employer and of the corporation whose stock he has sold (and any successor corporation) will not be materially impaired. The Shareholder further agrees and acknowledges that the Company, Buyer and its affiliates do not have any adequate remedy at law for the breach or threatened breach by such Shareholder of this covenant, and agree that the Company, Buyer or any affiliate of Buyer may, in addition to the other remedies which may be available to it hereunder, file a suit in equity to enjoin such Shareholder from such breach or threatened breach. If any provisions of this Section 3.1 are held to be invalid or against public policy, the remaining provisions shall not be affected thereby. The Shareholder acknowledges that the covenants set forth in this Section 3.1 are being executed and delivered by such Shareholder in consideration of the covenants of Buyer contained in this Agreement, and for other good and valuable consideration, receipt of which is hereby acknowledged. 3.2. Release of Shareholder from Guaranty. Within 30 days, Buyers shall obtain a complete release of the personal guaranty of Shareholder and his wife from NationsBank, Liberal, Kansas, and indemnify Shareholder and his wife during that period of time should the guaranty be invoked by NationsBank. 3.3. Further Assurances. From time to time, as and when requested by any party hereto, any other party hereto shall execute and deliver, or cause to be executed and delivered, such documents and instruments and shall take, or cause to be taken, such further or other actions as may be reasonably necessary to effectuate the transactions contemplated hereby. ARTICLE 4 Indemnification 4.1. Indemnification by and Remedies Against the Shareholder. In addition to any other remedies available to Buyer under this Agreement, or at law or in equity, the Shareholder shall indemnify, defend and hold harmless the Company, Buyer and their affiliates and their respective officers, directors, employees, agents and stockholders (collectively, the "Buyer Indemnified Parties"), against and with respect to any and all claims, costs, damages, losses, expenses, obligations, liabilities, recoveries, suits, causes of action and deficiencies, including interest, penalties and reasonable fees and expenses of attorneys, consultants and experts (collectively, the "Damages") in excess of $150,000 in the aggregate that the Buyer Indemnified Parties shall incur or suffer, which arise, result from or relate to any breach by the Shareholder of (or the failure of the Shareholder to perform) his respective representations, warranties, covenants or agreements in this Agreement or in any schedule, certificate, exhibit or other instrument furnished or delivered to Buyer by the Shareholder under this Agreement or provided, however, that the Shareholder shall not be required to so indemnify, defend and hold harmless Buyer Indemnified Parties against and with respect to any Damages incurred as a result of a breach by the Shareholder of his representations and warranties in this Agreement or in any schedule, certificate, exhibit or other instrument furnished or delivered to Buyer by the Shareholder under this Agreement for which Buyer fails to provide written notice of a claim for such Damages to the Shareholder on or before the expiration of the survival period (as specified in Section 5.1 hereof) of the specific representation or warranty alleged to have been breached. 4.2. Indemnification by and Remedies Against Buyer. In addition to any other remedies available to the Shareholder under this Agreement or at law or in equity, Buyer shall indemnify and hold harmless the Shareholder, his wife, children, agents, representatives, attorneys, successors, heirs, executors and administrators (collectively the "Shareholder Indemnified Parties") from any Damages that the Shareholder Indemnified Parties shall incur or suffer, which arise, result from or relate to (i) any breach of or failure by Buyer to perform any of its representations, warranties, covenants or agreements in this Agreement or in any schedule, certificate, exhibit or other instrument furnished or delivered to the Shareholder by or on behalf of Buyer under this Agreement or (ii) the conduct of the Company's business on or after the date hereof, provided, however, that Buyer shall not be required to so indemnify, defend and hold harmless the Shareholder Indemnified Parties as a result of a breach by Buyer of any of its representations and warranties in this Agreement or in any schedule, certificate, exhibit or other instrument furnished or delivered to the Shareholder by Buyer under this Agreement for which the Shareholder fails to provide written notice of the claim for such damages to Buyer on or before the expiration of the survival period (as specified in Section 5.1 hereof) of the specific representation or warranty alleged to have been breached. 4.2. Indemnification Procedure. In the event that any party hereto discovers or otherwise becomes aware of an indemnification claim arising under Section 4.1 or 4.2 of this Agreement, such indemnified party shall give written notice to the indemnifying party, specifying such claim, and may thereafter exercise any remedies available to such party under this Agreement; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of any obligations hereunder, to the extent the indemnifying party is not materially prejudiced thereby. Further, promptly after receipt by an indemnified party hereunder of written notice of the commencement of any action or proceeding with respect to which a claim for indemnification may be made pursuant to Section 4.1 or 4.2 hereof, such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party, give written notice to the latter of the commencement of such action; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of any obligations hereunder, to the extent the indemnifying party is not materially prejudiced thereby. In case any such action is brought against an indemnified party, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after such notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof unless the indemnifying party has failed to assume the defense of such claim and to employ counsel reasonably satisfactory to such indemnified person. An indemnifying party who elects not to assume the defense of a claim shall not be liable for the fees and expenses of more than one counsel in any single jurisdiction for all parties indemnified by such indemnifying party with respect to such claim or with respect to claims separate but similar or related in the same jurisdiction arising out of the same general allegations. Notwithstanding any of the foregoing to the contrary, the indemnified party will be entitled to select its own counsel and assume the defense of any action brought against it if the indemnifying party fails to select counsel reasonably satisfactory to the indemnified party, the expenses of such defense to be paid by the indemnifying party. No indemnifying party shall consent to entry of any judgment or enter into any settlement with respect to a claim without the consent of the indemnified party, which consent shall not be unreasonably withheld, or unless such judgment or settlement includes as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability with respect to such claim. No indemnified party shall consent to entry of any judgment or enter into any settlement of any such action, the defense of which has been assumed by an indemnifying party, without the consent of such indemnifying party, which consent shall not be unreasonably withheld or delayed. ARTICLE 5 Miscellaneous 5.1. Survival of Representations, Warranties and Covenants. All representations and warranties made by the parties hereto shall survive for a period of 24 months from the date hereof, notwithstanding any investigation made by or on behalf of any of the parties hereto; provided, however, that the representations and warranties contained in Section 2.1.11 hereof shall survive until the expiration of the applicable statute of limitations associated with the taxes at issue. All statements contained in any certificate, schedule, exhibit or other instrument delivered pursuant to this Agreement shall be deemed to have been representations and warranties by the respective party or parties, as the case may be, and shall also survive for a period of 24 months from the date hereof despite any investigation made by any party hereto or on its behalf. All covenants and agreements contained herein shall survive as provided herein. 5.2. Entirety. This Agreement embodies the entire agreement among the parties with respect to the subject matter hereof, and all prior agreements between the parties with respect thereto are hereby superseded in their entirety. 5.3. Counterparts. Any number of counterparts of this Agreement may be executed and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one instrument. 5.4. Notices and Waivers. Any notice or waiver to be given to any party hereto shall be in writing and shall be delivered by courier, sent by facsimile transmission or first class registered or certified mail, postage prepaid, return receipt requested: If to Buyer Addressed to: With a copy to: WellTech Eastern, Inc. Porter & Hedges, L.L.P. Two Tower Center, Tenth Floor 700 Louisiana, 35th Floor East Brunswick, New Jersey 08816 Houston, Texas 77210-4744 Attn: General Counsel Attn: Samuel N. Allen Facsimile: (908) 247-5148 Facsimile: (713) 228-1331 If to Shareholder Addressed to: With a copy to: Monty D. Elmore Gene H. Sharp, Esq. 2133 Sierra McQueen, McKinley, Dreiling, Morain & Tate, P.A. Liberal, Kansas 67901 419 N. Kansas - P. O. Box 2619 Liberal, Kansas 67905-2619 Facsimile: (316) 624-9163 Rex A. Sharp, Esq. Husch & Eppenberger 1200 Main Street, Suite 1700 Kansas City, Missouri 64105-2100 Facsimile: (816) 421-0596 Any communication so addressed and mailed by first-class registered or certified mail, postage prepaid, with return receipt requested, shall be deemed to be received on the third business day after so mailed, and if delivered by courier or facsimile to such address, upon delivery during normal business hours on any business day. 5.5. Table of Contents and Captions. The table of contents and captions contained in this Agreement are solely for convenient reference and shall not be deemed to affect the meaning or interpretation of any article, section, or paragraph hereof. 5.6. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of and be enforceable by the successors and assigns of the parties hereto. 5.7. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remainder of the terms, provisions, covenants and restrictions shall remain in full force and effect and shall in no way be affected, impaired or invalidated. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such which may be hereafter declared invalid, void or unenforceable. 5.8. Applicable Law. This Agreement shall be governed by and construed and enforced in accordance with the applicable laws of the State of Kansas. IN WITNESS WHEREOF, the Shareholder has executed this Agreement and the other parties hereto have caused this Agreement to be signed in their respective corporate names by their respective duly authorized representatives, all as of the day and year first above written. WELLTECH EASTERN, INC. By:________________________________________ Name: Bill Bixler Title: Vice President SHAREHOLDER ____________________________________________ Monty D. Elmore EX-10.37 7 STOCK PURCHASE AGREEMENT KENTING C:\DOCUMENT\KENTSTAG.07 EXECUTION COPY Stock Purchase Agreement Between WellTech Eastern, Inc. and Kenting Energy Services Inc. Dated as of July 30, 1997 Stock Purchase Agreement This Stock Purchase Agreement (this AAgreement@) is entered into as of July 30, 1997 by and between WellTech Eastern, Inc., a Delaware corporation (ABuyer@), and Kenting Energy Services Inc., an Alberta corporation (the AShareholder@). - -------------------------------------------------------------------------------- WITNESSETH : - -------------------------------------------------------------------------------- Whereas, Buyer is a corporation duly organized and validly existing under the laws of the State of Delaware, with its principal executive offices at Two Tower Center, Tenth Floor, East Brunswick, New Jersey 08816; and Whereas, Kenting Holdings (Argentina) S.A. (the ACompany@) is a corporation duly organized and validly existing under the laws of the republic of Argentina, with its principal executive offices at Uruguay 1134-Piso 3, (1016) Buenos Aires, Argentina; and Whereas, Kenting Drilling (Argentina) S.A. (the ACompany Subsidiary@) is a subsidiary of the Company and is a corporation duly organized and validly existing under the laws of the republic of Argentina, with its principal executive offices at Uruguay 1134-Piso 3, (1016) Buenos Aires, Argentina; and Whereas, the Shareholder owns 15,300,000 shares (the ACompany Shares@) of common stock, par value $1.00 per share, of the Company (ACompany Common Stock@), which constitutes all of the issued and outstanding shares of capital stock of the Company Whereas, the Company owns 24,545,362 shares (the ACompany-Owned Subsidiary Shares@) of common stock, par value $1.00 per share, of the Company Subsidiary (ASubsidiary Common Stock@), and the Shareholder owns 37,386 shares (the AShareholder-Owned Subsidiary Shares@) of Subsidiary Common Stock, which constitutes all of the issued and outstanding shares of capital stock of the Company Subsidiary; and Whereas, the Shareholder desires to sell to Buyer, and Buyer desires to purchase from the Shareholder all of the issued and outstanding capital stock of the Company and all of the shares of capital stock of the Company Subsidiary owned by the Shareholder. Now, Therefore, in consideration of the premises and of the mutual covenants and agreements herein contained, the parties hereto hereby agree as follows: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 C:\DOCUMENT\KENTSTAG.07 ARTICLE 1 ARTICLE 1 Purchase and SalePurchase and Sale 1.1. Purchase and Sale of the Company Shares. Subject to the terms and conditions of this Agreement, on the date hereof, the Shareholder agrees to sell and convey to Buyer, free and clear of all Encumbrances (defined below) and Buyer agrees to purchase and accept from the Shareholder, all of the Company Shares and all of the Shareholder-Owned Subsidiary Shares. In consideration of the sale of the Company Shares and the Shareholder-Owned Subsidiary Shares, Buyer shall pay to the Shareholder $9,575,000 in cash by wire transfer of immediately available funds, and the Cash Adjustment Payment (as defined in Section 1.3 hereof), if any, in accordance with Section 1.3 hereof. In addition, on the date hereof Buyer shall pay to the Shareholder $525,000 in satisfaction of all debts remaining due to the Shareholder or irs affiliates on the date hereof. The term AEncumbrances@ means all liens, security interests, pledges, mortgages, deed of trust, claims, rights of first refusal, options, charges, restrictions or conditions to transfer or assignment, liabilities, obligations, privileges, equities, easements, rights-of-way, limitations, reservations, restrictions and other encumbrances of any kind or nature. 1.2. Recording the Transfer of Shares. The parties hereto acknowledge that the Company Shares are currently held of record as follows: 15,299,988 shares (the AKID Company Shares@) by Kenting Drilling International, Inc., a predecessor (by amalgamation) to the Shareholder (AKID@) and 12 shares (the AKESL Company Shares@) by Kenting Energy Services Ltd, a predecessor (by amalgamation) to the Shareholder (AKESL@). The parties hereto acknowledge that the Shareholder-Owned Subsidiary Shares are currently held of record by KID. The Shareholder represents and warrants to Buyer that it has validly acquired the KID Company Shares, the KESL Company Shares and the Shareholder-Owned Subsidiary Shares by means of an amalgamation of various affiliated corporate entities and a subsequent liquidation of the resulting entity without having such acquisitions (the AShareholder Stock Acquisitions@) formally recorded in the appropriate stock records of the Company and the Company Subsidiary. On the date hereof, the Shareholder shall caused to be filed in the appropriate stock records of the Company and the Company Subsidiary those transfer documents necessary to properly record the Shareholder Stock Acquisitions in accordance with Argentina law (the ADelinquent Filings@) and those transfer documents necessary to properly record the transfer of the Company Shares and the Shareholder-Owned Shares hereunder in accordance with Argentina law such that, as a result of such filings, the Buyer (and its designees) will become the record and beneficial owners of the Company Shares and the Shareholder-Owned Subsidiary Shares. 1.3 Adjustment of Purchase Price. Buyer shall cause to be prepared and delivered to the Shareholder a consolidated balance sheet of the Company as of the date hereof (the AFinal Balance Sheet@) within sixty (60) days after the date hereof, which balance sheet will be prepared in accordance with Canadian generally accepted accounting principles, consistently applied in all respects (which shall not include any reserve or accruals for employee termination costs). Buyer and the Shareholder shall jointly review the Final Balance Sheet, and endeavor in good faith to resolve all disagreements regarding the entries thereon and reach a final determination thereof within 90 days from the date hereof. In the event that the parties cannot agree on the entries to be placed on the Final Balance Sheet, the dispute will be resolved by an independent accounting firm mutually agreed to by the Shareholder and Buyer (such agreement not to be unreasonably withheld or delayed) whose resolution shall be binding on and enforceable against the parties hereto. Within 10 days of reaching such final determination, the following adjusting payments shall be made: (1) If the sum of (A) the Final Net Current Value of the Company (defined below) plus (B) $100,056 (the ACapital Expenditure Amount@) exceeds the 4/30 Net Current Value of the Company (defined below), Buyer shall pay to the Shareholder the amount of such excess (the ACash Adjustment Payment@). (2) If the sum of (A) the Final Net Current Value of the Company plus the Capital Expenditure Amount is less than the 4/30 Net Current Value of the Company, the Shareholder shall pay to Buyer the amount of such difference. The term AFinal Net Current Value of the Company@ means the dollar value of the amount by which (i) the ATotal Current Assets@ (excluding any prepaid job costs relating to the assets referred to in Schedule 2.1.8 hereto (the AExcluded Assets@) transferred from the Company to the Shareholder or an associated company of the Shareholder in anticipation of the consummation of the transactions contemplated hereby but including the book value of any AInventories@ included in the Excluded Assets) plus the AOther Assets@ minus the ADue from Kenting Group@ as recorded on the Final Balance Sheet exceeds (ii) the ATotal Current Liabilities@ plus the A Term Debt@ plus the ADeferred Income Taxes@ minus the ADue to Kenting Group@ as recorded on the Final Balance Sheet. The term A4/30 Net Current Value of the Company@ means the dollar value of the amount by which (i) the ATotal Current Assets@ (excluding any prepaid job costs relating to the Excluded Assets but including the book value of any AInventories@ included in the Excluded Assets) plus the AOther Assets@ minus the ADue from Kenting Group@ as recorded on the 4/30 Balance Sheet (as defined in Section 2.1.6 hereof) exceeds (ii) the ATotal Current Liabilities@ plus the ATerm Debt@ plus the ADeferred Income Taxes@ minus the ADue to Kenting Group@ as recorded on the 4/30 Balance Sheet. ARTICLE 2 Representations and Warranties ARTICLE 2 Representations and Warranties 2.1. Representations and Warranties of the Shareholder.Representations and Warranties of the Shareholder. The Shareholder represents and warrants to Buyer as follows: 2.1.1. Organization and Standing.Organization and Standing. Each of the Company, the Company Subsidiary and the Shareholder is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, has full requisite corporate power and authority to carry on its business as it is currently conducted, and to own and operate the properties currently owned and operated by it, and is duly qualified or licensed to do business and is in good standing and is authorized to do business in all jurisdictions in which the character of the properties owned or the nature of the business conducted by it would make such qualification or licensing necessary, except where the failure to be so qualified or licensed would not have an adverse effect on its financial condition, properties or business. 2.1.2. Agreement Authorized and its Effect on Other Obligations.Agreement Authorized and its Effect on Other Obligations. The execution and delivery of this Agreement have been authorized by all of necessary corporate action on the part of the Shareholder, and the Shareholder has the legal capacity and requisite power and authority to enter into, and perform its obligations under this Agreement. This Agreement is a valid and binding obligation of the Shareholder enforceable against the Shareholder (subject to normal equitable principles) in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, debtor relief or similar laws affecting the rights of creditors generally. The execution, delivery and performance of this Agreement by the Shareholder will not conflict with or result in a violation or breach of any term or provision of, nor constitute a default under (i) any of the organizational or other documents of the Company or the Company Subsidiary or (ii) any obligation, indenture, mortgage, deed of trust, lease, contract or other agreement to which the Company, the Company Subsidiary or the Shareholder is a party or by which the Company, the Company Subsidiary or the Shareholder or their respective properties are bound. 2.1.3. Capitalization.Capitalization. The authorized capitalization of the Company consists of 15,300,000 shares of Company Common Stock, of which, as of the date hereof, 15,300,000 shares were issued and outstanding and, following the recording of the Delinquent Filings, are held beneficially and of record by the Shareholder. On the date hereof, the Company does not have any outstanding options, warrants, calls or commitments of any character relating to any of its authorized but unissued shares of capital stock. All issued and outstanding shares of Company Common Stock are validly issued, fully paid and non-assessable and are not subject to preemptive rights. None of the outstanding shares of Company Common Stock is subject to any voting trusts, voting agreement or other agreement or understanding with respect to the voting thereof, nor is any proxy in existence with respect thereto. The authorized capitalization of the Company Subsidiary consists of 24,582,748 shares of Subsidiary Common Stock, all of which shares were issued and outstanding as of the date hereof, with 24,545,362 shares held beneficially and of record by the Company (following the recording of the Delinquent Filings) and 37,386 shares held beneficially and of record by the Shareholder (following the recording of the Delinquent Filings). On the date hereof, the Company Subsidiary does not have any outstanding options, warrants, calls or commitments of any character relating to any of its authorized but unissued shares of capital stock. All issued and outstanding shares of Subsidiary Common Stock are validly issued, fully paid and non-assessable and are not subject to preemptive rights. None of the outstanding shares of Subsidiary Common Stock is subject to any voting trusts, voting agreement or other agreement or understanding with respect to the voting thereof, nor is any proxy in existence with respect thereto. 2.1.4. Ownership of the Company Shares.Ownership of the Company Shares. Following the recording of the Delinquent Filings, the Shareholder holds good and valid title to all of the Company Shares and the Shareholder-Owned Subsidiary Shares, free and clear of all Encumbrances. Following the recording of the Delinquent Filings, the Shareholder possesses full authority and legal right to sell, transfer and assign to Buyer the Company Shares and the Shareholder-Owned Subsidiary Shares, free and clear of all Encumbrances. Upon transfer to Buyer by the Shareholder of the Company Shares and the Shareholder-Owned Subsidiary Shares, Buyer will own the Company Shares and the Shareholder-Owned Subsidiary Shares free and clear of all Encumbrances. There are no claims pending or, to the knowledge of the Shareholder, threatened, against the Company or the Shareholder that concern or affect title to the Company Shares or the Shareholder-Owned Subsidiary Shares, or that seek to compel the issuance of capital stock or other securities of either the Company or the Company Subsidiary. 2.1.5. No Subsidiaries2.1.5. No Subsidiaries. Other than the Company Subsidiary, there is no corporation, partnership, joint venture, business trust or other legal entity in which the Company, either directly or indirectly through one or more intermediaries, owns or holds beneficial or record ownership of at least a majority of the outstanding voting securities. 2.1.6. Financial Statements2.1.6.Financial Statements. The Company has delivered to Buyer copies of the unaudited consolidated balance sheet of the Company and the Company Subsidiary (the A4/30 Balance Sheet@) and related consolidated statements of income, copies of which are attached hereto as Schedule 2.1.6 (collectively, the A4/30 Financial Statements@), as at and for the four months ended April 30, 1997 (the ABalance Sheet Date@). The 4/30 Financial Statements are complete in all material respects. The 4/30 Financial Statements presents fairly in all material respects the consolidated financial condition of the Company as at the dates and for the periods indicated. The 4/30 Financial Statements have been prepared in accordance with Canadian generally accepted accounting principles applied on a consistent basis. 2.1.7. Liabilities2.1.7.Liabilities. Except as provided in Schedule 2.1.7 hereto, to the knowledge of any of (i) the directors and officers of the Company, (ii) the directors and officers of the Company Subsidiary, (iii) Gary Meier and (iv) Ricardo Lopez Olaciregui (collectively, the ACompany Management@), neither the Company nor the Company Subsidiary has any liabilities or obligations, either accrued, absolute or contingent, nor are any of the foregoing persons aware of any potential liabilities or obligations (including, without limitation, liabilities related to non-performance of contracts, non-payment of taxes, infringement of the intellectual property rights of others, violations of applicable laws, current or pending litigation, environmental conditions or labor disputes) that could materially adversely affect the value and conduct of the business of the Company and the Company Subsidiary, taken as a whole, other than those required to be reflected or properly reserved against in the 4/30 Balance Sheet and the Final Balance Sheet (and which will be reflected in an accurate calculation of the 4/30 Net Current Value of the Company and the Final Net Current Value of the Company). 2.1.8. Absence of Certain Changes and Events2.1.8. Absence of Certain Changes and Events. The Shareholder has caused the Company and the Company Subsidiary to make those fixed asset transfers and those balance sheet adjustments referred to in Schedule 2.1.8 hereto. To the knowledge of Company Management, other than the transactions specified in Schedule 2.1.8 hereto, since the Balance Sheet Date, there has not been any material reduction in the value of the fixed assets of the Company or the Company Subsidiary or the occurrence of any other transaction or event that could materially adversely affect the value and conduct of the business of the Company and the Company Subsidiary, taken as a whole, other than those that will be reflected in an accurate calculation of the Final Net Current Value of the Company. 2.1.9. Title to and Condition of Assets2.1.9. Title to and Condition of Assets. Except as disclosed on Schedule 2.1.9 hereto, the Company and the Company Subsidiary have good title to all their assets reflected in the 4/30 Balance Sheet, including, without limitation, all of the Company-Owned Subsidiary Shares, free and clear of any Encumbrance of any nature whatsoever, except (i) Encumbrances reflected in the 4/30 Balance Sheet, (ii) liens for current taxes not yet due and payable, and (iii) such imperfections of title, easements and Encumbrances, if any, as are not substantial in character, amount, or extent and do not and will not materially detract from the value, or interfere with the present use, of the property subject thereto or affected thereby, or otherwise materially impair business operations. 2.1.10. Consents and Approvals. All consents, approvals and authorizations required to be made or obtained by the Company, the Company Subsidiary or the Shareholder in connection with the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated hereby have been obtained. 2.1.11. Finder=s Fee2.1.11. Finder=s Fee. All negotiations relative to this Agreement and the transactions contemplated hereby have been carried on by the Shareholder and its counsel directly with Buyer and its counsel, without the intervention of any other person in such manner as to give rise to any valid claim against any of the parties hereto for a brokerage commission, finder=s fee or any similar payments. 2.2. Representations and Warranties of Buyer2.2. Representations and Warranties of Buyer. Buyer represents and warrants to the Shareholder as follows: 2.2.1. Organization and Good Standing2.2.1. Organization and Good Standing. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, has full requisite corporate power and authority to carry on its business as it is currently conducted, and to own and operate the properties currently owned and operated by it, and is duly qualified or licensed to do business and is in good standing as a foreign corporation authorized to do business in all jurisdictions in which the character of the properties owned or the nature of the business conducted by it would make such qualification or licensing necessary, except where the failure to be so qualified or licensed would not have an adverse effect on its financial condition, properties or business. 2.2.2. Agreement Authorized and its Effect on Other Obligations2.2.2. Agreement Authorized and its Effect on Other Obligations. The consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of Buyer, and this Agreement is a valid and binding obligation of Buyer enforceable (subject to normal equitable principles) in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, debtor relief or similar laws affecting the rights of creditors generally. The execution, delivery and performance of this Agreement by Buyer will not conflict with or result in a violation or breach of any term or provision of, or constitute a default under (a) the Certificate of Incorporation or Bylaws of Buyer or (b) any obligation, indenture, mortgage, deed of trust, lease, contract or other agreement to which Buyer or any of its property is bound. 2.2.3. Consents and Approvals 2.2.3. Consents and Approvals. No consent, approval or authorization of, or filing of a registration with, any governmental or regulatory authority, or any other person or entity is required to be made or obtained by Buyer in connection with the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated hereby. 2.2.4. Finder=s Fee2.2.4. Finder=s Fee. All negotiations relative to this Agreement and the transactions contemplated hereby have been carried on by Buyer and its counsel directly with the Company, the Company Subsidiary and the Shareholder and its counsel, without the intervention by any other person as the result of any act of Buyer in such a manner as to give rise to any valid claim against any of the parties hereto for any brokerage commission, finder=s fee or any similar payments. ARTICLE 3 Additional Agreements ARTICLE 3 Additional Agreements 3.1. Noncompetition.Noncompetition. Except as otherwise consented to or approved in writing by Buyer, the Shareholder agrees that for a period of 42 months from the date hereof, it will not (and will cause its affiliates not to), directly or indirectly, acting alone or as a member of a partnership or as an officer, director, employee, consultant, representative, holder of, or investor in as much as 5% of any security of any class of any corporation or other business entity (i) engage in any businesses involved in providing well servicing or shallow/moderate depth drilling services within the country of Argentina; (ii) request any present customers or suppliers of the Company or the Company Subsidiary to curtail or cancel their business with the Company, the Company Subsidiary, Buyer or any affiliate of Buyer; (iii) disclose to any person, firm or corporation any trade, technical or technological secrets of the Company, the Company Subsidiary, Buyer or any affiliate of Buyer or any details of their organization or business affairs or (iv) induce or actively attempt to influence any employee of the Company, the Company Subsidiary, Buyer or any affiliate of Buyer to terminate his employment. The Shareholder agrees that if either the length of time or geographical area set forth in this Section 3.1 is deemed too restrictive in any court proceeding, the court may reduce such restrictions to those which it deems reasonable under the circumstances. The obligations expressed in this Section 3.1 are in addition to any other obligations that the Shareholder may have under the laws of any jurisdiction in which they do business requiring an employee of a business or a shareholder who sells his stock in a corporation (including a disposition in a merger) to limit his activities so that the goodwill and business relations of his employer and of the corporation whose stock he has sold (and any successor corporation) will not be materially impaired. Each of the Shareholder further agrees and acknowledges that the Company, the Company Subsidiary, Buyer and its affiliates do not have any adequate remedy at law for the breach or threatened breach by the Shareholder of this covenant, and agree that the Company, the Company Subsidiary, Buyer or any affiliate of Buyer may, in addition to the other remedies which may be available to it hereunder, file a suit in equity to enjoin the Shareholder from such breach or threatened breach. If any provisions of this Section 3.1 are held to be invalid or against public policy, the remaining provisions shall not be affected thereby. The Shareholder acknowledges that the covenants set forth in this Section 3.1 are being executed and delivered by such Shareholder in consideration of the covenants of Buyer contained in this Agreement, and for other good and valuable consideration, receipt of which is hereby acknowledged. 3.2. Employee Matters. From the date hereof, the Company and the Company Subsidiary shall remain responsible for all costs associated with the termination of any of their employees terminated after the date hereof; provided, however, that the Shareholder shall be solely responsible for any and all liabilities, costs and expenses associated with the termination of Gary Meier by either the Company or the Company Subsidiary, regardless of whether he is terminated before, on or after the date hereof (the AMeier Termination@). 3.3. Further Assurances. From time to time, as and when requested by any party hereto, any other party hereto shall execute and deliver, or cause to be executed and delivered, such documents and instruments and shall take, or cause to be taken, such further or other actions as may be reasonably necessary to effectuate the transactions contemplated hereby. Without limiting the generality of the foregoing, the Shareholder shall take those actions reasonably requested by Buyer to (i) properly record the transfer of the Company Shares and the Shareholder-Owned Subsidiary Shares in accordance with Section 1.2 hereof and (ii) resolve the title exceptions described in Schedule 2.1.9 hereto. ARTICLE 4 Indemnification ndemnification 4.1. Indemnification by the Shareholder4.1. Indemnification by the Shareholder. In addition to any other remedies available to Buyer under this Agreement, or at law or in equity, the Shareholder shall indemnify, defend and hold harmless the Company, the Company Subsidiary, Buyer and their affiliates and their respective officers, directors, employees, agents and stockholders (collectively, the ABuyer Indemnified Parties@), against and with respect to any and all claims, costs, damages, losses, expenses, obligations, liabilities, recoveries, suits, causes of action and deficiencies, including interest, penalties and reasonable fees and expenses of attorneys, consultants and experts (collectively, the ADamages@) that the Buyer Indemnified Parties shall incur or suffer, which arise, result from or relate to (i) any breach by the Shareholder of (or the failure of the Shareholder to perform) its respective representations, warranties, covenants or agreements in this Agreement or in any schedule, certificate, exhibit or other instrument furnished or delivered to Buyer by the Shareholder under this Agreement or (ii) the Meier Termination. 4.2. Indemnification by Buyer4.2. Indemnification by Buyer. In addition to any other remedies available to the Shareholder under this Agreement, or at law or in equity, Buyer shall indemnify, defend and hold harmless the Shareholder against and with respect to any and all Damages that such indemnitees shall incur or suffer, which arise, result from or relate to any breach of, or failure by Buyer to perform, any of its representations, warranties, covenants or agreements in this Agreement or in any schedule, certificate, exhibit or other instrument furnished or delivered to the Shareholder by or on behalf of Buyer under this Agreement. 4.3. Indemnification Procedure. In the event that any party hereto discovers or otherwise becomes aware of an indemnification claim arising under Section 4.1 or 4.2 of this Agreement, such indemnified party shall give written notice to the indemnifying party, specifying such claim, and may thereafter exercise any remedies available to such party under this Agreement; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of any obligations hereunder, to the extent the indemnifying party is not materially prejudiced thereby. Further, promptly after receipt by an indemnified party hereunder of written notice of the commencement of any action or proceeding with respect to which a claim for indemnification may be made pursuant to Section 4.1 or 4.2 hereof, such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party, give written notice to the latter of the commencement of such action; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of any obligations hereunder, to the extent the indemnifying party is not materially prejudiced thereby. In case any such action is brought against an indemnified party, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after such notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof unless the indemnifying party has failed to assume the defense of such claim and to employ counsel reasonably satisfactory to such indemnified person. An indemnifying party who elects not to assume the defense of a claim shall not be liable for the fees and expenses of more than one counsel in any single jurisdiction for all parties indemnified by such indemnifying party with respect to such claim or with respect to claims separate but similar or related in the same jurisdiction arising out of the same general allegations. Notwithstanding any of the foregoing to the contrary, the indemnified party will be entitled to select its own counsel and assume the defense of any action brought against it if the indemnifying party fails to select counsel reasonably satisfactory to the indemnified party, the expenses of such defense to be paid by the indemnifying party. No indemnifying party shall consent to entry of any judgment or enter into any settlement with respect to a claim without the consent of the indemnified party, which consent shall not be unreasonably withheld, or unless such judgment or settlement includes as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability with respect to such claim. No indemnified party shall consent to entry of any judgment or enter into any settlement of any such action, the defense of which has been assumed by an indemnifying party, without the consent of such indemnifying party, which consent shall not be unreasonably withheld or delayed. ARTICLE 5 ARTICLE 5 MiscellaneousMiscellaneous 5.1. Survival of Representations, Warranties and Covenants5.1. Survival of Representations, Warranties and Covenants. All representations, warranties, covenants and agreements made by the parties hereto shall survive indefinitely without limitation, notwithstanding any investigation made by or on behalf of any of the parties hereto. All statements contained in any certificate, schedule, exhibit or other instrument delivered pursuant to this Agreement shall be deemed to have been representations and warranties by the respective party or parties, as the case may be, and shall also survive indefinitely despite any investigation made by any party hereto or on its behalf. 5.2. Entirety5.2. Entirety. This Agreement embodies the entire agreement among the parties with respect to the subject matter hereof, and all prior agreements between the parties with respect thereto are hereby superseded in their entirety. 5.3. Counterparts.Counterparts. Any number of counterparts of this Agreement may be executed and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one instrument. 