As filed with the Securities and Exchange
Commission on June 9, 2011
Registration No. 333-173177
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 3
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
C&J Energy Services,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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1389
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20-5673219
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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10375 Richmond Avenue, Suite 2000
Houston, Texas 77042
(713) 260-9900
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
Theodore R. Moore
Vice President-General Counsel
C&J Energy Services, Inc.
10375 Richmond Avenue, Suite 2000
Houston, Texas 77042
(713) 260-9900
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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Jeffery K. Malonson
David P. Oelman
Vinson & Elkins L.L.P.
1001 Fannin Street, Suite 2500
Houston, Texas 77002
(713) 758-2222
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J. David Kirkland, Jr.
Tull R. Florey
Baker Botts L.L.P.
910 Louisiana Street
Houston, Texas 77002
(713) 229- 1234
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after this
Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933 check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and
may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell these securities and it is not soliciting an offer
to buy these securities in any jurisdiction where the offer or
sale is not permitted.
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Subject to Completion, Dated
June 9, 2011
PRELIMINARY PROSPECTUS
C&J Energy
Services, Inc.
Common Stock
C&J Energy Services, Inc. is
offering shares
of its common stock and the selling stockholders named in this
prospectus are
offering shares
of common stock. We will not receive any proceeds from the sale
of shares by the selling stockholders.
This is the initial public offering of shares of our common
stock. Prior to this offering, there has been no public market
for our common stock. We anticipate that the initial public
offering price of our common stock will be between
$ and
$ per share.
We have applied to list our common stock on the New York Stock
Exchange under the symbol CJES.
Investing in our common stock involves risks. Please read
Risk Factors beginning on page 13 of this
prospectus.
The Securities and Exchange Commission and state securities
regulators have not approved or disapproved of these securities,
or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
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Per Share
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Total
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Initial public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds, before expenses, to Issuer
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$
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$
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Proceeds, before expenses, to the Selling Stockholders
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$
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$
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The selling stockholders have granted the underwriters the right
to purchase up to an
additional shares
of common stock.
The underwriters expect to deliver the shares of common stock to
purchasers on or
about ,
2011.
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Goldman,
Sachs & Co. J.P.
Morgan |
Citi |
Co-Managers
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Wells Fargo Securities
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Simmons &
Company
International
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Tudor, Pickering, Holt & Co.
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Prospectus
dated ,
2011.
TABLE OF
CONTENTS
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Page
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Prospectus
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F-1
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EX-23.1 |
You should rely only on the information contained in this
prospectus and any free writing prospectus prepared by or on
behalf of us or to which we have referred you. Neither we, the
selling stockholders nor the underwriters have authorized anyone
to provide you with information different from that contained in
this prospectus and any free writing prospectus. We and the
selling stockholders are offering to sell shares of common stock
and seeking offers to buy shares of common stock only in
jurisdictions where offers and sales are permitted. The
information in this prospectus is accurate only as of the date
of this prospectus, regardless of the time of delivery of this
prospectus or any sale of the common stock.
We have not taken any action to permit a public offering of the
shares of common stock outside the United States or to permit
the possession or distribution of this prospectus outside the
United States. Persons outside the United States who come
into possession of this prospectus must inform themselves about
and observe any restrictions relating to the offering of the
shares of common stock and the distribution of this prospectus
outside the United States.
Until ,
2011, all dealers that buy, sell or trade our common stock,
whether or not participating in this offering, may be required
to deliver a prospectus. This requirement is in addition to the
dealers obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
Industry and
Market Data
The market data and certain other statistical information used
throughout this prospectus are based on independent industry
publications, government publications or other published
independent sources. Some data is also based on our good-faith
estimates.
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PROSPECTUS
SUMMARY
This summary provides a brief overview of information
contained elsewhere in this prospectus. Because it is
abbreviated, this summary does not contain all of the
information that you should consider before investing in our
common stock. You should read the entire prospectus carefully
before making an investment decision, including the information
presented under the headings Risk Factors beginning
on page 13 of this prospectus, Cautionary Note
Regarding Forward-Looking Statements on page 26 of
this prospectus, Managements Discussion and Analysis
of Financial Condition and Results of Operations beginning
on page 32 of this prospectus and the historical
consolidated financial statements and related notes thereto
included elsewhere in this prospectus. Unless indicated
otherwise, information presented in this prospectus assumes that
the underwriters option to purchase additional shares of
common stock is not exercised.
In this prospectus, unless the context otherwise requires,
the terms C&J, we, us,
our, and our company refer to C&J
Energy Services, Inc., its subsidiary C&J Spec-Rent
Services, Inc., or Spec-Rent, and Spec-Rents subsidiary,
Total E&S, Inc.
Our
Company
Overview
We are a rapidly growing independent provider of premium
hydraulic fracturing and coiled tubing services with a focus on
complex, technically demanding well completions. We provide our
services in conjunction with both conventional and
unconventional well completions as well as workover and
stimulation operations for existing wells. We compete with a
limited number of service companies for what we believe to be
the most complex hydraulic fracturing projects, which are
typically characterized by long lateral segments and multiple
fracturing stages in high-pressure formations. We believe
service providers are selected for these complex projects
primarily based on technical expertise, fleet capability and
experience rather than solely on price. We also provide pressure
pumping services and other related well stimulation services in
connection with our well completion and production enhancement
operations.
We have historically operated in what we believe to be some of
the most geologically challenging basins in South Texas, East
Texas/North Louisiana and Western Oklahoma. The customers we
serve are primarily large exploration and production companies
with significant unconventional resource positions, including
EOG Resources, EXCO Resources, Anadarko Petroleum, Plains
Exploration, Penn Virginia, Petrohawk, El Paso, Apache and
Chesapeake. We are in the process of acquiring additional
hydraulic fracturing fleets and are evaluating opportunities
with existing and new customers to expand our operations into
new areas throughout the United States with similarly demanding
completion and stimulation requirements.
Our revenues increased from $62.4 million for the year
ended December 31, 2008 to $244.2 million for the year
ended December 31, 2010, primarily as a result of increased
demand for our well completion services, improved pricing and
continued fleet expansion. This revenue increase represents a
compound annual growth rate of approximately 98%. For the year
ended December 31, 2010, Adjusted EBITDA was
$82.6 million and net income was $32.3 million. For
the three months ended March 31, 2011, revenues were
$127.2 million, Adjusted EBITDA was $51.9 million and
net income was $29.1 million.
We operate four modern, 15,000 pounds per square inch, or psi,
pressure rated hydraulic fracturing fleets with an aggregate
142,000 horsepower, and we currently have on order four
additional hydraulic fracturing fleets, which, upon delivery,
will increase our aggregate horsepower to 270,000 by the end of
2012. Our hydraulic fracturing equipment is specially designed
to handle well completions with long lateral segments and
multiple fracturing stages in high-pressure formations. We also
operate a fleet of 14 coiled tubing units, 16 double-pump
pressure pumps and nine single-pump pressure pumps. The unique
manner in which we deploy and utilize our equipment has allowed
us to control our costs, minimize downtime and deliver services
with less redundant pumping capacity.
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During the three months ended March 31, 2011, our
fracturing services generated monthly revenue per unit of
horsepower of approximately $383, which we believe to be higher
than the comparable performance of our peers. Revenue per
horsepower is a metric used by our management team to evaluate
how efficiently we are utilizing our assets relative to our
peers.
Our hydraulic fracturing fleets and coiled tubing units are
currently deployed in the Eagle Ford Shale of South Texas, the
Haynesville Shale of East Texas/North Louisiana and the Granite
Wash of Western Oklahoma. Recent advances in horizontal drilling
and hydraulic fracturing technologies have lowered unit recovery
costs in these basins and increased the potential for long-term
oil and natural gas development. Additionally, the increase in
the number of drilling permits awarded in the Eagle Ford,
Haynesville and Granite Wash regions, coupled with the
increasing complexity and technical completion requirements for
many wells in these regions, are expected to drive growth in
demand for our well completion services for the foreseeable
future. We have and plan to continue to focus on basins with
technically demanding hydraulic fracturing requirements.
Our
Services
We provide hydraulic fracturing, coiled tubing, pressure pumping
and other related well stimulation services to our customers
under a single operating segment. We have traditionally used our
coiled tubing and pressure pumping services to extend our
hydraulic fracturing services into new markets.
Hydraulic Fracturing. Our customers
utilize our hydraulic fracturing services to enhance the
production of oil and natural gas from formations with low
permeability, which restricts the natural flow of hydrocarbons.
The fracturing process consists of pumping a fluid into a cased
well at sufficient pressure to fracture the producing formation.
Sand, bauxite or synthetic proppants are suspended in the fluid
and are pumped into the fracture to prop the fracture open. The
extremely high pressure required to stimulate wells in the
regions in which we operate presents a challenging environment
for achieving a successfully fractured horizontal well. As a
result, an important element of the services we provide to
producers is designing the optimum well completion, which
includes determining the proper fluid, proppant and injection
specifications to maximize production. Our engineering staff
also provides technical evaluation, job design and fluid
recommendations for our customers as an integral element of our
fracturing service.
Coiled Tubing. Our customers utilize
our coiled tubing services to perform various functions
associated with well-servicing operations and to facilitate
completion of horizontal wells. Coiled tubing services involve
the insertion of steel tubing into a well to convey materials
and equipment to perform various applications on either a
completion or workover assignment. We believe coiled tubing has
become a preferred method of well completion, workover and
maintenance projects due to speed, ability to handle heavy-duty
jobs across a wide spectrum of pressure environments, safety and
ability to perform services without having to shut in a well. We
have successfully leveraged our existing relationships with
coiled tubing customers to expand our fracturing business.
Pressure Pumping. Our customers utilize
our pressure pumping services primarily in connection with
completing new wells and remedial and production enhancement
work on existing wells. Our pressure pumping services are
routinely performed in conjunction with our coiled tubing
services. Our pressure pumping services include well injection,
cased-hole testing, workover pumping, mud displacement, wireline
pumpdowns and pumping-down coiled tubing. Our pressure pumping
services often provide us with advance knowledge of a
customers need for coiled tubing services.
How We Generate
Our Revenues
We have completed thousands of fracturing stages and more than
9,000 coiled tubing projects. During the three months ended
March 31, 2011, we completed 633 fracturing stages and 638
coiled tubing projects. We seek to differentiate our services
from those of our competitors by providing customized solutions
for our customers most challenging well completions. We
believe our customers value the experience, technical expertise,
high level of customer service and demonstrated operational
efficiencies that we bring to projects.
2
We have entered into term contracts with EOG Resources (executed
April 2010), Penn Virginia (executed May 2010), Anadarko
Petroleum (executed August 2010), EXCO Resources (executed
August 2010), and Plains Exploration (executed March 2011) for
the provision of hydraulic fracturing services. We began service
under the Penn Virginia, EOG Resources, Anadarko Petroleum and
EXCO Resources contracts in July 2010, August 2010, February
2011 and April 2011, respectively. We anticipate beginning
service under the Plains Exploration contract in July 2011. Our
existing hydraulic fracturing fleets (Fleets 1, 2, 3 and
4) are dedicated through mid-2012, mid-2012, early 2013 and
mid-2014, respectively, to producers operating in the Eagle
Ford, Haynesville and Granite Wash basins. We are scheduled to
take delivery of Fleet 5 in June 2011 for deployment under a
two-year term contract. We are scheduled to take delivery of
Fleets 6, 7 and 8 in the fourth quarter of 2011, the first
half of 2012 and the second half of 2012, respectively. We
expect that each of these new fleets will be deployed under term
contracts similar to our existing term contracts.
Our revenues are derived from two sources:
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monthly payments for the committed hydraulic fracturing fleets
under term contracts as well as prevailing market rates for spot
market work, together with associated charges or handling fees
for chemicals and proppants that are consumed during the
fracturing process; and
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prevailing market rates for coiled tubing, pressure pumping and
other related well stimulation services, together with
associated charges for stimulation fluids, nitrogen and coiled
tubing materials.
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Hydraulic Fracturing. Our term
contracts generally range from one year to three years. Under
the term contacts, our customers are obligated to pay us on a
monthly basis for a specified number of hours of service,
whether or not those services are actually utilized. To the
extent customers utilize more than the specified contract
minimums, we will be paid a pre-agreed amount for the provision
of such additional services. Our current term contracts restrict
the ability of the customer to terminate or require our
customers to pay us a lump-sum early termination fee, generally
representing all or a significant portion of the remaining
economic value of the contracts to us.
Although we have entered into term contracts for each of our
hydraulic fracturing fleets, we also have the flexibility to
pursue spot market projects. Our term contracts allow us to
supplement monthly contract revenue by deploying equipment on
short-term spot market jobs on those days when the contract
customer does not require our services or is not entitled to our
services under the applicable term contract. We charge
prevailing market prices per hour for spot market work. We
believe our ability to provide services in the spot market
allows us to take advantage of any favorable pricing that may
exist in this market and allows us to develop new customer
relationships.
Under the term contracts and for spot market work, we may also
charge fees for set up and mobilization of equipment depending
on the job. Generally, these fees and other charges vary
depending on the equipment and personnel required for the job
and market conditions in the region in which the services are
performed. We also source chemicals and proppants that are
consumed during the fracturing process and we charge our
customers a fee for materials consumed in the process, or we
charge our customers a handling fee for proppants supplied by
the customer. Materials charges reflect the cost of the
materials plus a markup and are based on the actual quantity of
materials used in the fracturing process. Approximately 80% of
our revenues for the three months ended March 31, 2011 were
derived from hydraulic fracturing services or materials provided
in connection with hydraulic fracturing services.
Coiled Tubing and Pressure Pumping. Our
coiled tubing, pressure pumping and other related well
stimulation services are provided in the spot market at
prevailing prices per hour. We may also charge fees for set up
and mobilization of equipment depending on the job. The
set-up
charges and hourly rates are determined by a competitive bid
process and vary with the type of service to be performed, the
equipment and personnel required for the job and market
conditions in the region in which the service is performed. We
also charge customers for the materials, such as stimulation
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fluids, nitrogen and coiled tubing materials, that we use in
each job. Materials charges reflect the cost of the materials
plus a markup and are based on the actual quantity of materials
used for the project.
Industry Overview
and Trends Impacting Our Business
Ongoing Development of Existing and Emerging
Unconventional Resource Basins. Over the past
decade, exploration and production companies have focused on
exploiting the vast resource potential available across many of
North Americas unconventional resource plays through the
application of new horizontal drilling and completion
technologies, including multi-stage hydraulic fracturing. We
believe long-term capital for the continued development of these
basins will be provided in part by the participation of large
well-capitalized domestic oil and gas companies that have made
significant investments, as well as international oil and gas
companies that continue to make significant capital commitments
through joint ventures and direct investments in North
Americas unconventional basins. We believe these
investments indicate a long-term commitment to development,
which should mitigate the impact of short-term changes in oil
and natural gas prices on the demand for our services.
Increased Horizontal Drilling and Greater Service
Intensity in Unconventional Basins. As a
result of the higher specification equipment and increased
services associated with horizontal drilling, we view the
horizontal rig count as a reliable indicator of the overall
increase in the demand for our services. According to Baker
Hughes Incorporated, the U.S. horizontal rig count has
risen from approximately 335 at the beginning of 2007 to 1,051
as of June 3, 2011, and now represents 57% of the total
U.S. rig count. Development of horizontal wells has evolved
to feature increasingly longer laterals and more fracturing
stages, which has increased the requirement for advanced
hydraulic fracturing and stimulation services. Furthermore, we
believe operators have become more efficient at drilling
horizontal wells and have reduced the number of days required to
reach total depth, which has increased the number of wells
drilled and the number of fracturing stages completed in a year.
Increased Demand for Expertise to Execute Complex
Completions. We believe exploration and
production companies have shown a strong preference for a
customized approach to completing complex wells in
unconventional basins. As the fleet specifications and
capability to execute complex well completions have increased,
the required attention and experience to complete the most
difficult fracturing jobs has also increased. Accordingly, we
believe that technical expertise, fleet capability and
experience are the primary differentiating factors within the
industry.
High Levels of Asset Utilization and Constrained Supply
Growth. Asset utilization in the hydraulic
fracturing industry has meaningfully increased due to the
elevated levels of horizontal drilling. Advances such as pad
drilling and zipper-fracs, whereby an operator drills two offset
wells for simultaneous completion, have led to more wells being
drilled per rig and, thus, have increased levels of asset
utilization in the hydraulic fracturing industry. At the same
time, we believe manufacturers have had difficulty keeping pace
with the demand for new hydraulic fracturing equipment and
parts. Furthermore, the higher pressures required for more
complex applications combined with higher levels of asset
utilization are resulting in increased attrition of existing
hydraulic fracturing equipment. We believe that these trends
will continue to keep supply tight in our industry for the
foreseeable future.
The Spread of Unconventional Drilling and Completion
Techniques to the Redevelopment of Conventional
Fields. Oil and natural gas companies have
begun to apply the knowledge gained through the extensive
development of unconventional resource plays to their existing
conventional basins. Many of the techniques applied in
unconventional development, when applied to conventional wells
either through workover or recompletion, have the potential to
enhance overall production or enable production from previously
unproductive horizons and improve overall field economics. We
believe that there are thousands of older conventional wells
with the potential for the application of unconventional
completion techniques in close proximity to the regions in which
we operate. Many of our customers have begun to experiment with
such techniques.
4
Our Competitive
Strengths
Operational Expertise in Service-Intensive
Basins. We have focused our hydraulic
fracturing fleets in service-intensive domestic basins, which
require technically challenging, high-pressure fracturing
services. During the three months ended March 31, 2011, our
fracturing operations generated monthly revenue per unit of
horsepower of approximately $383, which we believe to be higher
than the comparable performance of our peers. The unique manner
in which we deploy and utilize our equipment has allowed us to
control our costs, minimize downtime and deliver services with
less redundant pumping capacity. Along with our focus on high
service-intensity basins, we have pursued geographic expansion
in a manner that provides for high levels of asset utilization.
We have configured our field offices and operations so that we
can most efficiently utilize our equipment under our current
contractual agreements and in the spot market.
High-Quality Service. We seek to
distinguish our services by providing customized solutions to
complex fracturing jobs through extensive front-end technical
analysis and close coordination with our customers. We provide
onsite design engineers to configure and execute jobs on a
well-by-well
basis (as opposed to a regional approach), and implement
targeted, pumping configurations to better meet the challenges
of a given well, which results in less redundant pumping
capacity. Our design engineers and job supervisors are involved
in every stage of the project from design to water testing to
pump configuration and deployment to post-job analysis. By
closely monitoring our equipment performance during pressure
intervals and by performing rigorous equipment maintenance at
the well site, we are able to complete a fracturing job
efficiently, while minimizing the risk of equipment failures. We
believe our customer focus and attention to detail enhances the
efficiency and quality of a fracturing project, resulting in
faster well completion for our customers. We believe the quality
of our service allows us to command a higher service rate while
still reducing total well completion costs for our customers.
Visible Revenue Growth. We have grown
significantly over the last three years and have scheduled
equipment deliveries and executed contracts that we believe will
support and sustain continued growth. Our four existing
hydraulic fracturing fleets are committed through mid-2012,
mid-2012, early 2013 and
mid-2014,
respectively. Our fifth fleet, which is expected to be delivered
and deployed in June 2011, is committed through June 2013. In
addition, our fracturing contracts generally allow us to
supplement monthly contract revenue by deploying equipment on
short-term spot market jobs on those days when the contract
customer does not require our services. This flexibility has
allowed us to opportunistically capitalize on spot market
pricing and to perform our services for new customers, which has
allowed us to broaden our customer base and, in some cases, has
led to contractual relationships. We are currently negotiating
additional term contracts with producers in anticipation of the
delivery and deployment of Fleet 6 in the fourth quarter of
this year. We expect to service these contracts with new
equipment as well as existing equipment once current contracts
expire.
Modern, High-Specification
Equipment. Over the last three years we have
invested in high-pressure rated, premium hydraulic fracturing
equipment that is especially suited for technically demanding
unconventional formations. Fleet 1 began operation in late 2007;
Fleet 2 began operation in July 2010; Fleet 3 began operation in
January 2011; Fleet 4 began operation in April 2011; Fleet 5 is
expected to be delivered and deployed in June 2011; Fleet 6 is
expected to be delivered and deployed in the fourth quarter of
2011; Fleet 7 is expected to be delivered and deployed in the
first half of 2012; and Fleet 8 is expected to be delivered and
deployed in the second half of 2012. We believe investment in
new equipment allows us to better serve the diverse and
increasingly challenging needs of our customer base. New
equipment is generally less costly to maintain and operate and
is more efficient for our customers because it reduces downtime,
including associated costs and expenditures, and enables
increased utilization of our assets.
All of our pumping equipment is rated for operating at pressures
up to 15,000 psi, which enables us to perform challenging
fracturing projects in the Eagle Ford and Haynesville Shale
plays. The fleet specifications required for these fracturing
projects also tend to prevent migration of less capable
equipment from other regions to compete for Eagle Ford and
Haynesville jobs. Historically, we have
5
had strong relationships with manufacturers of hydraulic
fracturing equipment and, as a result, believe we are able to
gain access to new, high capability equipment timely.
Strong Record of Operating Safety. As a
result of our strong emphasis on safety training and protocols
for each of our employees, we believe we have a superior safety
record and reputation. Our safety record has been maintained
while we have more than doubled our employee base in less than
two years. Our reputation for safety has allowed us to earn work
certification from several industry leaders that we believe have
some of the most demanding safety requirements, including
ConocoPhillips, Exxon Mobil Corporation and Royal Dutch Shell.
Experienced Management. We have a
senior management team that combines entrepreneurial creativity
and flexibility with a deep technical competency that comes from
years of experience and training at some of the worlds
largest providers of hydraulic fracturing and pressure pumping
services. Our Chief Executive Officer and President, Chief
Operating Officer, Vice President Coiled Tubing and
Vice President Hydraulic Fracturing each have over
20 years of experience in the energy services industry. In
addition, our managers, sales engineers and field operators have
extensive expertise in their operating basins and understand the
regional challenges our customers face. We have historically had
a broad network with many customers and suppliers, allowing our
operations personnel to develop and leverage their expertise in
selling services and products to our new and existing customers.
Our
Strategies
Capitalize on Growth in Development of Shale and Other
Resource Plays. The U.S. Energy
Information Administration, or EIA, forecasts that production
from shale gas sources will account for 45% of U.S. dry gas
production in 2035, up from 14% in 2009. We intend to continue
to focus our services on shale development and similar resource
basins with long-term development potential and attractive
economics. The characteristics of these basins should allow us
to leverage our high-pressure rated assets and the considerable
technical expertise of our senior operating team. We plan to
continue to avoid less complex fracturing projects characterized
by greater price competition and lower profit margins. We
believe there are significant opportunities to gain new
customers in the basins in which we currently operate.
Leverage Customer Relationships to Geographically
Expand. Our existing customer base includes
several of the largest acreage holders throughout North
Americas existing and emerging resource basins. In many
cases, our initial successful work with our customers in one
particular basin has led to additional work in other resource
positions in which the customer operates. We seek to continue to
leverage our existing customer base, as well as establish new
relationships with additional operators, to selectively expand
our hydraulic fracturing, coiled tubing and pressure pumping
services to other basins that have similar characteristics to
those in which we currently operate. Since we began to offer
hydraulic fracturing services in 2007, we have successfully
leveraged our existing relationships to extend our fracturing
services into new markets, including our entry into the East
Texas/Northern Louisiana hydraulic fracturing market in 2007. We
provide coiled tubing and pressure pumping services to multiple
customers in Oklahoma in the Granite Wash formation, which we
believe will continue to result in opportunities to provide
additional hydraulic fracturing services.
Pursue Additional Term Hydraulic Fracturing
Contracts. We seek to capitalize on the
strong market for hydraulic fracturing services in our operating
areas by negotiating additional term contracts. We intend to
pursue additional fracturing contracts with our existing
customers. We are currently discussing additional term contracts
with several parties that would require new equipment. If we are
successful with these negotiations, we intend to purchase
additional hydraulic fracturing equipment to service these
agreements. We believe that term contracts currently generate
attractive returns on investment, enhance the stability of our
earnings and cash flow and are consistent with our strategy of
dedicating equipment to financially stable and established
operators.
6
Maintain Flexibility to Pursue Spot Market
Work. Although we intend to enter into
additional term fracturing contracts, we also intend to maintain
our flexibility to pursue spot market projects. We believe our
ability to provide services in the spot market allows us to take
advantage of the current favorable pricing that exists in this
market and allows us to develop new customer relationships.
Recent
Developments
Acquisition of Total E&S, Inc. On
April 28, 2011, we acquired Total E&S, Inc., or Total,
a manufacturer of hydraulic fracturing, coiled tubing, pressure
pumping and other equipment used in the energy services
industry, and one of our largest suppliers of machinery and
equipment. The aggregate purchase price of approximately
$32.9 million included $23.0 million in cash to the
sellers and $9.9 million in repayment of the outstanding
debt of Total. In exchange for the consideration transferred, we
acquired net working capital assets with an estimated value of
approximately $6.9 million, including $5.4 million in
cash and cash equivalents. We funded $25.0 million of the
purchase price and debt repayment with borrowings under our
credit facility and funded the remainder with cash on hand.
Total is located in Granbury, Texas.
We believe the acquisition of a key supplier provides several
strategic advantages, including a significant reduction in our
exposure to third-party supply chain constraints, shorter cycle
times for the delivery of new equipment and replacement parts, a
reduction in and greater control of the cost of new equipment,
and enhanced operational control of our service offering, each
of which should help facilitate our continued growth.
Furthermore, the Total acquisition is expected to help minimize
downtime by enhancing our capabilities for maintenance and
repair of our hydraulic fracturing equipment.
Following our acquisition of Total, we acquired approximately
ten acres of adjacent property and began construction of an
approximate 36,000 square feet manufacturing facility. We
currently expect our new facility to be operational by December
2011. The total cost of construction of the facility is expected
to be approximately $1.3 million. By significantly
increasing Totals manufacturing capacity, we expect to
further increase its ability to service us and existing and
future third-party customers.
For more information regarding our historical relationship with
Total, please read Certain Relationships and Related Party
Transactions Acquisition of Total beginning on
page 91 of this prospectus.
Corporate
Information
We are a Delaware corporation. Our principal executive offices
are located at 10375 Richmond Avenue, Suite 2000, Houston,
Texas 77042 and our main telephone number is
(713) 260-9900.
Our website is available
at .
7
The
Offering
|
|
|
Common stock offered by C&J Energy Services, Inc.
|
|
shares |
|
|
|
Common stock offered by the Selling Stockholders
|
|
shares
( shares
if the underwriters option to purchase additional shares
is exercised in full) |
|
|
|
Common stock to be outstanding after this offering(1)
|
|
shares |
|
|
|
Common stock owned by Selling Stockholders after this offering
|
|
shares
( shares
if the underwriters option to purchase additional shares
is exercised in full) |
|
|
|
Use of Proceeds
|
|
We expect to receive approximately
$ million of net proceeds
from the sale of the common stock offered by us in this
offering, based upon an assumed initial public offering price of
$ per share (the midpoint of the
price range set forth on the cover page of this prospectus),
after deducting underwriting discounts and commissions and
estimated offering expenses. Each $1.00 increase (decrease) in
the initial public offering price would increase (decrease) our
net proceeds by approximately
$ million. |
|
|
|
|
|
We intend to use the net proceeds we receive from this offering
to repay all outstanding indebtedness under our credit facility,
approximately $107.1 million of which was outstanding on
May 31, 2011, and we intend to use any remaining net
proceeds to fund a portion of the purchase price of Fleet 5
in June 2011. We will not receive any proceeds from the sale of
shares by the selling stockholders, including pursuant to the
underwriters option to purchase additional shares.
Affiliates of certain of the underwriters are lenders under our
credit facility and, accordingly, will receive a portion of the
proceeds from this offering. Please read Use of
Proceeds on page 27 of this prospectus. |
|
|
|
Dividend Policy
|
|
We do not anticipate paying cash dividends on shares of our
common stock for the foreseeable future. In addition, our credit
facility contains restrictions on the payment of dividends to
holders of our common stock. |
|
Risk Factors
|
|
Investing in our common stock involves a high degree of risk.
For a discussion of factors you should consider before making an
investment, please read Risk Factors beginning on
page 13 of this prospectus. |
|
Proposed New York Stock Exchange Symbol
|
|
CJES |
|
|
|
(1) |
|
The number of outstanding shares as of June 8, 2011
excludes (i) 5,716,589 shares of common stock issuable
upon exercise of options to be outstanding immediately after
this offering, of which 1,907,318 currently are exercisable, and
(ii) an aggregate of approximately 1,890,618 shares of
common stock reserved and available for future issuance under
the C&J Energy Services, Inc. 2010 Stock Option Plan, or
the 2010 Plan. For additional information regarding the 2010
Plan, |
8
|
|
|
|
|
please read Executive Compensation and Other
Information Components of Executive Compensation
Program Stock Options on page 78 of this
prospectus. |
Risk
Factors
An investment in shares of our common stock involves risks.
Below is a summary of certain key risk factors that you should
consider in evaluating an investment in shares of our common
stock. This list is not exhaustive. Please read the full
discussion of these risks and other risks described under
Risk Factors beginning on page 13 of this
prospectus as well as other factors described in this prospectus.
Risks Relating
to Our Business
|
|
|
|
|
Our business depends on the oil and natural gas industry and
particularly on the level of exploration, development and
production of oil and natural gas in the United States. Our
markets may be adversely affected by industry conditions that
are beyond our control.
|
|
|
|
Because the oil and gas industry is cyclical, our operating
results may fluctuate.
|
|
|
|
Delays in delivery of our new fracturing fleets or future orders
of specialized equipment from suppliers could harm our business,
results of operations and financial condition.
|
|
|
|
Delays in deliveries of key raw materials or increases in the
cost of key raw materials could harm our business, results of
operations and financial condition.
|
|
|
|
There is potential for excess capacity in our industry.
|
|
|
|
Federal legislation and state legislative and regulatory
initiatives relating to hydraulic fracturing could result in
increased costs and additional operating restrictions or delays
as well as adversely affect our support services.
|
|
|
|
We participate in a capital-intensive industry. We may not be
able to finance future growth of our operations or future
acquisitions.
|
Risks Related
to This Offering and Our Common Stock
|
|
|
|
|
The initial public offering price of our common stock may not be
indicative of the market price of our common stock after this
offering. In addition, an active liquid trading market for our
common stock may not develop and our stock price may be volatile.
|
|
|
|
Purchasers of common stock in this offering will experience
immediate and substantial dilution of
$ per share.
|
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|
Subject to certain limitations, our existing stockholders may
sell common stock in the public markets, which could have an
adverse impact on the trading price of our common stock.
|
|
|
|
Provisions in our organizational documents and under Delaware
law could delay or prevent a change in control of our company,
which could adversely affect the price of our common stock.
|
9
Summary
Consolidated Financial Data
The following table presents our summary consolidated historical
financial data for the periods and as of the dates indicated.
The financial data as of December 31, 2009 and 2010 and for
the years ended December 31, 2008, 2009 and 2010 are
derived from our audited consolidated financial statements and
the notes thereto included elsewhere in this prospectus. The
financial data as of March 31, 2011 and for the three
months ended March 31, 2011 and 2010 are derived from our
unaudited consolidated financial statements and the notes
thereto included elsewhere in this prospectus and have been
prepared on a basis consistent with the audited financial
statements and the notes thereto and include all adjustments,
consisting of normal recurring adjustments, necessary for a fair
presentation of the financial information.
Historical results are not necessarily indicative of results we
expect in future periods. The data presented below should be
read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
beginning on page 32 of this prospectus and our
consolidated financial statements and the notes thereto included
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
244,157
|
|
|
$
|
67,030
|
|
|
$
|
62,441
|
|
|
$
|
127,204
|
|
|
$
|
32,636
|
|
Cost of sales
|
|
|
154,297
|
|
|
|
54,242
|
|
|
|
42,401
|
|
|
|
70,048
|
|
|
|
23,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
89,860
|
|
|
|
12,788
|
|
|
|
20,040
|
|
|
|
57,156
|
|
|
|
9,460
|
|
Selling, general and administrative expenses
|
|
|
17,998
|
|
|
|
9,533
|
|
|
|
8,950
|
|
|
|
8,825
|
|
|
|
2,867
|
|
Loss (gain) on sale/disposal of assets
|
|
|
1,571
|
|
|
|
920
|
|
|
|
397
|
|
|
|
(90
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
70,291
|
|
|
|
2,335
|
|
|
|
10,693
|
|
|
|
48,421
|
|
|
|
6,609
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
9
|
|
|
|
4
|
|
|
|
5
|
|
|
|
1
|
|
|
|
|
|
Interest expense
|
|
|
(17,350
|
)
|
|
|
(4,712
|
)
|
|
|
(6,913
|
)
|
|
|
(1,959
|
)
|
|
|
(2,998
|
)
|
Lender fees
|
|
|
(322
|
)
|
|
|
(391
|
)
|
|
|
(511
|
)
|
|
|
(25
|
)
|
|
|
(53
|
)
|
Other income
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
102
|
|
Other expense
|
|
|
(150
|
)
|
|
|
(52
|
)
|
|
|
(68
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
(17,650
|
)
|
|
|
(5,151
|
)
|
|
|
(7,487
|
)
|
|
|
(1,970
|
)
|
|
|
(2,950
|
)
|
Income (loss) before income taxes
|
|
|
52,641
|
|
|
|
(2,816
|
)
|
|
|
3,206
|
|
|
|
46,451
|
|
|
|
3,659
|
|
Provision (benefit) for income taxes
|
|
|
20,369
|
|
|
|
(386
|
)
|
|
|
2,085
|
|
|
|
17,366
|
|
|
|
1,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
32,272
|
|
|
$
|
(2,430
|
)
|
|
$
|
1,121
|
|
|
$
|
29,085
|
|
|
$
|
2,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share
|
|
$
|
0.70
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.02
|
|
|
$
|
0.61
|
|
|
$
|
0.05
|
|
Diluted income (loss) per share
|
|
$
|
0.67
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.02
|
|
|
$
|
0.60
|
|
|
$
|
0.05
|
|
Other Supplementary Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(1)
|
|
$
|
82,606
|
|
|
$
|
13,083
|
|
|
$
|
19,927
|
|
|
$
|
51,934
|
|
|
$
|
9,111
|
|
Capital expenditures
|
|
|
44,473
|
|
|
|
4,301
|
|
|
|
21,526
|
|
|
|
29,784
|
|
|
|
2,515
|
|
Balance Sheet Data (as of end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,817
|
|
|
$
|
1,178
|
|
|
$
|
109
|
|
|
$
|
2,056
|
|
|
|
|
|
Net working capital(2)
|
|
|
24,747
|
|
|
|
2,936
|
|
|
|
6,503
|
|
|
|
52,307
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
88,395
|
|
|
|
65,404
|
|
|
|
71,441
|
|
|
|
117,277
|
|
|
|
|
|
Total assets
|
|
|
226,088
|
|
|
|
150,231
|
|
|
|
155,212
|
|
|
|
285,358
|
|
|
|
|
|
|
|
|
(1) |
|
EBITDA and Adjusted EBITDA are non-GAAP financial measures, and
when analyzing our operating performance, investors should use
EBITDA and Adjusted EBITDA in addition to, and not as an
alternative for, operating income and net (loss) income (each as
determined in accordance |
10
|
|
|
|
|
with GAAP). We use EBITDA and Adjusted EBTIDA as supplemental
financial measures. EBITDA is defined as net income (loss)
before interest expense (net), income taxes and depreciation and
amortization. Adjusted EBTIDA is EBITDA further adjusted for
certain other items which are not indicative of future
performance or cash flow, including lender fees, other
non-operating expenses and loss on sale/disposal of property,
plant and equipment. We believe Adjusted EBITDA is a useful
supplemental indicator of our performance. |
|
|
|
EBITDA and Adjusted EBITDA, as used and defined by us, may not
be comparable to similarly titled measures employed by other
companies and are not measures of performance calculated in
accordance with GAAP. There are significant limitations to using
EBITDA and Adjusted EBITDA as measures of performance, including
the inability to analyze the effect of certain recurring and
non-recurring items that materially affect our net income or
loss, the lack of comparability of results of operations of
different companies and the different methods of calculating
EBITDA and Adjusted EBITDA reported by different companies, and
should not be considered in isolation or as substitutes for
analysis of our results as reported under GAAP. |
|
|
|
For example, EBITDA does not reflect: |
|
|
|
cash expenditures or future requirements for capital
expenditures or contractual commitments, changes in, or cash
requirements for, working capital needs;
|
|
|
|
interest expense or the cash requirements necessary
to service interest or principal payments on debt; and
|
|
|
|
any cash requirements for assets being depreciated
and amortized that may have to be replaced in the future.
|
|
|
|
EBITDA and Adjusted EBITDA do not represent funds available for
discretionary use because those funds are required for debt
service, capital expenditures, working capital and other
commitments and obligations. However, our management team
believes EBITDA and Adjusted EBITDA are useful to an investor in
evaluating us because these measures: |
|
|
|
are widely used by investors in our industry to
measure a companys operating performance without regard to
items excluded from the calculation of such terms, which can
vary substantially from company to company depending upon
accounting methods and book value of assets, capital structure
and the method by which assets were acquired, among other
factors;
|
|
|
|
help investors to more meaningfully evaluate and
compare the results of our operations from period to period by
removing the effect of our capital structure from our operating
structure, which is useful for trending, analyzing and
benchmarking the performance and value of our business; and
|
|
|
|
are used by our management team for various other
purposes in presentations to our board as bases for strategic
planning and forecasting and is an important measure in our
incentive compensation plans.
|
|
(2) |
|
Consists of (a) current assets less cash and cash
equivalents minus (b) current liabilities less current
portion of debt. |
11
Reconciliation of
Non-GAAP Financial Measures
|
|
|
|
|
The following table sets forth the reconciliation of our net
income (loss) to EBITDA and Adjusted EBITDA for the periods
indicated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
Net income (loss)
|
|
$
|
32,272
|
|
|
$
|
(2,430
|
)
|
|
$
|
1,121
|
|
|
$
|
29,085
|
|
|
$
|
2,243
|
|
Interest expense, net
|
|
|
17,341
|
|
|
|
4,708
|
|
|
|
6,909
|
|
|
|
1,958
|
|
|
|
2,998
|
|
Provision (benefit) for income taxes
|
|
|
20,369
|
|
|
|
(386
|
)
|
|
|
2,085
|
|
|
|
17,366
|
|
|
|
1,416
|
|
Depreciation and amortization
|
|
|
10,744
|
|
|
|
9,828
|
|
|
|
8,836
|
|
|
|
3,603
|
|
|
|
2,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
80,726
|
|
|
$
|
11,720
|
|
|
$
|
18,951
|
|
|
$
|
52,012
|
|
|
$
|
9,174
|
|
Adjustments to EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lender fees
|
|
|
322
|
|
|
|
391
|
|
|
|
511
|
|
|
|
25
|
|
|
|
53
|
|
Other (income) expense(1)
|
|
|
(13
|
)
|
|
|
52
|
|
|
|
68
|
|
|
|
(13
|
)
|
|
|
(100
|
)
|
Loss (gain) on sale/disposition of property, plant &
equipment
|
|
|
1,571
|
|
|
|
920
|
|
|
|
397
|
|
|
|
(90
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
82,606
|
|
|
$
|
13,083
|
|
|
$
|
19,927
|
|
|
$
|
51,934
|
|
|
$
|
9,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of state franchise taxes and other non-operating
expenses. |
12
RISK
FACTORS
You should carefully consider each of the following risk
factors and all of the other information set forth in this
prospectus before deciding to invest in our common stock. The
risks and uncertainties described below are not the only ones we
face. If any of the following risks actually occur, our
business, financial condition and results of operations could be
harmed and we may not be able to achieve our goals. If that
occurs, the value of our common stock could decline and you
could lose some or all of your investment.
Risks Relating to
Our Business
Our business
depends on the oil and natural gas industry and particularly on
the level of exploration, development and production of oil and
natural gas in the United States. Our markets may be adversely
affected by industry conditions that are beyond our
control.
We depend on our customers willingness to make operating
and capital expenditures to explore for, develop and produce oil
and natural gas in the United States. If these expenditures
decline, our business may suffer. Our customers
willingness to explore, develop and produce depends largely upon
prevailing industry conditions that are influenced by numerous
factors over which our management has no control, such as:
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the supply of and demand for oil and natural gas, including
current natural gas storage capacity and usage;
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the prices, and expectations about future prices, of oil and
natural gas;
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the supply of and demand for hydraulic fracturing and other well
service equipment in the United States;
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the cost of exploring for, developing, producing and delivering
oil and natural gas;
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public pressure on, and legislative and regulatory interest
within, federal, state and local governments to stop,
significantly limit or regulate hydraulic fracturing activities;
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the expected rates of decline of current oil and natural gas
production;
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lead times associated with acquiring equipment and products and
availability of personnel;
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regulation of drilling activity;
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the discovery rates of new oil and natural gas reserves;
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available pipeline and other transportation capacity;
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weather conditions, including hurricanes that can affect oil and
natural gas operations over a wide area;
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political instability in oil and natural gas producing countries;
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domestic and worldwide economic conditions;
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technical advances affecting energy consumption;
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the price and availability of alternative fuels; and
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merger and divestiture activity among oil and natural gas
producers.
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The level of activity in the oil and natural gas exploration and
production industry in the United States is volatile. In
2009, our industry experienced an unprecedented decline in
drilling activity in the United States as rig counts dropped by
approximately 57% from 2008 highs. Correlating with this
decline, the Henry Hub spot price for natural gas decreased from
an average of $8.90 per mcf in 2008 to $4.16 per mcf in 2009. As
of June 3, 2011, the Henry Hub spot price for natural gas
was $4.71 per mcf. Unexpected material declines in oil and
natural gas prices, or drilling or completion
13
activity in the southern United States oil and natural gas shale
regions, could have a material adverse effect on our business,
financial condition, results of operations and cash flows. In
addition, a decrease in the development rate of oil and natural
gas reserves in our market areas may also have an adverse impact
on our business, even in an environment of stronger oil and
natural gas prices.
The
cyclicality of the oil and natural gas industry in the United
States may cause our operating results to
fluctuate.
We have experienced in the past, and may experience in the
future, significant fluctuations in operating results as a
result of the reactions of our customers to actual and
anticipated changes in oil and natural gas prices in the United
States. For example, in 2009, due to fluctuations in our
operating results caused largely by the volatility of commodity
prices, we faced potential payment and covenant defaults under
our then-existing subordinated term loan agreement. In
connection with such potential defaults, we obtained a waiver
from our lenders to extend the maturity date and amend certain
payment terms and maintenance covenants under such facility. If
our operating results are adversely impacted by actual or
anticipated changes in oil and natural gas prices, or for any
other reason, then we may be in default under our debt
arrangements and be required to seek a waiver from our lenders
in the future, and such measures may not be successful.
There is
potential for excess capacity in our industry, which could
adversely affect our business and operating
results.
Currently, the demand for hydraulic fracturing services exceeds
the availability of fracturing equipment and crews across the
industry and in our operating areas in particular. The
accelerated wear and tear of hydraulic fracturing equipment due
to its deployment in unconventional, as opposed to conventional,
oil and natural gas fields characterized by longer lateral
lengths and larger numbers of fracturing stages has further
amplified this equipment and crew shortage. As a result, we and
our competitors have ordered additional fracturing equipment to
meet existing and projected long-term demand. If demand for
fracturing services decreases or the supply of fracturing
equipment and crews increases, then the increase in supply
relative to demand may result in lower prices and utilization of
our services and could adversely affect our business and results
of operations.
Our inability
to acquire or delays in the delivery of our new fracturing
fleets or future orders of specialized equipment from suppliers
could harm our business, results of operations and financial
condition.
We expect to take delivery of two new fracturing fleets during
2011, Fleet 5 in June 2011 and Fleet 6 in the fourth quarter of
2011. We expect to take delivery of another two hydraulic
fracturing fleets during 2012, Fleet 7 in the first half of 2012
and Fleet 8 in the second half of 2012. The delivery of Fleets
5, 6, 7 and 8 or any other fracturing fleets we may order in the
future could be materially delayed or not delivered at all.
Total is constructing our hydraulic fracturing pumps for all
four of our on-order fleets. The overall number of hydraulic
fracturing equipment suppliers in the industry is limited, and
there is high demand for such equipment, which may increase the
risk of delay or failure to deliver and limit our ability to
find alternative suppliers. Any material delay or failure to
deliver new fleets could defer or substantially reduce our
revenue from the deployment of these fracturing fleets.
Additionally, if the delivery of Fleet 5 is materially delayed
or not delivered, we may be unable to fulfill our term
fracturing contract relating to this fleet. In the event that we
were unable to commence service under our contract relating to
Fleet 5 (due to equipment delivery delay or otherwise) by a
specified date, the customer has the right to terminate the
contract without penalty.
Delays in
deliveries of key raw materials or increases in the cost of key
raw materials could harm our business, results of operations and
financial condition.
We have established relationships with a limited number of
suppliers of our raw materials and finished products. Should any
of our current suppliers be unable to provide the necessary raw
14
materials (such as proppant, chemicals or coiled tubing) or
finished products (such as fluid-handling equipment) or
otherwise fail to deliver the products in a timely manner and in
the quantities required, any resulting delays in the provision
of services could have a material adverse effect on our
business, financial condition, results of operations and cash
flows. During 2008, our industry faced sporadic proppant
shortages associated with pressure pumping operations requiring
work stoppages, which adversely impacted the operating results
of several competitors. We may not be able to mitigate any
future shortages of raw materials, including proppants.
Federal
legislation and state legislative and regulatory initiatives
relating to hydraulic fracturing could result in increased costs
and additional operating restrictions or delays as well as
adversely affect our support services.
The federal Safe Drinking Water Act, or SDWA, regulates the
underground injection of substances through the Underground
Injection Control, or the UIC program. Hydraulic fracturing
generally is exempt from regulation under the UIC program, and
the hydraulic fracturing process is typically regulated by state
oil and gas commissions. The United States Environmental
Protection Agency, or EPA, has recently taken the position that
hydraulic fracturing with fluids containing diesel fuel are
subject to regulation under the UIC program, specifically as
Class II UIC wells. At the same time, the EPA
has commenced a study of the potential environmental impacts of
hydraulic fracturing activities, and a committee of the
U.S. House of Representatives recently concluded an
investigation of hydraulic fracturing practices. As part of
these studies, both the EPA and the House committee have
requested that certain companies provide them with information
concerning the chemicals used in the hydraulic fracturing
process. These studies, depending on their results, could spur
initiatives to regulate hydraulic fracturing under the SDWA or
otherwise. Legislation, which has not passed, has been
introduced before Congress in the last few sessions to provide
for federal regulation of hydraulic fracturing and to require
disclosure of the chemicals used in the fracturing process. If
similar federal legislation is introduced and becomes law in the
future, the legislation could establish an additional level of
regulation at the federal level that could lead to operational
delays or increased operating costs, making it more difficult to
perform hydraulic fracturing and increasing our costs of
compliance and doing business.
In addition, various state and local governments have
implemented, or are considering, increased regulatory oversight
of hydraulic fracturing through additional permit requirements,
operational restrictions, disclosure requirements and temporary
or permanent bans on hydraulic fracturing in certain
environmentally sensitive areas such as certain watersheds. The
Texas Senate and House of Representatives have both passed bills
that would require the disclosure of information regarding the
substances used in the hydraulic fracturing process to the
Railroad Commission of Texas and the public. If signed into law
by the Governor, this bill could increase our costs of
compliance and doing business. Moreover, the availability of
information regarding the constituents of hydraulic fracturing
fluids could make it easier for third parties opposing the
hydraulic fracturing process to initiate legal proceedings based
on allegations that specific chemicals used in the fracturing
process could adversely affect groundwater. Disclosure of our
proprietary chemical formulas to third parties or to the public,
even if inadvertent, could diminish the value of those formulas
and could result in competitive harm to us.
The adoption of new laws or regulations imposing reporting
obligations on, or otherwise limiting, the hydraulic fracturing
process could make it more difficult to complete natural gas
wells in shale formations, increase our costs of compliance and
adversely affect the hydraulic fracturing services that we
render for our exploration and production customers. In
addition, if hydraulic fracturing becomes regulated at the
federal level as a result of federal legislation or regulatory
initiatives by the EPA, fracturing activities could become
subject to additional permitting requirements, and also to
attendant permitting delays and potential increases in cost,
which could adversely affect our business and results of
operations.
15
Our executive
officers and certain key personnel are critical to our business
and these officers and key personnel may not remain with us in
the future.
Our future success depends upon the continued service of our
executive officers and other key personnel, particularly Joshua
E. Comstock, our Chief Executive Officer, President and
Chairman. If we lose the services of Mr. Comstock, our other
executive officers or other key personnel, our business,
operating results and financial condition could be harmed.
Additionally, proceeds from the key person life insurance on
Mr. Comstock would not be sufficient to cover our losses in
the event we were to lose his services.
Reliance upon
a few large customers may adversely affect our revenues and
operating results.
Our top five customers accounted for approximately 81.0%, 67.4%
and 61.1% of our revenue for the years ended December 31,
2010, 2009 and 2008, respectively. Our top ten customers
represented approximately 90.2%, 90.6% and 79.9% of our revenue
for the years ended December 31, 2010, 2009 and 2008,
respectively. For the three months ended March 31, 2011,
our top five customers accounted for 89.8% of our revenues and
our top ten customers accounted for 97.2% of our revenues. It is
likely that we will continue to derive a significant portion of
our revenue from a relatively small number of customers in the
future. If a major customer fails to pay us or decides not to
continue to use our services, revenue could decline and our
operating results and financial condition could be harmed.
We may not be
able to renew our term contracts on attractive terms or at all,
which could adversely impact our results of operations,
financial condition and cash flows.
A significant amount of our revenue is currently derived from
term contracts. For the three months ended March 31, 2011,
we derived 53.6% of our total revenues from our term contracts.
The term of these contracts ranges from one to three years. Once
these contracts expire, we may not be able to extend the
contracts, enter into additional term contracts on favorable
terms or at all or deploy our hydraulic fracturing fleets in the
spot market on attractive terms. If we are not able to do so,
our results of operations, financial condition and cash flows
could be adversely impacted.
We are
vulnerable to the potential difficulties associated with rapid
growth and expansion.
We have grown rapidly over the last several years. For example,
from the year ended December 31, 2008 through the year
ended December 31, 2010, our Adjusted EBITDA increased
$62.7 million from $19.9 million to
$82.6 million. For the year ended December 31, 2010,
our revenues were $244.2 million and net income was
$32.3 million. We believe that our future success depends
on our ability to manage the rapid growth that we have
experienced and the demands from increased responsibility on our
management personnel. The following factors could present
difficulties to us:
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lack of sufficient executive-level personnel;
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increased administrative burden;
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long lead times associated with acquiring additional equipment,
including potential delays with respect to our four on-order
fracturing fleets; and
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ability to maintain the level of focused service attention that
we have historically been able to provide to our customers.
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In addition, we recently completed the acquisition of Total and
may in the future seek to grow our business through acquisitions
that enhance our existing operations. The success of any
completed acquisition, including our acquisition of Total, will
depend on our ability to integrate effectively the acquired
business into our existing operations. The process of
integrating acquired businesses may involve unforeseen
difficulties and may require a disproportionate amount of our
managerial and
16
financial resources. Our operating results could be adversely
affected if we do not successfully manage these potential
difficulties.
We may be
unable to employ a sufficient number of skilled and qualified
workers.
The delivery of our services and products requires personnel
with specialized skills and experience who can perform
physically demanding work. As a result of the volatility in the
energy service industry and the demanding nature of the work,
workers may choose to pursue employment in fields that offer a
more desirable work environment. Our ability to be productive
and profitable will depend upon our ability to employ and retain
skilled workers. In addition, our ability to expand our
operations depends in part on our ability to increase the size
of our skilled labor force. The demand for skilled workers in
our geographic area of operations is high, and the supply is
limited. A significant increase in the wages paid by competing
employers could result in a reduction of our skilled labor
force, increases in the wage rates that we must pay, or both. If
either of these events were to occur, our capacity and
profitability could be diminished and our growth potential could
be impaired.
Our operations
are subject to hazards inherent in the energy services
industry.
Risks inherent to our industry, such as equipment defects,
vehicle accidents, explosions and uncontrollable flows of gas or
well fluids, can cause personal injury, loss of life, suspension
of operations, damage to formations, damage to facilities,
business interruption and damage to, or destruction of property,
equipment and the environment. These risks could expose us to
substantial liability for personal injury, wrongful death,
property damage, loss of oil and natural gas production,
pollution and other environmental damages. The existence,
frequency and severity of such incidents will affect operating
costs, insurability and relationships with customers, employees
and regulators. In particular, our customers may elect not to
purchase our services if they view our safety record as
unacceptable, which could cause us to lose customers and
substantial revenues.
Our operational personnel have experienced accidents which have,
in some instances, resulted in serious injuries. Our safety
procedures may not always prevent such damages. Our insurance
coverage may be inadequate to cover our liabilities. In
addition, we may not be able to maintain adequate insurance in
the future at rates we consider reasonable and commercially
justifiable or on terms as favorable as our current
arrangements. The occurrence of a significant uninsured claim, a
claim in excess of the insurance coverage limits maintained by
us or a claim at a time when we are not able to obtain liability
insurance could have a material adverse effect on our ability to
conduct normal business operations and on our financial
condition, results of operations and cash flows.
We participate
in a capital-intensive industry. We may not be able to finance
future growth of our operations or future
acquisitions.
Historically, we have funded the growth of our operations and
equipment purchases from bank debt, capital contributions from
our equity sponsors and cash generated by our business. If we do
not generate sufficient cash from operations to expand our
business, our growth could be limited unless we are able to
obtain additional capital through equity or debt financings or
bank borrowings. Our inability to grow our business may
adversely impact our ability to sustain or improve our profits.
Our industry
is highly competitive and we may not be able to provide services
that meet the specific needs of oil and natural gas exploration
and production companies at competitive prices.
Our industry is highly competitive. The principal competitive
factors in our markets are generally technical expertise, fleet
capability and experience. We compete with large national and
multi-national companies that have longer operating histories,
greater financial resources and greater name recognition than we
do and who can operate at a loss in the regions in which we
operate. Several of our competitors provide a broader array of
services and have a stronger presence in more geographic
17
markets. In addition, there are several smaller companies
capable of competing effectively on a regional or local basis.
Our competitors may be able to respond more quickly to new or
emerging technologies and services and changes in customer
requirements. As a result of competition, we may lose market
share or be unable to maintain or increase prices for our
present services or to acquire additional business
opportunities, which could have a material adverse effect on our
business, financial condition, results of operations and cash
flows. In addition, competition among oilfield service and
equipment providers is affected by each providers
reputation for safety and quality. Our reputation for safety and
quality may not be sufficient to enable us to maintain our
competitive position.
Covenants in
our debt agreement restrict our business in many
ways.
Our credit facility contains restrictive covenants and requires
us to maintain a debt coverage ratio, to maintain a fixed charge
coverage ratio and to satisfy other financial condition tests.
Our ability to meet those financial requirements can be affected
by adverse industry conditions and other events beyond our
control, and we cannot be certain that we will meet those
requirements. In addition, our credit facility contains a number
of additional restrictive covenants, including a covenant
limiting, subject to certain exceptions, our ability to make
capital expenditures in excess of $100.0 million in any
fiscal year, provided that up to $50.0 million of such
amount in any fiscal year may be rolled over to the subsequent
fiscal year and up to $50.0 million of such amount may also
be pulled forward from the subsequent fiscal year. The capital
expenditure restrictions do not apply to capital expenditures
financed with proceeds from the issuance of common equity
interests or to maintenance capital expenditures.
A breach of any of these covenants could result in a default
under our credit facility. Upon the occurrence of an event of
default under our credit facility, the lenders could elect to
declare all amounts outstanding to be immediately due and
payable and terminate all commitments to extend further credit.
If we were unable to repay those amounts, the lenders under our
credit facility could proceed against the collateral granted to
them to secure that indebtedness.
We have pledged a significant portion of our and our
subsidiarys assets as collateral under our credit
facility. If the lenders under our credit facility accelerate
the repayment of borrowings, we may not have sufficient assets
to repay indebtedness under such facilities and our other
indebtedness. Please read Managements Discussion and
Analysis of Financial Condition and Results of
Operations Description of Our Indebtedness
beginning on page 44 of this prospectus for additional
information regarding our credit facility.
