As filed with the Securities and Exchange
Commission on March 30, 2011
Registration
No. 333-
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
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)
CALCULATION OF
REGISTRATION FEE
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Proposed Maximum
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Amount of
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Title of Each Class of
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Aggregate
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Registration
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Securities to be Registered
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Offering Price(1)(2)
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Fee
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Common Stock, par value $0.01 per share
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$ 225,000,000
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$ 26,122.50
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(1)
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Includes shares of common stock
issuable upon exercise of the underwriters option to
purchase additional shares of common stock.
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(2)
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Estimated solely for the purpose of
calculating the registration fee pursuant to Rule 457(o)
under the Securities Act of 1933.
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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
March 30, 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 intend to apply 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 11.
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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C&J Energy Services, Inc. has 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.
Joint Book-Running Managers
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Goldman,
Sachs & Co. |
J.P. Morgan |
Senior Co-Manager
Citi
Co-Manager
Simmons &
Company
International
Prospectus
dated ,
2011.
TABLE OF
CONTENTS
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. Although we believe these third-party sources are
reliable, we have not independently verified the information and
cannot guarantee its accuracy or completeness.
i
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,
Cautionary Note Regarding Forward-Looking Statements
and Managements Discussion and Analysis of Financial
Condition and Results of Operations 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 the company refer to C&J
Energy Services, Inc. and its subsidiary.
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 in connection with well completion and
production enhancement operations. We have historically operated
in 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 and continued fleet
expansion. This revenue increase represents a compound annual
growth rate of approximately 98%. For the year ended
December 31, 2010, we generated revenues of
$182.7 million in our hydraulic fracturing operations (75%
of the total), $50.6 million in our coiled tubing
operations (21% of the total) and $10.9 million in our
pressure pumping operations (4% of the total). Adjusted EBITDA
for the year ended December 31, 2010 was $82.6 million
and net income for the year ended December 31, 2010 was
$32.3 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
two additional hydraulic fracturing fleets, which, upon
delivery, will increase our aggregate horsepower to 206,000. 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 13 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 fourth quarter of
2010, our fracturing operations generated monthly revenue per
unit of horsepower of approximately $379, which we believe to be
higher than the comparable performance of our peers.
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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
a typical well, 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
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 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/or
equipment to perform various applications on either a completion
or workover assignment. 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 potential
coiled tubing work.
How We Generate
Our Revenues
We have completed thousands of fracturing stages and more than
8,000 coiled tubing projects. During the three months ended
December 31, 2010, we completed 389 fracturing stages and
530 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.
Our revenues are derived from three 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;
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sales of chemicals and proppant materials that are consumed
during the fracturing process and that we source from third
parties; and
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coiled tubing, pressure pumping and related services.
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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 and Anadarko Petroleum
contracts in July 2010, August 2010 and February 2011,
respectively. We anticipate beginning service under the EXCO
Resources contract in April 2011 and under the Plains
Exploration contract in July 2011. Our existing hydraulic
fracturing fleets (Fleets 1, 2, 3 and 4) are dedicated
through mid-2011, 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.
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
maximums, 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 with respect to
each of our hydraulic fracturing fleets, we also maintain 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
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 our term contracts and in connection with spot market
work, we source the chemicals and proppants used in connection
with our services and charge our clients for those materials as
part of the services we provide, or we charge our customers a
handling fee for proppants supplied by the customer.
Our coiled tubing and pressure pumping services are typically
contracted for much shorter periods of time than our hydraulic
fracturing services and are usually billed on an hourly basis or
on a per-job basis. 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.
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
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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 985 as
of March 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, 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. 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, 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.
Our Competitive
Strengths
Operational Expertise in Service-Intensive
Basins. We have focused our hydraulic
fracturing fleets in some of the most service-intensive domestic
basins, which require technically challenging, high-pressure
fracturing services. During the fourth quarter of 2010, our
fracturing operations generated monthly revenue per unit of
horsepower of approximately $379, 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.
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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
site-by-site
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.
This 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, executed contracts as well as contract
negotiations in progress that we believe will support and
sustain our growth for the foreseeable future. Three of our four
existing hydraulic fracturing fleets are committed through
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 and the extension of
our current term contract with Penn Virginia. 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 has been delivered and is expected to be
deployed in April 2011; Fleet 5 is expected to be delivered and
deployed in June 2011; and Fleet 6 is expected to be delivered
and deployed in the fourth quarter of 2011. 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 more 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 with 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
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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 (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. 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.