5.4. Notices and Waivers.Notices and Waivers. Any notice or waiver to be given to any party hereto shall be in writing and shall be delivered by courier, sent by facsimile transmission or first class registered or certified mail, postage prepaid, return receipt requested: If to Buyer ----------------------------------------------------------- - -------------------------------------------------------- Addressed to: With a copy to: - ----------------------------------------------------------- - -------------------------------------------------------- - ----------------------------------------------------------- - -------------------------------------------------------- WellTech Eastern, Inc. Porter & Hedges, L.L.P. Two Tower Center, Tenth Floor 700 Louisiana, 35th Floor East Brunswick, New Jersey 08816 Houston, Texas 77210-4744 Attn: General Counsel Attn: Samuel N. Allen Facsimile: (908) 247-5148 Facsimile: (713) 228-1331 ----------------------------------------------------------- - -------------------------------------------------------- If to any Shareholder ------------------------------------------------------ - -------------------------------------------------------- Addressed to: With a copy to: - ------------------------------------------------------ - -------------------------------------------------------- - ------------------------------------------------------ - -------------------------------------------------------- Kenting Energy Services Inc. Howard Mackie Suite 700, 112 - 4th Ave. S.W. 1000 Canterra Tower Calgary, Alberta T2P0H3 400 Third Ave. S.W. Attn: Chief Operating Officer Calgary, Alberta T2P0H3 Facsimile: (403) 264-0251 Attn: Brian Roberts Facsimile: (403) 266-1395 ------------------------------------------------------ - -------------------------------------------------------- Any communication so addressed and mailed by first-class registered or certified mail, postage prepaid, with return receipt requested, shall be deemed to be received on the third business day after so mailed, and if delivered by courier or facsimile to such address, upon delivery during normal business hours on any business day. 5.5. Table of Contents and Captions.Table of Contents and Captions. The table of contents and captions contained in this Agreement are solely for convenient reference and shall not be deemed to affect the meaning or interpretation of any article, section, or paragraph hereof. 5.6. Successors and Assigns.Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of and be enforceable by the successors and assigns of the parties hereto. 5.7. Severability.Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remainder of the terms, provisions, covenants and restrictions shall remain in full force and effect and shall in no way be affected, impaired or invalidated. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such which may be hereafter declared invalid, void or unenforceable. 5.8. Applicable Law.Applicable Law. While the parties hereto acknowledge and agree that the transfer of the Company Shares and the Shareholder-Owned Subsidiary Shares hereunder shall be effected and recorded in accordance with Argentina law, this Agreement shall be governed by and construed and enforced in accordance with the applicable laws of the Province of Alberta. 5.9. Fees, Expenses.Fees, Expenses. All legal and other fees and expenses incurred by the parties hereto in connection with the negotiation of this Agreement and the consummation of the transactions contemplated hereby shall be borne solely by the party incurring such fee or expense. Without limiting the generality of the foregoing, any fees and expenses incurred by the Shareholder=s counsel in connection with updating the stock records of the Company and the Company Subsidiary as required to properly record the transfer of the shares hereunder shall not be the obligation of the Company or the Company Subsidiary. All out-of-pocket expenses incurred by Buyer, the Company or the Company Subsidiary in connection with resolving the title exceptions described in Schedule 2.1.9 hereto shall be reimbursed by the Shareholder promptly upon written request accompanied by written evidence of such expense. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed in their respective corporate names by their respective duly authorized representatives, all as of the day and year first above written. WELLTECH EASTERN, INC. By:/s/ Francis D. John Name: Francis D. John Title: President KENTING ENERGY SERVICES INC. By: /s/A. E. Dumont Name: A. E. Dumont Title: President Schedule 2.1.6 - 4/30 Financial Statements See the financial statements attached hereto Schedule 2.1.7 - Liabilities See the listing attached hereto Schedule 2.1.8 - Material Pre-Closing Transactions Excluded Assets: Since the Balance Sheet date and in anticipation of the consummation of the transactions contemplated by this Agreement, the Company Subsidiary has transferred to P.D. Technical Services Inc. the following assets referred to in the attached Bill of Sale (the AExcluded Assets@): Balance Sheet Adjustments: The amounts payable from the Company or the Company Subsidiary to the Shareholder or its affiliates in excess of the amounts payable to the Company or the Company Subsidiary from the Shareholder or its affiliates shall be satisfied as follows: $3,000,000 US will be canceled in consideration for the transfer of the Excluded Assets with the remaining $525,000 US to be paid by the Buyer on the date hereof. Schedule 2.1.9 - Title Exceptions 1. The Argentina real property records do not currently show that the Company Subsidiary is the owner of the parcel of real property located in Las Heres, Argentina and the two parcels of real property located in Comodoro Rivadavia, Argentina (the ACompany Property@) that valid purchase documents in the possession of the Company Subsidiary indicate it as owning. The Shareholder represents and warrants that (i) the Company Subsidiary is the owner in fee simple of the Company Property (with no material Encumbrances thereon), (ii) no other party has claimed or can validly claim title to any portion of the Company Property and (iii) it has (or will cause to be) delivered all documents necessary to file in the appropriate real property records to reflect that the Company Subsidiary owns the Company Property in fee simple, free from any material Encumbrances. 2. Some of the certificates of title covering the thirty-seven (37) automobiles and light pickup trucks owned by the Company Subsidiary (the ACompany Vehicles@) either do not properly reflect the Company Subsidiary as the owner thereof or indicate that such automobile is subject to a third part lien. The Shareholder represents and warrants that Company Vehicles are owned outright by the Company Subsidiary subject to no Encumbrances, (ii) no other party has claimed or can validly claim title to any of the Company Vehicles and (iii) it has (or will cause to be) delivered to Buyer all documents necessary to file with the appropriate governmental agency to enable the Company Subsidiary to obtain a clear certificate of title to each Company Vehicle. EX-10.38 8 STOCK PURCHASE MOSLEY Stock Purchase Agreement among WellTech Eastern, Inc., Robert E. Mosley, Jr. Thelma Scoggin Mosley Thomas A. Mosley Nancy Evans Mosley James R. Mosley Dennis W. Mosley and Melanie Ostrum Mosley Dated as of August 22, 1997 TABLE OF CONTENTS (continued) Page TABLE OF CONTENTS Page ARTICLE 1Purchase and Sale 1.1. Purchase and Sale of the Company Shares. 1 1.2. Adjustment of Purchase Price. 1 1.3. Closing. 2 1.4. Closing Deliveries. 2 1.4.1. Opinion of Buyer's Counsel.2 1.4.2. Opinion of Shareholders' Counsel. 3 1.4.3. Lease of certain Real Estate. 3 1.4.4. Deed Without Warranty. 3 1.5. Resignations and Employment of Certain Persons. 3 1.6. Payment of Certain Indebtedness; Release of Guarantees 3 ARTICLE 2 Representations and Warranties 2.1. Representations and Warranties of the Shareholders. 4 2.1.1. Organization and Standing.4 2.1.2. Agreement Authorized and its Effect on Other Obligations. 4 2.1.3. Capitalization. 4 2.1.4. Ownership of the Company Shares. 4 2.1.5. No Subsidiaries 5 2.1.6. Financial Statements 5 2.1.7. Liabilities 5 2.1.8. Additional Company Information 5 2.1.9. No Defaults. 7 2.1.10. Absence of Certain Changes and Events 8 2.1.11. Taxes 8 2.1.12. Intellectual Property 9 2.1.13. Title to and Condition of Assets 9 2.1.14. Contracts. 9 2.1.15. Licenses and Permits. 9 2.1.16. Litigation 10 2.1.17. Environmental Compliance. 10 2.1.18. Compliance with Other Laws11 2.1.19. ERISA Plans and Labor Issues 11 2.1.20. Investigations; Litigation12 2.1.21. Absence of Certain Business Practices 12 2.1.22. No Untrue Statements. 12 2.1.23. Consents and Approvals. 13 2.1.24. Finder's Fee 13 2.2. Representations and Warranties of Buyer 13 2.2.1. Organization and Good Standing. 13 2.2.2. Agreement Authorized and its Effect on Other Obligations. 13 ARTICLE 3Additional Agreements 3.1. Noncompetition 13 3.2. Purchase and Sale of Certain Assets. 14 3.3. Further Assurances. 14 3.4. Public Announcements. 14 ARTICLE 4Indemnification 4.1. Indemnification by the Shareholders 15 4.2. Indemnification by Buyer 15 4.3. Indemnification Procedure 15 ARTICLE 5Miscellaneous 5.1. Survival of Representations, Warranties and Covenants 16 5.2. Entirety 16 5.3. Counterparts. 16 5.4. Notices and Waivers. 16 5.5. Table of Contents and Captions. 17 5.6. Successors and Assigns. 17 5.7. Severability. 17 5.8. Applicable Law. 17 Stock Purchase Agreement This Stock Purchase Agreement (this "Agreement") is entered into as of August 22, 1997, by and among WellTech Eastern, Inc., a Delaware corporation ("Buyer"), and Robert E. Mosley, Jr., Thelma Scoggin Mosley, Thomas A. Mosley, Nancy Evans Mosley, James R. Mosley, Dennis W. Mosley, and Melanie Ostrum Mosley (collectively, the "Shareholders"). WITNESSETH : Whereas, Buyer is a corporation duly organized and validly existing under the laws of the State of Delaware, with its principal executive offices at Two Tower Center, Tenth Floor, East Brunswick, New Jersey 08816; Whereas, Mosley Well Service, Inc. (the "Company") is a corporation duly organized and validly existing under the laws of the State of Louisiana, with its principal executive offices at 3000 Highway 80 East, Haughton, Louisiana 71037; Whereas, the Shareholders own 20,500 shares (the "Company Shares") of common stock, par value $1.00 per share, of the Company (the "Company Common Stock"), which constitutes all of the issued and outstanding shares of capital stock of the Company; and Whereas, the Shareholders desire to sell to Buyer, and Buyer desires to purchase from the Shareholders, all of the issued and outstanding capital stock of the Company. Now, Therefore, in consideration of the premises and of the mutual covenants and agreements herein contained, the parties hereto hereby agree as follows: I. ARTICLE Purchase and Sale A. Purchase and Sale of the Company Shares. Subject to the terms and conditions of this Agreement, on the date hereof, the Shareholders agree to sell and convey to Buyer, free and clear of all Encumbrances (as defined in Section hereof), and Buyer agrees to purchase and accept from the Shareholders, all of the Company Shares. In consideration of the sale of the Company Shares, Buyer shall pay to the Shareholders a purchase price of $21,000,000 (the "Purchase Price") in cash by wire transfer of immediately available funds, and the Cash Adjustment Payment (as defined in Section hereof), if any, in accordance with Section hereof. A. Adjustment of Purchase Price. Buyer shall cause to be prepared and delivered to the Shareholders a consolidated balance sheet of the Company as of the date hereof (the "Final Balance Sheet") within 60 days after the date hereof, which balance sheet will be prepared in accordance with generally accepted accounting principles, consistently applied in all respects (which shall not include any reserve or accruals for employee termination costs). Buyer and the Shareholders shall jointly review the Final Balance Sheet, and endeavor in good faith to resolve all disagreements regarding the entries thereon and reach a final determination thereof within 90 days from the date hereof. In the event that the parties cannot agree on the entries to be placed on the Final Balance Sheet, the dispute will be resolved by an independent accounting firm mutually agreed to by the Shareholders and Buyer (such agreement not to be unreasonably withheld or delayed) whose resolution shall be binding on and enforceable against the parties hereto. Within 10 days of reaching such final determination, the following adjusting payments shall be made: (1) If the Final Net Current Value of the Company (as defined below) (a) exceeds $1,000,000, Buyer shall pay to the Shareholders the amount of such excess (the "Cash Adjustment Payment") or (b) is less than $1,000,000, the Shareholders shall pay, pro rata according to each Shareholder's percentage ownership of the Company immediately prior to the Closing (as defined herein), to Buyer the amount of such difference; and (2) An amount equal to the capital expenditures made by the Company since the Buyer's letter of intent dated July 17, 1997 (the "Letter") and approved by the Buyer in its sole and absolute discretion (the "Approved Capital Expenditures") shall be paid to the Shareholders. The term "Final Net Current Value of the Company" means the dollar value of the amount by which the "Total Current Assets" plus the "Total Other Assets," excluding "Land," as recorded on the Final Balance Sheet, exceeds the "Total Liabilities," excluding "Income Taxes Payable," but including $___________, representing the aggregate amount of the payment of debt of the Company made by Buyer at the Closing, as recorded on the Final Balance Sheet. The parties expressly agree that the Cash Adjustment Payment will not include any income tax liability of the Company for 1997. A. Closing. Consummation of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Bank One, N.A. in Shreveport, Louisiana on the date hereof (the "Closing Date"), unless another time, place or date is agreed to by the Shareholders and the Buyer. A. Closing Deliveries. At the Closing, (a) the Shareholders shall deliver to Buyer duly and validly issued certificate(s) representing all shares of Company Shares owned beneficially or of record by them, each such certificate to be duly endorsed in blank and in good form for transfer, or accompanied by stock powers duly executed in blank sufficient and in good form to properly transfer such shares to Buyer, (b) the Shareholders and Buyer shall have delivered to one another all other documents, instruments and agreements as required under this Agreement, (c) Buyer shall deliver to the Shareholders the cash purchase price payable at Closing as provided in Section by wire transfer of immediately available funds, and (d) the Buyer and Shareholders will deliver to one another the opinions of counsel, lease and deed without warranty as described below: 1. Opinion of Buyer's Counsel. The Buyer shall deliver a favorable opinion, dated as of the Closing Date, from Porter & Hedges, L.L.P., counsel for the Buyer, in form and substance satisfactory to the Shareholders, to the effect that (i) the Buyer has been duly incorporated and is validly existing as a corporation in good standing under the laws of its state of organization; (ii) all corporate proceedings required to be taken by or on the part of the Buyer to authorize the execution of this Agreement and the implementation of the transactions contemplated hereby have been taken; and (iii) this Agreement has been duly executed and delivered by, and is the legal, valid and binding obligation of the Buyer and is enforceable against Buyer in accordance with its terms, except as enforceability may be limited by (a) equitable principles of general applicability or (b) bankruptcy, insolvency, reorganization, fraudulent conveyance or similar laws affecting the rights of creditors generally. In rendering such opinion, such counsel may rely upon (i) certificates of public officials and of officers of the Buyer as to matters of fact and (ii) the opinion or opinions of other counsel, which opinions shall be reasonably satisfactory to the Shareholders, as to matters other than federal or Texas law. 1. Opinion of Shareholders' Counsel. The Shareholders shall deliver a favorable opinion, dated the Closing Date, from Nelson, Hammond, & Self, P.C., counsel to the Shareholders, in form and substance satisfactory to Buyer, to the effect that (i) the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Louisiana and is qualified to transact business in every jurisdiction in which the nature of the Company's contacts require such qualification, (ii) all outstanding shares of the Company Common Stock have been validly issued and are fully paid, nonassessable and free of preemptive rights; (iii) all of the Company Shares are owned beneficially and of record by the Shareholders free of any Encumbrances; (iv) the Company owns all of its assets free and clear of any Encumbrances other than those Encumbrances listed on the Balance Sheet or Schedules hereto, and (v) this Agreement has been duly executed and delivered by, and is the legal, valid and binding obligation of the Shareholders and is enforceable against the Shareholders in accordance with its terms, except as the enforceability may be limited by (a) equitable principles of general applicability or (b) bankruptcy, insolvency, reorganization, fraudulent conveyance or similar laws affecting the rights of creditors generally. In rendering such opinion, such counsel may rely upon (i) certificates of public officials and of officers of the Company or the Shareholders as to matters of fact and (ii) on the opinion or opinions of other counsel, which opinions shall be reasonably satisfactory to Buyer, as to matters other than federal or Louisiana law. 1. Lease of certain Real Estate. Buyer and the Shareholders shall each deliver leases regarding certain real estate to be owned after the Closing by Robert E. Mosley, Jr., each of which is attached hereto in Exhibit 1.4.3. 1. Deed Without Warranty. Buyer shall deliver to Robert E. Mosley, Jr. or an entity controlled by Robert E. Mosley, Jr. the deeds regarding certain real estate owned prior to the Closing by the Company, each of which is attached hereto as Exhibit 1.4.4. A. Resignations and Employment of Certain Persons. At the Closing, each of the officers and directors of the Company will resign, and Buyer will commence employment of Thomas A. Mosley, James R. Mosley, and Dennis W. Mosley. A. Payment of Certain Indebtedness; Release of Guarantees. At the Closing, Buyer will pay or cause to be paid all the debt obligations set forth in Schedule 1.6. Within 60 days of the Closing, Buyer will cause to be released all personal guarantees of Robert E. Mosley, Jr. regarding indebtedness or other obligations of the Company to parties other than Buyer or the Company. I. ARTICLE Representations and Warranties A. Representations and Warranties of the Shareholders. Each of the Shareholders jointly and severally represents and warrants to Buyer as follows: 1. Organization and Standing. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Louisiana, has full requisite corporate power and authority to carry on its business as it is currently conducted, and to own and operate the properties currently owned and operated by it, and is duly qualified or licensed to do business and is in good standing as a foreign corporation authorized to do business in all jurisdictions in which the character of the properties owned or the nature of the business conducted by it would make such qualification or licensing necessary. 1. Agreement Authorized and its Effect on Other Obligations. Robert E. Mosley, Jr., Thelma S. Mosley, Thomas A. Mosley, and Nancy E. Mosley are residents of Louisiana, and James R. Mosley, Dennis W. Mosley, and Melanie O. Mosley are residents of Texas. Each of the Shareholders is above the age of 18 years and has the legal capacity and requisite power and authority to enter into, and perform his obligations under this Agreement. This Agreement is a valid and binding obligation of each of the Shareholders enforceable against each of the Shareholders in accordance with its terms. The execution, delivery and performance of this Agreement by the Company and each of the Shareholders will not conflict with or result in a violation or breach of any term or provision of, nor constitute a default under (i) the Certificate of Incorporation or Bylaws of the Company or (ii) any obligation, indenture, mortgage, deed of trust, lease, contract or other agreement to which the Company or either of the Shareholders is a party or by which the Company or either of the Shareholders or their respective properties are bound. 1. Capitalization. The authorized capitalization of the Company consists of 25,000 shares of Company Common Stock, of which, as of the date hereof, 20,500 shares are issued and outstanding and held beneficially and of record by the Shareholders. On the date hereof, the Company does not have any outstanding options, warrants, calls or commitments of any character relating to any of its authorized but unissued shares of capital stock. All issued and outstanding shares of Company Common Stock are validly issued, fully paid and non-assessable and are not subject to preemptive rights. None of the outstanding shares of Company Common Stock is subject to any voting trusts, voting agreement or other agreement or understanding with respect to the voting thereof, nor is any proxy in existence with respect thereto. 1. Ownership of the Company Shares. The Shareholders hold good and valid title to all of the Company Shares, free and clear of all Encumbrances. The Shareholders possess full authority and legal right to sell, transfer and assign the Company Shares to Buyer, free and clear of all Encumbrances. Upon transfer to Buyer by the Shareholders of the Company Shares, Buyer will own the Company Shares free and clear of all Encumbrances. There are no claims pending or, to the knowledge of any of the Shareholders, threatened, against the Company or any of the Shareholders that concern or affect title to the Company Shares, or that seek to compel the issuance of capital stock or other securities of the Company. 1. No Subsidiaries. Except as specified in Schedule hereto, there is no corporation, partnership, joint venture, business trust or other legal entity in which the Company, either directly or indirectly through one or more intermediaries, owns or holds beneficial or record ownership of the outstanding voting securities. 1. Financial Statements. The Company has delivered to Buyer copies of the Company's balance sheet as of December 31, 1996, a copy of which is attached hereto as Schedule (a) (the "1996 Balance Sheet"), and related statements of income (collectively, the "Financial Statements"), as at and for the year ended as of December 31, 1996 (the "1996 Balance Sheet Date"). The Financial Statements are complete in all material respects. The Financial Statements present fairly the financial condition of the Company as of the dates and for the periods indicated. The Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis. The accounts receivable reflected in the 1996 Balance Sheet, or which have been thereafter acquired by the Company, have been collected or are collectible at the aggregate recorded amounts thereof less applicable reserves, which reserves are adequate. The Company has also delivered to Buyer copies of the Company's unaudited balance sheet as of June 30, 1997, a copy of which is attached hereto as Schedule 2.1.6(b) (the "Interim Balance Sheet"). Except as set forth in Schedule 2.1.6(b), the Interim Balance Sheet is complete in all material respects and presents fairly the financial condition of the Company as of the date indicated. Except as set forth in Schedule 2.1.6(b), the Interim Balance Sheet has been prepared in accordance with generally accepted accounting principles applied on a consistent basis. The accounts receivable reflected in the Interim Balance Sheet, or which have been thereafter acquired by the Company, have been collected or are collectable at the aggregate recorded amounts thereof less applicable reserves, which reserves are adequate. 1. Liabilities. Except as disclosed on Schedule hereto, the Company does not have any liabilities or obligations, either accrued, absolute or contingent, nor do any of the Shareholders have any knowledge of any potential liabilities or obligations, other than those (i) reflected or reserved against in the Interim Balance Sheet, (ii) described in Schedule 2.1.6(b) or (iii) incurred in the ordinary course of business since the date of the Interim Balance Sheet that would not materially adversely affect the value and conduct of the business of the Company. 1. Additional Company Information. Attached as Schedule hereto are true, complete and correct lists of the following items: a) Real Estate. All real property and structures thereon owned, leased or subject to a contract of purchase and sale, or lease commitment, by the Company, with a description of the nature and amount of any Encumbrances thereon. The term "Encumbrances" means all liens, security interests, pledges, mortgages, deeds of trust, claims, rights of first refusal, options, charges, restrictions or conditions to transfer or assignment, liabilities, obligations, privileges, equities, easements, rights-of-way, limitations, reservations, restrictions and other encumbrances of any kind or nature; a) Machinery and Equipment. All rigs, carriers, rig equipment, machinery, transportation equipment, tools, equipment, furnishings, and fixtures owned, leased or subject to a contract of purchase and sale, or lease commitment, by the Company with a description of the nature and amount of any Encumbrances thereon; a) Inventory. All inventory items or groups of inventory items owned by the Company, excluding raw materials and work in process; a) Receivables. All accounts and notes receivable of the Company, together with (i) aging schedules by invoice date and due date, (ii) the amounts provided for as an allowance for bad debts, (iii) the identity and location of any asset in which the Company holds a security interest to secure payment of the underlying indebtedness, and (iv) a description of the nature and amount of any Encumbrances on such accounts and notes receivable; a) Payables. All accounts and notes payable of the Company, together with an appropriate aging schedule. The amounts owed represented by the line item "Long Term Liabilities" on the Interim Balance Sheet still owed and outstanding (including accrued and unpaid interest) as of the date hereof is $____________; a) Insurance. All insurance policies or bonds currently maintained by the Company, including title insurance policies, with respect to the Company, including those covering the Company's properties, rigs, machinery, equipment, fixtures, employees and operations, as well as a listing of any premiums, deductibles, audit adjustments or retroactive adjustments due or pending on such policies or any predecessor policies; a) Contracts. All contracts, including leases under which the Company is lessor or lessee, which are to be performed in whole or in part after the date hereof; a) Employee Compensation Plans. All bonus, incentive compensation, deferred compensation, profit-sharing, retirement, pension, welfare, group insurance, death benefit, or other employee benefit or fringe benefit plans, arrangements or trust agreements of the Company or any employee benefit plan maintained by the Company, together with copies of the most recent reports with respect to such plans, arrangements, or trust agreements filed with any governmental agency and all Internal Revenue Service determination letters and other correspondence from governmental entities that have been received with respect to such plans, arrangements or agreements (collectively, "Employee Plans"); a) Salaries. The names and salary rates of all present employees of the Company, and, to the extent existing on the date of this Agreement, all arrangements with respect to any bonuses to be paid to them from and after the date of this Agreement; a) Bank Accounts. The name of each bank in which the Company has an account and the names of all persons authorized to draw thereon; a) Employee Agreements. Any collective bargaining agreements of the Company with any labor union or other representative of employees, including amendments, supplements, and written or oral understandings, and all employment and consulting and severance agreements of the Company; a) Intellectual Property. All patents, patent applications, trademarks and service marks (including registrations and applications therefor), trade names, copyrights and written know-how, trade secrets and all other similar proprietary data and the goodwill associated therewith (collectively, the "Intellectual Property") used by the Company; a) Trade Names. All trade names, assumed names and fictitious names used or held by the Company, whether and where such names are registered and where used; a) Licenses and Permits. All permits, authorizations, certificates, approvals, registrations, variances, waivers, exemptions, rights-of-way, franchises, ordinances, licenses and other rights of every kind and character (collectively, the "Permits") of the Company under which it conducts its business; a) Promissory Notes. All long-term and short-term promissory notes, installment contracts, loan agreements, credit agreements, and any other agreements of the Company relating thereto or with respect to collateral securing the same; a) Guaranties. All indebtedness, liabilities and commitments of others and as to which the Company is a guarantor, endorser, co-maker, surety, or accommodation maker, or is contingently liable therefor and all letters of credit, whether stand-by or documentary, issued by any third party; a) Reserves and Accruals. All accounting reserves and accruals maintained in the Interim Balance Sheet and Schedule 2.1.6(b); a) Leases. All leases to which the Company is a party; and a) Environment. All environmental permits, approvals, certifications, licenses, registrations, orders and decrees applicable to current operations conducted by the Company and all environmental audits, assessments, investigations and reviews conducted by the Company within the last five years or otherwise in the Company's possession on any property owned, leased or used by the Company. 1. No Defaults. The Company is not a party to, or bound by, any contract or arrangement of any kind to be performed after the date hereof, nor is the Company in default in any obligation or covenant on its part to be performed under any obligation, lease, contract, order, plan or other arrangement. 1. Absence of Certain Changes and Events. Except as disclosed on Schedule hereto and other than as a result of the transactions contemplated by this Agreement, since June 30, 1997, there has not been: a) Financial Change. Any adverse change in the financial condition, backlog, operations, assets, liabilities or business of the Company; a) Property Damage. Any material damage, destruction, or loss to the business or properties of the Company (whether or not covered by insurance); a) Dividends. Any declaration, setting aside, or payment of any dividend or other distribution in respect of the Company Common Stock, or any direct or indirect redemption, purchase or any other acquisition by the Company of any such stock; a) Capitalization Change. Any change in the capital stock or in the number of shares or classes of the Company's authorized or outstanding capital stock as described in Section hereof; a) Labor Disputes. Any labor or employment dispute of whatever nature; or a) Other Material Changes. Any other event or condition known to any of the Shareholders particularly pertaining to and adversely affecting the operations, assets or business of the Company. 1. Taxes. All federal, state and local income, value added, sales, use, franchise, gross revenue, turnover, excise, payroll, property, employment, customs, duties and any and all other tax returns, reports, and estimates have been filed with appropriate governmental agencies, domestic and foreign, by the Company for each period for which any such returns, reports, or estimates were due (taking into account any extensions of time to file before the date hereof); all such returns are true and correct; the Company has only done business in Arkansas, Louisiana, Mississippi, and Texas and all taxes shown by such returns to be payable and any other taxes due and payable have been paid. No waiver of any statute of limitations executed by the Company with respect to any income or other tax is in effect for any period. Except for the Company's 1995 income tax return, the income tax returns of the Company have never been examined by the Internal Revenue Service or the taxing authorities of any other jurisdiction. There are no tax liens on any assets of the Company except for taxes not yet currently due. The Company is not subject to any tax-sharing or allocation agreement. The Company is not, nor has it ever attempted to become a Subchapter S-Corporation under the Internal Revenue Code of 1986, as amended. The Company is not and never has been, a member of a consolidated group subject to Treasury Regulation 1.1502-6 or any similar provision. 1. Intellectual Property. The Company owns or possesses licenses to use all Intellectual Property that is either material to the business of the Company or that is necessary for the rendering of any services rendered by the Company and the use or sale of any equipment or products used or sold by the Company, including all such Intellectual Property listed in Schedule hereto (the "Required Intellectual Property"). The Required Intellectual Property is owned or licensed by the Company free and clear of any Encumbrance. The Company has not granted to any other person any license to use any Required Intellectual Property. The Company has not infringed, misappropriated, or conflicted with, the Intellectual Property rights of others in connection with the use by the Company of the Required Intellectual Property or otherwise in connection with the Company's operation of its business, nor has the Company has received any notice of such infringement, misappropriation, or conflict such Intellectual Property rights of others. 1. Title to and Condition of Assets. Except as disclosed on Schedule hereto, the Company has good, indefeasible and marketable title to all its properties, interests in properties and assets, real and personal, reflected in the Interim Balance Sheet and Schedule 2.1.6(b) or in Schedule hereto, free and clear of any Encumbrance of any nature whatsoever, except Encumbrances reflected in the Interim Balance Sheet and Schedule 2.1.6(b) or in Schedule hereto. All leases pursuant to which the Company leases (whether as lessee or lessor) any substantial amount of real or personal property are in good standing, valid, and effective; and there is not, under any such leases, any existing default or event of default or event which with notice or lapse of time, or both, would constitute a default by the Company and in respect to which the Company has not taken adequate steps to prevent a default from occurring. The buildings and premises of the Company that are used in its business are in good operating condition and repair, subject only to ordinary wear and tear. All rigs, rig equipment, machinery, transportation equipment, tools and other major items of equipment of the Company are in good operating condition and in a state of good maintenance and repair, ordinary wear and tear excepted, and are free from any known defects except as may be repaired by routine maintenance. All such assets conform to all applicable laws governing their use. The Company has not violated any law, statute, ordinance, or regulation relating to any such assets, nor has any notice of such violation been received by the Company or any of the Shareholders. 1. Contracts. All contracts, leases, plans or other arrangements to which the Company is a party, by which it is bound or to which it or its assets are subject are in full force and effect, and constitute valid and binding obligations of the Company. The Company is not, and to the knowledge of the Company or any of the Shareholders, no other party to any such contract, lease, plan or other arrangement is, in default thereunder, and no event has occurred which (with or without notice, lapse of time, or the happening of any other event) would constitute a default thereunder. No contract has been entered into on terms which could reasonably be expected to have an adverse effect on the Company. Neither the Company nor any of the Shareholders has received any information which would cause such the Company or such Shareholders to conclude that any customer of the Company will (or is likely to) cease doing business with the Company (or its successors) as a result of the consummation of the transactions contemplated hereby. 1. Licenses and Permits. The Company possesses all Permits necessary under law or otherwise for the Company to conduct its business as now being conducted and to construct, own, operate, maintain and use its assets in the manner in which they are now being constructed, operated, maintained and used, including all such Permits listed in Schedule hereto (collectively, the "Required Permits"). Each of the Required Permits and the Company's rights with respect thereto is valid and subsisting, in full force and effect, and enforceable by the Company subject to administrative powers of regulatory agencies having jurisdiction, and will continue in full force and effect after the Closing Date. The Company is in compliance in all respects with the terms of each of the Required Permits. None of the Required Permits have been, or to the knowledge of the Company or any of the Shareholders, is threatened to be, revoked, canceled, suspended or modified. 1. Litigation. Except as set forth in Schedule hereto, there is no suit, action, or legal, administrative, arbitration, or other proceeding or governmental investigation pending to which the Company is a party or, to the knowledge of any of the Company or the Shareholders, might become a party or which particularly affects the Company or its assets, nor is any change in the zoning or building ordinances directly affecting the real property or leasehold interests of the Company, pending or, to the knowledge of any of the any of the Shareholders, threatened. 1. Environmental Compliance. a) Environmental Conditions. There are no environmental conditions or circumstances, including, without limitation, the presence or release of any Substance of Environmental Concern, on any property presently or previously owned, leased or operated by the Company, or on any property to which any Substance of Environmental Concern or waste generated by the Company's operations or use of its assets were disposed of, which would have or result in a material adverse effect on the business or business prospects of the Company. The term "Substance of Environmental Concern" means (a) any gasoline, petroleum (including crude oil or any fraction thereof), petroleum product, polychlorinated biphenyls, urea-formaldehyde insulation, asbestos, pollutant, contaminant, radiation and any other substance of any kind, whether or not any such substance is defined as toxic or hazardous under any Environmental Law (as defined in Section hereof), that is regulated pursuant to or could give rise to liability under any Environmental Law; a) Permits, etc. The Company has, and within the period of all applicable statutes of limitations has had, in full force and effect all environmental Permits required to conduct its operations, and is, within the period of all applicable statutes of limitations has been, operating in compliance thereunder; a) Compliance. The Company's operations and use of its assets are, and within the period of all applicable statutes of limitations, have been in compliance with applicable Environmental Law. "Environmental Law" as used herein means any and all laws, rules, orders, regulations, statutes, ordinances, codes, decrees, and other legally enforceable requirements (including, without limitation, common law) of the United States, or any state, local, municipal or other governmental authority or quasi-governmental authority, regulating, relating to, or imposing liability or standards of conduct concerning protection of the environmental or of human health, or employee health and safety as from time to time has been or is now in effect; a) Environmental Claims. No notice has been received by the Company or any of the Shareholders from any entity, governmental agency or individual regarding any existing, pending or threatened investigation, inquiry, enforcement action. litigation, or liability, including, without limitation any claim for remedial obligations, response costs or contribution, relating to any Environmental Law; a) Enforcement. The Company, and to the knowledge of any of the Shareholders, no predecessor of the Company or other party acting on behalf of the Company, has entered into or agreed to any consent, decree, order, settlement or other agreement, nor is subject to any judgment, decree, order or other agreement, in any judicial, administrative, arbitral, or other forum, relating to compliance with or liability under any Environmental Law; a) Liabilities. The Company has not assumed or retained, by contract or operation of law, any liabilities of any kind, fixed or contingent, known or unknown, under any Environmental Law; a) Renewals. Neither the Company nor any of the Shareholders knows of any reason the Company (or its successors) would not be able to renew without material expense any of the permits, licenses, or other authorizations required pursuant to any Environmental Law to conduct and use any of the Company's current or planned operations; and a) Asbestos and PCBs. No material amounts of friable asbestos currently exist on any property owned or operated by the Company, nor do polychlorinated biphenyls exist in concentrations of 50 parts per million or more in electrical equipment owned or being used by the Company in its operations or on its properties. 