Energy
Spectrum and Citigroup/Stepstone will continue to have
significant influence over us, including influence over
decisions that require stockholder approval, which could limit
your ability to influence the outcome of key transactions,
including a change in control.
Energy Spectrum Partners IV LP, whom we refer to in this
prospectus as Energy Spectrum, holds approximately 16.3% of our
outstanding common stock prior to giving effect to this offering
and will hold approximately % of
our outstanding common stock after this offering (assuming the
underwriters option to purchase additional shares is not
exercised). StepStone Capital Partners II Onshore, L.P.,
StepStone Capital Partners II Cayman Holdings, L.P., 2006
Co-Investment Portfolio, L.P. and Citigroup Capital
Partners II Employee Master Fund, L.P., whom we
collectively refer to in this prospectus as Citigroup/StepStone,
hold approximately 14.0% of our outstanding common stock prior
to giving effect to this offering and will hold
approximately % of our outstanding common stock after
this offering (assuming the underwriters option to
purchase additional shares is not exercised). In addition,
pursuant to our Amended and Restated Stockholders
Agreement, each of Citigroup/StepStone and Energy Spectrum,
collectively referred to in this prospectus as our Sponsors, has
the right to name one director to our board of directors for so
long as each holds 10% of our common stock. As a result, our
Sponsors have significant influence over our decisions to enter
into any corporate transaction regardless of whether others
believe that the transaction is in our best interests.
18
Please read Certain Relationships and Related Party
Transactions Amended and Restated Stockholders
Agreement beginning on page 89 of this prospectus.
As long as our Sponsors continue to hold a large portion of our
outstanding common stock, they will have the ability to
influence the vote in any election of directors and over
decisions that require stockholder approval. In addition, the
concentration of ownership may have the effect of delaying,
preventing or deterring a change in control of our company,
could deprive stockholders of an opportunity to receive a
premium for their common stock as part of a sale of our company
and might ultimately affect the market price of our common
stock.
Our Sponsors are also in the business of making investments in
companies and may from time to time acquire and hold interests
in businesses that compete directly or indirectly with us. Our
Sponsors may also pursue acquisition opportunities that are
complementary to our business, and, as a result, those
acquisition opportunities may not be available to us.
Failure to
establish and maintain effective internal control over financial
reporting could have a material adverse effect on our business,
operating results and the trading price of our common
stock.
As a privately held company, we are not currently required to
comply with Sections 302 and 404 of the Sarbanes-Oxley Act
of 2002, and are therefore not required to make a formal
assessment of the effectiveness of our internal control over
financial reporting for that purpose. Following the
effectiveness of the registration statement of which this
prospectus forms a part, we will be a public company and be
required to comply with Sections 302 and 404 of the
Sarbanes-Oxley Act of 2002, which will require our management to
certify financial and other information in our quarterly and
annual reports and provide an annual management report on the
effectiveness of our internal control over financial reporting.
We will not be required to make our first assessment of our
internal control over financial reporting until the year
following our first annual report required to be filed with the
SEC. To comply with the requirements of being a public company,
we will need to upgrade our systems, including information
technology, implement additional financial and management
controls, reporting systems and procedures and hire additional
accounting, finance and legal staff. Implementing these
requirements may occupy a significant amount of time of our
board of directors and management and significantly increase our
costs and expenses.
Our efforts to develop and maintain our internal controls may
not be successful, and we may be unable to maintain effective
controls over our financial processes and reporting in the
future and comply with the certification and reporting
obligations under Sections 302 and 404 of the
Sarbanes-Oxley Act of 2002. Any failure to maintain effective
controls, or any difficulties encountered in our implementation
or improvement of our internal controls over financial reporting
could result in material misstatements that are not prevented or
detected on a timely basis, which could potentially subject us
to sanctions or investigations by the SEC, the New York Stock
Exchange, or NYSE, or other regulatory authorities. Ineffective
internal controls could also cause investors to lose confidence
in our reported financial information.
Weather
conditions could materially impair our business.
Our operations in Louisiana and parts of Texas may be adversely
affected by hurricanes and tropical storms, resulting in reduced
demand for our well completion services. Adverse weather can
also directly impede our own operations. Repercussions of severe
weather conditions may include:
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curtailment of services;
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weather-related damage to facilities and equipment, resulting in
suspension of operations;
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inability to deliver equipment, personnel and products to job
sites in accordance with contract schedules;
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increase in the price of insurance; and
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loss of productivity.
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These constraints could also delay our operations, reduce our
revenues and materially increase our operating and capital costs.
Climate change
legislation or regulations restricting emissions of greenhouse
gases could result in increased operating costs and reduced
demand for our services.
On December 15, 2009, the EPA published its findings that
emissions of carbon dioxide, methane and other greenhouse gases,
or GHGs, present an endangerment to public health and welfare
because emissions of such gases are, according to the EPA,
contributing to the warming of the earths atmosphere and
other climate changes. Based on these findings, the EPA has
begun to adopt and implement regulations that would restrict
emissions of GHGs under existing provisions of the federal Clean
Air Act, or the CAA. The EPA recently adopted two sets of rules
regulating greenhouse gas emissions under the CAA, one of which
requires a reduction in emissions of greenhouse gases from motor
vehicles and the other of which will require that certain large
stationary sources obtain permits for their emissions of
greenhouse gases, effective January 2, 2011. The EPA has
also adopted rules requiring the reporting of greenhouse gas
emissions from specified large greenhouse gas emission sources,
on an annual basis, beginning in 2011 for emissions occurring
after January 1, 2010, as well as certain oil and natural
gas production facilities, on an annual basis, beginning in 2012
for emissions occurring in 2011.
In addition to the EPA, both houses of Congress have actively
considered legislation to reduce emissions of GHGs, and more
than one-third of the states have already taken legal measures
to reduce emissions of GHGs, primarily through the planned
development of GHG emission inventories
and/or
regional GHG cap and trade programs. Most of these cap and trade
programs work by requiring either major sources of emissions or
major producers of fuels to acquire and surrender emission
allowances, with the number of allowances available for purchase
reduced each year until the overall GHG emission reduction goal
is achieved.
Any new federal, regional or state restrictions on emissions of
carbon dioxide or other GHGs that may be imposed in areas in
which we conduct business could result in increased compliance
costs or additional operating restrictions on our customers.
Such legislation could potentially make our customers
products more expensive and thus reduce demand for them, which
could have a material adverse effect on the demand for our
services and our business. Finally, some scientists have
concluded that increasing concentrations of GHGs in the
earths atmosphere may produce climate changes that have
significant physical effects, such as increased frequency and
severity of storms, droughts, and floods and other climatic
events. If any such effects were to occur, they could have an
adverse effect on our results of operations. Please read
Business Environmental Matters beginning
on page 60 of this prospectus for a more detailed
description of our climate-change related risks.
We are subject
to extensive and costly environmental, health and safety laws,
rules and regulations that may require us to take actions that
will adversely affect our results of operations.
Our business is significantly affected by stringent and complex
federal, state and local laws and regulations governing the
discharge of substances into the environment or otherwise
relating to protection of the environment or human health and
safety. As part of our business, we handle, transport, and
dispose of a variety of fluids and substances used by our
customers in connection with their oil and natural gas
exploration and production activities. We also generate and
dispose of hazardous waste. The generation, handling,
transportation, and disposal of these fluids, substances, and
waste are regulated by a number of laws, including the Resource
Recovery and Conservation Act; the Comprehensive Environmental
Response, Compensation, and Liability Act; the Clean Water
20
Act; the Safe Drinking Water Act; and analogous state laws.
Failure to properly handle, transport or dispose of these
materials or otherwise conduct our operations in accordance with
these and other environmental laws could expose us to liability
for governmental penalties, third-party claims, cleanup costs
associated with releases of such materials, damages to natural
resources, and other damages, as well as potentially impair our
ability to conduct our operations. We could be exposed to
liability for cleanup costs, natural resource damages and other
damages under these and other environmental laws as a result of
our conduct that was lawful at the time it occurred or the
conduct of, or conditions caused by, prior operators or other
third parties. Environmental laws and regulations have changed
in the past, and they are likely to change in the future. If
existing regulatory requirements or enforcement policies change,
we may be required to make significant unanticipated capital and
operating expenditures.
Any failure by us to comply with applicable environmental,
health and safety laws, rules and regulations may result in
governmental authorities taking actions against our business
that could adversely impact our operations and financial
condition, including the:
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issuance of administrative, civil and criminal penalties;
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modification, denial or revocation of permits or other
authorizations;
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imposition of limitations on our operations; and
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performance of site investigatory, remedial or other corrective
actions.
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The effect of environmental laws and regulations on our business
is discussed in greater detail under Business
Environmental Matters beginning on page 60 of this
prospectus.
More stringent
trucking regulations may increase our costs and negatively
impact our results of operations.
As part of the services we provide, we operate as a motor
carrier and therefore are subject to regulation by the United
States Department of Transportation, or the DOT, and by other
various state agencies. These regulatory authorities exercise
broad powers, governing activities such as the authorization to
engage in motor carrier operations and regulatory safety, and
hazardous materials labeling, placarding and marking. There are
additional regulations specifically relating to the trucking
industry, including testing and specification of equipment and
product handling requirements. The trucking industry is subject
to possible regulatory and legislative changes that may affect
the economics of the industry by requiring changes in operating
practices or by changing the demand for common or contract
carrier services or the cost of providing truckload services.
Some of these possible changes include increasingly stringent
environmental regulations, changes in the hours of service
regulations which govern the amount of time a driver may drive
in any specific period, onboard black box recorder devices or
limits on vehicle weight and size.
Interstate motor carrier operations are subject to safety
requirements prescribed by the DOT. To a large degree,
intrastate motor carrier operations are subject to state safety
regulations that mirror federal regulations. Such matters as
weight and dimension of equipment are also subject to federal
and state regulations.
From time to time, various legislative proposals are introduced,
including proposals to increase federal, state or local taxes,
including taxes on motor fuels, which may increase our costs or
adversely impact the recruitment of drivers. We cannot predict
whether, or in what form, any increase in such taxes applicable
to us will be enacted.
New technology
may hurt our competitive position.
The energy service industry is subject to the introduction of
new completion techniques and services using new technologies,
some of which may be subject to patent protection. As
competitors and others use or develop new technologies or
technologies comparable to ours in the future, we may lose
market share or be placed at a competitive disadvantage.
Further, we may face competitive
21
pressure to implement or acquire certain new technologies at a
substantial cost. Some of our competitors have greater
financial, technical and personnel resources than we do, which
may allow them to gain technological advantages or implement new
technologies before we can. Additionally, we may be unable to
implement new technologies or products at all, on a timely basis
or at an acceptable cost. Limits on our ability to effectively
use or implement new technologies may have a material adverse
effect on our business, financial condition and results of
operations.
Our senior
executive officers and several of our directors may not be able
to organize and effectively manage a publicly traded company,
which could adversely affect our business, financial condition
and results of operations.
Some of our senior executive officers or directors have not
previously organized or managed a publicly traded company, and
our senior executive officers and directors may not be
successful in doing so. The demands of organizing and managing a
publicly traded company are much greater as compared to a
private company and some of our senior executive officers and
directors may not be able to meet those increased demands.
Failure to organize and effectively manage us could adversely
affect our business, financial condition and results of
operations.
Risks Related to
this Offering and Our Common Stock
The initial
public offering price of our common stock may not be indicative
of the market price of our common stock after this offering. In
addition, an active liquid trading market for our common stock
may not develop and our stock price may be
volatile.
Prior to this offering, our common stock was not traded on a
national stock exchange or in the
over-the-counter
markets. An active and liquid trading market for our common
stock may not develop or be maintained after this offering.
Liquid and active trading markets usually result in less price
volatility and more efficiency in carrying out investors
purchase and sale orders. The market price of our common stock
could vary significantly as a result of a number of factors,
some of which are beyond our control. In the event of a drop in
the market price of our common stock, you could lose a
substantial part or all of your investment in our common stock.
Moreover, the initial public offering price of our common stock
will be negotiated between us, the selling stockholders and
representatives of the underwriters, based on numerous factors,
including prevailing market conditions, our historical
performance, estimates of our business potential and our
earnings prospects, an assessment of our management and the
consideration of these factors in relation to market valuation
of companies in related businesses. The initial public offering
price of our common stock may not be indicative of the market
price of our common stock after this offering. Consequently, you
may not be able to sell our common stock at prices equal to or
greater than the price paid by you in this offering.
Even if an active trading market develops, the market price for
our common stock may be highly volatile and could be subject to
wide fluctuations after this offering. In addition to the
factors described in this section, some of the factors that
could negatively affect the market price of our common stock
include:
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changes in our funds from operations and earnings estimates;
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publication of research reports about us or the energy services
industry;
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increase in market interest rates, which may increase our cost
of capital;
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changes in market valuations of similar companies;
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adverse market reaction to any increased indebtedness we may
incur in the future;
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additions or departures of key management personnel;
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actions by our stockholders;
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speculation in the press or investment community;
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22
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a large volume of sellers of our common stock pursuant to our
resale registration statement with a relatively small volume of
purchasers; or
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general market and economic conditions.
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The stock markets in general have experienced extreme volatility
that has often been unrelated to the operating performance of
particular companies. These broad market fluctuations may
adversely affect the trading price of our common stock.
Purchasers of
common stock in this offering will experience immediate and
substantial dilution of $ per
share.
Based on an assumed initial public offering price of
$ per share, purchasers of our
common stock in this offering will experience an immediate and
substantial dilution of $ per
share in the pro forma as adjusted net tangible book value per
share of common stock from the initial public offering price,
and our pro forma as adjusted net tangible book value as of
March 31, 2011 after giving effect to this offering would
be $ per share. Please read
Dilution on page 29 of this prospectus for a
complete description of the calculation of net tangible book
value.
We do not
anticipate paying any dividends on our common stock in the
foreseeable future.
For the foreseeable future, we intend to retain earnings to grow
our business. Payments of dividends, if any, will be at the
discretion of our board of directors and will depend on many
factors, including general economic and business conditions, our
strategic plans, our financial results and condition, legal
requirements and other factors as our board of directors deems
relevant. Our credit facility restricts our ability to pay cash
dividends on our common stock and we may also enter into credit
agreements or borrowing arrangements in the future that will
restrict our ability to declare or pay cash dividends on our
common stock.
We will incur
increased costs as a result of being a public
company.
As a privately held company, we have not been responsible for
the corporate governance and financial reporting practices and
policies required of a publicly traded company. Following the
effectiveness of the registration statement of which this
prospectus forms a part, we will be a public company. As a
public company with listed equity securities, we will need to
comply with new laws, regulations and requirements, certain
corporate governance provisions of the Sarbanes-Oxley Act of
2002, related regulations of the SEC and the requirements of the
NYSE with which we are not required to comply with as a private
company. Complying with these laws, regulations and requirements
will occupy a significant amount of time of our board of
directors and management and will significantly increase our
costs and expenses. We will need to:
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institute a more comprehensive compliance function;
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design, establish, evaluate and maintain a system of internal
controls over financial reporting in compliance with the
requirements of Section 404 of the Sarbanes-Oxley Act of
2002 and the related rules and regulations of the SEC and the
Public Company Accounting Oversight Board, or PCAOB;
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comply with rules promulgated by the NYSE;
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prepare and distribute periodic public reports in compliance
with our obligations under the federal securities laws;
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establish new internal policies, such as those relating to
disclosure controls and procedures and insider trading;
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23
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involve and retain to a greater degree outside counsel and
accountants in the above activities; and
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establish an investor relations function.
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In addition, we also expect that being a public company subject
to these rules and regulations will require us to accept less
director and officer liability insurance coverage than we desire
or to incur substantial costs to obtain coverage. These factors
could also make it more difficult for us to attract and retain
qualified members of our board of directors, particularly to
serve on our Audit Committee, and qualified executive officers.
Future
issuances by us of common stock or convertible securities could
lower our stock price and dilute your ownership in
us.
We may issue additional shares of common stock or securities
convertible into shares of our common stock in public offerings
or privately negotiated transactions following this offering. As
of June 8, 2011, we had 47,499,074 shares of common
stock outstanding. We are currently authorized to issue up to
100,000,000 shares of common stock and
20,000,000 shares of preferred stock with terms designated
by our board. The potential issuance of additional shares of
common stock or convertible securities could lower the trading
price of our common stock and may dilute your ownership interest
in us.
Subject to
certain limitations, our existing stockholders may sell common
stock in the public markets, which could have an adverse impact
on the trading price of our common stock.
In December 2010, we sold 28,768,000 shares of our common
stock to institutional investors, accredited investors and one
of our executive officers in a private offering. We have filed a
shelf registration statement covering the resale of the common
stock sold in the offering. Pursuant to the terms of a
registration rights agreement we entered into with the
purchasers in the private offering, we anticipate that the shelf
registration statement will be declared effective by the SEC no
earlier than 60 days following the completion of this
offering. Additionally, pursuant to the terms of the
registration rights agreement, if an existing stockholder elects
to include shares of our common stock for resale in this
offering, such selling stockholder will be prohibited from
selling shares of our common stock (other than shares of common
stock included in this offering) for 180 days following the
effective date of the registration statement of which this
prospectus forms a part. On the effective date of the shelf
registration statement, and subject to the
lock-up
period for selling stockholders, shares owned by our existing
stockholders may be sold in the public markets. The sale of
common stock by our existing stockholders following the
effectiveness of the shelf registration statement, or the
perception that these sales may occur, could cause the market
price of our common stock to decline and impair our ability to
raise capital. Please read Shares Eligible for Future
Sale Registration Rights beginning on
page 103 of this prospectus for additional information
regarding the registration rights agreement.
Following completion of this offering, our Sponsors will own an
aggregate % of our outstanding
common stock. Pursuant to the terms of a stockholders
agreement among us and our Sponsors, our Sponsors have piggyback
rights with regard to this offering and the shelf registration
statement covering the resale of common stock sold in the
private offering. In addition, pursuant to the
stockholders agreement, our Sponsors and the other parties
to that agreement have the right to demand that we file a shelf
registration statement covering the resale of their shares of
common stock any time following 180 day after the earlier
of: (i) the effective date of the shelf registration
statement covering the resale of the shares issued in the
private offering in December 2010, or (ii) completion of
this offering. Each Sponsor, assuming such Sponsor holds at
least 5% of our common stock, has demand registration rights on
three occasions. The filing of a shelf registration statement
following a request by our Sponsors, or the sale of common stock
by our Sponsors following the effectiveness of the shelf
registration statement, or the perception that these sales may
occur, could cause the market price of our common stock to
decline and impair our ability to raise capital.
24
Please read Certain Relationships and Related Party
Transactions Amended and Restated Stockholders
Agreement beginning on page 89 of this prospectus for
additional information on our Sponsors demand rights and
piggyback rights. For additional information regarding shares of
our common stock available for sale, please read
Shares Eligible for Future Sale beginning on
page 103 of this prospectus.
The
underwriters of this offering may waive or release parties to
the lock-up agreements entered into in connection with this
offering, which could adversely affect the price of our common
stock.
Certain of our stockholders, directors and members of our senior
management team have entered into
lock-up
agreements with respect to their common stock, pursuant to which
they are subject to certain resale restrictions for a period of
180 days following the effectiveness date of the
registration statement this prospectus forms a part. Goldman,
Sachs & Co. and J.P. Morgan Securities LLC, at
any time and without notice, may release all or any portion of
the common stock subject to the foregoing
lock-up
agreements. If the restrictions under the
lock-up
agreements are waived, then common stock will be available for
sale into the public markets, which could cause the market price
of our common stock to decline and impair our ability to raise
capital.
Provisions in
our organizational documents and under Delaware law could delay
or prevent a change in control of our company, which could
adversely affect the price of our common stock.
The existence of some provisions in our organizational documents
and under Delaware law could delay or prevent a change in
control of our company that a stockholder may consider
favorable, which could adversely affect the price of our common
stock. The provisions in our amended and restated certificate of
incorporation and amended and restated bylaws that could delay
or prevent an unsolicited change in control of our company
include board authority to issue preferred stock without
stockholder approval, and advance notice provisions for director
nominations or business to be considered at a stockholder
meeting. In addition, once our Sponsors beneficial
ownership percentage drops below 25% of the outstanding shares
of common stock, we will be governed by Section 203 of the
Delaware General Corporation Law, or DGCL. These provisions may
also discourage acquisition proposals or delay or prevent a
change in control, which could harm our stock price. Please read
Description of Capital Stock Anti-Takeover
Effects of Provisions of Our Certificate of Incorporation, Our
Bylaws and Delaware Law beginning on page 100 of this
prospectus.
Future
offerings of debt securities and preferred stock, which would
rank senior to our common stock upon liquidation, may adversely
affect the market value of common stock.
In the future, we may attempt to increase our capital resources
by making offerings of debt or additional offerings of equity
securities, including commercial paper, medium-term notes,
senior or subordinated notes and classes of preferred stock.
Upon liquidation, holders of our debt securities and preferred
stock and lenders with respect to other borrowings will receive
a distribution of our available assets prior to the holders of
our common stock. Our preferred stock, which may be issued
without stockholder approval, if issued, could have a preference
on liquidating distributions or a preference on dividend
payments that would limit amounts available for distribution to
holders of our common stock. Because our decision to issue
securities in any future offering will depend on market
conditions and other factors beyond our control, we cannot
predict or estimate the amount, timing or nature of our future
offerings. Thus, holders of our common stock bear the risk that
our future offerings may reduce the market value of our common
stock.
25
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Various statements contained in this prospectus, including those
that express a belief, expectation or intention, as well as
those that are not statements of historical fact, are
forward-looking statements. These forward-looking statements may
include projections and estimates concerning the timing and
success of specific projects, our future revenues, income and
capital spending and our strategy. Our forward-looking
statements are generally accompanied by words such as
estimate, project, predict,
believe, expect, anticipate,
potential, plan, goal or
other words that convey the uncertainty of future events or
outcomes. The forward-looking statements in this prospectus
speak only as of the date of this prospectus; we disclaim any
obligation to update these statements unless required by law,
and we caution you not to rely on them unduly. We have based
these forward-looking statements on our current expectations and
assumptions about future events. While our management considers
these expectations and assumptions to be reasonable, they are
inherently subject to significant business, economic,
competitive, regulatory and other risks, contingencies and
uncertainties, most of which are difficult to predict and many
of which are beyond our control. These and other important
factors, including those discussed under Risk
Factors beginning on page 13 of this prospectus and
Managements Discussion and Analysis of Financial
Condition and Results of Operations beginning on
page 32 of this prospectus, may cause our actual results,
performance or achievements to differ materially from any future
results, performance or achievements expressed or implied by
these forward-looking statements. These risks, contingencies and
uncertainties include, but are not limited to, the following:
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a sustained decrease in domestic spending by the oil and natural
gas exploration and production industry;
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a decline in or substantial volatility of crude oil and natural
gas commodity prices;
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delay in or failure of delivery of our new fracturing fleets or
future orders of specialized equipment;
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the loss of or interruption in operations of one or more key
suppliers;
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overcapacity and competition in our industry;
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the incurrence of significant costs and liabilities in the
future resulting from our failure to comply, or our compliance
with, new or existing environmental regulations or an accidental
release of hazardous substances into the environment;
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the loss of, or inability to attract new, key management
personnel;
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the loss of, or failure to pay amounts when due by, one or more
significant customers;
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unanticipated costs, delays and other difficulties in executing
our long-term growth strategy;
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a shortage of qualified workers;
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operating hazards inherent in our industry;
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accidental damage to or malfunction of equipment;
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an increase in interest rates;
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the potential inability to comply with the financial and other
covenants in our debt agreements as a result of reduced revenues
and financial performance or our inability to raise sufficient
funds through assets sales or equity issuances should we need to
raise funds through such methods;
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the continued influence of our Sponsors;
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the potential failure to establish and maintain effective
internal control over financial reporting; and
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our inability to operate effectively as a publicly traded
company.
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26
USE OF
PROCEEDS
We expect to receive net proceeds of approximately
$ million from the sale of
the common stock offered by us in this offering, assuming an
initial public offering price of $
per share (the midpoint of the price range set forth on the
cover page of this prospectus), after deducting estimated
offering expenses and underwriting discounts and commissions of
approximately $ million. We
will not receive any of the proceeds from the sale of shares of
our common stock by the selling stockholders, including pursuant
to the underwriters option to purchase additional shares.
We intend to use the net proceeds we receive from this offering
to repay all outstanding indebtedness under our new senior
secured credit facility entered into in April 2011,
approximately $107.1 million of which was outstanding on
May 31, 2011. We intend to use any remaining net proceeds
to fund a portion of the purchase price of Fleet 5 in June
2011.
The following table illustrates our use of proceeds from this
offering:
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Sources of Cash (In millions)
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Uses of Cash (In millions)
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Net proceeds to us from this offering
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$
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Repayment of borrowings under our credit facility
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$
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Acquisition of Fleet 5
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Total
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$
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Total
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$
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As of May 31, 2011, we had approximately $92.9 million
available for borrowing under our new credit facility.
Indebtedness under our credit facility was incurred to repay
$49.6 million of indebtedness under our previous revolving
credit facility and $29.9 million of indebtedness, accrued
interest and early termination penalties under our subordinated
term loan and to fund $25.0 million of the purchase price
for our acquisition of Total. Indebtedness under our previous
revolving credit facility and our subordinated term loan, which
were terminated in connection with the repayment, were incurred
primarily to fund the acquisitions of Fleet 3 and
Fleet 4. Our new credit facility will mature on
April 19, 2016. As of May 31, 2011, the interest rate
under our credit facility was 2.7%. Please read
Managements Discussion and Analysis of Financial
Condition and Results of Operations Description of
Our Indebtedness beginning on page 44 of this
prospectus for a description of our credit facility. Affiliates
of certain of the underwriters are lenders under our credit
facility and, accordingly, will receive a portion of the
proceeds from this offering.
We estimate that the selling stockholders will receive net
proceeds of approximately
$ million from the sale
of shares
of our common stock in this offering based upon the assumed
initial offering price of $ per
share (the midpoint of the price range set forth on the cover
page of this prospectus), after deducting underwriting discounts
and commissions. If the underwriters option to purchase
additional shares is exercised in full, we estimate that the
selling stockholders will receive net proceeds of approximately
$ million.
We will pay all expenses related to this offering, other than
underwriting discounts and commissions related to the shares
sold by the selling stockholders.
An increase (decrease) in the initial public offering price of
$1.00 per share of common stock would cause the net proceeds
that we will receive from the offering, after deducting
estimated expenses and underwriting discounts and commissions,
to increase (decrease) by approximately
$ million.
DIVIDEND
POLICY
For the foreseeable future, we intend to retain earnings to grow
our business. Payments of dividends, if any, will be at the
discretion of our board of directors and will depend on many
factors, including general economic and business conditions, our
strategic plans, our financial results and condition, legal
requirements and other factors that our board of directors deems
relevant. Our credit facility restricts our ability to pay cash
dividends on our common stock, and we may also enter into credit
agreements or other borrowing arrangements in the future that
will restrict our ability to declare or pay cash dividends on
our common stock. Please read Managements Discussion
and Analysis of Financial Condition and Results of
Operations Description of Our Indebtedness
beginning on page 44 of this prospectus.
27
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization at March 31, 2011:
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on an actual basis;
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as adjusted to give effect to borrowings under our new senior
secured credit facility to: (i) repay borrowings under our
previous revolving credit facility and subordinated term loan on
April 19, 2011 and (ii) fund $25.0 million of the
purchase price of our acquisition of Total; and
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as further adjusted to give effect to this offering and the
application of net proceeds as described in Use of
Proceeds on page 27 of this prospectus.
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You should refer to Use of Proceeds on page 27
of this prospectus, Selected Consolidated Financial
Data beginning on page 30 of this prospectus,
Managements Discussion and Analysis of Financial
Condition and Results of Operations beginning on
page 32 of this prospectus and the financial statements
included elsewhere in this prospectus in evaluating the material
presented below.
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March 31, 2011
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As Further
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Actual
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As Adjusted
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Adjusted
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(In thousands, except per share data)
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Cash and cash equivalents
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$
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2,056
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$
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1,922
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$
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Long-term debt, including current maturities:
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Five-year $200 million credit facility
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$
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$
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107,100
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(1)
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$
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Three-year revolving credit facility
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54,067
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Subordinated term loan
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25,000
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Total long-term debt
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79,067
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107,100
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Stockholders equity:
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Preferred stock par value $0.01 per share,
20,000,000 shares authorized, no shares issued and
outstanding
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Common stock par value $0.01 per share,
100,000,000 shares authorized, 47,499,074 shares
issued and outstanding, actual and as
adjusted, shares
issued and outstanding as further adjusted(2)
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475
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475
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Additional paid-in capital
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80,420
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80,420
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Retained earnings
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59,768
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52,163
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(3)
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Total stockholders equity
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140,663
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133,058
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Total capitalization
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$
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219,730
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$
|
240,158
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As of May 31, 2011, we had
approximately $92.9 million available for borrowing.
|
|
|
|
(2)
|
|
The number of outstanding shares as
of March 31, 2011 excludes (i) 5,716,589 shares
of common stock issuable upon exercise of options to be
outstanding immediately after this offering, 1,907,318 of which
are exercisable, and (ii) an aggregate of approximately
1,890,618 shares of common stock reserved and available for
future issuance under the 2010 Plan. For additional information
regarding the 2010 Plan, please read Executive
Compensation and Other Information Components of
Executive Compensation Program Stock Options
on page 78 of this prospectus.
|
|
|
|
(3)
|
|
As part of the termination of our
previous subordinated term loan on April 19, 2011, we paid early
termination penalties totaling $4.7 million. In addition,
we were required to write-off $2.9 million of unamortized
debt issuance costs in connection with the termination of our
previous revolving credit facility and our subordinated term
loan. We recognized these costs in interest expense on an as
adjusted basis, reducing retained earnings.
|
28
DILUTION
Purchasers of the common stock in this offering will experience
immediate and substantial dilution in the net tangible book
value per share of the common stock for accounting purposes. Our
net tangible book value as of March 31, 2011 was
approximately $ million, or
$ per share of common stock. Net
tangible book value per share is determined by dividing our
tangible net worth (tangible assets less total liabilities) by
the total number of outstanding shares of common stock that will
be outstanding immediately prior to the closing of this
offering. After giving effect to the sale of the shares in this
offering at an assumed initial offering price of
$ and assuming the receipt of the
estimated net proceeds (after deducting estimated underwriting
discounts and commissions and expenses of this offering), our
net tangible book value as of March 31, 2011 would have
been approximately $ million,
or $ per share. This represents an
immediate increase in the net tangible book value of
$ per share to our existing
stockholders and an immediate dilution (i.e., the difference
between the offering price and the adjusted net tangible book
value after this offering) to new investors purchasing shares in
this offering of $ per share. The
following table illustrates the per share dilution to new
investors purchasing shares in this offering:
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share
|
|
|
|
|
|
$
|
|
|
Net tangible book value per share as of March 31, 2011
|
|
$
|
|
|
|
|
|
|
Increase per share attributable to new investors in this offering
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As adjusted net tangible book value per share after this offering
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to new investors in this offering
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes, on an adjusted basis as of
March 31, 2011, the total number of shares of common stock
owned by existing stockholders and to be owned by new investors,
the total consideration paid, and the average price per share
paid by our existing stockholders and to be paid by new
investors in this offering at
$ ,
the midpoint of the range of the initial public offering prices
set forth on the cover page of this prospectus, calculated
before deduction of estimated underwriting discounts and
commissions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Shares Acquired
|
|
Total Consideration
|
|
Price per
|
|
|
Number
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Share
|
|
|
|
|
|
|
(Dollars in
|
|
|
|
|
|
|
|
|
|
|
thousands)
|
|
|
|
|
|
Existing stockholders(1)
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
New investors(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
(1) |
|
The number of shares disclosed for the existing stockholders
includes shares
being sold by the selling stockholders in this offering as well
as shares
underlying vested and unvested outstanding options. Exercise of
these options, which have a price less than the initial offering
price, will result in additional dilution of net tangible book
value per share to new investors. |
|
(2) |
|
The number of shares disclosed for the new investors does not
include
the shares
being purchased by the new investors from the selling
stockholders in this offering. |
A $1.00 increase or decrease in the assumed initial offering
price of
$ per
share would increase or decrease our as adjusted net tangible
book value as of March 31, 2011 by approximately
$ million,
the as adjusted net tangible book value per share after this
offering by
$ per
share and the dilution in as adjusted net tangible book value
per share to new investors in this offering by
$ per
share, assuming the number of shares offered by us, as set forth
on the cover page of this prospectus, remains the same and after
deducting estimated underwriting discounts and commissions and
expenses of this offering.
29
SELECTED
CONSOLIDATED FINANCIAL DATA
The following table presents our summary historical financial
data for the periods and as of the dates indicated. The selected
consolidated statement of operations data and statement of cash
flows data for the years ended December 31, 2008, 2009 and
2010 and the selected consolidated balance sheet data as of
December 31, 2009 and 2010 are derived from our audited
consolidated financial statements and the notes thereto included
elsewhere in this prospectus. The selected consolidated
statement of operations data and statement of cash flows data
for the periods ended December 31, 2007 and 2006 and
October 16, 2006 and the selected consolidated balance
sheet data as of December 31, 2008, 2007 and 2006 and
October 16, 2006 were audited by Flackman
Goodman & Potter, P.A., or Flackman, an accounting
firm not registered with the PCAOB, and are considered
unaudited for purposes of the registration statement
of which this prospectus is a part. The unaudited consolidated
statement of operations data and unaudited statement of cash
flows data for the three months ended March 31, 2011 and
2010 and the selected unaudited consolidated balance sheet data
as of March 31, 2011 are derived from our unaudited
consolidated financial statements and the notes thereto included
elsewhere in this prospectus. The unaudited financial data has,
in our opinion, been prepared on a basis consistent with the
audited consolidated financial statements and notes thereto and
includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of this
information.
Historical results are not necessarily indicative of the results
we expect in future periods. The information presented below
should be read in conjunction with, and is qualified in its
entirety by reference to, Capitalization on
page 28 of this prospectus, Managements
Discussion and Analysis of Financial Condition and Results of
Operations beginning on page 32 of this prospectus
and our consolidated financial statements and the notes thereto
included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 17,
|
|
|
January 1,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2006 to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception Date)
|
|
|
October 16,
|
|
|
Three Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
to December 31,
|
|
|
2006
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(Predecessor)1
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
244,157
|
|
|
$
|
67,030
|
|
|
$
|
62,441
|
|
|
$
|
28,022
|
|
|
$
|
6,677
|
|
|
$
|
22,088
|
|
|
$
|
127,204
|
|
|
$
|
32,636
|
|
Cost of sales
|
|
|
154,297
|
|
|
|
54,242
|
|
|
|
42,401
|
|
|
|
14,227
|
|
|
|
2,504
|
|
|
|
7,226
|
|
|
|
70,048
|
|
|
|
23,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
89,860
|
|
|
|
12,788
|
|
|
|
20,040
|
|
|
|
13,795
|
|
|
|
4,173
|
|
|
|
14,862
|
|
|
|
57,156
|
|
|
|
9,460
|
|
Selling, general and administrative expenses
|
|
|
17,998
|
|
|
|
9,533
|
|
|
|
8,950
|
|
|
|
7,427
|
|
|
|
2,283
|
|
|
|
4,691
|
|
|
|
8,825
|
|
|
|
2,867
|
|
Loss (gain) on sale/disposal of assets
|
|
|
1,571
|
|
|
|
920
|
|
|
|
397
|
|
|
|
129
|
|
|
|
96
|
|
|
|
29
|
|
|
|
(90
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
70,291
|
|
|
|
2,335
|
|
|
|
10,693
|
|
|
|
6,239
|
|
|
|
1,794
|
|
|
|
10,142
|
|
|
|
48,421
|
|
|
|
6,609
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
9
|
|
|
|
4
|
|
|
|
5
|
|
|
|
50
|
|
|
|
15
|
|
|
|
81
|
|
|
|
1
|
|
|
|
|
|
Interest expense
|
|
|
(17,350
|
)
|
|
|
(4,712
|
)
|
|
|
(6,913
|
)
|
|
|
(5,786
|
)
|
|
|
(1,055
|
)
|
|
|
(2,742
|
)
|
|
|
(1,959
|
)
|
|
|
(2,998
|
)
|
Lender fees
|
|
|
(322
|
)
|
|
|
(391
|
)
|
|
|
(511
|
)
|
|
|
(341
|
)
|
|
|
(114
|
)
|
|
|
|
|
|
|
(25
|
)
|
|
|
(53
|
)
|
Other income
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
18
|
|
|
|
13
|
|
|
|
102
|
|
Other expense
|
|
|
(150
|
)
|
|
|
(52
|
)
|
|
|
(68
|
)
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
(17,650
|
)
|
|
|
(5,151
|
)
|
|
|
(7,487
|
)
|
|
|
(6,094
|
)
|
|
|
(1,153
|
)
|
|
|
(2,643
|
)
|
|
|
(1,970
|
)
|
|
|
(2,950
|
)
|
Income (loss) before income taxes
|
|
|
52,641
|
|
|
|
(2,816
|
)
|
|
|
3,206
|
|
|
|
145
|
|
|
|
641
|
|
|
|
7,499
|
|
|
|
46,451
|
|
|
|
3,659
|
|
Provision (benefit) for income taxes
|
|
|
20,369
|
|
|
|
(386
|
)
|
|
|
2,085
|
|
|
|
868
|
|
|
|
199
|
|
|
|
2,999
|
|
|
|
17,366
|
|
|
|
1,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
32,272
|
|
|
$
|
(2,430
|
)
|
|
$
|
1,121
|
|
|
$
|
(723
|
)
|
|
$
|
442
|
|
|
$
|
4,500
|
|
|
$
|
29,085
|
|
|
$
|
2,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.70
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.01
|
|
|
$
|
0.04
|
|
|
$
|
0.61
|
|
|
$
|
0.05
|
|
Diluted net income (loss) per share
|
|
$
|
0.67
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.01
|
|
|
$
|
0.04
|
|
|
$
|
0.60
|
|
|
$
|
0.05
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 17,
|
|
|
January 1,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2006 to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception Date)
|
|
|
October 16,
|
|
|
Three Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
to December 31,
|
|
|
2006
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(Predecessor)1
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Statement of Cash Flows Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
44,473
|
|
|
$
|
4,301
|
|
|
$
|
21,526
|
|
|
$
|
30,152
|
|
|
$
|
9,282
|
|
|
$
|
11,360
|
|
|
$
|
29,784
|
|
|
$
|
2,515
|
|
Cash flow provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
44,723
|
|
|
|
12,056
|
|
|
|
8,611
|
|
|
|
8,377
|
|
|
|
855
|
|
|
|
6,240
|
|
|
|
19,716
|
|
|
|
3,086
|
|
Investing activities
|
|
|
(43,818
|
)
|
|
|
(4,254
|
)
|
|
|
(20,673
|
)
|
|
|
(30,054
|
)
|
|
|
(108,760
|
)
|
|
|
(7,538
|
)
|
|
|
(27,442
|
)
|
|
|
(2,490
|
)
|
Financing activities
|
|
|
734
|
|
|
|
(6,733
|
)
|
|
|
11,921
|
|
|
|
21,305
|
|
|
|
106,700
|
|
|
|
1,000
|
|
|
|
6,965
|
|
|
|
(1,640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
October 16,
|
|
|
As of
|
|
|
|
As of December 31,
|
|
|
December 31,
|
|
|
2006
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(Predecessor)1
|
|
|
2011
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,817
|
|
|
$
|
1,178
|
|
|
$
|
109
|
|
|
$
|
250
|
|
|
$
|
622
|
|
|
$
|
1,827
|
|
|
$
|
2,056
|
|
Accounts receivable, net
|
|
|
44,354
|
|
|
|
12,668
|
|
|
|
13,362
|
|
|
|
4,409
|
|
|
|
5,557
|
|
|
|
4,842
|
|
|
|
71,769
|
|
Inventories, net
|
|
|
8,182
|
|
|
|
2,463
|
|
|
|
861
|
|
|
|
581
|
|
|
|
440
|
|
|
|
450
|
|
|
|
14,459
|
|
Property, plant and equipment, net
|
|
|
88,395
|
|
|
|
65,404
|
|
|
|
71,441
|
|
|
|
57,991
|
|
|
|
31,593
|
|
|
|
22,999
|
|
|
|
117,277
|
|
Total assets
|
|
|
226,088
|
|
|
|
150,231
|
|
|
|
155,212
|
|
|
|
133,711
|
|
|
|
111,467
|
|
|
|
56,455
|
|
|
|
285,358
|
|
Accounts payable
|
|
|
13,084
|
|
|
|
10,598
|
|
|
|
6,519
|
|
|
|
1,705
|
|
|
|
690
|
|
|
|
773
|
|
|
|
26,652
|
|
Long-term debt and capital lease obligations, excluding current
portion
|
|
|
44,817
|
|
|
|
60,668
|
|
|
|
25,041
|
|
|
|
56,773
|
|
|
|
51,700
|
|
|
|
28,755
|
|
|
|
49,067
|
|
Total stockholders equity
|
|
|
109,446
|
|
|
|
65,799
|
|
|
|
68,099
|
|
|
|
66,797
|
|
|
|
56,265
|
|
|
|
24,173
|
|
|
|
140,663
|
|
|
|
|
(1)
|
|
The statement of operations and
statement of cash flows data for the period from January 1,
2006 through October 16, 2006, and the balance sheet data
as of October 16, 2006, are the statement of operations and
statement of cash flows of our predecessor company, C&J
Spec-Rent Services, Inc.
|
31
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with Selected Consolidated Financial
Data beginning on page 30 of this prospectus and our
financial statements and related notes appearing elsewhere in
this prospectus. This discussion contains forward-looking
statements based on our current expectations, estimates and
projections about our operations and the industry in which we
operate. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of a
variety of risks and uncertainties, including those described in
this prospectus under Cautionary Note Regarding
Forward-Looking Statements on page 26 of this
prospectus and Risk Factors beginning on
page 13 of this prospectus. We assume no obligation to
update any of these forward-looking statements.
Overview
We are a rapidly growing independent provider of premium
hydraulic fracturing and coiled tubing services with a focus on
complex, technically demanding well completions. We have
historically operated in what we believe to be some of the most
geologically challenging basins in South Texas, East Texas/North
Louisiana and Western Oklahoma. We are in the process of
acquiring additional hydraulic fracturing fleets and are
evaluating opportunities with existing and new customers to
expand our operations into new areas throughout the United
States with similarly demanding completion and stimulation
requirements.
How We Generate
Our Revenues
We have completed thousands of fracturing stages and more than
9,000 coiled tubing projects. During the three months ended
March 31, 2011, we completed 633 fracturing stages and
638 coiled tubing projects. We seek to differentiate our
services from those of our competitors by providing customized
solutions for our customers most challenging well
completions. We believe our customers value the experience,
technical expertise, high level of customer service and
demonstrated operational efficiencies that we bring to projects.
We have entered into term contracts with EOG Resources (executed
April 2010), Penn Virginia (executed May 2010), Anadarko
Petroleum (executed August 2010), EXCO Resources (executed
August 2010), and Plains Exploration (executed March 2011) for
the provision of hydraulic fracturing services. We began service
under the Penn Virginia, EOG Resources, Anadarko Petroleum and
EXCO Resources contracts in July 2010, August 2010, February
2011 and April 2011, respectively. We anticipate beginning
service under the Plains Exploration contract in July 2011. Our
existing hydraulic fracturing fleets (Fleets 1, 2, 3 and
4) are dedicated through mid-2012, mid-2012, early 2013 and
mid-2014, respectively, to producers operating in the Eagle
Ford, Haynesville and Granite Wash basins. We are scheduled to
take delivery of Fleet 5 in June 2011 for deployment under a
two-year term contract. We are scheduled to take delivery of
Fleets 6, 7 and 8 in the fourth quarter of 2011, the first
half of 2012 and the second half of 2012, respectively. We
expect that each of these new fleets will be deployed under term
contracts similar to our existing term contracts.
Our revenues are derived from two sources:
|
|
|
|
|
monthly payments for the committed hydraulic fracturing fleets
under term contracts as well as prevailing market rates for spot
market work, together with associated charges or handling fees
for chemicals and proppants that are consumed during the
fracturing process; and
|
|
|
|
prevailing market rates for coiled tubing, pressure pumping and
other related well stimulation services, together with
associated charges for stimulation fluids, nitrogen and coiled
tubing materials.
|
Hydraulic Fracturing. Our term
contracts generally range from one year to three years. Under
the term contacts, our customers are obligated to pay us on a
monthly basis for a specified number of
32
hours of service, whether or not those services are actually
utilized. To the extent customers utilize more than the
specified contract minimums, we will be paid a pre-agreed amount
for the provision of such additional services. Our current term
contracts restrict the ability of the customer to terminate or
require our customers to pay us a lump-sum early termination
fee, generally representing all or a significant portion of the
remaining economic value of the contracts to us.
Although our term contracts provide us some visibility on
anticipated future minimum asset utilization, our term contracts
do not provide us with sufficient certainty to present backlog
information on an ongoing basis. Unlike long-term contracts for
equipment or services at fixed prices or on a day rate or
turnkey basis, where future revenue or earnings can be reliably
forecasted based on the dollar amount of backlog believed to be
firm, future revenues generated from our term contracts are
subject to a number of variables that prevent us from providing
similar information with any degree of certainty. Under our term
contracts, we derive revenues from:
|
|
|
|
|
mandatory monthly payments for a specified minimum number of
hours of service per month;
|
|
|
|
|
|
pre-agreed amounts for each hour of service in excess of the
contracted minimum number of hours of service per month; and
|
|
|
|
|
|
pre-agreed service charges for chemicals and proppant materials
that are consumed during the fracturing process.
|
Given these variables, revenues from our term contracts vary
substantially from
customer-to-customer
and from
month-to-month
depending on the number of hours of services actually provided
and chemicals and proppant materials consumed. Generally, when
we exceed the number of hours of service included in our base
monthly rate, we consume more chemicals and proppants and
provide additional pumping and related services to complete the
project, each of which will significantly impact our revenues.
Mandatory monthly payments under our term contracts have
historically accounted for less than half of our total revenues.
Although we have entered into term contracts for each of our
hydraulic fracturing fleets, we also have the flexibility to
pursue spot market projects. Our term contracts allow us to
supplement monthly contract revenue by deploying equipment on
short-term spot market jobs on those days when the contract
customer does not require our services or is not entitled to our
services under the applicable term contract. We charge
prevailing market prices per hour for spot market work. We may
also charge fees for set up and mobilization of equipment
depending on the job. Generally, these fees and other charges
vary depending on the equipment and personnel required for the
job and market conditions in the region in which the services
are performed. We also source chemicals and proppants that are
consumed during the fracturing process and we charge our
customers a fee for materials consumed in the process, or we
charge our customers a handling fee for chemicals and proppants
supplied by the customer. Materials charges reflect the cost of
the materials plus a markup and are based on the actual quantity
of materials based on the actual quantity of materials used in
the fracturing process. We believe our ability to provide
services in the spot market allows us to take advantage of any
favorable pricing that may exist in this market and allows us to
develop new customer relationships. Approximately 80% of our
revenues for the three months ended March 31, 2011 were
derived from hydraulic fracturing services.
Coiled Tubing and Pressure Pumping. Our
coiled tubing, pressure pumping and other related well
stimulation services are provided in the spot market at
prevailing prices per hour. We may also charge fees for set up
and mobilization of equipment depending on the job. The
set-up
charges and hourly rates are determined by a competitive bid
process and vary with the type of service to be performed, the
equipment and personnel required for the job and market
conditions in the region in which the service is performed. We
also charge customers for the materials, such as stimulation
fluids, nitrogen and coiled tubing materials, that we use in
each job. Materials charges reflect the cost of the materials
plus a markup and are based on the actual quantity of materials
used for the project.
33
How We Manage
Costs and Maintain Our Equipment
The principal expenses involved in conducting our business are
product and material costs, the costs of acquiring, maintaining
and repairing our equipment, labor expenses and fuel costs.
Additionally, we incur freight costs to deliver and stage our
hydraulic fracturing fleets to the worksite. We maintain and
repair all equipment we use in our operations. We purchase our
equipment, including engines, transmissions, radiators, motors
and pumps, from third-party vendors.
Depreciation costs represented approximately 4.0% of our
revenues for the year ended December 31, 2010 and 2.6% of
our revenues for the three months ended March 31, 2011.
Direct labor costs represented approximately 10.7% of our
revenues for the year ended December 31, 2010 and 9.4% of
our revenues for the three months ended March 31, 2011.
Other costs, including sand, chemical and freight costs,
represented approximately 34.7% of our revenues for the year
ended December 31, 2010 and 31.1% of our revenues for the
three months ended March 31, 2011. We also incur
significant fuel costs in connection with the operation of our
hydraulic fracturing fleets and the transportation of our
equipment and products.
How We Manage Our
Operations
Our management team uses a variety of tools to monitor and
manage our operations in the following four areas:
(1) asset utilization; (2) equipment maintenance
performance; (3) customer satisfaction; and (4) safety
performance.
Asset Utilization. We measure our
activity levels by the total number of jobs completed by each of
our hydraulic fracturing fleets and coiled tubing units on a
monthly basis. By consistently monitoring the activity level,
pricing and relative performance of each of our fleets and
units, we can more efficiently allocate our personnel and
equipment to maximize revenue generation. During the three
months ended March 31, 2011, we completed
69 fracturing jobs and 633 fracturing stages, and we
generated average revenue per fracturing job of
$1.5 million and average revenue per fracturing stage of
$165,717. Additionally, our hydraulic fracturing fleets were
nearly 100% utilized during the quarter, based on available
working days per month, which excludes scheduled maintenance
days. During the three months ended March 31, 2011, we
completed 638 coiled tubing jobs, and we generated average
revenue per job of $27,337.
Equipment Maintenance
Performance. Preventative maintenance on our
equipment is an important factor in our profitability. If our
equipment is not maintained properly, our repair costs may
increase and, during periods of high activity, our ability to
operate efficiently could be significantly diminished due to
having trucks and other equipment out of service. Our
maintenance crews perform regular inspections and preventative
maintenance on each of our trucks and other mechanical
equipment. Our management monitors the performance of our
maintenance crews at each of our service centers by reviewing
ongoing inspection and maintenance activity and monitoring the
level of maintenance expenses as a percentage of revenue. These
repair and maintenance costs represented approximately 6.3% of
our revenues for the year ended December 31, 2010 and 6.0%
of our revenues for the three months ended March 31, 2011.
A rising level of maintenance expenses as a percentage of
revenue at a particular service center can be an early
indication that our preventative maintenance schedule is not
being followed. In this situation, management can take
corrective measures to help reduce maintenance expenses as well
as ensure that maintenance issues do not interfere with
operations.
Customer Satisfaction. Upon completion
of each job, we encourage our customers to provide feedback on
their satisfaction level. Customers evaluate our performance
under various criteria and comment on their overall satisfaction
level. This feedback gives our management valuable information
from which to identify performance issues and trends. Our
management also uses this information to evaluate our position
relative to our competitors in the various markets in which we
operate.
Safety Performance. Maintaining a
strong safety record is a critical component of our operational
success. Many of our larger customers have safety standards we
must satisfy before we can perform services for them. We
maintain a safety database so that our customers can review our
historical safety
34
record. Our management also uses this safety database to
identify negative trends in operational incidents so that
appropriate measures can be taken to maintain and enhance our
safety standards.
Our
Challenges
We face many challenges and risks in the industry in which we
operate. Although many factors contributing to these risks are
beyond our ability to control, we continuously monitor these
risks, and we have taken steps to mitigate them to the extent
practicable. In addition, we believe that we are well positioned
to capitalize on the current growth opportunities available in
the hydraulic fracturing market. However, we may be unable to
capitalize on our competitive strengths to achieve our business
objectives and, consequently, our results of operations may be
adversely affected. Please read Risk Factors
beginning on page 13 of this prospectus, for additional
information about the risks we face.
Equipment Supply. The overall number of
hydraulic fracturing equipment suppliers in the industry in
which we operate is limited, and there has historically been
high demand for such equipment. This limited capacity of supply
increases the risk of delay and failure to timely deliver both
our on-order equipment and any future equipment that may be
necessary in the growth of our business. We currently expect to
take delivery of two new hydraulic fracturing fleets during
2011, Fleet 5 in June 2011 and Fleet 6 in the fourth quarter of
2011. We expect to take delivery of another two hydraulic
fracturing fleets during 2012, Fleet 7 in the first half of 2012
and Fleet 8 in the second half of 2012. If the delivery of Fleet
5 is materially delayed, then we may be unable to commence
service under our term contract relating to this fleet, and, in
turn, the customer may terminate the contract without penalty.
To mitigate the risk of a potential delay in equipment delivery,
we actively monitor the progression of the production schedule
of our on-order equipment. Our recent acquisition of Total, a
significant supplier of our new order hydraulic fracturing
equipment, has provided us with added monitoring capabilities
and control over access to, and delivery of, fracturing
equipment.
Hydraulic Fracturing
Legislation. Legislation has been introduced
before Congress in the last few sessions to provide for federal
regulation of hydraulic fracturing and to require disclosure of
the chemicals used in the fracturing process. Although the
federal legislation did not pass, if similar federal legislation
is introduced and becomes law in the future, the legislation
could establish an additional level of regulation that could
lead to operational delays or increased operating costs. In
addition, various state and local governments have implemented,
or are considering, increased regulatory oversight of hydraulic
fracturing and the Texas legislature has passed a bill, which
has been sent to the Governor for signature, that would require
disclosure of information regarding the substances used in the
hydraulic fracturing process.
The adoption of new laws or regulations imposing reporting
obligations on, or otherwise limiting, the hydraulic fracturing
process could make it more difficult to complete oil and natural
gas wells in shale formations, increase our costs of compliance,
and adversely affect the hydraulic fracturing services that we
render for our exploration and production customers. In
addition, if hydraulic fracturing becomes regulated at the
federal level as a result of federal legislation or regulatory
initiatives by the EPA, fracturing activities could become
subject to additional permitting requirements, and also to
attendant permitting delays and potential increases in cost,
which could adversely affect our business and results of
operations.
Financing Future Growth. Historically,
we have funded our growth through bank debt, capital
contributions from our Sponsors and cash generated from our
business. The successful execution of our growth strategy
depends on our ability to raise capital as needed to, among
other things, finance the purchase of additional hydraulic
fracturing fleets. If we are unable to generate sufficient cash
flows or to obtain additional capital on favorable terms or at
all, we may be unable to sustain or increase our current level
of growth in the future. However, we believe we are well
positioned to finance our future growth. On April 19, 2011,
we entered into a new five-year $200.0 million senior
secured revolving credit facility, which increased the amount of
funds we are permitted to borrow by $48.3 million and
increased the amount of borrowings we can incur in a given
fiscal year for capital expenditures by $60.0 million. We
intend to repay in full all amounts outstanding under our credit
35
facility with the proceeds of this offering. In addition, our
cash flows from operations have continued to increase
dramatically, with cash flows from operations during the three
months ended March 31, 2011 increasing by
$16.6 million from the same period in 2010. After giving
effect to this offering, we believe that our cash flows from
operations and available borrowings under our credit agreement
will be sufficient to allow us to sustain or increase our
current growth through at least 2012.
Outlook
Demand for hydraulic fracturing services has increased
significantly over the last two years in the markets in which we
operate and we have made substantial investments in the
acquisition of additional fracturing fleets in order to
capitalize on the market opportunity, which has led to
significant growth in our business. We believe the following
trends impacting our industry have increased the demand for our
services and will continue to support the sustained growth that
we have experienced to date:
|
|
|
|
|
Increased drilling in unconventional resource basins,
particularly liquids-rich formations, through the application of
horizontal drilling and completion technologies;
|
|
|
|
Improved drilling efficiencies increasing the number of
horizontal feet per day requiring completion services;
|
|
|
|
An increase in hydraulic fracturing intensity, particularly with
increasingly longer laterals and a greater number of fracturing
stages, in more demanding and technically complex
formations; and
|
|
|
|
Tight supply of hydraulic fracturing equipment resulting from
increased attrition of existing equipment and supply chain
constraints.
|
Results of
Operations
Our results of operations are driven primarily by four
interrelated variables: (1) drilling and stimulation
activities of our customers; (2) the prices we charge for
our services; (3) cost of products, materials and labor;
and (4) our service performance. Because we typically pass
the cost of raw materials such as proppants, sand and chemicals
onto our customers in our term contracts, our profitability is
not materially impacted by changes in the costs of such
materials. To a large extent, the pricing environment for our
services will dictate our level of profitability. To mitigate
the volatility in utilization and pricing for the services we
offer, we have entered into term contracts covering each of our
four existing fleets and one of our two on-order hydraulic
fracturing fleets.