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 .
6
The
Offering
The following summary contains basic information about this
offering and the shares of our common stock and is not intended
to be complete. This summary may not contain all of the
information that is important to you. For a more complete
understanding of this offering and the shares of our common
stock, we encourage you to read this entire prospectus,
including without limitation, the sections of this prospectus
entitled Risk Factors and Description of
Capital Stock.
|
|
|
Common stock offered by C&J Energy Services, Inc.
|
|
shares
( shares
if the underwriters option to purchase additional shares
is exercised in full) |
|
Common stock offered by the Selling Stockholders
|
|
shares |
|
Common stock to be outstanding after this offering
|
|
shares
( shares
if the underwriters option to purchase additional shares
is exercised in full)(1) |
|
Common stock owned by Selling Stockholders after this offering
|
|
shares |
|
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. If the underwriters option to
purchase additional shares is exercised in full, we estimate
that our net proceeds will be
$ million. Each $1.00
increase (decrease) in the public offering price would increase
(decrease) our net proceeds by approximately
$ million, or
$ million if the
underwriters option to purchase additional shares is
exercised in full. |
|
|
|
We intend to use the net proceeds we receive from this offering,
and any proceeds from any exercise of the underwriters
option to purchase additional shares, to repay all outstanding
indebtedness under our credit facility, approximately
$54.1 million of which was outstanding on March 25,
2011, to repay in full $25.0 million outstanding under our
subordinated term loan, to fund future capital expenditures and
working capital, and for general corporate purposes, including
acquisitions and expansion of our hydraulic fracturing fleets.
We will not receive any proceeds from the sale of shares by the
selling stockholders. |
|
Dividend Policy
|
|
We do not anticipate paying cash dividends on shares of our
common stock for the foreseeable future. In addition, our credit
facility and subordinated term loan contain restrictions on the
payment of dividends to holders of our common stock. |
7
|
|
|
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 11. |
|
Proposed New York Stock Exchange Symbol
|
|
CJES |
|
|
|
(1) |
|
The number of outstanding shares excludes (i)
5,790,254 shares of common stock issuable upon exercise of
options to be outstanding immediately after this offering, of
which 1,949,318 currently are exercisable, and (ii) an
aggregate of approximately 1,858,953 shares of common stock
reserved and available for future issuance under the 2010 Plan. |
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 11 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.
|
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.
|
|
|
|
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.
|
8
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.
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
and our consolidated financial statements and the notes thereto
included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per
|
|
|
|
share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
244,157
|
|
|
$
|
67,030
|
|
|
$
|
62,441
|
|
Cost of sales
|
|
|
154,297
|
|
|
|
54,242
|
|
|
|
42,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
89,860
|
|
|
|
12,788
|
|
|
|
20,040
|
|
Selling, general and administrative expenses
|
|
|
17,998
|
|
|
|
9,533
|
|
|
|
8,950
|
|
Loss on sale/disposal of Assets
|
|
|
1,571
|
|
|
|
920
|
|
|
|
397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
70,291
|
|
|
|
2,335
|
|
|
|
10,693
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
9
|
|
|
|
4
|
|
|
|
5
|
|
Interest expense
|
|
|
(17,350
|
)
|
|
|
(4,712
|
)
|
|
|
(6,913
|
)
|
Lender fees
|
|
|
(322
|
)
|
|
|
(391
|
)
|
|
|
(511
|
)
|
Other income
|
|
|
163
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
(150
|
)
|
|
|
(52
|
)
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
(17,650
|
)
|
|
|
(5,151
|
)
|
|
|
(7,487
|
)
|
Income (loss) before income taxes
|
|
|
52,641
|
|
|
|
(2,816
|
)
|
|
|
3,206
|
|
Provision (benefit) for income taxes
|
|
|
20,369
|
|
|
|
(386
|
)
|
|
|
2,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
32,272
|
|
|
$
|
(2,430
|
)
|
|
$
|
1,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share
|
|
$
|
0.70
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.02
|
|
Diluted income (loss) per share
|
|
$
|
0.67
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.02
|
|
Other Supplementary Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(1)
|
|
$
|
82,606
|
|
|
$
|
13,083
|
|
|
$
|
19,927
|
|
Capital expenditures
|
|
|
44,473
|
|
|
|
4,301
|
|
|
|
21,526
|
|
Balance Sheet Data (as of end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,817
|
|
|
$
|
1,178
|
|
|
$
|
109
|
|
Net working capital(2)
|
|
|
24,747
|
|
|
|
2,936
|
|
|
|
6,503
|
|
Property, plant and equipment, net
|
|
|
88,395
|
|
|
|
65,404
|
|
|
|
71,441
|
|
Total assets
|
|
|
226,088
|
|
|
|
150,231
|
|
|
|
155,212
|
|
|
|
|
(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 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 |
9
|
|
|
|
|
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.