1. Compliance with Other Laws. The Company is not in violation of or in default with respect to, or in alleged violation of or alleged default with respect to, the Occupational Safety and Health Act (29 U.S.C. 651 et seq.) as amended, or any other applicable law or any applicable rule, regulation, or any writ or decree of any court or any governmental commission, board, bureau, agency, or instrumentality, or delinquent with respect to any report required to be filed with any governmental commission, board, bureau, agency or instrumentality. 1. ERISA Plans and Labor Issues. Except for the Company's employee benefit plans listed in Schedule 2.1.19 (the "Benefit Plans"), the Company does not currently sponsor, maintain or contribute to and has not at any time sponsored, maintained or contributed to any other employee benefit plan which is or was subject to any provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Except for the Benefit Plans, the Company does not maintain any plan, program, policy, contract, agreement or other arrangement that provides pension, retirement, medical, dental, disability, life insurance or other benefits to any current or former employees of the Company, including any retired employees, or their beneficiaries or dependents. The Company is not obligated to pay any severance or benefits to any employee or former employee of the Company as the result of any change in the ownership or control of the Company. The Company has not engaged in any unfair labor practices which could reasonably be expected to result in an adverse effect on its operations or assets. The Company does not have any dispute with any of its existing or former employees. There are no labor disputes or, to the knowledge of any of the Shareholders, any disputes threatened by current or former employees of the Company. All the Benefit Plans have been maintained in full compliance with all applicable requirements of ERISA and other applicable law, and there are no claims under the Benefit Plans except routine claims for benefits. 1. Investigations; Litigation. No investigation or review by any governmental entity with respect to the Company or any of the transactions contemplated by this Agreement is pending or, to the knowledge of the Company or any of the Shareholders, threatened, nor has any governmental entity indicated to the Company or any of the Shareholders an intention to conduct the same, and there is no action, suit or proceeding pending or, to the knowledge of any of the Shareholders, threatened against or affecting the Company at law or in equity, or before any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, that either individually or in the aggregate, does or is likely to result in any material adverse change in the financial condition, properties or business of the Company. 1. Absence of Certain Business Practices. Neither the Company nor any officer, employee or agent of the Company, nor any other person acting on its behalf, has, directly or indirectly, within the past five years, given or agreed to give any gift or similar benefit to any customer, supplier, government employee or other person who is or may be in a position to help or hinder the business of the Company (or to assist the Company in connection with any actual or proposed transaction) which (i) might subject the Company to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (ii) if not given in the past, might have had a material adverse effect on the assets, business or operations of the Company as reflected in the Financial Statements, or (iii) if not continued in the future, might materially adversely effect the assets, business operations or prospects of the Company or which might subject the Company to suit or penalty in a private or governmental litigation or proceeding. 1. No Untrue Statements. The Company and each of the Shareholders have made available to Buyer true, complete and correct copies of all contracts, employee benefit plans, documents concerning all litigation and administrative proceedings, licenses, permits, insurance policies, lists of suppliers and customers, and records relating principally to the Company's assets and business, and such information covers all commitments and liabilities of the Company relating to its business or assets. This Agreement and the agreements and instruments to be entered into in connection herewith do not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements made herein and therein not misleading in any material respect. 1. Consents and Approvals. No consent, approval or authorization of, or filing or registration with, any governmental or regulatory authority, or any other person or entity, is required to be made or obtained by the Company or any of the Shareholders in connection with the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated hereby. 1. Finder's Fee. Any and all brokerage commissions, finder's fees or any similar payments made or incurred relative to this Agreement and the transactions contemplated hereby shall be paid solely by the Shareholders. Neither the Company nor the Buyer shall incur, or otherwise be liable for in any way, any brokerage commission, finder's fee, or any similar payment relative to this Agreement or the transactions contemplated hereby. A. Representations and Warranties of Buyer. Buyer represents and warrants to each of the Shareholders as follows 1. Organization and Good Standing. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, has full requisite corporate power and authority to carry on its business as it is currently conducted, and to own and operate the properties currently owned and operated by it, and is duly qualified or licensed to do business and is in good standing as a foreign corporation authorized to do business in all jurisdictions in which the character of the properties owned or the nature of the business conducted by it would make such qualification or licensing necessary. 1. Agreement Authorized and its Effect on Other Obligations. The consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of Buyer, and this Agreement is a valid and binding obligation of Buyer enforceable in accordance with its terms. I. ARTICLE Additional Agreements A. Noncompetition. Except for the operation of the drilling rig referred to in Section 3.2 and as otherwise consented to or approved in writing by Buyer, each of the Shareholders agrees that for a period of 60 months from the date hereof, such Shareholder will not, directly or indirectly, acting alone or as a member of a partnership or as an officer, director, employee, consultant, representative, holder of, or investor in as much as 5% of any security of any class of any corporation or other business entity (i) engage in competition with the business or businesses conducted by the Company, Buyer or any affiliate of Buyer on the date hereof, or in any service business the services of which are provided and marketed by the Company, Buyer or any affiliate of Buyer on the date hereof in any state of the United States or any foreign country in which the Company, Buyer or any affiliate of Buyer transacts business on the date hereof; (ii) request any present customers or suppliers of the Company to curtail or cancel their business with Buyer or any affiliate of Buyer; (iii) disclose to any person, firm or corporation any trade, technical or technological secrets of the Company, Buyer or any affiliate of Buyer or any details of their organization or business affairs; or (iv) induce or actively attempt to influence any employee of the Company, Buyer or any affiliate of Buyer to terminate his employment. Each of the Shareholders agrees that if either the length of time or geographical area set forth in this Section is deemed too restrictive in any court proceeding, the court may reduce such restrictions to those which it deems reasonable under the circumstances. The obligations expressed in this Section are in addition to any other obligations that the Shareholders may have under the laws of the states in which they do business requiring an employee of a business or a shareholder who sells his stock in a corporation to limit his activities so that the goodwill and business relations of his employer and of the corporation whose stock he has sold (and any successor corporation) will not be materially impaired. Each of the Shareholders further agrees and acknowledges that the Company, Buyer and its affiliates do not have any adequate remedy at law for the breach or threatened breach by such Shareholder of this covenant, and agree that the Company, Buyer or any affiliate of Buyer may, in addition to the other remedies which may be available to it hereunder, file a suit in equity to enjoin such Shareholder from such breach or threatened breach. If any provisions of this Section are held to be invalid or against public policy, the remaining provisions shall not be affected thereby. Each of the Shareholders acknowledges that the covenants set forth in this Section are being executed and delivered by such Shareholder in consideration of the covenants of Buyer contained in this Agreement, and for other good and valuable consideration, receipt of which is hereby acknowledged. A. Purchase and Sale of Certain Assets. All real estate owned in fee simple by the Company will, at the Closing, be sold to Robert E. Mosley or an entity controlled by Robert E. Mosley for $2,000,000 payable by wire transfer at the Closing in immediately available funds. The Skytop-Brewster TR-800 drilling rig known as Remco Rig 2 and related equipment, including a 10,000 foot drill string, will, at Closing, be sold to Robert E. Mosley or an entity controlled by Robert E. Mosley for $1,800,000 payable at Closing by wire transfer in immediately available funds. A. Further Assurances. From time to time, as and when requested by any party hereto, any other party hereto shall execute and deliver, or cause to be executed and delivered, such documents and instruments and shall take, or cause to be taken, such further or other actions as may be reasonably necessary to effectuate the transactions contemplated hereby. A. Public Announcements. Except as authorized in writing by Buyer, the Shareholders nor any of their respective Affiliates or agents shall issue any press release or public announcement regarding the execution of this Agreement or the transactions contemplated thereby except as required by applicable law. The Shareholders hereby consent to Buyer's issuance of a press release announcing the completion of the transactions contemplated by this Agreement. I. ARTICLE Indemnification A. Indemnification by the Shareholders. In addition to any other remedies available to Buyer under this Agreement, or at law or in equity, each of the Shareholders shall jointly and severally indemnify, defend and hold harmless the Company, Buyer and their affiliates and their respective officers, directors, employees, agents and stockholders (collectively, the "Buyer Indemnified Parties"), against and with respect to any and all claims, costs, damages, losses, expenses, obligations, liabilities, recoveries, suits, causes of action and deficiencies, including interest, penalties and reasonable fees and expenses of attorneys, consultants and experts (collectively, the "Damages") that the Buyer Indemnified Parties shall incur or suffer, which arise, result from or relate to any breach by any of the Shareholders of (or the failure of any of the Shareholders to perform) their respective representations, warranties, covenants or agreements in this Agreement or in any schedule, certificate, exhibit or other instrument furnished or delivered to Buyer by any of the Shareholders under this Agreement. A. Indemnification by Buyer. In addition to any other remedies available to the Shareholders under this Agreement, or at law or in equity, Buyer shall indemnify, defend and hold harmless each of the Shareholders against and with respect to any and all Damages that such indemnitees shall incur or suffer, which arise, result from or relate to any breach of, or failure by Buyer to perform, any of its representations, warranties, covenants or agreements in this Agreement or in any schedule, certificate, exhibit or other instrument furnished or delivered to any of the Shareholders by or on behalf of Buyer under this Agreement. A. Indemnification Procedure. In the event that any party hereto discovers or otherwise becomes aware of an indemnification claim arising under Article 4 of this Agreement, such indemnified party shall give written notice to the indemnifying party, specifying such claim, and may thereafter exercise any remedies available to such party under this Agreement; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of any obligations hereunder, to the extent the indemnifying party is not materially prejudiced thereby. Further, promptly after receipt by an indemnified party hereunder of written notice of the commencement of any action or proceeding with respect to which a claim for indemnification may be made pursuant to Article 4 hereof, such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party, give written notice to the latter of the commencement of such action; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of any obligations hereunder, to the extent the indemnifying party is not materially prejudiced thereby. In case any such action is brought against an indemnified party, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after such notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof unless the indemnifying party has failed to assume the defense of such claim and to employ counsel reasonably satisfactory to such indemnified person. An indemnifying party who elects not to assume the defense of a claim shall not be liable for the fees and expenses of more than one counsel in any single jurisdiction for all parties indemnified by such indemnifying party with respect to such claim or with respect to claims separate but similar or related in the same jurisdiction arising out of the same general allegations. Notwithstanding any of the foregoing to the contrary, the indemnified party will be entitled to select its own counsel and assume the defense of any action brought against it if the indemnifying party fails to select counsel reasonably satisfactory to the indemnified party, the expenses of such defense to be paid by the indemnifying party. No indemnifying party shall consent to entry of any judgment or enter into any settlement with respect to a claim without the consent of the indemnified party, which consent shall not be unreasonably withheld, or unless such judgment or settlement includes as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability with respect to such claim. No indemnified party shall consent to entry of any judgment or enter into any settlement of any such action, the defense of which has been assumed by an indemnifying party, without the consent of such indemnifying party, which consent shall not be unreasonably withheld or delayed. I. ARTICLE Miscellaneous A. Survival of Representations, Warranties and Covenants. All representations, warranties, covenants and agreements made by the parties hereto shall survive indefinitely without limitation, notwithstanding any investigation made by or on behalf of any of the parties hereto. All statements contained in any certificate, schedule, exhibit or other instrument delivered pursuant to this Agreement shall be deemed to have been representations and warranties by the respective party or parties, as the case may be, and shall also survive indefinitely despite any investigation made by any party hereto or on its behalf. A. Entirety. This Agreement embodies the entire agreement among the parties with respect to the subject matter hereof, and all prior agreements between the parties with respect thereto are hereby superseded in their entirety. A. Counterparts. Any number of counterparts of this Agreement may be executed and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one instrument. A. Notices and Waivers. Any notice or waiver to be given to any party hereto shall be in writing and shall be delivered by courier, sent by facsimile transmission or first class registered or certified mail, postage prepaid, return receipt requested: If to Buyer: Addressed to: With a copy to: WellTech Eastern, Inc. Porter & Hedges, L.L.P. Two Tower Center, Tenth Floor 700 Louisiana, 35th Floor East Brunswick, New Jersey 08816 Houston, Texas 77210-4744 Attn: General Counsel Attn: Samuel N. Allen Facsimile: (908) 247-5148 Facsimile: (713) 228-1331 If to Shareholders: Addressed to: With a copy to: Robert E. Mosley, Jr. Sydney B. Nelson 3000 Highway 80 East Nelson, Hammons & Self, P.C. Haughton, Louisiana 71037 705 Milam Street Facsimile: (318) 949-4107 Shreveport, Louisiana 71101 Facsimile: (318) 221-4762 Any communication so addressed and mailed by first-class registered or certified mail, postage prepaid, with return receipt requested, shall be deemed to be received on the third business day after so mailed, and if delivered by courier or facsimile to such address, upon delivery during normal business hours on any business day. A. Table of Contents and Captions. The table of contents and captions contained in this Agreement are solely for convenient reference and shall not be deemed to affect the meaning or interpretation of any article, section, or paragraph hereof. A. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of and be enforceable by the successors and assigns of the parties hereto. A. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remainder of the terms, provisions, covenants and restrictions shall remain in full force and effect and shall in no way be affected, impaired or invalidated. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such which may be hereafter declared invalid, void or unenforceable. A. Applicable Law. This Agreement shall be governed by and construed and enforced in accordance with the applicable laws of the State of Texas. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the Shareholders have executed this Agreement and the Buyer has caused this Agreement to be signed in its corporate name by its duly authorized representative, all as of the day and year first above written. BUYER: WELLTECH EASTERN, INC. By: Name: Title: SHAREHOLDERS: Robert E. Mosley, Jr. Thelma Scoggin Mosley Thomas A. Mosley Nancy Evans Mosley James R. Mosley Dennis W. Mosley Melanie Ostrum Mosley EX-10.39 9 CREDIT AGREEMENT PNC 1 CREDIT AGREEMENT, dated as of June 6, 1997, among KEY ENERGY GROUP, INC., a Maryland corporation (the "Borrower"), the several banks and other financial institutions or entities from time to time parties to this Agreement (the "Lenders"), PNC BANK, N.A., as Administrative Agent for the Lenders hereunder (in such capacity, the "Administrative Agent"), NORWEST BANK OF TEXAS, N.A., as Collateral Agent for the Lenders hereunder (in such capacity, the "Collateral Agent") and LEHMAN COMMERCIAL PAPER INC., as advisor, arranger and syndication agent with respect to the credit facilities contained herein (in such capacity, the "Arranger"). W I T N E S S E T H : WHEREAS, the Borrower has requested the Lenders to extend credit to it to refinance certain existing indebtedness, to pay related fees and expenses and to finance other general corporate purposes of the Borrower and its Subsidiaries; and WHEREAS, the Lenders are willing to extend such credit on and subject to the terms and conditions hereafter set forth: NOW, THEREFORE, in consideration of the premises and the mutual agreements hereafter set forth, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Adjustment Date": each date on or after September 30, 1997 that is the second Business Day following receipt by the Lenders of both (i) the financial statements required to be delivered pursuant to Section 6.1(a) or 6.1(b), as applicable, for the most recently completed fiscal period (which shall be June 30, 1997, in the case of the Adjustment Date occurring on September 30, 1997) and (ii) the related compliance certificate required to be delivered pursuant to Section 6.2(b) with respect to such fiscal period. "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. Notwithstanding the foregoing (i) no Subsidiary of the Borrower shall be deemed to be an Affiliate of the Borrower and (ii) no Affiliate of any investment company that controls the Borrower shall be deemed to be an Affiliate of the Borrower solely because such investment company Affiliate is in control of, is controlled by, or is under common control with, such investment company. 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 2 "Agents": the collective reference to the Arranger, the Collateral Agent and the Administrative Agent. "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": (a) 1-3/4% for Term Loans which are Base Rate Loans, (b) 2-3/4% for Term Loans which are Eurodollar Loans and, (c) during the period from the Closing Date until the first Adjustment Date, 1.00% for Revolving Credit Loans which are Base Rate Loans and 2.25% for Revolving Credit Loans which are Eurodollar Loans. The Applicable Margin for Revolving Credit Loans will be adjusted on each Adjustment Date to the applicable rate per annum set forth under the heading "Applicable Margin for Revolving Credit Loans which are Eurodollar Loans" or "Applicable Margin for Revolving Credit Loans which are Base Rate Loans", as the case may be, on Annex I which corresponds to the Consolidated Leverage Ratio as determined from the financial statements and compliance certificate relating to the end of the fiscal period immediately preceding such Adjustment Date; provided that in the event that the financial statements required to be delivered pursuant to Section 6.1(a) or 6.1(b), as applicable, and the related compliance certificate required to be delivered pursuant to Section 6.2(b), are not delivered when due, then (i if such financial statements and compliance certificate are delivered after the date such financial statements and compliance certificate were required to be delivered (without giving effect to any applicable cure period) and the Applicable Margin increases from that previously in effect as a result of the delivery of such financial statements, then the Applicable Margin in respect of the Revolving Credit Loans during the period from the date upon which such financial statements were required to be delivered (without giving effect to any applicable cure period) until the date upon which they actually are delivered shall, except as otherwise provided in clause (iii) below, be the Applicable Margin as so increased; (ii if such financial statements and compliance certificate are delivered after the date such financial statements and compliance certificate were required to be delivered and the Applicable Margin decreases from that previously in effect as a result of the delivery of such financial statements, then such decrease in the Applicable Margin shall not become applicable until the date upon which the financial statements and certificate actually are delivered; and (iii if such financial statements and compliance certificate are not delivered prior to the expiration of the applicable cure period, then, effective upon such expiration, for the period from the date upon which such financial statements and 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 3 compliance certificate were required to be delivered (after the expiration of the applicable cure period) until two Business Days following the date upon which they actually are delivered, the Applicable Margin in respect of Revolving Credit Loans shall be 1-1/4% per annum, in the case of Base Rate Loans, and 2-1/2% per annum, in the case of Eurodollar Loans (it being understood that the foregoing shall not limit the rights of the Administrative Agent and the Lenders set forth in Section 8). "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 Borrower or any of its Subsidiaries of any property, business or assets of the Borrower or such Subsidiary (excluding any sale and leaseback of assets and any mortgage of real property); provided that any sale or other disposition expressly permitted by clauses (a), (c) or (d) of Section 7.6 shall not constitute an "Asset Sale" hereunder, and the Net Cash Proceeds from any such excluded sale or other disposition shall not be subject to Section 2.9. "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. "Base Rate": for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greater of (a) the Prime Rate in effect on such day, and (b) 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 PNC Bank, N.A. as its prime rate in effect at its principal office in Pittsburgh (the Prime Rate not being intended to be the lowest rate of interest charged by PNC Bank, N.A. in connection with extensions of credit to debtors); 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 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 or the Federal Funds Effective Rate, respectively. "Base Rate Loans": Loans the rate of interest applicable to which is based upon the Base Rate. 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 4 "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 2.2 or 2.4 as a date on which the Borrower requests the Lenders to make Loans hereunder. "Business Day": (a) for all purposes other than as covered by clause (b) below, a day other than a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to close and (b) 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 (a) 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 and improvements during such period) which should be capitalized under GAAP on a consolidated balance sheet of such Person and its Subsidiaries; provided that "Capital Expenditures" shall not include (i) expenditures for Permitted Acquisitions or (ii) expenditures by any Person prior to the time such Person was acquired by the Borrower or any Subsidiary in a Permitted Acquisition. "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 of capital stock of a corporation, and any and all equivalent ownership interests in a Person (other than a corporation). "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) demand deposits, certificates of deposit, time deposits, eurodollar time deposits or overnight bank deposits having maturities of twelve 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; (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 twelve months from the date of acquisition; and 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 5 (d) money market funds the assets of which consist primarily of obligations of the types referred to in clauses (a) through (c) above. "Change of Control": a "Change of Control" shall be deemed to occur if a "Change of Control" (as defined in the Indenture or, if the Indenture shall have been terminated, as defined in the Indenture immediately prior to such termination) shall occur. "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. "Collateral Agent": as defined in the preamble hereto. "Commercial Letter of Credit": as defined in Section 3.1(a). "Commitment": as to any Lender, the sum of the 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 May, 1997 with respect to the Borrower and the credit facilities provided for herein. "Consolidated" or "consolidated": when used in respect of any Subsidiary or any financial statements or financial term relating to the Borrower and its Subsidiaries, refers to the Borrower and the Subsidiaries of the Borrower (including Excluded Subsidiaries) whose accounts are consolidated with the Borrower's accounts in accordance with GAAP. "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. 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 6 "Consolidated EBITDA": with respect to any Person for any period, Consolidated Net Income of such Person 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, (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 and (g) if applicable, restructuring charges, write-off of goodwill and licensing agreements, 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 (other than any income represented by a receivable that in the ordinary course would be expected to be paid in cash), all as determined on a consolidated basis. "Consolidated Fixed Charge Coverage Ratio": for any period, the ratio of (a) Consolidated EBITDA of the Borrower and its Subsidiaries 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 (and not financed) during such period, (iii) Consolidated Interest Expense for such period and (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 scheduled payments in respect of the Loans, but excluding any portion of such scheduled payments made as a voluntary prepayment pursuant to Section 2.8). "Consolidated Interest Coverage Ratio": for any period, the ratio of (a) Consolidated EBITDA of the Borrower and its Subsidiaries 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). "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 payable under Financing Leases and oil and gas leases shall be excluded from Consolidated Lease Expense. 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 7 "Consolidated Leverage Ratio": on the date of any determination thereof, the ratio of (a) Consolidated Total Debt on such date, less the amount of cash and Cash Equivalents in excess of $5,000,000 held by the Borrower and its Subsidiaries on such date to (b) Consolidated EBITDA of the Borrower and its Subsidiaries for the four full fiscal quarters ending on such date; provided that for purposes of calculating Consolidated EBITDA of the Borrower and its Subsidiaries for any period of four full fiscal quarters, the Consolidated EBITDA of any Person acquired by the Borrower or its Subsidiaries during such period shall be included on a pro forma basis for such period of four full fiscal quarters (assuming the consummation of each such acquisition and the incurrence or assumption of any Indebtedness in connection therewith occurred on the first day of such period of four full fiscal quarters and assuming only such cost reductions as are related to such acquisition and are realizable on or before the date of calculation) if the consolidated balance sheet of such acquired Person and its consolidated Subsidiaries as at the end of the period preceding the acquisition of such Person and the related consolidated statements of income and stockholders' equity and of cash flows for such period (i) have been previously provided to the Administrative Agent and the Lenders and (ii) either (A) have been reported on without a qualification arising out of the scope of the audit (other than a "going concern" or like qualification or exception) by independent certified public accountants of nationally recognized standing or (B) have been found acceptable by the Administrative Agent. "Consolidated Net Income": with respect to any Person for any period, the consolidated net income (or loss) of such Person for such period, determined on a consolidated basis in accordance with GAAP. "Consolidated Total Debt": at any date, the aggregate principal amount of all Indebtedness of the Borrower and its Subsidiaries at such date, which on a consolidated basis in accordance with GAAP would be required to be reflected on a consolidated balance sheet of the Borrower and its Subsidiaries as a liability. "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. "Convertible Subordinated Debentures": the 7% Convertible Subordinated Debentures due 2003 issued by the Borrower pursuant to the Indenture. "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. 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 8 "Domestic Subsidiary": any Subsidiary of the Borrower organized under the laws of any jurisdiction within the United States. "Environmental Consultant": as defined in Section 6.8(c). "Environmental Laws": any and all laws, rules, orders, regulations, statutes, ordinances, codes, decrees, or other legally enforceable requirements (including, without limitation, common law) of any foreign government, the United States, or any state, local, municipal or other governmental authority, regulating, relating to or imposing liability or standards of conduct concerning protection of the environment or of human health, or employee health and safety, as has been, is now, or at any time hereafter is, in effect. "Environmental Permits": any and all permits, licenses, registrations, approvals, notifications, exemptions and any other authorization required under any Environmental Law. "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. 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 9 "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 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 of the Borrower and its Subsidiaries 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, depletion 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 Capital Expenditures of the Borrower and its Subsidiaries 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) optional prepayments of Revolving Credit Loans not accompanied by reductions of the Revolving Credit Commitments, (y) mandatory prepayments pursuant to Section 2.9 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 2.9(d). "Excluded Subsidiary" or "Excluded Subsidiaries": (a) Amidrill, Inc., Production Systems, Inc., WellTech, Inc. (California), WellTech, Inc. de Venezuela, WellTech, Inc. de Mexico, WellTech, Inc. (Northeast), WellTech, Inc., WellTech Oilfield Services (Canada), Ltd., WellTech Oilfield Services Limited, WellTech (Overseas) Limited, and Bronson Transport, Inc., (b) Thunderbird Tool Company, (c) KEG Canal Properties, Inc., KEG Villa Ashley, Inc., KEG Pearl Acres, Inc., KEG Anna Heights, Inc., KEG Orleans Place, Inc., and Pyramid Land Corporation, and (d) any other entity which becomes a Subsidiary of Borrower after the date of this Agreement if such entity has assets with a book value of $1,000,000 or less and annual revenues of $1,000,000 or less; provided that all entities deemed to be Excluded Subsidiaries 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 10 under this subsection (d) may not have, in the aggregate, assets with a book value exceeding $5,000,000 or annual revenues exceeding $5,000,000. "Existing Credit Facilities": as defined in Section 4.16. "Existing Letters of Credit": as defined in Section 3.1. "Financing Lease": any lease (or other similar 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 Borrower organized under the laws of any jurisdiction outside the United States. "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 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 11 guaranteeing person's maximum reasonably anticipated liability in respect thereof as determined by the Borrower in good faith. "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 trade payables and accrued expenses incurred in the ordinary course of such Person's business not more than 150 days past due or being contested in good faith), (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 trade payables or performance obligations incurred in the ordinary course of business not more than 150 days past due or being contested in good faith), (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 and (i) all obligations of the kind referred to in clauses (a) through (h) 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). "Indenture": the Indenture, dated as of July 3, 1996, between the Borrower and American Stock Transfer & Trust Company, as trustee. "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. 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am "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, 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 Maturity Date (in the case of the Term Loans) shall end on the Revolving Credit Termination Date or the Term Loan Maturity 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. "Issuing Lender": (a) with respect to the Existing Letters of Credit, Norwest Bank, and (b) with respect to any Letters of Credit issued after the Closing Date, any Lender designated as "Issuing Lender" hereunder by the Borrower with the consent of the Arranger, the Administrative Agent and such Lender, in its capacity as issuer of any Letter of Credit. "L/C Commitment": $10,000,000. "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. "Lehman": Lehman Commercial Paper Inc. "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 Borrower and each Domestic Subsidiary of the Borrower which is, or is required by the terms hereof to be, a party to a Loan Document. "Master Guarantee and Collateral Agreement": the Master Guarantee and Collateral Agreement to be executed and delivered by the Borrower and each of its Domestic 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 business, assets, property, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole or (b) the validity or enforceability of this Agreement or any of the other Loan Documents or the rights or remedies of the Administrative Agent, the Collateral Agent, the Arranger or the Lenders hereunder or thereunder. "Material Environmental Amount": an amount payable by the Borrower and/or its Subsidiaries under any Environmental Law in excess of $2,500,000 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, polychlorinated biphenyls, urea-formaldehyde insulation, asbestos, pollutants, contaminants, radioactive materials, and any other substances of any kind, whether or not any such substance is defined as hazardous or toxic under any Environmental Law, that is regulated pursuant to or could give rise to liability under any Environmental Law. "Mortgage": the mortgage or deed of trust to be made by the appropriate Loan Party in favor of, or for the benefit of, the Collateral 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 Collateral Agent for the benefit of the Lenders shall be granted a Lien pursuant to the Mortgages and the real property as to which the Collateral Agent for the benefit of the Lenders shall be granted a Lien in accordance with Section 6.10. "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 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 Collateral 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 2.9(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 with any Person other than the Borrower and its Subsidiaries) 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 2.18(a). "Non-U.S. Lender": as defined in Section 2.18(b). "Norwest Bank": Norwest Bank Texas, N.A. "Notes": the collective reference to the 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 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 and the Collateral Agent) or otherwise. "Oil and Gas Mortgages": mortgages in favor of the Collateral Agent for the ratable benefit of the Lenders, in form and substance reasonably satisfactory to the Collateral Agent, covering the Oil and Gas Properties. "Oil and Gas Properties": the oil and gas properties described in Schedule 1.1C which are to be mortgaged pursuant hereto and the oil and gas property as to which the Collateral Agent for the benefit of the Lenders shall be granted a Lien in accordance with Section 6.10. "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). "Permitted Acquisitions": the acquisition by the Borrower and its Subsidiaries of (a) rigs and other well service equipment (b) well service companies (including the acquisition of the minority interests in Servicios for an aggregate amount not to exceed $5,000,000) and (c) oil and gas properties and related equipment, provided that (i), after giving effect to such acquisitions and any borrowings hereunder in connection therewith, (x) the Consolidated Leverage Ratio shall not be more than 3.75 to 1.00 and (y) the sum of (1) the Borrower's cash and Cash Equivalents on hand and (2) the aggregate Available Revolving Credit Commitments shall be at least $10,000,000 or (ii) after giving effect to such acquisition the Consolidated Leverage Ratio is not increased and such acquisition is funded solely with the Borrower's Capital Stock. "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). "Projections": as defined in Section 6.2(c). "Properties": the collective reference to the real property owned, leased or operated by the Borrower or any of its Subsidiaries (or with respect to Sections 6.8 and 10.5, any of the Excluded Subsidiaries). "Recovery Event": any settlement of or payment in respect of a property or casualty insurance claim relating to any asset of the Borrower or any of its Subsidiaries. "Register": as defined in Section 10.6(e). "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 Borrower or any of its Subsidiaries in connection therewith which are not applied to prepay the Revolving Credit Loans or reduce the Revolving Credit Commitments pursuant to Section 2.9(c) as a result of the delivery of a Reinvestment Notice. "Reinvestment Event": any Asset Sale or 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 60 days of an Asset Sale or Recovery Event stating that no Default or 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 an Asset Sale or a Recovery Event to restore or replace the assets in respect of which such Asset Sale or Recovery Event occurred, to make Permitted Acquisitions, or to invest in the business of the Borrower and its Subsidiaries, within six months from the date of receipt of such Net Cash Proceeds and confirming 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 an Asset Sale or 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 six 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 Reinvestment 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. 