In the near term, we expect that our revenues and results of
operations will be positively impacted by: (i) the addition
and deployment of Fleet 2 in July 2010; (ii) the
addition and deployment of Fleet 3 in January 2011;
(iii) the addition and deployment of Fleet 4 in April
2011 and (iv) the scheduled delivery and deployment of
Fleet 5 in June 2011. We also expect to take delivery and
deploy Fleets 6, 7 and 8 in the fourth quarter of 2011, the
first half of 2012 and the second half of 2012, respectively.
Each of our fleets is, or is expected to be, deployed under a
term contract. We expect that our results of operations in 2011
compared to 2010 will be significantly impacted by the dramatic
growth of our asset base over the last twelve months.
36
Results for
the Three Months Ended March 31, 2011 Compared to the Three
Months Ended March 31, 2010
The following table summarizes the dollar changes for our
results of operations for the three months ended March 31,
2011 when compared to the three months ended March 31, 2010
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
$ Change
|
|
|
|
(unaudited)
|
|
|
|
|
|
Revenue
|
|
$
|
127,204
|
|
|
$
|
32,636
|
|
|
$
|
94,568
|
|
Cost of sales
|
|
|
70,048
|
|
|
|
23,176
|
|
|
|
46,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
57,156
|
|
|
|
9,460
|
|
|
|
47,696
|
|
Selling, general and administrative expenses
|
|
|
8,825
|
|
|
|
2,867
|
|
|
|
5,958
|
|
Loss on sale/disposal of assets
|
|
|
(90
|
)
|
|
|
(16
|
)
|
|
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
48,421
|
|
|
|
6,609
|
|
|
|
41,812
|
|
Other income and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Interest expense
|
|
|
(1,959
|
)
|
|
|
(2,998
|
)
|
|
|
1,039
|
|
Lender fees
|
|
|
(25
|
)
|
|
|
(53
|
)
|
|
|
28
|
|
Other income
|
|
|
13
|
|
|
|
102
|
|
|
|
(89
|
)
|
Other expense
|
|
|
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
(1,970
|
)
|
|
|
(2,950
|
)
|
|
|
980
|
|
Income (loss) before income taxes
|
|
|
46,451
|
|
|
|
3,659
|
|
|
|
42,792
|
|
Provision (benefit) for income taxes
|
|
|
17,366
|
|
|
|
1,416
|
|
|
|
15,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
29,085
|
|
|
$
|
2,243
|
|
|
$
|
26,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Revenue increased $94.6 million, or 290%, to
$127.2 million for the three months ended March 31,
2011 compared to $32.6 million for the same period in 2010.
This increase was primarily due to the deployment of additional
hydraulic fracturing equipment. Fleet 2, which was deployed
in the third quarter of 2010, contributed $29.3 million of
revenue in the first quarter of 2011 and Fleet 3, which was
deployed early in the first quarter of 2011, contributed $28.1
million of revenue in the first quarter of 2011. In addition, we
experienced increased utilization of our equipment across all
service lines as well as improved pricing for our services. We
continued to benefit from increased horizontal drilling and
completion related activity in unconventional resource plays,
which enabled us to obtain higher revenues for our hydraulic
fracturing services due to the complexity of the work performed
in these areas.
Cost of
Sales
Cost of sales increased $46.9 million, or 202%, to
$70.0 million for the three months ended March 31,
2011 compared to $23.2 million for the same period in 2010.
As a percentage of revenue, cost of sales decreased to 55% for
the three months ended March 31, 2011 from 71% for the same
period in 2010 due primarily to the significant increase in
revenue in the first quarter of 2011 compared to the same period
in the prior year.
Selling, General
and Administrative Expenses (SG&A)
SG&A increased $6.0 million, or 208%, to
$8.8 million for the three months ended March 31, 2011
compared to $2.9 million for the same period in 2010. The
increase primarily relates to $2.6 million in higher
long-term and short-term incentive costs and $1.8 million
in higher payroll and related personnel costs associated with
the continued hiring of personnel to support our growth. We
37
also incurred $0.6 million in additional costs associated
with our marketing and promotional efforts and $0.2 million
in increased professional fees.
Interest
Expense
Interest expense decreased by $1.0 million, or 35%, to
$2.0 million for the three months ended March 31, 2011
compared to $3.0 million for the same period in 2010. This
decrease was due primarily to charges of $1.5 million incurred
in the first quarter of 2010 in connection with the change in
fair value of our warrant liability. The warrants were exercised
in December 2010. Partially offsetting the decrease was higher
interest expense of approximately $0.2 million related to
higher average outstanding debt balances and $0.2 million
of increased amortization of deferred financing costs during the
first quarter of 2011 as compared to the same period in 2010.
Income
Taxes
We recorded a tax provision of $17.4 million for the three
months ended March 31, 2011, at an effective rate of 37.4%,
compared to a tax provision of $1.4 million for the three
months ended March 31, 2010, at an effective rate of 38.7%.
Results for
the Year Ended December 31, 2010 Compared to the Year Ended
December 31, 2009
The following table summarizes the dollar changes for our
results of operations for the year ended December 31, 2010
when compared to the year ended December 31, 2009 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
Revenue
|
|
$
|
244,157
|
|
|
$
|
67,030
|
|
|
$
|
177,127
|
|
Cost of sales
|
|
|
154,297
|
|
|
|
54,242
|
|
|
|
100,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
89,860
|
|
|
|
12,788
|
|
|
|
77,072
|
|
Selling, general and administrative expenses
|
|
|
17,998
|
|
|
|
9,533
|
|
|
|
8,465
|
|
Loss on sale/disposal of assets
|
|
|
1,571
|
|
|
|
920
|
|
|
|
651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
70,291
|
|
|
|
2,335
|
|
|
|
67,956
|
|
Other income and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
9
|
|
|
|
4
|
|
|
|
5
|
|
Interest expense
|
|
|
(17,350
|
)
|
|
|
(4,712
|
)
|
|
|
(12,638
|
)
|
Lender fees
|
|
|
(322
|
)
|
|
|
(391
|
)
|
|
|
69
|
|
Other income
|
|
|
163
|
|
|
|
|
|
|
|
163
|
|
Other expense
|
|
|
(150
|
)
|
|
|
(52
|
)
|
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
(17,650
|
)
|
|
|
(5,151
|
)
|
|
|
(12,499
|
)
|
Income (loss) before income taxes
|
|
|
52,641
|
|
|
|
(2,816
|
)
|
|
|
55,457
|
|
Provision (benefit) for income taxes
|
|
|
20,369
|
|
|
|
(386
|
)
|
|
|
20,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
32,272
|
|
|
$
|
(2,430
|
)
|
|
$
|
34,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Revenue increased $177.1 million, or 264%, to
$244.2 million for the year ended December 31, 2010
compared to $67.0 million for the same period in 2009. This
increase was due primarily to increased utilization of our
hydraulic fracturing and coiled tubing equipment and, to a
lesser extent, improved pricing for our services and the
deployment of Fleet 2 in the third quarter of 2010, which
contributed $67.6 million of revenue during the year. We
continued to benefit from increased horizontal drilling and
completion related activity in unconventional resource plays,
which enabled us to obtain higher revenues for our hydraulic
fracturing services due to the complexity of the work performed
in these areas.
38
Cost of
Sales
Cost of sales increased $100.1 million, or 184%, to
$154.3 million for the year ended December 31, 2010
compared to $54.2 million for the same period in 2009. As a
percentage of revenue, cost of sales decreased to 63% for the
year ended December 31, 2010 from 81% for the same period
in 2009 due primarily to the significant increase in our
revenues from 2009 to 2010.
Selling, General
and Administrative Expenses (SG&A)
SG&A increased $8.5 million, or 89%, to
$18.0 million for the year ended December 31, 2010
compared to $9.5 million for the same period in 2009. The
increase primarily relates to $4.0 million in higher
long-term and short-term incentive costs and $2.3 million
in higher payroll and related personnel costs associated with
the continued hiring of personnel to support our growth. We also
incurred $0.7 million in additional costs associated with
our marketing and promotional efforts and $0.5 million in
increased professional fees.
Interest
Expense
Interest expense increased by $12.6 million, or 268%, to
$17.4 million for the year ended December 31, 2010
compared to $4.7 million for the same period in 2009. This
increase was due primarily to $10.1 million in increased
charges incurred in 2010 in connection with the change in fair
value of our warrant liability during the year. Also
contributing to the increase in interest expense was
approximately $2.2 million related to higher average
interest rates during 2010 as compared to 2009.
Income
Taxes
We recorded a tax provision of $20.4 million for the year
ended December 31, 2010, at an effective rate of 38.7%,
compared to a benefit of $386,000 for the year ended
December 31, 2009, at an effective rate of 13.7%. For the
year ended December 31, 2009, we incurred intangible
amortization expense for book purposes that was non-deductible
for federal income tax purposes, giving way to a lower effective
benefit rate during the year.
Results for
the Year Ended December 31, 2009 Compared to the Year Ended
December 31, 2008
The following table summarizes the dollar changes for our
results of operations for the year ended December 31, 2009
when compared to the year ended December 31, 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
$ Change
|
|
|
Revenue
|
|
$
|
67,030
|
|
|
$
|
62,441
|
|
|
$
|
4,589
|
|
Cost of sales
|
|
|
54,242
|
|
|
|
42,401
|
|
|
|
11,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
12,788
|
|
|
|
20,040
|
|
|
|
(7,252
|
)
|
Selling, general and administrative expenses
|
|
|
9,533
|
|
|
|
8,950
|
|
|
|
583
|
|
Loss on sale/disposal of assets
|
|
|
920
|
|
|
|
397
|
|
|
|
523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
2,335
|
|
|
|
10,693
|
|
|
|
(8,358
|
)
|
Other income and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
4
|
|
|
|
5
|
|
|
|
(1
|
)
|
Interest expense
|
|
|
(4,712
|
)
|
|
|
(6,913
|
)
|
|
|
2,201
|
|
Lender fees
|
|
|
(391
|
)
|
|
|
(511
|
)
|
|
|
120
|
|
Other (expense) income
|
|
|
(52
|
)
|
|
|
(68
|
)
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
(5,151
|
)
|
|
|
(7,487
|
)
|
|
|
2,336
|
|
Net (loss) income before (benefit) provision for income taxes
|
|
|
(2,816
|
)
|
|
|
3,206
|
|
|
|
(6,022
|
)
|
(Benefit) provision for income taxes
|
|
|
(386
|
)
|
|
|
2,085
|
|
|
|
(2,471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(2,430
|
)
|
|
$
|
1,121
|
|
|
$
|
(3,551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
Revenue
Revenue increased $4.6 million, or 7%, to
$67.0 million for the year ended December 31, 2009
compared to $62.4 million for the same period in 2008. This
increase was primarily due to a full year of operation of our
hydraulic fracturing services and East Texas operations, which
began in late 2007 and gradually ramped up throughout 2008.
Partially offsetting this increase, however, were decreases in
revenue from our coiled tubing and pressure pumping services,
which were negatively impacted in 2009 due to a significant
decline in investment by our customers in oil and gas
exploration and development activities. Towards the end of 2009,
we began experiencing increases in revenue across all service
lines, as drilling and completion activity began to rise with
higher commodity prices and growing interest in the Eagle Ford
Shale resource play.
Cost of
Sales
Cost of sales increased $11.8 million, or 28%, to
$54.2 million for the year ended December 31, 2009,
compared to $42.4 million for the same period in 2008. As a
percentage of revenue, cost of sales increased to 81% for the
year ended December 31, 2009 from 68% for the same period
in 2008. The overall decline in the oil and gas industry, which
began in late 2008 and continued throughout most of 2009,
resulted in lower utilization of our equipment and services and,
to a lesser extent, pricing pressure from our competitors.
Selling, General
and Administrative Expenses (SG&A)
SG&A increased $0.6 million, or 7%, to
$9.5 million for the year ended December 31, 2009
compared to $8.9 million for the same period in 2008. The
increase primarily relates to $0.9 million in higher costs
incurred for professional fees, property taxes, and
office-related costs, $0.4 million in higher payroll and
related personnel costs, and $0.2 million in increased
costs for other SG&A-related expenses. Partially offsetting
the increase were lower costs of $0.9 million due to the
elimination of our short-term incentive program for 2009.
Interest
Expense
Interest expense decreased by $2.2 million, or 32%, to
$4.7 million for the year ended December 31, 2009
compared to $6.9 million for the same period in 2008. A
lower average effective interest rate during 2009 contributed
approximately $1.9 million to the decrease and lower
average outstanding debt balances contributed approximately
$0.4 million to the decrease. An increase in interest
expense of $0.3 million related to the initial valuation of
our warrant liability partially offset the overall decrease in
interest expense in 2009 compared to 2008.
Income
Taxes
We recorded a tax benefit of $386,000 for the year ended
December 31, 2009 at an effective rate of 13.7%, compared
to a tax provision of $2.1 million at an effective rate of
65%, for the year ended December 31, 2008. The primary
cause for the disparity in effective rates year over year was
amortization expense on our intangible assets that is
non-deductible for federal income tax purposes, and, to a lesser
extent, permanent
book-to-tax
differences generated in 2008 in connection with real estate
lease incentives.
Liquidity and
Capital Resources
Our primary sources of liquidity to date have been capital
contributions and borrowings from stockholders, borrowings under
our credit facilities and cash flows from operations. Our
primary use of capital has been the acquisition and maintenance
of equipment. During 2009, we spent significantly less on
capital expenditures than we had in previous years. Our capital
expenditures increased in 2010 and we anticipate capital
expenditures will continue to increase in 2011. We have ordered
four new hydraulic fracturing fleets, Fleets 5, 6, 7 and 8,
which are scheduled for delivery in June 2011, the fourth
quarter of 2011, the first half of 2012 and the second half of
2012, respectively. Fleet 5 has
40
an aggregate cost of approximately $22.4 million, of which
approximately $4.1 million has been funded. Fleet 6 has an
aggregate cost of approximately $23.8 million, of which
approximately $1.0 million has been funded. Fleet 7 has an
aggregate cost of approximately $24.7 million, of which
approximately $1.0 million has been funded. Fleet 8 has an
aggregate cost of approximately $24.7 million, of which
approximately $0.4 million has been funded. We intend to fund
the remaining costs of Fleet 5 with proceeds from this offering
and borrowings under our credit facility and we intend to fund
Fleets 6, 7 and 8 through a combination of cash flows from
operations and borrowings under our credit facility.
On April 19, 2011, we entered into a five-year
$200.0 million revolving credit facility, which we refer to
in this prospectus as the credit facility. As of May 31,
2011, $107.1 million was drawn under the credit facility.
Proceeds from the credit facility were used to repay
$49.6 million of indebtedness outstanding under our
previous revolving credit facility and $29.9 million of
indebtedness, accrued interest and early termination penalties
under our subordinated term loan.
We continually monitor potential capital sources, including
equity and debt financings, in order to meet our planned capital
expenditures and liquidity requirements. Our ability to fund
operating cash flow shortfalls, if any, and to fund planned 2011
and 2012 capital expenditures will depend upon our future
operating performance, and more broadly, on the availability of
equity and debt financing, which will be affected by prevailing
economic conditions in our industry and financial, business and
other factors, some of which are beyond our control. Based on
our existing operating performance, we believe our cash flows
and existing capital as well as borrowings available under our
credit facility are adequate to meet operational and capital
expenditure needs for the next 12 months.
Our credit facility contains covenants that require us to
maintain an interest coverage ratio, to maintain a leverage
ratio and to satisfy certain other conditions. These covenants
are subject to a number of exceptions and qualifications set
forth in the credit agreement that evidences such credit
facility. Please read Description of Our
Indebtedness beginning on page 44 of this prospectus. In
addition, our credit facility contains covenants that limit our
ability to make capital expenditures in excess of
$100.0 million in any fiscal year, provided that up to
$50.0 million of such amount in any fiscal year may be
rolled over to the subsequent fiscal year, and up to
$50.0 million of such amount may also be pulled forward
from the subsequent fiscal year, and the capital expenditure
restrictions do not apply to capital expenditures financed with
proceeds from the issuance of common equity interests or to
maintenance capital expenditures. The credit facility also
restricts our ability to incur additional debt or sell assets,
make certain investments, loans and acquisitions, guarantee
debt, grant liens, enter into transactions with affiliates,
engage in other lines of business and pay dividends and
distributions.
Capital
Requirements
The energy services business is capital-intensive, requiring
significant investment to expand, upgrade and maintain
equipment. Our capital requirements have consisted primarily of,
and we anticipate will continue to be:
|
|
|
|
|
growth capital expenditures, such as those to acquire additional
equipment and other assets or upgrade existing equipment to grow
our business; and
|
|
|
|
maintenance capital expenditures, which are capital expenditures
made to extend the useful life of partially or fully depreciated
assets.
|
We continually monitor new advances in hydraulic fracturing
equipment and down-hole technology, as well as technologies that
may complement our existing businesses, and commit capital funds
to upgrade and purchase additional equipment to meet our
customers needs. During 2010, we spent $44.5 million
on capital expenditures. Assuming the timely delivery of Fleet 5
and Fleet 6, we expect our total 2011 capital expenditure budget
to be approximately $107.0 million, of which
$29.8 million has been spent as of March 31, 2011.
41
Historically, we have grown through organic expansion. We plan
to continue to monitor the economic environment and demand for
our services and adjust our business as necessary.
Financial
Condition and Cash Flows
The following table sets forth historical cash flows information
for each of the years ended December 31, 2010, 2009 and
2008 and for the three months ended March 31, 2011 and 2010
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Years Ended December 31,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Cash flows provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
44,723
|
|
|
$
|
12,056
|
|
|
$
|
8,611
|
|
|
$
|
19,716
|
|
|
$
|
3,086
|
|
Investing activities
|
|
|
(43,818
|
)
|
|
|
(4,254
|
)
|
|
|
(20,673
|
)
|
|
|
(27,442
|
)
|
|
|
(2,490
|
)
|
Financing activities
|
|
|
734
|
|
|
|
(6,733
|
)
|
|
|
11,921
|
|
|
|
6,965
|
|
|
|
(1,640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
$
|
1,639
|
|
|
$
|
1,069
|
|
|
$
|
(141
|
)
|
|
$
|
(761
|
)
|
|
$
|
(1,044
|
)
|
Cash Provided by
Operating Activities
Net cash provided by operating activities increased
$16.6 million for the three months ended March 31,
2011 compared to the same period in 2010. This increase was
primarily due to higher net income and deferred tax expense,
partially offset by a decrease related to working capital
changes. The significant changes in working capital related to
accounts receivable and accounts payable which were higher due
to the increase in activity levels. Net cash provided by
operating activities increased $32.7 million for the year
ended December 31, 2010 compared to the year ended
December 31, 2009, and increased $3.4 million for the
year ended December 31, 2009 compared to the year ended
December 31, 2008. The increase in operating cash flows for
the year ended December 31, 2010 compared to the year ended
December 31, 2009 was primarily due to an increase in net
income of $34.7 million. The significant changes in working
capital requirements in both periods primarily related to
accounts receivable, corresponding to changes in revenues. The
increase in operating cash flows for the year ended
December 31, 2009 compared to the year ended
December 31, 2008 was primarily due to working capital
improvements, offset by lower profitability.
Cash Flows Used
in Investing Activities
Net cash used in investing activities increased
$25.0 million for the three months ended March 31,
2011 compared to the same period in 2010. This increase was due
to higher capital expenditures related to the growth of our
hydraulic fracturing services. A substantial amount of the cost
for Fleet 4 was incurred during the first quarter of 2011.
Partially offsetting the increase were proceeds received from
disposals of equipment during the first quarter of 2011. Net
cash used in investing activities increased $39.6 million
for the year ended December 31, 2010 compared to the year
ended December 31, 2009, and decreased $16.4 million
for the year ended December 31, 2009 compared to the year
ended December 31, 2008. The increase in cash used for
investing activities for the year ended December 31, 2010
to the year ended December 31, 2009 was due to higher
capital expenditures related to the growth of our hydraulic
fracturing services. The decrease in cash used for investing
activities for the year ended December 31, 2009 to the year
ended December 31, 2008 was due to a reduction in the funds
used for capital equipment, which was $4.3 million for the
year ended December 31, 2009 compared to $21.5 million
for the year ended December 31, 2008. Our overall capital
expenditures plan in 2009 was decreased due to the decline in
commodity prices and the resultant decline in activity levels.
42
Cash Flows
Provided by (Used in) Financing Activities
Net cash provided by financing activities was $7.0 million
for the three months ended March 31, 2011 compared to net
cash used in financing activities of $1.6 million for the
same period in 2010. The increase was primarily due to net
borrowings under our credit facility during the first quarter of
2011 to fund working capital requirements and capital
expenditures. Net cash provided by financing activities was
$0.7 million for the year ended December 31, 2010
compared to net cash used in financing activities of
$6.7 million for the year ended December 31, 2009 and
net cash provided by financing activities of $11.9 million
for the year ended December 31, 2008. The increase in cash
provided by financing activities for the year ended
December 31, 2010 compared to the prior year was largely
due to the increased borrowings under our credit facility during
2010, primarily to fund working capital requirements and capital
expenditures, partially offset by debt repayments in the first
half of 2010 to our previous lenders. During the year ended
December 31, 2009, we repaid long-term borrowings under our
debt facilities totaling $8.7 million and raised
$2.0 million in borrowings from our Sponsors and
management. The sources of cash for financing activities for the
year ended December 31, 2008 were $11.9 million of net
borrowings under our debt facilities. Borrowings were used to
fund capital expenditures and for general corporate purposes.
Contractual
Obligations
The following table summarizes our contractual cash obligations
as of December 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
After
|
|
Contractual Cash
Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
Credit facility(1)(4)
|
|
$
|
49,408
|
|
|
$
|
28,946
|
|
|
$
|
20,462
|
|
|
$
|
|
|
|
$
|
|
|
Subordinated term loan(2)(4)
|
|
|
36,958
|
|
|
|
3,500
|
|
|
|
7,000
|
|
|
|
26,458
|
|
|
|
|
|
Operating leases
|
|
|
19,750
|
|
|
|
4,722
|
|
|
|
10,387
|
|
|
|
3,994
|
|
|
|
647
|
|
Hydraulic fracturing fleet purchase obligations(3)
|
|
|
48,763
|
|
|
|
48,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other equipment purchase obligations
|
|
|
2,273
|
|
|
|
2,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
157,152
|
|
|
$
|
88,204
|
|
|
$
|
37,849
|
|
|
$
|
30,452
|
|
|
$
|
647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes estimated interest under the credit facility, assuming
an interest rate of 5.0%. |
|
(2) |
|
Includes estimated interest under the subordinated term loan,
assuming an interest rate of 14.0%. |
|
|
|
(3) |
|
Includes the remaining purchase obligations associated with
Fleet 3, Fleet 4 and Fleet 5 as of December 31, 2010. |
|
|
|
(4) |
|
On April 19, 2011, we entered into a new five-year
$200.0 million senior secured revolving credit agreement
maturing on April 19, 2016. As of May 31, 2011,
$107.1 million was drawn under the new facility, bearing
interest at 2.7%. Our existing senior credit facility and
subordinated term loan were terminated and all amounts
outstanding, including accrued and unpaid interest and early
termination penalties, were paid in full. Please read
Description of Our Indebtedness below
for further discussion. |
For additional discussion related to our short and long-term
obligations, please read Note 2 to the unaudited
consolidated financial statements for the three months ended
March 31, 2011 included elsewhere in this prospectus.
Off-Balance Sheet
Arrangements
We had no off-balance sheet arrangements as of March 31,
2011.
43
Description of
Our Indebtedness
The following is a summary description of our outstanding
indebtedness. This summary is not a description of all of the
terms of such indebtedness and is qualified in its entirety by
reference to our credit facility, which has been filed as an
exhibit to the registration statement of which this prospectus
forms a part.
Senior Secured Credit Agreement. On
April 19, 2011, we entered into a new five-year
$200.0 million senior secured revolving credit agreement,
which we refer to herein as our credit facility, with Bank of
America, N.A., as administrative agent, swing line lender and
L/C issuer, Comerica Bank, as L/C issuer and syndication agent,
Wells Fargo Bank, National Association, as documentation agent,
and various lenders. Our obligations under our credit facility
are guaranteed by our subsidiary C&J Spec-Rent Services,
Inc. Our credit facility enables us to borrow funds on a
revolving basis for working capital needs and also provides for
the issuance of letters of credit. In addition, we may request
additional commitments up to $75.0 million through an
incremental facility upon the satisfaction of certain
conditions. As of May 31, 2011, $107.1 million was
drawn under our credit facility, leaving approximately
$92.9 million available for borrowing as of that date. Up
to the entire credit facility amount may be drawn as letters of
credit, and the credit facility has a sublimit of
$15.0 million for swing line loans.
Loans under our credit facility are denominated in
U.S. dollars and will mature on April 19, 2016.
Outstanding loans bear interest at either LIBOR or a base rate,
at our election, plus an applicable margin which, prior to our
delivery of a compliance certificate for the quarter ending
June 30, 2011, is equal to 1.50% for base rate loans and
2.50% for LIBOR loans, and thereafter, will be based on the
Leverage Ratio. As of May 31, 2011, the interest rate under
our credit facility was 2.7%.
All obligations under our credit facility are secured, subject
to agreed upon exceptions, by a first priority perfected
security position on all real and personal property of us and
our subsidiary, as guarantor.
Voluntary prepayments are permitted under the terms of our
credit facility at any time without penalty or premium.
Our credit facility provides for payment of certain fees and
expenses, including (i) a fee on the revolving loan
commitments which varies depending on our Leverage Ratio,
(ii) a letter of credit fee on the stated amount of issued
and undrawn letters of credit and a fronting fee to the issuing
lender, and (iii) other customary fees, including an agency
fee.
Our credit facility contains customary affirmative covenants
including financial reporting, governance and notification
requirements. In addition, our credit facility contains, among
other things, restrictions on our and our guarantors
ability to consolidate or merge with other companies, conduct
asset sales, incur additional indebtedness, grant liens, issue
guarantees, make investments, loans or advances, pay dividends,
enter into certain transactions with affiliates and to make
capital expenditures in excess of $100.0 million in any
fiscal year, provided that up to $50.0 million of such
amount in any fiscal year may be rolled over to the subsequent
fiscal year and up to $50.0 million of such amount may also
be pulled forward from the subsequent fiscal year, and the
capital expenditure restrictions do not apply to, among other
things, capital expenditures financed solely with proceeds from
the issuance of common equity interests or to normal replacement
and maintenance capital expenditures.
Our credit facility requires us to maintain, measured on a
consolidated basis, (i) an Interest Coverage
Ratio of not less than 3.00 to 1.00 and (ii) a
Leverage Ratio of not greater than 3.00 to 1.00
prior to this offering and not greater than 3.25 to 1.00 after
this offering, in each case as such terms are defined in our
credit facility.
Our credit facility provides that, upon the occurrence of events
of default, our obligations thereunder may be accelerated and
the lending commitments terminated. Such events of default
44
include, among other things, payment defaults to lenders,
failure to meet covenants, material inaccuracies of
representations or warranties, cross defaults to other
indebtedness, insolvency, bankruptcy, ERISA and judgment
defaults, and change in control, which includes (i) a
change in control under certain unsecured indebtedness issued by
us or our subsidiaries, (ii) a person or group other than
certain permitted holders becoming the beneficial owner of 35%
or more of our voting securities, or (iii) our board of
directors being comprised for a period of 18 consecutive
months of individuals who were neither members at the beginning
of such period nor approved by individuals who were members at
the beginning of such period.
Each loan and issuance of a letter of credit under the credit
facility is subject to the conditions that the representations
and warranties in the loan documents remain true and correct in
all material respect and no default or event of default shall
have occurred or be continuing at the time of or immediately
after such borrowing or extension of a letter of credit.
Inflation
Inflation in the United States has been relatively low in recent
years and did not have a material impact on our results of
operations for the years ended December 31, 2010, 2009 and
2008. Although the impact of inflation has been insignificant in
recent years, it is still a factor in the U.S. economy and
we tend to experience inflationary pressure on the cost of
energy services and equipment as increasing oil and natural gas
prices increase activity in our areas of operations.
Quantitative and
Qualitative Disclosures About Market Risks
Market risk is the risk of loss arising from adverse changes in
market rates and prices. The principal market risk to which we
are exposed is the risk related to interest rate fluctuations.
To a lesser extent, we are also exposed to risks related to
increases in the prices of fuel and raw materials consumed in
performing our services. We do not engage in commodity price
hedging activities.
Interest Rate Risk. We are exposed to
changes in interest rates as a result of our floating rate
borrowings under our credit facility, which has variable
interest rates. The impact of a 1% increase in interest rates on
our outstanding debt as of December 31, 2010, 2009 and 2008
and March 31, 2011 would have resulted in an increase in
interest expense and a corresponding decrease in net income of
approximately $0.7 million, $0.7 million,
$0.7 million and $0.2 million, respectively.
Concentration of Credit
Risk. Substantially all of our customers are
engaged in the oil and gas industry. This concentration of
customers may impact overall exposure to credit risk, either
positively or negatively, in that customers may be similarly
affected by changes in economic and industry conditions. Our top
ten customers accounted for approximately 97.2% of our revenues
for the three months ended March 31, 2011. Our top ten
customers accounted for approximately 90.2%, 90.6% and 79.9% of
our revenues for the years ended December 31, 2010, 2009
and 2008, respectively. During the three months ended
March 31, 2011, sales to Anadarko Petroleum, EOG Resources,
Plains Exploration and Penn Virginia represented 27.7%, 23.8%,
15.6% and 14.3%, respectively, of our total sales. In 2010,
sales to EOG Resources, Penn Virginia, Anadarko Petroleum and
Apache represented 32.5%, 17.9%, 16.4% and 9.7%, respectively,
of our total sales. In 2009, sales to Penn Virginia, Anadarko
Petroleum and EnCana represented 25.9%, 11.7% and 11.0%,
respectively, of our total sales. In 2008, sales to Penn
Virginia, El Paso Production Oil & Gas and EOG
Resources represented 24.0%, 14.4% and 10.1%, respectively, of
our total sales.
Commodity Price Risk. Our fuel and
material purchases expose us to commodity price risk. Our
material costs primarily include the cost of inventory consumed
while performing our stimulation services such as fracturing
sand, fracturing chemicals, coiled tubing and fluid supplies.
Our fuel costs consist primarily of diesel fuel used by our
various trucks and other motorized equipment. The prices for
fuel and the raw materials in our inventory are volatile and are
impacted by changes in supply and demand, as well as market
uncertainty and regional shortages. Historically, we were
generally able to pass along price increases to our customers;
however, we may be unable to do so in the future.
45
Critical
Accounting Policies
The selection and application of accounting policies is an
important process that has developed as our business activities
have evolved and as the accounting standards have developed.
Accounting standards generally do not involve a selection among
alternatives, but involve the implementation and interpretation
of existing standards, and the use of judgment applied to the
specific set of circumstances existing in our business. We make
every effort to properly comply with all applicable standards on
or before their adoption, and we believe the proper
implementation and consistent application of the accounting
standards are critical.
Our discussion and analysis of our financial condition and
results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the U.S. The
preparation of these consolidated financial statements requires
us to make estimates and assumptions that affect the reported
amounts of assets, liabilities, expenses and related
disclosures. We base our estimates and assumptions on historical
experience and on various other factors that we believe to be
reasonable under the circumstances. We evaluate our estimates
and assumptions on an ongoing basis. The results of our analysis
form the basis for making assumptions about the carrying values
of assets and liabilities that are not readily apparent from
other sources. Our actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies involve
significant areas of managements judgments and estimates
in the preparation of our consolidated financial statements.
Property, Plant and
Equipment. Property, plant and equipment is
recorded at cost less accumulated depreciation. Certain
equipment held under capital leases are classified as equipment
and the related obligations are recorded as liabilities.
Maintenance and repairs, which do not improve or extend the life
of the related assets, are charged to operations when incurred.
Refurbishments and renewals are capitalized when the value of
the equipment is enhanced for an extended period. When property
and equipment are sold or otherwise disposed of, the asset
account and related accumulated depreciation account are
relieved, and any gain or loss is included in operating income.
The cost of property and equipment currently in service is
depreciated over the estimated useful lives of the related
assets, which range from five to twenty-five years. Depreciation
is computed on a straight-line basis for financial reporting
purposes. Capital leases are amortized using the straight-line
method over the estimated useful lives of the assets and lease
amortization is included in depreciation expense. Depreciation
expense charged to operations was $3.3 million for the
three months ended March 31, 2011. Depreciation expense
charged to operations was $9.7 million, $8.8 million
and $7.6 million for the years ended December 31,
2010, 2009 and 2008, respectively.
Goodwill, Intangible Assets and
Amortization. Goodwill and other intangible
assets with infinite lives are not amortized, but tested for
impairment annually or more frequently if circumstances indicate
that impairment may exist. Intangible assets with finite useful
lives are amortized either on a straight-line basis over the
assets estimated useful life or on a basis that reflects
the pattern in which the economic benefits of the intangible
assets are realized. The impairment test requires the allocation
of goodwill and all other assets and liabilities to reporting
units. We have one reporting unit and perform impairment tests
on the carrying value of goodwill at least annually. Our annual
impairment tests involve the use of different valuation
techniques, including a combination of the income and market
approach, to determine the fair value of the reporting unit.
Determining the fair value of a reporting unit is a matter of
judgment and often involves the use of significant estimates and
assumptions. If the fair value of the reporting unit is less
than its carrying value, an impairment loss is recorded to the
extent that the implied fair value of the reporting units
goodwill is less than its carrying value. For the three months
ended March 31, 2011, and the years ended December 31,
2010, 2009 and 2008, no impairment write-down was deemed
necessary. Significant and unanticipated changes to these
assumptions could require an additional provision for impairment
in a future period.
46
Impairment of Long-Lived Assets. We
assess the impairment of our long-lived assets whenever events
or changes in circumstances indicate that the carrying value may
not be recoverable. Such indicators include changes in our
business plans, a change in the physical condition of a
long-lived asset or the extent or manner in which it is being
used, or a severe or sustained downturn in the oil and natural
gas industry.
Recoverability is assessed by using undiscounted future net cash
flows of assets grouped at the lowest level for which there are
identifiable cash flows independent of the cash flows of other
groups of assets. If the undiscounted future net cash flows are
less than the carrying amount of the asset, the asset is deemed
impaired. The amount of the impairment is measured as the
difference between the carrying value and the fair value of the
asset.
We make estimates and judgments about future undiscounted cash
flows and fair values. Although our cash flow forecasts are
based on assumptions that are consistent with our plans, there
is a significant degree of judgment involved in determining the
cash flows attributable to a long-lived asset over its estimated
remaining useful life. Our estimates of anticipated cash flows
could be reduced significantly in the future and as a result,
the carrying amounts of our long-lived assets could be subject
to impairment charges in the future.
Revenue Recognition. All revenue is
recognized when persuasive evidence of an arrangement exists,
the service is complete, the amount is fixed or determinable and
collectability is reasonably assured, as follows:
Hydraulic Fracturing Revenue. We enter into
arrangements with our customers to provide hydraulic fracturing
services, which can be either on a spot market basis or under
term contracts. We only enter into arrangements with customers
for which collectability is reasonably assured. Revenue is
recognized and customers are invoiced upon the completion of
each job, which can consist of one or numerous fracturing
stages. Once the job has been completed to the satisfaction of
the customer, a field ticket is written that includes charges
for the service performed and the chemicals and proppants
consumed during the course of the service. The field ticket will
also include charges for the mobilization of the equipment to
location, additional equipment used on the job, if any, and
other miscellaneous consumables. Rates for services performed on
a spot market basis are based on the
agreed-upon
hourly spot market rate. With respect to services performed
under term contracts, customers are invoiced a monthly mandatory
payment based on a specified minimum number of hours of service
per month as defined in the contract, upon the earlier of the
passage of time or completion of the job. To the extent
customers utilize more than the contracted minimum number of
hours of service per month, they are invoiced for the excess at
rates defined in the contract upon the completion of each job.
Coiled Tubing and Pressure Pumping Revenue. We
enter into arrangements to provide coiled tubing and pressure
pumping services to only those customers for which
collectability is reasonably assured. These arrangements are
typically short-term in nature and each job can last anywhere
from a few hours to multiple days. Coiled tubing and pressure
pumping revenue is recognized upon completion of each days
work based upon a completed field ticket. The field ticket
includes charges for the mobilization of the equipment to
location, the service performed, the personnel on the job,
additional equipment used on the job, if any, and miscellaneous
consumables used throughout the course of the service. We
typically charge the customer on an hourly basis for these
services at agreed upon spot market rates.
Materials Consumed While Performing
Services. We generate revenue from chemicals and
proppants that are necessarily consumed while performing
hydraulic fracturing services. We charge fees to our customers
based on the amount of chemicals and proppants used in providing
these services. In addition, ancillary to coiled tubing and
pressure pumping revenue, we generate revenue from various
fluids and supplies that are necessarily consumed during those
processes. We do not sell or otherwise charge a fee separate and
apart from the services we provide for any of the
47
materials consumed while performing hydraulic fracturing
services or coiled tubing and pressure pumping services.
Accounts Receivable and Allowance for Doubtful
Accounts. Accounts receivable are stated at
the amount billed to customers and are ordinarily due upon
receipt. We provide an allowance for doubtful accounts, which is
based upon a review of outstanding receivables, historical
collection information and existing economic conditions.
Provisions for doubtful accounts are recorded when it becomes
evident that the customer will not make the required payments at
either contractual due dates or in the future. At March 31,
2011, the allowance for doubtful accounts totaled
$0.6 million. At December 31, 2010 and 2009, the
allowance for doubtful accounts totaled $0.5 million and
$0.3 million, respectively. Bad debt expense was $67,500
for the three months ended March 31, 2011. Bad debt expense was
$0.5 million, $0.2 million and $0.1 million for
the years ended December 31, 2010, 2009 and 2008,
respectively.
Stock-Based Compensation. We recognize
compensation expense related to share-based awards, based on the
grant date estimated fair value. We amortize the fair value of
stock options on a straight-line basis over the requisite
service period of the award, which is generally the vesting
period. The determination of the fair value of stock options was
estimated using the Black-Scholes option-pricing model and
required the use of highly subjective assumptions. The
Black-Scholes option-pricing model requires inputs such as the
expected term of the grant, expected volatility and risk-free
interest rate. Further, the forfeiture rate also affects the
amount of aggregate compensation that we are required to record
as an expense.
We estimate our forfeiture rate based on an analysis of our
actual forfeitures and will continue to evaluate the
appropriateness of the forfeiture rate based on actual
forfeiture experience, analysis of employee turnover and other
factors. Quarterly changes in the estimated forfeiture rate can
have a significant effect on reported stock-based compensation
expense, as the cumulative effect of adjusting the rate for all
expense amortization is recognized in the period the forfeiture
estimate is changed. If a revised forfeiture rate is higher than
the previously estimated forfeiture rate, an adjustment is made
that will result in a decrease to the stock-based compensation
expense recognized in the consolidated financial statements. If
a revised forfeiture rate is lower than the previously estimated
forfeiture rate, an adjustment is made that will result in an
increase to the stock-based compensation expense recognized in
the consolidated financial statements.
We will continue to use judgment in evaluating the expected
term, volatility and forfeiture rate related to our stock-based
compensation on a prospective basis and will incorporate these
factors into our option-pricing model.
Each of these inputs is subjective and generally requires
significant management judgment. If, in the future, we determine
that another method for calculating the fair value of our stock
options is more reasonable, or if another method for calculating
these input assumptions is prescribed by authoritative guidance,
and, therefore, should be used to estimate expected volatility
or expected term, the fair value calculated for our employee
stock options could change significantly. Higher volatility and
longer expected terms generally result in an increase to
stock-based compensation expense determined at the date of grant.
Income Taxes. Income taxes are provided
for the tax effects of transactions reported in financial
statements and consist of taxes currently due plus deferred
taxes. 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 rates is recognized in income in the period that
includes the enactment date.
48
Deferred income tax expense represents the change during the
period in the deferred tax assets and deferred tax liabilities.
The components of the deferred tax assets and liabilities are
individually classified as current and non-current based on
their characteristics. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is
more likely than not that some portion or all of the deferred
tax assets will not be realized.
Effective January 1, 2009, we adopted guidance issued by
the Financial Accounting Standards Board, or FASB, in accounting
for uncertainty in income taxes. This guidance clarifies the
accounting for income taxes by prescribing the minimum
recognition threshold an income tax position is required to meet
before being recognized in the financial statements and applies
to all income tax positions. Each income tax position is
assessed using a two step process. A determination is first made
as to whether it is more likely than not that the income tax
position will be sustained, based upon technical merits, upon
examination by the taxing authorities. If the income tax
position is expected to meet the more likely than not criteria,
the benefit recorded in the financial statements equals the
largest amount that is greater than 50% likely to be realized
upon its ultimate settlement. We did not recognize any uncertain
tax positions upon adoption of the guidance and had no uncertain
tax positions as of March 31, 2011, and December 31,
2010 and 2009. Management believes there are no tax positions
taken or expected to be taken in the next twelve months that
would significantly change our unrecognized tax benefits.
We will record income tax related interest and penalties, if
applicable, as a component of the provision for income tax
expense. However, there were no amounts recognized relating to
interest and penalties in the consolidated statements of
operations for the three months ended March 31, 2011, and for
the years ended December 31, 2010, 2009 and 2008. The tax
years that remain open to examination by the major taxing
jurisdictions to which we are subject range from 2007 to 2009.
We have identified our major taxing jurisdictions as the United
States of America and Texas. None of our federal or state tax
returns are currently under examination.
We are subject to the Texas Margin Tax, which is determined by
applying a tax rate to a base that considers both revenue and
expenses. It is considered an income tax and is accounted for in
accordance with the provisions of the FASB Accounting Standards
Codification, or ASC, Topic 740, Income Taxes.
Recently Adopted
Accounting Pronouncements
In December 2010, the FASB issued ASU No. 2010-09,
Business Combinations: Disclosure of Supplementary Pro
Forma Information for Business Combinations or ASU
2010-29. ASU 2010-29 addresses diversity in the interpretation
of pro forma revenue and earnings disclosure requirements for
business combinations. If a public entity presents comparative
financial statements, the entity should disclose revenue and
earnings of the combined entity as though the business
combination that occurred during the current year had occurred
as of the beginning of the comparable prior annual reporting
period only. The Company adopted ASU 2010-29 on January 1,
2011. This update had no impact on our financial position,
results of operations or cash flows.
49
BUSINESS
Overview
We are a rapidly growing independent provider of premium
hydraulic fracturing and coiled tubing services with a focus on
complex, technically demanding well completions. We provide our
services in conjunction with both conventional and
unconventional well completions as well as workover and
stimulation operations for existing wells. We compete with a
limited number of service companies for what we believe to be
the most complex hydraulic fracturing projects, which are
typically characterized by long lateral segments and multiple
fracturing stages in high-pressure formations. We believe
service providers are selected for these complex projects
primarily based on technical expertise, fleet capability and
experience rather than solely on price. We also provide pressure
pumping services and other related well stimulation services in
connection with our well completion and production enhancement
operations.
We have historically operated in what we believe to be some of
the most geologically challenging basins in South Texas, East
Texas/North Louisiana and Western Oklahoma. The customers we
serve are primarily large exploration and production companies
with significant unconventional resource positions, including
EOG Resources, EXCO Resources, Anadarko Petroleum, Plains
Exploration, Penn Virginia, Petrohawk, El Paso, Apache and
Chesapeake. We are in the process of acquiring additional
hydraulic fracturing fleets and are evaluating opportunities
with existing and new customers to expand our operations into
new areas throughout the United States with similarly demanding
completion and stimulation requirements.
Our revenues increased from $62.4 million for the year
ended December 31, 2008 to $244.2 million for the year
ended December 31, 2010, primarily as a result of increased
demand for our well completion services, improved pricing and
continued fleet expansion. This revenue increase represents a
compound annual growth rate of approximately 98%. For the year
ended December 31, 2010 Adjusted EBITDA was
$82.6 million and net income was $32.3 million. For
the three months ended March 31, 2011, revenues were
$127.2 million, Adjusted EBITDA was $51.9 million and
net income was $29.1 million.
We operate four modern, 15,000 pounds per square inch, or psi,
pressure rated hydraulic fracturing fleets with an aggregate
142,000 horsepower, and we currently have on order four
additional hydraulic fracturing fleets, which, upon delivery,
will increase our aggregate horsepower to 270,000 by the end of
2012. Our hydraulic fracturing equipment is specially designed
to handle well completions with long lateral segments and
multiple fracturing stages in high-pressure formations. We also
operate a fleet of 14 coiled tubing units, 16 double-pump
pressure pumps and nine single-pump pressure pumps. The unique
manner in which we deploy and utilize our equipment has allowed
us to control our costs, minimize downtime and deliver services
with less redundant pumping capacity. During the three months
ended March 31, 2011, our fracturing services generated
monthly revenue per unit of horsepower of approximately $383,
which we believe to be higher than the comparable performance of
our peers. Revenue per horsepower is a metric used by our
management team to evaluate how efficiently we are utilizing our
assets relative to our peers.
Our hydraulic fracturing fleets and coiled tubing units are
currently deployed in the Eagle Ford Shale of South Texas, the
Haynesville Shale of East Texas/North Louisiana and the Granite
Wash of Western Oklahoma. Recent advances in horizontal drilling
and hydraulic fracturing technologies have lowered unit recovery
costs in these basins and increased the potential for long-term
oil and natural gas development. Additionally, the increase in
the number of drilling permits awarded in the Eagle Ford,
Haynesville and Granite Wash regions, coupled with the
increasing complexity and technical completion requirements for
many wells in these regions, are expected to drive growth in
demand for our well completion services for the foreseeable
future. We have and plan to continue to focus on basins with
technically demanding hydraulic fracturing requirements.
50
Industry
Overview
The energy services industry provides hydraulic fracturing and
other well stimulation services to oil and natural gas
exploration companies. Fracturing involves pumping a fluid down
a well casing or tubing under high pressure to cause the
underground formation to crack, allowing the oil or natural gas
to flow more freely. A propping agent, or proppant, is suspended
in the fracturing fluid and keeps open the cracks (fractures)
created by the fracturing process in the underground formation.
Proppants generally consist of sand, resin-coated sand or
ceramic particles and other engineered proprietary materials.
The total size of the hydraulic fracturing market, based on
revenue, was estimated to be approximately $10.8 billion in
2009 and approximately $15.7 billion in 2010 based on data
from Spears & Associates.
A recent trend that has increased the demand for hydraulic
fracturing services in the United States has been the
development of unconventional resources, such as natural gas
shales and oil shales. According to the EIA, the amount of
technically recoverable natural gas found in shales is
827 trillion cubic feet, which is over 35 times the amount
of total dry gas produced in the United States in 2009.
U.S. production of natural gas from shales is projected to
increase from less than 5% of production in 2007 to 45% in 2035.
According to the EIA, oil production from shale oil is also
expected to rise significantly in the next 25 years,
specifically from areas such as the Eagle Ford Shale, the Bakken
Shale, and other unconventional oil resources.
Two technologies which are critical to the recovery of natural
gas and oil from unconventional resources are horizontal
drilling and hydraulic fracturing. Horizontal drilling is used
to provide greater access to the hydrocarbons trapped in the
producing formation by exposing the well to more of the
producing formation. Hydraulic fracturing unlocks the
hydrocarbons trapped in formations by opening fractures in the
rock and allowing hydrocarbons to flow from the formation into
the well. In addition, horizontal wells have become longer and
more complex, resulting in an increase in the number of
fracturing stages per well, higher demand for horsepower per
well and per job, and an increased amount of proppant and
chemicals used per well.
The increased level of horizontal drilling is illustrated by the
growing number of horizontal rigs active in United States over
the past three years. This increased activity level has
largely targeted unconventional resources and shale plays. The
following table highlights the increase in the horizontal rig
count in United States.
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As of
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June 3,
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As of December 31,
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2011
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2010
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2009
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2008
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Horizontal U.S. Rig Count(1)
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1,051
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947
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571
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587
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As a Percentage of Total U.S. Rigs
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56.7
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%
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55.9
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%
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48.0
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%
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34.1
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%
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(1) |
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Estimate of activity as measured by Baker Hughes Incorporated. |
We believe investment in domestic unconventional resources,
including shale plays, has accelerated over the past five years.
In recent years, well-capitalized producers have leased large
acreage positions in shale plays, including those in the Eagle
Ford Shale and Haynesville Shale, using short-term leases (three
years or less) which require producers to drill wells to retain
the acreage. To help fund their drilling program in these areas,
a number of producers have also entered into joint venture
transactions with large international operators and private
equity sponsors. Typically, the joint venture partner will agree
to fund a significant portion of the near-term drilling capital
budget in exchange for an equity interest in the joint venture.
These producers and their joint venture partners have committed
significant capital to the development of unconventional
resources, which we believe will result in sustained drilling
activity.
We have observed increased bidding activity in our areas of
operations, a growing backlog of fracturing projects, full
equipment utilization and substantial pricing power for
fracturing service
51
providers. We currently expect these factors to continue to
persist and the market for fracturing services to continue to be
tight.
Growth in horizontal drilling has also resulted in increased
demand for coiled tubing services and pressure pumping services.
However, we believe the increases have not been as significant
as in the hydraulic fracturing business.
Trends Impacting
Our Business
Ongoing Development of Existing and Emerging
Unconventional Resource Basins. Over the past
decade, exploration and production companies have focused on
exploiting the vast resource potential available across many of
North Americas unconventional resource plays through the
application of new horizontal drilling and completion
technologies, including multi-stage hydraulic fracturing. We
believe long-term capital for the continued development of these
basins will be provided in part by the participation of large
well-capitalized domestic oil and gas companies that have made
significant investments, as well as international oil and gas
companies that continue to make significant capital commitments
through joint ventures and direct investments in North
Americas unconventional basins. We believe these
investments indicate a long-term commitment to development,
which should mitigate the impact of short-term changes in oil
and natural gas prices on the demand for our services.
Increased Horizontal Drilling and Greater Service
Intensity in Unconventional Basins. As a
result of the higher specification equipment and increased
services associated with horizontal drilling, we view the
horizontal rig count as a reliable indicator of the overall
increase in the demand for our services. According to Baker
Hughes Incorporated, the U.S. horizontal rig count has
risen from approximately 335 at the beginning of 2007 to 1,051
as of June 3, 2011, and now represents 57% of the total
U.S. rig count. Development of horizontal wells has evolved
to feature increasingly longer laterals and more fracturing
stages, which has increased the requirement for advanced
hydraulic fracturing and stimulation services. Furthermore, we
believe operators have become more efficient at drilling
horizontal wells and have reduced the number of days required to
reach total depth, which has increased the number of wells
drilled and the number of fracturing stages completed in a year.
Increased Demand for Expertise to Execute Complex
Completions. We believe exploration and
production companies have shown a strong preference for a
customized approach to completing complex wells in
unconventional basins. As the fleet specifications and
capability to execute complex well completions have increased,
the required attention and experience to complete the most
difficult fracturing jobs has also increased. Accordingly, we
believe that technical expertise, fleet capability and
experience are the primary differentiating factors within the
industry.
High Levels of Asset Utilization and Constrained Supply
Growth. Asset utilization in the hydraulic
fracturing industry has meaningfully increased due to the
elevated levels of horizontal drilling. Advances such as pad
drilling and zipper-fracs, whereby an operator drills two offset
wells for simultaneous completion, have led to more wells being
drilled per rig and, thus, have increased levels of asset
utilization in the hydraulic fracturing industry. At the same
time, manufacturers have had difficulty keeping pace with the
demand for new hydraulic fracturing equipment and parts.
Furthermore, the higher pressures required for more complex
applications combined with higher levels of asset utilization
are resulting in increased attrition of existing hydraulic
fracturing equipment. We believe that these trends will continue
to keep supply tight in our industry for the foreseeable future.
The Spread of Unconventional Drilling and Completion
Techniques to the Redevelopment of Conventional
Fields. Oil and natural gas companies have
begun to apply the knowledge gained through the extensive
development of unconventional resource plays to their existing
conventional basins. Many of the techniques applied in
unconventional development, when applied to conventional wells
either through workover or recompletion, have the potential to
enhance overall production or enable production from previously
unproductive horizons and improve overall field economics. We
believe that there are thousands of older conventional wells
with the potential for the application of
52
unconventional completion techniques in close proximity to the
regions in which we operate. Many of our customers have begun to
experiment with such techniques.
Our
Services
We provide hydraulic fracturing, coiled tubing, pressure pumping
and other related well stimulation services to our customers
under a single operating segment. We have traditionally used our
coiled tubing and pressure pumping services to extend our
hydraulic fracturing services into new markets.
Hydraulic Fracturing. Our customers
utilize our hydraulic fracturing services to enhance the
production of oil and natural gas from formations with low
permeability, which restricts the natural flow of hydrocarbons.
The fracturing process consists of pumping a fluid into a cased
well at sufficient pressure to fracture the producing formation.
Sand, bauxite or synthetic proppants are suspended in the fluid
and are pumped into the fracture to prop the fracture open. The
extremely high pressure required to stimulate wells in the
regions in which we operate presents a challenging environment
for achieving a successfully fractured horizontal well. As a
result, an important element of the services we provide to
producers is designing the optimum well completion, which
includes determining the proper fluid, proppant and injection
specifications to maximize production. Our engineering staff
also provides technical evaluation, job design and fluid
recommendations for our customers as an integral element of our
fracturing service.
Coiled Tubing. Our customers utilize
our coiled tubing services to perform various functions
associated with well-servicing operations and to facilitate
completion of horizontal wells. Coiled tubing services involve
the insertion of steel tubing into a well to convey materials
and equipment to perform various applications on either a
completion or workover assignment. We believe coiled tubing has
become a preferred method of well completion, workover and
maintenance projects due to speed, ability to handle heavy-duty
jobs across a wide spectrum of pressure environments, safety and
ability to perform services without having to shut in a well. We
have successfully leveraged our existing relationships with
coiled tubing customers to expand our fracturing business.
Pressure Pumping. Our customers utilize
our pressure pumping services primarily in connection with
completing new wells and remedial and production enhancement
work on existing wells. Our pressure pumping services are
routinely performed in conjunction with our coiled tubing
services. Our pressure pumping services include well injection,
cased-hole testing, workover pumping, mud displacement, wireline
pumpdowns and pumping-down coiled tubing. Our pressure pumping
services often provide us with advance knowledge of a
customers need for coiled tubing services.
Our Competitive
Strengths
Operational Expertise in Service-Intensive
Basins. We have focused our hydraulic
fracturing fleets in service-intensive domestic basins, which
require technically challenging, high-pressure fracturing
services. During the three months ended March 31, 2011, our
fracturing operations generated monthly revenue per unit of
horsepower of approximately $383, which we believe to be higher
than the comparable performance of our peers. The unique manner
in which we deploy and utilize our equipment has allowed us to
control our costs, minimize downtime and deliver services with
less redundant pumping capacity. Along with our focus on high
service-intensity basins, we have pursued geographic expansion
in a manner that provides for high levels of asset utilization.
We have configured our field offices and operations so that we
can most efficiently utilize our equipment under our current
contractual agreements and in the spot market.
High-Quality Service. We seek to
distinguish our services by providing customized solutions to
complex fracturing jobs through extensive front-end technical
analysis and close coordination with our customers. We provide
onsite design engineers to configure and execute jobs on a
well-by-well basis (as opposed to a regional approach), and
implement targeted, pumping configurations to better meet the
challenges of a given well, which results in less redundant
pumping capacity. Our design engineers and job supervisors are
involved in every stage of the project from design to water
testing
53
to pump configuration and deployment to post-job analysis. By
closely monitoring our equipment performance during pressure
intervals and by performing rigorous equipment maintenance at
the well site, we are able to complete a fracturing job
efficiently, while minimizing the risk of equipment failures. We
believe our customer focus and attention to detail enhances the
efficiency and quality of a fracturing project, resulting in
faster well completion for our customers. We believe the quality
of our service allows us to command a higher service rate while
still reducing total well completion costs for our customers.
Visible Revenue Growth. We have grown
significantly over the last three years and have scheduled
equipment deliveries and executed contracts that we believe will
support and sustain continued growth. Our four existing
hydraulic fracturing fleets are committed through mid-2012,
mid-2012, early 2013 and mid-2014, respectively. Our fifth
fleet, which is expected to be delivered and deployed in June
2011, is committed through June 2013. In addition, our
fracturing contracts generally allow us to supplement monthly
contract revenue by deploying equipment on short-term spot
market jobs on those days when the contract customer does not
require our services. This flexibility has allowed us to
opportunistically capitalize on spot market pricing and to
perform our services for new customers, which has allowed us to
broaden our customer base and, in some cases, has led to
contractual relationships. We are currently negotiating
additional term contracts with producers in anticipation of the
delivery and deployment of Fleet 6 in the fourth quarter of
this year. We expect to service these contracts with new
equipment as well as existing equipment once current contracts
expire.