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 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 Borrower, but in any event, with respect to financial matters, the chief financial officer of the Borrower. "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 and as the same shall be reduced pursuant to Section 2.3(c). "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 2.3(a). "Revolving Credit Note": as defined in Section 2.6(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": June 30, 2002. "Security Documents": the collective reference to each Mortgage, each Oil and Gas Mortgage, the Master Guarantee and Collateral Agreement and all other security documents hereafter delivered to the Collateral 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. "Seller Indebtedness": Indebtedness of the Borrower which is issued to the seller in a Permitted Acquisition as all or a portion of the consideration for such Permitted Acquisition. "Servicios": Servicios WellTech, S.A., an Argentine corporation. "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). "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 Borrower, but such references shall not include any Excluded Subsidiary. "Subsidiary Guarantor": each Subsidiary of the Borrower which is a party to the Master Guarantee and Collateral Agreement. "Term Loan Commitment": as to any Lender, the obligation of such Lender, if any, to make a Term Loan to the Borrower hereunder in a principal amount not to exceed the amount set forth under the heading "Term Loan Commitment" opposite such Lender's name on Schedule 1.1A. "Term Loan Lender": each Lender which has a Term Loan Commitment or which has made a Term Loan. "Term Loan Maturity Date": June 30, 2004. "Term Loan Percentage": as to any Term Loan Lender at any time, the percentage which such Lender's Term Loan Commitment then constitutes of the aggregate Term Loan Commitments (or, at any time after the Closing Date, the percentage which the aggregate principal amount of such Lender's Term Loan then outstanding constitutes of the aggregate principal amount of the Term Loans then outstanding). "Term Loans": as defined in Section 2.1. "Term Note": as defined in Section 2.6(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. "Vehicles": as defined in the Master Guarantee and Collateral Agreement. "Wholly Owned Subsidiary": as to any Person, any other Person all of the Capital Stock of which is owned by such Person directly and/or through other Wholly Owned Subsidiaries. 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 Borrower and its 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 Term Loans. Subject to the terms and conditions hereof, each Term Loan Lender severally agrees to make a term loan (a "Term Loan") to the Borrower on the Closing Date in an amount not to exceed the amount of the Term Loan Commitment of such Lender. The 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 2.10. 2.2 Procedure for 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 Term Loan Lenders make Term Loans on the Closing Date and specifying (a) the amount to be borrowed and (b) the Closing Date. Upon receipt of such notice, the Administrative Agent shall promptly notify each Term Loan Lender thereof. Not later than 12:00 Noon, New York City time, on the Closing Date, each 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 Term Loan to be made by such Lender. The Administrative Agent shall on such date by 2:00 P.M., New York City time, make available to the Borrower, in accordance with the instructions of the Borrower, in like funds as received by the Administrative Agent, all such amounts made available to the Administrative Agent by the Term Loan Lenders. 2.3 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. 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 2.4 and 2.10, 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. (c) The Revolving Credit Commitments shall be reduced (and each Revolving Credit Lender's Revolving Credit Commitment shall be ratably reduced) on each anniversary of the Closing Date, commencing with the third such anniversary, to the amount set forth opposite such anniversary below: Anniversary Amount Third $110,000,000 Fourth $ 80,000,000 Fifth $ 0 2.4 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. 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, $5,000,000 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. 2.5 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 per annum set forth under the heading "Commitment Fee Rate" on Annex I on the average daily 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 Arranger the fees and other compensation in the amounts and on the dates previously agreed to in writing by the Borrower and the Arranger. (c) 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. (d) The Borrower agrees to pay to the Collateral Agent the fees in the amount and on the dates agreed to in writing from time to time by the Borrower and the Collateral Agent. 2.6 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) and (ii) the principal amount of the Term Loans of such Term Loan Lender, in 25 consecutive quarterly installments, each of which installments for each Lender shall be such Lender's Term Loan Percentage of the amount for such installment payment date set forth on the amortization schedule set forth on Schedule 2.6, commencing on June 30, 1998 and on the last day of each March, June, September and December thereafter (or on such earlier date on which the then unpaid principal amount of the 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 2.12. (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. (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 and 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 2.6(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 Term Loan of such Lender, substantially in the form of Exhibit C-2 with appropriate insertions as to date and principal amount (a "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 2.6(e). 2.7 Optional Termination or Reduction of Revolving Credit 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, from time to time, to reduce the amount of the Revolving Credit 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 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 then in effect. 2.8 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 2.19. 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 to the remaining installments in the direct order of the scheduled payment date thereof. Notwithstanding the foregoing, so long as any Revolving Credit Loans are outstanding, each Term Loan Lender shall have the right to refuse all or any portion of any prepayment pursuant to this Section 2.8 allocable to such Lender's Term Loans, and the amount so refused shall be applied to prepay the Revolving Credit Loans. 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. 2.9 Mandatory Prepayments and Commitment Reductions. (a) If any senior or subordinated debt securities or instruments of the Borrower or any of its Subsidiaries shall be issued or sold, or the Borrower or any of its Subsidiaries shall incur any Indebtedness, after the Closing Date (except any debt securities or instruments issued or sold or Indebtedness incurred pursuant to Section 7.2), an amount equal to 100% of the Net Cash Proceeds thereof shall be applied on the date of such issuance, sale or incurrence toward the prepayment of the Revolving Credit Loans and, with respect to Net Cash Proceeds thereof received after the third anniversary of the Closing Date only, the prepayment of the Loans and the reduction of the Revolving Credit Commitments as set forth in paragraph (f) of this Section 2.9. 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 Borrower or any of its Subsidiaries shall be issued or sold after the Closing Date (except any Capital Stock issued as a part of the consideration of and in connection with a Permitted Acquisition), an amount equal to 100% of the Net Cash Proceeds thereof shall be applied on the date of such issuance or sale toward the prepayment of the Revolving Credit Loans and, with respect to Net Cash Proceeds thereof received after the third anniversary of the Closing Date only, the prepayment of the Loans and the reduction of the Revolving Credit Commitments as set forth in paragraph (f) of this Section 2.9; provided that, so long as no Default or Event of Default shall have occurred and be continuing, the Borrower shall not be required to reduce the Revolving Credit Commitments to less than $80,000,000 as a result of the application of Net Cash Proceeds pursuant to this paragraph (b). (c) If the Borrower or any of its Subsidiaries shall receive Net Cash Proceeds from any Asset Sale or Recovery Event after the Closing Date, 100% of the Net Cash Proceeds thereof shall be applied on the date such Net Cash Proceeds are received toward the prepayment of the Loans and the reduction of the Revolving Credit Commitments as set forth in paragraph (f) of this Section 2.9. Notwithstanding the foregoing sentence, (i) no prepayment and reduction of Revolving Credit Commitments shall be required in respect of the first $2,000,000 in Net Cash Proceeds received from Asset Sales and Recovery Events in any fiscal year (excluding any Net Cash Proceeds described in clause (ii) of this sentence) and (ii) if no Default or Event of Default shall have occurred and be continuing and a Reinvestment Notice with respect to such Asset Sale or Recovery Event has been delivered, to the extent that the Net Cash Proceeds from any Asset Sale or Recovery Event are to be used to restore or replace the assets in respect of which an Asset Sale or Recovery Event has occurred within six months from the date of such Asset Sale or Recovery Event, as certified by a Responsible Officer of the Borrower pursuant to such Reinvestment Notice, such Net Cash Proceeds shall not be applied toward the prepayment of Loans and the reduction of the Revolving Credit Commitments except as provided in the next two succeeding sentences. If the Net Cash Proceeds from any Reinvestment Event 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 pending the reinvestment of such Net Cash Proceeds. On each Reinvestment Prepayment Date, an amount equal to the Reinvestment Prepayment Amount with respect to the applicable Reinvestment Event shall be applied toward the prepayment of the Loans and the reduction of the Revolving Credit Commitments as set forth in paragraph (f) of this Section 2.9. (d) If, for any fiscal year of the Borrower ending on or after June 30, 2000, there shall be Excess Cash Flow, the Borrower shall, on the relevant Excess Cash Flow Application Date, apply toward the prepayment of the Loans and the reduction of the Revolving Credit Commitments as set forth in paragraph (f) of this Section 2.9 an amount equal to (i) 50% of such Excess Cash Flow if the Consolidated Leverage Ratio at the end of the relevant fiscal year shall be greater than or equal to 3.00 to 1.00 or (ii) 25% of such Excess Cash Flow if the Consolidated Leverage Ratio at the end of the relevant fiscal year shall be less than 3.00 to 1.00. Each such prepayment and commitment reduction shall be made on a date (an "Excess Cash Flow Application Date") no later than five Business 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) If any Convertible Subordinated Debentures are outstanding on April 30, 2003, the Borrower shall prepay the Term Loans in full on such date, together with all accrued interest thereon and all amounts payable pursuant to Section 2.19 in connection with such prepayment. (f) Amounts to be applied in connection with prepayments of Loans and Revolving Credit Commitment reductions made pursuant to this Section 2.9 shall be applied, first, to prepay the Revolving Credit Loans and reduce permanently the Revolving Credit Commitments, pro rata according to the outstanding amounts of Revolving Credit Commitments, except for amounts to be applied prior to the third anniversary of the Closing Date pursuant to paragraphs (a) and (b) of this Section 2.9 which shall be applied only toward prepayment of the then outstanding Revolving Credit Loans and not to reduce permanently the Revolving Credit Commitments, and, second, after the Aggregate Outstanding Revolving Extensions of Credit and the Revolving Credit Commitments have been reduced to zero, to prepay the Term Loans pro rata according to the outstanding principal amounts thereof. 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. Amounts on deposit in the cash collateral account shall be invested as directed by the Borrower subject to the approval of the Administrative Agent, which approval shall not be unreasonably withheld. The application of any prepayment pursuant to this Section 2.9 shall be made first to Base Rate Loans and second to Eurodollar Loans, provided that at the request of the Borrower the application of any prepayment to any Eurodollar Loan may be delayed until the end of an Interest Period (or Interest Periods) so that such application does not result in the incurrence by any Lender of any loss or expense under Section 2.19, and during such delay, the Administrative Agent shall hold the amount of such prepayment in a cash collateral account. Amounts prepaid in respect of the Term Loans shall be applied to installments thereof pro rata according to the outstanding principal amounts thereof. Amounts prepaid on account of the Term Loans may not be reborrowed. Each prepayment of the Loans under this Section 2.9 shall be accompanied by accrued interest to the date of such prepayment on the amount prepaid. 2.10 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 Maturity 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 Maturity 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. 2.11 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 $5,000,000 or a whole multiple of $1,000,000 in excess thereof, (b) no more than eight Eurodollar Tranches in respect of the Revolving Credit Loans shall be outstanding at any one time and (c) no more than twelve Eurodollar Tranches in respect of all Loans (including the Revolving Credit Loans) shall be outstanding at any one time. 2.12 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 any principal of any Loan or Reimbursement Obligations shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such amounts shall bear interest at 2% above the rate otherwise applicable thereto from the date of such non-payment until such overdue principal is paid in full (as well after as before judgment). If all or a portion of any interest shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such amounts shall bear interest at 2% above the rate otherwise applicable to the Loans or Reimbursement Obligations on which such interest accrued from the date of such non-payment until such overdue principal is paid in full (as well after as before judgment). If all or a portion of any commitment fee or any other amount payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such amounts shall bear interest at a rate which is 2% above the rate applicable to Base Rate Loans which are Revolving Credit Loans, in each case from the date of such non-payment until such overdue 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 2.12 shall be payable from time to time on demand. 2.13 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. (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. 2.14 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. 2.15 Pro Rata Treatment and Payments. (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 Term Loan Percentages or Revolving Credit Percentages, as the case may be, of the relevant Lenders. Except as provided in Section 2.8, 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. 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 held by the Revolving Credit Lenders. Each payment made at any time when any amount hereunder is due and payable shall be made pro rata according to the respective amounts then due and payable to the 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. Payments received by the Administrative Agent after such time shall be deemed to have been received on the next Business Day. 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 2.15(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 2.19, calculated as if such Lender's failure to fund such amount were a failure of the Borrower to borrow such amount after having given notice of such borrowing). Nothing herein shall be deemed to limit the rights of the Borrower against any defaulting Lender. (c) Unless the Administrative Agent shall have been notified in writing by the Borrower prior to the date of any payment being made hereunder that the Borrower will not make such payment to the Administrative Agent, the Administrative Agent may assume that the Borrower is making such payment, and the Administrative Agent may, but shall not be required to, in reliance upon such assumption, make available to the Lenders their respective pro rata shares of a corresponding amount. If such payment is not made to the Administrative Agent by the Borrower within three Business Days of such required date, the Administrative Agent shall be entitled to recover, on demand, from each Lender to which any amount which was made available pursuant to the preceding sentence, such amount with interest thereon at the rate per annum equal to the daily average Federal Funds Effective Rate. Nothing herein shall be deemed to limit the rights of the Administrative Agent or any Lender against the Borrower. 2.16 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 suspended 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 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 2.19. 2.17 Requirements of Law. (a) If after the date hereof 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 2.18 and changes in the rate of tax (whether characterized as income, franchise or other 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 on an after-tax basis for such increased cost or reduced amount receivable. If any Lender becomes entitled to claim any additional amounts pursuant to this Section 2.17, 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 Agent) of a written request therefor, the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender on an after-tax basis 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 2.17, 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 2.17 shall survive the termination of this Agreement and the payment of the Notes and all other amounts payable hereunder. 2.18 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 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 2.18(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 2.18 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 (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 2.18(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 2.18(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 2.18(a)). 2.19 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 shall not exceed the sum of (i) an amount equal to the excess, if any, of (A) 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 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 (B) 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 plus (ii) any transaction costs of such Lender in connection with the related funding or redeployment of funds. A certificate as to any amounts payable pursuant to this Section 2.19, 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. 2.20 Change of Lending Office. Each Lender agrees that, upon the occurrence of any event giving rise to the operation of Section 2.16, 2.17(a) or 2.18 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 2.20 shall affect or postpone any of the obligations of the Borrower or the rights of any Lender pursuant to Section 2.16, 2.17(a) or 2.18. 2.21 Use of Proceeds. The Borrower shall use the proceeds of the Loans only in the manner expressly contemplated by Section 4.16. 2.22 Replacement of Lenders. If no Event of Default then exists, the Borrower may replace any Lender (the "Replaced Lender") if an event occurs giving rise to the operation of Section 2.16 or Section 2.17, which results in the Replaced Lender charging to Borrower increased costs in excess of those being generally charged by the other Lenders and such Lender is not able to eliminate the increased costs pursuant to Section 2.20. The Replaced Lender shall be replaced with one or more banks, financial institutions, or other entities which are reasonably acceptable to the Administrative Agent (each a "Replacement Lender") under the terms set out in Section 10.6(c). Upon execution of the Assignment and Acceptance referred to in Section 10.6(c), payment of amounts referred to in Section 10.6(c), and delivery to the Replacement Lender of the appropriate Note or Notes executed by Borrower, the Replacement Lender shall become a Lender under this Agreement and the Replaced Lender shall no longer be a Lender under this Agreement, except with respect to indemnification provisions under this Agreement, which shall survive as to such Replaced Lender. SECTION 3. LETTERS OF CREDIT 3.1 L/C Commitment. (a) Prior to the date hereof, Norwest Bank has issued the Letters of Credit listed on Schedule 3.1 (the "Existing Letters of Credit"), and subject to the terms and conditions hereof, the Lender designated as Issuing Lender hereunder, in reliance on the agreements of the other Revolving Credit Lenders set forth in Section 3.4(a), agrees to issue letters of credit (together with the Existing Letters of Credit, "Letters of Credit") for the account of the Borrower, or for the joint and several account of the Borrower and any Subsidiary, on any Business Day during the Revolving Credit Commitment Period in such form as may be requested by the Borrower and approved from time to time by the Issuing Lender; provided, that such approval may not be unreasonably withheld, delayed or conditioned; and provided, further, 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 or 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 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 issued after the Closing Date shall be subject to the Uniform Customs and, to the extent not inconsistent therewith, the laws of the State of New York. 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 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. (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, or amending 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 Participation. (a) Effective on the Closing Date in respect of the Existing Letters of Credit, and effective on the date of issuance thereof in respect of each Letter of Credit issued hereunder after the Closing Date, the Issuing Lender in respect of each Letter of Credit irrevocably agrees to grant and hereby grants to each L/C Participant, and, to induce such Issuing Lender to issue Letters of Credit hereunder, each L/C Participant irrevocably agrees to accept and purchase and hereby accepts and purchases from such 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 such Issuing Lender's obligations and rights under such Letter of Credit and the amount of each draft paid by such Issuing Lender thereunder. Each L/C Participant unconditionally and irrevocably agrees with such Issuing Lender in respect of each Letter of Credit that, if a draft is paid under any Letter of Credit issued by such Issuing Lender for which such 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 such Issuing Lender upon demand at such 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 Revolving Credit Loans that are 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. (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 to the Issuing Lender on any and all amounts drawn under Letters of Credit from the date of such drawing until the date three Business Days after receipt by the Borrower from the Issuing Lender of notice of such drawing at the rate set forth in Section 2.12(b) for Revolving Credit Loans, and thereafter until payment in full at the rate set forth in Section 2.12(c). 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, subject to Section 3.7, 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 of care specified in the Uniform Commercial Code of the State of New York, shall 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 to determine whether 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, the Collateral Agent and the Lenders to enter into this Agreement and to make the Loans and issue or participate in the Letters of Credit, the Borrower hereby represents and warrants to the Arranger, the Administrative Agent, the Collateral Agent and each Lender that: 4.1 Financial Condition. (a) 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 the borrowings under this Agreement contemplated to be made on the Closing Date and the use of proceeds thereof and the payment of estimated fees and expenses in connection therewith. 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 in all material respects 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. (b) The audited consolidated balance sheets of the Borrower as at June 30, 1996 and June 30, 1995 and the related audited consolidated statements of income and of cash flows for the fiscal years ended on such dates, reported on by KPMG Peat Marwick 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 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 March 31, 1997, and the related unaudited consolidated statements of income and of cash flows for the nine-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 nine-month period then ended (subject to normal year-end audit adjustments). All such financial statements described in this Section 4.1(b), 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). Except for contingent obligations incurred in the ordinary course of business, the Borrower had at the date of the most recent audited balance sheet referred to above no material undisclosed liabilities, Guarantee Obligations, contingent liability or liability for taxes, nor any material 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 such balance sheet or in the notes thereto. During the period from June 30, 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 of any material part of their business or property. 4.2 No Change. (a) Since June 30, 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 June 30, 1996 to and including the date hereof no dividends or other distributions have been declared, paid or made upon the Capital Stock of the Borrower nor has any of the Capital Stock of the Borrower been redeemed, retired, purchased or otherwise acquired for value by the Borrower. 4.3 Corporate Existence; Compliance with Law. Each Loan Party (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, except (in the case of any Subsidiary) where the failure to do so could not reasonably be expected to have a Material Adverse Effect, (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, except where the failure to do so could not reasonably be expected to have a Material Adverse Effect, (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 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 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 for those obtained on or before the date of this Agreement and listed in Schedule 4.4, and except the filings referred to in Section 4.19. 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 and the use of the proceeds thereof will not violate any Requirement of Law or Contractual Obligation of any Loan Party 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 Borrower, threatened by or against the Borrower or any of its 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 Borrower nor any of its 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. 4.8 Ownership of Property; Liens. Each of the Borrower and its Domestic 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 (other than Servicios) have no fee interests in any material real property other than the Mortgaged Property, the Oil and Gas Properties and, as of the date hereof, the real property described on Schedule 4.8. 4.9 Intellectual Property. The Borrower and each of its 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 Borrower know of any valid basis for any such claim. To the Borrower's knowledge, the use of Intellectual Property by the Borrower and its Subsidiaries does not infringe on the rights of any Person where such infringement could reasonably be expected to have a Material Adverse Effect. 4.10 No Burdensome Restrictions. No Requirement of Law or Contractual Obligation of the Borrower or any of its Subsidiaries could reasonably be expected to have a Material Adverse Effect. 4.11 Taxes. Each of the Borrower and its Domestic Subsidiaries, and to the knowledge of the Borrower, Servicios has filed or caused to be filed all material Federal, state and other 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 material tax Lien has been filed; and, to the knowledge of the Borrower, no claim is being asserted, with respect to any material tax, fee or other charge. 4.12 Federal Regulations. Except as otherwise provided by Sections 4.16 and 7.7, 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. No part of the proceeds of any Loans will be used 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-3 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 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 $1,000,000. 4.14 Investment Company Act; Other Regulations. No Loan Party is 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. As of the date hereof, the Subsidiaries listed on Schedule 4.15 constitute all the direct or indirect Subsidiaries of 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. 4.16 Purpose of Loans; Limitations on Use. The proceeds of the Loans shall be used to refinance indebtedness of the Loan Parties under the existing credit facilities described on Schedule 4.16 (the "Existing Credit Facilities") and to pay related fees and expenses, to finance Permitted Acquisitions and capital expenditures, to finance the repurchase from time to time the outstanding Capital Stock of the Borrower to the extent permitted by subsection 7.7 and for general corporate purposes of the Borrower and its Subsidiaries (including Excluded Subsidiaries) in the ordinary course of business; provided, that the amount of proceeds of the Loans which may be used for Permitted Acquisitions of oil and gas properties shall be limited to an amount equal to the lesser of (a) $25,000,000 and (b) 65% of the value of the oil and gas properties of Odessa Exploration Incorporated (after giving effect to any such Permitted Acquisition), which value shall be calculated as the present value discounted at 10% of future net revenue relating to all proved developed producing reserves and proved undeveloped reserves from such properties. In addition, if at least 90% of the original outstanding principal amount of the Convertible Subordinated Debentures shall have been converted into common stock of the Borrower, the Borrower may use proceeds of the Loans to repurchase or redeem the remaining outstanding Convertible Subordinated Debentures as permitted by Section 7.10. 4.17 Environmental Matters. Other than exceptions to any of the following that could not, individually or in the aggregate, reasonably be expected to give rise to a Material Adverse Effect: (a) the Borrower and each of its Subsidiaries: (i) are, and to the knowledge of the executive management of the Borrower within the period of all applicable statutes of limitation have been, in compliance with all applicable Environmental Laws; (ii) hold all Environmental Permits (each of which is in full force and effect) required for any of their current operations or for any property owned, leased, or otherwise operated by any of them; (iii) are, and to the knowledge of the executive management of the Borrower within the period of all applicable statutes of limitation have been, in compliance with all of their Environmental Permits; and (iv) reasonably believe that: each of their Environmental Permits required for their continued operations will be timely renewed and complied with, without material expense; any additional Environmental Permits that may be required of any of them will be timely obtained and complied with, without material expense; and compliance with any Environmental Law that is or is reasonably expected by the Borrower's executive management to become applicable to any of them will be timely attained and maintained, without material expense. (b) To the knowledge of the executive management of the Borrower, Materials of Environmental Concern are not present at, on, under, in, or about any real property now or formerly owned, leased or operated by the Borrower or any of its Subsidiaries or at any other location (including, without limitation, any location to which Materials of Environmental Concern have been sent for re-use or recycling or for treatment, storage, or disposal) which could reasonably be expected to (i) give rise to liability of the Borrower or any of its Subsidiaries under any applicable Environmental Law or otherwise result in costs to the Borrower or any of its Subsidiaries, or (ii) interfere with the continued operations of the Borrower or any of its Subsidiaries, or (iii) impair the fair saleable value of any real property owned or leased by the Borrower or any of its Subsidiaries. (c) There is no judicial, administrative, or arbitral proceeding (including any notice of violation or alleged violation) under or relating to any Environmental Law to which the Borrower or any of its Subsidiaries is, or to the knowledge of the executive management of the Borrower will be, named as a party that is pending or, to the knowledge of the executive management of the Borrower, threatened. (d) Neither the Borrower nor any of its Subsidiaries has received any written request for information, or been notified that it is a potentially responsible party under or relating to the federal Comprehensive Environmental Response, Compensation, and Liability Act or any similar Environmental Law. (e) Neither the Borrower nor any of its Subsidiaries has entered into or agreed to any consent decree, order, or settlement or other agreement, nor is subject to any judgment, decree, or order or other agreement, in any judicial, administrative, arbitral, or other forum, relating to compliance with or liability under any Environmental Law. (f) To the knowledge of the executive management of the Borrower, neither the Borrower nor any of its Subsidiaries has assumed or retained, by contract or operation of law, any liabilities of any kind, fixed or contingent, known or unknown, under or relating to any Environmental Law. For purposes of Section 8, each of the foregoing representations and warranties contained in this Section 4.17 that is qualified by the knowledge of the executive management of the Borrower shall be deemed not to be so qualified. 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, with all such statements and information being taken as a whole, 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 Borrower and its Subsidiaries to be reasonable at such time. There is no fact known to the executive management of the Borrower 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 Collateral Agent, for the benefit of the Lenders, a security interest which has attached (as that term is used in Section 9-203 of the New York UCC) in the Pledged Securities and other instruments, negotiable documents, chattel paper and money described therein, to the extent that the Loan Parties to the Master Guaranty and Collateral Agreement have rights in such Collateral, and proceeds thereof and, when the Pledged Notes and the stock certificates representing the Pledged Stock described therein and other instruments, negotiable documents, chattel paper and money described therein are delivered to the Collateral Agent, the Master Guarantee and Collateral Agreement shall constitute a perfected first priority Lien on, and security interest in, all right, title and interest of the relevant pledgor in such Pledged Securities and other instruments, negotiable documents, chattel paper and money 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, except for inchoate tax liens for obligations to be paid in the ordinary course of business. (b) The Master Guarantee and Collateral Agreement is effective to create in favor of the Collateral Agent, for the benefit of the Lenders, a security interest which has attached (as that term is used in Section 9-203 of the New York UCC) in the Collateral described therein (other than the Collateral described in Section 4.19(a)), to the extent that the Loan Parties to the Master Guarantee and Collateral Agreement have rights in such Collateral, and proceeds thereof, and when financing statements in appropriate form are properly filed (with all required filing fees being paid) in the offices specified on Schedule 4.19(b) and, with respect to vehicles included in the Collateral and covered by certificates of title issued by any State, when the security interest of the Collateral Agent has been noted on such certificate of title in accordance with the certificate of title laws of such State, the Master Guarantee and Collateral Agreement shall constitute a perfected Lien on, and security interest in, all right, title and interest of the Loan Parties in substantially all of such Collateral 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, and properly filed and recorded (with all required filing and recording fees being paid) in the office(s) specified on Schedule 4.19(c), shall constitute a Lien on, and security interest in, all right, title and interest of the Loan Parties in the Mortgaged Property properly described therein, 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) Each Oil and Gas Mortgage, when executed and delivered by the relevant Loan Party, and properly filed and recorded (with all required filing and recording fees being paid) in the office(s) specified on Schedule 4.19(d), shall constitute a perfected Lien on, and security interest in, all right, title and interest of the Loan Parties in the Oil and Gas Property properly described therein, as security for the Obligations (as defined in the relevant Oil and Gas 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. 4.20 Solvency. The Borrower and its Subsidiaries, taken as a whole, are, and after giving effect to the incurrence of all Indebtedness and obligations being incurred in connection herewith will be, Solvent. 4.21 Labor Matters. There are no strikes pending or, to the knowledge of the Borrower, threatened against the Borrower or any of its 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 Borrower and each of its 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 Borrower or any of its 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 Borrower or such Subsidiary. 4.22 Indenture. All Indebtedness of the Borrower hereunder constitutes "Senior Indebtedness" within the meaning of the Indenture. 4.23 Excluded Subsidiaries. As of the Closing Date the Borrower is in the process of dissolving all Excluded Subsidiaries listed in clause (a) of the definition of Excluded Subsidiaries in Section 1.1; and the Borrower expects to dissolve the Excluded Subsidiaries listed in clause (c) of the definition of Excluded Subsidiaries in Section 1.1 in the ordinary of business when the assets of such corporations are disposed of. 4.24 Oil and Gas Properties. The Oil and Gas Properties described in Schedule 1.1C constitute 80% of the value of the proved developed producing and proved undeveloped reserves of Odessa Exploration Incorporated on the Closing Date. For purposes of this Section, the value of such reserves shall be calculated as the present value discounted at 10% of future revenue relating to such reserves. 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 June 15, 1997), of the following conditions precedent: (a) Loan Documents. The Administrative Agent shall have received (i) this Agreement, executed and delivered by a duly authorized officer of the Borrower, with a counterpart or a conformed copy for each Lender and (ii) for the account of any Lender requesting Notes in accordance with Section 2.6(e), Notes conforming to the requirements hereof and executed and delivered by a duly authorized officer of the Borrower. The Collateral Agent shall have received 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. (b) Related Agreements. The Administrative Agent 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 the Indenture and any other debt instrument, security agreement or other material contract to which the Loan Parties may be a party. (c) Termination of Existing Credit Facilities. The Administrative Agent shall have received evidence satisfactory to the Administrative Agent and the Arranger that the Existing Credit Facilities shall be simultaneously terminated, all amounts thereunder shall be simultaneously paid in full and arrangements satisfactory to the Arranger and the Administrative Agent shall have been made for the termination of Liens and security interests granted in connection therewith. (d) Fees. The Lenders, 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. (e) Approvals. All governmental and third party approvals necessary or, in the reasonable discretion of the Arranger, advisable in connection with the financings contemplated hereby and the continuing operations of the Borrower and its Domestic 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 continuing operations of the Borrower. (f) Financial Statements. The Lenders shall have received satisfactory unaudited interim consolidated financial statements of the Borrower for the fiscal quarterly period ended March 31, 1997 and such interim financial statements shall not reflect any material adverse change in the consolidated financial condition of the Borrower as reflected in the financial statements previously delivered to the Lenders. (g) Pro Forma Balance Sheet. The Lenders shall have received the Pro Forma Balance Sheet, which Pro Forma Balance Sheet shall be in form and substance reasonably satisfactory to the Lenders. (h) Business Plan. The Lenders shall have received a satisfactory business plan for fiscal years 1997-2004 and a satisfactory written analysis of the business and prospects of the Borrower and its Subsidiaries for the period from the Closing Date through the Revolving Credit Termination Date. (i) Lien Searches. The Collateral Agent shall have received the results of a recent lien 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 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 as described in Section 5.1(c) pursuant to documentation reasonably satisfactory to the Arranger. (j) Solvency Analysis. The Lenders shall have received a reasonably satisfactory solvency analysis certified by the chief financial officer of the Borrower which shall document the solvency of the Borrower and its Subsidiaries considered as a whole after giving effect to the transactions contemplated hereby. (k) Legal Opinions. The Administrative Agent shall have received, with a counterpart for each Lender, (i) the executed legal opinion of Jack D. Loftis, Jr., Esq., general counsel to the Loan Parties, substantially in the form of Exhibit E-1 and (ii) the executed legal opinion of Porter & Hedges L.L.P., counsel to the Loan Parties, substantially in the form of Exhibit E-2. Each such legal opinion shall be in form and substance reasonably satisfactory to the Lenders and shall cover such matters incident to the transactions contemplated by this Agreement as the Arranger may reasonably require. (l) Closing Certificate. The Administrative Agent 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. (m) Corporate Proceedings of Loan Parties. The Administrative Agent 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. (n) Pledged Securities; Stock Powers. The Collateral Agent shall have received the Pledged Notes (duly indorsed to bearer) and the Pledged Stock pledged pursuant to the Master Guarantee and Collateral Agreement (including, without limitation, all of the shares of Odessa Exploration Incorporated), together with an undated stock power for each such certificate executed in blank by a duly authorized officer of the pledgor thereof. (o) 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 delivered to the Collateral Agent or to be filed, registered or recorded in order to create in favor of the Collateral Agent, for the benefit of the Lenders, a perfected Lien on substantially all of 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, other than those documents required to be filed, registered or recorded after the Closing Date pursuant to Section 6.11. (p) Forms U-1, G-3. To each Lender which has requested such form prior to the Closing Date, a Form U-1 or G-3 confirming that none of the proceeds of the Term Loans shall be used to purchase or carry margin stock. 