Modern, High-Specification
Equipment. Over the last three years we have
invested in high-pressure rated, premium hydraulic fracturing
equipment that is especially suited for technically demanding
unconventional formations. Fleet 1 began operation in late 2007;
Fleet 2 began operation in July 2010; Fleet 3 began operation in
January 2011; Fleet 4 began operation in April 2011; Fleet 5 is
expected to be delivered and deployed in June 2011; Fleet 6 is
expected to be delivered and deployed in the fourth quarter of
2011; Fleet 7 is expected to be delivered and deployed in the
first half of 2012; and Fleet 8 is expected to be delivered and
deployed in the second half of 2012. We believe investment in
new equipment allows us to better serve the diverse and
increasingly challenging needs of our customer base. New
equipment is generally less costly to maintain and operate and
is more efficient for our customers because it reduces downtime,
including associated costs and expenditures, and enables
increased utilization of our assets.
All of our pumping equipment is rated for operating at pressures
up to 15,000 psi, which enables us to perform challenging
fracturing projects in the Eagle Ford and Haynesville Shale
plays. The fleet specifications required for these fracturing
projects also tend to prevent migration of less capable
equipment from other regions to compete for Eagle Ford and
Haynesville jobs. Historically, we have had strong relationships
with manufacturers of hydraulic fracturing equipment and, as a
result, believe we are able to gain access to new, high
capability equipment timely.
Strong Record of Operating Safety. As a
result of our strong emphasis on safety training and protocols
for each of our employees, we believe we have a superior safety
record and reputation. Our safety record has been maintained
while we have more than doubled our employee base in less than
two years. Our reputation for safety has allowed us to earn work
certification from several industry leaders that we believe have
some of the most demanding safety requirements, including
ConocoPhillips, Exxon Mobil Corporation and Royal Dutch Shell.
Experienced Management. We have a
senior management team that combines entrepreneurial creativity
and flexibility with a deep technical competency that comes from
years of experience and training at some of the worlds
largest providers of hydraulic fracturing and pressure pumping
services. Our Chief Executive Officer and President, Chief
Operating Officer, Vice President Coiled Tubing and
Vice President Hydraulic Fracturing each have over
20 years of experience in the energy services industry. In
addition, our managers, sales engineers and field operators have
extensive expertise in their operating basins and understand the
regional challenges our customers face. We have historically had
a broad network with many customers and suppliers,
54
allowing our operations personnel to develop and leverage their
expertise in selling services and products to our new and
existing customers.
Our
Strategies
Capitalize on Growth in Development of Shale and Other
Resource Plays. The EIA forecasts that
production from shale gas sources will account for 45% of U.S.
dry gas production in 2035, up from 14% in 2009. We intend to
continue to focus our services on shale development and similar
resource basins with long-term development potential and
attractive economics. The characteristics of these basins should
allow us to leverage our high-pressure rated assets and the
considerable technical expertise of our senior operating team.
We plan to continue to avoid less complex fracturing projects
characterized by greater price competition and lower profit
margins. We believe there are significant opportunities to gain
new customers in the basins in which we currently operate.
Leverage Customer Relationships to Geographically
Expand. Our existing customer base includes
several of the largest acreage holders throughout North
Americas existing and emerging resource basins. In many
cases, our initial successful work with our customers in one
particular basin has led to additional work in other resource
positions in which the customer operates. We seek to continue to
leverage our existing customer base, as well as establish new
relationships with additional operators, to selectively expand
our hydraulic fracturing, coiled tubing and pressure pumping
services to other basins that have similar characteristics to
those in which we currently operate. Since we began to offer
hydraulic fracturing services in 2007, we have successfully
leveraged our existing relationships to extend our fracturing
services into new markets, including our entry into the East
Texas/Northern Louisiana hydraulic fracturing market in 2007. We
provide coiled tubing and pressure pumping services to multiple
customers in Oklahoma in the Granite Wash formation, which we
believe will continue to result in opportunities to provide
additional hydraulic fracturing services.
Pursue Additional Term Hydraulic Fracturing
Contracts. We seek to capitalize on the
strong market for hydraulic fracturing services in our operating
areas by negotiating additional term contracts. We intend to
pursue additional fracturing contracts with our existing
customers. We are currently discussing additional term contracts
with several parties that would require new equipment. If we are
successful with these negotiations, we intend to purchase
additional hydraulic fracturing equipment to service these
agreements. We believe that term contracts currently generate
attractive returns on investment, enhance the stability of our
earnings and cash flow and are consistent with our strategy of
dedicating equipment to financially stable and established
operators.
Maintain Flexibility to Pursue Spot Market
Work. Although we intend to enter into
additional term fracturing contracts, we also intend to maintain
our flexibility to pursue spot market projects. We believe our
ability to provide services in the spot market allows us to take
advantage of the current favorable pricing that exists in this
market and allows us to develop new customer relationships.
Sales and
Marketing
Our sales and marketing activities typically are performed
through our local operations in each geographical region. We
believe our local field sales personnel have an excellent
understanding of region-specific issues and customer operating
procedures and, therefore, can effectively target marketing
activities. We also have multiple corporate sales
representatives that supplement our field sales efforts and
focus on large accounts and selling technical services. Our
sales representatives work closely with our local managers and
field sales personnel to target market opportunities. We
facilitate teamwork among our sales representatives by basing a
portion of their compensation on aggregate company sales targets
rather than individual sales targets. We believe this emphasis
on teamwork allows us to successfully expand our customer base
and better serve our existing customers. Additionally, recently
we have experienced an increase in unsolicited inquiries to our
55
corporate headquarters about our services, several of which have
led to hydraulic fracturing and coiled tubing jobs.
Customers
Our customers include EOG Resources, EXCO Resources, Anadarko
Petroleum, Plains Exploration, Penn Virginia, Petrohawk,
El Paso, Apache and Chesapeake. Our top ten customers
accounted for approximately 90.2%, 90.6% and 79.9% of our
revenues for the years ended December 31, 2010, 2009 and
2008, respectively, and 97.2% of our revenues for the three
months ended March 31, 2011. In 2008, sales to Penn
Virginia, El Paso and EOG Resources represented 24.0%,
14.4% and 10.1%, respectively, of our total sales. In 2009,
sales to Penn Virginia, Anadarko Petroleum and EnCana
represented 25.9%, 11.7% and 11.0%, respectively, of our total
sales. In 2010, sales to EOG Resources, Penn Virginia, Anadarko
Petroleum and Apache accounted for 32.5%, 17.9%, 16.4% and 9.7%,
respectively, of our total sales. The majority of our revenues
are generated from our fracturing services. We currently own
four fracturing fleets. We are in the process of purchasing four
additional fracturing fleets. Due to the large percentage of our
revenues derived from our fracturing services and the limited
number of fracturing fleets we possess, our customer
concentration has historically been high. We believe our
continued efforts to increase the number of fracturing fleets we
operate will allow us to serve a larger number of customers and
reduce customer concentration.
Seasonality
Our results of operations have not historically reflected any
material seasonal tendencies and we currently do not believe
that seasonal fluctuations will have a material impact on us in
the foreseeable future.
Competition
The markets in which we operate are highly competitive. To be
successful, a company must provide services and products that
meet the specific needs of oil and natural gas exploration and
production companies and drilling services contractors at
competitive prices.
We provide our services and products across South Texas, East
Texas/North Louisiana and Western Oklahoma, and we compete
against different companies in each service we offer. Our
competition includes many large and small oilfield service
companies, including the largest integrated oilfield services
companies.
Our major competitors for our fracturing services include
Halliburton, Schlumberger, Baker Hughes, Weatherford
International, RPC, Inc., Pumpco, an affiliate of Complete
Production Services, and Frac Tech. Our major competitors for
our coiled tubing services include Halliburton, Schlumberger,
Baker Hughes and a significant number of regional businesses. We
believe that the principal competitive factors in the market
areas that we serve are technical expertise, fleet capability
and experience. While we must be competitive in our pricing, we
believe our customers select our services and products based on
a high level of technical expertise, local leadership and shale
knowledge that our personnel use to deliver quality services and
products.
Safety
In the oilfield services industry, an important competitive
factor in establishing and maintaining long-term customer
relationships is having an experienced and skilled work force.
In recent years, many of our larger customers have placed an
emphasis not only on pricing, but also on safety records and
quality management systems of contractors. We believe that these
factors will gain further importance in the future. We have
directed substantial resources toward employee safety and
quality management training programs, as well as our employee
review process. Our reputation for safety has allowed us to earn
work certification from several industry leaders with what we
believe to be
56
some of the most demanding safety requirements, including
ConocoPhillips, Exxon Mobil Corporation and Royal Dutch Shell.
Suppliers
We purchase the materials used in our services, such as
fracturing sand, fracturing chemicals, coiled tubing and fluid
supplies, from various suppliers. Please read Certain
Relationships and Related Party Transactions
Supplier Agreements beginning on page 91 of this
prospectus for additional information on our related party
suppliers. Where we currently source materials from a single
supplier, we believe that we will be able to make satisfactory
alternative arrangements in the event of interruption of supply.
However, given the limited number of suppliers of certain of our
raw materials, we may not always be able to make alternative
arrangements should one of our suppliers fail to deliver
or timely deliver our materials. During the year ended
December 31, 2010, we purchased 5% or more of our materials
or equipment from each of Economy Polymers &
Chemicals, Total, SPM and Sintex Minerals & Services,
Inc. During the three months ended March 31, 2011, we
purchased 5% or more of our materials and equipment from Economy
Polymers & Chemicals and Total.
Equipment
We operate four modern, 15,000 psi pressure rated hydraulic
fracturing fleets with an aggregate 142,000 horsepower, and we
currently have on order four additional hydraulic fracturing
fleets, which, upon delivery, will increase our aggregate
horsepower to 270,000 by the end of 2012. Our hydraulic
fracturing equipment is specially designed to handle well
completions with long lateral segments and multiple fracturing
stages in high-pressure formations. We also operate a fleet of
14 coiled tubing units, 16 double-pump pressure pumps and
nine single-pump pressure pumps. The number of pressure pumps
and related horsepower of each hydraulic fracturing fleet is
currently as follows:
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Fleet 1: consists of 17 pressure pumps
representing 34,000 horsepower of capacity.
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Fleet 2: consists of 12 pressure pumps
representing 24,000 horsepower of capacity.
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Fleet 3: consists of 21 pressure pumps
representing 42,000 horsepower of capacity.
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Fleet 4: consists of 21 pressure pumps
representing 42,000 horsepower of capacity.
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Fleet 5 (on order): consists of 15
pressure pumps representing 30,000 horsepower of capacity.
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Fleet 6 (on order): consists of 17
pressure pumps representing 34,000 horsepower of capacity.
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Fleet 7 (on order): consists of 16
pressure pumps representing 32,000 horsepower of capacity.
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Fleet 8 (on order): consists of 16
pressure pumps representing 32,000 horsepower of capacity.
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Each hydraulic fracturing fleet also includes the necessary
blending units, manifolds, data vans and other ancillary
equipment. We have the flexibility to allocate pressure pumps
and other equipment among our fleets as needed to satisfy
customer demand.
We purchase the majority of our hydraulic fracturing equipment
from Total, whom we recently acquired, and Stewart &
Stevenson. Please read Prospectus Summary
Recent Developments Acquisition of Total E&S,
Inc. on page 7 of this prospectus. Although we
believe that we will be able to make satisfactory alternative
arrangements in the event of interruption of supply from either
of these companies, we cannot be certain.
57
We believe that our equipment is rigorously maintained and
suitable for our current operations. Most of our hydraulic
fracturing fleets are serviced by our own mechanics who work
onsite or at one of our facilities. We regularly perform
preventative maintenance on our equipment in order to avoid any
major equipment failures which could result in extended
equipment downtime.
We have entered into operating leases with financial
institutions covering approximately $15.0 million of
equipment consisting of one blender, one chemical additions
truck, four fracturing sanders, twelve trailer-mounted
fracturing pumps, eight freightliners and seven tractors. The
operating leases terminate on August 1, 2014 and both
operating leases may be extended at our election subject to
certain terms and conditions. Pursuant to the operating leases,
we have the option to purchase all of the leased equipment.
Principal
Properties
Our corporate headquarters are located at 10375 Richmond Avenue,
Suite 2000, Houston, Texas 77042. We lease
24,365 square feet of general office space at our corporate
headquarters. The lease expires on January 31, 2017. As of
March 31, 2011, we owned or leased the following additional
principal properties:
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Leased or
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Expiration of
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Location
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Type of Facility
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Size
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Owned
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Lease
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|
500 North Shoreline Blvd., Suite 350 Corpus Christi, Texas
78401
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general office space
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7,685 square feet of building space
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Leased
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|
July 31, 2015
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5604 Medco Drive Marshall, Texas 75672
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general office space, warehouse and maintenance center
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14 acres, 37,000 square of building space
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Land Leased
Building Owned
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December 18, 2011
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214 W. 13th Street Elk City, Oklahoma 73644
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general office space, warehouse and repair facility
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1.85 acres, 9,000 square feet of building space
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Leased
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Month-to-month
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4460 Highway 77 Robstown, Texas 78380
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general office space, warehouse and maintenance center
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14.6 acres, 61,000 square feet of building space
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Owned
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We also lease several smaller facilities, which leases generally
have terms of one to three years. We believe that our existing
facilities are adequate for our operations and their locations
allow us to efficiently serve our customers in the South Texas,
East Texas/North Louisiana and Western Oklahoma regions. We do
not believe that any single facility is material to our
operations and, if necessary, we could readily obtain a
replacement facility.
Risk Management
and Insurance
Our operations are subject to hazards inherent in the oil and
gas industry, including accidents, blowouts, explosions,
craterings, fires, oil spills and hazardous materials spills.
These conditions can cause:
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personal injury or loss of life;
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damage to, or destruction of property, equipment, the
environment and wildlife; and
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suspension of operations.
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In addition, claims for loss of oil and natural gas production
and damage to formations can occur in the well services
industry. If a serious accident were to occur at a location
where our equipment and services are being used, it could result
in us being named as a defendant in lawsuits asserting large
claims.
58
Because our business involves the transportation of heavy
equipment and materials, we may also experience traffic
accidents which may result in spills, property damage and
personal injury.
Despite our efforts to maintain high safety standards, we from
time to time have suffered accidents, and there is a risk that
we will experience accidents in the future. In addition to the
property and personal losses from these accidents, the frequency
and severity of these incidents affect our operating costs and
insurability, and our relationship with customers, employees and
regulatory agencies. Any significant increase in the frequency
or severity of these incidents, or the general level of
compensatory payments, could adversely affect the cost of, or
our ability to obtain, workers compensation and other
forms of insurance, and could have other material adverse
effects on our financial condition and results of operations.
We maintain insurance coverage of types and amounts that we
believe to be customary in the industry including workers
compensation, employers liability, sudden &
accidental pollution, umbrella, comprehensive commercial general
liability, business automobile, property and equipment physical
damage insurance. Our insurance coverage may be inadequate to
cover our liabilities. In addition, we may not be able to
maintain adequate insurance in the future at rates we consider
reasonable and commercially justifiable or on terms as favorable
as our current arrangements.
We enter into Master Service Agreements (MSAs) with
each of our customers. Our MSAs delineate our and our
customers respective indemnification obligations with
respect to the services we provide. With respect to our
hydraulic fracturing services, our MSAs typically provide for
knock-for-knock
indemnification for all losses, which means that we and our
customers assume liability for damages to or caused by our
respective personnel and property. For catastrophic losses our
MSAs generally include industry-standard carve-outs from the
knock-for-knock
indemnities, pursuant to which our customers (typically the
exploration and production company) assume liability for
(i) damage to the hole, including the cost to re-drill;
(ii) damage to the formation, underground strata and the
reservoir; (iii) damages or claims arising from loss of
control of a well or a blowout; and (iv) allegations of
subsurface trespass. Additionally, our MSAs typically provide
that we can be held responsible for events of catastrophic loss
only if they arise as a result of our willful misconduct.
Our MSAs provide for industry-standard pollution indemnities,
pursuant to which we assume liability for surface pollution
associated with our equipment and resulting from our negligent
actions, and our customer assumes (without regard to fault)
liability arising from all other pollution, including, without
limitation, underground pollution and pollution emanating from
the wellbore as a result of an explosion, fire or blowout.
The description of our insurance and our indemnification
provisions set forth above is a summary of their material terms.
Future MSAs or insurance policies may change as a result of
market and other conditions.
Legal
Proceedings
We are subject to various legal proceedings and claims arising
in the ordinary course of our business. Our management does not
expect the outcome in any of these known legal proceedings,
individually or collectively, to have a material adverse effect
on our financial condition or results of operations.
Government
Regulations
We operate under the jurisdiction of a number of regulatory
bodies that regulate worker safety standards, the handling of
hazardous materials, the possession and handling of radioactive
materials, the transportation of explosives, the protection of
the environment, and motor carrier operations. Regulations
concerning equipment certification create an ongoing need for
regular maintenance,
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which is incorporated into our daily operating procedures. The
oil and gas industry is subject to environmental regulation
pursuant to local, state and federal legislation.
Among the services we provide, we operate as a motor carrier and
therefore are subject to regulation by the DOT and by various
state agencies. These regulatory authorities exercise broad
powers, governing activities such as the authorization to engage
in motor carrier operations; regulatory safety; hazardous
materials labeling, placarding and marking; financial reporting;
and certain mergers, consolidations and acquisitions. There are
additional regulations specifically relating to the trucking
industry, including testing and specification of equipment and
product handling requirements. The trucking industry is subject
to possible regulatory and legislative changes that may affect
the economics of the industry by requiring changes in operating
practices or by changing the demand for common or contract
carrier services or the cost of providing truckload services.
Some of these possible changes include increasingly stringent
environmental regulations, changes in the hours of service
regulations which govern the amount of time a driver may drive
in any specific period, onboard black box recorder devices or
limits on vehicle weight and size.
Interstate motor carrier operations are subject to safety
requirements prescribed by DOT. To a large degree, intrastate
motor carrier operations are subject to safety regulations that
mirror federal regulations. Such matters as weight and dimension
of equipment are also subject to federal and state regulations.
DOT regulations mandate drug testing of drivers.
From time to time, various legislative proposals are introduced,
including proposals to increase federal, state or local taxes,
including taxes on motor fuels, which may increase our costs or
adversely impact the recruitment of drivers. We cannot predict
whether, or in what form, any increase in such taxes applicable
to us will be enacted.
Some of our operations utilize equipment that contains sealed,
low-grade radioactive sources. Our activities involving the use
of radioactive materials are regulated by the United States
Nuclear Regulatory Commission, or NRC, and state regulatory
agencies under agreement with the NRC. Standards implemented by
these regulatory agencies require us to obtain licenses or other
approvals for the use of such radioactive materials. We believe
that we have obtained these licenses and approvals when
necessary and that we are in substantial compliance with these
requirements.
Environmental
Matters
Our operations are subject to numerous foreign, federal, state
and local environmental, health and safety laws, rules and
regulations including those governing the release
and/or
discharge of materials into the environment or otherwise
relating to environmental protection. Numerous governmental
agencies issue regulations to implement and enforce these laws,
for which compliance is often costly and difficult. The
violation of these laws and regulations may result in the denial
or revocation of permits, issuance of corrective action orders,
assessment of administrative and civil penalties, and even
criminal prosecution. We believe that we are in substantial
compliance with applicable environmental laws and regulations.
Further, we do not anticipate that compliance with existing
environmental laws and regulations will have a material effect
on our consolidated financial statements. It is possible,
however, that substantial costs for compliance or penalties for
non-compliance may be incurred in the future. Moreover, it is
possible that other developments, such as the adoption of
stricter environmental laws, regulations, and enforcement
policies, could result in additional costs or liabilities that
we cannot currently quantify.
We generate wastes, including hazardous wastes, which are
subject to the federal Resource Conservation and Recovery Act,
or RCRA, and comparable state statutes. The EPA, the NRC, and
state agencies have limited the approved methods of disposal for
some types of hazardous and nonhazardous wastes. Some oil and
natural gas exploration and production wastes handled by us in
our field service activities currently are exempt from
regulation as hazardous wastes. There is no guarantee, however,
that the EPA or individual states will not adopt more stringent
requirements for the handling of nonhazardous waste or
categorize some nonhazardous waste as hazardous in the
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future. Any such change could result in an increase in our costs
to manage and dispose of waste, which could have a material
adverse effect on our results of operations and financial
position.
The federal Comprehensive Environmental Response, Compensation,
and Liability Act, which we refer to herein as CERCLA or the
Superfund law, and comparable state statutes impose liability,
without regard to fault or legality of the original conduct, on
classes of persons that are considered to have contributed to
the release of a hazardous substance into the environment. Such
classes of persons include the current and past owners or
operators of sites where a hazardous substance was released, and
companies that disposed or arranged for disposal of hazardous
substances at offsite locations such as landfills. Under CERCLA,
these persons may be subject to joint and several liability for
the costs of cleaning up the hazardous substances that have been
released into the environment and for damages to natural
resources, and it is not uncommon for neighboring landowners and
other third parties to file claims for personal injury and
property damage allegedly caused by the hazardous substances
released into the environment. We currently own, lease, or
operate numerous properties and facilities that for many years
have been used for industrial activities, including oil and
natural gas production operations. Hazardous substances, wastes,
or hydrocarbons may have been released on or under the
properties owned or leased by us, or on or under other locations
where such substances have been taken for disposal. In addition,
some of these properties have been operated by third parties or
by previous owners whose treatment and disposal or release of
hazardous substances, wastes, or hydrocarbons, was not under our
control. These properties and the substances disposed or
released on them may be subject to CERCLA, RCRA and analogous
state laws. Under such laws, we could be required to remove
previously disposed substances and wastes (including substances
disposed of or released by prior owners or operators), remediate
contaminated property (including groundwater contamination,
whether from prior owners or operators or other historic
activities or spills), or perform remedial plugging of disposal
wells or pit closure operations to prevent future contamination.
These laws and regulations may also expose us to liability for
our acts that were in compliance with applicable laws at the
time the acts were performed.
In the course of our operations, some of our equipment may be
exposed to naturally occurring radiation associated with oil and
natural gas deposits, and this exposure may result in the
generation of wastes containing naturally occurring radioactive
materials, or NORM. NORM wastes exhibiting trace levels of
naturally occurring radiation in excess of established state
standards are subject to special handling and disposal
requirements, and any storage vessels, piping, and work area
affected by NORM may be subject to remediation or restoration
requirements. Because many of the properties presently or
previously owned, operated, or occupied by us have been used for
oil and natural gas production operations for many years, it is
possible that we may incur costs or liabilities associated with
elevated levels of NORM.
The Federal Water Pollution Control Act, or the Clean Water Act,
and applicable state laws impose restrictions and strict
controls regarding the discharge of pollutants into state waters
or waters of the United States. The discharge of pollutants into
jurisdictional waters is prohibited unless the discharge is
permitted by the EPA or applicable state agencies. In addition,
the Oil Pollution Act of 1990 imposes a variety of requirements
on responsible parties related to the prevention of oil spills
and liability for damages, including natural resource damages,
resulting from such spills in waters of the United States. A
responsible party includes the owner or operator of a facility.
The Federal Water Pollution Control Act and analogous state laws
provide for administrative, civil and criminal penalties for
unauthorized discharges and, together with the Oil Pollution
Act, impose rigorous requirements for spill prevention and
response planning, as well as substantial potential liability
for the costs of removal, remediation, and damages in connection
with any unauthorized discharges.
SDWA, regulates the underground injection of substances through
the UIC program. Hydraulic fracturing generally is exempt from
regulation under the UIC program, and the hydraulic fracturing
process is typically regulated by state oil and gas commissions.
The EPA recently has taken the position that hydraulic
fracturing with fluids containing diesel fuel are subject to
regulation under the UIC program, specifically as
Class II UIC wells. We do not utilize diesel in
our fracturing services,
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and we do not expect this change to have a material impact on
our operations. At the same time, the EPA has commenced a study
of the potential environmental impacts of hydraulic fracturing
activities, and a committee of the U.S. House of
Representatives recently concluded an investigation of hydraulic
fracturing practices. As part of these studies, both the EPA and
the House committee have requested that certain companies
provide them with information concerning the chemicals used in
the hydraulic fracturing process. These studies, depending on
their results, could spur initiatives to regulate hydraulic
fracturing under the SDWA or otherwise. Legislation has been
introduced before Congress in the last few sessions to provide
for federal regulation of hydraulic fracturing and to require
disclosure of the chemicals used in the fracturing process.
Although the federal legislation did not pass, if similar
federal legislation is introduced and becomes law in the future,
the legislation could establish an additional level of
regulation at the federal level that could lead to operational
delays or increased operating costs, making it more difficult to
perform hydraulic fracturing and increasing our costs of
compliance and doing business.
In addition, various state and local governments have
implemented, or are considering, increased regulatory oversight
of hydraulic fracturing through additional permit requirements,
operational restrictions, disclosure requirements and temporary
or permanent bans on hydraulic fracturing in certain
environmentally sensitive areas such as certain watersheds. The
Texas Senate and House of Representatives have both passed bills
that would require the disclosure of information regarding the
substances used in the hydraulic fracturing process to the
Railroad Commission of Texas and to the public. If signed into
law by the Governor, this bill could increase our costs of
compliance and doing business. Moreover, the availability of
information regarding the constituents of hydraulic fracturing
fluids could make it easier for third parties opposing the
hydraulic fracturing process to initiate legal proceedings based
on allegations that specific chemicals used in the fracturing
process could adversely affect groundwater. Disclosure of our
proprietary chemical formulas to third parties or to the public,
even if inadvertent, could diminish the value of those formulas
and could result in competitive harm to us.
The adoption of new laws or regulations imposing reporting
obligations on, or otherwise limiting, the hydraulic fracturing
process could make it more difficult to complete natural gas
wells in shale formations, increase our costs of compliance and
adversely affect the hydraulic fracturing services that we
render for our exploration and production customers. In
addition, if hydraulic fracturing becomes regulated at the
federal level as a result of federal legislation or regulatory
initiatives by the EPA, fracturing activities could become
subject to additional permitting requirements, and also to
attendant permitting delays and potential increases in cost,
which could adversely affect our business.
There have been no material incidents or citations, related to
our hydraulic fracturing operations in the past five years.
During that period we have not been involved in any litigation
over alleged environmental violations, have not been ordered to
pay any material monetary fine or penalty with respect to
alleged environmental violations, and are not currently facing
any type of governmental enforcement action or other regulatory
proceeding involving alleged environmental violations related to
our hydraulic fracturing operations. In addition, pursuant to
our MSAs, we are generally liable for only surface pollution,
not underground or flowback pollution, which our customers are
generally liable for and for which we are typically indemnified
by our customers.
We maintain insurance against some risks associated with
underground contamination that may occur as a result of well
services activities. However, this insurance is limited to
activities at the wellsite and may not continue to be available
or may not be available at premium levels that justify its
purchase. The occurrence of a significant event not fully
insured or indemnified against could have a materially adverse
effect on our financial condition and results of operations.
Some of our operations also result in emissions of regulated air
pollutants. The federal Clean Air Act and analogous state laws
require permits for facilities that have the potential to emit
substances into the atmosphere that could adversely affect
environmental quality. These laws and their implementing
regulations also impose generally applicable limitations on air
emissions and require
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adherence to maintenance, work practice, reporting and
recordkeeping, and other requirements. Many of these regulatory
requirements, including New Source Performance
Standards and Maximum Achievable Control
Technology standards, are expected to be made more
stringent as a result of more stringent ambient air quality
standards and other air quality protection goals adopted by the
EPA. Failure to obtain a permit or to comply with permit or
other regulatory requirements could result in the imposition of
substantial administrative, civil and even criminal penalties.
In addition, we or our customers could be required to shut down
or retrofit existing equipment, leading to additional expenses
and operational delays.
More stringent laws and regulations relating to climate change
and GHGs may be adopted in the future and could cause us to
incur additional operating costs or reduce the demand for our
services. On December 15, 2009, the EPA published its
findings that emissions of carbon dioxide, methane, and other
GHGs present an endangerment to public health and welfare
because emissions of such gases are, according to the EPA,
contributing to the warming of the earths atmosphere and
other climate changes. Based on these findings, EPA has begun to
adopt and implement regulations that would restrict emissions of
GHGs under existing provisions of the CAA. The EPA recently
adopted two sets of rules regulating GHG emissions under the
CAA, one of which requires a reduction in emissions of GHGs from
motor vehicles and the other of which will require that certain
large stationary sources obtain permits for their emissions of
GHGs, effective January 2, 2011. The EPA has also adopted
rules requiring the reporting of GHG emissions from specified
large GHG sources, on an annual basis, beginning in 2011 for
emissions occurring after January 1, 2010, as well as
certain oil and natural gas production facilities, on an annual
basis, beginning in 2012 for emissions occurring in 2011. We do
not believe our operations are currently subject to these
requirements, but our business could be affected if our
customers operations become subject to these or other
similar requirements. These requirements could increase the cost
of doing business for us and our customers, reduce the demand
for the oil and gas our customers produce, and thus have an
adverse effect on the demand for our products and services.
In addition, both houses of Congress have actively considered
legislation to reduce emissions of GHGs, and more than one-third
of the states have already taken legal measures to reduce
emissions of GHGs, primarily through the planned development of
GHG emission inventories
and/or
regional GHG cap and trade programs. Most of these cap and trade
programs work by requiring either major sources of emissions or
major producers of fuels to acquire and surrender emission
allowances, with the number of allowances available for purchase
reduced each year until the overall GHG emission reduction goal
is achieved. Although it is not possible at this time to predict
how legislation or new regulations that may be adopted to
address GHG emissions would impact our business, any new
federal, regional or state restrictions on emissions of carbon
dioxide or other GHGs that may be imposed in areas in which we
conduct business could result in increased compliance costs or
additional operating restrictions on our customers. Such
restrictions could potentially make our customers products
more expensive and thus reduce demand for them, which could have
a material adverse effect on the demand for our services and our
business. Finally, it should be noted that some scientists have
concluded that increasing concentrations of GHGs in the
Earths atmosphere may produce climate changes that have
significant physical effects, such as increased frequency and
severity of storms, droughts, and floods and other climatic
events; if any such effects were to occur, they could have an
adverse effect on our assets and operations.
We are also subject to the requirements of the federal
Occupational Safety and Health Act, or OSHA, and comparable
state statutes that regulate the protection of the health and
safety of workers. In addition, the OSHA hazard communication
standard requires that information be maintained about hazardous
materials used or produced in operations and that this
information be provided to employees, state and local government
authorities and the public. We believe that our operations are
in substantial compliance with the OSHA requirements, including
general industry standards, record keeping requirements and
monitoring of occupational exposure to regulated substances.
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Employees
As of June 8, 2011, we had 720 employees, 158 of whom
were full-time salaried personnel. Most of the remaining
employees are hourly personnel. We will hire additional
employees for certain large projects and, subject to local
market conditions, additional crew members are generally
available for hire on relatively short notice. Our employees are
not represented by any labor unions. We consider our relations
with our employees to be good.
Formation
We were initially formed as a partnership in 1997 pursuant to
the laws of the State of Texas. In 2005, the assets of the
partnership were purchased by C&J Spec-Rent Services, Inc.
In 2006, we reorganized as a corporation by merging C&J
Spec-Rent Services, Inc. with and into a newly-formed Texas
corporation, pursuant to a merger agreement between us, C&J
Merger Sub, Inc., and C&J Spec-Rent Services, Inc.
Concurrent with the reorganization, we named the company
C&J Energy Services, Inc. In 2010, we converted from a
Texas corporation to a Delaware corporation. C&J Spec-Rent
Services, Inc. is a wholly-owned subsidiary of our company and
owns most of our assets. Our remaining assets are held by Total.
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MANAGEMENT
Executive
Officers and Directors
Our board of directors is comprised of the following seven
members: Joshua E. Comstock, as Chairman of the board; Randall
C. McMullen; Darren Friedman; James P. Benson; Michael Roemer;
H. H. Tripp Wommack, III and C. James
Stewart, III. Messrs. Benson and Friedman were
appointed pursuant to the Amended and Restated
Stockholders Agreement. Please read Certain
Relationships and Related Party Transactions Amended
and Restated Stockholders Agreement beginning on
page 89 of this prospectus. Under the terms of the Amended
and Restated Stockholders Agreement, subject to retaining
certain ownership thresholds:
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Energy Spectrum is entitled to appoint one director, currently
Mr. Benson; and
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Citigroup/StepStone
is entitled to appoint one director, currently Mr. Friedman.
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Set forth below are the names, ages and positions of our
executive officers and directors as of June 8, 2011. All
directors are elected for a term of one year and serve until
their successors are elected and qualified or upon earlier of
death, resignation or removal. All executive officers hold
office until their successors are elected and qualified or upon
earlier of death, resignation or removal.
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Name
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Age
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Position with Our
Company
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Joshua E. Comstock
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President, Chief Executive Officer and Chairman of the Board of
Directors
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Randall C. McMullen, Jr.
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Executive Vice President, Chief Financial Officer, Treasurer and
Director
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Bretton W. Barrier
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Chief Operating Officer
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Theodore R. Moore
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Vice President General Counsel and Corporate
Secretary
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Brandon D. Simmons
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Vice President Coiled Tubing
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John D. Foret
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Vice President Coiled Tubing
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William D. Driver
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Vice President Hydraulic Fracturing
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J. P. Pat Winstead
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Vice President Sales and Marketing
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Darren M. Friedman
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Director
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James P. Benson
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Director
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Michael Roemer
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Director
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H. H. Tripp Wommack, III
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Director
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C. James Stewart, III
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Director
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Joshua E. Comstock Mr. Comstock
has served as our Chief Executive Officer and as one of our
directors since 1997. Mr. Comstock was given the additional
title of President in December 2010 and the title of Chairman of
the Board in February 2011. In 1997, Mr. Comstock was a
founder of C&J. Mr. Comstock is responsible for
general oversight of our company. Mr. Comstock began
working as a foreman on several specialized natural gas pipeline
construction projects. Through this experience,
Mr. Comstock gained extensive knowledge and understanding
of the gathering and transporting of natural gas. In January
1990, Mr. Comstock began working for J4 Oilfield Service, a
test pump services company. His primary responsibility was
working in natural gas production as a service contractor for
Exxon.
As a founder of our company, Mr. Comstock is one of the
driving forces behind us and our success to date. Over the
course of our history, Mr. Comstock has successfully grown
us through his leadership skills and business judgment and for
this reason we believe Mr. Comstock is a valuable asset to
our board and is the appropriate person to serve as Chairman of
the board.
Randall C. McMullen, Jr.
Mr. McMullen has served as our Executive Vice President,
Chief Financial Officer and Treasurer and director since joining
us in August 2005. Prior to joining our
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company, Mr. McMullen held various positions with Credit
Suisse First Boston, the GulfStar Group and Growth Capital
Partners. Mr. McMullen graduated magna cum laude from Texas
A&M University with a B.B.A. in Finance.
During Mr. McMullens tenure with us, we have grown
rapidly. Mr. McMullens financial and investment
banking expertise have been invaluable to us in our efforts to
continue our growth through raising additional capital. For this
reason, we believe Mr. McMullen is well suited to serve on
our board of directors.
Bretton W. Barrier Mr. Barrier
has served in multiple positions since joining us in January
2007, including Vice President Hydraulic Fracturing,
and, most recently, Chief Operating Officer. Mr. Barrier
has over 20 years of experience in the oil and gas
industry. He is responsible for all of our Fracturing
Operations, including management of teams at each operating
location, customer and vendor management and health and safety
matters. Prior to joining us, Mr. Barrier worked for
El Paso/Coastal
from July 2000 to January 2007, where he oversaw production,
completions and workovers for all South Texas operations, as
well as supervised over 60% of that divisions fracturing
treatments from 2003 to 2007. Prior to working at
El Paso/Coastal, Mr. Barrier worked for Halliburton
from August 1990 to July 2000, where he served in various
positions including equipment operator, service supervisor and
service leader.
Theodore R. Moore Mr. Moore has
served as our Vice President General Counsel and
Corporate Secretary since February 2011. Prior to that time,
Mr. Moore practiced corporate law at Vinson &
Elkins L.L.P. from 2002 through January 2011. Mr. Moore
represented public and private companies and investment banking
firms in numerous capital markets offerings and mergers and
acquisitions, primarily in the oil and gas industry.
Mr. Moore received a B.A. in Political Economy from Tulane
University and a J.D. from Tulane Law School.
Brandon D. Simmons Mr. Simmons
has been with our company since 2001, primarily as an
operational manager of our coiled tubing unit. Mr. Simmons
has served as our Vice President Coiled Tubing since
2005. Mr. Simmons operated the first Stewart &
Stevenson coiled tubing unit ever built and has a complete
mechanical knowledge of coiled tubing units and supporting
equipment. Mr. Simmons has been heavily involved in the
design of our coiled tubing units. Prior to joining our company,
Mr. Simmons spent eight years with Superior Energy and
Preeminent Coiled Tubing Services operating coiled tubing units.
John D. Foret Mr. Foret has been
with our company since 2001. Mr. Foret has served as our
Vice President Coiled Tubing since 2008.
Mr. Foret has 25 years of experience in the oil and
gas industry and currently is responsible for our coiled tubing
operations. Prior to joining us, Mr. Foret was a workover
supervisor for Cudd Energy Services, covering various
geographical areas, including the Southern United States, Gulf
of Mexico, Norway, Scotland, India and South America.
William D. Driver Mr. Driver has
served as our Vice President Hydraulic Fracturing
since joining us in August 2007. Mr. Driver has
20 years of experience in the oil and gas industry. Along
with Mr. Barrier, he is responsible for our companys
Fracturing Operations. Prior to joining our company,
Mr. Driver worked for Halliburton in the capacity of
equipment operator, service supervisor, field service quality
coordinator, operations manager and camp manager from August
1990 to August 2007.
J.P. Pat Winstead
Mr. Winstead has served as our Vice President
Sales and Marketing since 2008. Mr. Winsteads primary
role at our company is to oversee our sales and marketing
efforts. Mr. Winstead also managed and will continue to
manage our expansion into new regions, specifically East
Texas/North Louisiana and Western Oklahoma. Prior to joining our
company, Mr. Winstead spent the last 25 years working
in various sales and marketing roles for several companies,
including Ainsworth Trucking and SUNDANCE Cattle Co.
Darren M. Friedman Mr. Friedman
is a Partner of StepStone Group LLC, focusing on private equity
partnership, equity and mezzanine investments. Prior to joining
StepStone, Mr. Friedman was a
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Managing Partner of Citi Private Equity, managing over
$10 billion of capital across three private equity
investing activities. Mr. Friedman sits or has sat on the
boards or advisory boards of several portfolio companies, funds
and a number of Investment Committees. Prior to joining Citi
Private Equity, Mr. Friedman worked in the Investment
Banking division at Salomon Smith Barney. Mr. Friedman
received an M.B.A. from the Wharton School at the University of
Pennsylvania and a B.S. in Finance from the University of
Illinois.
Mr. Friedman brings extensive business, financial and
banking expertise to our board of directors from his background
in investment banking and private equity fund management.
Mr. Friedman also brings extensive prior board service
experience to our board from his service on numerous other
boards/limited partnership advisory boards.
James P. Benson Mr. Benson is a
founding shareholder and a Managing Partner of Energy Spectrum,
which manages private equity through institutional partnerships
styled as Energy Spectrum Partners and Energy
Trust Partners, and also manages a Financial Advisory
business focused on energy mergers and acquisitions and
institutional financings named Energy Spectrum Advisors, Inc.
Energy Spectrum was established in 1996. Prior to Energy
Spectrum, Mr. Benson was a Managing Director of Reid
Investments, Inc., a private investment banking firm focused on
energy mergers and acquisitions and financial advisory services,
joining the firm in mid-1987. He started his career at
InterFirst Bank Dallas, and was a credit officer focused on
energy lending and energy work-out. Mr. Benson graduated
from the University of Kansas with a B.S. in Finance and earned
his M.B.A. with a concentration in Finance from Texas Christian
University.
Mr. Bensons extensive financial and banking
experience in the energy industry from his over 20 years of
experience working at private equity firms specializing in the
energy industry make him well qualified to serve on our board.
Michael Roemer Mr. Roemer has
served as the Chief Financial Officer of Hammond, Kennedy,
Whitney & Co., a private equity group, and a partner
in several affiliate funds of Hammond, Kennedy since 2000. Prior
to joining Hammond, Kennedy, Mr. Roemer served as a
Shareholder and Vice President of Flackman, Goodman &
Potter, P.A. from 1988 to 2000. Mr. Roemer is a licensed
CPA with over 20-five years experience, and is a member of the
American Institute of Certified Public Accountants and the New
Jersey Society of Certified Public Accountants. Mr. Roemer
received his B.S. in Accounting from the University of Rhode
Island.
Mr. Roemers extensive background in public accounting
from his over 20 years of experience as a licensed CPA
combined with his subsequent experience as the chief financial
officer of a private equity firm make him well qualified to
serve on our board.
H.H. Tripp
Wommack, III Mr. Wommack is
currently the Chairman and CEO of Saber Oil and Gas Ventures,
LLC, an oil and gas company that focuses on acquisition and
exploitation efforts in the Permian Basin of West Texas and
Southeast New Mexico. Mr. Wommack has served in this
position since August 2008. Mr. Wommack also serves as the
Chairman of Cibolo Creek Partners, LLC, which specializes in
commercial real estate investments, and Globe Energy Services,
LLC, an energy services company in the Permian Basin. Prior to
his current positions, Mr. Wommack was Chairman, President
and CEO of Southwest Royalties, Inc. from August 1983 to August
2004 and Saber Resources from July 2004 until August 2008.
Additionally, Mr. Wommack was the Founder, Chairman and CEO
of Basic Energy Services (formerly Sierra Well Services, Inc.),
and following its initial public offering, Mr. Wommack
continued to serve on the board of Basic Energy Services through
June 2009. Mr. Wommack graduated with a B.A. from the
University of North Carolina, Chappell Hill, and earned a J.D.
from the University of Texas.
Mr. Wommack adds extensive executive and management
expertise to us from his background as chairman
and/or chief
executive officer of numerous companies. In addition, we believe
Mr. Wommacks knowledge from serving as chairman and
chief executive officer of a company that went through an
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initial public offering will be valuable to us in our
registration process. For these reasons, we believe
Mr. Wommack to be an asset to our board.
C. James Stewart III
Mr. Stewart is currently the Chairman of
Stewart & Sons Holding Co., a position he has held
since 2003. From 1972 to 2003, Mr. Stewart worked at
Stewart & Stevenson in multiple capacities, including
serving as Executive Vice President and Director from 1999 to
2003. Mr. Stewart received a B.S. from Texas Christian
University.
We believe Mr. Stewarts extensive business and
marketing experience at a large oil field services company make
him a valuable member of our board of directors.
Board of
Directors
The number of members of our board of directors is determined
from
time-to-time
by resolution of the board of directors. Currently, our board of
directors consists of seven persons.
Board Diversity. The board seeks
independent directors who represent a mix of backgrounds and
experiences that will enhance the quality of the boards
deliberations and decisions. In evaluating directors, we
consider diversity in its broadest sense, including persons
diverse in perspectives, personal and professional experiences,
geography, gender, race and ethnicity. This process has resulted
in a board that is comprised of highly qualified directors that
reflect diversity as we define it.
Board Independence. We are not
currently required to comply with the corporate governance rules
of any stock exchange and, as a private company, we are not
currently subject to the Sarbanes-Oxley Act of 2002 and related
SEC rules, collectively, Sarbanes-Oxley. However, upon the
effectiveness of the registration statement of which this
prospectus forms a part, we will become subject to
Sarbanes-Oxley and, upon the listing of our common stock on the
NYSE, we will become subject to the listing rules of the NYSE.
Our board of directors has affirmatively determined that no
member of our board, other than Mr. Comstock and
Mr. McMullen, has a material relationship with us and
therefore the remaining members of our board are
independent as defined under the NYSEs listing
standards. In reaching this determination, our board concluded
that Mr. Stewarts relationship with one of our
suppliers did not affect his independence. Please read
Certain Relationships and Related Party
Transactions Supplier Agreements beginning on
page 91 of this prospectus for additional information
regarding Mr. Stewarts relationship with one of our
suppliers.
Executive Sessions of Our Board of
Directors. Our independent directors are
provided the opportunity to meet in executive session at each
regularly scheduled meeting of our board. Messrs. Friedman
and Benson preside over such meetings.
Risk Oversight. The board is actively
involved in oversight of risks that could affect us. This
oversight function is conducted primarily through committees of
our board, as disclosed in the descriptions of each of the
committees below and in the charters of each of the committees,
but the full board retains responsibility for general oversight
of risks. Our Audit Committee, which was formed in February
2011, will be charged with oversight of our system of internal
controls and risks relating to financial reporting, legal,
regulatory and accounting compliance. Our board will continue to
satisfy its oversight responsibility through full reports from
our Audit Committee chair regarding the committees
considerations and actions, as well as through regular reports
directly from officers responsible for oversight of particular
risks within our company. In addition, we have internal audit
systems in place to review adherence to policies and procedures,
which are supported by a separate internal audit department.
68
Committees of the
Board
Our board has established three standing committees to assist it
in discharging its responsibilities: an Audit Committee, a
Compensation Committee and a Nominating and Governance
Committee. The following chart reflects the current membership
of each committee:
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Nominating and
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Compensation
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Governance
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Name
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Audit Committee
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Committee
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Committee
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Joshua E. Comstock
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Randall C. McMullen, Jr.
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Darren M. Friedman
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*
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*
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James P. Benson
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*
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**
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Michael Roemer
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**
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*
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*
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H. H. Tripp Wommack, III
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*
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**
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C. James Stewart, III
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*
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*
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Each of these committees has a charter, which will be available
no later than the closing of this offering on our website
at
and stockholders may obtain printed copies, free of charge, by
sending a written request to C&J Energy Services, Inc.,
10375 Richmond Avenue, Suite 2000, Houston, Texas 77042,
Attn: Corporate Secretary.
Audit Committee. Our Audit Committee is
responsible for oversight of our risks relating to accounting
matters, financial reporting and legal and regulatory compliance.
In particular, our Audit Committee has the following purposes
pursuant to its charter:
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oversee the quality, integrity and reliability of the financial
statements and other financial information we provide to any
governmental body or the public;
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oversee our compliance with legal and regulatory requirements;
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retain our independent registered public accounting firm;
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oversee the qualifications, performance and independence of our
independent registered public accounting firm;
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oversee the performance of our internal audit function;
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oversee our systems of internal controls regarding finance,
accounting, legal compliance and ethics that our management and
board have established;
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provide an open avenue of communication among our independent
registered public accounting firm, financial and senior
management, the internal auditing department, and our board,
always emphasizing that the independent registered public
accounting firm is accountable to our Audit Committee; and
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perform such other functions as our board may assign to our
Audit Committee from time to time.
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Our Audit Committee was established in February 2011. Going
forward, our Audit Committee, in connection with these purposes
and to satisfy its oversight responsibilities, will annually
select, engage and evaluate the performance and ongoing
qualifications of, and determine the compensation for, our
independent registered public accounting firm, review our annual
and quarterly financial statements, and confirm the independence
of our independent registered public accounting firm. Our Audit
Committee will meet with our management and independent
registered public accounting firm regarding the adequacy of our
financial controls and our compliance with legal, tax and
regulatory
69
matters and our significant policies. In particular, our Audit
Committee will separately meet regularly with our chief
financial officer, corporate controller, director of internal
audit, our independent registered public accounting firm and
other members of management. Our Audit Committee chair will
routinely meet between formal committee meetings with our chief
financial officer, corporate controller, director of internal
audit and our independent registered public accounting firm. The
committee will also receive regular reports regarding issues
such as the status and findings of audits being conducted by the
internal and independent auditors, accounting changes that could
affect our financial statements and proposed audit adjustments.
While our Audit Committee has the responsibilities and powers
set forth in its charter, it is not the duty of our Audit
Committee to plan or conduct audits, to determine that our
financial statements are complete and accurate, or to determine
that such statements are in accordance with accounting
principles generally accepted in the United States and other
applicable rules and regulations. Our management is responsible
for the preparation of our financial statements in accordance
with accounting principles generally accepted in the United
States and our internal controls. Our independent registered
public accounting firm is responsible for the audit work on our
financial statements. It is also not the duty of our Audit
Committee to conduct investigations or to assure compliance with
laws and regulations and our policies and procedures. Our
management is responsible for compliance with laws and
regulations and compliance with our policies and procedures.
Since its inception in February 2011, our Audit Committee has
met twice and consists of Mr. Roemer (Chairman),
Mr. Friedman and Mr. Wommack. Subject to a one-year
phase-in period, Sarbanes-Oxley and the listing standards of the
NYSE require an audit committee consisting of at least three
members, each of whom must meet certain independence standards.
These rules will apply to us upon the effectiveness of the
registration statement of which this prospectus forms a part.
Our board has determined that all members of our Audit Committee
are independent as that term is defined in the New York Stock
Exchanges listing standards and by
Rule 10A-3
promulgated under the Securities Exchange Act of 1934, as
amended, or the Exchange Act. Our board has determined that each
member of our Audit Committee is financially literate and that
Mr. Roemer has the necessary accounting and financial
expertise to serve as Chairman. Our board has also determined
that Mr. Roemer is an audit committee financial
expert following a determination that Mr. Roemer met
the criteria for such designation under the SECs rules and
regulations.
Compensation Committee. Our
Compensation Committee is responsible for risks relating to
employment policies and our compensation and benefits systems.
Pursuant to its charter, the purposes of our Compensation
Committee are to:
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review, evaluate, and approve our agreements, plans, policies,
and programs to compensate our corporate officers;
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review and discuss with our management the Compensation
Discussion and Analysis to be included in our proxy statement
for the annual meeting of stockholders and to determine whether
to recommend to our board that the Compensation Discussion and
Analysis be included in the proxy statement, in accordance with
applicable rules and regulations;
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produce our Compensation Committee Report for inclusion in the
proxy statement, in accordance with applicable rules and
regulations;
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otherwise discharge our boards responsibility relating to
compensation of our corporate officers; and
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perform such other functions as our board may assign to our
Compensation Committee from time to time.
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In connection with these purposes, our board has delegated to
our Compensation Committee the overall responsibility for
establishing, implementing and monitoring the compensation for
our
70
corporate officers. Our Compensation Committee was established
in February 2011. Going forward, our Compensation Committee will
review and approve the compensation of our corporate officers
and make appropriate adjustments based on our performance,
achievement of predetermined goals and changes in an
officers duties and responsibilities. Our Compensation
Committee will also approve all employment agreements related to
the executive team and approve recommendations regarding equity
awards for all employees. Together with management, and any
counsel or other advisors deemed appropriate by our Compensation
Committee, our Compensation Committee will review and discuss
the particular executive compensation matter presented and make
a final determination, with the exception of compensation
matters relating to our Chief Executive Officer. In the case of
our Chief Executive Officer, our Compensation Committee
will review and discuss the particular compensation matter
(together with our management and any counsel or other advisors
deemed appropriate) and formulate a recommendation. Our
Compensation Committees chairman then will report our
Compensation Committees recommendation for approval by the
full board or, in certain cases, by the independent directors.
Under its charter, our Compensation Committee has the sole
authority to retain and terminate any compensation consultant to
be used to assist in the evaluation of the compensation of our
corporate officers and directors and also has the sole authority
to approve the consultants fees and other retention terms.
Our board has determined that all members of our Compensation
Committee are independent as that term is defined in the
NYSEs listing standards. Our Compensation Committee,
consisting of Mr. Wommack (Chairman), Mr. Friedman,
Mr. Benson, Mr. Roemer and Mr. Stewart, has held
one meeting since its formation in February 2011.
Nominating and Governance
Committee. Our Nominating and Governance
Committee is responsible for oversight relating to management
and board succession planning, and stockholder responses to our
ethics and business practices. Pursuant to its charter, the
purposes of our Nominating and Governance Committee are to:
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assist our board by identifying individuals qualified to become
members of our board and recommend director nominees to our
board for election at the annual meetings of stockholders or for
appointment to fill vacancies;
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recommend director nominees to our board for each of its
committees;
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advise our board about the appropriate composition of our board
and its committees;
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advise our board about and recommend to our board appropriate
corporate governance practices and assist our board in
implementing those practices;
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lead our board in its annual review of the performance of our
board and its committees;
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direct all matters relating to the succession of our Chief
Executive Officer;
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review and make recommendations to our board with respect to the
form and amount of director compensation; and
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perform such other functions as our board may assign to our
Nominating and Governance Committee from time to time.
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Our Nominating and Governance Committee was formed in February
2011. In connection with these purposes, our Nominating and
Governance Committee will actively seek individuals qualified to
become members of our board, seek to implement the independence
standards required by law, applicable listing standards, our
amended and restated certificate of incorporation and our
amended and restated bylaws, and identify the qualities and
characteristics necessary for an effective Chief Executive
Officer.
71
Our Nominating and Governance Committee is responsible for
establishing criteria for selecting new directors and actively
seeking individuals to become directors for recommendation to
our board. In considering candidates for our board, our
Nominating and Governance Committee will consider the entirety
of each candidates credentials. There is currently no set
of specific minimum qualifications that must be met by a nominee
recommended by our Nominating and Governance Committee, as
different factors may assume greater or lesser significance at
particular times and the needs of our board may vary in light of
its composition and our Nominating and Governance
Committees perceptions about future issues and needs.
However, while our Nominating and Governance Committee does not
maintain a formal list of qualifications, in making its
evaluation and recommendation of candidates, our Nominating and
Governance Committee may consider, among other factors,
diversity, age, skill, experience in the context of the needs of
our board, independence qualifications and whether prospective
nominees have relevant business and financial experience, have
industry or other specialized expertise, and have high moral
character.
Our Nominating and Governance Committee may consider candidates
for our board from any reasonable source, including from a
search firm engaged by our Nominating and Governance Committee
or stockholder recommendations. Our Nominating and Governance
Committee does not intend to alter the manner in which it
evaluates candidates based on whether the candidate is
recommended by a stockholder. However, in evaluating a
candidates relevant business experience, our Nominating
and Governance Committee may consider previous experience as a
member of our board.
In addition, our board has delegated to our Nominating and
Governance Committee the responsibility for establishing,
implementing and monitoring the compensation for our directors.
In the future, our Nominating and Governance Committee will
establish, review and approve the compensation of our directors
and make appropriate adjustments based on our performance,
duties and responsibilities and competitive environment. Our
Nominating and Governance Committees primary objectives in
establishing and implementing director compensation are to:
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ensure the ability to attract, motivate and retain the talent
necessary to provide qualified board leadership; and
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use the appropriate mix of long-term and short-term compensation
to ensure high
board/committee
performance.
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Our board has determined that all members of our Nominating and
Governance Committee are independent as defined under the
NYSEs listing standards. Our Nominating and Governance
Committee, consists of Mr. Benson (Chairman),
Mr. Roemer and Mr. Stewart. Since its formation in
February 2011, our Nominating and Governance Committee has not
held a meeting.
Compensation
Committee Interlocks and Insider Participation
Mr. Wommack (Chairman), Mr. Friedman, Mr. Benson,
Mr. Roemer and Mr. Stewart have served on our
Compensation Committee since its inception in February 2011.
None of these directors has ever served as one of our officers
or employees. None of our executive officers has served as a
director or member of the compensation committee (or other
committee performing similar functions) of any other entity of
which an executive officer served on our board or our
Compensation Committee.
Code of Ethics
for Chief Executive Officer, Chief Financial Officer, Controller
and Certain Other Officers
Prior to completion of this offering, our board will adopt a
Code of Ethics for our Chief Executive Officer, our Chief
Financial Officer, our Controller and all other financial and
accounting officers. Following the closing of our initial public
offering, any change to, or waiver from, the Code of Ethics
72
will be disclosed on our website within two business days after
such change or waiver. Among other matters, the Code of Ethics
will require each of these officers to:
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act with honesty and integrity, including the ethical handling
of actual or apparent conflicts of interest in personal and
professional relations;
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avoid conflicts of interest and disclose any material
transactions or relationships that reasonably could be expected
to give rise to a conflict of interest;
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work to ensure that we fully, fairly and accurately disclose
information in a timely and understandable manner in all reports
and documents that we file with the SEC and in other public
communications made by us;
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comply with applicable governmental laws, rules and
regulations; and
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report any violations of the Code of Ethics to the Chief
Executive Officer and the chairman of our Audit Committee.