5.2 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. Except to the extent that they are made as of a specific date, 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 and the other Loan Documents 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 5.2 have been satisfied. SECTION 6. AFFIRMATIVE COVENANTS The Borrower hereby agrees 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 Borrower shall and, if applicable, shall cause each of its Subsidiaries (and with respect to Section 6.8, each of the Excluded 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 95 days after the end of each fiscal year of the Borrower, a copy of the audited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as at the end of such year and the related audited 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 LLP or other independent certified public accountants of nationally recognized standing; (b) as soon as available, but in any event not later than 50 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 Consolidated 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 Consolidated 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 40 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 Consolidated Subsidiaries as at the end of such month and the related unaudited consolidated statement of income of the Borrower and its Consolidated 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, certified by a Responsible Officer of the Borrower as being fairly stated in all material respects (subject to normal year-end audit adjustments); all such financial statements referred to in this Section 6.1(b) 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, subject to normal year-end adjustments. 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 such certificate and (ii) copies of all reports or written communications providing advice, recommendations or analysis to the management of the Borrower from such independent certified public accountants with regard to their audit of the financial statements referred to in Section 6.1(a) or the internal financial controls and systems of the Borrower; 12 (b) concurrently with the delivery of any financial statement pursuant to Section 6.1, (x) a certificate of a Responsible Officer of 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 6.10 with respect thereto), (ii) neither the Borrower nor any of its Subsidiaries has changed its name, its principal place of business, its chief executive office, its principal place of business, the location where records concerning the Collateral are kept 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 and (iii) 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 and (y) in the case of quarterly or annual financial statements, a certificate containing all information reasonably necessary for determining compliance by the Borrower and its Subsidiaries with the provisions of this Agreement (including but not limited to Sections 2.9 and 7.1) as of the last day of such fiscal quarter or fiscal year of the Borrower; (c) as soon as available, and in any event no later than 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 retained earnings 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 "Projections"), which Projections shall in each case be accompanied by a certificate of a Responsible Officer of the Borrower stating that such Projections are based on estimates, information and assumptions believed by such Responsible Officer to be reasonable and that such Responsible Officer has no reason to believe that such Projections are incorrect or misleading in any material respect; (d) within 50 days after the end of each fiscal quarter of each fiscal year of the Borrower, a narrative discussion and analysis of the consolidated 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 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 Borrower or any of its Subsidiaries may make to, or file with, the Securities and Exchange Commission or any successor or analogous Governmental Authority of the United States; 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 or (in the case of trade payables and obligations other than for borrowed money) within 150 days after the due date, 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 Borrower or its 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 commercially reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business, except, in each case in clauses (a), (b) and (c) above, 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 general liability) 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 or, in the case of Foreign Subsidiaries, in conformity with generally accepted accounting principles in effect in the jurisdiction where such Foreign Subsidiary is located at such time and, in the case of the Borrower and its Domestic Subsidiaries, 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 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 Borrower and its Subsidiaries with senior officers of the Borrower and its 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 Borrower or any of its Subsidiaries or (ii) litigation, investigation or proceeding which may exist at any time between the Borrower or any of its 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) the following events, as soon as possible and in any event within 30 days after the Borrower or any of its 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 in a material amount to a Plan, the creation of any Lien in a material amount 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; (d) (i) any release or discharge by the Borrower or any Subsidiary of any Materials of Environmental Concern required to be reported under Environmental Laws to any Governmental Authority which could reasonably be expected to result in the assessment or payment of a Material Environmental Amount; (ii) any condition, circumstance, occurrence or event that could reasonably be expected to result in the assessment or payment of a Material Environmental Amount, or could result in the imposition of any Lien or other restriction on the title, ownership or transferability of any Mortgaged Property; and (iii) any action to be taken by the Borrower or any Subsidiary that could reasonably be expected to subject the Borrower or any Subsidiary to the assessment or payment of a Material Environmental Amount; 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 Borrower or the applicable Subsidiary proposes to take with respect thereto. 6.8 Environmental Laws. (a)(i) Comply with all Environmental Laws applicable to it, and obtain, comply with and maintain any and all Environmental Permits necessary for its operations as conducted and as planned; and (ii) take all reasonable efforts to ensure that all of its tenants, subtenants, contractors, subcontractors, and invitees comply with all applicable Environmental Laws, and obtain, comply with and maintain any and all Environmental Permits, applicable to any of them insofar as any failure to so comply, obtain or maintain reasonably could be expected to adversely affect the Borrower or any of its Subsidiaries. For purposes of this 6.8(a), noncompliance by the Borrower with any applicable Environmental Law or Environmental Permit shall be deemed not to constitute a breach of this covenant provided that, upon learning of any actual or suspected noncompliance, the Borrower shall undertake reasonable efforts to achieve compliance, and provided further that, in any case, such non- 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am compliance, and any other noncompliance with applicable Environmental Law, individually or in the aggregate, could not reasonably be expected to give rise to a Material Adverse Effect. (b) Promptly comply in all material respects with all orders and directives of all Governmental Authorities directed to the Borrower or any of its Domestic Subsidiaries regarding Environmental Laws, other than such orders and directives or parts thereof as are being contested in good faith and by appropriate proceedings. (c) Within six months after the Closing Date, complete the development of a program to promote compliance with and to minimize prudently any liabilities or potential liabilities under any Environmental Law that may affect Borrower or any of its Domestic Subsidiaries (the "Environmental Program") and implement the Environmental Program upon a reasonable schedule thereafter. The Environmental Program shall be developed with the assistance of a reputable independent environmental consulting firm reasonably acceptable to the Administrative Agent (an "Environmental Consultant") or a qualified employee of the Borrower. Upon the Administrative Agent's request, a reasonably detailed written description of the Environmental Program shall be provided to the Administrative Agent, after which, upon the Administrative Agent's request, Borrower shall confer with the Administrative Agent concerning any questions the Administrative Agent may have about the Environmental Program. (d) Prior to acquiring any ownership or leasehold interest in real property, or other interest in any real property which in the Borrower's reasonable judgment could give rise to significant liability under any Environmental Law, obtain a written environmental assessment report regarding the environmental condition of such real property by a reputable independent environmental consulting firm. Upon the request of the Administrative Agent, a copy of each such environmental assessment report shall be delivered to the Administrative Agent by the end of the calendar quarter in which the acquisition closed, together with a list of all acquisitions of interests in real property by the Borrower and the Subsidiaries in such quarter. Pursuant to this Section 6.8(d), the Administrative Agent shall have the right, but shall not have any duty, to obtain, review or discuss any such report. (e) Promptly upon the Administrative Agent's request if there has been an Event of Default which has not been fully and timely cured, permit an Environmental Consultant whom the Administrative Agent in its discretion designates to perform an environmental assessment (including, without limitation: reviewing documents; interviewing knowledgeable persons; and sampling and analyzing soil, air, surface water, groundwater, and/or other media in or about property owned or leased by the Borrower, or on which operations of the Borrower otherwise take place). Such environmental assessment shall be in form, scope, and substance reasonably satisfactory to the Administrative Agent. The Borrower shall cooperate fully in the conduct of such environmental assessment, and shall pay the costs of such environmental assessment immediately upon written demand by the Administrative Agent. Pursuant to this section 6.8(e), the Administrative Agent shall have the right, but shall not have any duty, to request and/or obtain such environmental assessment. 6.9 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 in the reasonable judgment of the Collateral Agent to maintain in favor of the Collateral Agent, for the benefit of the Lenders, Liens on the Collateral that are duly perfected in accordance with all applicable Requirements of Law. 6.10 Additional Collateral. (a) With respect to any assets acquired after the Closing Date by the Borrower or any of its 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), (d) or (e) of this Section 6.10), promptly (and in any event within 30 days after the acquisition or creation thereof): (i) execute and deliver to the Collateral Agent such amendments to the Master Guarantee and Collateral Agreement or such other documents as the Collateral Agent shall reasonably deem necessary or advisable to grant to the Collateral Agent, for the benefit of the Lenders, a Lien on such assets, (ii) take all actions reasonably 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 reasonably requested by the Collateral Agent, and (iii) if requested by the Collateral Agent, deliver to the Collateral 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 Collateral Agent. (b) With respect to any Person that, subsequent to the Closing Date, becomes a Domestic Subsidiary of the Borrower (including, without limitation, any Person which had previously been an Excluded Subsidiary), promptly: (i) execute and deliver to the Collateral Agent, for the benefit of the Lenders, such amendments to the Master Guarantee and Collateral Agreement as the Collateral Agent shall deem reasonably necessary or advisable to grant to the Collateral Agent, for the benefit of the Lenders, a Lien on the Capital Stock of such Subsidiary which is owned by the Borrower or any of its Subsidiaries, (ii) deliver to the Collateral Agent the certificates representing such Capital Stock, together with undated stock powers duly executed and delivered in blank, (iii) cause such new Domestic Subsidiary (A)to become a party to the Master Guarantee and Collateral Agreement, pursuant to documentation which is in form and substance reasonably satisfactory to the Collateral 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 reasonably requested by the Collateral Agent, and (iv) if requested by the Collateral Agent, deliver to the Collateral 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 Collateral Agent. (c) With respect to any fee interest in any real property acquired after the Closing Date by the Borrower or any of its Domestic Subsidiaries having a purchase price (or, if acquired through a merger or stock acquisition, a fair market value) in excess of $1,000,000, 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 Domestic Subsidiary to purchase such real property but subject to such easements, rights of way, restrictions and other similar encumbrances as such property may be subject at the time of acquisition), in favor of the Collateral Agent, for the benefit of the Lenders, covering such real property, in form and substance reasonably satisfactory to the Collateral Agent, (ii) if requested by the Collateral Agent, provide the Lenders with any consents or estoppels deemed necessary or advisable by the Collateral Agent in connection with such mortgage or deed of trust, each of the foregoing in form and substance reasonably satisfactory to the Collateral Agent and (iii) if requested by the Collateral Agent, deliver to the Collateral 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 Collateral Agent. Notwithstanding the foregoing, compliance shall not be required with the foregoing provision of this paragraph (c) in respect of any interest in real property which, at the time of acquisition thereof by the Borrower or its Subsidiary, is subject to a legal or contractual restriction that would prohibit the granting of a mortgage thereon to the Collateral Agent; provided, that the aggregate book value of real property owned by the Borrower and its Subsidiaries so subject may not exceed $5,000,000 at any time. (d) With respect to any Foreign Subsidiary created or acquired after the Closing Date by the Borrower or any of its Domestic Subsidiaries, promptly (i) execute and deliver to the Collateral Agent such amendments to the Master Guarantee and Collateral Agreement (or comparable documentation) as the Collateral Agent deems reasonably necessary or advisable in order to grant to the Collateral Agent, for the benefit of the Lenders, a perfected first priority security interest in the Capital Stock (except for Liens permitted under Section 7.3) of such new Foreign Subsidiary which is owned by the Borrower or any of its Domestic 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 Collateral Agent the certificates representing such Capital Stock, together with undated stock powers, in blank, executed and delivered by a duly authorized officer of the Borrower or such Subsidiary, as the case may be, and (iii) if requested by the Collateral Agent, deliver to the Collateral 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 Collateral Agent. (e) With respect to any oil and gas property acquired after the Closing Date by the Borrower or any of its Domestic Subsidiaries having a purchase price (or, if acquired through a merger or stock acquisition, a fair market value) in excess of $1,000,000 and which, after giving effect to such acquisition and assuming that a perfected first priority Lien thereon were not granted to the Collateral Agent would result in the Collateral Agent having a perfected first priority Lien on less than 80% in value (calculated as provided in Section 4.24) of the reserves contained in all of the oil and gas properties of the Borrower and its Domestic Subsidiaries, promptly (i) execute and deliver a first priority oil and gas mortgage (subordinate only to such oil and gas mortgages as are necessary to permit the Borrower or such Domestic Subsidiary to purchase such property but subject to such restrictions and other similar encumbrances as such property may be subject at the time of acquisition), in favor of the Collateral Agent, for the benefit of the Lenders, covering such property, in form and substance reasonably satisfactory to the Collateral Agent, and (ii) if requested by the Collateral Agent, deliver to the Collateral Agent title opinions relating to the matters described in the preceding clause reasonably satisfactory to the Collateral Agent. 6.11 Post-Closing Matters. (a) Mortgages and Oil and Gas Mortgages. Within 90 days after the Closing Date, deliver to the Collateral Agent each Mortgage and each Oil and Gas Mortgage, executed and delivered by a duly authorized officer of each party thereto, with a copy for each Lender. (b) Legal Opinions. Deliver to the Collateral Agent within 90 days after the Closing Date, such legal opinions from local counsel in respect of the Mortgages and the recording thereof as may be reasonably requested by the Collateral Agent, with a counterpart for each Lender. Deliver to the Collateral Agent as promptly as practicable, but in any event within 180 days after the Closing Date, such title opinions in respect of the Oil and Gas Properties as may be reasonably requested by the Collateral Agent. Such legal opinions shall be in form and substance reasonably satisfactory to the Collateral Agent and shall cover such matters incident to the transactions contemplated by this Agreement as the Collateral Agent may reasonably require. (c) Flood Insurance. Within 90 days after the Closing Date, deliver to the Collateral Agent if requested by the Collateral Agent, (i) a policy of flood insurance with respect to each parcel of real property subject to a Mortgage on which there are improvements located in the 100-year flood plain, which (A) 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 (B) has a term ending not earlier than the maturity of the indebtedness secured by such Mortgage and (ii) confirmation that the Borrower has received from the Collateral Agent the notice required pursuant to Section 208(e)(3) of Regulation H of the Board. (d) Vehicles. Within 90 days after the Closing Date, deliver to the Collateral Agent each document (including, without limitation, any certificates of title) required by the Security Documents or under law or reasonably requested by the Collateral Agent to be delivered to the Collateral Agent or to be filed, registered or recorded in order to create in favor of the Collateral Agent, for the benefit of the Lenders, a perfected Lien on all of the Vehicles covered by a certificate of title, prior and superior in right to any other Person (other than with respect to Liens expressly permitted by Section 7.3), which documents 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. (e) Environmental. Prior to or concurrently with the execution and delivery of the Mortgages, deliver to the Collateral Agent and the Arranger environmental reports in respect of each Mortgaged Property listed in Schedule 6.11(e), which reports shall be reasonably satisfactory to the Collateral Agent. At any time upon the request of the Required Lenders, deliver to the Collateral Agent and the Arranger environmental reports in respect of the Mortgaged Properties not covered by an environmental report delivered pursuant to the preceding sentence, which reports shall be reasonably satisfactory to the Collateral Agent. 6.12 Interest Rate Protection Agreements. Within 120 days after the Closing Date, enter into Interest Rate Protection Agreements in respect of at least $50,000,000 of the Term Loans, providing interest rate protection for such period of time, and under such terms and conditions, as shall be reasonably acceptable to the Arranger. SECTION 7. NEGATIVE COVENANTS The Borrower hereby agrees 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, the Collateral Agent or the Administrative Agent hereunder, the Borrower shall not, and, if applicable, shall not permit any of its Subsidiaries to, directly or indirectly: 7.1 Financial Condition Covenants. (a) Consolidated Leverage Ratio. Permit the Consolidated Leverage Ratio as of any date set forth below to exceed the ratio set forth below opposite such date: Consolidated Date Leverage Ratio June 30, 1997 4.00 to 1.00 September 30, 1997 4.00 to 1.00 December 31, 1997 4.00 to 1.00 March 31, 1998 4.00 to 1.00 June 30, 1998 3.50 to 1.00 September 30, 1998 3.50 to 1.00 December 31, 1998 3.25 to 1.00 March 31, 1999 3.25 to 1.00 June 30, 1999 3.00 to 1.00 September 30, 1999 3.00 to 1.00 December 31, 1999 2.75 to 1.00 March 31, 2000 2.75 to 1.00 June 30, 2000 2.50 to 1.00 September 30, 2000 2.50 to 1.00 December 31, 2000 2.50 to 1.00 March 31, 2001 2.50 to 1.00 June 30, 2001 2.50 to 1.00 September 30, 2001 2.50 to 1.00 December 31, 2001 2.50 to 1.00 March 31, 2002 2.50 to 1.00 June 30, 2002 2.50 to 1.00 September 30, 2002 2.50 to 1.00 December 31, 2002 2.50 to 1.00 March 31, 2003 2.50 to 1.00 June 30, 2003 2.50 to 1.00 September 30, 2003 2.50 to 1.00 December 31, 2003 2.50 to 1.00 March 31, 2004 2.50 to 1.00 (b) Consolidated Interest Coverage Ratio. Permit the Consolidated Interest Coverage Ratio for any period of four consecutive fiscal quarters of the Borrower ending as of any date set forth below to be less than the ratio set forth below opposite such date: Consolidated Interest Date Coverage Ratio June 30, 1997 2.50 to 1.00 September 30, 1997 2.50 to 1.00 December 31, 1997 2.50 to 1.00 March 31, 1998 2.50 to 1.00 June 30, 1998 2.75 to 1.00 September 30, 1998 2.75 to 1.00 December 31, 1998 3.00 to 1.00 March 31, 1999 3.00 to 1.00 June 30, 1999 3.25 to 1.00 September 30, 1999 3.25 to 1.00 December 31, 1999 3.50 to 1.00 March 31, 2000 3.50 to 1.00 June 30, 2000 3.50 to 1.00 September 30, 2000 3.50 to 1.00 December 31, 2000 3.50 to 1.00 March 31, 2001 3.50 to 1.00 June 30, 2001 3.50 to 1.00 September 30, 2001 3.50 to 1.00 December 31, 2001 3.50 to 1.00 March 31, 2002 3.50 to 1.00 June 30, 2002 3.50 to 1.00 September 30, 2002 3.50 to 1.00 December 31, 2002 3.50 to 1.00 March 31, 2003 3.50 to 1.00 June 30, 2003 3.50 to 1.00 September 30, 2003 3.50 to 1.00 December 31, 2003 3.50 to 1.00 March 31, 2004 3.50 to 1.00 (c) Consolidated Fixed Charge Coverage Ratio. Permit the Consolidated Fixed Charge Coverage Ratio for any period of four consecutive fiscal quarters of the Borrower ending as of any date set forth below to be less than the ratio set forth below opposite such date: Consolidated Fixed Charge Date Coverage Ratio June 30, 1997 1.05 to 1.00 September 30, 1997 1.05 to 1.00 December 31, 1997 1.05 to 1.00 March 31, 1998 1.05 to 1.00 June 30, 1998 1.05 to 1.00 September 30, 1998 1.05 to 1.00 December 31, 1998 1.05 to 1.00 March 31, 1999 1.10 to 1.00 June 30, 1999 1.10 to 1.00 September 30, 1999 1.10 to 1.00 December 31, 1999 1.10 to 1.00 March 31, 2000 1.10 to 1.00 June 30, 2000 1.10 to 1.00 September 30, 2000 1.10 to 1.00 December 31, 2000 1.10 to 1.00 March 31, 2001 1.10 to 1.00 June 30, 2001 1.10 to 1.00 September 30, 2001 1.10 to 1.00 December 31, 2001 1.10 to 1.00 March 31, 2002 1.10 to 1.00 June 30, 2002 1.10 to 1.00 September 30, 2002 1.10 to 1.00 December 31, 2002 1.10 to 1.00 March 31, 2003 1.10 to 1.00 June 30, 2003 1.10 to 1.00 September 30, 2003 1.10 to 1.00 December 31, 2003 1.10 to 1.00 March 31, 2004 1.10 to 1.00 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, (iii) of Servicios to the Borrower or any Subsidiary in an aggregate principal amount at any time outstanding not to exceed $5,000,000 in excess of the amount of such Indebtedness outstanding on the date of this Agreement and (iv) of any Foreign Subsidiary (other than Servicios) to the Borrower or any Subsidiary in an aggregate principal amount at any time outstanding (with respect to all such Foreign Subsidiaries of the Borrower) not to exceed $1,000,000, provided that such Indebtedness referred to in clauses (iii) and (iv) hereof, 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 Collateral Agent on terms and conditions reasonably 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 Financing Lease or otherwise) in an aggregate principal amount not exceeding as to the Borrower and its Subsidiaries (i) $15,000,000 at any time outstanding minus (ii) the amount of Indebtedness outstanding under clauses (f) and (i) of this Section 7.2 and the amount of indebtedness attributable to sale and leaseback transactions permitted pursuant to Section 7.12; (d) Indebtedness of the Borrower and its Subsidiaries under the Convertible Subordinated Debentures; (e) Indebtedness outstanding on the date hereof, or incurred hereafter pursuant to existing commitments or agreements, and, in each case, listed on Schedule 7.2 and any refinancings, refundings, renewals or extensions thereof not increasing the principal amount thereof; (f) Indebtedness of a Person which becomes a Subsidiary after the date hereof in an aggregate principal amount at any time outstanding not exceeding (i) $15,000,000, minus (ii) the sum of (A) the amount of Indebtedness outstanding under clauses (c) and (i) of this Section 7.2 and (B) the amount of indebtedness attributable to sale and leaseback transactions permitted pursuant to Section 7.12, provided that (x) such Indebtedness existed at the time such corporation became a Subsidiary and was not created in anticipation thereof and (y) immediately after giving effect to the acquisition of such corporation by the Borrower no Default or Event of Default shall have occurred and be continuing, and any refinancings, refundings, renewals or extensions thereof not increasing the principal amount thereof. (g) Indebtedness constituting deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds and performance bonds and other obligations of a like nature that are incurred in the ordinary course of business, not to exceed $5,000,000 in the aggregate at any time outstanding; (h) Indebtedness under Interest Rate Protection Agreements and Hedge Agreements entered into the ordinary course of business for hedging purposes and not for speculative purposes; (i) Seller Indebtedness in an aggregate principal amount at any time outstanding not exceeding (i) $15,000,000 minus (ii) the sum of (A) the amount of Indebtedness outstanding under clauses (c) and (f) of this Section 7.2, and any refinancings, refundings, renewals or extensions thereof not increasing the principal amount thereof and (B) the amount of indebtedness attributable to sale and leaseback transactions permitted pursuant to Section 7.12; (j) Indebtedness in the form of Guarantee Obligations permitted by Section 7.4; and (k) Indebtedness not otherwise permitted by the foregoing clauses (a) through (j) in an aggregate principal amount at any time outstanding of not to exceed $5,000,000. 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 Borrower or its Subsidiaries 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 180 days or which are being contested in good faith by appropriate proceedings and which, in any case, do not encumber a material amount of the assets of the Borrower and its Subsidiaries; (c) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation; (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 within 180 days after 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 and the proceeds and products thereof, (iii) the principal 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 existence on the date hereof listed on Schedule 7.3 (i) securing Indebtedness permitted by Section 7.2(e) provided that no such Lien is spread to cover any additional property after the Closing Date and that the principal amount of Indebtedness secured thereby is not increased or (ii) securing Indebtedness which is being repaid on the Closing Date, provided that such Liens shall be released promptly following the Closing Date; (i) Liens on the property or assets of a corporation which becomes a Subsidiary after the date hereof securing Indebtedness permitted by Section 7.2(f), provided that (i) such Liens existed at the time such corporation became a Subsidiary and were not created in anticipation thereof, (ii) any such Lien is not spread to cover any property or assets of such corporation after the time such corporation becomes a Subsidiary, and (iii) the principal amount of Indebtedness secured thereby is not increased; (j) Liens on assets acquired in a Permitted Acquisition securing Seller Indebtedness incurred in connection with such Permitted Acquisition; and (k) the Permitted Exceptions (as defined in the Mortgages). 7.4 Limitation on Guarantee Obligations. Create, incur, assume or suffer to exist any Guarantee Obligation except: (a) Guarantee Obligations made in the ordinary course of its business by the Borrower or any Subsidiary in respect of Indebtedness and other obligations of any of the Borrower or any of its Subsidiaries which Indebtedness or other obligations are otherwise not prohibited under this Agreement; (b) the Guarantee Obligations of the Loan Parties pursuant to the Master Guarantee and Collateral Agreement; (c) the Guarantee Obligations of the Subsidiaries of the Borrower under the Indenture; and (d) Guarantee Obligations (in respect of obligations not constituting Indebtedness) arising under agreements entered into by the Borrower or any Subsidiary in the ordinary course of business. 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 Subsidiary of 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 Subsidiaries of the Borrower provided that in the case of any such transaction involving a Wholly Owned Subsidiary, such Wholly Owned Subsidiary shall be the continuing or surviving corporation; (b) any Subsidiary may be dissolved, liquidated or wound up or may sell, lease, assign, 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, and the Borrower may sell, lease, assign, transfer or otherwise dispose of any or all of its assets to any wholly owned Subsidiary of the Borrower which is a party to the Master Guarantee and Collateral Agreement; and (c) any Subsidiary may sell, lease, transfer or otherwise dispose of any or all of its assets so long as (i) such transaction does not violate Section 7.6 and (ii) the Borrower complies with the provisions of Section 2.9(c) with respect to such transaction. 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 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, $1,000,000 in any period of twelve consecutive months; (b) the sale or other disposition of any property in the ordinary course of business, including obsolete or worn out property not permitted to be disposed of pursuant to clause (a) of this Section 7.6, provided that (other than inventory and light vehicles) the aggregate book value of all assets so sold or disposed of in any period of twelve consecutive months shall not exceed $5,000,000; (c) the sale of inventory and light vehicles in the ordinary course of business; (d) as permitted by Section 7.5(b); and (e) the sale of Servicios for consideration of which not less than 80% is comprised of cash or assets located in the United States. 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 Collateral Agent created by the Security Documents, and the Collateral 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 Borrower or any of its Subsidiaries or any warrants or options to purchase any such Capital Stock or any of the Convertible Subordinated Debentures, whether now or hereafter outstanding, or make any other distribution in respect thereof or purchase any thereof, either directly or indirectly, whether in cash or property or in obligations of the Borrower or any Subsidiary, except that the Borrower (a) may make open market purchases of its outstanding common stock in an aggregate amount during the term of this Agreement not to exceed (i) $10,000,000, while the Consolidated Leverage Ratio is less than 3.75 to 1.0 but greater than or equal to 2.50 to 1.0 and (ii) $25,000,000 (including any amounts expended pursuant to clause (i)), while the Consolidated Leverage Ratio is less than 2.50 to 1.0, (b) may (i) make scheduled payments of principal and interest in respect of the Convertible Subordinated Debentures, and (ii) if permitted by Section 7.10, redeem the Convertible Subordinated Debentures after at least 90% of the Convertible Subordinated Debentures have been converted and (c) may make cash payments required pursuant to Section 11.1 of the Indenture in connection with conversions of the Convertible Subordinated Debentures. Notwithstanding the foregoing, any Subsidiary of the Borrower may pay dividends and other distributions to the Borrower and Servicios may pay dividends to its shareholders. 7.8 Limitation on Capital Expenditures. Make or commit to make 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, an amount equal to the sum of (i) the amount set forth below opposite such fiscal year plus (ii) an additional amount for any Person or business unit acquired by the Borrower in a Permitted Acquisition since the Closing Date, such amount being calculated as 10% of the net revenues, calculated in accordance with GAAP, of such Person or business unit during such fiscal year (or, if such Person or business unit was acquired after the beginning of such fiscal year, such revenues for the portion of such fiscal year during which such Person or business unit was owned by the Borrower): Fiscal Year Ending Amount 1998 $30,000,000 1999 $31,500,000 2000 $33,075,000 2001 $34,728,750 2002 $36,465,188 2003 $38,288,447 2004 $40,202,869 Any amount permitted by the foregoing provision to be expended as Capital Expenditures in any fiscal year and not so expended may be carried over for expenditure in the immediately succeeding fiscal year. 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) Permitted Acquisitions; (d) loans by the Borrower or any Subsidiary to Servicios in an aggregate principal amount at any time outstanding not to exceed the amount thereof outstanding on the date of this Agreement plus $5,000,000; (e) as permitted by subsection 7.2(b)(iv); (f) 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; (g) expense accounts for, and other expense advances to, its directors, officers and employees in the ordinary course of business; (h) loans and advances to its officers and employees in an aggregate amount not to exceed $1,000,000 at any time outstanding; (i) the Borrower's purchase or redemption of its own Capital Stock to the extent permitted by Section 7.7; (j) current trade and customer accounts receivable that are for goods furnished or services rendered in the ordinary course of business and that are payable in accordance with Borrower's or any Subsidiary's customary trade terms; (k) Interest Rate Protection Agreements to the extent permitted under this Agreement, and Hedge Agreements entered into in the ordinary course of business for hedging purposes and not for speculative purposes; (l) the Borrower may repurchase its capital stock and/or options to purchase such stock held by directors, officers and employees of the Borrower or any Subsidiary upon the death, disability, retirement or termination of such directors, officers or employees or the exercise of such options, or from the shareholders of Borrower so long as the purpose is to acquire stock for reissuance to new employees of Borrower and its Subsidiaries; provided, that the amount expended for such purposes shall not exceed $1,000,000 in any fiscal year or $2,500,000 while this Agreement is in effect; (m) the Borrower and its Subsidiaries may acquire and own investments (including Indebtedness and other obligations) received in connection with the bankruptcy or reorganization of suppliers and customers and in settlement of delinquent obligations of, and other disputes with, customers and suppliers arising in the ordinary course of business; (n) investments acquired by the Borrower and its Subsidiaries in connection with Permitted Acquisitions; and (o) the Borrower's current investment in the Argent Classic Convertible Arbitrage Fund L.P., provided that such investment must be converted into cash or a Cash Equivalent within 90 days after the Closing Date. 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 Convertible Subordinated Debentures, (b) amend, modify or change, or consent or agree to any amendment, modification or change to any of the terms of any such Indebtedness or preferred Capital Stock which would be materially adverse to Lenders 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 a material contract, to the extent such amendment, modification or change could reasonably be expected to have a Material Adverse Effect, except that, after 90% of the original outstanding principal amount of Convertible Subordinated Debentures have been converted into common stock of the Borrower, the Borrower may, at any time when no Default or Event of Default has occurred and is continuing, repurchase or redeem the remaining outstanding Convertible Subordinated Debentures; provided that the Borrower may not repurchase or redeem such Convertible Subordinated Debentures at any time when the Consolidated Leverage Ratio is or, after giving effect to such repurchase or redemption, would be, greater than 3.75. 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 Borrower) unless such transaction (a) is otherwise permitted under this Agreement, and (b) is upon fair and reasonable terms no less favorable to 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; provided, that any such transaction involving more than $5,000,000 must be approved by a majority of the disinterested members of the Borrower's Board of Directors. 7.12 Limitation on Sales and Leasebacks. Enter into any arrangement with any Person providing for the leasing by the Borrower or any of its Subsidiaries of real or personal property which has been or is to be sold or transferred by 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 Borrower or such Subsidiary, if, after giving effect thereto, the amount of all indebtedness attributable to transactions consummated pursuant to this Section 7.12, plus the amount of Indebtedness outstanding pursuant to clause (c), (f) and (i) of Section 7.2, would exceed $15,000,000. 7.13 Limitation on Changes in Fiscal Year. Permit the fiscal year of the Borrower to end on a day other than June 30. 7.14 Limitation on Negative Pledge Clauses. Enter into with any Person any agreement, other than (a) this Agreement and the other Loan Documents and (b) any industrial revenue bonds, purchase money Liens 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 Borrower or any of its 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 including any business in the oil and gas well service industry. 7.16 Limitation on Consolidated Lease Expense. Permit Consolidated Lease Expense for any fiscal year of the Borrower and its Subsidiaries to exceed $20,000,000. 