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Code of
Conduct
Prior to the closing of this offering, our board will adopt a
Code of Conduct, which will set forth the standards of behavior
expected of each of our employees, directors and agents. Among
other matters, the Code of Conduct will be designed to deter
wrongdoing and to promote:
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honest and ethical dealing with each other, with our clients and
vendors, and with all other third parties;
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respect for the rights of fellow employees and all third parties;
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equal opportunity, regardless of age, race, sex, sexual
orientation, ethnicity, creed, religion, national origin,
marital status, veteran status, handicap or disability;
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fair dealing with employees and all other third parties with
whom we conduct business;
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avoidance of conflicts of interest;
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compliance with all applicable laws and regulations;
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the safeguarding of our assets; and
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the reporting of any violations of the Code of Conduct to the
appropriate officers.
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73
EXECUTIVE
COMPENSATION AND OTHER INFORMATION
Compensation
Discussion and Analysis
Our Sponsors and certain members of our senior management have
historically been responsible for implementing and administering
our executive compensation program. As a private company, our
executive compensation program has not historically consisted of
formal policies or procedures. Instead, compensation decisions
were made either (1) in accordance with the terms of
existing employment agreements with our executive officers, or
(2) on an ad hoc basis and at the discretion of our
Sponsors and certain members of our senior management after
considering the overall performance of our company, the
employees contribution to our overall performance, and the
employees total compensation package relative to other
employees.
In February 2011, however, our board of directors established a
Compensation Committee that has the authority to oversee our
executive compensation program and to implement any formal
equity-based compensation plans or policies that the committee
deems appropriate for our employees, including our named
executive officers. As we move to a more structured approach to
compensation, we anticipate that our Compensation Committee will
continue to consult with certain of our executive officers
regarding our compensation and benefit programs, other than with
respect to such executive officers own compensation and
benefits. Our Compensation Committee will also have the
authority to engage a compensation consultant at any time if the
committee determines that it would be appropriate to consider
the recommendations of an independent outside source. Each of
our Sponsors has the right to appoint one member to our
Compensation Committee for so long as such Sponsor holds 10% of
our common stock.
We expect that future compensation of our employees, including
our named executive officers, will include a significant
component of incentive compensation based on our performance. We
expect that our Compensation Committee will pursue a
compensation philosophy that emphasizes
pay-for-performance
based on a combination of our overall performance (primarily,
our operating and financial performance, risk management,
execution on our growth strategy, and safety record) and the
individual employees contribution to our overall
performance. We expect that a pay-for-performance compensation
philosophy will place the majority of each of our executive
officers compensation packages at risk should we fail to
meet our overall performance objectives. We expect that
performance metrics and targets will be selected in a manner
designed to minimize risk to our company and our shareholders,
while aggressively pursuing the successful execution of our
business objectives.
We believe implementing a
pay-for-performance
approach generally aligns the interests of our executive
officers and other employees with our shareholders
interests and, at the same time, enables us to maintain a lower
level of base compensation should our operating and financial
performance fail to meet expectations. We expect that our
Compensation Committee will design our executive compensation
policies in a manner that allows us to continue to attract and
retain individuals with the background and skills necessary to
successfully execute our business strategy in a demanding
environment, to motivate those individuals to reach near-term
and long-term goals in a way that aligns their interests with
our shareholders, and to reward individual and overall success
in reaching such goals.
In designing our executive compensation program, we expect that
our Compensation Committee will rely on three primary elements
of compensation (in addition to other benefits)
salary, cash bonus and long-term equity incentive awards. We
anticipate that the performance-driven elements of our
compensation philosophy will consist of cash bonuses and
long-term equity incentives, as opposed to salary. We believe
that annual cash bonuses and equity-incentive awards are
flexible in application and can be tailored to meet our
compensation objectives. The determination of an employees
cash bonus will reflect our Compensation Committees
assessment of the employees relative contribution to
achieving or exceeding our annual, near-term goals. We
anticipate that the
74
determination of an employees long-term equity incentive
awards will be based, in large part, on the employees
demonstrated and expected contribution to our longer term
performance objectives.
Objectives of Our
Executive Compensation Program
The objectives of our compensation program are to keep
compensation consistent with our strategic business and
financial objectives and competitive within our industry, and to
assure that we attract, motivate, and retain talented executive
personnel.
Key Components of Our Executive Compensation
Programs. Our compensation and benefits
programs have historically consisted of the following key
components, which are described in greater detail under
Components of Our Executive Compensation
Program:
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Base salary;
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Bonus awards;
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Stock options;
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Severance and change in control benefits; and
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Other benefits.
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We maintain employment agreements with certain of our named
executive officers that will continue to provide each of these
compensation elements in the future, and we anticipate that our
Compensation Committee will provide other executives with
compensation packages that include some or all of the above
elements for 2011.
Setting 2010
Executive Compensation
The following officers constituted our named executive officers
for 2010:
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Joshua E. Comstock, Chief Executive Officer, President and
Chairman
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Randall C. McMullen, Jr., Executive Vice President, Chief
Financial Officer and Treasurer
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Bretton W. Barrier, Chief Operations Officer
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J. P. Pat Winstead, Vice President Sales
and Marketing
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John D. Foret, Vice President Coiled Tubing
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We anticipate that our named executive officers for the year
ended December 31, 2011 will include Theodore R. Moore, who
became our Vice President General Counsel and
Corporate Secretary effective February 1, 2011.
Mr. Moore was not employed by us at the end of 2010.
During 2010, Messrs. Comstock and McMullen received
compensation and benefits pursuant to the employment agreements
that governed their employment relationship with us at that
time. Our board of directors, after consultation with our chief
executive officer, determined the appropriate compensation and
benefits for Messrs. Barrier, Foret and Winstead.
Components of
Executive Compensation Program
The employment agreements that we maintained with
Messrs. Comstock and McMullen prior to December 23,
2010, which we refer to in this prospectus as the Previous
Employment Agreements, contained provisions that set base
salary, bonuses, and other benefits. The Previous Employment
Agreements also provided for certain severance payments in
connection with a termination of the executives employment
under certain conditions.
In anticipation of this offering, we elected to enter into new
employment agreements with Messrs. Comstock and McMullen in
December 2010 to establish agreements that reflect the increased
responsibilities associated with being the Chief Executive
Officer and Chief Financial Officer
75
of a publicly traded company. Additionally, our significant
growth over the last few years resulted in a dramatic increase
in Mr. Barriers duties and responsibilities and our
initial public offering is expected to further expand his role
within our company. As a result, our board of directors
determined it was appropriate to enter into an employment
agreement with Mr. Barrier at the same time we entered into
new agreements with Messrs. Comstock and McMullen. Our initial
public offering and recent growth are not currently expected to
appreciably expand the duties and responsibilities of Messrs.
Foret and Winstead. Therefore, our Compensation Committee
elected not to enter into employment agreements with Messrs.
Foret and Winstead at this time.
Base
Salary
Each named executive officers base salary is a fixed
component of compensation and does not vary depending on the
level of performance achieved by us. We generally do not adjust
base pay for our named executive officers based on our
performance. As such, base pay functions as an important
counterbalance to incentive, discretionary, and equity
compensation, all of which are contingent on our performance.
The determination as to the reasonableness of a named executive
officers base salary has been made by our board of
directors and Chief Executive Officer based on their extensive
experience in the energy industry. We review the base salaries
for each named executive annually as well as at the time of any
promotion or significant change in job responsibilities, and in
connection with each review consider individual and company
performance over the course of that year. The total base salary
received by each named executive for 2010 is reported in the
Summary Compensation Table beginning on page 80 of this
prospectus.
Effective December 23, 2010, our named executive
officers base salaries were as follows: Mr. Comstock,
$625,000; Mr. McMullen, $450,000; Mr. Barrier,
$325,000; Mr. Foret, $187,425 and Mr. Winstead,
$165,900. These base salaries were set at levels that reflect
the increase in duties and responsibilities of our named
executive officers resulting from the continued growth of our
company and this offering.
Bonus
Awards
Annual Cash Bonus. Both Messrs. Comstock
and McMullens Previous Employment Agreements provided that
their annual cash bonuses for fiscal year 2010 were to be based
on the level of achievement of the EBITDA Target for fiscal year
2010, which was $24.9 million. Under their Previous
Employment Agreements, Messrs. Comstock and McMullen would
not receive any bonus if we did not achieve at least 85% of the
EBITDA Target for the applicable year. If we achieved at least
85% of the EBITDA Target (as set forth in our annual budget for
fiscal year 2010) then Messrs. Comstock and McMullen
were to receive a cash bonus equal to an increasing percentage
of the total EBITDA, as defined in our previous revolving credit
facility, for the fiscal year 2010.
Mr. Comstocks Previous Employment Agreement provided
that (i) if the EBITDA for fiscal year 2010 was at least
85% but less than 90% of the EBITDA Target, his bonus would
equal 1.5% of actual EBITDA; (ii) if the EBITDA for fiscal
year 2010 was at least 90% but less than 100% of the EBITDA
Target, his bonus would equal 1.75% of actual EBITDA; and
(iii) if the EBITDA for fiscal year 2010 was at least 100%
of the EBITDA Target, his bonus would equal 2.125% of actual
EBITDA.
Mr. McMullens Previous Employment Agreement provided
that (i) if the EBITDA for fiscal year 2010 was at least
85% but less than 90% of the EBITDA Target, his bonus would
equal 0.25% of actual EBITDA; (ii) if the EBITDA for fiscal
year 2010 was at least 90% but less than 95% of the EBITDA
Target, his bonus would equal 0.50% of actual EBITDA;
(iii) if the EBITDA for fiscal year 2010 was at least 95%
but less than 100% of the EBITDA Target, his bonus would equal
0.75% of actual EBITDA; and (iv) if the EBITDA for fiscal
year 2010 was at least 100% of the EBITDA Target, his bonus
would equal 1.00% of actual EBITDA.
The EBITDA used to calculate the bonus awards, which is defined
in our previous revolving credit facility, was
$84.0 million. This bonus calculation of EBITDA differs
from Adjusted EBITDA
76
disclosed in Summary Consolidated Financial Data
primarily because it adds back $0.8 million of non-routine
advisor and attorney fees and $0.6 million of share-based
compensation expense.
Based upon our EBITDA achieved in 2010, Mr. Comstock
received a cash bonus of $1,785,000 and Mr. McMullen
received a cash bonus of $840,000. The total cash bonus earned
by each of our named executive officers for 2010 is reported in
the Summary Compensation Table beginning on page 80 of this
prospectus.
The 2011 Employment Agreements for Mr. Comstock,
Mr. McMullen and Mr. Barrier provide for annual cash
bonuses so long as we achieve certain performance targets
established by our Compensation Committee. For 2011, our
Compensation Committee intends to award annual cash bonuses to
Messrs. Comstock, McMullen and Barrier based upon its assessment
of our overall performance at the end of 2011 and each executive
officers contribution to our overall performance.
Mr. Comstocks target bonus range will be from 150% to
200% of his base salary. Mr. McMullens target bonus
range will be from 100% to 150% of his base salary.
Mr. Barriers target bonus range will be from 75% to
100% of his base salary.
Registration Statement
Bonus. Messrs. Comstock and McMullens
2011 Employment Agreements provide for the payment of a cash
bonus to each of them in the amount of $125,000 if a
registration statement is declared effective by the SEC on or
prior to June 29, 2011. Any such bonus will be paid as soon
as practicable following the effectiveness of the registration
statement, but in no event later than 30 days following the
effective date of the registration statement. These bonuses are
intended to reward the achievement of a milestone for our
company on a timeline specified by our Compensation Committee to
achieve parallel business goals. The registration statement
bonus opportunity was made available only to
Messrs. Comstock and McMullen because their extraordinary
individual contributions will be the largest driver of the
timely achievement of this milestone and they have more control
over the factors that will contribute to the achievement of this
goal than our other named executive officers.
Discretionary Bonus. In addition to the annual
bonuses and registration statement bonuses, our Compensation
Committee has the authority to award additional incentive bonus
compensation to our named executive officers. For 2010, our
named executive officers, excluding Mr. Comstock, received
one-time transaction bonuses funded primarily by our Sponsors in
connection with the successful completion of the private
placement of our common stock in December 2010. These bonuses
were largely set and determined at the discretion of our
Sponsors, with recommendations from Mr. Comstock regarding
individual recipients and amounts based on his assessment of
each individuals contribution to the success of the
private placement. We and our Sponsors paid out a total of
approximately $3,592,547 in transactional bonuses to executive
officers, excluding Mr. Comstock, approximately $1,534,462 of
which was received by our named executive officers during 2010
and $2,058,085 in February 2011. Individual transactional
bonuses provided to our named executive officers are included in
the Summary Compensation Table beginning on page 80 of this
prospectus and further described in Certain Relationships
and Related Party Transactions One-Time 2010
Bonuses on page 91.
Our board of directors elected not to award additional incentive
bonus compensation to our named executive officers for 2010
after concluding that the transaction bonus paid to our named
executive officers in December 2010 provided sufficient
compensation to reward the achievement of our strategic business
and financial objectives, as well as the contributions of each
of our named executive officers to the achievement of those
objectives. Our board of directors determined, however, that the
registration statement bonuses provided in Messrs. Comstock and
McMullens 2011 Employment Agreements should be increased
to adequately compensate them for the additional work required
to complete this offering. Our board of directors increased
these bonuses by awarding additional discretionary bonuses in
the amounts of $200,000 and $100,000 for Messrs. Comstock and
McMullen, respectively, contingent upon the successful
completion of this offering. A discretionary bonus of $50,000
was also awarded to Mr. Barrier for the additional work to
complete this offering.
77
Stock Options.
We grant options because options compensate our named executive
officers only in the event of an increase in the market value of
our common stock, thus aligning the interests of our named
executive officers with those of our shareholders. We believe
the three year vesting period typically associated with these
stock option awards will mitigate any risk that they would be
incentivized to take actions that may not be in the long-term
interest of our shareholders in order to increase our share
price in the near-term. Finally, we prefer to issue stock
options because the compensation cost to us associated with
options is generally fully deductible. Please read
Tax Deductibility of Executive
Compensation on page 79 of this prospectus.
Prior to December 23, 2010, all options granted to our
named executive officers were granted under the C&J Energy
Services, Inc. 2006 Stock Option Plan, or the 2006 Plan. The
2006 Plan provided for awards of incentive stock options,
non-statutory stock options, restricted stock, and other stock
based awards to employees, officers, directors, consultants and
advisors. As of the end of fiscal year 2010, our named executive
officers have been awarded only non-qualified stock options, and
no other
stock-based
awards have been made under the 2006 Plan. Non-statutory stock
options granted to our named executive officers vested 20% on
the date of grant and another 20% on each of the first four
anniversaries of the grant date. On December 23, 2010, the
2006 Plan was amended to provide that (i) no additional
awards will be granted under the 2006 Plan, (ii) all awards
outstanding under the 2006 Plan will continue to be subject to
the terms of the 2006 Plan, and (iii) options to purchase
all 237,927 shares awarded under the 2006 Plan vested and
became exercisable in connection with the completion of the
private placement of our common stock in December 2010.
Additionally, on December 23, 2010, we granted the
remaining 35,000 shares available for issuance under the
2006 Stock Option Plan as follows: 17,500 options were granted
to each of Messrs. Comstock and McMullen, which were fully
vested on the date of grant and have an exercise price of $10.00
per share.
On December 23, 2010, we adopted the C&J Energy
Services, Inc. 2010 Stock Option Plan, or the 2010 Plan. We will
use the 2010 Plan to grant equity awards to our employees,
consultants, and outside directors. We have reserved 5,699,889
shares for issuance under the 2010 Plan. The 2010 Plan allows us
to grant non-statutory stock options and incentive stock
options. On December 23, 2010, we granted non-statutory
stock options under the 2010 Plan to Messrs. Comstock,
McMullen, and Barrier in the amounts of 1,662,468, 1,187,477 and
474,991, respectively. The size of each award was determined by
our board of directors based on each executives duties and
responsibilities and each executives contribution to our
overall performance in 2010. All of the December 23, 2010
stock option awards to our named executive officers
(i) have an exercise price equal to the fair market value
of our shares on the date of grant, (ii) vest equally on
each of the first, second, and third anniversaries of the grant
date and (iii) expire ten years following the grant date.
Severance and Change in Control
Benefits. We believe it is important that
Messrs. Comstock, McMullen and Barrier focus their
attention and energy on our business without any distractions
regarding the effects of a termination that is beyond their
control or our change in control. Therefore,
Messrs. Comstock, McMullen and Barriers employment
agreements provide that they will be entitled to receive
severance benefits and accelerated vesting of their options in
the event their employment is terminated under certain
circumstances. Specifically, all payment obligations to
Messrs. Comstock, McMullen and Barrier associated with a
change in control are double trigger payments, which
require termination of employment within the two years following
a change in control to receive the benefit. Our Compensation
Committee believed that a double trigger payment was more
appropriate than a single trigger payment (where a payment is
made upon the occurrence of a change in control alone) because
it financially protects the employee if he is terminated
following a change in control transaction, without providing a
potential windfall if the employee is not terminated. For more
detailed information regarding our severance and change in
control benefits, please read Potential
Payments Upon Termination or Change in Control beginning
on page 82 of this prospectus.
78
Other Benefits.
Each of our named executive officers is provided with certain
perquisites, including the use of a company-owned vehicle or an
annual automobile allowance, related automobile insurance
coverage, and a health care subsidy. In connection with
relocating our corporate headquarters to Houston, Texas at the
beginning of this year, we also reimbursed certain employees for
the cost of relocating to Houston. Other benefits received by
each of our named executive officers for the fiscal year ended
December 31, 2010 are disclosed in the Summary Compensation
Table beginning on page 80 of this prospectus.
We do not maintain a defined benefit or pension plan for our
executive officers or other employees because we believe such
plans primarily reward longevity rather than performance.
Nevertheless, we recognize the importance of providing our
employees with assistance in saving for their retirement. We,
therefore, maintain a retirement plan, or the 401(k) Plan,
that is qualified under Section 401(k) of the Internal
Revenue Code of 1986, as amended, or the Code. We offer matching
contributions for each of our employees, including our named
executive officers, up to 4% of their qualifying compensation
each year, subject to certain limitations imposed by the Code.
Amounts of the matching contributions to the 401(k) Plan
during 2010 on behalf of our named executive officers are
disclosed in the Summary Compensation Table beginning on
page 80 of this prospectus.
Stock Ownership
Guidelines
Stock ownership guidelines have not been implemented for our
named executive officers or directors at this time. We will
continue to periodically review best practices and reevaluate
our position with respect to stock ownership guidelines.
Tax Deductibility
of Executive Compensation
Limitations on deductibility of compensation may occur under
Section 162(m) of the Internal Revenue Code. An exception
applies to this deductibility limitation for a limited period of
time in the case of companies that become publicly traded. In
addition, following such limited period of time, an exception to
the $1 million limit applies with respect to certain
performance-based compensation.
Although deductibility of compensation is preferred, tax
deductibility is not a primary objective of our compensation
programs. We believe that achieving our compensation objectives
is more important than the benefit of tax deductibility of
compensation, and prefer to maintain flexibility in how we
compensate our executive officers that may result in limited
deductibility of amounts of compensation from time to time.
Relation of
Compensation Policies and Practices to Risk Management
We anticipate that our compensation policies and practices will
be designed to provide rewards for short-term and long-term
performance, both on an individual basis and at the entity
level. In general, optimal financial and operational
performance, particularly in a competitive business, requires
some degree of risk-taking. Accordingly, the use of compensation
as an incentive for performance can foster the potential for
management and others to take unnecessary or excessive risks to
reach performance thresholds that qualify them for additional
compensation, primarily cash bonuses.
From a risk-management perspective, our policy will be to
conduct our commercial activities within pre-defined risk
parameters that are closely monitored and are structured in a
manner intended to control and minimize the potential for
unwarranted risk-taking. We also routinely monitor and measure
the execution and performance of our projects and acquisitions
relative to expectations.
We expect our compensation arrangements to contain a number of
design elements that serve to minimize the incentive for taking
unwarranted risk to achieve short-term, unsustainable results.
Those elements include delaying the rewards and subjecting such
rewards to forfeiture for
79
terminations related to violations of our risk management
policies and practices or of our code of conduct.
In combination with our risk-management practices, we do not
believe that risks arising from our compensation policies and
practices for our employees, including our named executive
officers, are reasonably likely to have a material adverse
effect on us.
Actions Taken
After the 2010 Fiscal Year
As noted above, we have entered into an employment agreement
with Mr. Moore effective February 1, 2011.
Mr. Moores employment agreement is substantially
similar to the agreement we maintain with Mr. Barrier, and
includes base salary, bonus, equity compensation, severance and
employee benefit provisions. Because we anticipated that
Mr. Moores contribution to our initial public
offering and assistance managing our legal and business concerns
following the public offering would be substantial, we concluded
that it was appropriate to formalize his employment relationship
with us, and to provide him with a compensation package that is
comparable to the compensation packages received by other
members of our senior management team.
In February 2011, our board of directors concluded that the
overall compensation package of certain of our employees,
including Mr. Winstead and Mr. Foret, relative to our
other named executive officers, was insufficient to meet our
objective to retain talented executive personnel by providing
both short-term and long-term incentive compensation. As a
result, we awarded stock options to these employees under the
2010 Plan. We granted 40,000 options to Mr. Winstead and
40,000 options to Mr. Foret. The amount of each grant was
determined by our board of directors based on each
executives duties and responsibilities and each
executives contribution to our overall performance in
2010. All of the February 2011 stock option awards to employees
(i) have an exercise price equal to the fair market value
of our shares on the date of grant, (ii) vest equally on
each of the first, second, and third anniversaries of the grant
date and (iii) expire ten years following the grant date.
Summary
Compensation Table
The table below sets forth the annual compensation earned during
the 2010 fiscal year by our named executive officers:
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Option
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All Other
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Name and Principal Position
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Year
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Salary(1)
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Bonus(2)
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Awards(3)
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Compensation(4)
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Total
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Joshua E. Comstock.
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2010
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$
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284,750
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$
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1,785,000
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$
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11,149,535
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$
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23,195
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$
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13,242,480
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Chief Executive Officer, President and Chairman
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Randall C. McMullen, Jr.
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2010
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$
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190,564
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$
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1,725,000
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$
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7,997,137
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$
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18,816
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$
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9,931,517
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Executive Vice President, Chief Financial Officer
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Bretton W. Barrier
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2010
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$
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187,824
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$
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187,424
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$
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3,152,399
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$
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24,595
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$
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3,552,242
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Chief Operations Officer
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J.P. Pat Winstead.
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2010
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$
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163,584
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$
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2,141,035
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$
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24,595
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$
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2,329,214
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Vice President Sales and Marketing
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John D. Foret.
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2010
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$
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184,809
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$
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187,424
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$
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19,908
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$
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392,141
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Vice President Coiled Tubing
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(1)
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The amounts in this column reflect
the base salaries earned by each of the named executive officers
during the 2010 fiscal year rather than the base salaries that
were in effect at the end of the 2010 fiscal year. These amounts
are calculated based on a base salary of $267,750, $178,500,
$178,500, $158,000 and $178,500 from January 1, 2010
through April 17, 2010; a base salary of $281,137,
$187,425, $187,425, $165,900 and $187,425 from April 18,
2010 through December 23, 2010; and a base salary of
$625,000, $450,000, $325,000, $165,900 and $187,425 from
December 24, 2010 through December 31, 2010, for
Messrs Comstock, McMullen, Barrier, Winstead and Foret,
respectively.
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(2)
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The amounts in this column reflect
amounts earned for the 2010 fiscal year but which were paid
during the 2011 year. The bonus amount for
Mr. Comstock reflects the bonus provided for within his
Previous Employment Agreement; amounts for Mr. McMullen
include $840,000 provided for within his Previous Employment
Agreement and a transactional bonus of $885,000; amounts for
Mr. Barrier include $93,712 with respect to his
discretionary bonus and a transactional bonus of
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80
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$93,712; amounts for
Mr. Winstead include $82,950 with respect to his
discretionary bonus and $2,058,085 with respect to his
transactional bonus; and amounts for Mr. Foret include
$93,712 with respect to his discretionary bonus and $93,712 with
respect to his transactional bonus.
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(3)
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The amounts in this column
represent the grant date fair value of each stock option award
granted under our 2006 and 2010 Plans, computed in accordance
with FASB ASC Topic 718. Please read Note 9 to our
consolidated financial statements for the fiscal year ended
December 31, 2010 included elsewhere in this prospectus for
a discussion of the assumptions used in determining the grant
date fair value of these awards.
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(4)
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The amounts in this column reflect
payments to each of the named executive officers in the amount
of $6,995 for company subsidized health care benefits and $9,800
for company matching contributions to each of the
executives 401(k) Plan account. For Mr. Comstock,
amounts also include a $6,400 payment for a monthly automobile
allowance during the months of January to May of 2010 and for
the use of a company-owned vehicle and associated automobile
insurance and maintenance costs for the remainder of the year.
For Messrs. McMullen and Foret, amounts include $2,020 and
$3,113, respectively, for the use of a company-owned vehicle and
associated automobile insurance and maintenance costs, and for
Messrs. Barrier and Winstead, $7,800 each for an automobile
allowance during the 2010 year.
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Grants of
Plan-Based Awards for the 2010 Fiscal Year
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Option
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Grant
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Awards:
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Exercise
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Date Fair
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Number of
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or Base
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Value of
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Securities
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Price of
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Stock and
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Grant
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Underlying
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Option
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Option
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Name
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Date
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Options
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Awards(1)
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Awards
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Joshua E. Comstock
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12/23/2010
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(2)
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1,662,468
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$
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10.00
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$
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11,033,392
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12/23/2010
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(3)
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17,500
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$
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10.00
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$
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116,143
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Randall C. McMullen, Jr.
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12/23/2010
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(2)
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1,187,477
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$
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10.00
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$
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7,880,993
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12/23/2010
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(3)
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17,500
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$
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10.00
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$
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116,143
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Bretton W. Barrier
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12/23/2010
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(2)
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474,991
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$
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10.00
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$
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3,152,399
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Pat Winstead
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John D. Foret
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(1)
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The exercise price for the stock
options granted December 23, 2010 was based upon the per
share offering price that we used for our common stock offering
in December 2010.
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(2)
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The stock option awards reflected
in these columns were granted under the 2010 Plan.
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(3)
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The stock option awards reflected
in these columns were granted under the 2006 Plan.
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The stock option awards that were granted to
Messrs. Comstock, McMullen and Barrier from our 2010 Plan
on December 23, 2010 are governed by individual stock
option agreements. Each of the awards were granted with a
ten-year expiration date, measured from the grant date for the
awards. The stock options are subject to forfeiture prior to
vesting, which will occur in three equal installments on each of
the yearly anniversaries of the grant date. Vesting for the
options will accelerate upon certain terminations of employment,
however, as described in greater detail below in the
Potential Payments Upon Termination or Change
in Control.
The stock option awards granted to Messrs. Comstock and McMullen
under our 2006 Plan were fully vested at the time the awards
were granted.
Outstanding
Equity Awards at 2010 Fiscal Year-End
The following table provides information on the current stock
option and stock award holdings by the named executive officers.
This table includes unexercised options. The vesting dates for
each
81
award are shown in the accompanying footnotes. There were no
other outstanding equity awards as of December 31, 2010
other than options.
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Number of
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Number of
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Securities
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Securities
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Underlying
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Underlying
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Unexercised
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Unexercised
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Option
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Option
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Options
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Options
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Exercise
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Expiration
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Name
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Exercisable(1)
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Unexercisable(2)
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Price
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Date
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Joshua E. Comstock
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17,500
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1,662,468
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$
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10.00
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12/23/2020
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105,000
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$
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1.43
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11/11/2018
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525,000
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$
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1.43
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11/1/2016
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Randall C. McMullen, Jr.
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17,500
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1,187,477
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$
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10.00
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12/23/2020
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161,000
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$
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1.43
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11/11/2018
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87,500
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$
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1.43
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11/1/2016
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Bretton W. Barrier
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474,991
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$
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10.00
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12/23/2020
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157,500
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$
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1.43
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1/30/2017
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Pat Winstead
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42,000
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$
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1.43
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11/11/2018
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35,000
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$
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1.43
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11/1/2016
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John D. Foret
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7,000
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$
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1.43
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11/11/2018
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70,000
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$
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1.43
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11/1/2016
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(1)
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Each of the stock options reflected
in this column were granted from the 2006 Plan and became fully
vested on December 23, 2010.
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(2)
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Each of the stock options reflected
in this column were granted on December 23, 2010 and will
vest in equal installments on each of December 23, 2011,
December 23, 2012, and December 23, 2013.
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Option Exercises
in the 2010 Fiscal Year
None of our named executive officers exercised a stock option
award in 2010.
Pension
Benefits
While we provide our employees with the 401(k) Plan, we do not
currently maintain a defined benefit pension plan. Please read
Components of Executive Compensation
Program Other Benefits beginning on page 79 of
this prospectus.
Nonqualified
Deferred Compensation
We do not provide a nonqualified deferred compensation plan for
our employees at this time.
Stock Option
Plans and Agreements
The stock option agreements for the 2010 Plan grants to our
named executive officers (which are the only unvested stock
options outstanding for such officers as of the end of
2010) state that if any of the executives cease to provide
services to us (other than because of their death or
disability), then their options that were previously vested but
unexercised will terminate at the end of the 90th day
following the date of their termination of service. Further, if
any of our named executive officers experiences a termination of
employment (i) by us without cause, (ii) because we
decide not to renew the executives employment agreement,
or (iii) by the executive for good reason, then any
unvested options awarded to that executive under the 2010 Plan
will immediately become fully vested and exercisable. If a named
executive officer experiences a termination of employment other
than of a type described in (i), (ii), or (iii) of the
immediately preceding sentence, then upon such a termination all
unvested options will be forfeited. Finally, the stock option
agreements provide that if a named executive officers
employment is terminated by us for cause then all options
granted to them under the 2010 Plan are forfeited upon the
effective date of such termination.
Potential
Payments Upon Termination or Change in Control
The employment agreements between us and Messrs. Comstock,
McMullen and Barrier contain certain severance provisions. We
believe that severance provisions should be included in
employment
82
agreements as a means of attracting and retaining executives and
to provide replacement income if their employment is terminated
because of a termination that may be beyond the executives
control, except in certain circumstances such as when there is
cause.
If we terminate Messrs. Comstock, McMullen or
Barriers employment for cause, or if such an executive
resigns without good reason, then that executive will be paid
(i) (A) that executives base salary earned through
the date of termination and (B) any accrued but unpaid
vacation pay due to the executive ((A) and (B) together,
the accrued obligations) and (ii) unreimbursed expenses.
If Messrs. Comstock, McMullen or Barriers employment
is terminated by the executive for good reason or by us other
than for cause, because of death or disability, or because we
choose not to renew the executives employment agreement
(in each case, other than during a change in control period),
then the named executive officer will be entitled to receive:
(i) payment of the accrued obligations and any unreimbursed
expenses, (ii) any unpaid bonuses owed to the executive for
a completed calendar year that have yet to be paid,
(iii) if the executives termination is after
June 30, then a pro-rata payment of his annual bonus for
the year of his termination (but no longer than two years from
the date of termination), (iv) immediate vesting of all
unvested stock options awarded to the executive under any plan,
(v) salary continuation severance payments based on the
executives base salary in effect on the date of
termination continuing for the longer of (A) the remainder
of the term of the executives employment agreement and
(B) one year from the date of termination, and (vi) a
lump-sum payment of an amount equal to all Consolidated Omnibus
Budget Reconciliation Act, or COBRA, premiums that would be
payable during the period described in (v). Notwithstanding
(v) in the prior sentence, if the termination occurs
because we choose not to renew the executives employment
agreement then the period in (v) shall instead be twelve
(12) months if the term of the employment agreement ends on
the third anniversary of the effective date of the employment
agreement, six (6) months if the term of the agreement ends
on the fourth anniversary of the effective date of the
employment agreement, and three (3) months (or such longer
time as may be provided under our severance policies generally)
if the term of the employment agreement ends on or after the
fifth anniversary of the effective date of the employment
agreement. Our obligation to pay the executive items
(iii) through (vi) of this paragraph is subject to the
executives execution of a release of claims against us
within 50 days after the date of his termination of
employment.
If a named executive officers employment is terminated by
reason of death or disability, the employment agreements provide
that the executive will be entitled to: (i) payment of the
Accrued Obligations, (ii) payment of any unreimbursed
expenses, (iii) any unpaid bonuses owed to the executive
for a completed calendar year that have yet to be paid,
(iv) if the executives termination is after
June 30, then a pro-rata payment of his annual bonus for
the year of his termination, and (v) the payment of any and
all benefit obligations due to the named executive officer or
his estate (as the case may be) available in which the executive
participated.
If, during the two years following a change in control (as
defined in the named executive officers employment
agreements), we terminate a named executive officers
employment without cause, such executive resigns for good
reason, or we choose not to renew the executives
employment agreement, then the named executive officer will be
entitled to receive: (i) payment of the Accrued Obligations
and any unreimbursed expenses, (ii) any unpaid bonuses owed
to the executive for a completed calendar year that have yet to
be paid, (iii) if the executives termination is after
June 30, then a pro-rata payment of his annual bonus for
the year of his termination, (iv) immediate vesting of all
unvested stock options awarded to the executive under any plan,
(v) salary continuation severance payments based on the
executives base salary in effect on the date of
termination continuing for the longer of (A) the remainder
of the term of the executives employment agreement and
(B) two years from the date of termination, and (vi) a
lump-sum payment of an amount equal to all COBRA premiums that
would be payable during the period described in (v). Our
obligation to pay the executive items (iii) through
(vi) of this paragraph is subject to the executives
execution of a release of claims against us within 50 days
after the date of his termination of employment.
83
If any portion of the payments under this agreement, or under
other agreements with the named executive officers, would
constitute excess parachute payments and would
result in the imposition of an excise tax on the executive, then
the payments made to the named executive officer will either be
(i) delivered in full, or (ii) reduced in accordance
with the executives employment agreement until no portion
of the payments are subject to an excise tax, whichever results
in the receipt by the named executive officer of the greatest
benefit on an after-tax basis.
All payments of the accrued obligations and unreimbursed
expenses would be paid to the named executive officer within
thirty (30) days after the date of the executives
termination of employment. So long as (i) the named
executive officer signs a release on or before the
50thday
following the executives termination of employment and
(ii) the executive complies with the confidentiality,
noncompetition, non-disclosure, and non-solicitation provisions
of the executives employment agreement, all salary
continuation payments will begin, and all lump-sum COBRA
payments will be made, on the
60th day
following the executives termination of employment. In
general, breach by a named executive officer of the
confidentiality, noncompetition, non-disclosure, and
non-solicitation provisions of the executives employment
agreement may result in (A) the termination of severance
payments to the executive at the boards discretion and
(B) if a court finds that the executive has breached the
employment agreement in this way, the repayment by the executive
of all severance payments previously made.
All payments of deferred compensation paid upon a termination of
employment will be paid on the second day following the sixth
month after the named executives termination of employment
if so required by Section 409A of the Code.
We do not currently maintain any employment agreements or
severance agreements with Messrs. Foret or Winstead that
would provide them with severance or termination benefits.
The following table quantifies the amounts that each of our
named executive officers could be expected to receive upon a
termination or a change in control, assuming that such an event
occurred on December 31, 2010. Such amounts can not be
determined with any certainty outside of the occurrence of an
actual termination or change in control event, and we have
assumed that our common stocks fair market value of $10.00
per share on December 31, 2010 would be the value of any
accelerated equity upon such a hypothetical termination or
change in control event. Due to the fact that the exercise price
of the outstanding 2010 Plan stock option awards held by
Messrs. Comstock, McMullen and Barrier as of
December 31, 2010 and the fair market value of our common
stock on December 31, 2010 was the same, there is no value
associated with the acceleration of equity awards to report in
the table below. We have also assumed for purposes of the table
below that all accrued obligations and other similar expenses
were paid current as of December 31, 2010. Any actual
payments that may be made pursuant to the agreements described
above are dependent on various factors, which may or may not
exist at the time a change in control
84
actually occurs
and/or the
named executive officer is actually terminated. Therefore, such
amounts and disclosures should be considered
forward-looking statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Without Cause or
|
|
Without Cause
|
|
|
|
|
Good Reason
|
|
or Good Reason
|
|
|
|
|
Termination,
|
|
Termination,
|
|
|
|
|
or Non-Renewal
|
|
or Non-Renewal
|
|
Termination
|
|
|
outside of a
|
|
in connection
|
|
Due to
|
|
|
Change in
|
|
with Change
|
|
Death or
|
Name and Principal Position
|
|
Control(1)
|
|
in Control
|
|
Disability
|
|
Joshua E. Comstock
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary and Bonus
|
|
$
|
3,035,000
|
|
|
$
|
3,035,000
|
|
|
$
|
1,785,000
|
|
Continued Medical
|
|
|
20,350
|
|
|
|
20,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,055,350
|
|
|
$
|
3,055,350
|
|
|
$
|
1,785,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Randall C. McMullen, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary and Bonus
|
|
$
|
1,740,000
|
|
|
$
|
1,740,000
|
|
|
$
|
840,000
|
|
Continued Medical
|
|
|
20,350
|
|
|
|
20,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,760,350
|
|
|
$
|
1,760,350
|
|
|
$
|
840,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bretton W. Barrier
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary and Bonus
|
|
$
|
837,424
|
|
|
$
|
837,424
|
|
|
$
|
187,424
|
|
Continued Medical
|
|
|
20,350
|
|
|
|
20,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
857,774
|
|
|
$
|
857,774
|
|
|
$
|
187,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amounts reflected in the
Salary and Bonus line of this column were calculated
by using the base salary of each executive officer on
December 31, 2010, and the full amount of the bonus that
each of the executives received for the 2010 year due to
the fact that a termination on the last day of the year would
not have resulted in a pro-rata bonus but rather a bonus for the
entire 2010 year. However, the salary continuation amounts
that are shown above are applicable only to a termination by us
without cause, or for a termination by the executive for good
reason; in the event that we did not renew the executives
employment agreement outside of a change in control protection
period, the amounts in the Salary and Bonus line of
this column would instead be lowered to the following amounts:
$2,410,000 for Mr. Comstock, $1,290,000 for
Mr. McMullen and $512,424 for Mr. Barrier.
|
Director
Compensation
Our directors did not receive compensation for their service on
our board during the year ended December 31, 2010.
Beginning on February 3, 2011, the individuals that serve
on our board of directors that are not also employees will
receive compensation for services they provide to us. The
employee-directors,
Messrs. Comstock and McMullen, will not receive additional
compensation for their services as directors. All compensation
that Messrs. Comstock and McMullen received for their
services to us during 2010 as employees has been described in
the Compensation Discussion and Analysis and disclosed in the
Summary Compensation Table above.
The remaining non-employee directors will be compensated for
their service on the board of directors with an annual fee of
$35,000, a fee of $2,000 per board meeting attended in person or
telephonically, as well as a $1,000 meeting fee for personal or
telephonic attendance at committee meetings for any committee on
which that director serves.
Non-employee directors will also receive compensation for
serving as the chairman of certain committees. Our Audit
Committee chairman will receive an annual fee of $15,000, while
our Nominating and Governance Committee chairman and our
Compensation Committee chairman will each be eligible to receive
an annual fee of a $10,000. Currently, Mr. Roemer serves as
the chairman of our Audit Committee, Mr. Benson serves as
the chairman of our Nominating and Governance Committee, and
Mr. Wommack serves as the chairman of our Compensation
Committee.
Equity awards in the form of stock options will also be granted
to our non-employee directors on an annual basis. The value of
the annual equity award will be approximately $25,000 on the
grant date, based on a Black-Scholes valuation model. As of
December 31, 2010, our directors did not hold any
outstanding equity awards.
85
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the beneficial ownership of our common
stock by (a) 5% stockholders, (b) other selling
stockholders, (c) current directors, (d) executive
officers, and (e) executive officers and directors as a
group, as of June 8, 2011, before this offering and after
the completion of this offering. All information with respect to
beneficial ownership has been furnished by the respective
selling stockholders, directors, officers or 5% or more
stockholders, as the case may be. This table does not reflect
information as to persons or entities who may become 5%
stockholders as a result of purchasing shares of common stock in
this offering. Unless otherwise indicated in the footnotes to
this table, each of the stockholders named in this table has
sole voting and investment power with respect to the shares
indicated as beneficially owned. Other than as specifically
noted below, the mailing address for each executive officer and
director is in care of C&J Energy Services, Inc., 10375
Richmond Avenue, Suite 2000, Houston, Texas 77042. The
percentages of ownership are based on 47,499,074 shares of
common stock outstanding as of June 8, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially
|
|
|
|
|
|
|
Owned
|
|
|
|
|
|
|
After this Offering
|
|
|
Shares Beneficially
|
|
Shares Beneficially
|
|
(Option to Purchase
|
|
|
Owned
|
|
Owned
|
|
Additional Shares
|
|
|
Prior to this Offering
|
|
After this Offering
|
|
Exercised in Full)
|
Name of Beneficial Owner
|
|
Number
|
|
Percentage(1)
|
|
Number
|
|
Percentage(1)
|
|
Number
|
|
Percentage(1)
|
|
5% Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
StepStone Capital Partners II Onshore, L.P.(2)
|
|
|
1,038,462
|
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
%
|
StepStone Capital Partners II Cayman Holdings, L.P.(3)
|
|
|
1,301,233
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Co-Investment Portfolio, L.P.(4)
|
|
|
2,047,787
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Citigroup Capital Partners II Employee Master Fund, L.P.(5)
|
|
|
2,300,241
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Spectrum Partners IV LP(6)
|
|
|
7,720,501
|
|
|
|
16.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passport Capital, LLC(7)
|
|
|
3,130,000
|
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSD Energy Partners, L.P.(8)
|
|
|
2,500,000
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scopia Management, Inc.(9)
|
|
|
2,500,000
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joshua E. Comstock(10)
|
|
|
4,038,500
|
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Randall C. McMullen, Jr.
|
|
|
493,500
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John D. Foret
|
|
|
287,000
|
|
|
|
|
*
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
Bretton W. Barrier
|
|
|
166,600
|
|
|
|
|
*
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
Brandon D. Simmons
|
|
|
255,500
|
|
|
|
|
*
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
William D. Driver
|
|
|
122,500
|
|
|
|
|
*
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
J. P. Pat Winstead
|
|
|
112,000
|
|
|
|
|
*
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
Theodore R. Moore
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Darren M. Friedman
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James P. Benson(11)
|
|
|
7,720,501
|
|
|
|
16.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Roemer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H. H. Wommack, III
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. James Stewart III
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Officers and Directors as a Group (13 persons)
|
|
|
13,196,101
|
|
|
|
27.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
|
|
|
(1)
|
|
For each stockholder, this
percentage is determined by assuming the named stockholder
exercises all options which the stockholder has the right to
acquire within 60 days of June 8, 2011, but that no
other person exercises any options.
|
|
|
|
(2)
|
|
The address of StepStone Capital
Partners II Onshore, L.P. is
c/o StepStone
Group LLC, 4350 La Jolla Village Drive, Suite 800,
San Diego, CA 92122. StepStone Co-Investment Funds GP, LLC,
which is a wholly owned subsidiary of StepStone Group LLC, is
the general partner of StepStone Capital Partners II
Onshore, L.P., and each may be considered a beneficial owner,
with shared voting and dispositive power of
1,038,462 shares. StepStone Group LLC is the investment
advisor to StepStone Capital Partners II Onshore, L.P.
|
|
(3)
|
|
The address of StepStone Capital
Partners II Cayman Holdings, L.P. is 4350 La Jolla
Village Drive, Suite 800, San Diego, CA 92122.
StepStone Co-Investment Funds GP, LLC, which is a wholly owned
subsidiary of StepStone Group LLC, is the general partner of
StepStone Capital Partners II Cayman Holdings, L.P., and
each may be considered a beneficial owner, with shared voting
and dispositive power of 1,301,233 shares. StepStone Group
LLC is the investment advisor to StepStone Capital
Partners II Cayman Holdings, L.P.
|
|
(4)
|
|
The address of 2006 Co-Investment
Portfolio, L.P. is 4350 La Jolla Village Drive,
Suite 800, San Diego, CA 92122. StepStone
Co-Investment Funds GP, LLC, which is a wholly owned subsidiary
of StepStone Group LLC, is the general partner of 2006
Co-Investment Portfolio, L.P., and each may be considered a
beneficial owner, with shared voting and dispositive power of
2,047,787 shares. StepStone Group LLC is the investment
advisor to 2006 Co-Investment Portfolio, L.P.
|
|
|
|
(5)
|
|
The address of Citigroup Capital
Partners II Employee Master Fund, L.P. is 485 Lexington
Avenue, 17th Floor, New York, NY 10017. A wholly owned
subsidiary of Citigroup Inc. is the general partner of Citigroup
Private Equity LP, which is the general partner of Citigroup
Capital Partners II Employee Master Fund, L.P., and each
may be considered a beneficial owner, with shared voting and
dispositive power of 2,300,241 shares. Citigroup
Alternative Investments LLC is the investment advisor to
Citigroup Capital Partners II Employee Master Fund, L.P.
|
|
|
|
(6)
|
|
The address of Energy Spectrum
Partners IV LP is 5956 Sherry Lane, Suite 900, Dallas,
Texas 75225.
|
|
(7)
|
|
The address of Passport Capital,
LLC is 30 Hotaling Place, Suite 300, San Francisco, CA
94111. The beneficial owners of common shares of Passport
Capital, LLC are Blackwell Partners, LLC, or Blackwell, Passport
Energy Master Fund SPC Ltd for an on behalf of Portfolio
A Energy Strategy, or Energy, Passport Global Master
Fund for and on behalf of Portfolio A global
strategy, or Global, and Passport Special Opportunities Master
Fund, LP, or Special Ops. Passport Plus, LLC, or Plus, serves as
general partner to Special Ops. Passport Capital, LLC serves as
investment manager to Blackwell, Energy, Global and Special Ops
and as sole managing member to Plus. John H. Burbank III, or
Burbank, serves as sole managing member of Passport. As a
result, each of Passport, Plus, and Burbank may be considered to
share voting and dispositive power of the 3,130,000 shares
beneficially owned by Blackwell, Energy, Global and Special Ops.
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(8)
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The address of MSD Energy Partners,
L.P. or, MSD Energy Partners, is c/o MSDC Management, L.P.,
645 Fifth Avenue, 21st Floor, New York, NY 10022. MSDC
Management, L.P. is the investment manager of MSD Energy
Partners and may be deemed to have or share voting and/or
dispositive power over, and/or beneficially own, the 2,500,000
common shares held by MSD Energy Partners. Each of Glenn R.
Fuhrman, John C. Phelan, Marc R. Lisker and Marcello Liguori is
a managing director of MSDC Management, L.P. and may be deemed
to have or share voting and/or dispositive power over, and/or
beneficially own, the 2,500,000 common shares beneficially owned
by MSDC Management, L.P. Each of Mr. Fuhrman,
Mr. Phelan, Mr. Lisker and Mr. Liguori disclaim
beneficial ownership of such common shares, except to the extent
of the pecuniary interest of such person in such shares.
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(9)
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The address of Scopia Management,
Inc. is 152 West 57th Street, 33rd Floor, New York, NY 10019.
The beneficial owners of common shares of Scopia Management,
Inc. are Scopia PX, LLC, or Scopia PX, Scopia PX International
Limited (or Scopia PX International), Scopia International
Limited, or Scopia International, Windermere JUP FD US FOC Pool,
or Windermere, and Highmark Ltd Seq Acct US EQ1, or Highmark.
Scopia Management, Inc. is the investment manager of Scopia PX,
and in such capacity may be deemed to have shared voting and
dispositive power over the 670,306 common shares owned by Scopia
PX. Scopia Management, Inc. is the investment manager of Scopia
PX International, and in such capacity may be deemed to have
shared voting and dispositive power over the 1,361,705 common
shares owned by Scopia PX International. Scopia Management, Inc.
is the investment manager of Scopia International, and in such
capacity may be deemed to have shared voting and dispositive
power over the 318,215 common shares owned by Scopia
International. Scopia Management, Inc. is the investment manager
of Windermere, and in such capacity may be deemed to have shared
voting and dispositive power over the 16,857 common shares owned
by Windermere. Scopia Management, Inc. is the investment manager
of Highmark, and in such capacity may be deemed to have shared
voting and dispositive power over the 132,917 common shares
owned by Highmark.
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87
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(10)
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Included in the shares indicated as
being beneficially owned by Mr. Comstock are
1,508,500 shares owned by a trust for the benefit of
Mr. Comstock, 966,000 shares owned by a trust for the
benefit of Mrs. Comstock, of which Mr. Comstock is a
co-trustee of and has shared voting power of and of which he may
be deemed to be the beneficial owner, and 150,000 shares
owned by JRC Investments, LLC, of which Mr. Comstock has
sole voting power of and of which he may be deemed to be the
beneficial owner in his capacity as the sole member of JRC
Investments, LLC.
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(11)
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The 7,720,501 shares indicated
as being beneficially owned by Mr. Benson are owned
directly by Energy Spectrum Partners IV LP. Mr. Benson
serves as a Managing Partner of Energy Spectrum Partners IV
LP. As such, Mr. Benson may be deemed to have beneficial
ownership of such shares owned by Energy Spectrum
Partners IV LP. Mr. Benson disclaims beneficial
ownership of such shares.
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88
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Private Equity
Investments
On October 16, 2006, we, Energy Spectrum Partners IV
LP, Citigroup Capital Partners II 2006 Citigroup
Investment, L.P., or CCP II 2006, Citigroup Capital
Partners II Onshore, L.P., or CCP II Onshore, Citigroup
Capital Partners II Cayman Holdings, L.P., or CCP II
Cayman, and Citigroup Capital Partners II Employee Master
Fund, L.P., or CCP II Employee, and with CCP II 2006, CCP II
Onshore and CCP II Cayman, CCP II, entered into a Contribution
Agreement, or the Contribution Agreement. Pursuant to the
Contribution Agreement, Energy Spectrum Partners IV LP and
CCP II each acquired 2,500,000 shares of our common stock
for $25.0 million. In connection with the Contribution
Agreement, we, Energy Spectrum Partners IV LP, CCP II and
certain of our other stockholders entered into a
Shareholders Agreement dated October 16, 2006, which
we refer to herein as the 2006 Shareholders Agreement.
On October 7, 2007, C&J Energy Services, Inc., Energy
Spectrum Partners IV LP, CCP II and certain of our other
stockholders named therein entered into a Share Purchase
Agreement, or the Share Purchase Agreement. Pursuant to the
Share Purchase Agreement, Energy Spectrum Partners IV LP
and CCP II each purchased 500,000 shares of our common
stock for an aggregate $10.0 million. Energy Spectrum
Partners IV LP and CCP II were granted the right to
purchase such shares pursuant to their preemptive rights set
forth in the 2006 Shareholders Agreement.
On September 30, 2010, StepStone Group LLC became the
investment adviser to, and an affiliate of StepStone Group LLC
became the general partner of, CCP II 2006, CCP II Onshore and
CCP II Cayman. In connection with the transaction, CCP II 2006
was renamed 2006 Co-Investment Portfolio, L.P., CCP II Onshore
was renamed StepStone Capital Partners II Onshore, L.P. and
CCP II Cayman was renamed StepStone Capital Partners II
Cayman Holdings, L.P.
Amended and
Restated Stockholders Agreement
In December 2010, the Sponsors, we and certain of our other
stockholders entered into an Amended and Restated
Stockholders Agreement, which was amended on May 12,
2011, as amended, the Amended and Restated Stockholders
Agreement. The following members of our management are a party
to the Amended and Restated Stockholders Agreement: Joshua
E. Comstock , John D. Foret, Aaron Larson, Randall C.
McMullen, Jr., James Moore, Brandon D. Simmons, Michael
Thorn, Bretton W. Barrier and J.P. Pat Winstead. The
Amended and Restated Stockholders Agreement amends and
restates that certain Shareholders Agreement, dated
October 16, 2006, between Energy Spectrum Capital IV
LP, CCP II and certain of our stockholders, which we refer to
herein as the 2006 Shareholders Agreement. The
following summary of the Amended and Restated Stockholders
Agreement does not purport to be complete and is qualified in
its entirety by reference to the provisions of the Amended and
Restated Stockholders Agreement, which along with its
amendment, are filed as exhibits to the registration statement
of which this prospectus is a part.
Management Rights. As long as Energy
Spectrum owns 10% or more of our outstanding common stock then
entitled to vote, we have agreed to take all action within our
power required to cause the board of directors at all times to
include at least one member designated by Energy Spectrum. As
long as Citigroup/StepStone collectively own 10% or more of our
outstanding common stock then entitled to vote, we have agreed
to take all action within our power required to cause the board
of directors at all times to include at least one member
designated by Citigroup/StepStone.
Demand Registration Rights. Under the
Amended and Restated Stockholders Agreement, from and
after the earlier of (i) 180 days following a
qualified public offering or (ii) the effective date of the
shelf registration statement relating to the common stock sold
in the 2010 Private Placement, each of Energy Spectrum and
Citigroup/StepStone, assuming such Sponsor holds at least 5% of
our fully diluted common stock have the right to demand on three
occasions, and non-Sponsor
89
stockholders, assuming all non-Sponsor stockholders collectively
hold at least 5% of our fully diluted common stock have the
right to demand on two occasions, that we effect a registration
under the Securities Act for the sale of all or part of their
registrable securities so long as the registrable securities
proposed to be sold on an individual registration statement have
an aggregate gross offering price of at least $20 million,
unless we otherwise agree to a lesser amount, which we refer to
herein as a Demand Registration. Holders of registrable
securities may not require us to effect more than one Demand
Registration in any six-month period. After such time that we
become eligible to use
Form S-3
(or a comparable form) for the registration under the Securities
Act of any of its securities, any demand request by a Sponsor
with a reasonably anticipated aggregate offering price of
$50 million may be for a shelf registration
statement pursuant to Rule 415 under the Securities Act.
Piggyback Registration Rights. If we
propose to file a registration statement under the Securities
Act relating to an offering of our common stock, such as the
registration statement of which this prospectus is a part,
subject to certain exceptions, upon the written request of
holders of registrable securities, we will use our commercially
reasonable efforts to include in such registration, and any
related underwriting, all of the Sponsor and non-Sponsor
stockholders registrable securities included in such
requests, subject to customary cutback provisions. Certain of
the selling stockholders are participating in this offering
pursuant to piggyback rights under the Amended and Restated
Stockholders Agreement.
Registration Procedures and
Expenses. The Amended and Restated
Stockholders Agreement contains customary procedures
relating to underwritten offerings and the filing of
registration statements. We have agreed to pay all registration
expenses incurred in connection with any registration, including
all registration and filings fees, printing expenses, accounting
fees, our legal fees, reasonable fees of one counsel to the
holders of registrable securities, blue sky fees and expenses
and the expense of any special audits incident to or required by
any such registration. All underwriting discounts and selling
commissions and stock transfer taxes applicable to securities
registered by holders and fees of counsel to any such holder
(other than as described above) will be payable by holders of
registrable securities.
The proceeding summary of the Amended and Restated
Stockholders Agreement does not purport to be complete and
is qualified in its entirety by the provisions of the Amended
and Restated Stockholders Agreement, which is filed as an
exhibit to the registration statement of which this prospectus
is a part.
Warrants
The fluctuations in our operating results during 2009 led to
entry into negotiations with Guggenheim Corporate Funding LLC,
or Guggenheim, the administrative agent under our subordinated
term loan facility, and certain lenders in order to extend the
maturity date and amend certain payment terms and covenants
contained in the previously existing Guggenheim Term Loan
Agreement to avoid potential payment and covenant defaults. In
connection with such negotiations, we obtained a waiver from
such parties and issued the warrants described below and certain
promissory notes. Please read Promissory
Notes on page 92 of this prospectus for additional
information on the promissory notes issued in connection with
the Guggenheim Term Loan Agreement waiver.