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 three 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 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 shall prove to have been incorrect in any material respect on or as of the date made or deemed made; or (c) The Borrower or any other Loan Party shall default in the observance or performance of any agreement contained in Section 7; or (d) 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 8), and such default shall continue unremedied for a period of 30 days; or (e) The Borrower or any of its 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 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 Borrower and its Subsidiaries the outstanding principal amount of which exceeds in the aggregate $1,000,000; or (f) (i) The Borrower or any of its Subsidiaries (other than Servicios) 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 Borrower or any of its Subsidiaries (other than Servicios) shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Borrower or any of its Subsidiaries (other than Servicios) 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 Borrower or any of its Subsidiaries (other than Servicios) 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 Borrower or any of its Subsidiaries (other than Servicios) 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 Borrower or any of its Subsidiaries (other than Servicios) 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 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 Borrower or any of its Subsidiaries (other than Servicios) involving in the aggregate a liability (not paid or fully covered by insurance) of $2,000,000 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 material 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) Any Change of Control shall occur; 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 Borrower, 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 AGENTS 9.1 Appointment. Each Lender hereby irrevocably designates and appoints the Agents as the agents of such Lender under this Agreement and the other Loan Documents, and each Lender irrevocably authorizes each 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 such 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, no Agent shall 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 any Agent. 9.2 Delegation of Duties. Each 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. No Agent shall 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 Agents 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 any 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. No Agent shall 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 Agents. Each 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 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 Borrower), independent accountants and other experts selected by such Agent. The Agents 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. Each 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 in no event shall the Lenders be obligated to indemnify the Agents for any amounts described in the proviso to Section 9.7. Each 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. No Agent shall be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless such Agent has received written notice from a Lender 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 and the Collateral 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 or the Collateral Agent shall have received such directions, the Administrative Agent or the Collateral 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 Agents and Other Lenders. Each Lender expressly acknowledges that neither any Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Agents hereafter 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 any Agent to any Lender. Each Lender represents to each Agent that it has, independently and without reliance upon any Agent or any other Lender, and based on such documents and information as it 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 any 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 Administrative Agent hereunder, no Agent shall 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 such Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates. 9.7 Indemnification. The Lenders agree to indemnify each Agent in its capacity as such (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), ratably according to their respective Commitments, 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 any 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 any 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 such 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 Agents in Their Individual Capacities. Each 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 such Agent were not an 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 issued or participated in by it, each 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 an Agent, respectively, and the terms "Lender" and "Lenders" shall include each Agent in their individual capacities. 9.9 Successor Agents. The Administrative Agent or the Collateral Agent may resign as Administrative Agent or Collateral Agent, as the case may be, upon 10 days' notice to the Lenders. If the Administrative Agent or the Collateral Agent shall resign as Administrative Agent or Collateral Agent under this Agreement and the other Loan Documents, then the Required Lenders shall appoint from among the Lenders a successor agent in such capacity, which successor agent, so long as no Default or Event of Default shall have occurred and be continuing, 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 or the Collateral Agent, as the case may be, hereunder. Effective upon such appointment and approval, the terms "Administrative Agent" and "Collateral Agent" shall mean such successor agent, and the former Administrative Agent's or Collateral Agent's rights, powers and duties as such shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or Collateral Agent or any of the parties to this Agreement or any holders of the Notes. After any retiring Agent's resignation as 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 Agent under this Agreement and the other Loan Documents. 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 which is party to the relevant Loan Documents may, or, with the written consent of the Required Lenders, the Administrative Agent, the Arranger and each Loan Party which is a 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 and the Arranger, 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 Default and its consequences; provided that no such waiver and no such amendment, supplement or modification shall (i) forgive the principal amount of any Loan or any L/C Obligation, or extend the final scheduled date of maturity of any Loan, 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 waive any mandatory prepayment or make any change in the application of any prepayment of the Loans specified in the first sentence of Section 2.9(f) or in Section 2.15(a), or the right to refuse prepayments set forth in the penultimate sentence of Section 2.8, in each case without the consent of each Lender directly affected thereby, (ii) extend the scheduled date or reduce the amount of any amortization payment in respect of the Term Loans referred to in Section 2.6 without the consent of each Term Loan Lender directly affected thereby, (iii) extend the scheduled date or reduce the amount of any reduction of the Revolving Credit Commitments referred to in Section 2.3(c) without the consent of each Revolving Credit Lender directly affected thereby, (iv) 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, (v) amend, modify or waive any provision of Section 9 without the written consent of the Agents, 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 Agents and all future holders of the Notes. In the case of any waiver, the Loan Parties, the Lenders and the Agents 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 Borrower, the Administrative Agent, the Collateral Agent and the Arranger, and as set forth in Schedule 1.1A 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: The Borrower: Key Energy Group, Inc. Two Tower Center, Tenth Floor East Brunswick, New Jersey 08816 Attention: Mr. Francis D. John Telecopy: (908) 659-1526 Telephone: (908) 247-5148 The Administrative Agent: PNC Bank, N.A. 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 Attention: Mr. Thomas Grundman Telecopy: (412) 762-2571 Telephone: (412) 762-3025 The Collateral Agent: Norwest Bank Texas, N.A. 500 West Texas Avenue Midland, Texas 79701 Attention: Mr. Mark McKinney Telecopy: (915) 685-5441 Telephone: (915) 685-5149 The Arranger: Lehman Commercial Paper Inc. 3 World Financial Center New York, New York 10285 Attention: Michele 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, 2.7, 2.8 or 2.10 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 any Agent or any Lender, any right, remedy, power 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 Agents 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 (including any local counsel) to the Agents, (b) to pay or reimburse each Lender and each of the Agents 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 Agents, (c) to pay, indemnify, and hold each Lender and each 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 each 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 Borrower, any of its Subsidiaries, any of its Excluded 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. Without limiting the foregoing, and to the extent permitted by applicable law, the Borrower agrees not to assert, and hereby waives, and to cause each of its Subsidiaries not to assert and to so waive, all rights for contribution or any other rights of recovery with respect to all claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature, under or related to Environmental Laws, that any of them might have by statute or otherwise against any Indemnitee. The agreements 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; Participation and Assignments. (a) This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lenders, the Agents, all future holders of the Notes and their respective successors and assigns, except that the Borrower may not 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 2.17, 2.18 and 2.19 with respect to its participation in the Commitments and the Loans outstanding from time to time as if it was a Lender; provided that, in the case of Section 2.18, 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 the Arranger 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 or a Person under common management with such Lender, 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 Term Loan Commitments and/or 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 for any assignment which occurs at any time when any Event of Default shall have occurred and be continuing. (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 holder of such Note(s), 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 or a Person under common management with such Lender, 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) in connection with an assignment by Lehman or (z) in the case of an Assignee which is already a Lender or is an affiliate of a Lender or a Person under common management with 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 and/or Term Note, as the case may be, of the assigning Lender) a new Revolving Credit Note and/or Term Note, as the case may be, to the order of such Assignee in an amount equal to the Revolving Credit Commitment and/or 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 and/or Term Loan, as the case may be, upon request, a new Revolving Credit Note and/or Term Note, as the case may be, to the order of the assigning Lender in an amount equal to the Revolving Credit Commitment and/or 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) 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 Borrower and its Affiliates which has been delivered to such Lender by or on behalf of the Borrower pursuant to this Agreement or which has been delivered to such Lender by or on behalf of the Borrower in connection with such Lender's credit evaluation of the Borrower and its 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 Borrower, any such notice being expressly waived by the Borrower to the extent permitted by applicable law, upon any amount becoming due and payable by 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 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 Borrower. Each Lender agrees promptly to notify 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 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. 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 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 Borrower 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. 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 any Agent nor any Lender has any fiduciary relationship with or duty to the Borrower arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Agents and Lenders, on one hand, 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 Borrower and the Lenders. 10.14 WAIVERS OF JURY TRIAL. THE BORROWER, THE AGENTS 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 Agents 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 Agents or any Lender from disclosing any such information (a) to the Agents 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 such 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. 10.16 Enforceability; Usury. In no event shall any provision of this Agreement, the Notes, or any other instrument evidencing or securing the indebtedness of the Borrower hereunder ever obligate the Borrower to pay or allow any Lender to collect interest on the Notes or any other indebtedness of the Borrower hereunder at a rate greater than the maximum non-usurious rate permitted by applicable law (herein referred to as the "Highest Lawful Rate"), or obligate the Borrower to pay any taxes, assessments, charges, insurance premiums or other amounts to the extent that such payments, when added to the interest payable on the Notes, would be held to constitute the payment by the Borrower of interest at a rate greater than the Highest Lawful Rate; and this provision shall control over any provision to the contrary. Without limiting the generality of the foregoing, in the event the maturity of all or any part of the principal amount of the indebtedness of the Borrower hereunder shall be accelerated for any reason, then such principal amount so accelerated shall be credited with any interest theretofore paid thereon in advance and remaining unearned at the time of such acceleration. If, pursuant to the terms of this Agreement or the Notes, any funds are applied to the payment of any part of the principal amount of the indebtedness of the Borrower hereunder prior to the maturity thereof, then (a) any interest which would otherwise thereafter accrue on the principal amount so paid by such application shall be canceled, and (b) the indebtedness of the Borrower hereunder remaining unpaid after such application shall be credited with the amount of all interest, if any, theretofore collected on the principal amount so paid by such application and remaining unearned at the date of said application; and if the funds so applied shall be sufficient to pay in full all the indebtedness of the Borrower hereunder, then the Lenders shall refund to the Borrower all interest theretofore paid thereon in advance and remaining unearned at the time of such acceleration. Regardless of any other provision in this Agreement, or in any of the written evidences of the indebtedness of the Borrower hereunder, the Borrower shall never be required to pay any unearned interest on such indebtedness or any portion thereof, and shall never be required to pay interest thereon at a rate in excess of the Highest Lawful Rate construed by courts having competent jurisdiction thereof. 13 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 14 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. KEY ENERGY GROUP, INC.. By: _____________________________________ Name: Title: LEHMAN COMMERCIAL PAPER INC., as Arranger and as a Lender By: _____________________________________ Name: Title: PNC BANK, N.A. as Administrative Agent and as a Lender By: _____________________________________ Name: Title: NORWEST BANK TEXAS, N.A. as Collateral Agent and as a Lender By: _____________________________________ Name: Title: 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 15 THE BANK OF NEW YORK By: ____________________________________ Name: Daniel T. Gates Title: Vice President 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 16 BHF-BANK AKTIENGESELLSCHAFT By: ____________________________________ Name: Title: 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 17 MORGAN STANLEY SENIOR FUNDING, INC. By: _____________________________________ Name: Title: 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 18 CREDIT LYONNAIS, New York Branch By: _____________________________________ Name: Title: 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 19 PRIME INCOME TRUST By: __________________________________________ Name: Rafael Scolari Title:Vice President - Portfolio Manager 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 20 GOLDMAN SACHS CREDIT PARTNERS L.P. By: ______________________________________ Name: Title: 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 1 21 HIBERNIA NATIONAL BANK By: _______________________________________ Name: Title: 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 2 22 SENIOR HIGH INCOME PORTFOLIO, INC. By: _________________________________________ Name: Title: 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 3 23 DEBT STRATEGIES FUND, INC. By: _________________________________________ Name: Title: 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 4 24 ORIX USA CORPORATION By: ________________________________________ Name: Hiroyuki Miyauchi Title: Executive Vice President 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 5 25 PILGRIM AMERICA PRIME RATE TRUST By: ________________________________________ Name: Thomas C. Hunt Title: 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 6 26 ROYALTON COMPANY BY PACIFIC INVESTMENT MANAGEMENT COMPANY, as its Investment Advisor By: _________________________________________ Name: Title: 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 7 27 SKANDINAVISKA ENSKILDA BANKEN CORPORATION By: _________________________________________ Name: Sverker Johansson Title: By: _________________________________________ Name: Paul Robin Title: 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 8 28 CRESCENT/MACH I PARTNERS, L.P. BY: TCW ASSET MANAGEMENT COMPANY Its Investment Manager By: _________________________________________ Name: Title: 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 9 29 29 VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST By: _________________________________________ Name: Jeffrey W. Maillet Title: Senior Vice President and Director 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 10 1 Annex I Pricing Grid Applicable Margin Applicable Margin for Revolving Credit for Revolving Credit Consolidated Loans which are Loans which are Commitment verage Ratio Eurodollar Loans Base Rate Loans Fee Rate =3.5 to 1.0 but 2.50% 1.25% .375% less than 4.0 to 1.0 =3.0 to 1.0 but 2.25% 1.00% .375% less than 3.5 to 1.0 =2.50 to 1.0 but 1.75% .50% .25% less than 3.0 to 1.0 2.50 to 1.0 1.50% .25 .25% 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 11 1 Schedule 1.1A Commitments; Lending Offices and Addresses 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 12 1 Schedule 1.1B Mortgaged Property 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 13 1 Schedule 1.1C Oil and Gas Properties to be Mortgaged 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 14 1 Schedule 1.1D Rigs 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 15 1 Schedule 1.1E Vehicles 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 16 1 Schedule 2.6 TERM LOAN AMORTIZATION Date Principal Amount June 30, 1998 $ 500,000 September 30, 1998 $ 125,000 December 31, 1998 $ 125,000 March 31, 1999 $ 125,000 June 30, 1999 $ 125,000 September 30, 1999 $ 125,000 December 31, 1999 $ 125,000 March 31, 2000 $ 125,000 June 30, 2000 $ 125,000 September 30, 2000 $ 125,000 December 31, 2000 $ 125,000 March 31, 2001 $ 125,000 June 30, 2001 $ 125,000 September 30, 2001 $ 125,000 December 31, 2001 $ 125,000 March 31, 2002 $ 125,000 June 30, 2002 $ 125,000 September 30, 2002 $ 8,750,000 December 31, 2002 $ 8,750,000 March 31, 2003 $ 8,750,000 June 30, 2003 $ 8,750,000 September 30, 2003 $ 20,625,000 December 31, 2003 $ 20,625,000 March 31, 2004 $ 20,625,000 June 30, 2004 $ 20,625,000 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 17 1 Schedule 3.1 Existing Letters of Credit Account Party Issuer Amount Number Beneficiary 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 18 2 Schedule 4.4 Consents 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 19 3 Schedule 4.8 Other Real Property Interests 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 20 1 Schedule 4.15 Subsidiaries 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 21 1 Schedule 4.16 Existing Credit Facilities 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 22 1 Schedule 4.19(b) UCC Filing Jurisdictions 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 23 1 Schedule 4.19(c) Mortgage Filing Jurisdictions 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 24 1 Schedule 4.19(d) Oil and Gas Mortgage Filing Jurisdictions 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 25 1 Schedule 6.11(e) Mortgaged Properties to be Covered by Environmental Reports 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 26 1 Schedule 7.2 Existing Indebtedness 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 27 1 Schedule 7.3 Existing Liens 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 28 EXECUTION COPY $255,000,000 CREDIT AGREEMENT among KEY ENERGY GROUP, INC. THE SEVERAL LENDERS FROM TIME TO TIME PARTIES HERETO PNC BANK, N.A., as Administrative Agent NORWEST BANK TEXAS, N.A., as Collateral Agent and LEHMAN COMMERCIAL PAPER INC., as Advisor, Arranger and Syndication Agent Dated as of June 6, 1997 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 29 Page TABLE OF CONTENTS Page SECTION 1. DEFINITIONS..................................................... 1 1.1 Defined Terms................................................. 1 1.2 Other Definitional Provisions................................. 20 SECTION 2. AMOUNT AND TERMS OF COMMITMENTS................................. 21 2.1 Term Loans.................................................... 21 2.2 Procedure for Term Loan Borrowing............................. 21 2.3 Revolving Credit Commitments.................................. 21 2.4 Procedure for Revolving Credit Borrowing...................... 22 2.5 Commitment Fees, etc. ........................................ 22 2.6 Repayment of Loans; Evidence of Debt.......................... 23 2.7 Optional Termination or Reduction of Revolving Credit Commit.. 24 2.8 Optional Prepayments.......................................... 24 2.9 Mandatory Prepayments and Commitment Reductions............... 25 2.10 Conversion and Continuation Options.......................... 27 2.11 Minimum Amounts and Maximum Number of Eurodollar Tranches.... 27 2.12 Interest Rates and Payment Dates............................. 28 2.13 Computation of Interest and Fees............................. 28 2.14 Inability to Determine Interest Rate......................... 29 2.15 Pro Rata Treatment and Payments.............................. 29 2.16 Illegality................................................... 30 2.17 Requirements of Law.......................................... 31 2.18 Taxes........................................................ 32 2.19 Indemnity.................................................... 34 2.20 Change of Lending Office..................................... 34 2.21 Use of Proceeds.............................................. 35 2.22 Replacement of Lenders....................................... 35 SECTION 3. LETTERS OF CREDIT............................................... 35 3.1 L/C Commitment................................................ 35 3.2 Procedure for Issuance of Letter of Credit.................... 36 3.3 Fees, Commissions and Other Charges........................... 36 3.4 L/C Participation............................................. 36 3.5 Reimbursement Obligation of the Borrower...................... 37 3.6 Obligations Absolute.......................................... 38 3.7 Letter of Credit Payments..................................... 38 3.8 Applications.................................................. 38 SECTION 4. REPRESENTATIONS AND WARRANTIES.................................. 38 4.1 Financial Condition........................................... 39 4.2 No Change................................................. ... 39 4.3 Corporate Existence; Compliance with Law...................... 40 4.4 Corporate Power; Authorization; Enforceable Obligations....... 40 4.5 No Legal Bar.................................................. 40 4.6 No Material Litigation........................................ 40 4.7 No Default.................................................... 41 4.8 Ownership of Property; Liens............................... .. 41 4.9 Intellectual Property......................................... 41 4.10 No Burdensome Restrictions................................... 41 4.11 Taxes........................................................ 41 4.12 Federal Regulations.......................................... 41 4.13 ERISA........................................................ 42 4.14 Investment Company Act; Other Regulations.................... 42 4.15 Subsidiaries................................................. 42 4.16 Purpose of Loans; Limitations on Use......................... 42 4.17 Environmental Matters........................................ 43 4.18 Accuracy of Information...................................... 44 4.19 Security Documents........................................... 45 4.20 Solvency..................................................... 46 4.21 Labor Matters................................................ 46 4.22 Indenture.................................................... 46 4.23 Excluded Subsidiaries........................................ 46 4.24 Oil and Gas Properties....................................... 46 SECTION 5. CONDITIONS PRECEDENT............................................ 46 5.1 Conditions to Initial Extension of Credit..................... 46 5.2 Conditions to Each Extension of Credit........................ 49 SECTION 6. AFFIRMATIVE COVENANTS........................................... 49 6.1 Financial Statements.......................................... 49 6.2 Certificates; Other Information............................... 50 6.3 Payment of Obligations........................................ 52 6.4 Conduct of Business and Maintenance of Existence, etc. ...... 52 6.5 Maintenance of Property; Insurance............................ 52 6.6 Inspection of Property; Books and Records; Discussions........ 52 6.7 Notices....................................................... 52 6.8 Environmental Laws............................................ 53 6.9 Further Assurances............................................ 55 6.10 Additional Collateral........................................ 55 6.11 Post-Closing Matters........................................ 57 6.12 Interest Rate Protection Agreements.......................... 58 SECTION 7. NEGATIVE COVENANTS.............................................. 58 7.1 Financial Condition Covenants................................. 58 7.2 Limitation on Indebtedness.................................... 61 7.3 Limitation on Liens........................................... 62 7.4 Limitation on Guarantee Obligations........................... 63 7.5 Limitation on Fundamental Changes............................. 64 7.6 Limitation on Sale of Assets.................................. 64 7.7 Limitation on Restricted Payments............................. 65 7.8 Limitation on Capital Expenditures............................ 65 7.9 Limitation on Investments, Loans and Advances................. 66 7.10 Limitation on Optional Payments and Modifications of Debt Instruments and Organizational Documentation, etc. .... 67 7.11 Limitation on Transactions with Affiliates................... 68 7.12 Limitation on Sales and Leasebacks........................... 68 7.13 Limitation on Changes in Fiscal Year......................... 68 7.14 Limitation on Negative Pledge Clauses........................ 68 7.15 Limitation on Lines of Business.............................. 68 7.16 Limitation on Consolidated Lease Expense..................... 68 SECTION 8. EVENTS OF DEFAULT............................................... 69 SECTION 9. THE AGENTS...................................................... 72 9.1 Appointment................................................... 72 9.2 Delegation of Duties.......................................... 72 9.3 Exculpatory Provisions........................................ 72 9.4 Reliance by Agents............................................ 72 9.5 Notice of Default............................................. 73 9.6 Non-Reliance on Agents and Other Lenders...................... 73 9.7 Indemnification............................................... 74 9.8 Agents in Their Individual Capacities......................... 74 9.9 Successor Agents.............................................. 74 SECTION 10. MISCELLANEOUS.................................................. 75 10.1 Amendments and Waivers....................................... 75 10.2 Notices...................................................... 75 10.3 No Waiver; Cumulative Remedies............................... 76 10.4 Survival.....................................................77 10.5 Payment of Expenses and Taxes................................ 77 10.6 Successors and Assigns; Participation and Assignments........ 78 10.7 Adjustments; Set-off..........................................81 10.8 Counterparts................................................. 81 10.9 Severability................................................. 81 10.10 Integration..................................................82 10.11 GOVERNING LAW................................................82 10.12 Submission To Jurisdiction; Waivers..........................82 10.13 Acknowledgements............................................ 82 10.14 WAIVERS OF JURY TRIAL....................................... 83 10.15 Confidentiality............................................. 83 10.16 Enforceability; Usury....................................... 83 -i- 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 30 ANNEXES: I Pricing Grid SCHEDULES: 1.1A Commitments; Lending Offices and Addresses 1.1B Real Property to be Mortgaged (Non-Oil and Gas Properties) 1.1C Oil and Gas Properties to be Mortgaged 2.6 Term Loan Amortization 3.1 Existing Letters of Credit 4.4 Consents 4.8 Other Real Property Interests 4.15 Subsidiaries 4.16 Existing Credit Facilities 4.19(b) UCC Filing Jurisdictions 4.19(c) Mortgage Filing Jurisdictions 4.19(d) Oil and Gas Mortgage Filing Jurisdictions 6.11(e) Mortgaged Properties to be Covered by Environmental Reports 7.2 Existing Indebtedness 7.3 Existing 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 Term Note D Form of Closing Certificate E-1 Legal Opinion of Jack D. Loftis, Jr., Esq. E-2 Form of Opinion of Porter & Hedges F Form of Exemption Certificate G Form of Assignment and Acceptance -ii- 053113\0942\01675\9744AU7K.CRA 08/26/97 11:51am 31 1 EXHIBIT C-1 FORM OF REVOLVING CREDIT NOTE THIS NOTE AND THE OBLIGATIONS REPRESENTED HEREBY MAY NOT BE TRANSFERRED EXCEPT IN COMPLIANCE WITH THE TERMS AND PROVISIONS OF THE CREDIT AGREEMENT REFERRED TO BELOW. TRANSFERS OF THIS NOTE AND THE OBLIGATIONS REPRESENTED HEREBY MUST BE RECORDED IN THE REGISTER MAINTAINED BY THE ADMINISTRATIVE AGENT PURSUANT TO THE TERMS OF SUCH CREDIT AGREEMENT. $____________ New York, New York June 6, 1997 FOR VALUE RECEIVED, the undersigned, Key Energy Group, Inc., a Maryland corporation (the "Borrower"), hereby unconditionally promises to pay to (the "Lender") or its registered assigns at the office of PNC Bank, N.A. located at 249 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2707, in lawful money of the United States and in immediately available funds, on the Revolving Credit Termination Date the principal amount of (a) DOLLARS ($ ), or, if less, (b) the aggregate unpaid principal amount of all Revolving Credit Loans made by the Lender to the Borrower pursuant to Section 2.3 of the Credit Agreement, as hereinafter defined. The Borrower further agrees to pay interest in like money at such office on the unpaid principal amount hereof from time to time outstanding at the rates and on the dates specified in Section 2.12 of such Credit Agreement. The holder of this Note is authorized to endorse on the schedules annexed hereto and made a part hereof or on a continuation thereof which shall be attached hereto and made a part hereof the date, Type and amount of each Revolving Credit Loan made pursuant to the Credit Agreement and the date and amount of each payment or prepayment of principal thereof, each continuation thereof, each conversion of all or a portion thereof to another Type and, in the case of Eurodollar Loans, the length of each Interest Period with respect thereto. Each such endorsement shall constitute prima facie evidence of the accuracy of the information endorsed. The failure to make any such endorsement or any error in any such endorsement shall not affect the obligations of the Borrower in respect of any Revolving Credit Loan. This Note (a) is one of the Revolving Credit Notes referred to in the Credit Agreement dated as of June 6, 1997 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among the Borrower, the Lender, the other banks and financial institutions or entities from time to time parties thereto, PNC Bank, N.A., as Administrative Agent, Norwest Bank Texas, N.A., as Collateral Agent, and Lehman Commercial Paper Inc., as Advisor, Arranger and Syndication Agent, (b) is subject to the provisions of the Credit Agreement and (c) is subject to optional and mandatory prepayment in whole or in part as provided in the Credit Agreement. This Note is secured and guaranteed as provided in the Loan Documents. Reference is hereby made to the Loan Documents for a description of the properties and assets in which a security interest has been granted, the nature and extent of the security and the guarantees, the terms and conditions upon which the security interests and each guarantee were granted and the rights of the holder of this Note in respect thereof. 053113\0942\01675\974GG3VX.NOT 32 2 Upon the occurrence of any one or more of the Events of Default, all principal and all accrued interest then remaining unpaid on this Note shall become, or may be declared to be, immediately due and payable, all as provided in the Credit Agreement. All parties now and hereafter liable with respect to this Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive presentment, demand, protest and all other notices of any kind. Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN OR IN THE CREDIT AGREEMENT, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AND IN ACCORDANCE WITH THE REGISTRATION AND OTHER PROVISIONS OF SECTION 10.6 OF THE CREDIT AGREEMENT. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. KEY ENERGY GROUP, INC. By: _______________________________ Name: Title: 053113\0942\01675\974GG3VX.NOT 33 1 Schedule A to Revolving Credit Note LOANS, CONVERSIONS AND REPAYMENTS OF BASE RATE LOAN Amount Amount of Base Rate Amount of Base Rate Converted to Amount of Principal of Loans Converted to Unpaid Principal Balance Date Loans Base Rate Loans Base Rate Loans Repaid Eurodollar Loans of Base Rate Loans Notation Made By ================ ========================== ========================== ========================== ========================== ========================== =================== 053113\0942\01675\974GG3VX.NOT 34 1 Schedule B to Revolving Credit Note LOANS, CONTINUATIONS, CONVERSIONS AND REPAYMENTS OF EURODOLLAR LOANS Interest Period and Amount of Principal of Amount of Eurodollar Unpaid Principal Amount of Amount Converted Eurodollar Rate with Eurodollar Loans Loans Converted to Balance of Eurodollar Notation Date Eurodollar Loans to Eurodollar Loans Respect Thereto Repaid Base Rate Loans Loans Made By ============== ===================== ===================== ======================= ======================= ======================= ======================= ==================== 053113\0942\01675\974GG3VX.NOT 35 1 EXHIBIT C-2 FORM OF TERM NOTE THIS NOTE AND THE OBLIGATIONS REPRESENTED HEREBY MAY NOT BE TRANSFERRED EXCEPT IN COMPLIANCE WITH THE TERMS AND PROVISIONS OF THE CREDIT AGREEMENT REFERRED TO BELOW. TRANSFERS OF THIS NOTE AND THE OBLIGATIONS REPRESENTED HEREBY MUST BE RECORDED IN THE REGISTER MAINTAINED BY THE ADMINISTRATIVE AGENT PURSUANT TO THE TERMS OF SUCH CREDIT AGREEMENT. $____________ New York, New York June 6, 1997 FOR VALUE RECEIVED, the undersigned, Key Energy Group, Inc., a Maryland corporation (the "Borrower"), hereby unconditionally promises to pay to (the "Lender") or its registered assigns at the office of PNC Bank, N.A. located at 249 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2707, in lawful money of the United States and in immediately available funds, the principal amount of (a) DOLLARS ($ ), or, if less, (b) the unpaid principal amount of the Term Loan made by the Lender pursuant to Section 2.1 of the Credit Agreement, as hereinafter defined. The principal amount shall be paid in the amounts and on the dates specified in Section 2.6 of the Credit Agreement. The Borrower further agrees to pay interest in like money at such office on the unpaid principal amount hereof from time to time outstanding at the rates and on the dates specified in Section 2.12 of the Credit Agreement. The holder of this Note is authorized to endorse on the schedules annexed hereto and made a part hereof or on a continuation thereof which shall be attached hereto and made a part hereof the date, Type and amount of the Term Loan and the date and amount of each payment or prepayment of principal with respect thereto, each conversion of all or a portion thereof to another Type, each continuation of all or a portion thereof as the same Type and, in the case of Eurodollar Loans, the length of each Interest Period with respect thereto. Each such endorsement shall constitute prima facie evidence of the accuracy of the information endorsed. The failure to make any such endorsement or any error in any such endorsement shall not affect the obligations of the Borrower in respect of the Term Loan. This Note (a) is one of the Term Notes referred to in the Credit Agreement dated as of June 6, 1997 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among the Borrower, the Lender, the other banks and financial institutions or entities from time to time parties thereto, PNC Bank, N.A., as Administrative Agent, Norwest Bank Texas, N.A., as Collateral Agent, and Lehman Commercial Paper Inc., as Advisor, Arranger and Syndication Agent, (b) is subject to the provisions of the Credit Agreement and (c) is subject to optional and mandatory prepayment in whole or in part as provided in the Credit Agreement. This Note is secured and guaranteed as provided in the Loan Documents. Reference is hereby made to the Loan Documents for a description of the properties and assets in which a security interest has been granted, the nature and extent of the security and the guarantees, the terms and conditions upon which the security interests and each guarantee were granted and the rights of the holder of this Note in respect thereof. 053113\0942\01675\974GGGKV.NOT 36 2 Upon the occurrence of any one or more of the Events of Default, all principal and all accrued interest then remaining unpaid on this Note shall become, or may be declared to be, immediately due and payable, all as provided in the Credit Agreement. All parties now and hereafter liable with respect to this Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive presentment, demand, protest and all other notices of any kind. Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN OR IN THE CREDIT AGREEMENT, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AND IN ACCORDANCE WITH THE REGISTRATION AND OTHER PROVISIONS OF SECTION 10.6 OF THE CREDIT AGREEMENT. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. KEY ENERGY GROUP, INC. By: _______________________________ Name: Title: 053113\0942\01675\974GGGKV.NOT 37 1 Schedule A to Term Note LOANS, CONVERSIONS AND REPAYMENTS OF BASE RATE LOANS Amount Amount of Base Rate Amount of Base Rate Converted to Amount of Principal of Loans Converted to Unpaid Principal Balance Date Loans Base Rate Loans Base Rate Loans Repaid Eurodollar Loans of Base Rate Loans Notation Made By ================ ========================== ========================== ========================== ========================== ========================== =================== 053113\0942\01675\974GGGKV.NOT 38 1 Schedule B to Term Note LOANS, CONTINUATIONS, CONVERSIONS AND REPAYMENTS OF EURODOLLAR LOANS Interest Period and Amount of Principal of Amount of Eurodollar Unpaid Principal Amount of Amount Converted Eurodollar Rate with Eurodollar Loans Loans Converted to Balance of Eurodollar Notation Date Eurodollar Loans to Eurodollar Loans Respect Thereto Repaid Base Rate Loans Loans Made By ============== ===================== ===================== ======================= ======================= ======================= ======================= ==================== 053113\0942\01675\974GGGKV.NOT 39 EX-10.40 10 MASTER GUARANTEE AND COLLATERAL AGREEMENT MASTER GUARANTEE AND COLLATERAL AGREEMENT, dated as of June 6, 1997, made by each of the signatories hereto (together with any other entity that may become a party hereto as provided herein, the "Grantors"), in favor of NORWEST BANK TEXAS, N.A., as Collateral Agent (in such capacity, the "Collateral Agent") for the banks and other financial institutions (the "Lenders") from time to time parties to the Credit Agreement, dated as of June 6, 1997 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among KEY ENERGY GROUP, INC. (the "Borrower"), the Lenders, PNC BANK, N.A., as Administrative Agent (the "Administrative Agent") and the Collateral Agent. W I T N E S S E T H : WHEREAS, pursuant to the Credit Agreement, the Lenders have severally agreed to make extensions of credit to the Borrower upon the terms and subject to the conditions set forth therein; WHEREAS, the Borrower is a member of an affiliated group of companies that includes each other Grantor; WHEREAS, the proceeds of the extensions of credit under the Credit Agreement will be used in part to enable the Borrower to make valuable transfers to one or more of the other Grantors in connection with the operation of their respective businesses; WHEREAS, the Borrower and the other Grantors are engaged in related businesses, and each Grantor will derive substantial direct and indirect benefit from the making of the extensions of credit under the Credit Agreement; and WHEREAS, it is a condition precedent to the obligation of the Lenders to make their respective extensions of credit to the Borrower under the Credit Agreement that the Grantors shall have executed and delivered this Agreement to the Collateral Agent for the ratable benefit of the Lenders; NOW, THEREFORE, in consideration of the premises and to induce the Lenders to enter into the Credit Agreement and to make their respective extensions of credit to the Borrower thereunder, each Grantor hereby agrees with the Collateral Agent, for the ratable benefit of the Lenders, as follows: SECTION 1. DEFINED TERMS 1.1 Definitions. (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement, and the following terms which are defined in the Uniform Commercial Code in effect in the State of New York on the date hereof are used herein as so defined: Accounts, Chattel Paper, Documents, Farm Products, Instruments and Inventory. (b) The following terms shall have the following meanings: 053113\0942\02497\9764JKRJ.GUA 09/10/97 10:34AM 40 2 "Agreement": this Master Guarantee and Collateral Agreement, as the same may be amended, supplemented or otherwise modified from time to time. "Borrower Obligations": the collective reference to the unpaid principal of and interest on the Loans and Reimbursement Obligations and all other obligations and liabilities of the Borrower (including, without limitation, interest accruing at the then applicable rate provided in the Credit Agreement after the maturity of the Loans and Reimbursement Obligations and interest accruing at the then applicable rate provided in the Credit Agreement 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) to the Administrative Agent, the Collateral Agent or any Lender (or, in the case of any Hedge Agreement referred to below, any Affiliate of 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, the Credit Agreement, this Agreement, the other Loan Documents, any Letter of Credit or any Hedge Agreement entered into by the Borrower with any Lender (or, in the case of any Hedge Agreement, any Affiliate of any Lender) in each case whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Administrative Agent, the Collateral Agent or to the Lenders that are required to be paid by the Borrower pursuant to the terms of any of the foregoing agreements). "Collateral": as defined in Section 3. "Collateral Account": any collateral account established by the Collateral Agent as provided in Section 6.1 or 6.4. "Copyrights": (i) all copyrights arising under the laws of the United States, any other country or any political subdivision thereof, whether registered or unregistered and whether published or unpublished, all registrations and recordings thereof, and all applications in connection therewith, including, without limitation, all registrations, recordings and applications in the United States Copyright Office, and (ii) the right to obtain all renewals thereof. "Copyright Licenses": any written agreement naming any Grantor as licensor or licensee, granting any right under any Copyright, including, without limitation, the grant of rights to manufacture, distribute, exploit and sell materials derived from any Copyright. "Equipment": all "equipment" as such term is defined in Section 9-109 of the Uniform Commercial Code in effect in the State of New York on the date hereof, excluding any Vehicles and Excluded Vehicles covered by a certificate of title issued by any State. "Excluded Assets": any assets of the type specified in Sections 3(a) through 3(l) now owned or hereafter acquired by any Grantor or in which any Grantor has or at any time in the future may acquire any right, title or interest and which is, but only so long as the same is, subject to any Lien (x) in existence on the date hereof listed on Schedule 7.3 of the Credit Agreement, (y) permitted under clauses (f), (i) and (j) of Section 7.3 of the Credit 053113\0942\02497\9764JKRJ.GUA 09/10/97 10:34AM 41 3 Agreement, which, in the case of either (x) or (y) prohibits the granting of a Lien to the Collateral Agent (unless an appropriate consent of the lienholder thereof has been obtained). "Excluded Vehicles": all trucks, trailers, construction and earth moving equipment, drilling rigs, well service rigs and workover rigs covered by a certificate of title issued by any State and having a purchase price (or if acquired for other than cash, a fair market value at the time of acquisition) of less than $50,000. "General Intangibles": all "general intangibles" as such term is defined in Section 9-106 of the Uniform Commercial Code in effect in the State of New York on the date hereof and, in any event, including, without limitation, with respect to any Grantor, all contracts, agreements, instruments and indentures in any form, and portions thereof, to which such Grantor is a party or under which such Grantor has any right, title or interest or to which such Grantor or any property of such Grantor is subject, as the same may from time to time be amended, supplemented or otherwise modified, including, without limitation, (i) all rights of such Grantor to receive moneys due and to become due to it thereunder or in connection therewith, (ii) all rights of such Grantor to damages arising thereunder and (iii) all rights of such Grantor to perform and to exercise all remedies thereunder, in each case to the extent the grant by such Grantor of a security interest pursuant to this Agreement in its right, title and interest in such contract, agreement, instrument or indenture is not prohibited by such contract, agreement, instrument or indenture without the consent of any other party thereto, would not give any other party to such contract, agreement, instrument or indenture the right to terminate its obligations thereunder, or is permitted with consent if all necessary consents to such grant of a security interest have been obtained from the other parties thereto (it being understood that the foregoing shall not be deemed to obligate such Grantor to obtain such consents); provided, that the foregoing limitation shall not affect, limit, restrict or impair the grant by such Grantor of a security interest pursuant to this Agreement in any Receivable or any money or other amounts due or to become due under any such contract, agreement, instrument or indenture. "Guarantor Obligations": with respect to any Guarantor, the collective reference to (i) the Borrower Obligations and (ii) all obligations and liabilities of such Guarantor which may arise under or in connection with this Agreement or any other Loan Document to which such Guarantor is a party, in each case whether on account of guarantee obligations, reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Administrative Agent, the Collateral Agent or to the Lenders that are required to be paid by such Guarantor pursuant to the terms of this Agreement or any other Loan Document). "Guarantors": the collective reference to each Grantor other than the Borrower. "Hedge Agreements": as to any Person, all foreign exchange transactions, and commodity, currency and interest rate swaps, caps or collar agreements or similar arrangements entered into by such Person providing for protection against fluctuations in hydrocarbon prices, interest rates or currency exchange rates or the exchange of nominal interest obligations, either generally or under specific contingencies. 053113\0942\02497\9764JKRJ.GUA 42 4 "Intellectual Property": the collective reference to all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including, without limitation, the Copyrights, the Copyright Licenses, the Patents, the Patent Licenses, the Trademarks and the Trademark Licenses, and all rights to sue at law or in equity for any infringement or other impairment thereof, including the right to receive all proceeds and damages therefrom. "Intercompany Note": any promissory note evidencing loans made by any Grantor to the Borrower or any of its Subsidiaries. "Issuers": the collective reference to each issuer of a Pledged Security. "New York UCC": the Uniform Commercial Code as from time to time in effect in the State of New York. "Obligations": (i) in the case of the Borrower, the Borrower Obligations, and (ii) in the case of each Guarantor, its Guarantor Obligations. "Patents": (i) all letters patent of the United States, any other country or any political subdivision thereof, all reissues and extensions thereof and all goodwill associated therewith, (ii) all applications for letters patent of the United States or any other country and all divisions, continuations and continuations-in-part thereof and (iii) all rights to obtain any reissues or extensions of the foregoing. "Patent License": all agreements, whether written or oral, providing for the grant by or to any Grantor of any right to manufacture, use or sell any invention covered in whole or in part by a Patent. "Pledged Notes": all promissory notes listed on Schedule 2, all other Intercompany Notes at any time issued to any Grantor and all other promissory notes issued to or held by any Grantor in an amount in excess of $500,000 (other than promissory notes issued in connection with extensions of trade credit by any Grantor in the ordinary course of business). "Pledged Securities": the collective reference to the Pledged Notes and the Pledged Stock. "Pledged Stock": the shares of Capital Stock listed on Schedule 2, together with any other shares, stock certificates, options or rights of any nature whatsoever in respect of the Capital Stock of any Person that may be issued or granted to, or held by, any Grantor after the date of this Agreement and while this Agreement is in effect which is required by the Credit Agreement to be pledged hereunder. "Proceeds": all "proceeds" as such term is defined in Section 9-306(1) of the Uniform Commercial Code in effect in the State of New York on the date hereof and, in any event, shall include, without limitation, all dividends or other income from the Pledged Securities, collections thereon or distributions or payments with respect thereto. 053113\0942\02497\9764JKRJ.GUA 43 5 "Receivable": any right to payment for goods sold or leased or for services rendered, whether or not such right is evidenced by an Instrument or Chattel Paper and whether or not it has been earned by performance (including, without limitation, any Account). "Securities Act": the Securities Act of 1933, as amended. "Trademarks": (i) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers, and all goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, or otherwise, and all common-law rights related thereto, and (ii) the right to obtain all renewals thereof. "Trademark License": any agreement, whether written or oral, providing for the grant by or to any Grantor of any right to use any Trademark. "Vehicles": (a) all trucks, trailers, construction and earth moving equipment, drilling rigs, well service rigs, workover rigs and other vehicles not covered by a certificate of title issued by any State, including without limitation any of the foregoing listed on Schedule 8, (b) all trucks, trailers, construction and earth moving equipment, drilling rigs, well service rigs, workover rigs and other vehicles covered by a certificate of title issued by any State and having a purchase price (or if acquired for other than cash, a fair market value at the time of acquisition) in excess of $50,000, (c) without duplication of the foregoing, all items listed on Schedule 8 and (d) all tires and other appurtenances to any of the foregoing. 1.2 Other Definitional Provisions. (a) The words "hereof," "herein", "hereto" 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 and Schedule references are to this Agreement unless otherwise specified. (b) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. (c) Where the context requires, terms relating to the Collateral or any part thereof, when used in relation to a Grantor, shall refer to such Grantor's Collateral or the relevant part thereof. SECTION 2. GUARANTEE 2.1 Guarantee. (a) Each of the Guarantors hereby, jointly and severally, unconditionally and irrevocably, guarantees to the Lenders, and to the Collateral Agent, for the ratable benefit of the Lenders, and their respective successors, indorsees, transferees and 053113\0942\02497\9764JKRJ.GUA 44 6 assigns, the prompt and complete payment and performance by the Borrower when due (whether at the stated maturity, by acceleration or otherwise) of the Borrower Obligations. (b) Anything herein or in any other Loan Document to the contrary notwithstanding, the maximum liability of each Guarantor hereunder and under the other Loan Documents shall in no event exceed the amount which can be guaranteed by such Guarantor under applicable federal and state laws relating to the insolvency of debtors (after giving effect to the right of contribution established in Section 2.2). (c) Each Guarantor agrees that the Borrower Obligations may at any time and from time to time exceed the amount of the liability of such Guarantor hereunder without impairing the guarantee contained in this Section 2 or affecting the rights and remedies of the Collateral Agent or any Lender hereunder. (d) Subject to the limitations in Section 2.1(b), the guarantee contained in this Section 2 shall remain in full force and effect until all the Borrower Obligations and the obligations of each Guarantor under the guarantee contained in this Section 2 shall have been satisfied by payment in full, no Letter of Credit shall be outstanding and the Commitments shall be terminated, notwithstanding that from time to time during the term of the Credit Agreement the Borrower may be free from any Borrower Obligations. (e) No payment made by the Borrower, any of the Guarantors, any other guarantor or any other Person or received or collected by the Administrative Agent, the Collateral Agent or any Lender from the Borrower, any of the Guarantors, any other guarantor or any other Person by virtue of any action or proceeding or any set-off or appropriation or application at any time or from time to time in reduction of or in payment of the Borrower Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of any Guarantor hereunder which shall, notwithstanding any such payment (other than any payment made by such Guarantor in respect of the Borrower Obligations or any payment received or collected from such Guarantor in respect of the Borrower Obligations), remain liable for the Borrower Obligations up to the maximum liability of such Guarantor hereunder until the Borrower Obligations are paid in full, no Letter of Credit shall be outstanding and the Commitments are terminated. 2.2 Right of Contribution. Each Guarantor hereby agrees that to the extent that a Guarantor shall have paid more than its proportionate share of any payment made hereunder, such Guarantor shall be entitled to seek and receive contribution from and against any other Guarantor hereunder which has not paid its proportionate share of such payment. Each Guarantor's right of contribution shall be subject to the terms and conditions of Section 2.3. The provisions of this Section 2.2 shall in no respect limit the obligations and liabilities of any Guarantor to the Collateral Agent and the Lenders, and each Guarantor shall remain liable to the Collateral Agent and the Lenders for the full amount guaranteed by such Guarantor hereunder. 2.3 No Subrogation. Notwithstanding any payment made by any Guarantor hereunder or any set-off or application of funds of any Guarantor by the Administrative Agent, the Collateral Agent or any Lender, no Guarantor shall be entitled to be subrogated to 053113\0942\02497\9764JKRJ.GUA 45 7 any of the rights of the Administrative Agent, the Collateral Agent or any Lender against the Borrower or any other Guarantor or any collateral security or guarantee or right of offset held by the Collateral Agent or any Lender for the payment of the Borrower Obligations, nor shall any Guarantor seek or be entitled to seek any contribution or reimbursement from the Borrower or any other Guarantor in respect of payments made by such Guarantor hereunder, until all amounts owing to the Administrative Agent, the Collateral Agent and the Lenders by the Borrower on account of the Borrower Obligations are paid in full, no Letter of Credit shall be outstanding and the Commitments are terminated. If any amount shall be paid to any Guarantor on account of such subrogation rights at any time when all of the Borrower Obligations shall not have been paid in full, such amount shall be held by such Guarantor in trust for Administrative Agent, the Collateral Agent and the Lenders, segregated from other funds of such Guarantor, and shall, forthwith upon receipt by such Guarantor, be turned over to the Collateral Agent in the exact form received by such Guarantor (duly indorsed by such Guarantor to the Collateral Agent, if required), to be applied against the Borrower Obligations, whether matured or unmatured, in the order specified in Section 6.5. 2.4 Amendments, etc. with respect to the Borrower Obligations. Each Guarantor shall remain obligated hereunder notwithstanding that, without any reservation of rights against any Guarantor and without notice to or further assent by any Guarantor, any demand for payment of any of the Borrower Obligations made by the Administrative Agent, the Collateral Agent or any Lender may be rescinded by the Administrative Agent, the Collateral Agent or such Lender and any of the Borrower Obligations continued, and the Borrower Obligations, or the liability of any other Person upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by the Administrative Agent, the Collateral Agent or any Lender, and the Credit Agreement and the other Loan Documents and any other documents executed and delivered in connection therewith may be amended, modified, supplemented or terminated, in whole or in part, as Administrative Agent, the Collateral Agent (or the Required Lenders or all Lenders, as the case may be) may deem advisable from time to time, and any collateral security, guarantee or right of offset at any time held by the Collateral Agent or any Lender for the payment of the Borrower Obligations may be sold, exchanged, waived, surrendered or released. Neither the Collateral Agent nor any Lender shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Borrower Obligations or for the guarantee contained in this Section 2 or any property subject thereto. 2.5 Guarantee Absolute and Unconditional. Each Guarantor waives any and all notice of the creation, renewal, extension or accrual of any of the Borrower Obligations and notice of or proof of reliance by the Administrative Agent, the Collateral Agent or any Lender upon the guarantee contained in this Section 2 or acceptance of the guarantee contained in this Section 2; the Borrower Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon the guarantee contained in this Section 2; and all dealings between the Borrower and any of the Guarantors, on the one hand, and the Administrative Agent, the Collateral Agent and the Lenders, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon the guarantee contained in this Section 2. 053113\0942\02497\9764JKRJ.GUA 46 8 Each Guarantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Borrower or any of the Guarantors with respect to the Borrower Obligations. Each Guarantor understands and agrees that subject to the limitations in Section 2.1(b) the guarantee contained in this Section 2 shall be construed as a continuing, absolute and unconditional guarantee of payment without regard to (a) the validity or enforceability of the Credit Agreement or any other Loan Document, any of the Borrower Obligations or any other collateral security therefor or guarantee or right of offset with respect thereto at any time or from time to time held by the Administrative Agent, the Collateral Agent or any Lender, (b) any defense, set-off or counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by the Borrower or any other Person against the Administrative Agent, the Collateral Agent or any Lender, or (c) any other circumstance whatsoever (with or without notice to or knowledge of the Borrower or such Guarantor) which constitutes, or might be construed to constitute, an equitable or legal discharge of the Borrower for the Borrower Obligations, or of such Guarantor under the guarantee contained in this Section 2, in bankruptcy or in any other instance. When making any demand hereunder or otherwise pursuing its rights and remedies hereunder against any Guarantor, Administrative Agent, the Collateral Agent or any Lender may, but shall be under no obligation to, make a similar demand on or otherwise pursue such rights and remedies as it may have against the Borrower, any other Guarantor or any other Person or against any collateral security or guarantee for the Borrower Obligations or any right of offset with respect thereto, and any failure by the Administrative Agent, the Collateral Agent or any Lender to make any such demand, to pursue such other rights or remedies or to collect any payments from the Borrower, any other Guarantor or any other Person or to realize upon any such collateral security or guarantee or to exercise any such right of offset, or any release of the Borrower, any other Guarantor or any other Person or any such collateral security, guarantee or right of offset, shall not relieve any Guarantor of any obligation or liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the Administrative Agent, the Collateral Agent or any Lender against any Guarantor. For the purposes hereof "demand" shall include the commencement and continuance of any legal proceedings. 2.6 Reinstatement. The guarantee contained in this Section 2 shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Borrower Obligations is rescinded or must otherwise be restored or returned by the Administrative Agent, the Collateral Agent or any Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower or any Guarantor, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, the Borrower or any Guarantor or any substantial part of its property, or otherwise, all as though such payments had not been made. 2.7 Payments. Each Guarantor hereby guarantees that payments hereunder will be paid to the Collateral Agent without set-off or counterclaim (other than a defense of payment and performance in full of the Borrower Obligations) in Dollars at the office of the Collateral Agent located at 500 West Texas Avenue, Midland, Texas 79701. 053113\0942\02497\9764JKRJ.GUA 47 9 SECTION 3. GRANT OF SECURITY INTEREST Each Grantor hereby assigns and transfers to the Collateral Agent, and hereby grants to the Collateral Agent, for the ratable benefit of the Lenders, a security interest in, all of the following property now owned or at any time hereafter acquired by such Grantor or in which such Grantor now has or at any time in the future may acquire any right, title or interest, but expressly excluding the Excluded Assets (collectively, the "Collateral"), as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of such Grantor's Obligations: (a) all Accounts; (b) all Chattel Paper; (c) all Documents; (d) all Equipment; (e) all General Intangibles; (f) all Instruments; (g) all Intellectual Property; (h) all Inventory; (i) all Pledged Securities; (j) all Vehicles; (k) all books and records pertaining to the Collateral; and (l) to the extent not otherwise included, all Proceeds and products of any and all of the foregoing and all collateral security and guarantees given by any Person with respect to any of the foregoing. SECTION 4. REPRESENTATIONS AND WARRANTIES To induce the Administrative Agent, the Collateral Agent and the Lenders to enter into the Credit Agreement and to induce the Lenders to make their respective extensions of credit to the Borrower thereunder, each Grantor hereby represents and warrants to the Administrative Agent, the Collateral Agent and each Lender that: 4.1 Representations in Credit Agreement. The representations and warranties of the Borrower set forth in Section 4 of the Credit Agreement which are specifically made in respect of a particular Guarantor or in respect of the Loan Documents to which such 053113\0942\02497\9764JKRJ.GUA 48 10 Guarantor is a party, each of which is hereby incorporated herein by reference, are true and correct in all material respects, and the Collateral Agent and each Lender shall be entitled to rely on each of them as if they were fully set forth herein, provided that each reference in each such representation and warranty to the Borrower's knowledge shall, for the purposes of this Section 4.1, be deemed to be a reference to such Guarantor's knowledge. 4.2 Title; No Other Liens. Except for the security interest granted to the Collateral Agent for the ratable benefit of the Lenders pursuant to this Agreement and the other Liens permitted to exist on the Collateral by the Credit Agreement, such Grantor owns each item of the Collateral free and clear of any and all Liens or claims of others. No financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except (i) the financing statements that have been filed in favor of the Collateral Agent, for the ratable benefit of the Lenders, pursuant to this Agreement, (ii) the financing statements listed on Schedule 9 in respect of the Existing Credit Facilities, duly executed termination statements in respect of each of which are being delivered to the Collateral Agent on the Closing Date and (iii) those filed with respect to Liens permitted by the Credit Agreement. 4.3 Perfected First Priority Liens. The security interests granted pursuant to this Agreement (a) upon completion of the filings and other actions specified on Schedule 3 will constitute valid perfected security interests in all of the Collateral in favor of the Collateral Agent, for the ratable benefit of the Lenders, as collateral security for such Grantor's Obligations, enforceable in accordance with the terms hereof against all creditors of such Grantor and, except as provided in Section 9-307 of the Uniform Commercial Code in effect in the relevant jurisdiction, any Persons purporting to purchase any Collateral from such Grantor and (b) are prior to all other Liens on the Collateral in existence on the date hereof except for (i) unrecorded Liens permitted by the Credit Agreement which have priority over the Liens on the Collateral by operation of law, (ii) Liens described on Schedule 9, provided that upon the repayment of the Indebtedness under the Existing Credit Facilities, all Liens listed on Schedule 9 showing CIT or Norwest as the Secured Party or Assignee shall be deemed deleted from such Schedule, and (iii) Liens permitted to be incurred pursuant to clauses (f), (i) and (j) of Section 7.3 of the Credit Agreement. 4.4 Chief Executive Office, Etc.. On the date hereof, such Grantor's jurisdiction of organization and the location of such Grantor's chief executive office, principal place of business and office where records concerning the Accounts of such Grantor are kept, or its sole place of business, are specified on Schedule 4. 4.5 Inventory and Equipment. On the date hereof, the Inventory and the Equipment (other than mobile goods) are kept at the locations listed on Schedule 5. 4.6 Farm Products. None of the Collateral constitutes, or is the Proceeds of, Farm Products. 4.7 Pledged Securities. (a) The shares of Pledged Stock pledged by such Grantor hereunder constitute all the issued and outstanding shares of all classes of the Capital 053113\0942\02497\9764JKRJ.GUA 49 11 Stock of each Issuer owned by such Grantor (except that not more than 65% of the Capital Stock of any other Foreign Subsidiary is required to be pledged hereunder). (b) All the shares of the Pledged Stock have been duly and validly issued and are fully paid and nonassessable (except that no such representation is made as to the Capital Stock issued by Servicios). (c) To the knowledge of the Borrower's executive management, each of the Pledged Notes constitutes the legal, valid and binding obligation of the obligor with respect thereto, enforceable in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. (d) Such Grantor is the record and beneficial owner of, and has good and indefeasible title to, the Pledged Securities pledged by it hereunder, free of any and all Liens or options in favor of, or claims of, any other Person, except the security interest created by this Agreement and except as permitted by the Credit Agreement. 4.8 Receivables. (a) No amount payable to such Grantor under or in connection with any Receivable is evidenced by any Instrument or Chattel Paper in an amount in excess of $500,000 (or in excess of $1,000,000 in the aggregate for all such Instruments and Chattel Paper) which has not been delivered to the Collateral Agent. (b) Receivables in respect of which the obligor is a Governmental Authority do not constitute more than 5% of the Receivables. (c) The amounts represented by such Grantor to the Lenders from time to time as owing to such Grantor in respect of the Receivables will at such times be accurate to the best knowledge of such Grantor. 4.9 Intellectual Property. The Borrower and its Subsidiaries have no material Intellectual Property on the date hereof. 4.10 Vehicles. Schedule 8 is a substantially complete and correct list of all Vehicles with a fair market value in excess of $50,000 owned by such Grantor on the date hereof. SECTION 5. COVENANTS Each Grantor covenants and agrees with the Collateral Agent and the Lenders that, from and after the date of this Agreement until the Obligations shall have been paid in full, no Letter of Credit shall be outstanding and the Commitments shall have terminated: 5.1 Covenants in Credit Agreement. In the case of each Guarantor, such Guarantor shall take, or shall refrain from taking, as the case may be, each action that is 053113\0942\02497\9764JKRJ.GUA 50 12 necessary to be taken or not taken, as the case may be, so that no Default or Event of Default is caused by the failure to take such action or to refrain from taking such action by such Guarantor or any of its Subsidiaries. 5.2 Delivery of Instruments and Chattel Paper. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any Instrument or Chattel Paper in an amount in excess of $500,000 (or in excess of $1,000,000 in the aggregate for all such Instruments and Chattel Paper), such Instrument or Chattel Paper shall be immediately delivered to the Collateral Agent, duly indorsed in a manner reasonably satisfactory to the Collateral Agent, to be held as Collateral pursuant to this Agreement. 5.3 Maintenance of Insurance. (a) Such Grantor will maintain, with financially sound and reputable companies, insurance policies (i) insuring the Inventory, Equipment and Vehicles against loss by fire, explosion, theft and such other casualties as may be customary in the business in which the Borrower is engaged and (ii) insuring such Grantor, the Collateral Agent and the Lenders against liability for personal injury and property damage relating to such Inventory, Equipment and Vehicles, such policies to be in such form and amounts and having such coverage as may be customary in the business in which the Borrower is engaged. (b) All such insurance shall (i) provide that no cancellation, material reduction in amount or material change in coverage thereof shall be effective until at least 30 days after receipt by the Collateral Agent of written notice thereof, (ii) name the Collateral Agent as insured party or loss payee, (iii) if reasonably requested by the Collateral Agent, include a breach of warranty clause and (iv) be otherwise customary in the business in which the Borrower is engaged. (c) The Borrower shall deliver to the Collateral Agent and the Lenders a report of a reputable insurance broker with respect to such insurance once in each calendar year and such supplemental reports with respect thereto as the Collateral Agent may from time to time reasonably request. 5.4 Payment of Obligations. Such Grantor will pay and discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all taxes, assessments and governmental charges or levies imposed upon a material portion of the Collateral or in respect of income or profits therefrom, as well as all claims of any kind (including, without limitation, claims for labor, materials and supplies) against or with respect to a material portion of the Collateral, except that no such charge need be paid if the amount or validity thereof is currently being contested in good faith by appropriate proceedings, reserves in conformity with GAAP with respect thereto have been provided on the books of such Grantor and such proceedings could not reasonably be expected to result in the sale, forfeiture or loss of any material portion of the Collateral or any interest therein. 5.5 Maintenance of Perfected Security Interest; Further Documentation. (a) Such Grantor shall take such steps as are reasonably requested by the Collateral Agent to maintain the security interest created by this Agreement as a perfected security interest having at least the priority described in Section 4.3. 053113\0942\02497\9764JKRJ.GUA 51 13 (b) Such Grantor will furnish to the Collateral Agent and the Lenders from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Collateral Agent may reasonably request, all in reasonable detail. (c) At any time and from time to time, upon the written request of the Collateral Agent, and at the sole expense of such Grantor, such Grantor will promptly and duly execute and deliver, and have recorded, such further instruments and documents and take such further actions as the Collateral Agent may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code (or other similar laws) in effect in any jurisdiction with respect to the security interests created hereby. 5.6 Changes in Locations, Name, etc. Such Grantor will not, except upon written notice to the Collateral Agent and delivery (within 30 days thereafter) to the Collateral Agent of (a) all additional executed financing statements and other documents reasonably requested by the Collateral Agent to maintain the validity, perfection and priority of the security interests provided for herein and (b) if applicable, a written supplement to Schedule 5 showing any additional location at which Inventory or Equipment shall be kept: (i) permit any material portion of the Inventory or Equipment (other than Inventory or Equipment covered by a certificate of title or constituting mobile goods) to be kept at a location other than those listed on Schedule 5; (ii) change the location of its chief executive office, principal place of business or office where records concerning the Accounts are kept, or sole place of business from that referred to in Section 4.4; or (iii) change its name, identity or corporate structure to such an extent that any financing statement filed by the Collateral Agent in connection with this Agreement would become misleading. 5.7 Notices. Such Grantor will advise the Collateral Agent and the Lenders promptly, in reasonable detail, of: (a) any Lien (other than security interests created hereby or Liens permitted under the Credit Agreement) on any of the Collateral which would materially and adversely affect the ability of the Collateral Agent to exercise any of its remedies hereunder; and (b) of the occurrence of any other event which could reasonably be expected to have a material adverse effect on the aggregate value of the Collateral or on the security interests created hereby. 5.8 Pledged Securities. (a) If such Grantor shall become entitled to receive or shall receive any stock certificate (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction 053113\0942\02497\9764JKRJ.GUA 52 14 of capital or any certificate issued in connection with any reorganization), option or rights in respect of the Capital Stock of any Issuer, whether in addition to, in substitution of, as a conversion of, or in exchange for, any shares of the Pledged Stock, or otherwise in respect thereof, such Grantor shall accept the same as the agent of the Administrative Agent, the Collateral Agent and the Lenders, hold the same in trust for the Administrative Agent, the Collateral Agent and the Lenders and deliver the same forthwith to the Collateral Agent in the exact form received, duly indorsed by such Grantor to the Collateral Agent, if required, together with an undated stock power covering such certificate duly executed in blank by such Grantor and with, if the Collateral Agent so requests, signature guaranteed, to be held by the Collateral Agent, subject to the terms hereof, as additional collateral security for the Obligations. Any sums paid upon or in respect of the Pledged Securities upon the liquidation or dissolution of any Issuer (other than any amount which the Borrower would not be required to apply to prepay the Loans pursuant to Section 2.9(c) of the Credit Agreement if such liquidation or dissolution were an Asset Sale) shall be paid over to the Collateral Agent to be held by it hereunder as additional collateral security for the Obligations, and in case any distribution of capital shall be made on or in respect of the Pledged Securities or any property shall be distributed upon or with respect to the Pledged Securities pursuant to the recapitalization or reclassification of the capital of any Issuer or pursuant to the reorganization thereof, the property so distributed shall, unless otherwise subject to a perfected security interest in favor of the Collateral Agent, be delivered to the Collateral Agent to be held by it hereunder as additional collateral security for the Obligations. If any such sums of money or property so paid or distributed in respect of the Pledged Securities shall be received by such Grantor, such Grantor shall, until such money or property is paid or delivered to the Collateral Agent, hold such money or property in trust for the Lenders, segregated from other funds of such Grantor, as additional collateral security for the Obligations. (b) Without the prior written consent of the Collateral Agent, such Grantor will not (i) sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Pledged Securities or Proceeds thereof (except pursuant to a transaction permitted by the Credit Agreement), (ii) create, incur or permit to exist any Lien or option in favor of, or any claim of any Person with respect to, any of the Pledged Securities or Proceeds thereof, or any interest therein, except for the security interests created by this Agreement or permitted by the Credit Agreement or (iii) enter into any agreement or undertaking restricting the right or ability of such Grantor or the Collateral Agent to sell, assign or transfer any of the Pledged Securities or Proceeds thereof. (c) In the case of each Grantor which is an Issuer, such Issuer agrees that (i) it will be bound by the terms of this Agreement relating to the Pledged Securities issued by it and will comply with such terms insofar as such terms are applicable to it, (ii) it will notify the Collateral Agent promptly in writing of the occurrence of any of the events described in Section 5.8(a) with respect to the Pledged Securities issued by it and (iii) the terms of Sections 6.3(c) and 6.7 shall apply to it, mutatis mutandis, with respect to all actions that may be required of it pursuant to Section 6.3(c) or 6.7 with respect to the Pledged Securities issued by it. 5.9 Receivables. (a) Other than in the ordinary course of business consistent with its reasonable business practices, such Grantor will not (i) grant any extension of the 053113\0942\02497\9764JKRJ.GUA 53 15 time of payment of any Receivable, (ii) compromise or settle any Receivable for less than the full amount thereof, (iii) release, wholly or partially, any Person liable for the payment of any Receivable, (iv) allow any credit or discount whatsoever on any Receivable or (v) amend, supplement or modify any Receivable in any manner that could adversely affect the value thereof. (b) Such Grantor will deliver to the Collateral Agent a copy of each material demand, notice or document received by it that questions or calls into doubt the validity or enforceability of more than 10% of the aggregate amount of the then outstanding Receivables of such Grantor. 5.10 Intellectual Property. (a) Except to the extent such Grantor, in the exercise of its reasonable business judgment, may elect not to do so and where its failure to do so will not have a Material Adverse Effect, such Grantor (either itself or through licensees) will (i) use each material Trademark on each and every trademark class of goods applicable to its current line as reflected in its current catalogs, brochures and price lists in order to maintain such material Trademark in full force free from any claim of abandonment for non-use, (ii) maintain as in the past the quality of products and services offered under such material Trademark, (iii) use such material Trademark with the appropriate notice of registration and all other notices and legends required by applicable Requirements of Law, (iv) not adopt or use any mark which is confusingly similar or a colorable imitation of such material Trademark unless the Collateral Agent, for the ratable benefit of the Lenders, shall obtain a perfected security interest in such mark pursuant to this Agreement, and (v) not (and not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby such material Trademark may become invalidated or impaired in any way. (b) Except to the extent such Grantor, in the exercise of its reasonable business judgment, may elect not to do so and where its failure to do so will not have a Material Adverse Effect, such Grantor (either itself or through licensees) will not do any act, or omit to do any act, whereby any material Patent may become forfeited, abandoned or dedicated to the public. (c) Except to the extent such Grantor, in the exercise of its reasonable business judgment, may elect not to do so and where its failure to do so will have a Material Adverse Effect, such Grantor (either itself or through licensees) (i) will employ each material Copyright and (ii) will not (and will not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any material portion of the Copyrights may become invalidated or otherwise impaired. Such Grantor will not (either itself or through licensees) do any act whereby any material portion of the Copyrights may fall into the public domain. (d) Except to the extent such Grantor, in the exercise of its reasonable business judgment, may elect not to do so and where its failure to do so will not have a Material Adverse Effect, such Grantor (either itself or through licensees) will not do any act that knowingly uses any material Intellectual Property to infringe the intellectual property rights of any other Person. 