On June 22, 2010, Sands Point Funding Ltd., Copper River
CLO Ltd., Kennecott Funding Ltd., Midland National Life
Insurance Company and North American Life Insurance Company for
Life and Health Care Insurance, collectively, the Holders, us
and Guggenheim, as administrative agent, entered into an Amended
and Restated Warrant Agreement, or the Warrant Agreement. The
Warrant Agreement was entered into in connection with the
assignment and amendment of the Amended and Restated Term Loan
Agreement, dated September 30, 2009 between C&J
Spec-Rent Services, Inc., Guggenheim Corporate Funding, LLC and
the lenders a party thereto, or the Guggenheim Term Loan
Agreement. Pursuant to the terms of the Warrant Agreement, we
issued warrants to the Holders.
90
We, the Holders and Guggenheim entered into a Warrant Exercise
and Termination Agreement, dated as of November 21, 2010,
pursuant to which the Holders exercised their warrants
concurrent with the closing of the 2010 Private Placement. In
addition, pursuant to the agreement, the Holders sold and we
bought shares of our common stock issued in connection with the
exercise of the warrants concurrent with the closing of the 2010
Private Placement, at which point the Holders no longer held any
of our warrants or shares of our commons stock.
2010 Private
Placement
Mr. Comstock, as the sole member of JRC Investments, LLC, a
Delaware limited liability company which we refer to herein as
JRC Investments, agreed to purchase 150,000 shares of
common stock in the 2010 Private Placement, which were issued in
the name of JRC Investments and funded with the proceeds of a
loan from FBR Capital Markets LT, Inc., an affiliate of FBR
Capital Markets & Co. The shares were purchased at the
offering price of $10.00 per share, the same price paid by all
investors participating in the 2010 Private Placement.
One-Time 2010
Bonuses
In connection with the closing of the 2010 Private Placement,
Energy Spectrum, Citigroup/StepStone and entities affiliated
with Guggenheim paid an aggregate $3.1 million to certain
members of our management team, excluding Mr. Comstock, for
their extraordinary efforts. Such amount was paid by such
stockholders on a pro rata basis based on the number of shares
held by each such stockholder that were redeemed by us in the
2010 Private Placement.
Acquisition of
Total
We purchase a significant portion of machinery and equipment
from Total. On April 28, 2011, we acquired Total. The
aggregate purchase price of approximately $32.9 million
included $23.0 million in cash to the sellers and
$9.9 million in repayment of the outstanding debt of Total.
In exchange for the consideration transferred, we acquired net
working capital assets with an estimated value of approximately
$6.9 million, including $5.4 million in cash and cash
equivalents. Our Chief Executive Officer, Joshua E.
Comstock, owned 12% of Totals outstanding equity and
served on its board of directors until March 2011.
Supplier
Agreements
For the years ended December 31, 2010, 2009 and 2008, fixed
asset purchases from Total were $22.2 million,
$1.5 million and $8.7 million, respectively, and
$17.9 million for the three months ended March 31,
2011. Deposits with Total on equipment to be purchased at
December 31, 2010, 2009 and 2008 were $4.2 million,
$0, and $94,500, respectively, and $2.4 million for the
three months ended March 31, 2011. Amounts payable to Total
at December 31, 2010, 2009 and 2008 were $73,783, $293,083
and $59,484, respectively, and $2.1 million for the three
months ended March 31, 2011, and were included in accounts
payable. As of March 31, 2011, we had $22.3 million in
purchase commitments for Total.
HKW Capital Partners, II, L.P., or HKW, owned a controlling
interest in Total. Mr. Comstock is a limited partner in an
HKW-related party, HKW Capital Partners III, L.P., or HKW
III. Mr. Comstock committed $2.0 million to HKW III.
From March 2007 through the closing date, Total paid
management fees to HKW in the amount of $180,000 per year.
Additionally, Total has built and sold coiled tubing and
hydraulic fracturing equipment to us during such period.
Mr. Comstock is a co-investor in FURminator, Inc., a
portfolio company of HKW III, through his ownership of
500,000 shares of its common stock. Mr. Roemer, an HKW
officer, is a member of our board.
We have purchased controls and instrumentation equipment from
Supreme Electrical Services, Inc., or Supreme, in an aggregate
amount of approximately $1.0 million over the last year.
Supreme is wholly owned by Stewart & Sons Holding Co.,
which in turn is wholly owned by C. James Stewart, III.
91
Mr. Stewart is a member of our board. We plan to continue
our purchasing relationship with Supreme for the foreseeable
future.
Promissory
Notes
In October and December 2009, we issued an aggregate of
approximately $1.8 million of subordinated promissory notes
to affiliates of Citi Private Equity and Northern Trust, N.A.,
whose notes were secured by affiliates of Energy Spectrum, and
an aggregate $182,000 of subordinated promissory notes to
Mr. Comstock. The subordinated promissory notes were due on
October 1, 2014 and interest on the notes was payable
quarterly, at a rate of prime plus 0.50%. On October 28,
2010, we repaid all outstanding amounts with cash on hand,
consisting of $2.1 million of principal and accrued
interest under these promissory notes in connection with the
amendment of our credit facilities.
Registration
Rights Agreement
In connection with the 2010 Private Placement, we entered into a
Registration Rights Agreement with purchasers in the private
placement. Please read Shares Eligible for Future
Sale Registration Rights beginning on
page 103 of this prospectus for additional information on
the terms of the Registration Rights Agreement.
Other
Transactions
JRC Investments, of which Mr. Comstock is the sole member,
owns a personal aircraft that Mr. Comstock uses for
personal travel and business travel. When Mr. Comstock uses
the aircraft for business travel, we reimburse JRC Investments
for the hourly engine maintenance and airframe maintenance
program costs or we pay such costs directly to the pilot, as the
manager of the plane, without reimbursement to JRC Investments.
For the year ended December 31, 2010, we paid approximately
$54,396 to reimburse JRC Investments for business travel on the
aircraft, and we paid the pilot, as the manager of the plane,
$90,897 to cover costs billed directly to JRC Investments. These
reimbursement costs and third party payments are included in
selling, general and administrative expenses in our consolidated
statement of operations. We believe that the costs and expenses
associated with these reimbursements and third party payments
were substantially less than what we could have obtained in an
arms-length transaction.
Policies and
Procedures
We review all relationships and transactions in which we, our
control persons and our directors and executive officers or
their immediate family members are participants to determine
whether such persons have a direct or indirect material
interest. Pursuant to the Related Persons Transactions Policy we
intend to adopt prior to the closing of this offering, our
General Counsel will be primarily responsible for developing and
implementing procedures and controls to obtain information from
the directors and executive officers with respect to related
person transactions and for subsequently determining, based on
the facts and circumstances disclosed to them, whether we or a
related person has a direct or indirect material interest in the
transaction.
We will adopt a Code of Business Conduct and Ethics prior to the
closing of this offering, which will discourage all conflicts of
interest and provide guidance with respect to conflicts of
interest. Under the planned Code of Business Conduct and Ethics,
conflicts of interest will occur when private or family
interests interfere in any way, or even appear to interfere,
with our interests. Our restrictions on conflicts of interest
under the Code of Business Conduct and Ethics will include
related person transactions.
Prior to the closing of this offering, we will have multiple
processes for reporting conflicts of interests, including
related person transactions. Under our planned Code of Business
Conduct and Ethics, all employees will be required to report any
actual or apparent conflicts of interest, or potential
92
conflicts of interest, to their supervisors and all related
person transactions involving our regional or market executives
must be communicated in writing as part of their quarterly
representation letter. This information will then reviewed by
our Audit Committee, our board or our independent registered
public accounting firm, as deemed necessary, and discussed with
management. Going forward, as part of this review, the following
factors will generally be considered:
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the nature of the related persons interest in the
transaction;
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material terms of the transaction, including, without
limitation, the amount and type of transaction;
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the importance of the transaction to the related person;
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the importance of the transaction to us;
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whether the transaction would impair the judgment of a director
or executive officer to act in the best interest of our
company; and
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any other matters deemed appropriate with respect to the
particular transaction.
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Ultimately, all such transactions will be required to be
approved or ratified by our board in accordance with our planned
Related Persons Transactions Policy. Any member of our board who
is a related person with respect to a transaction will be
recused from the review of the transaction.
In addition, we will annually distribute a questionnaire to our
executive officers and members of our board requesting certain
information regarding, among other things, their immediate
family members, employment and beneficial ownership interests.
This information is then reviewed for any conflicts of interest
under the planned Code of Business Conduct and Ethics. At the
completion of the annual audit, our Audit Committee and our
independent registered public accounting firm will review with
management, insider and related person transactions and
potential conflicts of interest.
Historically, related party transactions were reviewed by our
board without any formal policies or procedures being in place.
We believe the more detailed process for identifying, reviewing
and assessing related party transactions required by our planned
Code of Business Conduct and Ethics is a preferable process for
dealing with related party transactions as a public company
going forward. Because we have not yet adopted our Code of
Business Conduct and Ethics, all of the related party
transactions described above were approved under our previous
practices for assessing related party transactions.
93
SELLING
STOCKHOLDERS
The following table and related footnotes set forth certain
information regarding the selling stockholders. The number of
shares in the column Number of Shares of Common Stock Offered
Hereby represents all of the shares that each selling
stockholder is offering under this prospectus. To our knowledge,
each of the selling stockholders has sole voting and investment
power as to the shares shown, except as disclosed in this
prospectus or to the extent this power may be shared with a
spouse. Except as noted in this prospectus, none of the selling
stockholders is a director, officer or employee of ours or an
affiliate of such person.
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Percentage Beneficially Owned
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Maximum
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After
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Number of
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After
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Offering
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Shares
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Number
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Shares to be
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Offering
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(Assuming
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Owned
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of Shares
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Sold Upon
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(Assuming no
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Exercise of
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Prior
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to be Sold
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Exercise of
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Exercise of
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Underwriters
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to this
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in the
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Underwriters
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Before
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Underwriters
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Option in
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Offering
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Offering
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Option(1)
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Offering
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Option)(2)
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Full)(1)
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2006 Co-Investment Portfolio, L.P.(3)
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2,047,787
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Advanced Series Trust AST Academic Strategies
Asset Allocation Portfolio(4)
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3,301
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AQR Funds AQR Diversified Arbitrage Fund(5)
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31,094
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AQR Opportunistic Premium Offshore Fund, L.P.(6)
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3,152
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Blackwell Partners, LLC(7)
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355,000
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CCA Event Driven Master Fund LLC(8)
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737,500
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Citigroup Capital Partners II Employee Master Fund, L.P.(9)
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2,300,241
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CNH Diversified Opportunities Master Account, L.P.(10)
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2,093
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Energy Spectrum Partners IV LP(11)
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7,720,501
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Fidelity Advisors Series I: Fidelity Value Advisor
Strategies Fund(12)
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541,500
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Fidelity Investment Trust: Fidelity Global Commodity Stock
Fund(13)
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57,300
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Variable Insurance Products Fund III: Value Strategies
Portfolio(14)
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158,500
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Fonds voor Gemene Rekening Beroepsvervoer(15)
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132,500
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Highmark Ltd Seg Acct US EQ1(16)
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132,917
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James Frawley & Joanne Frawley TIC(17)
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2,500
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Newland Master Fund, LTD(18)
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2,012,500
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94
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Percentage Beneficially Owned
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
After
|
|
|
|
|
|
|
Number of
|
|
|
|
After
|
|
Offering
|
|
|
Shares
|
|
Number
|
|
Shares to be
|
|
|
|
Offering
|
|
(Assuming
|
|
|
Owned
|
|
of Shares
|
|
Sold Upon
|
|
|
|
(Assuming no
|
|
Exercise of
|
|
|
Prior
|
|
to be Sold
|
|
Exercise of
|
|
|
|
Exercise of
|
|
Underwriters
|
|
|
to this
|
|
in the
|
|
Underwriters
|
|
Before
|
|
Underwriters
|
|
Option in
|
|
|
Offering
|
|
Offering
|
|
Option(1)
|
|
Offering
|
|
Option)(2)
|
|
Full)(1)
|
|
Passport Energy Fund SPC Ltd for and on behalf of Portfolio
A Energy Strategy(19)
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passport Global Fund SPC Ltd for an on behalf of Portfolio
A Global Strategy(20)
|
|
|
1,345,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passport Special Opportunities Master Fund, LP(21)
|
|
|
930,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scopia International Limited(22)
|
|
|
318,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scopia PX International Limited(23)
|
|
|
1,361,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scopia PX, LLC(24)
|
|
|
670,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Simmons, Christopher(25)
|
|
|
175,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stark Master Fund Ltd.(26)
|
|
|
1,410,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
StepStone Capital Partners II Cayman Holdings, L.P.(27)
|
|
|
1,301,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
StepStone Capital Partners II Onshore, L.P.(28)
|
|
|
1,038,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Windermere JUP FD US FOC Pool(29)
|
|
|
16,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
25,305,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
If the underwriters fully exercise
their option to purchase additional shares, then the selling
stockholders will sell the number of shares of common stock
indicated. If the underwriters partially exercise their option
to purchase additional shares, then the number of shares to be
sold by selling stockholder will be allocated pro rata.
|
|
|
|
(2)
|
|
Gives effect to the issuance and
sale by us
of shares
in the offering.
|
|
|
|
(3)
|
|
StepStone Co-Investment Funds GP,
LLC, which is a wholly owned subsidiary of StepStone Group LLC,
is the general partner of 2006 Co-Investment Portfolio, L.P.
StepStone Group LLC is the investment advisor to 2006
Co-Investment Portfolio, L.P. Darren Friedman is a Partner of
StepStone Group LLC. StepStone Co-Investment Funds GP, LLC,
StepStone Group LLC, and Mr. Friedman each may be deemed
beneficial owners, with shared voting and dispositive power of
the shares owned by 2006 Co-Investment Portfolio, L.P.
|
|
|
|
(4)
|
|
Advanced
Series Trust AST Academic Strategies Asset
Allocation Portfolio is an affiliate of Prudential Investment
Management Services LLC and Prudential Annuities Distributors,
Inc., both of whom are broker-dealers registered under
Section 15 of the Exchange Act. Advanced
Series Trust AST Academic Strategies Asset
Allocation Portfolio has represented to us that it is not acting
as an underwriter in this offering, it purchased the units it is
offering under this prospectus in the ordinary course of
business, and at the time of such purchase, it had no agreement
or understanding, directly or indirectly, with any person to
distribute the securities. CNH Partners, LLC, as the
sub-advisor
of Advanced Series Trust AST Academic
Strategies Asset Allocation Portfolio, has discretionary voting
and investment power. CNH Partners, LLC is controlled indirectly
by Todd Pulvino and Mark Mitchell, and accordingly, both
Mr. Pulvino and Mr. Mitchell may be deemed to share
voting and investment power over the shares owned by Advanced
Series Trust AST Academic Strategies Asset
Allocation Portfolio.
|
|
|
|
(5)
|
|
CNH Partners, LLC, as the
sub-advisor
of AQR Funds AQR Diversified Arbitrage Fund, has
discretionary voting and investment power. CNH Partners, LLC is
controlled indirectly by Todd Pulvino and Mark Mitchell, and
accordingly, both Mr. Pulvino and Mr. Mitchell may be
deemed to share voting and investment power over the shares
owned by AQR Funds AQR Diversified Arbitrage Fund.
|
95
|
|
|
(6)
|
|
CNH Partners, LLC, as the
sub-advisor
of AQR Opportunistic Premium Offshore, L.P., has discretionary
voting and investment power. CNH Partners, LLC is controlled
indirectly by Todd Pulvino and Mark Mitchell, and accordingly,
both Mr. Pulvino and Mr. Mitchell may be deemed to
share voting and investment power over the shares owned by AQR
Opportunistic Premium Offshore Fund, L.P.
|
|
|
|
(7)
|
|
Passport Capital LLC or Passport is
the investment manager to Blackwell and
John H. Burbank III or Mr. Burbank is the
managing member of Passport. As a result, each of Passport and
Mr. Burbank may be considered to share voting and
dispositive power of the 355,000 shares beneficially owned
by Blackwell.
|
|
|
|
(8)
|
|
CCA Event Driven Master
Fund LLC is an affiliate of Citigroup Global Markets Inc.,
which is a broker-dealer registered under Section 15 of the
Exchange Act. CCA Event Driven Master Fund LLC has
represented to us that it is not acting as an underwriter in
this offering, it purchased the units it is offering under this
prospectus in the ordinary course of business, and at the time
of such purchase, it had no agreement or understanding, directly
or indirectly, with any person to distribute the securities.
Derrick Queen, Mukesh Patel and Rajeer Narang, as portfolio
managers of CCA Event Drive Master Fund LLC, may each be
deemed to share voting and investment power over the shares
owned by CCA Event Driven Master Fund LLC.
|
|
|
|
(9)
|
|
Citigroup Capital Partners II
Employee Master Fund, L.P. is an affiliate of Citigroup Inc.,
which is a broker dealer registered under Section 15 of the
Exchange Act. Citigroup Capital Partners II Employee Master
Fund, L.P. has represented to us that it is not acting as an
underwriter in this offering, it purchased the units it is
offering under this prospectus in the ordinary course of
business, and at the time of such purchase, it had no agreement
or understanding, directly or indirectly, with any person to
distribute the securities. Citigroup Private Equity LP, as
general partner of Citigroup Capital Partners II Employee
Master Fund, L.P., and Robert Grogan, as President of the
general partner, and Matthew Coeny, Townsend Weekes, Craig
Barrack, Francis Genesi, Rodrigo Neira, as Vice Presidents of
the general partner, and Jim Deluise, as Treasurer of the
general partner, and Ken Hemmer, as Assistant Treasurer of the
general partner, and Rakesh Patel, as Secretary of the general
partner and Carolyn Luxemberg and Nancy F. Ongley, as Assistant
Secretaries of the general partner, may each be deemed to share
voting and investment power over the shares owned by Citigroup
Capital Partners II Employee Master Fund, L.P.
|
|
|
|
(10)
|
|
CNH Partners, LLC, as the advisor
of CNH Diversified Opportunities Master Account, L.P., has
discretionary voting and investment power. CNH Partners, LLC is
controlled indirectly by Todd Pulvino and Mark Mitchell, and
accordingly, both Mr. Pulvino and Mr. Mitchell may
each be deemed to share voting and investment power over the
shares owned by CNH Diversified Opportunities Master Account,
L.P.
|
|
|
|
(11)
|
|
James P. Benson, as managing
partner of Energy Spectrum Partners IV LP, has voting and
investment power over the shares owned by Energy Spectrum
Partners IV LP.
|
|
|
|
(12)
|
|
Fidelity Advisors Series 1:
Fidelity Advisor Strategies Fund (the Fund) is an
investment company registered under Section 8 of the
Investment Company Act of 1940 advised by Fidelity
Management & Research Company (Fidelity),
82 Devonshire Street, Boston, Massachusetts 02109, a
wholly-owned subsidiary of FMR LLC and an investment adviser
registered under Section 203 of the Investment Advisers Act
of 1940. Edward C. Johnson 3d and FMR LLC, through its control
of Fidelity, and the Fund each has sole power to dispose of the
securities owned by the Fund.
|
|
|
|
|
|
Members of
the family of Edward C. Johnson 3d, Chairman of FMR LLC, are the
predominant owners, directly or through trusts, of Series B
voting common shares of FMR LLC, representing 49% of the voting
power of FMR LLC. The Johnson family group and all other
Series B shareholders have entered into a
shareholders voting agreement under which all
Series B voting common shares will be voted in accordance
with the majority vote of Series B voting common shares.
Accordingly, through their ownership of voting common shares and
the execution of the shareholders voting agreement,
members of the Johnson family may be deemed, under the
Investment Company Act of 1940, to form a controlling group with
respect to FMR LLC.
|
|
|
|
|
|
Neither FMR
LLC nor Edward C. Johnson 3d, Chairman of FMR LLC, has the sole
power to vote or direct the voting shares owned directly by the
Fund, which power resides with the Funds Boards of
Trustees. Fidelity carries out the voting of the shares under
written guidelines established by the Funds Boards of
Trustees
|
|
|
|
|
|
The Fund is
an affiliate of a broker-dealer registered under Section 15
of the Exchange Act. The Fund has represented to us that it is
not acting as an underwriter in this offering, it purchased the
units it is offering under this prospectus in the ordinary
course of business, and at the time of such purchase, it had no
agreement or understanding, directly or indirectly, with any
person to distribute the securities.
|
|
|
|
(13)
|
|
Fidelity Investment Trust: Fidelity
Global Commodity Stock Fund is an investment company registered
under Section 8 of the Investment Company Act of 1940 (the
Investment Fund) advised by Fidelity, 82 Devonshire
Street, Boston, Massachusetts 02109, a wholly-owned subsidiary
of FMR LLC and an investment adviser registered under
Section 203 of the Investment Advisers Act of 1940. Edward
C. Johnson 3d and FMR LLC, through its control of Fidelity, and
the Investment Fund each has sole power to dispose of the
securities owned by the Fund.
|
|
|
|
|
|
Members of
the family of Edward C. Johnson 3d, Chairman of FMR LLC, are the
predominant owners, directly or through trusts, of Series B
voting common shares of FMR LLC, representing 49% of the voting
power of FMR LLC. The Johnson family group and all other
Series B shareholders have entered into a
shareholders voting agreement under which all
Series B voting common shares will be voted in accordance
with the majority vote of Series B voting common shares.
Accordingly, through their ownership of voting common shares and
the execution of the shareholders voting agreement,
|
96
|
|
|
|
|
members of the Johnson family may
be deemed, under the Investment Company Act of 1940, to form a
controlling group with respect to FMR LLC.
|
|
|
|
|
|
Neither FMR
LLC nor Edward C. Johnson 3d, Chairman of FMR LLC, has the sole
power to vote or direct the voting shares owned directly by the
Investment Fund, which power resides with the Funds Boards
of Trustees. Fidelity carries out the voting of the shares under
written guidelines established by the Funds Boards of
Trustees
|
|
|
|
|
|
The
Investment Fund is an affiliate of a broker-dealer registered
under Section 15 of the Exchange Act. The Investment Fund
has represented to us that it is not acting as an underwriter in
this offering, it purchased the units it is offering under this
prospectus in the ordinary course of business, and at the time
of such purchase, it had no agreement or understanding, directly
or indirectly, with any person to distribute the securities.
|
|
|
|
(14)
|
|
Variable Insurance Products
Fund III: Value Strategies Portfolio is an investment
company registered under Section 8 of the Investment
Company Act of 1940 (the Value Fund) advised by
Fidelity, 82 Devonshire Street, Boston, Massachusetts 02109, a
wholly-owned subsidiary of FMR LLC and an investment adviser
registered under Section 203 of the Investment Advisers Act
of 1940. Edward C. Johnson 3d and FMR LLC, through its control
of Fidelity, and the Value Fund each has sole power to dispose
of the securities owned by the Value Fund.
|
|
|
|
|
|
Members of
the family of Edward C. Johnson 3d, Chairman of FMR LLC, are the
predominant owners, directly or through trusts, of Series B
voting common shares of FMR LLC, representing 49% of the voting
power of FMR LLC. The Johnson family group and all other
Series B shareholders have entered into a
shareholders voting agreement under which all
Series B voting common shares will be voted in accordance
with the majority vote of Series B voting common shares.
Accordingly, through their ownership of voting common shares and
the execution of the shareholders voting agreement,
members of the Johnson family may be deemed, under the
Investment Company Act of 1940, to form a controlling group with
respect to FMR LLC.
|
|
|
|
|
|
Neither FMR
LLC nor Edward C. Johnson 3d, Chairman of FMR LLC, has the sole
power to vote or direct the voting shares owned directly by the
Value Fund, which power resides with the Value Funds
Boards of Trustees. Fidelity carries out the voting of the
shares under written guidelines established by the Value
Funds Boards of Trustees
|
|
|
|
|
|
The Value
Fund is an affiliate of a broker-dealer registered under
Section 15 of the Exchange Act. The Value Fund has
represented to us that it is not acting as an underwriter in
this offering, it purchased the units it is offering under this
prospectus in the ordinary course of business, and at the time
of such purchase, it had no agreement or understanding, directly
or indirectly, with any person to distribute the securities.
|
|
|
|
(15)
|
|
Wellington Management Company, LLP,
or Wellington, is an investment adviser registered under the
Investment Advisers Act of 1940, as amended. Wellington, in such
capacity, may be deemed to share beneficial ownership over the
shares held by its client accounts.
|
|
|
|
(16)
|
|
Scopia Management, Inc. is the
investment manager of Highmark Ltd Seg Acct US EQ1, and in such
capacity may be deemed to have shared voting and dispositive
power over the shares owned by Highmark Ltd Seg Acct US EQ1.
Matthew Sirovich, Jeremy Mindich, Tajar Varghese and Joseph Yin
are the beneficial owners of Scopia Management, Inc., and in
such capacity may be deemed to have shared voting and
dispositive power over the shares owned by Highmark Ltd Seg Acct
US EQ1.
|
|
|
|
(17)
|
|
Mr. Frawley, is the Senior
Managing Director at FBR Capital Markets, Inc., a broker-dealer
registered under Section 15 of the Exchange Act.
Mr. Frawley has represented to us that he is not acting as
an underwriter in this offering, he purchased the units he is
offering under this prospectus in the ordinary course of
business, and at the time of such purchase, he had no agreement
or understanding, directly or indirectly, with an person to
distribute the securities. Mr. Frawley and
Mrs. Frawley, as tenants in common, share voting and
investment power over their shares.
|
|
|
|
(18)
|
|
Ken Brodkowitz and Michael Vermut,
as the sole managing members for Newland Capital Management,
LLC, which serves as investment manager to Newland Master Fund,
Ltd, have voting and investment power over the shares owned by
Newland Master Fund, Ltd.
|
|
|
|
(19)
|
|
Passport Capital LLC or Passport is
the investment manager to Energy and John H. Burbank III or
Mr. Burbank is the managing member of Passport. As a
result, each of Passport and Mr. Burbank may be considered
to share voting and dispositive power of the 500,000 shares
beneficially owned by Energy.
|
|
|
|
(20)
|
|
Passport Capital LLC or Passport is
the investment manager to Global and John H. Burbank III or
Mr. Burbank is the managing member of Passport. As a
result, each of Passport and Mr. Burbank may be considered
to share voting and dispositive power of the
1,345,000 shares beneficially owned by Global.
|
|
|
|
(21)
|
|
Passport Capital LLC or Passport is
the investment manager to Special Opportunities and Passport
Plus, LLC or Plus serves as the general partner to Special
Opportunities. John H. Burbank III or Mr. Burbank is
the managing member of Passport. As a result, each of Passport,
Plus and Mr. Burbank may be considered to share voting and
dispositive power of the 930,000 shares beneficially owned
by Special Opportunities.
|
|
|
|
(22)
|
|
Scopia Management, Inc. is the
investment manager of Scopia International Limited, and in such
capacity may be deemed to have shared voting and dispositive
power over the shares owned by Scopia International Limited.
Matthew Sirovich, Jeremy Mindich, Tajar Varghese and Joseph Yin
are the beneficial owners of Scopia Management, Inc., and in
such capacity may be deemed to have shared voting and
dispositive power over the shares owned by Scopia International
Limited.
|
97
|
|
|
(23)
|
|
Scopia Management, Inc. is the
investment manager of Scopia PX International Limited, and in
such capacity may be deemed to have shared voting and
dispositive power over the shares owned by Scopia PX
International Limited. Matthew Sirovich, Jeremy Mindich, Tajar
Varghese and Joseph Yin are the beneficial owners of Scopia
Management, Inc., and in such capacity may be deemed to have
shared voting and dispositive power over the shares owned by
Scopia PX International Limited.
|
|
|
|
(24)
|
|
Scopia Management, Inc. is the
investment manager of Scopia PX, LLC, and in such capacity may
be deemed to have shared voting and dispositive power over the
shares owned by Scopia PX, LLC. Matthew Sirovich, Jeremy
Mindich, Tajar Varghese and Joseph Yin are the beneficial owners
of Scopia Management, Inc., and in such capacity may be deemed
to have shared voting and dispositive power over the shares
owned by Scopia PX, LLC.
|
|
|
|
(25)
|
|
Mr. Simmons has sole voting
and investment power of his shares.
|
|
|
|
(26)
|
|
Michael A. Roth and Brian J. Stark
have shared voting and investment power over the shares owned by
Stark Master Fund Ltd., both of whom each disclaim
beneficial ownership of such shares.
|
|
|
|
(27)
|
|
StepStone Co-Investment Funds GP,
LLC, which is a wholly owned subsidiary of StepStone Group LLC,
is the general partner of StepStone Capital Partners II
Cayman Holdings, L.P. StepStone Group LLC is the investment
advisor to StepStone Capital Partners II Cayman Holdings,
L.P. Darren Friedman is a Partner of StepStone Group LLC.
StepStone Co-Investment Funds GP, LLC, StepStone Group LLC, and
Mr. Friedman each may be deemed beneficial owners, with
shared voting and dispositive power of the shares owned by
StepStone Capital Partners II Cayman Holdings, L.P.
|
|
|
|
(28)
|
|
StepStone Co-Investment Funds GP,
LLC, which is a wholly owned subsidiary of StepStone Group LLC,
is the general partner of StepStone Capital Partners II
Onshore, L.P. StepStone Group LLC is the investment advisor to
StepStone Capital Partners II Onshore, L.P. Darren Friedman
is a Partner of StepStone Group LLC. StepStone Co-Investment
Funds GP, LLC, StepStone Group LLC, and Mr. Friedman each
may be deemed beneficial owners, with shared voting and
dispositive power of the shares owned by StepStone Capital
Partners II Onshore, L.P.
|
|
|
|
(29)
|
|
Scopia Management, Inc. is the
investment manager of Windermere JUP FD US FOC Pool, and in such
capacity may be deemed to have shared voting and dispositive
power over the shares owned by Windermere JUP FD US FOC Pool.
Matthew Sirovich, Jeremy Mindich, Tajar Varghese and Joseph Yin
are the beneficial owners of Scopia Management, Inc., and in
such capacity may be deemed to have shared voting and
dispositive power over the shares owned by Windermere JUP FD US
FOC Pool.
|
98
DESCRIPTION OF
CAPITAL STOCK
The authorized capital stock of C&J Energy Services, Inc.
consists of 100,000,000 shares of common stock,
$0.01 par value per share, of which 47,499,074 shares
are issued and outstanding, and 20,000,000 shares of
preferred stock, $0.01 par value per share, of which no
shares are issued and outstanding. Additionally, as of
June 8, 2011, 5,746,589 shares of our common stock
were issuable upon exercise of outstanding options, 1,907,318 of
which were exercisable, and an aggregate of approximately
1,860,618 shares of common stock are reserved and available
for future issuance under the 2010 Plan. Currently, none of our
common stock is subject to any warrants to purchase nor are
there any outstanding securities convertible into our common
stock.
The following summary of the capital stock, the amended and
restated certificate of incorporation and the amended and
restated bylaws of C&J Energy Services, Inc. does not
purport to be complete and is qualified in its entirety by
reference to the provisions of applicable law and to our amended
and restated certificate of incorporation and amended and
restated bylaws, which are filed as exhibits to the registration
statement of which this prospectus is a part.
Common
Stock
Except as provided by law or in a preferred stock designation,
holders of common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the
stockholders, will have the exclusive right to vote for the
election of directors and do not have cumulative voting rights.
Except as otherwise required by law, holders of common stock, as
such, are not entitled to vote on any amendment to the amended
and restated certificate of incorporation (including any
certificate of designations relating to any series of preferred
stock) that relates solely to the terms of any outstanding
series of preferred stock if the holders of such affected series
are entitled, either separately or together with the holders of
one or more other such series, to vote thereon pursuant to the
amended and restated certificate of incorporation (including any
certificate of designations relating to any series of preferred
stock) or pursuant to the General Corporation Law of the State
of Delaware. Subject to preferences that may be applicable to
any outstanding shares or series of preferred stock, holders of
common stock are entitled to receive ratably such dividends
(payable in cash, stock or otherwise), if any, as may be
declared from time to time by our board of directors out of
funds legally available for dividend payments. All outstanding
shares of common stock are fully paid and non-assessable, and
the shares of common stock to be issued upon completion of this
offering will be fully paid and non-assessable. The holders of
common stock have no preferences or rights of conversion,
exchange, pre-emption or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common
stock. In the event of any liquidation, dissolution or
winding-up
of our affairs, holders of common stock will be entitled to
share ratably in our assets that are remaining after payment or
provision for payment of all of our debts and obligations and
after liquidation payments to holders of outstanding shares of
preferred stock, if any.
Preferred
Stock
Our amended and restated certificate of incorporation authorizes
our board of directors, subject to any limitations prescribed by
law, without further stockholder approval, to establish and to
issue from time to time one or more classes or series of
preferred stock covering up to an aggregate of
20,000,000 shares. Each class or series of preferred stock
will cover the number of shares and will have the powers,
preferences, rights, qualifications, limitations and
restrictions determined by the board of directors, which may
include, among others, dividend rights, liquidation preferences,
voting rights, conversion rights, preemptive rights and
redemption rights. Except as provided by law or in a preferred
stock designation, the holders of preferred stock will not be
entitled to vote at or receive notice of any meeting of
stockholders.
99
Anti-Takeover
Effects of Provisions of Our Certificate of Incorporation, Our
Bylaws and Delaware Law
Some provisions of Delaware law, and our amended and restated
certificate of incorporation and our amended and restated bylaws
described below, contain provisions that could make the
following transactions more difficult: acquisitions of us by
means of a tender offer, a proxy contest or otherwise; or
removal of our incumbent officers and directors. These
provisions may also have the effect of preventing changes in our
management. It is possible that these provisions could make it
more difficult to accomplish or could deter transactions that
stockholders may otherwise consider to be in their best interest
or in our best interests, including transactions that might
result in a premium over the market price for our shares.
These provisions, summarized below, are expected to discourage
coercive takeover practices and inadequate takeover bids. These
provisions are also designed to encourage persons seeking to
acquire control of us to first negotiate with us. We believe
that the benefits of increased protection and our potential
ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure us outweigh the
disadvantages of discouraging these proposals because, among
other things, negotiation of these proposals could result in an
improvement of their terms.
Certificate of Incorporation and
Bylaws. Among other things, our amended and
restated certificate of incorporation
and/or
amended and restated bylaws:
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establish advance notice procedures with regard to stockholder
proposals relating to the nomination of candidates for election
as directors or new business to be brought before meetings of
our stockholders. These procedures provide that notice of
stockholder proposals must be timely given in writing to our
corporate secretary prior to the meeting at which the action is
to be taken. Generally, to be timely, notice must be received at
our principal executive offices not less than 90 days nor
more than 120 days prior to the first anniversary date of
the annual meeting for the preceding year. Our amended and
restated bylaws specify the requirements as to form and content
of all stockholders notices. These requirements may
preclude stockholders from bringing matters before the
stockholders at an annual or special meeting;
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provide our board of directors the ability to authorize
undesignated preferred stock. This ability makes it possible for
our board of directors to issue, without stockholder approval,
preferred stock with voting or other rights or preferences that
could impede the success of any attempt to change control of us.
These and other provisions may have the effect of deferring
hostile takeovers or delaying changes in control or management
of our company;
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provide that the authorized number of directors may be changed
only by resolution of the board of directors;
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provide that all vacancies, including newly created
directorships, may, except as otherwise required by law, be
filled by the affirmative vote of a majority of directors then
in office, even if less than a quorum;
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provide that any action required or permitted to be taken by the
stockholders must be effected at a duly called annual or special
meeting of stockholders and may not be effected by any consent
in writing in lieu of a meeting of such stockholders, subject to
the rights of the holders of any series of preferred stock;
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provide that directors may be removed only for cause and only by
the affirmative vote of holders of at least 80% of the voting
power of our then outstanding common stock;
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provide our amended and restated certificate of incorporation
and amended and restated bylaws may be amended by the
affirmative vote of the holders of at least two-thirds of our
then outstanding common stock;
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provide that special meetings of our stockholders may only be
called by the board of directors, the chief executive officer or
the chairman of the board; and
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provide that our amended and restated bylaws can be amended or
repealed at any regular or special meeting of stockholders or by
the board of directors.
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Opt-Out of Section 203 of the
DGCL. We have expressly elected not to be
governed by the Business Combination provisions of
Section 203 of the DGCL. At any time after the Sponsors no
longer beneficially own at least 25% of the outstanding shares
of our common stock, such election shall be automatically
withdrawn and we will thereafter be governed by the
Business Combination provisions of Section 203
of the DGCL. Section 203 prohibits a person who acquires
more than 15% but less than 85% of all classes of our
outstanding voting stock without the approval of our board from
thereafter merging or combining with us for a period of three
years, unless such merger or combination is approved by both a
two-thirds vote of the shares not owned by such person and our
board. These provisions would apply even if the proposed merger
or acquisition could be considered beneficial by some
stockholders.
Limitation of
Liability and Indemnification Matters
Our amended and restated certificate of incorporation limits the
liability of our directors for monetary damages for breach of
their fiduciary duty as directors, except for liability that
cannot be eliminated under the DGCL. Delaware law provides that
directors of a company will not be personally liable for
monetary damages for breach of their fiduciary duty as
directors, except for liabilities:
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for any breach of their duty of loyalty to us or our
stockholders;
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for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
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for unlawful payment of dividend or unlawful stock repurchase or
redemption, as provided under Section 174 of the
DGCL; or
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for any transaction from which the director derived an improper
personal benefit.
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Any amendment, repeal or modification of these provisions will
be prospective only and would not affect any limitation on
liability of a director for acts or omissions that occurred
prior to any such amendment, repeal or modification.
Our amended and restated certificate of incorporation and
amended and restated bylaws also provide that we will indemnify
our directors and officers to the fullest extent permitted by
Delaware law. Our amended and restated certificate of
incorporation and amended and restated bylaws also permit us to
purchase insurance on behalf of any officer, director, employee
or other agent for any liability arising out of that
persons actions as our officer, director, employee or
agent, regardless of whether Delaware law would permit
indemnification. We have entered into indemnification agreements
with each of our current directors and executive officers and
expect to enter into indemnification agreements with each of our
future directors and executive officers. These agreements
require us to indemnify these individuals to the fullest extent
permitted under Delaware law against liability that may arise by
reason of their service to us, and to advance expenses incurred
as a result of any proceeding against them as to which they
could be indemnified. We believe that the limitation of
liability provision in our amended and restated certificate of
incorporation and the indemnification agreements facilitates our
ability to continue to attract and retain qualified individuals
to serve as directors and officers.
Corporate
Opportunity
Our amended and restated certificate of incorporation provides
that, to the fullest extent permitted by applicable law, we
renounce any interest or expectancy in, or in being offered an
opportunity to participate in, any business opportunity that may
be from time to time presented to Citigroup Capital
Partners II Employee Master Fund, L.P., certain private
funds advised or managed
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by StepStone Group LLC, Energy Spectrum Partners IV LP or
their affiliates or any of their respective officers, directors,
agents, shareholders, members, partners, affiliates and
subsidiaries (other than us and our subsidiary) or business
opportunities that such parties participate in or desire to
participate in, even if the opportunity is one that we might
reasonably have pursued or had the ability or desire to pursue
if granted the opportunity to do so, and no such person shall be
liable to us for breach of any fiduciary or other duty, as a
director or officer or controlling stockholder or otherwise, by
reason of the fact that such person pursues or acquires any such
business opportunity, directs any such business opportunity to
another person or fails to present any such business
opportunity, or information regarding any such business
opportunity, to us unless, in the case of any such person who is
our director or officer, any such business opportunity is
expressly offered to such director or officer solely in his or
her capacity as our director or officer.
Amended and
Restated Stockholders Agreement
For a description of the Amended and Restated Stockholders
Agreement that was entered into in December 2010 and amended on
May 12, 2011, please read Certain Relationships and
Related Party Transactions Amended and Restated
Stockholders Agreement beginning on page 89 of
this prospectus.
Transfer Agent
and Registrar
American Stock Transfer & Trust Company, LLC acts
as the transfer agent and registrar for our common stock.
Listing; Public
Market
There is no established market for our shares of common stock.
We have applied to list on the NYSE under the ticker symbol
CJES, subject to completion of the offering and
compliance with certain conditions. The development and
maintenance of a public market for our common stock, having the
desirable characteristics of depth, liquidity and orderliness,
depends on the existence of willing buyers and sellers, the
presence of which is not within our control or that of any
market maker. The number of active buyers and sellers of shares
of our common stock at any particular time may be limited, which
may have an adverse effect on the price at which shares of our
common stock can be sold.
Special Election
Meeting
Our amended and restated certificate of incorporation provides
that in the event the shelf registration statement we filed on
March 30, 2011 has not been declared effective and such
shares have not been listed for trading on a national securities
exchange 180 days following March 30, 2011, a special
meeting of our stockholders will be called to solely consider
the removal of each of our then-serving directors and the
subsequent election of new directors to fill the then-created
vacancies. The removal of any director requires the affirmative
vote of a majority of the holders of registrable shares under
our Registration Rights Agreement, excluding executive officers.
Directors appointed by our Sponsors are not subject to removal
at such a special meeting, subject to certain exceptions. The
requirement to hold this special meeting may be waived by
holders of
2/3
of the registrable securities under our Registration Rights
Agreement, excluding executive officers. Please read our amended
and restated certificate of incorporation (including portions of
the Registration Rights Agreement incorporated by reference
therein), which is an exhibit to the registration statement of
which this prospectus forms a part.
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SHARES ELIGIBLE
FOR FUTURE SALE
Prior to this offering, there has been no public market for our
common stock. Future sales of our common stock in the public
market, or the availability of such shares for sale in the
public market, could adversely affect prevailing market prices
of our common stock from time to time. As described below, an
undetermined number of shares will be available for sale shortly
after this offering, subject to contractual and legal
restrictions on resale. Sales of a substantial number of shares
of our common stock in the public market after such restrictions
lapse, or the perception that those sales may occur, could
adversely affect the prevailing market price of our common stock
at such time and our ability to raise equity-related capital at
a time and price we deem appropriate.
Sales of
Restricted Shares
Upon the closing of this offering, we will have outstanding an
aggregate
of shares
of common stock. We issued 14,408,224 shares to our
Sponsors in certain private placements, 5,746,589 options to
purchase shares issued to our employees, former employees and
nonemployee directors under compensatory plans or arrangements,
4,322,850 shares purchased by our employees, former
employees and family members of employees and
28,768,000 shares issued pursuant to the 2010 Private
Placement. The majority of the shares outstanding prior to this
offering are subject to the resale limitations of the
Registration Rights Agreement as described below under
Registration Rights. In addition, shares
held by our directors and officers, certain of our principal
stockholders and the selling stockholders are subject to the
Lock-Up
Agreements described below under
Lock-Up
Agreements. Because each of the securities outstanding
prior to this offering were issued and sold in private
placements, such shares are eligible for resale only if
registered under the Securities Act or if they qualify for an
exemption from registration under Rule 144, Rule 701,
Regulation S or another exemption from registration under
the Securities Act.
As a result of the
Lock-Up
Agreements and the Registration Rights Agreement, shares of our
common stock (excluding the shares to be sold in this offering)
that will be available for sale in the public market shortly
after this offering, assuming registration of such shares under
the Securities Act or when permitted under Rule 144,
Rule 701, Regulation S or another exemption from
registration under the Securities Act, are as follows:
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shares subject to the
Lock-Up
Agreements will not be eligible for sale for 180 days from
the date of this prospectus, subject to certain exceptions.
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shares subject to the
Registration Rights Agreement will not be eligible for sale for
at least 60 days following the closing of this offering, if
the owner of such shares elected not to participate in this
offering.
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Lock-up
Agreements
We, all of our directors and officers, the Sponsors and certain
other selling stockholders have agreed not to sell or otherwise
transfer or dispose of any common stock for a period of
180 days from the date of this prospectus, subject to
certain exceptions and extensions. Please read
Underwriting beginning on page 109 of this
prospectus for a description of these
lock-up
provisions.
Registration
Rights
In December 2010, in connection with the closing of the 2010
Private Placement, we entered into a registration rights
agreement among us, certain of our stockholders and FBR Capital
Markets & Co., or the Registration Rights Agreement.
Under the Registration Rights Agreement, we agreed, at our
expense, to file with the SEC, in no event later than
March 31, 2011, a shelf registration statement registering
for resale the 28,768,000 shares of our common stock sold
in the 2010 Private Placement plus any additional shares of
common stock issued in respect thereof whether by stock
dividend, stock distribution, stock split, or otherwise, and to
cause such registration statement to be declared
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effective by the SEC as soon as practicable but in any event
within 180 days after the initial filing of such
registration statement. Upon the filing of the registration
statement of which this prospectus is a part, we are permitted,
pursuant to the terms of the Registration Rights Agreement, to
delay the effectiveness of the required shelf registration
statement for up to 60 days following the closing of this
offering.
We are required to use our commercially reasonable efforts to
cause the shelf registration statement to become effective under
the Securities Act as soon as practicable after the filing and,
subject to certain blackout periods, to continuously maintain
the effectiveness of the shelf registration statement under the
Securities Act until the first to occur of:
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the sale of all of the shares of common stock covered by the
shelf registration statement in accordance with the intended
distribution of such common stock;
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none of the shares of common stock with rights under the
registration rights agreement remain outstanding; or
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the first anniversary of the initial effective date of the shelf
registration statement, subject to certain conditions and
extension periods, as applicable.
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We filed such a shelf registration statement on March 30,
2011.
In addition, all holders of our common stock sold in the 2010
Private Placement and each of their respective direct and
indirect transferees may elect, pursuant to limited piggyback
rights set forth in the Registration Rights Agreement, to
participate in this offering in order to resell their shares,
subject to:
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compliance with the Registration Rights Agreement;
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cutback rights on the part of the underwriters, provided that
(i) we will be permitted to include shares comprising at
least 50% of the total securities in the initial public offering
proposed under the registration statement; (ii) the holders
of the registrable shares will be entitled to include shares
comprising at least 25% of the total securities in the initial
public offering proposed under the registration statement; and
(iii) existing holders of registrable securities under the
Amended and Restated Stockholders Agreement will be
entitled to include shares comprising at least 25% of the total
securities in the initial public offering proposed under the
registration statement; and
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other conditions and limitations that may be imposed by the
underwriters.
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The preceding summary of certain provisions of the Registration
Rights Agreement is not intended to be complete, and is subject
to, and qualified in its entirety by reference to, all of the
provisions of the Registration Rights Agreement and you should
read this summary together with the complete text of the
Registration Rights Agreement, which is filed as an exhibit to
the registration statement of which this prospectus is a part.
Rule 144
In general, under Rule 144 as currently in effect, a person
(or persons whose shares are aggregated) who is not deemed to
have been an affiliate of ours at any time during the three
months preceding a sale, and who has beneficially owned
restricted securities within the meaning of Rule 144 for a
least six months (including any period of consecutive ownership
of preceding non-affiliated holders) would be entitled to sell
those shares, subject only to the availability of current public
information about us. A non-affiliated person who has
beneficially owned restricted securities within the meaning of
Rule 144 for at least one year would be entitled to sell
those shares without regard to the provisions of Rule 144.
A person (or persons whose shares are aggregated) who is deemed
to be an affiliate of ours and who has beneficially owned
restricted securities within the meaning of Rule 144 for at
least six
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months would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of one percent
of the then outstanding shares of our common stock or the
average weekly trading volume of our common stock reported
through the NYSE during the four calendar weeks preceding the
filing of notice of the sale. Such sales are also subject to
certain manner of sale provisions, notice requirements and the
availability of current public information about us.
Rule 701
Employees, directors, officers, consultants or advisors who were
issued shares in connection with a compensatory stock or option
plan or other written compensatory agreement in accordance with
Rule 701 before the effective date of the registration
statement of which this prospectus is a part are entitled to
sell such shares 90 days after the effective date of the
registration statement of which this prospectus is a part in
reliance on Rule 144 without having to comply with the
holding period requirement of Rule 144 and, in the case of
non-affiliates, without having to comply with the public
information, volume limitation or notice filing provisions of
Rule 144. The SEC has indicated that Rule 701 will
apply to typical stock options granted by an issuer before it
becomes subject to the reporting requirements of the Exchange
Act, along with the shares acquired upon exercise of such
options, including exercises after the date of this prospectus.
Regulation S
Regulation S generally permits offers and sales of
securities to
non-U.S. persons
that occur outside the United States within the meaning of and
in accordance with regulation S under the Securities Act.
To qualify as a
non-U.S. person
under Regulation S, the proposed transferee must
(a) have his, her or its principal address outside the
United States, (b) be located outside the United States at
the time any offer to buy the shares was made to the proposed
transferee and at the time that the buy order was originated by
the proposed transferee, and (c) not be a
U.S. person (as defined in Rule 902(k)
under the Securities Act). In general, the shares we issued in
the 2010 Private Placement pursuant to Regulation S will be
freely tradable one year from the date on which they were issued.
Stock Issued
Under Employee Plans
We intend to file a registration statement on
Form S-8
under the Securities Act to register stock issuable under the
2010 Plan. This registration statement is expected to be filed
following the effective date of the registration statement of
which this prospectus is a part and will be effective upon
filing. Accordingly, shares registered under such registration
statement will be available for sale in the open market
following the effective date, unless such shares are subject to
vesting restrictions with us, Rule 144 restrictions
applicable to our affiliates, the Registration Rights Agreement
restrictions described above or the
lock-up
restrictions described above.
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CERTAIN U.S.
FEDERAL INCOME TAX CONSIDERATIONS FOR
NON-UNITED
STATES HOLDERS
The following is a general discussion of certain
U.S. federal income tax consequences of the ownership and
disposition of our common stock by a
non-U.S. holder.
As used in this discussion, the term
non-U.S. holder
means a beneficial owner of our common stock that is not, for
U.S. federal income tax purposes:
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an individual who is a citizen or resident of the United States;
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a corporation (including any entity treated as a corporation for
U.S. federal income tax purposes) created or organized in
or under the laws of the United States, any state thereof or the
District of Columbia;
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an estate whose income is subject to U.S. federal income
taxation regardless of its source; or
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a trust, if a court within the United States is able to exercise
primary supervision over the administration of the trust and one
or more United States persons (as defined under the Code) have
authority to control all substantial decisions of the trust, or
if it has a valid election in effect under applicable
U.S. Treasury Regulations to be treated as a United States
person.
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An individual may generally be treated as a resident of the
United States in any calendar year for U.S. federal income
tax purposes, by, among other ways, being present in the United
States for at least 31 days in that calendar year and for
an aggregate of at least 183 days during a three-year
period ending in the current calendar year. For purposes of the
183-day
calculation, all of the days present in the current year,
one-third of the days present in the immediately preceding year
and one-sixth of the days present in the second preceding year
are counted. Residents are taxed for U.S. federal income
tax purposes as if they were U.S. citizens.
This summary is based upon provisions of the Code, and Treasury
regulations, administrative rulings and judicial decisions, all
as of the date hereof. Those authorities may be changed, perhaps
retroactively, so as to result in U.S. federal income tax
consequences different from those summarized below. This summary
does not address all aspects of U.S. federal income
taxation and does not deal with U.S. federal estate tax
laws or foreign, state, local or other tax considerations that
may be relevant to
non-U.S. holders
in light of their personal circumstances. In addition, this
summary does not address tax considerations applicable to
investors that may be subject to special treatment under the
U.S. federal income tax laws, such as (without limitation):
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certain former U.S. citizens or residents;
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shareholders that hold our common stock as part of a straddle,
constructive sale transaction, synthetic security, hedge,
conversion transaction or other integrated investment or risk
reduction transaction;
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shareholders that acquired our common stock through the exercise
of employee stock options or otherwise as compensation or
through a tax-qualified retirement plan;
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shareholders that are partnerships or entities treated as
partnerships for U.S. federal income tax purposes or other
pass-through entities or owners thereof;
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financial institutions;
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insurance companies;
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tax-exempt entities;
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dealers in securities or foreign currencies; and
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traders in securities that use a
mark-to-market
method of accounting for U.S. federal income tax purposes.
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If a partnership (including an entity treated as a partnership
for U.S. federal income tax purposes) holds our common
stock, the tax treatment of a partner generally will depend upon
the status of the partner and the activities of the partnership.
If you are a partner of a partnership
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(including an entity treated as a partnership for
U.S. federal income tax purposes) holding our common stock,
you should consult your tax advisor.
Investors considering the purchase of common stock should
consult their tax advisors regarding the application of the
U.S. federal income tax laws to their particular situations
as well as any tax consequences arising under U.S. estate
tax laws and under the laws of any state, local or foreign
taxing jurisdiction or under any applicable tax treaty.
Distributions on
Common Stock
We do not expect to pay any cash distributions on our common
stock in the foreseeable future. However, in the event we do
make such cash distributions, these distributions generally will
constitute dividends for U.S. federal income tax purposes
to the extent paid from our current or accumulated earnings and
profits, as determined under U.S. federal income tax
principles. If any such distribution exceeds our current and
accumulated earnings and profits, the excess will be treated as
a non-taxable return of capital to the extent of the
non-U.S. holders
tax basis in our common stock and thereafter as capital gain
from the sale or exchange of such common stock. Please read
Gain on Disposition of Common Stock.
Dividends paid to a
non-U.S. holder
of our common stock that are not effectively connected with the
non-U.S. holders
conduct of a trade or business within the United States will be
subject to U.S. withholding tax at a 30% rate, or if an
income tax treaty applies, a lower rate specified by the treaty.
In order to receive a reduced treaty rate, a
non-U.S. holder
must provide to the withholding agent Internal Revenue Service,
or the IRS,
Form W-8BEN
(or applicable substitute or successor form) properly certifying
eligibility for the reduced rate.
Dividends that are effectively connected with a
non-U.S. holders
conduct of a trade or business in the United States and, if an
income tax treaty so requires, are attributable to a permanent
establishment maintained by the
non-U.S. holder
in the United States, are taxed on a net income basis at the
regular graduated rates and in the manner applicable to United
States persons (as defined under the Code). In that case, we
will not have to withhold U.S. federal withholding tax if
the
non-U.S. holder
complies with applicable certification and disclosure
requirements (which may generally be met by providing an IRS
Form W-8ECI).
In addition, a branch profits tax may be imposed at
a 30% rate, or a lower rate specified under an applicable income
tax treaty, on dividends received by a foreign corporation that
are effectively connected with its conduct of a trade or
business in the United States.
Gain on
Disposition of Common Stock
Subject to the discussion below regarding backup withholding, a
non-U.S. holder
generally will not be subject to U.S. federal income tax on
gain recognized on a disposition of our common stock unless:
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the gain is effectively connected with the
non-U.S. holders
conduct of a trade or business in the United States and, if
required by an applicable tax treaty, is attributable to a
permanent establishment maintained by the
non-U.S. holder
in the United States, in which case, the gain will be taxed on a
net income basis at the rates and in the manner applicable to
United States persons (as defined under the Code), and if the
non-U.S. holder
is a foreign corporation, the branch profits tax described above
may also apply;
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the
non-U.S. holder
is an individual who is present in the United States for
183 days or more in the taxable year of the disposition and
meets other requirements, in which case, the
non-U.S. holder
will be subject to a flat 30% tax on the gain derived from the
disposition, which may be offset by U.S. source capital
losses; or
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we are or have been a United States real property holding
corporation, or USRPHC, for U.S. federal income tax
purposes at any time during the shorter of the five-year period
ending on the date of disposition or the period that the
non-U.S. holder
held our common stock.
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Generally, a corporation is a USRPHC if the fair market value of
its United States real property interests equals or exceeds 50%
of the sum of the fair market value of its worldwide real
property
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interests and its other assets used or held for use in a trade
or business. We believe that we are not currently, and we do not
anticipate becoming in the future, a USRPHC for
U.S. federal income tax purposes. If we were to become a
USRPHC and our common stock were considered to be
regularly traded on an established securities market
for U.S. federal income tax purposes, the tax relating to
stock in a USRPHC generally would not apply to a
non-U.S. holder
whose actual and constructive stock holdings of our common stock
constituted 5% or less of our common stock at all times during
the applicable period described in the third bullet point above.
Information
Reporting and Backup Withholding Tax
Dividends paid to you will generally be subject to information
reporting and may be subject to U.S. backup withholding.
You will be exempt from backup withholding if you properly
provide a
Form W-8BEN
certifying under penalties of perjury that you are a
non-U.S. holder
or otherwise meet documentary evidence requirements for
establishing that you are a
non-U.S. holder,
or you otherwise establish an exemption. Copies of the
information returns reporting such dividends and the tax
withheld with respect to such dividends also may be made
available to the tax authorities in the country in which you
reside.
The gross proceeds from the disposition of our common stock may
be subject to information reporting and backup withholding. If
you receive payments of the proceeds of a disposition of our
common stock to or through a U.S. office of a broker, the
payment will be subject to both U.S. backup withholding and
information reporting unless you properly provide an IRS
Form W-8BEN
certifying under penalties of perjury that you are a
non-U.S. person
(and the payor does not have actual knowledge or reason to know
that you are a United States person, as defined under the Code)
or you otherwise establish an exemption. If you sell your common
stock outside the United States through a
non-U.S. office
of a
non-U.S. broker
and the sales proceeds are paid to you outside the United
States, then the U.S. backup withholding and information
reporting requirements generally will not apply to that payment.
However, U.S. information reporting, but not backup
withholding, will generally apply to a payment of sales
proceeds, even if that payment is made outside the United
States, if you sell your common stock through a
non-U.S. office
of a broker that has certain relationships with the
United States unless the broker has documentary evidence in
its files that you are a
non-U.S. person
and certain other conditions are met, or you otherwise establish
an exemption.
Backup withholding is not an additional tax. You may obtain a
refund or credit of any amounts withheld under the backup
withholding rules that exceed your U.S. federal income tax
liability, if any, provided the required information is timely
furnished to the IRS.
Additional
Withholding Requirements
Under recently-enacted legislation, the relevant withholding
agent may be required to withhold 30% of any dividends and the
proceeds of a sale or other disposition of our common stock paid
after December 31, 2012 to (i) a foreign financial
institution (as specifically defined under those rules) unless
such foreign financial institution agrees to verify, report and
disclose its U.S. account holders and meets certain other
requirements or (ii) a non-financial foreign entity that is
the beneficial owner of the payment unless such entity certifies
that it does not have any substantial United States owners or
provides the name, address and taxpayer identification number of
each substantial United States owner and such entity meets
certain other requirements.
THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION ONLY AND
SHOULD NOT BE VIEWED AS TAX ADVICE. INVESTORS CONSIDERING THE
PURCHASE OF OUR COMMON STOCK SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL
INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AND THE
APPLICABILITY AND EFFECT OF STATE, LOCAL, ESTATE OR FOREIGN TAX
LAWS AND TAX TREATIES.
108
UNDERWRITING
We, the selling stockholders and the underwriters named below
have entered into an underwriting agreement with respect to the
shares being offered. Subject to certain conditions, each
underwriter has severally agreed to purchase the number of
shares indicated in the following table. Goldman,
Sachs & Co., J.P. Morgan Securities LLC and
Citigroup Global Markets Inc. are the representatives of the
underwriters.
|
|
|
|
|
|
|
Number of
|
Underwriters
|
|
Shares
|
|
Goldman, Sachs & Co.
|
|
|
|
|
J.P. Morgan Securities LLC
|
|
|
|
|
Citigroup Global Markets Inc.
|
|
|
|
|
Wells Fargo Securities, LLC
|
|
|
|
|
Simmons & Company International
|
|
|
|
|
Tudor, Pickering, Holt & Co. Securities, Inc.
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
The underwriters are committed to take and pay for all of the
shares being offered, if any are taken, other than the shares
covered by the option described below unless and until this
option is exercised.
If the underwriters sell more shares than the total number set
forth in the table above, the underwriters have an option to buy
up to an
additional shares
from the selling stockholders. They may exercise that option for
30 days. If any shares are purchased pursuant to this
option, the underwriters will severally purchase shares in
approximately the same proportion as set forth in the table
above.
The following tables show the per share and total underwriting
discounts and commissions to be paid to the underwriters by us
and the selling stockholders. Such amounts are shown assuming
both no exercise and full exercise of the underwriters
option to purchase additional shares.
|
|
|
|
|
|
|
|
|
Paid by C&J
|
|
|
No Exercise
|
|
Full Exercise
|
|
Per Share
|
|
$
|
|
|
|
$
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Paid by the Selling Stockholders
|
|
|
No Exercise
|
|
Full Exercise
|
|
Per Share
|
|
$
|
|
|
|
$
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
Shares sold by the underwriters to the public will initially be
offered at the initial public offering price set forth on the
cover of this prospectus. Any shares sold by the underwriters to
securities dealers may be sold at a discount of up to
$ per share from the initial
public offering price. If all the shares are not sold at the
initial public offering price, the representatives may change
the offering price and the other selling terms. The offering of
the shares by the underwriters is subject to receipt and
acceptance and subject to the underwriters right to reject
any order in whole or in part.
We and our officers and directors, our Sponsors and the other
selling stockholders have agreed with the underwriters, subject
to certain exceptions, including an exception for sales of
common stock to satisfy tax withholding and other obligations in
connection with the exercise of options issued under the 2006
Plan, not to dispose of or hedge any of their common stock or
securities convertible into or exchangeable for shares of common
stock during the period from the date of this prospectus
continuing through the date 180 days after the date of this
prospectus, except with the prior written
109
consent of Goldman, Sachs & Co. and J.P. Morgan Securities
LLC. This agreement does not apply to the issuance by us of
stock or other awards pursuant to existing employee benefit
plans. Please read Shares Eligible for Future
Sale beginning on page 103 of this prospectus for a
discussion of certain transfer restrictions.
The 180-day
restricted period described in the preceding paragraph will be
automatically extended if: (1) during the last 17 days
of the
180-day
restricted period we issue an earnings release or announce
material news or a material event; or (2) prior to the
expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
15-day
period following the last day of the
180-day
restricted period, in which case the restrictions described in
the preceding paragraph will continue to apply until the
expiration of the
18-day
period beginning on the issuance of the earnings release of the
announcement of the material news or material event.
Prior to this offering, there has been no public market for the
shares. The initial public offering price has been negotiated
among us, the selling stockholders and the representatives.
Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing
market conditions, will be our historical performance, estimates
of our business potential and our earnings prospects, an
assessment of our management and the consideration of these
factors in relation to market valuation of companies in related
businesses.
An application has been made to list the common stock on the
NYSE under the symbol CJES. In order to meet one of
the requirements for listing the common stock on the NYSE, the
underwriters have undertaken to sell lots of 100 or more shares
to a minimum of 400 beneficial holders.
In connection with the offering, the underwriters may purchase
and sell shares of common stock in the open market. These
transactions may include short sales, stabilizing transactions
and purchases to cover positions created by short sales. Short
sales involve the sale by the underwriters of a greater number
of shares than they are required to purchase in this offering.
Covered short sales are sales made in an amount not
greater than the underwriters option to purchase
additional shares in this offering. The underwriters may close
out any covered short position by either exercising their option
to purchase additional shares or purchasing shares in the open
market. In determining the source of shares to close out the
covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase
additional shares pursuant to the option granted to them.
Naked short sales are any sales in excess of such
option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position
is more likely to be created if the underwriters are concerned
that there may be downward pressure on the price of the common
stock in the open market after pricing that could adversely
affect investors who purchase in the offering. Stabilizing
transactions consist of various bids for or purchases of common
stock made by the underwriters in the open market prior to the
completion of the offering.
The underwriters may also impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased shares sold by or for the
account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing
transactions, as well as other purchases by the underwriters for
their own accounts, may have the effect of preventing or
retarding a decline in the market price of the companys
stock, and together with the imposition of the penalty bid, may
stabilize, maintain or otherwise affect the market price of the
common stock. As a result, the price of the common stock may be
higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be
discontinued at any time. These transactions may be effected on
the NYSE, in the
over-the-counter
market or otherwise.
At our request, the underwriters have reserved up
to % of the shares of common stock
being sold in this offering for sale to certain of our officers,
directors, employees and consultants and
110
other persons having a relationship with us at the initial
public offering price through a directed share program. The
number of shares available for sale to the general public in
this offering will be reduced to the extent that these reserved
shares are purchased by participants in the program. Any
reserved shares not purchased by these persons will be offered
by the underwriters to the general public on the same basis as
the other shares in this offering. We have agreed to indemnify
the underwriters against certain liabilities and expenses,
including liabilities under the Securities Act, in connection
with the sales of the directed shares.
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive, which we refer
to herein as a Relevant Member State, each underwriter has
represented and agreed that with effect from and including the
date on which the Prospectus Directive is implemented in that
Relevant Member State, or the Relevant Implementation Date, it
has not made and will not make an offer of shares to the public
in that Relevant Member State prior to the publication of a
prospectus in relation to the shares which has been approved by
the competent authority in that Relevant Member State or, where
appropriate, approved in another Relevant Member State and
notified to the competent authority in that Relevant Member
State, all in accordance with the Prospectus Directive, except
that it may, with effect from and including the Relevant
Implementation Date, make an offer of shares to the public in
that Relevant Member State at any time:
(a) to legal entities which are authorised or regulated to
operate in the financial markets or, if not so authorised or
regulated, whose corporate purpose is solely to invest in
securities;
(b) to any legal entity which has two or more of
(1) an average of at least 250 employees during the
last financial year; (2) a total balance sheet of more than
43,000,000 and (3) an annual net turnover of more
than 50,000,000, as shown in its last annual or
consolidated accounts;
(c) to fewer than 100 natural or legal persons (other than
qualified investors as defined in the Prospectus Directive)
subject to obtaining the prior consent of the representatives
for any such offer; or
(d) in any other circumstances which do not require the
publication by us of a prospectus pursuant to Article 3 of
the Prospectus Directive.
For the purposes of this provision, the expression an
offer of shares to the public in relation to any
shares in any Relevant Member State means the communication in
any form and by any means of sufficient information on the terms
of the offer and the shares to be offered so as to enable an
investor to decide to purchase or subscribe the shares, as the
same may be varied in that Relevant Member State by any measure
implementing the Prospectus Directive in that Relevant Member
State and the expression Prospectus Directive means Directive
2003/71/EC and includes any relevant implementing measure in
each Relevant Member State.
Each underwriter has represented and agreed that:
(a) it has only communicated or caused to be communicated
and will only communicate or cause to be communicated an
invitation or inducement to engage in investment activity
(within the meaning of Section 21 of the FSMA) received by
it in connection with the issue or sale of the shares in
circumstances in which Section 21(1) of the FSMA does not
apply to us; and
(b) it has complied and will comply with all applicable
provisions of the FSMA with respect to anything done by it in
relation to the shares in, from or otherwise involving the
United Kingdom.
The shares may not be offered or sold by means of any document
other than (i) in circumstances which do not constitute an
offer to the public within the meaning of the Companies
Ordinance (Cap.32, Laws of Hong Kong), or (ii) to
professional investors within the meaning of the
Securities and Futures Ordinance (Cap.571, Laws of Hong Kong)
and any rules made thereunder, or
111
(iii) in other circumstances which do not result in the
document being a prospectus within the meaning of
the Companies Ordinance (Cap.32, Laws of Hong Kong), and no
advertisement, invitation or document relating to the shares may
be issued or may be in the possession of any person for the
purpose of issue (in each case whether in Hong Kong or
elsewhere), which is directed at, or the contents of which are
likely to be accessed or read by, the public in Hong Kong
(except if permitted to do so under the laws of Hong Kong) other
than with respect to shares which are or are intended to be
disposed of only to persons outside Hong Kong or only to
professional investors within the meaning of the
Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong)
and any rules made thereunder.
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation for subscription or purchase, of the
shares may not be circulated or distributed, nor may the shares
be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to
persons in Singapore other than (i) to an institutional
investor under Section 274 of the Securities and Futures
Act, Chapter 289 of Singapore, or the SFA, (ii) to a
relevant person, or any person pursuant to Section 275(1A),
and in accordance with the conditions specified in
Section 275 of the SFA or (iii) otherwise pursuant to,
and in accordance with the conditions of, any other applicable
provision of the SFA.
Where the shares are subscribed or purchased under
Section 275 by a relevant person which is: (a) a
corporation (which is not an accredited investor) the sole
business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of
whom is an accredited investor; or (b) a trust (where the
trustee is not an accredited investor) whose sole purpose is to
hold investments and each beneficiary is an accredited investor,
shares, debentures and units of shares and debentures of that
corporation or the beneficiaries rights and interest in
that trust shall not be transferable for 6 months after
that corporation or that trust has acquired the shares under
Section 275 except: (1) to an institutional investor
under Section 274 of the SFA or to a relevant person, or
any person pursuant to Section 275(1A), and in accordance
with the conditions specified in Section 275 of the SFA;
(2) where no consideration is given for the transfer; or
(3) by operation of law.
The securities have not been and will not be registered under
the Financial Instruments and Exchange Law of Japan (the
Financial Instruments and Exchange Law) and each underwriter has
agreed that it will not offer or sell any securities, directly
or indirectly, in Japan or to, or for the benefit of, any
resident of Japan (which term as used herein means any person
resident in Japan, including any corporation or other entity
organized under the laws of Japan), or to others for reoffering
or resale, directly or indirectly, in Japan or to a resident of
Japan, except pursuant to an exemption from the registration
requirements of, and otherwise in compliance with, the Financial
Instruments and Exchange Law and any other applicable laws,
regulations and ministerial guidelines of Japan.
The underwriters do not expect sales to discretionary accounts
to exceed five percent of the total number of shares offered.
We estimate that our share of the total expenses of the
offering, excluding underwriting discounts and commissions, will
be approximately $ .
We, our subsidiary and the selling stockholders have agreed to
indemnify the several underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as
amended.
Conflicts of
Interest
The underwriters and their respective affiliates are full
service financial institutions engaged in various activities,
which may include securities trading, commercial and investment
banking, financial advisory, investment management, investment
research, principal investment, hedging, financing and brokerage
activities. Certain of the underwriters and their respective
affiliates have, from time to time, performed, and may in the
future perform, various financial advisory and investment
banking services
112
for us, for which they received or will receive customary fees
and expenses. Affiliates of certain of the underwriters are
lenders under our credit facility and, accordingly, will receive
a portion of the proceeds of this offering. Additionally, an
affiliate of Wells Fargo Securities, LLC is acting as
Documentation Agent under our credit facility.
In the ordinary course of their various business activities, the
underwriters and their respective affiliates may make or hold a
broad array of investments and actively trade debt and equity
securities (or related derivative securities) and financial
instruments (including bank loans) for their own account and for
the accounts of their customers, and such investment and
securities activities may involve our securities
and/or
instruments. The underwriters and their respective affiliates
may also make investment recommendations
and/or
publish or express independent research views in respect of such
securities or instruments and may at any time hold, or recommend
to clients that they acquire, long
and/or short
positions in such securities and instruments.
Because an affiliate
of
will receive more than 5% of the net proceeds of this offering,
it may be deemed to have a conflict of interest with
us under Rule 5121 of the Financial Industry Regulatory
Authority (FINRA). When a FINRA member with a
conflict of interest participates in a public offering, that
rule requires (subject to certain exceptions that are not
applicable here) that the initial public offering price may be
no higher than that recommended by a qualified independent
underwriter, as defined in Rule 5121 of FINRA. In
accordance with this
rule,
has assumed the responsibilities of acting as a qualified
independent underwriter. In its role as a qualified independent
underwriter, has performed a due diligence investigation and
participated in the preparation of this prospectus and the
registration statement of which this prospectus is a
part.
will not receive any additional fees for serving as qualified
independent underwriter in connection with this offering. We
have agreed to
indemnify
against liabilities incurred in connection with acting as a
qualified independent underwriter, including liabilities under
the Securities Act.
Advisory
Services
FBR Capital Markets & Co., or FBR, provided financial
advisory services to us in connection with our transition from a
private company to a publicly held corporation. We paid FBR a
$1,000,000 fee for such services.
113
LEGAL
MATTERS
The validity of the shares of our common stock offered by this
prospectus will be passed upon for us by Vinson &
Elkins L.L.P., Houston, Texas. Certain legal matters in
connection with this offering will be passed upon for the
underwriters by Baker Botts L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements of C&J Energy
Services, Inc. as of December 31, 2010 and 2009, and the
related consolidated statements of operations, changes in
shareholders equity and cash flows for each of the three
years in the period ended December 31, 2010 included in
this prospectus have been audited by UHY LLP, or UHY,
independent registered public accounting firm, as stated in
their report appearing herein, and are included herein in
reliance on the authority of that firm as experts in accounting
and auditing.
CHANGE IN
ACCOUNTANTS
Our financial statements for the years ended December 31,
2008 and 2009 were audited by Flackman Goodman &
Potter, P.A., or Flackman, an independent public accounting
firm. At the time that Flackman performed audit services for us,
we were not a public company and were not subject to SEC
regulations, including the requirement for our auditors to be a
PCAOB registered accounting firm. In preparation for this
offering, on December 17, 2010, we released Flackman and
engaged UHY, an independent PCAOB registered public accounting
firm, to audit our financial statements as of and for the year
ended December 31, 2010 and to re-audit our financial
statements as of December 31, 2009 and for the years ended
December 31, 2008 and 2009. These financial statements,
including UHYs audit report thereon, are included in this
prospectus and in the registration statement. The engagement of
UHY was approved by our board of directors.
Neither of Flackmans reports on the financial statements
for the years ended December 31, 2008 and 2009 contained an
adverse opinion or disclaimer of opinion, or was qualified or
modified as to uncertainty, audit scope, or accounting
principles. During such time period, there were no disagreements
between us and Flackman on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope
or procedure.
We have provided Flackman with a copy of the disclosure
contained in the registration statement of which this prospectus
is a part, which was received by Flackman on March 30, 2011.
Flackman has furnished a letter addressed to the SEC and filed
as an exhibit to our registration statement stating its
agreement with the statements made in the registration statement
of which this prospectus is a part.
WHERE YOU CAN
FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1
(including the exhibits, schedules and amendments thereto) under
the Securities Act, with respect to the shares of our common
stock offered by this prospectus. This prospectus does not
contain all of the information set forth in the registration
statement and the exhibits and schedules thereto. For further
information with respect to us and the common stock offered
hereby, we refer you to the registration statement and the
exhibits and schedules filed therewith. Statements contained in
this prospectus as to the contents of any contract, agreement or
any other document are summaries of the material terms of that
contract, agreement or other document. With respect to each of
these contracts, agreements or other documents filed as an
exhibit to the registration statement, reference is made to the
exhibits for a more complete description of the matter involved.
A copy of the registration statement, and the exhibits and
schedules thereto, may be inspected without charge at the public
reference facilities maintained by the SEC at
100 F Street NE, Washington, D.C. 20549. Copies
of these materials may
114
be obtained, upon payment of a duplicating fee, from the Public
Reference Section of the SEC at 100 F Street NE,
Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330
for further information on the operation of the public reference
facility. The SEC maintains a website that contains reports,
proxy and information statements and other information regarding
registrants that file electronically with the SEC, including us.
The address of the SECs website is
http://www.sec.gov.
After we have completed this offering, we will file annual,
quarterly and current reports, proxy statements and other
information with the SEC. We maintain a website
at and
we expect to make our periodic reports and other information
filed with or furnished to the SEC available, free of charge,
through our website, as soon as reasonably practicable after
those reports and other information are electronically filed
with or furnished to the SEC. Information on our website or any
other website is not incorporated by reference into this
prospectus and does not constitute a part of this prospectus.
You may read and copy any reports, statements or other
information on file at the public reference rooms. You can also
request copies of these documents, for a copying fee, by writing
to the SEC, or you can review these documents on the SECs
website, as described above. In addition, we will provide
electronic or paper copies of our filings free of charge upon
request.
115
To the Board of Directors and Shareholders of
C&J Energy Services, Inc.
We have audited the accompanying consolidated balance sheets of
C&J Energy Services, Inc. and Subsidiary (collectively, the
Company) as of December 31, 2010 and 2009, and
the related consolidated statements of operations, changes in
shareholders equity and cash flows for each of the three
years in the period ended December 31, 2010. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of C&J Energy Services,
Inc. and Subsidiary as of December 31, 2010 and 2009, and
the consolidated results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2010, in conformity with accounting principles
generally accepted in the United States of America.
Houston, Texas
February 15, 2011
F-2
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,816,734
|
|
|
$
|
1,178,275
|
|
Accounts receivable, net of allowance for doubtful accounts of
$509,717 and $311,324, respectively
|
|
|
44,354,381
|
|
|
|
12,668,069
|
|
Inventories, net
|
|
|
8,181,903
|
|
|
|
2,462,935
|
|
Prepaid expenses and other current assets
|
|
|
3,767,614
|
|
|
|
347,206
|
|
Deferred tax assets
|
|
|
265,000
|
|
|
|
167,000
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS
|
|
|
59,385,632
|
|
|
|
16,823,485
|
|
PROPERTY, PLANT AND EQUIPMENT, net
|
|
|
88,395,494
|
|
|
|
65,404,436
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
60,338,653
|
|
|
|
60,338,653
|
|
Intangible assets, net of accumulated amortization of $4,498,183
and $3,429,308
|
|
|
5,767,817
|
|
|
|
6,836,692
|
|
Deposits on equipment under construction
|
|
|
8,413,009
|
|
|
|
578,205
|
|
Deferred financing costs, net of accumulated amortization of
$505,560 and $1,010,591, respectively
|
|
|
3,190,215
|
|
|
|
241,286
|
|
Other
|
|
|
597,571
|
|
|
|
8,479
|
|
|
|
|
|
|
|
|
|
|
TOTAL OTHER ASSETS
|
|
|
78,307,265
|
|
|
|
68,003,315
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
226,088,391
|
|
|
$
|
150,231,236
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
13,084,316
|
|
|
$
|
10,598,159
|
|
Revolving credit facility
|
|
|
|
|
|
|
4,125,000
|
|
Current portion of long-term debt and capital leases
|
|
|
27,222,222
|
|
|
|
2,540,697
|
|
Accrued expenses
|
|
|
8,179,351
|
|
|
|
1,470,859
|
|
Accrued taxes
|
|
|
6,525,100
|
|
|
|
271,000
|
|
Warrants
|
|
|
|
|
|
|
335,967
|
|
Deferred revenue
|
|
|
4,033,000
|
|
|
|
33,000
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
59,043,989
|
|
|
|
19,374,682
|
|
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
|
|
|
44,816,961
|
|
|
|
60,668,298
|
|
LONG-TERM DEFERRED REVENUE
|
|
|
723,250
|
|
|
|
756,250
|
|
DEFERRED TAX LIABILITIES
|
|
|
12,058,000
|
|
|
|
3,633,000
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
116,642,200
|
|
|
|
84,432,230
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Common stock, par value of $.01, 100,000,000 shares
authorized, 47,499,074 and 46,322,850 issued and outstanding,
respectively
|
|
|
474,991
|
|
|
|
463,229
|
|
Additional paid-in capital
|
|
|
78,288,578
|
|
|
|
66,925,222
|
|
Retained earnings (accumulated deficit)
|
|
|
30,682,622
|
|
|
|
(1,589,445
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY
|
|
|
109,446,191
|
|
|
|
65,799,006
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
226,088,391
|
|
|
$
|
150,231,236
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
REVENUE
|
|
$
|
244,157,215
|
|
|
$
|
67,029,969
|
|
|
$
|
62,441,238
|
|
COST OF SALES
|
|
|
154,297,372
|
|
|
|
54,241,544
|
|
|
|
42,401,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
89,859,843
|
|
|
|
12,788,425
|
|
|
|
20,040,049
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
17,998,125
|
|
|
|
9,533,223
|
|
|
|
8,949,638
|
|
LOSS ON SALE/DISPOSAL OF ASSETS
|
|
|
1,571,033
|
|
|
|
920,078
|
|
|
|
397,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
70,290,685
|
|
|
|
2,335,124
|
|
|
|
10,693,173
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
8,841
|
|
|
|
3,661
|
|
|
|
4,890
|
|
Interest expense
|
|
|
(17,349,346
|
)
|
|
|
(4,712,077
|
)
|
|
|
(6,913,606
|
)
|
Lender fees
|
|
|
(322,205
|
)
|
|
|
(390,664
|
)
|
|
|
(510,733
|
)
|
Other income
|
|
|
162,661
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
(149,659
|
)
|
|
|
(51,923
|
)
|
|
|
(67,693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL OTHER EXPENSE
|
|
|
(17,649,708
|
)
|
|
|
(5,151,003
|
)
|
|
|
(7,487,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
52,640,977
|
|
|
|
(2,815,879
|
)
|
|
|
3,206,031
|
|
PROVISION (BENEFIT) FOR INCOME TAXES
|
|
|
20,368,910
|
|
|
|
(386,000
|
)
|
|
|
2,085,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
32,272,067
|
|
|
$
|
(2,429,879
|
)
|
|
$
|
1,121,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.70
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.02
|
|
Diluted
|
|
$
|
0.67
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.02
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
46,351,853
|
|
|
|
46,322,850
|
|
|
|
46,322,850
|
|
Diluted
|
|
|
47,850,728
|
|
|
|
46,322,850
|
|
|
|
46,603,816
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Earnings
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
(Accumulated
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit)
|
|
|
Equity
|
|
|
Balance at January 1, 2008
|
|
|
46,322,850
|
|
|
$
|
463,229
|
|
|
$
|
66,614,044
|
|
|
$
|
(280,571
|
)
|
|
$
|
66,796,702
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
181,727
|
|
|
|
|
|
|
|
181,727
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,121,005
|
|
|
|
1,121,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
46,322,850
|
|
|
|
463,229
|
|
|
|
66,795,771
|
|
|
|
840,434
|
|
|
|
68,099,434
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
129,451
|
|
|
|
|
|
|
|
129,451
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,429,879
|
)
|
|
|
(2,429,879
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
46,322,850
|
|
|
|
463,229
|
|
|
|
66,925,222
|
|
|
|
(1,589,445
|
)
|
|
|
65,799,006
|
|
Exercise of warrants
|
|
|
1,176,224
|
|
|
|
11,762
|
|
|
|
10,728,943
|
|
|
|
|
|
|
|
10,740,705
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
634,413
|
|
|
|
|
|
|
|
634,413
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,272,067
|
|
|
|
32,272,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
47,499,074
|
|
|
$
|
474,991
|
|
|
$
|
78,288,578
|
|
|
$
|
30,682,622
|
|
|
$
|
109,446,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
32,272,067
|
|
|
$
|
(2,429,879
|
)
|
|
$
|
1,121,005
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
9,675,130
|
|
|
|
8,758,915
|
|
|
|
7,647,812
|
|
Amortization expense
|
|
|
1,068,875
|
|
|
|
1,068,875
|
|
|
|
1,188,227
|
|
Provision for doubtful accounts receivable, net of write-offs
|
|
|
504,245
|
|
|
|
200,000
|
|
|
|
145,000
|
|
Share-based compensation expense
|
|
|
634,413
|
|
|
|
129,451
|
|
|
|
181,727
|
|
Loss on change in fair value of warrant liability
|
|
|
10,403,058
|
|
|
|
335,967
|
|
|
|
|
|
Deferred income taxes
|
|
|
8,327,000
|
|
|
|
(624,000
|
)
|
|
|
1,689,000
|
|
Loss on sale/disposal of assets
|
|
|
1,571,033
|
|
|
|
920,078
|
|
|
|
397,238
|
|
Non cash paid in kind interest expense
|
|
|
277,564
|
|
|
|
293,298
|
|
|
|
|
|
Amortization of deferred financing costs
|
|
|
746,846
|
|
|
|
319,344
|
|
|
|
319,344
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(32,190,557
|
)
|
|
|
494,371
|
|
|
|
(9,098,455
|
)
|
Inventories
|
|
|
(5,718,968
|
)
|
|
|
(1,602,368
|
)
|
|
|
(279,275
|
)
|
Prepaid expenses and other current assets
|
|
|
(1,707,584
|
)
|
|
|
164,632
|
|
|
|
(437,419
|
)
|
Accounts payable
|
|
|
2,486,157
|
|
|
|
4,078,869
|
|
|
|
4,814,744
|
|
Accrued liabilities
|
|
|
6,708,492
|
|
|
|
73,080
|
|
|
|
645,228
|
|
Accrued taxes
|
|
|
6,254,100
|
|
|
|
(125,000
|
)
|
|
|
284,874
|
|
Deferred revenue
|
|
|
4,000,000
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(589,092
|
)
|
|
|
|
|
|
|
(8,479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
44,722,779
|
|
|
|
12,055,633
|
|
|
|
8,610,571
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of and deposits on property, plant and equipment
|
|
|
(44,472,780
|
)
|
|
|
(4,300,897
|
)
|
|
|
(21,526,076
|
)
|
Proceeds from MEDCO Incentive
|
|
|
|
|
|
|
|
|
|
|
819,500
|
|
Proceeds from sale/disposal of property, plant and equipment
|
|
|
654,931
|
|
|
|
47,292
|
|
|
|
33,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(43,817,849
|
)
|
|
|
(4,253,605
|
)
|
|
|
(20,672,736
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings (repayment) of revolving credit facilities, net
|
|
|
(34,500,000
|
)
|
|
|
(6,150,000
|
)
|
|
|
17,000,000
|
|
Proceeds from long-term debt
|
|
|
75,887,850
|
|
|
|
2,000,000
|
|
|
|
|
|
Repayments of long-term debt
|
|
|
(36,919,529
|
)
|
|
|
(2,500,000
|
)
|
|
|
(5,000,000
|
)
|
Repayments of capital lease obligations
|
|
|
(40,697
|
)
|
|
|
(82,873
|
)
|
|
|
(78,742
|
)
|
Financing costs
|
|
|
(3,695,775
|
)
|
|
|
|
|
|
|
|
|
Proceeds from exercise of warrants
|
|
|
1,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
|
|
733,529
|
|
|
|
(6,732,873
|
)
|
|
|
11,921,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
1,638,459
|
|
|
|
1,069,155
|
|
|
|
(140,907
|
)
|
CASH AND CASH EQUIVALENTS, beginning of year
|
|
|
1,178,275
|
|
|
|
109,120
|
|
|
|
250,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of year
|
|
$
|
2,816,734
|
|
|
$
|
1,178,275
|
|
|
$
|
109,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
5,795,578
|
|
|
$
|
4,094,823
|
|
|
$
|
6,168,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes (net of refunds received)
|
|
$
|
5,747,710
|
|
|
$
|
395,929
|
|
|
$
|
111,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
|
|
Note 1
|
Nature of
Business and Summary of Significant Accounting
Policies
|
Organization of
Business: C&J Energy Services, Inc.
(the Company) was incorporated in Texas in 2006 and
re-incorporated in Delaware in 2010. The Company provides
specialty equipment services for oil and natural gas exploration
and production companies in the Texas, Louisiana, and Oklahoma
regions of the United States of America.
The nature of operations and the regions in which the Company
operate are subject to changing economic, regulatory and
political conditions. The Company is vulnerable to near-term and
long-term changes in the demand for and prices of oil and
natural gas and the related demand for oilfield service
operations.
Use of Estimates: The
preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Estimates are used
for, but are not limited to, determining the following:
allowance for doubtful accounts, recoverability of long-lived
assets and intangibles, useful lives used in depreciation and
amortization, income taxes and valuation allowances. The
accounting estimates used in the preparation of the consolidated
financial statements may change as new events occur, as more
experience is acquired, as additional information is obtained
and as the Companys operating environment changes.
Basis of Presentation: The
Company presents its financial statements in accordance with
generally accepted accounting principles in the United States.
Principles of Consolidation: The
consolidated financial statements include the accounts of
C&J Energy Services, Inc. and its wholly-owned subsidiary,
C&J Spec-Rent Services, Inc. (the Subsidiary).
All significant inter-company transactions and accounts have
been eliminated upon consolidation.
Cash and Cash Equivalents: For
purposes of the statement of cash flows, cash is defined as cash
on-hand and balances in operating bank accounts, amounts due
from depository institutions, interest-bearing deposits in other
banks, and money market accounts. The Company considers all
highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
Accounts Receivable and Allowance for Doubtful
Accounts: Accounts receivable are stated
at the amount billed to customers and are ordinarily due upon
receipt. The Company provides an allowance for doubtful
accounts, which is based upon a review of outstanding
receivables, historical collection information and existing
economic conditions. Provisions for doubtful accounts are
recorded when it becomes evident that the customer will not make
the required payments at either contractual due dates or in the
future. At December 31, 2010 and 2009, the allowance for
doubtful accounts totaled $509,717 and $311,324, respectively.
Bad debt expense was $504,245, $200,000 and $145,000 for the
years ended December 31, 2010, 2009 and 2008, respectively.
Inventories: Inventories,
consisting of spare parts to be used in maintaining equipment
and general supplies and materials for the Companys
operations, are stated at the lower of cost
(first-in,
first-out basis) or market (net realizable value). Appropriate
consideration is given to deterioration, obsolescence and other
factors in evaluating net realizable value. At December 31,
2010 and 2009, the inventory reserve totaled $37,318.
F-7
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Property, Plant and
Equipment: Property, plant and equipment
is recorded at cost less accumulated depreciation. Certain
equipment held under capital leases are classified as equipment
and the related obligations are recorded as liabilities.
Maintenance and repairs, which do not improve or extend the life
of the related assets, are charged to operations when incurred.
Refurbishments and renewals are capitalized when the value of
the equipment is enhanced for an extended period. When property
and equipment are sold or otherwise disposed of, the asset
account and related accumulated depreciation account are
relieved, and any gain or loss is included in operating income.
The cost of property and equipment currently in service is
depreciated over the estimated useful lives of the related
assets, which range from five to twenty-five years. Depreciation
is computed on a straight-line basis for financial reporting
purposes. Capital leases are amortized using the straight-line
method over the estimated useful lives of the assets and lease
amortization is included in depreciation expense. Depreciation
expense charged to operations was $9,675,130, $8,758,915 and
$7,647,812 for the years ended December 31, 2010, 2009 and
2008, respectively.
Goodwill, Intangible Assets and
Amortization: Goodwill and other
intangible assets with infinite lives are not amortized, but
tested for impairment annually or more frequently if
circumstances indicate that impairment may exist. Intangible
assets with finite useful lives are amortized either on a
straight-line basis over the assets estimated useful life
or on a basis that reflects the pattern in which the economic
benefits of the intangible assets are realized.
The impairment test requires the allocation of goodwill and all
other assets and liabilities to reporting units. The Company has
one reporting unit and performs impairment tests on the carrying
value of goodwill at least annually. The Companys annual
impairment tests involve the use of different valuation
techniques, including a combination of the income and market
approach, to determine the fair value of the reporting unit.
Determining the fair value of a reporting unit is a matter of
judgment and often involves the use of significant estimates and
assumptions. If the fair value of the reporting unit is less
than its carrying value, an impairment loss is recorded to the
extent that the implied fair value of the reporting units
goodwill is less than its carrying value. For the years ended
December 31, 2010, 2009 and 2008, no impairment write-down
was deemed necessary. Significant and unanticipated changes to
these assumptions could require an additional provision for
impairment in a future period.
Deferred Financing Costs: Costs
incurred to obtain financing are capitalized and amortized on a
straight-line basis over the term of the loan, which
approximates the effective interest method. These costs are
classified within interest expense on the accompanying
consolidated statements of operations and approximated $746,846,
$319,344 and $319,344 for the years ended December 31,
2010, 2009 and 2008, respectively. Estimated future amortization
expense relating to deferred financing costs is as follows:
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
2011
|
|
$
|
1,165,208
|
|
2012
|
|
|
1,165,208
|
|
2013
|
|
|
859,799
|
|
|
|
|
|
|
|
|
$
|
3,190,215
|
|
|
|
|
|
|
Impairment of Long-Lived
Assets: Long-lived assets, which include
property, plant and equipment, are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. An impairment loss is
recorded in the period in which it is determined that the
carrying amount is not recoverable. The determination of
recoverability is made
F-8
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
based upon the estimated undiscounted future net cash flows,
excluding interest expense. The impairment loss is determined by
comparing the fair value, as determined by a discounted cash
flow analysis, with the carrying value of the related assets.
For the years ended December 31, 2010, 2009 and 2008, no
impairment write-down was deemed necessary.
Revenue Recognition: All revenue
is recognized when persuasive evidence of an arrangement exists,
the service is complete, the amount is fixed or determinable and
collectability is reasonably assured, as follows:
Hydraulic Fracturing Revenue. The Company
enters into arrangements with its customers to provide hydraulic
fracturing services, which can be either on a spot market basis
or under term contracts. The Company only enters into
arrangements with customers for which collectability is
reasonably assured. Revenue is recognized and customers are
invoiced upon the completion of each job, which can consist of
one or numerous fracturing stages. Once the job has been
completed to the satisfaction of the customer, a field ticket is
written that includes charges for the service performed and the
chemicals and proppants consumed during the course of the
service. The field ticket will also include charges for the
mobilization of the equipment to location, additional equipment
used on the job, if any, and other miscellaneous consumables.
Rates for services performed on a spot market basis are based on
the
agreed-upon
hourly spot market rate. With respect to services performed
under term contracts, customers are invoiced a monthly mandatory
payment based on a specified minimum number of hours of service
per month as defined in the contract, upon the earlier of the
passage of time or completion of the job. To the extent
customers utilize more than the contracted minimum number of
hours of service per month, they are invoiced for the excess at
rates defined in the contract upon the completion of each job.
Coiled Tubing and Pressure Pumping
Revenue. The Company enters into arrangements to
provide coiled tubing and pressure pumping services to only
those customers for which collectability is reasonably assured.
These arrangements are typically short-term in nature and each
job can last anywhere from a few hours to multiple days. Coiled
tubing and pressure pumping revenue is recognized upon
completion of each days work based upon a completed field
ticket. The field ticket includes charges for the mobilization
of the equipment to location, the service performed, the
personnel on the job, additional equipment used on the job, if
any, and miscellaneous consumables used throughout the course of
the service. The Company typically charges the customer on an
hourly basis for these services at agreed upon spot market rates.
Materials Consumed While Performing
Services. The Company generates revenue from
chemicals and proppants that are necessarily consumed while
performing hydraulic fracturing services. The Company charges
fees to its customers based on the amount of chemicals and
proppants used in providing these services. In addition,
ancillary to coiled tubing and pressure pumping revenue, the
Company generates revenue from various fluids and supplies that
are necessarily consumed during those processes. The Company
does not sell or otherwise charge a fee separate and apart from
the services it provides for any of the materials consumed while
performing hydraulic fracturing services or coiled tubing and
pressure pumping services.
Share-Based Compensation: The
Company accounts for share-based compensation cost based on the
fair value at grant date by utilizing a Black-Scholes
option-pricing model. The Company recognizes share-based
compensation cost on a straight-line basis over the requisite
service period. Further information regarding share-based
compensation can be found in Note 9, Share-Based
Compensation.
Income Taxes: Income taxes are
provided for the tax effects of transactions reported in
financial statements and consist of taxes currently due plus
deferred taxes. Deferred tax assets and
F-9
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 rates is recognized in income in the period that
includes the enactment date. Deferred income tax expense
represents the change during the period in the deferred tax
assets and deferred tax liabilities.
The components of the deferred tax assets and liabilities are
individually classified as current and non-current based on
their characteristics. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is
more likely than not that some portion or all of the deferred
tax assets will not be realized.
Effective January 1, 2009, the Company adopted guidance
issued by the Financial Accounting Standards Board
(FASB) in accounting for uncertainty in income
taxes. This guidance clarifies the accounting for income taxes
by prescribing the minimum recognition threshold an income tax
position is required to meet before being recognized in the
financial statements and applies to all income tax positions.
Each income tax position is assessed using a two step process. A
determination is first made as to whether it is more likely than
not that the income tax position will be sustained, based upon
technical merits, upon examination by the taxing authorities. If
the income tax position is expected to meet the more likely than
not criteria, the benefit recorded in the financial statements
equals the largest amount that is greater than 50% likely to be
realized upon its ultimate settlement. The Company did not
recognize any uncertain tax positions upon adoption of the
guidance and had no uncertain tax positions as of
December 31, 2010 and 2009. Management believes there are
no tax positions taken or expected to be taken in the next
twelve months that would significantly change the Companys
unrecognized tax benefits.
The Company will record income tax related interest and
penalties, if applicable, as a component of the provision for
income tax expense. However, there were no amounts recognized
relating to interest and penalties in the consolidated
statements of operations for the years ended December 31,
2010, 2009 and 2008. The tax years that remain open to
examination by the major taxing jurisdictions to which the
Company is subject range from 2007 to 2009. The Company has
identified its major taxing jurisdictions as the United States
of America and Texas. None of the Companys federal or
state tax returns are currently under examination.
The Company is subject to the Texas Margin Tax, which is
determined by applying a tax rate to a base that considers both
revenue and expenses. It is considered an income tax and is
accounted for in accordance with the provisions of the FASB
Accounting Standards Codification (ASC) Topic 740,
Income Taxes.
Fair Value of Financial
Instruments: The Companys financial
instruments consist of cash and cash equivalents, accounts
receivable, accounts payable, accrued warrants, notes payable
and long-term debt. The recorded values of cash and cash
equivalents, accounts receivable, and accounts payable
approximate their fair values based on their short-term nature.
The carrying values of notes payable and long-term debt
approximate their fair values, as interest approximates market
rates. See Note 6 for further information regarding fair
value of warrants.
Earnings per Share: Basic
earnings (loss) per share have been based on the weighted
average number of ordinary shares outstanding during the
applicable period. Diluted earnings (loss) per share has been
computed based on the weighted average number of ordinary shares
and ordinary share equivalents outstanding in the applicable
period, as if all potentially dilutive securities were converted
into ordinary shares (using the treasury stock method).
F-10
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of basic and diluted earnings (loss) per share
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributed to common shareholders
|
|
$
|
32,272,067
|
|
|
$
|
(2,429,879
|
)
|
|
$
|
1,121,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
46,351,853
|
|
|
|
46,322,850
|
|
|
|
46,322,850
|
|
Effect of potentially dilutive common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants and stock options
|
|
|
1,498,875
|
|
|
|
|
|
|
|
280,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding and assumed
conversions
|
|
|
47,850,728
|
|
|
|
46,322,850
|
|
|
|
46,603,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.70
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.67
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive securities excluded as anti-dilutive
|
|
|
243,146
|
|
|
|
254,381
|
|
|
|
26,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications: Certain
reclassifications have been made to the prior years
financial statements to conform to the current year
presentation. These reclassifications had no effect on
previously reported results of operations or retained earnings
(accumulated deficit).
Recent Accounting
Pronouncements: In June 2009, the FASB
issued authoritative guidance that eliminates the qualifying
special purpose entity concept, changes the requirements for
derecognizing financial assets and requires enhanced disclosures
about transfers of financial assets. The guidance also revises
earlier guidance for determining whether an entity is a variable
interest entity, requires a new approach for determining who
should consolidate a variable interest entity, changes when it
is necessary to reassess who should consolidate a variable
interest entity, and requires enhanced disclosures related to an
enterprises involvement in variable interest entities. The
Company adopted this guidance effective January 1, 2010,
which did not have a material effect on the consolidated
financial statements.
In January 2010, the FASB issued authoritative guidance that
changes the disclosure requirements for fair value measurements.
Specifically, the changes require a reporting entity to disclose
separately the amounts of significant transfers in and out of
Level 1 and Level 2 fair value measurements and
describe the reasons for the transfers. The changes also clarify
existing disclosure requirements related to how assets and
liabilities should be grouped by class and valuation techniques
used for recurring and nonrecurring fair value measurements. The
Company adopted this guidance in the first quarter 2010, which
did not have a material effect on the consolidated financial
position, results of operations or cash flows.
F-11
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 2
|
Property, Plant
and Equipment
|
Major classifications of property, plant and equipment and their
respective useful lives are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
December 31,
|
|
|
|
Useful Lives
|
|
2010
|
|
|
2009
|
|
|
Land
|
|
Indefinite
|
|
$
|
395,400
|
|
|
$
|
395,400
|
|
Machinery and equipment
|
|
5-10 years
|
|
|
79,380,054
|
|
|
|
76,455,371
|
|
Building and leasehold improvements
|
|
5-25 years
|
|
|
5,092,456
|
|
|
|
4,910,127
|
|
Transportation equipment
|
|
5 years
|
|
|
4,773,372
|
|
|
|
2,375,368
|
|
Office furniture, fixtures and equipment
|
|
5-10 years
|
|
|
1,004,764
|
|
|
|
839,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,646,046
|
|
|
|
84,975,892
|
|
Less: accumulated depreciation
|
|
|
|
|
(27,712,337
|
)
|
|
|
(19,571,456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,933,709
|
|
|
|
65,404,436
|
|
Assets not yet placed in service
|
|
|
|
|
25,461,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
|
$
|
88,395,494
|
|
|
$
|
65,404,436
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
December 31,
|
|
|
|
Period
|
|
2010
|
|
|
2009
|
|
|
Trade name
|
|
15 years
|
|
$
|
3,675,000
|
|
|
$
|
3,675,000
|
|
Customer relationship
|
|
8 years
|
|
|
6,591,000
|
|
|
|
6,591,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,266,000
|
|
|
|
10,266,000
|
|
Less: accumulated amortization
|
|
|
|
|
(4,498,183
|
)
|
|
|
(3,429,308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
|
$
|
5,767,817
|
|
|
$
|
6,836,692
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization expense for the years ended December 31,
2010, 2009 and 2008 totaled $1,068,875, $1,068,875 and
$1,188,227, respectively.
Estimated amortization expense for each of the next five years
is as follows:
|
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
2011
|
|
$
|
1,068,875
|
|
2012
|
|
|
1,068,875
|
|
2013
|
|
|
1,068,875
|
|
2014
|
|
|
897,234
|
|
2015
|
|
|
245,000
|
|
Thereafter
|
|
|
1,418,958
|
|
|
|
|
|
|
|
|
$
|
5,767,817
|
|
|
|
|
|
|
F-12
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 4
|
Long-Term Debt
and Capital Lease Obligations
|
Debt and capital lease obligations consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Senior credit facility with a financial institution maturing on
June 1, 2013 with maximum allowable indebtedness of
$126,666,667; a principal installment of $3,333,333 paid on
December 15, 2010, principal installments of $1,111,111 to
be paid on January 1, 2011 and February 1, 2011 and
then monthly in the amount of $2,500,000, with any remaining
balance due at maturity; interest payable monthly at a variable
interest rate determined from a pricing scale based on
debt/EBITDA ratio, where the LIBOR floor is 1.5% (weighted
average approximate rate of 5.0% at December 31,
2010).
|
|
$
|
47,039,183
|
|
|
$
|
|
|
$25,000,000 subordinated term loan with a financial institution
due in a lump sum on June 30, 2014; interest payable
monthly, at a rate of LIBOR plus 13%, where the LIBOR floor is
1.0% (14% at December 31, 2010).
|
|
|
25,000,000
|
|
|
|
|
|
$37,500,000 maximum credit facility with a bank, principal
payable quarterly in varying amounts, due on January 31,
2011, interest payable quarterly, at a rate of prime plus 4% or
LIBOR plus 4%, where the LIBOR floor is 2.5%. This facility was
closed in 2010.
|
|
|
|
|
|
|
37,500,000
|
|
$35,000,000 term loan with a financial institution due on
April 30, 2011; principal payable quarterly in varying
amounts, due April 11, 2011; interest payable quarterly, at
a rate of LIBOR plus 9.0%, where the LIBOR floor is 2.5%. The
Company has the option to pay up to 4% of the interest in kind,
thereby capitalizing accrued interest by increasing the
outstanding principal. This loan was paid in full in 2010.
|
|
|
|
|
|
|
27,781,111
|
|
$909,000 of subordinated promissory notes with a group of
stockholders, due on October 1, 2012; interest payable
quarterly, at a rate of prime plus 0.50%. The Company has the
option to pay the interest in kind, thereby capitalizing accrued
interest by increasing the outstanding principal. These notes
were paid and closed in 2010.
|
|
|
|
|
|
|
914,539
|
|
$1,000,000 of subordinated promissory notes with a financial
institution due on October 1, 2012; interest payable
quarterly, at a rate of prime plus 0.50%. The Company has the
option to pay the interest in kind, thereby capitalizing accrued
interest by increasing the outstanding principal. These notes
were paid and closed in 2010.
|
|
|
|
|
|
|
914,539
|
|
$182,000 of subordinated promissory notes with a stockholder due
on October 1, 2012; interest payable quarterly, at a rate
of prime plus 0.50%. The Company has the option to pay the
interest in kind, thereby capitalizing accrued interest by
increasing the outstanding principal. These notes were paid and
closed in 2010.
|
|
|
|
|
|
|
183,109
|
|
F-13
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Capital lease payable for 77 vehicle location units; interest at
4.95%, due in monthly installments of $4,235 including interest
through October 2010. This lease was paid in full in 2010.
|
|
|
|
|
|
|
38,012
|
|
Capital lease payable for 55 vehicle location units; interest at
4.95%, due in monthly installments of $3,025 including interest
through January 2010. This lease was paid in full in 2010.
|
|
|
|
|
|
|
2,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,039,183
|
|
|
|
67,333,995
|
|
Less: amount maturing within one year
|
|
|
27,222,222
|
|
|
|
6,665,697
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital lease obligations
|
|
$
|
44,816,961
|
|
|
$
|
60,668,298
|
|
|
|
|
|
|
|
|
|
|
The cost of equipment under capital leases included in the
balance sheets as property, plant and equipment was $242,417 at
December 31, 2010 and 2009. Accumulated amortization of the
leased equipment at December 31, 2010 and 2009 was $163,072
and $114,589, respectively. Amortization of assets under capital
leases is included in depreciation expense.
Debt is secured by a general assignment of all assets of the
Company. The loan agreements contain restrictive covenants
relating to net worth, fixed charge coverage, debt leverage,
capital expenditures, etc. which are to be maintained. As of
December 31, 2010, the Company was in compliance with all
of its restrictive covenants.
The carrying value of the Companys credit facility and
subordinated promissory notes approximate fair value as all
interest terms are based on variable market rates plus a small
percentage. In 2009, the $35,000,000 term loan was amended and
restated. In conjunction with this, the Company executed and
delivered a warrant agreement as further discussed in
Note 5.
Interest expense for the years ended December 31, 2010,
2009 and 2008 totaled $17,349,346, $4,712,077 and $6,913,606,
respectively. Accrued interest at December 31, 2010, 2009
and 2008 totaled $188,494, $126,090 and $457,445, respectively.
The following is a summary of scheduled debt and capital lease
maturities by year:
|
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
2011
|
|
$
|
27,222,222
|
|
2012
|
|
|
16,816,961
|
|
2013
|
|
|
3,000,000
|
|
2014
|
|
|
25,000,000
|
|
|
|
|
|
|
|
|
$
|
72,039,183
|
|
|
|
|
|
|
|
|
Note 5
|
Derivative
Liabilities
|
The Derivatives and Hedging topic of the FASB
ASC 815, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts. The guidance provides that an
entity should use a two-step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the
instruments contingent exercise and settlement provisions.
The topic also indicates that contracts issued or held by
that reporting entity that are both (1) indexed to its own
stock and (2) classified in stockholders equity in
its statement of financial position should not be
considered derivative instruments.
F-14
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has the obligation to issue common stock warrants in
connection with a debt agreement allowing the financial
institution to exercise warrants at $.01 per share upon the
settlement of the term loan. The financial institution will earn
warrants over the life of the agreement beginning
December 31, 2009. As of December 31, 2009, the
financial institution earned warrants equating to approximately
242,900 shares of common stock.
Prior to the implementation of this topic, the warrants, when
issued, would have been classified as permanent equity because
they met the exception and all of the criteria in the FASB
guidance covering the accounting for derivative financial
instruments indexed to, and potentially settled in, a
companys own stock. However, the warrants contain
provisions such that if the Company makes certain equity
offerings in the future at a price lower than a specified price,
additional warrants would be issuable to the debt holder.
The Derivative and Hedging topic provides that an
instruments strike price or the number of shares used to
calculate the settlement amount are not fixed if its terms
provide for any potential adjustment, regardless of the
probability of such adjustment(s) or whether such adjustments
are in the entitys control. If the instruments
strike price or the number of shares used to calculate the
settlement amount are not fixed, the instrument (or embedded
feature) would still be considered indexed to an entitys
own stock if the only variables that could affect the settlement
amount would be inputs to the fair value of a
fixed-for-fixed
forward or option on equity shares. The warrants contain a
provision that changes the number of shares to be issued in the
event the Company issues additional shares at a more favorable
price than a specified price.
Under the provisions of the Derivative and Hedging topic, the
embedded conversion feature in the Companys warrants are
not considered indexed to the Companys stock because
future equity offerings (or sales) of the Companys stock
are not an input to the fair value of a
fixed-for-fixed
option on equity shares. Accordingly, as of December 31,
2009, the Companys warrants have been recognized as a
liability in the Companys consolidated balance sheet. At
the time the term loan was paid in full, 1,176,224 warrants had
been accumulated by the financial institution. The warrants were
exercised in December 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Derivative Instruments
|
|
Derivative not Designated
|
|
|
|
|
As of
|
|
|
As of
|
|
as Hedging Instruments
|
|
Balance Sheet Location
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
Equity contracts
|
|
|
Current liabilities
|
|
|
$
|
|
|
|
$
|
335,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
|
|
|
$
|
335,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of derivative instruments on the consolidated
statements of operations for the years ended December 31,
2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Location of
|
|
|
Amount of Loss
|
|
|
Amount of Loss
|
|
|
|
Loss Recognized in
|
|
|
Recognized in
|
|
|
Recognized in
|
|
|
|
Operations on
|
|
|
Operations on
|
|
|
Operations on
|
|
Derivative not Designated as
Hedging Instruments
|
|
Derivative
|
|
|
Derivative
|
|
|
Derivative
|
|
|
Equity contracts
|
|
|
Interest expense
|
|
|
$
|
10,403,058
|
|
|
$
|
335,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
10,403,058
|
|
|
$
|
335,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 6
|
Fair Value of
Financial Instruments
|
The Company follows the Fair Value Measurements topic of the
FASB ASC, which defines fair value, establishes a framework for
measuring fair value under generally accepted accounting
principles and expands disclosures about fair value
measurements. The provisions of this standard apply to other
accounting pronouncements that require or permit fair value
measurements.
This guidance defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date. Hierarchical levels, as defined in this
guidance and directly related to the amount of subjectivity
associated with the inputs to fair valuations of these assets
and liabilities are as follows:
|
|
|
|
|
Level 1 Unadjusted quoted prices
in active markets that are accessible at the measurement date
for identical, unrestricted assets or liabilities.
|
|
|
|
Level 2 Inputs other than quoted
prices included within Level 1 that are observable for the
asset or liability, either directly or indirectly, including
quoted prices for similar assets or liabilities in active
markets; quoted prices for identical or similar assets or
liabilities in markets that are not active; inputs other than
quoted prices that are observable for the asset or liability
(e.g., interest rates); and inputs that are derived principally
from or corroborated by observable market data by correlation or
other means.
|
|
|
|
Level 3 Inputs that are both
significant to the fair value measurement and unobservable.
Unobservable inputs reflect the Companys judgment about
assumptions market participants would use in pricing the asset
or liability estimated impact to quoted prices markets.
|
The reported fair values for financial instruments that use
Level 3 inputs to determine fair value are based on the
Black-Scholes valuation model. Accordingly, certain fair values
may not represent actual values of our financial instruments
that could have been realized as of December 31, 2009 or
that will be realized in the future and do not include expenses
that could be incurred in an actual sale or settlement.
The Company had the following liabilities measured at fair value
on a recurring basis as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Warrants
|
|
$
|
|
|
|
$
|
|
|
|
$
|
335,967
|
|
|
$
|
335,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivative Liabilities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
335,967
|
|
|
$
|
335,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2009, the Company recorded
derivative liabilities on its balance sheet related to certain
warrants. As of December 31, 2009, the Company used the
Black-Scholes valuation model to determine the fair value of
these warrants using the following assumptions: stock price of
$1.44 per share, exercise price of $0.01, risk-free discount
rate of 2.69%, and volatility of 75%.
Expected volatilities are based on comparable public company
data. The risk-free rate is based on the approximate
U.S. Treasury yield rate in effect at the time of grant.
The Companys calculation of stock price, included in the
Black Scholes valuation model, involves the use of different
valuation techniques, including a combination of an income
and/or
market approach. Determination of the fair value is a matter of
judgment and often involves the use of significant estimates and
assumptions.
F-16
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The warrants were exercised in December 2010. The final value of
the warrants, upon exercise, was determined based on the value
of the underlying common stock included in a private offering of
the Companys common stock that occurred during December
2010 (approximately $10.00 per share).
A reconciliation of the Companys liabilities measured at
fair value on a recurring basis using significant unobservable
inputs (Level 3) is as follows:
|
|
|
|
|
|
|
Level 3
|
|
|
Balance January 1, 2009
|
|
$
|
|
|
Included in earnings as interest expense
|
|
|
(335,967
|
)
|
|
|
|
|
|
Balance December 31, 2009
|
|
|
(335,967
|
)
|
Included in earnings as interest expense
|
|
|
(10,403,058
|
)
|
Reclassified to APIC
|
|
|
10,739,025
|
|
|
|
|
|
|
Balance December 31, 2010
|
|
$
|
|
|
|
|
|
|
|
The Company is not a party to any significant hedge
arrangements, commodity swap agreements or any other derivative
financial instruments.