053113\0942\02497\9764JKRJ.GUA 54 16 (e) Except to the extent such Grantor, in the exercise of its reasonable business judgment, may elect not to do so and where its failure to do so will not have a Material Adverse Effect, such Grantor will notify the Collateral Agent and the Lenders immediately if it knows, or has reason to know, that any application or registration relating to any material Intellectual Property may become forfeited, abandoned or dedicated to the public, or of any adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office, the United States Copyright Office or any court or tribunal in any country) regarding such Grantor's ownership of, or the validity of, any material Intellectual Property or such Grantor's right to register the same or to own and maintain the same. (f) Except to the extent such Grantor, in the exercise of its reasonable business judgment, may elect not to do so and where its failure to do so will not have a Material Adverse Effect, whenever such Grantor, either by itself or through any agent, employee, licensee or designee, shall file an application for the registration of any Intellectual Property with the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof, such Grantor shall report such filing to the Collateral Agent within five Business Days after the last day of the fiscal quarter in which such filing occurs. Upon request of the Collateral Agent, such Grantor shall execute and deliver, and have recorded, any and all agreements, instruments, documents, and papers as the Collateral Agent may request to evidence the Collateral Agent's and the Lenders' security interest in any Copyright, Patent or Trademark and the goodwill and general intangibles of such Grantor relating thereto or represented thereby. (g) Except to the extent such Grantor, in the exercise of its reasonable business judgment, may elect not to do so and where its failure to do so will not have a Material Adverse Effect, such Grantor will take all reasonable and necessary steps, including, without limitation, in any proceeding before the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof, to maintain and pursue each application (and to obtain the relevant registration) and to maintain each registration of the material Intellectual Property, including, without limitation, filing of applications for renewal, affidavits of use and affidavits of incontestability. (h) In the event that any material Intellectual Property is infringed, misappropriated or diluted by a third party, such Grantor shall, except to the extent such Grantor, in the exercise in its reasonable business judgment, may elect not to do so and where its failure to do so will not have a Material Adverse Effect, (i) take such actions as such Grantor shall reasonably deem appropriate under the circumstances to protect such Intellectual Property and (ii) if such Intellectual Property is of material economic value, promptly notify the Collateral Agent after it learns thereof and sue for infringement, misappropriation or dilution, to seek injunctive relief where appropriate and to recover any and all damages for such infringement, misappropriation or dilution. 5.11 Vehicles. (a) If a Grantor removes a Vehicle covered by a certificate of title from the State which has issued the certificate of title for such Vehicle with the intent of 053113\0942\02497\9764JKRJ.GUA 55 17 permanently relocating that Vehicle in a different State, such Grantor shall, within four months after such relocation, file all applications for certificates of title indicating the Collateral Agent's first priority security interest in such Vehicle and take all actions required to continue the perfected security interest of the Collateral Agent in such Vehicle, unless otherwise provided in the Credit Agreement. (b) With respect to any Vehicles acquired by a Grantor subsequent to the date hereof, within 90 days after the date of acquisition thereof, all applications for certificates of title indicating the Collateral Agent's first priority security interest in the Vehicle covered by such certificate, and any other necessary documentation, shall be filed in each office in each jurisdiction which the Collateral Agent shall deem advisable to perfect its security interests in the Vehicles, except as otherwise provided in the Credit Agreement. SECTION 6. REMEDIAL PROVISIONS 6.1 Certain Matters Relating to Receivables. (a) The Collateral Agent shall have the right to make test verifications of the Receivables in any manner and through any medium that it reasonably considers advisable, and each Grantor shall furnish all such assistance and information as the Collateral Agent may require in connection with such test verifications. At any time and from time to time, upon the Collateral Agent's request and at the expense of the applicable Grantor, such Grantor shall cause independent public accountants or others satisfactory to the Collateral Agent to furnish to the Collateral Agent reports showing reconciliations, aging and test verifications of, and trial balances for, the Receivables. (b) The Collateral Agent hereby authorizes each Grantor to collect such Grantor's Receivables; provided, however, the Collateral Agent may curtail or terminate said authority at any time after the occurrence and during the continuance of an Event of Default. If required by the Collateral Agent at any time after the occurrence and during the continuance of an Event of Default, any payments of Receivables, when collected by any Grantor, (i) shall be forthwith (and, in any event, within two Business Days) deposited by such Grantor in the exact form received, duly indorsed by such Grantor to the Collateral Agent if required, in a Collateral Account maintained under the sole dominion and control of the Collateral Agent, subject to withdrawal by the Collateral Agent for the account of the Lenders only as provided in Section 6.5, and (ii) until so turned over, shall be held by such Grantor in trust for the Collateral Agent and the Lenders, segregated from other funds of such Grantor. Each such deposit of Proceeds of Receivables shall be accompanied by a report identifying in reasonable detail the nature and source of the payments included in the deposit. (c) At the Collateral Agent's request, at any time during the continuance of an Event of Default, each Grantor shall deliver to the Collateral Agent all original and other documents evidencing, and relating to, the agreements and transactions which gave rise to the Receivables, including, without limitation, all original orders, invoices and shipping receipts. 6.2 Communications with Obligors; Grantors Remain Liable. (a) The Collateral Agent in its own name or in the name of others may at any time after the 053113\0942\02497\9764JKRJ.GUA 56 18 occurrence and during the continuance of an Event of Default communicate with obligors under the Receivables to verify with them to the Collateral Agent's satisfaction the existence, amount and terms of any Receivables. (b) Upon the request of the Collateral Agent at any time after the occurrence and during the continuance of an Event of Default, each Grantor shall notify obligors on the Receivables that the Receivables have been assigned to the Collateral Agent for the ratable benefit of the Lenders and that payments in respect thereof shall be made directly to the Collateral Agent. (c) Anything herein to the contrary notwithstanding, each Grantor shall remain liable under each of the Receivables to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise thereto. Neither the Collateral Agent nor any Lender shall have any obligation or liability under any Receivable (or any agreement giving rise thereto) by reason of or arising out of this Agreement or the receipt by the Collateral Agent or any Lender of any payment relating thereto, nor shall the Collateral Agent or any Lender be obligated in any manner to perform any of the obligations of any Grantor under or pursuant to any Receivable (or any agreement giving rise thereto), to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party thereunder, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. 6.3 Pledged Stock. (a) Unless an Event of Default shall have occurred and be continuing and the Collateral Agent shall have given notice to the applicable Grantor of the Collateral Agent's intent to exercise its corresponding rights pursuant to Section 6.3(b), each Grantor shall be permitted to receive all cash dividends paid in respect of the Pledged Stock and all payments made in respect of the Pledged Notes, in each case paid in the normal course of business of the relevant Issuer and consistent with past practice and to exercise all voting and corporate rights with respect to the Pledged Securities; provided, however, that no vote shall be cast or corporate right exercised or other action taken which would materially impair the Collateral or which would be inconsistent with or result in any violation of any provision of the Credit Agreement, this Agreement or any other Loan Document. (b) If an Event of Default shall occur and be continuing and the Collateral Agent shall give notice of its intent to exercise such rights to the applicable Grantor or Grantors, (i) the Collateral Agent shall have the right to receive any and all cash dividends, payments or other Proceeds paid in respect of the Pledged Securities and make application thereof to the Obligations, and (ii) any or all of the Pledged Securities shall be registered in the name of the Collateral Agent or its nominee, and the Collateral Agent or its nominee may thereafter exercise (x) all voting, corporate and other rights pertaining to such Pledged Securities at any meeting of shareholders of the relevant Issuer or Issuers or otherwise and (y) any and all rights of conversion, exchange and subscription and any other rights, privileges or options pertaining to such Pledged Securities as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Pledged Securities upon the merger, consolidation, reorganization, recapitalization or other 053113\0942\02497\9764JKRJ.GUA 57 19 fundamental change in the corporate structure of any Issuer, or upon the exercise by any Grantor or the Collateral Agent of any right, privilege or option pertaining to such Pledged Securities, and in connection therewith, the right to deposit and deliver any and all of the Pledged Securities with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Collateral Agent may determine), all without liability except to account for property actually received by it, but the Collateral Agent shall have no duty to any Grantor to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing. (c) Each Grantor hereby authorizes and instructs each Issuer of any Pledged Securities pledged by such Grantor hereunder to comply with any instruction received by it from the Collateral Agent in writing that (x) states that an Event of Default has occurred and is continuing and (y) is otherwise in accordance with the terms of this Agreement, without any other or further instructions from such Grantor, and each Grantor agrees that each Issuer shall be fully protected in so complying. 6.4 Proceeds to be Turned Over To Collateral Agent. In addition to the rights of the Collateral Agent and the Lenders specified in Section 6.1 with respect to payments of Receivables, if an Event of Default shall occur and be continuing and the Collateral Agent shall have given notice to the applicable Grantor, all Proceeds received by any Grantor consisting of cash, checks and other near-cash items shall be held by such Grantor in trust for the Collateral Agent and the Lenders, segregated from other funds of such Grantor, and shall, forthwith upon receipt by such Grantor, be turned over to the Collateral Agent in the exact form received by such Grantor (duly indorsed by such Grantor to the Collateral Agent, if required). All Proceeds received by the Collateral Agent hereunder shall be held by the Collateral Agent in a Collateral Account maintained under its sole dominion and control. All Proceeds while held by the Collateral Agent in a Collateral Account (or by such Grantor in trust for the Collateral Agent and the Lenders) shall continue to be held as collateral security for all the Obligations and shall not constitute payment thereof until applied as provided in Section 6.5. 6.5 Application of Proceeds. At such intervals as may be agreed upon by the Borrower and the Collateral Agent, or, if an Event of Default shall have occurred and be continuing, at any time at the Collateral Agent's election, the Collateral Agent may apply all or any part of Proceeds constituting Collateral, whether or not held in any Collateral Account, and any proceeds of the guarantee set forth in Section 2, in payment of the Obligations in the following order: First, to pay incurred and unpaid fees and expenses of the Collateral Agent and the Administrative Agent under the Loan Documents; Second, to the Administrative Agent, for application by it towards payment of amounts then due and owing and remaining unpaid in respect of the Obligations, pro rata among the Lenders according to the amounts of the Obligations then due and owing and remaining unpaid to the Lenders; 053113\0942\02497\9764JKRJ.GUA 58 20 Third, to the Administrative Agent, for application by it towards prepayment of the Obligations, pro rata among the Lenders according to the amounts of the Obligations then held by the Lenders; and Fourth, any balance of such Proceeds remaining after the Obligations shall have been paid in full, no Letters of Credit shall be outstanding and the Commitments shall have terminated shall be paid over to the Borrower or to whomsoever may be lawfully entitled to receive the same. 6.6 Code and Other Remedies. If an Event of Default shall occur and be continuing, the Collateral Agent, on behalf of the Lenders, may exercise, in addition to all other rights and remedies granted to them in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the New York UCC or any other applicable law. Without limiting the generality of the foregoing, the Collateral Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon any Grantor or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker's board or office of the Collateral Agent or any Lender or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Administrative Agent, the Collateral Agent or any Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in any Grantor, which right or equity is hereby waived and released. Each Grantor further agrees, at the Collateral Agent's request, to assemble the Collateral and make it available to the Collateral Agent at places which the Collateral Agent shall reasonably select, whether at such Grantor's premises or elsewhere. The Collateral Agent shall apply the net proceeds of any action taken by it pursuant to this Section 6.6, after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Collateral Agent and the Lenders hereunder, including, without limitation, reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Obligations, in the order set forth in Section 6.5, and only after such application and after the payment by the Collateral Agent of any other amount required by any provision of law, including, without limitation, Section 9-504(1)(c) of the New York UCC, need the Collateral Agent account for the surplus, if any, to any Grantor. To the extent permitted by applicable law, each Grantor waives all claims, damages and demands it may acquire against the Collateral Agent or any Lender arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition. 053113\0942\02497\9764JKRJ.GUA 59 21 6.7 Private Sales. (a) Each Grantor recognizes that the Collateral Agent may be unable to effect a public sale of any or all the Pledged Stock, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. Each Grantor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Collateral Agent shall be under no obligation to delay a sale of any of the Pledged Stock for the period of time necessary to permit the Issuer thereof to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if such Issuer would agree to do so. (b) Each Grantor agrees to use its best efforts to do or cause to be done all such other acts as may be necessary to make such sale or sales of all or any portion of the Pledged Stock pursuant to this Section 6.7 valid and binding and in compliance with any and all other applicable Requirements of Law. Each Grantor further agrees that a breach of any of the covenants contained in this Section 6.7 will cause irreparable injury to the Collateral Agent and the Lenders, that the Collateral Agent and the Lenders have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section 6.7 shall be specifically enforceable against such Grantor, and such Grantor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred and is continuing under the Credit Agreement. 6.8 Waiver; Deficiency. Each Grantor waives and agrees not to assert any rights or privileges which it may acquire under Section 9-112 of the New York UCC. Each Grantor shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay its Obligations and the fees and disbursements of any attorneys employed by the Collateral Agent or any Lender to collect such deficiency. SECTION 7. THE COLLATERAL AGENT 7.1 Collateral Agent's Appointment as Attorney-in-Fact, etc. (a) Each Grantor hereby irrevocably constitutes and appoints the Collateral Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Grantor and in the name of such Grantor or in its own name, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, each Grantor hereby gives the Collateral Agent the power and right, on behalf of such Grantor, without notice to or assent by such Grantor, to do any or all of the following: 053113\0942\02497\9764JKRJ.GUA 60 22 (i) in the name of such Grantor or its own name, or otherwise, take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any Receivable or Contract or with respect to any other Collateral and file any claim or take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Collateral Agent for the purpose of collecting any and all such moneys due under any Receivable or Contract or with respect to any other Collateral whenever payable; (ii) in the case of any Intellectual Property, execute and deliver, and have recorded, any and all agreements, instruments, documents and papers as the Collateral Agent may request to evidence the Collateral Agent's and the Lenders' security interest in such Intellectual Property and the goodwill and general intangibles of such Grantor relating thereto or represented thereby; (iii) pay or discharge taxes and Liens levied or placed on or threatened against the Collateral, effect any repairs or any insurance called for by the terms of this Agreement and pay all or any part of the premiums therefor and the costs thereof; (iv) execute, in connection with any sale provided for in Section 6.6 or 6.7, any indorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral; and (v) (1) direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Collateral Agent or as the Collateral Agent shall direct; (2) ask or demand for, collect, and receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (3) sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (4) commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any portion thereof and to enforce any other right in respect of any Collateral; (5) defend any suit, action or proceeding brought against such Grantor with respect to any Collateral; (6) settle, compromise or adjust any such suit, action or proceeding and, in connection therewith, give such discharges or releases as the Collateral Agent may deem appropriate; (7) assign any Copyright, Patent or Trademark (along with the goodwill of the business to which any such Copyright, Patent or Trademark pertains), throughout the world for such term or terms, on such conditions, and in such manner, as the Collateral Agent shall in its sole discretion determine; and (8) generally, sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Collateral Agent were the absolute owner thereof for all purposes, and do, at the Collateral Agent's option and such Grantor's expense, at any time, or from time to time, all acts and things which the Collateral Agent deems necessary to protect, preserve or realize upon the Collateral and the Collateral Agent's and the Lenders' security interests therein and to effect the intent of this Agreement, all as fully and effectively as such Grantor might do. 053113\0942\02497\9764JKRJ.GUA 61 23 Anything in this Section 7.1(a) to the contrary notwithstanding, the Collateral Agent agrees that it will not exercise any rights under the power of attorney provided for in this Section 7.1(a) unless an Event of Default shall have occurred and be continuing. (b) If any Grantor fails to perform or comply with any of its agreements contained herein, the Collateral Agent, at its option, but without any obligation so to do, may perform or comply, or otherwise cause performance or compliance, with such agreement. (c) The expenses of the Collateral Agent incurred in connection with actions undertaken as provided in this Section 7.1, together with interest thereon at a rate per annum equal to the rate per annum at which interest would then be payable on past due Base Rate Loans that are Revolving Credit Loans under the Credit Agreement, from the date of payment by the Collateral Agent to the date reimbursed by the relevant Grantor, shall be payable by such Grantor to the Collateral Agent on demand. (d) Each Grantor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated and the security interests created hereby are released. 7.2 Duty of Collateral Agent. The Collateral Agent's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the New York UCC or otherwise, shall be to deal with it in the same manner as the Collateral Agent deals with similar property for its own account. Neither the Collateral Agent, any Lender nor any of their respective officers, directors, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Grantor or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. The powers conferred on the Collateral Agent and the Lenders hereunder are solely to protect the Collateral Agent's and the Lenders' interests in the Collateral and shall not impose any duty upon the Collateral Agent or any Lender to exercise any such powers. The Collateral Agent and the Lenders shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their officers, directors, employees or agents shall be responsible to any Grantor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct. 7.3 Execution of Financing Statements. Pursuant to Section 9-402 of the New York UCC and any other applicable law, each Grantor authorizes the Collateral Agent to file or record financing statements and other filing or recording documents or instruments with respect to the Collateral without the signature of such Grantor in such form and in such offices as the Collateral Agent reasonably determines appropriate to perfect the security interests of the Collateral Agent under this Agreement. A photographic or other reproduction of this Agreement shall be sufficient as a financing statement or other filing or recording document or instrument for filing or recording in any jurisdiction. 053113\0942\02497\9764JKRJ.GUA 62 24 7.4 Authority of Collateral Agent. Each Grantor acknowledges that the rights and responsibilities of the Collateral Agent under this Agreement with respect to any action taken by the Collateral Agent or the exercise or non-exercise by the Collateral Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Collateral Agent and the Lenders, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Collateral Agent and the Grantors, the Collateral Agent shall be conclusively presumed to be acting as agent for the Lenders with full and valid authority so to act or refrain from acting, and no Grantor shall be under any obligation, or entitlement, to make any inquiry respecting such authority. SECTION 8. MISCELLANEOUS 8.1 Amendments in Writing. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except in accordance with Section 10.1 of the Credit Agreement. 8.2 Notices. All notices, requests and demands to or upon the Collateral Agent or any Grantor hereunder shall be effected in the manner provided for in Section 10.2 of the Credit Agreement; provided that any such notice, request or demand to or upon any Guarantor shall be addressed to such Guarantor at its notice address set forth on Schedule 1. 8.3 No Waiver by Course of Conduct; Cumulative Remedies. Neither the Collateral Agent nor any Lender shall by any act (except by a written instrument pursuant to Section 8.1), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default. No failure to exercise, nor any delay in exercising, on the part of the Collateral Agent or any Lender, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Collateral Agent or any Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Collateral Agent or such Lender would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. 8.4 Enforcement Expenses; Indemnification. (a) Each Guarantor agrees to pay or reimburse each Lender and the Collateral Agent for all its costs and expenses incurred in collecting against such Guarantor under the guarantee contained in Section 2 or otherwise enforcing or preserving any rights under this Agreement and the other Loan Documents to which such Guarantor is a party, including, without limitation, the fees and disbursements of counsel to each Lender and of counsel to the Collateral Agent. (b) Each Guarantor agrees to pay, and to save the Collateral Agent and the Lenders harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other taxes which may be payable or determined to 053113\0942\02497\9764JKRJ.GUA 63 25 be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Agreement. (c) Each Guarantor agrees to pay, and to save the Collateral Agent and the Lenders harmless from, any and all 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 to the extent the Borrower would be required to do so pursuant to Section 10.5 of the Credit Agreement. (d) The agreements in this Section 8.4 shall survive repayment of the Obligations and all other amounts payable under the Credit Agreement and the other Loan Documents. 8.5 Successors and Assigns. This Agreement shall be binding upon the successors and assigns of each Grantor and shall inure to the benefit of the Administrative Agent, the Collateral Agent and the Lenders and their successors and assigns; provided that no Grantor may assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of the Collateral Agent. 8.6 Set-Off. Each Grantor hereby irrevocably authorizes the Administrative Agent, the Collateral Agent and each Lender at any time and from time to time while an Event of Default pursuant to Section 8(a) of the Credit Agreement shall have occurred and be continuing, without notice to such Grantor or any other Grantor, any such notice being expressly waived by each Grantor, to set-off and appropriate and apply 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 unmatured, at any time held or owing by the Administrative Agent, the Collateral Agent or such Lender to or for the credit or the account of such Grantor, or any part thereof in such amounts as the Administrative Agent, the Collateral Agent or such Lender may elect, against and on account of the obligations and liabilities of such Grantor to the Administrative Agent, the Collateral Agent or such Lender hereunder and claims of every nature and description of the Administrative Agent, the Collateral Agent or such Lender against such Grantor, in any currency, whether arising hereunder, under the Credit Agreement, any other Loan Document or otherwise, as the Administrative Agent, the Collateral Agent or such Lender may elect, whether or not the Collateral Agent or any Lender has made any demand for payment and although such obligations, liabilities and claims may be contingent or unmatured. The Collateral Agent and each Lender shall notify such Grantor promptly of any such set-off and the application made by the Administrative Agent, the Collateral Agent or such Lender of the proceeds thereof, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Administrative Agent, the Collateral Agent and each Lender under this Section 8.6 are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Administrative Agent, the Collateral Agent or such Lender may have. 053113\0942\02497\9764JKRJ.GUA 64 26 8.7 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. 8.8 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. 8.9 Section Headings. The Section headings used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 8.10 Integration. This Agreement and the other Loan Documents represent the agreement of the Grantors, the Administrative Agent, the Collateral Agent and the Lenders with respect to the subject matter hereof and thereof, and there are no promises, undertakings, representations or warranties by the Administrative Agent, the Collateral Agent or any Lender relative to subject matter hereof and thereof not expressly set forth or referred to herein or in the other Loan Documents. 8.11 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 8.12 Submission To Jurisdiction; Waivers. Each Grantor 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 of America 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 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 such Grantor at its address referred to in Section 8.2 or at such other address of which the Collateral Agent shall have been notified pursuant thereto; 053113\0942\02497\9764JKRJ.GUA 65 27 (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 any special, exemplary, punitive or consequential damages. 8.13 Acknowledgements. Each Grantor hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents to which it is a party; (b) neither the Administrative Agent, the Collateral Agent nor any Lender has any fiduciary relationship with or duty to any Grantor arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Grantors, on the one hand, and the Administrative Agent, the Collateral Agent and Lenders, 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 Grantors and the Lenders. 8.14 WAIVER OF JURY TRIAL. EACH GRANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. 8.15 Additional Grantors. Each Subsidiary of the Borrower that is required to become a party to this Agreement pursuant to Section 6.10 of the Credit Agreement shall become a Grantor for all purposes of this Agreement upon execution and delivery by such Subsidiary of an Assumption Agreement in the form of Annex 1 hereto. 8.16 Releases. (a) At such time as the Loans, the Reimbursement Obligations and the other Obligations shall have been paid in full, the Commitments have been terminated and no Letters of Credit shall be outstanding, the Collateral shall be released from the Liens created hereby, and this Agreement and all obligations (other than those expressly stated to survive such termination) of the Collateral Agent and each Grantor hereunder shall terminate, all without delivery of any instrument or performance of any act by any party, and all rights to the Collateral shall revert to the Grantors. At the request and sole expense of any Grantor following any such termination, the Collateral Agent shall deliver to such Grantor any Collateral held by the Collateral Agent hereunder, and execute and deliver to such Grantor such documents as such Grantor shall reasonably request to evidence such termination. (b) If any of the Collateral shall be sold, transferred or otherwise disposed of by any Grantor in a transaction permitted by the Credit Agreement, then the Collateral Agent, 053113\0942\02497\9764JKRJ.GUA 66 28 at the request and sole expense of such Grantor, shall execute and deliver to such Grantor all releases or other documents reasonably necessary or desirable for the release of the Liens created hereby on such Collateral. At the request and sole expense of the Borrower, a Subsidiary Guarantor shall be released from its obligations hereunder in the event that all the Capital Stock of such Subsidiary Guarantor shall be sold, transferred or otherwise disposed of in a transaction permitted by the Credit Agreement; provided that the Borrower shall have delivered to the Collateral Agent, at least five Business Days prior to the date of the proposed release, a written request for release identifying the applicable Subsidiary Guarantor and the terms of the sale or other disposition in reasonable detail, including the price thereof and any expenses in connection therewith, together with a certification by the Borrower stating that such transaction is in compliance with the Credit Agreement and the other Loan Documents. 053113\0942\02497\9764JKRJ.GUA 67 29 IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to be duly executed and delivered as of the date first above written. KEY ENERGY GROUP, INC. By: _______________________________ Title: YALE E. KEY, INC. By: _______________________________ Title: WELLTECH EASTERN, INC. By: _______________________________ Title: TST PARAFFIN SERVICE CO., INC. By: _______________________________ Title: KEY ENERGY DRILLING, INC. d/b/a CLINT HURT DRILLING By: _______________________________ Title: KALKASKA OILFIELD SERVICES, INC. By: _______________________________ Title: ODESSA EXPLORATION INCORPORATED By: _______________________________ Title: 053113\0942\02497\9764JKRJ.GUA 68 30 NORWEST BANK TEXAS, N.A., as Collateral Agent By: _______________________________ Title: 053113\0942\02497\9764JKRJ.GUA 69 EXECUTION COPY MASTER GUARANTEE AND COLLATERAL AGREEMENT made by KEY ENERGY GROUP, INC. and certain of its Subsidiaries in favor of NORWEST BANK TEXAS, N.A., as Collateral Agent Dated as of June 6, 1997 053113\0942\02497\9764JKRJ.GUA 70 TABLE OF CONTENTS Page SECTION 1. DEFINED TERMS................................................... 1 1.1 Definitions................................................... 1 1.2 Other Definitional Provisions................................. 5 SECTION 2. GUARANTEE....................................................... 5 2.1 Guarantee..................................................... 5 2.2 Right of Contribution......................................... 6 2.3 No Subrogation................................................ 6 2.4 Amendments, etc. with respect to the Borrower Obligations..... 7 2.5 Guarantee Absolute and Unconditional.......................... 7 2.6 Reinstatement................................................. 8 2.7 Payments...................................................... 8 SECTION 3. GRANT OF SECURITY INTEREST...................................... 9 SECTION 4. REPRESENTATIONS AND WARRANTIES.................................. 9 4.1 Representations in Credit Agreement........................... 9 4.2 Title; No Other Liens......................................... 10 4.3 Perfected First Priority Liens................................ 10 4.4 Chief Executive Office, Etc................................... 10 4.5 Inventory and Equipment....................................... 10 4.6 Farm Products................................................. 10 4.7 Pledged Securities............................................ 10 4.8 Receivables................................................... 11 4.9 Intellectual Property......................................... 11 4.10 Vehicles..................................................... 11 SECTION 5. COVENANTS....................................................... 11 5.1 Covenants in Credit Agreement................................. 11 5.2 Delivery of Instruments and Chattel Paper..................... 12 5.3 Maintenance of Insurance...................................... 12 5.4 Payment of Obligations........................................ 12 5.5 Maintenance of Perfected Security Interest; Further Doc....... 12 5.6 Changes in Locations, Name, etc............................... 13 5.7 Notices....................................................... 13 5.8 Pledged Securities............................................ 13 5.9 Receivables................................................... 14 5.10 Intellectual Property........................................ 15 5.11 Vehicles..................................................... 16 SECTION 6. REMEDIAL PROVISIONS............................................. 17 6.1 Certain Matters Relating to Receivables....................... 17 6.2 Communications with Obligors; Grantors Remain Liable.......... 17 i 053113\0942\02497\9764JKRJ.GUA 71 Page 6.3 Pledged Stock................................................. 18 6.4 Proceeds to be Turned Over To Collateral Agent................ 19 6.5 Application of Proceeds....................................... 19 6.6 Code and Other Remedies....................................... 20 6.7 Private Sales................................................. 21 6.8 Waiver; Deficiency............................................ 21 SECTION 7. THE COLLATERAL AGENT............................................ 21 7.1 Collateral Agent's Appointment as Attorney-in-Fact, etc....... 21 7.2 Duty of Collateral Agent...................................... 23 7.3 Execution of Financing Statements............................. 23 7.4 Authority of Collateral Agent................................. 24 SECTION 8. MISCELLANEOUS................................................... 24 8.1 Amendments in Writing......................................... 24 8.2 Notices....................................................... 24 8.3 No Waiver by Course of Conduct; Cumulative Remedies........... 24 8.4 Enforcement Expenses; Indemnification......................... 24 8.5 Successors and Assigns........................................ 25 8.6 Set-Off....................................................... 25 8.7 Counterparts.................................................. 26 8.8 Severability.................................................. 26 8.9 Section Headings.............................................. 26 8.10 Integration.................................................. 26 8.11 GOVERNING LAW................................................ 26 8.12 Submission To Jurisdiction; Waivers.......................... 26 8.13 Acknowledgements............................................. 27 8.14 WAIVER OF JURY TRIAL......................................... 27 8.15 Additional Grantors.......................................... 27 8.16 Releases..................................................... 27 ii 053113\0942\02497\9764JKRJ.GUA 72 SCHEDULES 1 Notice Addresses of Grantors 2 Description of Pledged Securities 3 Filings and Other Actions Required to Perfect Security Interests 4 Location of Jurisdiction of Organization and Chief Executive Office 5 Location of Inventory and Equipment 6 [Reserved] 7 [Reserved] 8 Vehicles 9 Existing Prior Liens ANNEXES 1 Form of Assumption Agreement iii 053113\0942\02497\9764JKRJ.GUA 73 EX-11.(A) 11 STATEMENT EARNINGS PER SHARE KEY ENERGY GROUP, INC. COMPUTATION OF PER SHARE EARNINGS YEARS ENDED JUNE 30, 1997 AND 1996
Year Ended Year Ended June 30, 1997 June 30, 1996 ----------------------- ------------------------ Fully- Fully- (Thousands, except per share amounts) Primary Diluted Primary Diluted - -------------------------------------------------------------------------------------------------- Net Income and Adjusted Earnings: Net Income before income taxes and minority interest $14,602 $14,602 $5,575 $5,575 Effect of interest on debentures - 3,900 - - ------- ------- ------- ------- Adjusted net income before income taxes and minority interest $14,602 $18,502 $5,575 $5,575 ======= ======= ======= ======= Net Income $9,098 $9,098 $3,586 $3,586 Effect of interest on convertible debentures, net of tax effect - 2,535 - - ------- ------- ------- ------- Adjusted net income $9,098 $11,633 $3,586 $3,586 ======= ======= ======= ======= Weighted Average Shares and Share Equivalents Outstanding: Weighted average shares outstanding (as reported) 11,216 11,216 7,789 7,789 Common Share equivalents issuable under stock option plans 712 1,001 152 292 Common share equivalents issuable on assumed conversion of WellTech warrants 260 375 - 33 Common share equivalents issuable on assumed conversion of convertible debentures - 5,333 - - Common share equivalents issuable on assumed conversion of CIT warrants 17 38 - - ------- ------- ------- ------- Weighted average shares and share equivalents outstanding 12,205 17,963 7,941 8,114 ======= ======= ======= ======= Earnings per Share: Net income $0.75 $0.65 $0.45 $0.44
EX-22 12 SUBSIDIARIES Company EI Number - ------------------------------------------------------ Yale E. Key 75-1074929 Phoenix Well Service, Inc. 75-2256225 T.S.T. Paraffin Service Company, Inc. 75-1898097 Well-Co Oil Service, Inc. 75-2513771 Key Energy Drilling, Inc. 22-3363468 Odessa Exploration, Inc. 06-1377021 Welltech Eastern, Inc. 38-3283245 Kalkaska Oilfield Services, Inc. 38-3083604 KEG AMA Heights, Inc. 72-1339784 KEG Canal Properties, Inc. 72-1339783 KEG Orleans Place, Inc. 72-1339787 KEG Pearl Acres, Inc. 72-1339785 KEG Villa Ashley, Inc. 72-1339782 Thunderbird Tool Company 74-1801530 Brownlee Well Service 75-1173934 Integrity Fishing and Rental 75-2572049 Hitwell Surveys 55-0623721 Cobra Industries 85-0283192 EX-27 13 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS JUN-30-1997 JUL-1-1996 JUN-30-1997 41,704 0 46,782 1,552 5,171 93,333 227,255 (19,069) 320,095 33,142 52,000 0 0 1,230 55,031 320,095 8,180 163,630 3,030 149,028 0 0 7,535 14,602 5,500 9,098 0 0 0 9,098 0.75 0.65
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