The provision for income tax expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
10,502,000
|
|
|
$
|
|
|
|
$
|
30
|
|
State
|
|
|
1,539,910
|
|
|
|
238,000
|
|
|
|
395,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
12,041,910
|
|
|
|
238,000
|
|
|
|
396,026
|
|
Deferred (benefit) provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
8,327,000
|
|
|
|
(624,000
|
)
|
|
|
1,689,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred (benefit) provision
|
|
|
8,327,000
|
|
|
|
(624,000
|
)
|
|
|
1,689,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$
|
20,368,910
|
|
|
$
|
(386,000
|
)
|
|
$
|
2,085,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reconciles the statutory tax rates to the
Companys actual tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes, net of federal benefit
|
|
|
2.9
|
%
|
|
|
(8.5
|
)%
|
|
|
12.4
|
%
|
Non-deductible amortization expense on intangibles
|
|
|
0.0
|
%
|
|
|
(11.9
|
)%
|
|
|
11.3
|
%
|
Permanent difference on MEDCO incentive proceeds
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
7.3
|
%
|
Other
|
|
|
0.8
|
%
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
38.7
|
%
|
|
|
13.7
|
%
|
|
|
65.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys Federal deferred tax assets and liabilities
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets short-term
|
|
$
|
265,000
|
|
|
$
|
167,000
|
|
Deferred tax liabilities long-term
|
|
|
(12,058,000
|
)
|
|
|
(3,633,000
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(11,793,000
|
)
|
|
$
|
(3,466,000
|
)
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, the Companys net operating loss
carry forwards totaled approximately $16,500,000 for Federal
purposes. The Company anticipates utilizing all of these carry
forwards in its 2010 consolidated Federal income tax return.
The Companys deferred tax assets and liabilities as of
December 31, 2010 and 2009 consist of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Compensation
|
|
$
|
655,000
|
|
|
$
|
421,000
|
|
Allowance for doubtful accounts
|
|
|
178,000
|
|
|
|
106,000
|
|
Inventory reserves
|
|
|
13,000
|
|
|
|
13,000
|
|
Accruals
|
|
|
73,000
|
|
|
|
48,000
|
|
Net operating losses
|
|
|
|
|
|
|
5,525,000
|
|
Contribution Carryover
|
|
|
|
|
|
|
73,000
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
919,000
|
|
|
|
6,186,000
|
|
Valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
919,000
|
|
|
|
6,186,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation on property, plant and equipment
|
|
|
(9,429,000
|
)
|
|
|
(7,056,000
|
)
|
Amortization of goodwill
|
|
|
(3,283,000
|
)
|
|
|
(2,596,000
|
)
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
(12,712,000
|
)
|
|
|
(9,652,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(11,793,000
|
)
|
|
$
|
(3,466,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Note 8
|
Employee Benefit
Plan
|
The Company maintains a contributory profit sharing plan under a
401(k) arrangement which covers all employees meeting certain
eligibility requirements. Eligible employees can make annual
contributions to the plan up to the maximum amount allowed by
current regulations. The Company matches dollar for dollar all
contributions made by eligible employees up to 4% of their gross
salary. The Companys 401(k) contributions for the years
ended December 31, 2010, 2009 and 2008 totaled $208,977,
$140,473 and $123,585, respectively.
|
|
Note 9
|
Share-Based
Compensation
|
The Companys 2006 Stock Option Plan (the 2006
Plan) permits the grant of share options to its employees
for up to 1,907,318 shares of common stock. The Company
believes that such awards better align the interests of its
employees with those of its shareholders. Option awards are
generally granted with an exercise price equal to the market
price for the Companys stock at the date of grant; those
option awards generally vest over 4 years of continuous
service with 20% on the vesting start date and 20% on each of
the first four anniversaries of the vesting start date. Two
employees have
F-18
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
been given full 100% vesting as of the vesting start date.
Certain option awards provide for accelerated vesting if there
is a change in control, as defined in the 2006 Plan. The Company
accelerated the vesting of these unvested options related to the
2006 Plan such that all outstanding options were completely
vested.
The Companys 2010 Stock Option Plan (the 2010
Plan) permits the grant of share options to its employees
for up to 5,699,889 shares of common stock. Under the 2010
Plan, option awards are generally granted with an exercise price
equal to the market price for the Companys stock at the
date of grant; those option awards generally vest over three
years of continuous service with one-third vesting on the first,
second, and third anniversaries of the options grant date.
Certain option awards provide for accelerated vesting if there
is a change in control, as defined in the 2010 Plan.
The fair value of each option award is estimated on the date of
grant using a Black-Scholes option valuation model that uses the
assumptions noted in the table below. Expected volatilities are
based on comparable public company data. The Company uses
historical data to estimate employee termination and forfeiture
rates of the options within the valuation model. The expected
term of options granted is derived using the plain
vanilla method due to the lack of history and volume of
option activity at the Company. The risk-free rate is based on
the approximate U.S. Treasury yield rate in effect at the
time of grant. The Companys calculation of stock price
involves the use of different valuation techniques, including a
combination of an income
and/or
market approach. Determination of the fair value is a matter of
judgment and often involves the use of significant estimates and
assumptions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Expected volatility
|
|
|
75
|
%
|
|
|
*
|
|
|
|
65
|
%
|
Expected dividends
|
|
|
None
|
|
|
|
*
|
|
|
|
None
|
|
Exercise price
|
|
$
|
10.00
|
|
|
|
*
|
|
|
$
|
1.43
|
|
Expected term (in years)
|
|
|
6.00
|
|
|
|
*
|
|
|
|
6.25
|
|
Risk-free rate
|
|
|
2.1
|
%
|
|
|
*
|
|
|
|
1.87
|
%
|
The weighted-average grant-date fair value of options granted
during the year ended December 31, 2010 was $6.64.
|
|
|
* |
|
There were no options granted during the year ended
December 31, 2009. |
F-19
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of option activity under the plans for the year ended
December 31, 2010 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Life
|
|
|
Value
|
|
|
|
(In years)
|
|
|
Outstanding at January 1, 2010
|
|
|
1,872,318
|
|
|
$
|
1.43
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,359,936
|
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
5,232,254
|
|
|
$
|
6.93
|
|
|
|
8.61
|
|
|
$
|
16,048,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010
|
|
|
1,907,318
|
|
|
$
|
1.59
|
|
|
|
6.21
|
|
|
$
|
16,048,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested shares at December 31, 2010, 2009 and 2008
totaled 3,324,936, 56,484 and 102,979, respectively. As of
December 31, 2010, there was $21,885,413 of total
unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the Plan. That cost is
expected to be recognized over a weighted-average period of
3.0 years.
Share-based compensation cost that has been charged against
operations was $634,413, $129,451 and $181,727 for the years
ended December 31, 2010, 2009 and 2008, respectively. The
total income tax benefit recognized in the income statement for
share-based compensation arrangements was approximately
$222,000, $45,000 and $62,000 for the years ended
December 31, 2010, 2009 and 2008, respectively.
|
|
Note 10
|
Related Party
Transactions
|
The Company purchases a significant portion of machinery and
equipment from a vendor that is 12% owned by the Companys
chief executive officer, Mr. Comstock. For the years ended
December 31, 2010, 2009 and 2008, fixed asset purchases
from this vendor total $22,190,788, $1,490,080 and $8,692,870,
respectively. Deposits with this vendor on equipment to be
purchased at December 31, 2010 and 2009 totaled $4,198,962
and $0, respectively. Amounts payable to this vendor at
December 31, 2010 and 2009 totaled $73,783 and $293,083,
respectively, and are included in accounts payable.
The Company has subordinated promissory notes with stockholders
as discussed in Note 4. Interest for the years ended
December 31, 2010, 2009 and 2008 aggregated $63,896, $6,648
and $0, respectively, and was capitalized by increasing the
principal amount of the notes.
|
|
Note 11
|
Concentration of
Credit Risk
|
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents and accounts receivable. Concentrations of credit
risk with respect to accounts receivable are limited because the
Company performs credit evaluations, sets credit limits, and
monitors the payment patterns of its customers. Cash balances on
deposits with financial institutions, at times, may exceed
federally insured limits. The Company monitors the
institutions financial condition.
F-20
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Four customers accounted for approximately 76% of sales for the
year ended December 31, 2010. Accounts receivable balances
for these same four customers totaled approximately $29,755,201
at December 31, 2010. Three customers accounted for
approximately 49% of sales for the year ended December 31,
2009. Accounts receivable balances for these same three
customers totaled approximately $2,511,000 at December 31,
2009. Three customers accounted for approximately 46% of sales
for the year ended December 31, 2008.
|
|
Note 12
|
Commitments and
Contingencies
|
At December 31, 2010 and 2009, the Company had commitments
of approximately $51,035,792 and $886,500, respectively, for the
acquisition of machinery and equipment. The outstanding
commitments at December 31, 2010 are all expected to be
incurred in 2011.
The Company has entered into certain
take-or-pay
contracts which guarantees a minimum level of monthly revenue.
The revenue related to these contracts is recognized on the
earlier of the passage of time under terms as defined by the
respective contract or as the services are performed.
From time to time the Company may be involved in claims and
litigation arising in the ordinary course of business. Because
there are inherent uncertainties in the ultimate outcome of such
matters, it is presently not possible to determine the ultimate
outcome of any potential claims or litigation against the
Company; however, management believes that the outcome of such
matters will not have a material adverse effect upon the
Companys consolidated financial position, results of
operation or liquidity.
The Company occupies various facilities and leases certain
equipment under non-cancellable lease agreements. Lease expense
under operating leases for the years ended December 31,
2010, 2009 and 2008 totaled $2,941,879, $731,569 and $394,164,
respectively. Future minimum lease payments under operating
leases for the years subsequent to December 31, 2010 are as
follows:
|
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
2011
|
|
$
|
4,722,005
|
|
2012
|
|
|
5,191,697
|
|
2013
|
|
|
5,195,002
|
|
2014
|
|
|
3,337,546
|
|
2015
|
|
|
656,298
|
|
Thereafter
|
|
|
646,688
|
|
|
|
|
|
|
|
|
$
|
19,749,236
|
|
|
|
|
|
|
|
|
Note 13
|
Medco
Incentive
|
In 2007, the Company and Marshall Economic Development
Corporation (MEDCO) entered into an agreement under
which MEDCO agreed to provide funds for the building of new
facilities in Marshall, Texas. MEDCO is a state funded
organization chartered to assist in the creation of
manufacturing jobs in the Marshall, Texas area by facilitating
the construction of roads and buildings for companies willing to
locate manufacturing facilities in the local area. The incentive
package offered to the Company includes 14 acres of land to
be leased to the Company for an initial three years for $1 with
the option to purchase the land at the end of the three year
term for $500,000. The Company has also been given the option to
continue to lease the land for an additional ten years under two
five year options for $1 per year. For each year after the end
of the initial three year lease, the purchase option on the land
will be reduced by $50,000 and at the end of year 13, the
purchase option price will be reduced to $0 and MEDCO will deed
the property to the Company. The incentive package also
F-21
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
allows for $825,000 to be contributed to the Company toward the
construction of a building and infrastructure on the
aforementioned land. In return for these economic incentives,
the Company will be required to maintain approximately 130 new
jobs at the new facility in Marshall, Texas over a three year
period and then maintain these jobs over the period of the lease.
During 2008, the Company completed construction of the building,
hired 45 employees and placed approximately $20,000,000 of
equipment in service at the Marshall location. Management has
treated the $825,000 received from MEDCO as deferred revenue to
be amortized over the life of the building located in Marshall,
Texas. The impact of the deferred revenue stream directly
offsets depreciation expense in the consolidated statements of
operations. This treatment was determined by management as
appropriate under the assumption that it is probable that the
Company will meet the employment target over the three year
period set forth in the MEDCO agreement and will either choose a
purchase option under the lease or remain in the facility until
such time that MEDCO will deed the property to the Company.
During 2010 and 2009, the Company has continued to meet the
employment target.
|
|
Note 14
|
Subsequent
Events
|
The Company evaluates events and transactions occurring after
the balance sheet date, but before the financial statements are
available to be issued. The Company evaluated such events and
transactions through February 15, 2011, the date the
financial statements were available for issuance.
F-22
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,055,769
|
|
|
$
|
2,816,734
|
|
Accounts receivable, net of allowance for doubtful accounts of
$576,717 and $509,717, respectively
|
|
|
71,768,797
|
|
|
|
44,354,381
|
|
Inventories, net
|
|
|
14,459,096
|
|
|
|
8,181,903
|
|
Prepaid expenses and other current assets
|
|
|
4,654,215
|
|
|
|
3,767,614
|
|
Deferred tax assets
|
|
|
312,000
|
|
|
|
265,000
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS
|
|
|
93,249,877
|
|
|
|
59,385,632
|
|
PROPERTY, PLANT AND EQUIPMENT, net
|
|
|
117,276,855
|
|
|
|
88,395,494
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
60,338,653
|
|
|
|
60,338,653
|
|
Intangible assets, net of accumulated amortization of $4,765,402
and $4,498,183
|
|
|
5,500,598
|
|
|
|
5,767,817
|
|
Deposits on equipment under construction
|
|
|
5,432,128
|
|
|
|
8,413,009
|
|
Deferred financing costs, net of accumulated amortization of
$796,862 and $505,560, respectively
|
|
|
2,961,913
|
|
|
|
3,190,215
|
|
Other
|
|
|
597,571
|
|
|
|
597,571
|
|
|
|
|
|
|
|
|
|
|
TOTAL OTHER ASSETS
|
|
|
74,830,863
|
|
|
|
78,307,265
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
285,357,595
|
|
|
$
|
226,088,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
26,651,631
|
|
|
$
|
13,084,316
|
|
Current portion of long-term debt and capital leases
|
|
|
30,000,000
|
|
|
|
27,222,222
|
|
Accrued expenses
|
|
|
6,190,575
|
|
|
|
8,179,351
|
|
Accrued taxes
|
|
|
6,012,005
|
|
|
|
6,525,100
|
|
Deferred revenue
|
|
|
33,000
|
|
|
|
4,033,000
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
68,887,211
|
|
|
|
59,043,989
|
|
LONG-TERM DEBT
|
|
|
49,066,962
|
|
|
|
44,816,961
|
|
DEFERRED TAX LIABILITIES
|
|
|
25,940,000
|
|
|
|
12,058,000
|
|
OTHER LONG-TERM LIABILITIES
|
|
|
800,401
|
|
|
|
723,250
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
144,694,574
|
|
|
|
116,642,200
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Common stock, par value of $.01, 100,000,000 shares
authorized, 47,499,074 issued and outstanding
|
|
|
474,991
|
|
|
|
474,991
|
|
Additional paid-in capital
|
|
|
80,420,248
|
|
|
|
78,288,578
|
|
Retained earnings
|
|
|
59,767,782
|
|
|
|
30,682,622
|
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY
|
|
|
140,663,021
|
|
|
|
109,446,191
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
285,357,595
|
|
|
$
|
226,088,391
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-23
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
REVENUE
|
|
$
|
127,204,077
|
|
|
$
|
32,636,448
|
|
COST OF SALES
|
|
|
70,048,019
|
|
|
|
23,176,216
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
57,156,058
|
|
|
|
9,460,232
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
8,824,907
|
|
|
|
2,867,163
|
|
GAIN ON DISPOSAL OF ASSETS
|
|
|
(89,612
|
)
|
|
|
(16,197
|
)
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
48,420,763
|
|
|
|
6,609,266
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
591
|
|
|
|
179
|
|
Interest expense
|
|
|
(1,958,667
|
)
|
|
|
(2,997,689
|
)
|
Lender fees
|
|
|
(25,000
|
)
|
|
|
(53,250
|
)
|
Other income
|
|
|
13,000
|
|
|
|
101,515
|
|
Other expense
|
|
|
|
|
|
|
(1,146
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL OTHER EXPENSE
|
|
|
(1,970,076
|
)
|
|
|
(2,950,391
|
)
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
46,450,687
|
|
|
|
3,658,875
|
|
PROVISION FOR INCOME TAXES
|
|
|
17,365,527
|
|
|
|
1,415,766
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
29,085,160
|
|
|
$
|
2,243,109
|
|
|
|
|
|
|
|
|
|
|
INCOME PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.61
|
|
|
$
|
0.05
|
|
Diluted
|
|
$
|
0.60
|
|
|
$
|
0.05
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
47,499,074
|
|
|
|
46,322,850
|
|
Diluted
|
|
|
48,696,969
|
|
|
|
46,836,469
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-24
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Equity
|
|
|
Balance at December 31, 2009
|
|
|
46,322,850
|
|
|
|
463,229
|
|
|
|
66,925,222
|
|
|
|
(1,589,445
|
)
|
|
|
65,799,006
|
|
Exercise of warrants
|
|
|
1,176,224
|
|
|
|
11,762
|
|
|
|
10,728,943
|
|
|
|
|
|
|
|
10,740,705
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
634,413
|
|
|
|
|
|
|
|
634,413
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,272,067
|
|
|
|
32,272,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
47,499,074
|
|
|
|
474,991
|
|
|
|
78,288,578
|
|
|
|
30,682,622
|
|
|
|
109,446,191
|
|
Share-based compensation expense*
|
|
|
|
|
|
|
|
|
|
|
2,131,670
|
|
|
|
|
|
|
|
2,131,670
|
|
Net income*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,085,160
|
|
|
|
29,085,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2011*
|
|
|
47,499,074
|
|
|
$
|
474,991
|
|
|
$
|
80,420,248
|
|
|
$
|
59,767,782
|
|
|
$
|
140,663,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-25
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
29,085,160
|
|
|
$
|
2,243,109
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
3,335,589
|
|
|
|
2,249,772
|
|
Amortization expense
|
|
|
267,219
|
|
|
|
267,218
|
|
Provision for doubtful accounts receivable, net of write-offs
|
|
|
67,500
|
|
|
|
12,500
|
|
Share-based compensation expense
|
|
|
2,131,670
|
|
|
|
32,650
|
|
Loss on change in fair value of warrant liability
|
|
|
|
|
|
|
1,475,714
|
|
Deferred income taxes
|
|
|
13,835,000
|
|
|
|
150,460
|
|
Gain on disposal of assets
|
|
|
(89,612
|
)
|
|
|
(16,197
|
)
|
Non cash paid in kind interest expense
|
|
|
|
|
|
|
277,564
|
|
Amortization of deferred financing costs
|
|
|
291,302
|
|
|
|
79,836
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(27,481,916
|
)
|
|
|
(6,322,053
|
)
|
Inventories
|
|
|
(6,277,193
|
)
|
|
|
515,114
|
|
Prepaid expenses and other current assets
|
|
|
(2,599,425
|
)
|
|
|
38,729
|
|
Accounts payable
|
|
|
13,567,315
|
|
|
|
1,538,155
|
|
Accrued liabilities
|
|
|
(1,988,776
|
)
|
|
|
(721,680
|
)
|
Accrued taxes
|
|
|
(513,095
|
)
|
|
|
1,265,306
|
|
Deferred revenue
|
|
|
(4,000,000
|
)
|
|
|
|
|
Other
|
|
|
85,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
19,716,139
|
|
|
|
3,086,197
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase of and deposits on property, plant and equipment
|
|
|
(29,784,282
|
)
|
|
|
(2,514,940
|
)
|
Proceeds from disposal of property, plant and equipment
|
|
|
2,342,399
|
|
|
|
24,561
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(27,441,883
|
)
|
|
|
(2,490,379
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Repayment of revolving credit facilities
|
|
|
(1,000,000
|
)
|
|
|
(1,000,000
|
)
|
Proceeds from long-term debt
|
|
|
12,750,001
|
|
|
|
|
|
Repayments of long-term debt
|
|
|
(4,722,222
|
)
|
|
|
(625,000
|
)
|
Repayments of capital lease obligations
|
|
|
|
|
|
|
(14,969
|
)
|
Financing costs
|
|
|
(63,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
|
|
6,964,779
|
|
|
|
(1,639,969
|
)
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(760,965
|
)
|
|
|
(1,044,151
|
)
|
CASH AND CASH EQUIVALENTS, beginning of period
|
|
|
2,816,734
|
|
|
|
1,178,275
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period
|
|
$
|
2,055,769
|
|
|
$
|
134,124
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,087,352
|
|
|
$
|
818,695
|
|
|
|
|
|
|
|
|
|
|
Income taxes (net of refunds received)
|
|
$
|
4,037,068
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-26
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
Note
1 Nature of Business and Summary of Significant
Accounting Policies
Organization of
Business: C&J Energy Services, Inc.
(the Company) was incorporated in Texas in 2006 and
re-incorporated in Delaware in 2010. The Company provides
specialty equipment services for oil and natural gas exploration
and production companies in the Texas, Louisiana, and Oklahoma
regions of the United States of America.
The nature of operations and the regions in which the Company
operate are subject to changing economic, regulatory and
political conditions. The Company is vulnerable to near-term and
long-term changes in the demand for and prices of oil and
natural gas and the related demand for oilfield service
operations.
Basis of Presentation: The
accompanying consolidated financial statements include all
adjustments, comprised of normal recurring adjustments,
considered necessary by management to fairly state the
Companys results of operations, financial position and
cash flows. They have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission
(SEC) for interim financial information.
Accordingly, they do not include all of the information and
footnotes required by U.S. GAAP for complete financial
statements. Therefore, these consolidated financial statements
should be read in conjunction with the Companys audited
consolidated financial statements and notes thereto for the year
ended December 31, 2010. The operating results for interim
periods are not necessarily indicative of results that may be
expected for any other interim period or for the full year.
Principles of Consolidation: The
consolidated financial statements include the accounts of
C&J Energy Services, Inc. and its wholly-owned subsidiary,
C&J Spec-Rent Services, Inc. (the Subsidiary).
All significant inter-company transactions and accounts have
been eliminated upon consolidation.
Use of Estimates: The
preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Estimates are used
for, but are not limited to, determining the following:
allowance for doubtful accounts, recoverability of long-lived
assets and intangibles, useful lives used in depreciation and
amortization, income taxes and valuation allowances. The
accounting estimates used in the preparation of the consolidated
financial statements may change as new events occur, as more
experience is acquired, as additional information is obtained
and as the Companys operating environment changes.
Accounts Receivable and Allowance for Doubtful
Accounts: Accounts receivable are stated
at the amount billed to customers and are ordinarily due upon
receipt. The Company provides an allowance for doubtful
accounts, which is based upon a review of outstanding
receivables, historical collection information and existing
economic conditions. Provisions for doubtful accounts are
recorded when it becomes evident that the customer will not make
the required payments at either contractual due dates or in the
future.
Inventories: Inventories,
consisting of spare parts to be used in maintaining equipment
and general supplies and materials for the Companys
operations, are stated at the lower of cost
(first-in,
first-out basis) or market (net realizable value). Appropriate
consideration is given to deterioration, obsolescence and other
factors in evaluating net realizable value.
F-27
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Property, Plant and
Equipment: Property, plant and equipment
is recorded at cost less accumulated depreciation. Certain
equipment held under capital leases are classified as equipment
and the related obligations are recorded as liabilities.
Maintenance and repairs, which do not improve or extend the life
of the related assets, are charged to operations when incurred.
Refurbishments and renewals are capitalized when the value of
the equipment is enhanced for an extended period. When property
and equipment are sold or otherwise disposed of, the asset
account and related accumulated depreciation account are
relieved, and any gain or loss is included in operating income.
The cost of property and equipment currently in service is
depreciated over the estimated useful lives of the related
assets, which range from five to twenty-five years. Depreciation
is computed on a straight-line basis for financial reporting
purposes.
Goodwill, Intangible Assets and
Amortization: Goodwill and other
intangible assets with infinite lives are not amortized, but
tested for impairment annually or more frequently if
circumstances indicate that impairment may exist. Intangible
assets with finite useful lives are amortized either on a
straight-line basis over the assets estimated useful life
or on a basis that reflects the pattern in which the economic
benefits of the intangible assets are realized. No impairment
was recorded in the periods presented herein.
Revenue Recognition: All revenue
is recognized when persuasive evidence of an arrangement exists,
the service is complete, the amount is fixed or determinable and
collectability is reasonably assured, as follows:
Hydraulic Fracturing Revenue. The Company
enters into arrangements with its customers to provide hydraulic
fracturing services, which can be either on a spot market basis
or under term contracts. The Company only enters into
arrangements with customers for which collectability is
reasonably assured. Revenue is recognized and customers are
invoiced upon the completion of each job, which can consist of
one or numerous fracturing stages. Once the job has been
completed to the satisfaction of the customer, a field ticket is
written that includes charges for the service performed and the
chemicals and proppants consumed during the course of the
service. The field ticket will also include charges for the
mobilization of the equipment to location, additional equipment
used on the job, if any, and other miscellaneous consumables.
Rates for services performed on a spot market basis are based on
the
agreed-upon
hourly spot market rate. With respect to services performed
under term contracts, customers are invoiced a monthly mandatory
payment based on a specified minimum number of hours of service
per month as defined in the contract, upon the earlier of the
passage of time or completion of the job. To the extent
customers utilize more than the contracted minimum number of
hours of service per month, they are invoiced for the excess at
rates defined in the contract upon the completion of each job.
Coiled Tubing and Pressure Pumping
Revenue. The Company enters into arrangements to
provide coiled tubing and pressure pumping services to only
those customers for which collectability is reasonably assured.
These arrangements are typically short-term in nature and each
job can last anywhere from a few hours to multiple days. Coiled
tubing and pressure pumping revenue is recognized upon
completion of each days work based upon a completed field
ticket. The field ticket includes charges for the mobilization
of the equipment to location, the service performed, the
personnel on the job, additional equipment used on the job, if
any, and miscellaneous consumables used throughout the course of
the service. The Company typically charges the customer on an
hourly basis for these services at agreed upon spot market rates.
Materials Consumed While Performing
Services. The Company generates revenue from
chemicals and proppants that are necessarily consumed while
performing hydraulic fracturing
F-28
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
services. The Company charges fees to its customers based on the
amount of chemicals and proppants used in providing these
services. In addition, ancillary to coiled tubing and pressure
pumping revenue, the Company generates revenue from various
fluids and supplies that are necessarily consumed during those
processes. The Company does not sell or otherwise charge a fee
separate and apart from the services it provides for any of the
materials consumed while performing hydraulic fracturing
services or coiled tubing and pressure pumping services.
Share-Based Compensation: The
Company accounts for share-based compensation cost based on the
fair value at grant date by utilizing a Black-Scholes
option-pricing model. The Company recognizes share-based
compensation cost on a straight-line basis over the requisite
service period. Further information regarding share-based
compensation can be found in Note 5, Share-Based
Compensation.
Fair Value of Financial
Instruments: The Companys financial
instruments consist of cash and cash equivalents, accounts
receivable, accounts payable, accrued warrants, notes payable
and long-term debt. The recorded values of cash and cash
equivalents, accounts receivable, and accounts payable
approximate their fair values based on their short-term nature.
The carrying values of notes payable and long-term debt
approximate their fair values, as interest approximates market
rates. See Note 4 for further information regarding fair
value of warrants.
Income Taxes: Income taxes are
provided for the tax effects of transactions reported in
financial statements and consist of taxes currently due plus
deferred taxes. 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 rates is recognized in income in the period that
includes the enactment date. Deferred income tax expense
represents the change during the period in the deferred tax
assets and deferred tax liabilities.
The components of the deferred tax assets and liabilities are
individually classified as current and non-current based on
their characteristics. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is
more likely than not that some portion or all of the deferred
tax assets will not be realized.
Earnings per Share: Basic
earnings per share is based on the weighted average number of
ordinary shares outstanding during the applicable period.
Diluted earnings per share is computed based on the weighted
average number of ordinary shares and ordinary share equivalents
outstanding in the applicable period, as if all potentially
dilutive securities were converted into ordinary
F-29
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
shares (using the treasury stock method). The components of
basic and diluted earnings per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income attributed to common shareholders
|
|
$
|
29,085,160
|
|
|
$
|
2,243,109
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
47,499,074
|
|
|
|
46,322,850
|
|
Effect of potentially dilutive common shares:
|
|
|
|
|
|
|
|
|
Warrants and stock options
|
|
|
1,197,895
|
|
|
|
513,619
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding and assumed
conversions
|
|
|
48,696,969
|
|
|
|
46,836,469
|
|
|
|
|
|
|
|
|
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.61
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.60
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive securities excluded as anti-dilutive
|
|
|
3,648,180
|
|
|
|
647,318
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting
Pronouncements: In December 2010, the
FASB issued ASU
No. 2010-09,
Business Combinations: Disclosure of Supplementary Pro
Forma Information for Business Combinations (ASU
2010-29).
ASU 2010-29
addresses diversity in the interpretation of the pro forma
revenue and earnings disclosure requirements for business
combinations. If a public entity presents comparative financial
statements, the entity should disclose revenue and earnings of
the combined entity as though the business combination that
occurred during the current year had occurred as of the
beginning of the comparable prior annual reporting period only.
The Company adopted ASU
2010-29 on
January 1, 2011. This update had no impact on the
Companys financial position, results of operations or cash
flows.
F-30
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Note
2 Long-Term Debt
Debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Senior credit facility with a financial institution maturing on
June 1, 2013 with maximum allowable indebtedness of
$126,666,667; with principal installments of $2,500,000 to be
paid monthly with any remaining balance due at maturity;
interest payable monthly at a variable interest rate determined
from a pricing scale based on debt/EBITDA ratio, where the LIBOR
floor is 1.5% (weighted average approximate rate of 5.3% at
March 31, 2011)
|
|
$
|
54,066,962
|
|
|
$
|
47,039,183
|
|
$25,000,000 subordinated term loan with a financial institution
due in a lump sum on June 30, 2014; interest payable
monthly, at a rate of LIBOR plus 13%, where the LIBOR floor is
1.0% (14.0% at March 31, 2011)
|
|
|
25,000,000
|
|
|
|
25,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,066,962
|
|
|
|
72,039,183
|
|
Less: amount maturing within one year
|
|
|
30,000,000
|
|
|
|
27,222,222
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
49,066,962
|
|
|
$
|
44,816,961
|
|
|
|
|
|
|
|
|
|
|
Debt is secured by a general assignment of all assets of the
Company. The loan agreements contain restrictive covenants
relating to net worth, fixed charge coverage, debt leverage,
capital expenditures, etc. which are to be maintained. As
discussed in Note 8, Subsequent Events, the
Companys senior credit facility and subordinated term loan
were retired on April 19, 2011.
Note
3 Derivative Liabilities
The Derivatives and Hedging topic of the FASB
ASC 815, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts. The guidance provides that an
entity should use a two-step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the
instruments contingent exercise and settlement provisions.
The topic also indicates that contracts issued or held by
that reporting entity that are both (1) indexed to its own
stock and (2) classified in stockholders equity in
its statement of financial position should not be
considered derivative instruments.
The Company has the obligation to issue common stock warrants in
connection with a debt agreement allowing the financial
institution to exercise warrants at $.01 per share upon the
settlement of the term loan. The financial institution will earn
warrants over the life of the agreement beginning
December 31, 2009. As of March 31, 2010, the financial
institution earned warrants equating to approximately
612,000 shares of common stock.
Prior to the implementation of this topic, the warrants, when
issued, would have been classified as permanent equity because
they met the exception and all of the criteria in the FASB
guidance covering the accounting for derivative financial
instruments indexed to, and potentially settled in, a
companys own stock. However, the warrants contain
provisions such that if the Company makes certain equity
offerings in the future at a price lower than a specified price,
additional warrants would be issuable to the debt holder.
F-31
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
The Derivative and Hedging topic provides that an
instruments strike price or the number of shares used to
calculate the settlement amount are not fixed if its terms
provide for any potential adjustment, regardless of the
probability of such adjustment(s) or whether such adjustments
are in the entitys control. If the instruments
strike price or the number of shares used to calculate the
settlement amount are not fixed, the instrument (or embedded
feature) would still be considered indexed to an entitys
own stock if the only variables that could affect the settlement
amount would be inputs to the fair value of a
fixed-for-fixed
forward or option on equity shares. The warrants contain a
provision that changes the number of shares to be issued in the
event the Company issues additional shares at a more favorable
price than a specified price.
Under the provisions of the Derivative and Hedging topic, the
embedded conversion feature in the Companys warrants are
not considered indexed to the Companys stock because
future equity offerings (or sales) of the Companys stock
are not an input to the fair value of a
fixed-for-fixed
option on equity shares. Accordingly, as of March 31, 2010,
the warrants have been recognized as a liability in the
Companys consolidated balance sheet. The warrants were
exercised in December 2010.
The effect of derivative instruments on the consolidated
statements of operations for the three months ended
March 31, 2011 and 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Location of
|
|
Amount of Loss
|
|
|
Amount of Loss
|
|
|
|
Loss Recognized in
|
|
Recognized in
|
|
|
Recognized in
|
|
Derivative not Designated as
|
|
Operations on
|
|
Operations on
|
|
|
Operations on
|
|
Hedging Instruments
|
|
Derivative
|
|
Derivative
|
|
|
Derivative
|
|
|
Equity contracts
|
|
Interest expense
|
|
$
|
|
|
|
$
|
1,475,714
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
|
|
|
$
|
1,475,714
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
4 Fair Value of Financial Instruments
The Company follows the Fair Value Measurements topic of the
FASB ASC, which defines fair value, establishes a framework for
measuring fair value under generally accepted accounting
principles and expands disclosures about fair value
measurements. The provisions of this standard apply to other
accounting pronouncements that require or permit fair value
measurements.
This guidance defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date. Hierarchical levels, as defined in this
guidance and directly related to the amount of subjectivity
associated with the inputs to fair valuations of these assets
and liabilities are as follows:
|
|
|
|
|
Level 1 Unadjusted quoted prices
in active markets that are accessible at the measurement date
for identical, unrestricted assets or liabilities.
|
|
|
|
Level 2 Inputs other than quoted
prices included within Level 1 that are observable for the
asset or liability, either directly or indirectly, including
quoted prices for similar assets or liabilities in active
markets; quoted prices for identical or similar assets or
liabilities in markets that are not active; inputs other than
quoted prices that are observable for the asset or liability
(e.g., interest rates); and inputs that are derived principally
from or corroborated by observable market data by correlation or
other means.
|
F-32
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
|
|
|
|
|
Level 3 Inputs that are both
significant to the fair value measurement and unobservable.
Unobservable inputs reflect the Companys judgment about
assumptions market participants would use in pricing the asset
or liability estimated impact to quoted prices markets.
|
The reported fair values for financial instruments that use
Level 3 inputs to determine fair value are based on the
Black-Scholes valuation model. Accordingly, certain fair values
may not represent actual values of our financial instruments
that could have been realized during the periods presented.
For the three months ended March 31, 2010, the Company
recorded derivative liabilities on its balance sheet related to
the warrants discussed in Note 3, Derivative
Liabilities. The Company used the Black-Scholes valuation
model to determine the fair value of these warrants using the
following assumptions: stock price of $3.09 per share, exercise
price of $0.01, risk-free discount rate of 2.14%, and volatility
of 75%.
Expected volatilities are based on comparable public company
data. The risk-free rate is based on the approximate
U.S. Treasury yield rate in effect at the time of grant.
The Companys calculation of stock price, included in the
Black Scholes valuation model, involves the use of different
valuation techniques, including a combination of an income
and/or
market approach. Determination of the fair value is a matter of
judgment and often involves the use of significant estimates and
assumptions.
The warrants were exercised in December 2010. The final value of
the warrants, upon exercise, was determined based on the value
of the underlying common stock included in a private offering of
the Companys common stock that occurred during December
2010 (approximately $10.00 per share).
A reconciliation of the Companys liabilities measured at
fair value on a recurring basis using significant unobservable
inputs (Level 3) is as follows:
|
|
|
|
|
|
|
Level 3
|
|
|
Balance December 31, 2009
|
|
$
|
(335,967
|
)
|
Included in earnings as interest expense
|
|
|
(1,475,714
|
)
|
|
|
|
|
|
Balance March 31, 2010
|
|
$
|
(1,811,681
|
)
|
|
|
|
|
|
The Company is not a party to any hedge arrangements, commodity
swap agreements or any other derivative financial instruments.
Note
5 Share-Based Compensation
The Companys 2006 Stock Option Plan (the 2006
Plan) permits the grant of share options to its employees
for up to 1,907,318 shares of common stock. The Company
believes that such awards better align the interests of its
employees with those of its shareholders. Option awards are
generally granted with an exercise price equal to the market
price for the Companys stock at the date of grant; those
option awards generally vest over 4 years of continuous
service with 20% on the vesting start date and 20% on each of
the first four anniversaries of the vesting start date. Two
employees have been given full 100% vesting as of the vesting
start date. Certain option awards provide for accelerated
vesting if there is a change in control, as defined in the 2006
Plan. The Company accelerated the vesting of these unvested
options related to the 2006 Plan such that all outstanding
options were completely vested.
The Companys 2010 Stock Option Plan (the 2010
Plan) permits the grant of share options to its employees
for up to 5,699,889 shares of common stock. Under the 2010
Plan, option awards are generally granted with an exercise price
equal to the market price for the Companys stock at the
date of grant; those option awards generally vest over three
years of continuous service with one-third
F-33
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
vesting on the first, second, and third anniversaries of the
options grant date. Certain option awards provide for
accelerated vesting if there is a change in control, as defined
in the 2010 Plan.
The fair value of each option award is estimated on the date of
grant using a Black-Scholes option valuation model. Expected
volatilities are based on comparable public company data. The
Company uses historical data to estimate employee termination
and forfeiture rates of the options within the valuation model.
The expected term of options granted is derived using the
plain vanilla method due to the lack of history and
volume of option activity at the Company. The risk-free rate is
based on the approximate U.S. Treasury yield rate in effect
at the time of grant. The Companys calculation of stock
price involves the use of different valuation techniques,
including a combination of an income
and/or
market approach. Determination of the fair value is a matter of
judgment and often involves the use of significant estimates and
assumptions.
During the three months ended March 31, 2011, 484,335
options were granted at exercise prices ranging from $10.00 to
$11.00 per share. The key input variables used in valuing these
options were: risk-free interest of 2.2% to 2.6%; dividend yield
of zero; stock price volatility of 75%; and expected option
lives of 5 to 6 years.
During the three months ended March 31, 2010 no stock
options were granted by the Company.
As of March 31, 2011, the Company had 5,716,589 options
outstanding to employees and nonemployee directors.
Note
6 Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents and accounts receivable. Concentrations of credit
risk with respect to accounts receivable are limited because the
Company performs credit evaluations, sets credit limits, and
monitors the payment patterns of its customers. Cash balances on
deposits with financial institutions, at times, may exceed
federally insured limits. The Company monitors the
institutions financial condition.
Note
7 Commitments and Contingencies
The Company has entered into certain
take-or-pay
contracts which guarantees a minimum level of monthly revenue.
The revenue related to these contracts is recognized on the
earlier of the passage of time under terms as defined by the
respective contract or as the services are performed.
From time to time the Company may be involved in claims and
litigation arising in the ordinary course of business. Because
there are inherent uncertainties in the ultimate outcome of such
matters, it is presently not possible to determine the ultimate
outcome of any potential claims or litigation against the
Company; however, management believes that the outcome of such
matters will not have a material adverse effect upon the
Companys consolidated financial position, results of
operation or liquidity.
Note
8 Subsequent Events
The Company evaluates events and transactions occurring after
the balance sheet date, but before the financial statements are
available to be issued. The Company evaluated such events and
transactions through May 12, 2011, the date the financial
statements were available for issuance.
On April 19, 2011, the Company entered into a credit
agreement with a new lender providing the Company the ability to
borrow up to $200.0 million. The agreement provides for
borrowings under revolving credit loans and swing line loans and
the Company may obtain stand-by letters of credit
F-34
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
from the lender up to the remaining amount available under the
agreement. The agreement does contain compliance covenants to be
met on a quarterly and annual basis. The interest rate is
adjustable quarterly and is initially set at either LIBOR plus
2.5% or the lenders prime rate plus 1.5%, depending on the
borrowing.
As part of the agreement, the Companys existing senior
credit facility and subordinated term loan were both terminated.
Amounts outstanding under the senior credit facility and
subordinated term loan, including accrued and unpaid interest
and applicable early termination penalties of $4.7 million,
were paid in full.
On April 28, 2011, the Company acquired all of the
outstanding capital stock of Total E&S, Inc.
(TES) in exchange for $23.0 million in cash. In
addition, the Company made payments of $9.9 million to
retire the outstanding debt of TES. The Companys chief
executive officer, Joshua E. Comstock, owned 12% of
TESs outstanding equity and served on its board of
directors until March 2011. The Company is the largest customer
of TES, comprising more than 75% of its revenue for the year
ended December 31, 2010. TES is engaged in the manufacture
and assembly of specialized pressure pumping and coil tubing
equipment for the oilfield services industry.
F-35
C&J Energy Services,
Inc.
Common Stock
PROSPECTUS
Joint Book-Running
Managers
Goldman, Sachs & Co.
J.P. Morgan
Citi
Co-Managers
Wells Fargo Securities
Simmons & Company
International
Tudor, Pickering, Holt & Co.
Part II
INFORMATION NOT
REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other Expenses
of Issuance and Distribution
|
The following table sets forth an itemized statement of the
amounts of all expenses (excluding underwriting discounts and
commissions) payable by us in connection with the registration
of the common stock offered hereby. With the exception of the
Registration Fee, FINRA Filing Fee and NYSE Listing Fee, the
amounts set forth below are estimates. The selling stockholders
will not bear any portion of such expenses.
|
|
|
|
|
SEC Registration Fee
|
|
$
|
|
|
FINRA Filing Fee
|
|
|
|
|
NYSE Listing Fee
|
|
|
|
|
Accountants Fees and Expenses
|
|
|
|
|
Legal Fees and Expenses
|
|
|
|
|
Printing and Engraving Expenses
|
|
|
|
|
Transfer Agent and Registrar Fees
|
|
|
|
|
Miscellaneous
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
|
|
|
|
|
|
Item 14.
|
Indemnification
of Directors and Officers
|
Our amended and restated certificate of incorporation limits the
liability of our directors for monetary damages for breach of
their fiduciary duty as directors, except for liability that
cannot be eliminated under the DGCL. Delaware law provides that
directors of a company will not be personally liable for
monetary damages for breach of their fiduciary duty as
directors, except for liabilities:
|
|
|
|
|
for any breach of their duty of loyalty to us or our
stockholders;
|
|
|
|
for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
|
|
|
|
for unlawful payment of dividend or unlawful stock repurchase or
redemption, as provided under Section 174 of the
DGCL; or
|
|
|
|
for any transaction from which the director derived an improper
personal benefit.
|
Any amendment, repeal or modification of these provisions will
be prospective only and would not affect any limitation on
liability of a director for acts or omissions that occurred
prior to any such amendment, repeal or modification.
Our amended and restated certificate of incorporation and
amended and restated bylaws also provide that we will indemnify
our directors and officers to the fullest extent permitted by
Delaware law. Our amended and restated certificate of
incorporation and amended and restated bylaws also permit us to
purchase insurance on behalf of any officer, director, employee
or other agent for any liability arising out of that
persons actions as our officer, director, employee or
agent, regardless of whether Delaware law would permit
indemnification. We have entered into indemnification agreements
with each of our current directors and executive officers and
expect to enter into indemnification agreements with each of our
future directors and executive officers. These agreements
require us to indemnify these individuals to the fullest extent
permitted under Delaware law against liability that may arise by
reason of their service to us, and to advance expenses incurred
as a result of any proceeding against them as to which they
could be indemnified. We believe that the limitation of
liability provision in our amended and restated certificate of
incorporation and the indemnification agreements facilitate our
ability to continue to attract and retain qualified individuals
to serve as directors and officers.
II-1
|
|
Item 15.
|
Recent Sales
of Unregistered Securities
|
On October 7, 2007, C&J Energy Services, Inc., Energy
Spectrum Partners IV LP, CCP II and certain of our other
stockholders named therein entered into the Share Purchase
Agreement. Pursuant to the Share Purchase Agreement, Energy
Spectrum Partners IV LP and CCP II each purchased
500,000 shares of our common stock for an aggregate
$10.0 million. We believe the issuances in this offering
were exempt from registration under Section 4(2) of the
Securities Act based upon representations made to us by the
purchasers in the Share Purchase Agreement. Energy Spectrum
Partners IV LP and CCP II were granted the right to
purchase such shares pursuant to their preemptive rights set
forth in the 2006 Shareholders Agreement.
On December 23, 2010, we completed a private placement of
28,263,000 shares of our common stock. FBR Capital
Markets & Co. acted as initial purchaser and placement
agent in the offering. We refer to this offering herein as the
2010 Private Placement. Shares of our common stock were sold to
accredited investors, qualified institutional buyers and certain
persons outside the United States in offshore transactions at a
price per share of $10.00. FBR Capital Markets &
Co.s initial purchasers discount and placement fee
was $0.70 per share, resulting in a price per share received by
us before expenses of $9.30, or $262,845,900 in aggregate
proceeds to us before expenses. On January 21, 2011, FBR
Capital Markets & Co. exercised a portion of their
over-allotment option and purchased or placed an additional
505,000 shares of our common stock. The price per share,
initial purchasers discount and placement fee per share
and price per share received by us were the same in the
over-allotment exercise as they were in the initial offering. We
received an additional $4,969,500 from the sale of the
over-allotment shares before expenses. We believe the issuances
in this offering were exempt from registration pursuant to
Section 4(2), Rule 144A, Regulation S or
Regulation D of the Securities Act based upon the
representations to us or FBR Capital Markets & Co. by
each investor or investor transferee that such investor is an
accredited investor as defined in Rule 501(a)
under the Securities Act, such investor is a non-US person and
otherwise complies with the requirements for relation of
Regulation S, or such investor is a qualified
institutional investor as defined in Rule 144A under
the Securities Act, as the case may be.
(a)
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
*1
|
.1
|
|
Form of Underwriting Agreement
|
|
**3
|
.1
|
|
Amended and Restated Certificate of Incorporation of C&J
Energy Services, Inc.
|
|
**3
|
.2
|
|
Amended and Restated Bylaws of C&J Energy Services, Inc.
|
|
**4
|
.1
|
|
Form of Stock Certificate
|
|
*5
|
.1
|
|
Opinion of Vinson & Elkins L.L.P. as to the legality of the
securities being registered
|
|
**10
|
.1
|
|
C&J Energy Services, Inc. 2006 Stock Option Plan, adopted
by the Board of Directors and approved by the Shareholders on
October 16, 2006
|
|
**10
|
.2
|
|
Amendment to the C&J Energy Services, Inc. 2006 Stock
Option Plan, dated December 23, 2010
|
|
**10
|
.3
|
|
C&J Energy Services, Inc. 2010 Stock Option Plan, adopted
by the Board of Directors and approved by the Shareholders on
December 15, 2010
|
|
**10
|
.4
|
|
Master Operating Lease dated July 14, 2010, between BB&T
Equipment Finance Corporation, the C&J Spec-Rent Services,
Inc. and C&J Energy Services, Inc., as amended,
supplemented and modified from time to time, and the related
Equipment Schedules (as defined therein)
|
II-2
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
**10
|
.5
|
|
Master Operating Lease Agreement dated as of July 21, 2010,
between AIG Commercial Equipment Finance, Inc., and C&J
Spec-Rent Services, Inc. and C&J Energy Services, Inc., as
amended, supplemented and modified from time to time, and the
related Equipment Schedules (as defined therein)
|
|
**10
|
.6
|
|
Rider 1 dated as of July 21, 2010 to Master Operating Lease
Agreement dated as of July 21, 2010, between AIG Commercial
Equipment Finance, Inc., and C&J Spec-Rent Services, Inc.
and C&J Energy Services, Inc., as amended, supplemented and
modified from time to time, and the related Equipment Schedules
(as defined in the Master Operating Lease Agreement)
|
|
**10
|
.7
|
|
Amended and Restated Employment Agreement effective December 23,
2010 between C&J Energy Services, Inc. and Joshua E.
Comstock
|
|
**10
|
.8
|
|
Amended and Restated Employment Agreement effective December 23,
2010 between C&J Energy Services, Inc. and Randall C.
McMullen, Jr.
|
|
**10
|
.9
|
|
Amended and Restated Employment Agreement effective December 23,
2010 between C&J Energy Services, Inc. and Bretton W.
Barrier
|
|
**10
|
.10
|
|
Employment Agreement effective February 1, 2011 between C&J
Energy Services, Inc. and Theodore R. Moore
|
|
**10
|
.11
|
|
Joshua E. Comstock Non-Statutory Stock Option Agreement, dated
December 23, 2010
|
|
**10
|
.12
|
|
Randall C. McMullen, Jr. Non-Statutory Stock Option Agreement,
dated December 23, 2010
|
|
**10
|
.13
|
|
Bretton W. Barrier Non-Statutory Stock Option Agreement, dated
December 23, 2010
|
|
**10
|
.14
|
|
Theodore R. Moore Non-Statutory Stock Option Agreement, dated
February 1, 2011
|
|
**10
|
.15
|
|
Amended and Restated Stockholders Agreement of C&J Energy
Services, Inc. dated as of December 23, 2010
|
|
**10
|
.16
|
|
First Amendment to the Amended and Restated Stockholders
Agreement of C&J Energy Services, Inc. dated as of
May 12, 2011
|
|
**10
|
.17
|
|
Registration Rights Agreement, dated December 23, 2010, among
C&J Energy Services, Inc., certain of our stockholders and
FBR Capital Markets & Co.
|
|
**10
|
.18
|
|
Credit Agreement, dated as of April 19, 2011, among C&J
Energy Services, Inc. as Borrower, Bank of America, N.A. as
Administrative Agent, Swing Line Lender and L/C Issuer, Comerica
Bank as L/C Issuer and Syndication Agent, Wells Fargo Bank,
National Association as Documentation Agent, and the Other
Lenders party thereto
|
|
**16
|
.1
|
|
Letter from Flackman Goodman & Proctor, P.A., dated March
30, 2011
|
|
**21
|
.1
|
|
List of Subsidiaries of C&J Energy Services, Inc.
|
|
23
|
.1
|
|
Consent of UHY LLP
|
|
*23
|
.2
|
|
Consent of Vinson & Elkins L.L.P. (included as part of
Exhibit 5.1 hereto)
|
|
**24
|
.1
|
|
Power of Attorney
|
|
|
|
* |
|
To be filed by amendment. |
|
** |
|
Previously filed. |
|
|
|
Management contract or compensatory plan or arrangement. |
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the foregoing provisions, or
II-3
otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized in the City of Houston, State of Texas, on
June 9, 2011.
C&J Energy Services, Inc.
|
|
|
|
By:
|
/s/ Joshua
E. Comstock
|
Joshua E. Comstock
Chief Executive Officer, President and Chairman
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signatures
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Joshua
E. Comstock
Joshua
E. Comstock
|
|
Chief Executive Officer, President and Chairman of the Board of
Directors (principal executive officer)
|
|
June 9, 2011
|
|
|
|
|
|
/s/ Randall
C. McMullen, Jr.
Randall
C. McMullen, Jr.
|
|
Executive Vice President, Chief Financial Officer, Treasurer and
Director (principal financial officer)
|
|
June 9, 2011
|
|
|
|
|
|
/s/ Mark
C. Cashiola
Mark
C. Cashiola
|
|
Corporate Controller
(principal accounting officer)
|
|
June 9, 2011
|
|
|
|
|
|
*
Darren
M. Friedman
|
|
Director
|
|
June 9, 2011
|
|
|
|
|
|
*
James
P. Benson
|
|
Director
|
|
June 9, 2011
|
|
|
|
|
|
*
Michael
Roemer
|
|
Director
|
|
June 9, 2011
|
|
|
|
|
|
*
H.
H. Tripp Wommack, III
|
|
Director
|
|
June 9, 2011
|
|
|
|
|
|
*
C.
James Stewart, III
|
|
Director
|
|
June 9, 2011
|
|
|
|
*By
|
/s/ Randall
C. McMullen, Jr.
|
|
Randall C. McMullen, Jr.,
Attorney-in-fact
II-5
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
*1
|
.1
|
|
Form of Underwriting Agreement
|
|
**3
|
.1
|
|
Amended and Restated Certificate of Incorporation of C&J
Energy Services, Inc.
|
|
**3
|
.2
|
|
Amended and Restated Bylaws of C&J Energy Services, Inc.
|
|
**4
|
.1
|
|
Form of Stock Certificate
|
|
*5
|
.1
|
|
Opinion of Vinson & Elkins L.L.P. as to the legality of the
securities being registered
|
|
**10
|
.1
|
|
C&J Energy Services, Inc. 2006 Stock Option Plan, adopted
by the Board of Directors and approved by the Shareholders on
October 16, 2006
|
|
**10
|
.2
|
|
Amendment to the C&J Energy Services, Inc. 2006 Stock
Option Plan, dated December 23, 2010
|
|
**10
|
.3
|
|
C&J Energy Services, Inc. 2010 Stock Option Plan, adopted
by the Board of Directors and approved by the Shareholders on
December 15, 2010
|
|
**10
|
.4
|
|
Master Operating Lease dated July 14, 2010, between BB&T
Equipment Finance Corporation, the C&J Spec-Rent Services,
Inc. and C&J Energy Services, Inc., as amended,
supplemented and modified from time to time, and the related
Equipment Schedules (as defined therein)
|
|
**10
|
.5
|
|
Master Operating Lease Agreement dated as of July 21, 2010,
between AIG Commercial Equipment Finance, Inc., and C&J
Spec-Rent Services, Inc. and C&J Energy Services, Inc., as
amended, supplemented and modified from time to time, and the
related Equipment Schedules (as defined therein)
|
|
**10
|
.6
|
|
Rider 1 dated as of July 21, 2010 to Master Operating Lease
Agreement dated as of July 21, 2010, between AIG Commercial
Equipment Finance, Inc., and C&J Spec-Rent Services, Inc.
and C&J Energy Services, Inc., as amended, supplemented and
modified from time to time, and the related Equipment Schedules
(as defined in the Master Operating Lease Agreement)
|
|
**10
|
.7
|
|
Amended and Restated Employment Agreement effective December 23,
2010 between C&J Energy Services, Inc. and Joshua E.
Comstock
|
|
**10
|
.8
|
|
Amended and Restated Employment Agreement effective December 23,
2010 between C&J Energy Services, Inc. and Randall C.
McMullen, Jr.
|
|
**10
|
.9
|
|
Amended and Restated Employment Agreement effective December 23,
2010 between C&J Energy Services, Inc. and Bretton W.
Barrier
|
|
**10
|
.10
|
|
Employment Agreement effective February 1, 2011 between C&J
Energy Services, Inc. and Theodore R. Moore
|
|
**10
|
.11
|
|
Joshua E. Comstock Non-Statutory Stock Option Agreement, dated
December 23, 2010
|
|
**10
|
.12
|
|
Randall C. McMullen, Jr. Non-Statutory Stock Option Agreement,
dated December 23, 2010
|
|
**10
|
.13
|
|
Bretton W. Barrier Non-Statutory Stock Option Agreement, dated
December 23, 2010
|
|
**10
|
.14
|
|
Theodore R. Moore Non-Statutory Stock Option Agreement, dated
February 1, 2011
|
|
**10
|
.15
|
|
Amended and Restated Stockholders Agreement of C&J Energy
Services, Inc. dated as of December 23, 2010
|
|
**10
|
.16
|
|
First Amendment to the Amended and Restated Stockholders
Agreement of C&J Energy Services, Inc. dated as of
May 12, 2011
|
|
**10
|
.17
|
|
Registration Rights Agreement, dated December 23, 2010, among
C&J Energy Services, Inc., certain of our stockholders and
FBR Capital Markets & Co.
|
|
**10
|
.18
|
|
Credit Agreement, dated as of April 19, 2011, among C&J
Energy Services, Inc. as Borrower, Bank of America, N.A. as
Administrative Agent, Swing Line Lender and L/C Issuer, Comerica
Bank as L/C Issuer and Syndication Agent, Wells Fargo Bank,
National Association as Documentation Agent, and the Other
Lenders party thereto
|
|
**16
|
.1
|
|
Letter from Flackman Goodman & Proctor, P.A., dated March
30, 2011
|
|
**21
|
.1
|
|
List of Subsidiaries of C&J Energy Services, Inc.
|
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Exhibit
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Number
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Description
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23
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.1
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Consent of UHY LLP
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*23
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.2
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Consent of Vinson & Elkins L.L.P. (included as part of
Exhibit 5.1 hereto)
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**24
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.1
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Power of Attorney
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* |
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To be filed by amendment. |
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** |
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Previously filed. |
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Management contract or compensatory plan or arrangement. |