|
|
|
|
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,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net income (loss)
|
|
$
|
32,272
|
|
|
$
|
(2,430
|
)
|
|
$
|
1,121
|
|
Interest expense, net
|
|
|
17,341
|
|
|
|
4,708
|
|
|
|
6,909
|
|
Provision (benefit) for income taxes
|
|
|
20,369
|
|
|
|
(386
|
)
|
|
|
2,085
|
|
Depreciation and amortization
|
|
|
10,744
|
|
|
|
9,828
|
|
|
|
8,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
80,726
|
|
|
$
|
11,720
|
|
|
$
|
18,951
|
|
Adjustments to EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Lender fees
|
|
|
322
|
|
|
|
391
|
|
|
|
511
|
|
Other (income) expense(a)
|
|
|
(13
|
)
|
|
|
52
|
|
|
|
68
|
|
Loss on sale/disposition of property, plant & equipment
|
|
|
1,571
|
|
|
|
920
|
|
|
|
397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
82,606
|
|
|
$
|
13,083
|
|
|
$
|
19,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Consists of state franchise taxes and other non-operating
expenses. |
|
|
|
(2) |
|
Consists of current assets less cash minus current liabilities
less current portion of debt. |
10
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:
|
|
|
|
|
the supply of and demand for oil and natural gas, including
current natural gas storage capacity and usage;
|
|
|
|
the prices, and expectations about future prices, of oil and
natural gas;
|
|
|
|
the supply of and demand for hydraulic fracturing and other well
service equipment in the United States;
|
|
|
|
the cost of exploring for, developing, producing and delivering
oil and natural gas;
|
|
|
|
public pressure on, and legislative and regulatory interest
within, federal, state and local governments to stop,
significantly limit or regulate hydraulic fracturing activities;
|
|
|
|
the expected rates of decline of current oil and natural gas
production;
|
|
|
|
lead times associated with acquiring equipment and products and
availability of personnel;
|
|
|
|
regulation of drilling activity;
|
|
|
|
the discovery rates of new oil and natural gas reserves;
|
|
|
|
available pipeline and other transportation capacity;
|
|
|
|
weather conditions, including hurricanes that can affect oil and
natural gas operations over a wide area;
|
|
|
|
political instability in oil and natural gas producing countries;
|
|
|
|
domestic and worldwide economic conditions;
|
|
|
|
technical advances affecting energy consumption;
|
|
|
|
the price and availability of alternative fuels; and
|
|
|
|
merger and divestiture activity among oil and natural gas
producers.
|
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 March 25, 2011, the Henry Hub spot price for natural gas
was $4.40 per mcf. Unexpected material declines in oil and
natural gas prices, or drilling or completion
11
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 there can be no assurance that such measures
would 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. The delivery of Fleet 5 and Fleet 6 or any other
fracturing fleets we may order in the future could be materially
delayed or not delivered at all. One supplier is constructing
our hydraulic fracturing pumps for both Fleet 5 and Fleet 6. 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
materials (such as proppant, chemicals or coiled tubing) or
finished products (such as fluid-handling
12
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. There can be no assurances that we will
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 is also conducting 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.
Bills have been introduced into the Texas Senate and House of
Representatives 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. 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. Moreover, 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.
13
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; Randall C. McMullen, Jr., our Chief Financial
Officer; Bretton W. Barrier, our Chief Operating Officer;
Theodore Moore, our Vice President General Counsel
and Corporate Secretary; John D. Foret, our Vice
President Coiled Tubing; Brandon D. Simmons, our
Vice President Coiled Tubing, William D. Driver, our
Vice President Hydraulic Fracturing and J.P.
Pat Winstead, our Vice President Sales
and Marketing. We believe our senior managements
experience, reputations and relationships with customers and
equipment suppliers are critical elements of the success of our
business. If we lose the services of one or more of our
executive officers or key employees, 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. 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. The term of these contracts ranges from one to
three years. Once these contracts expire, there can be no
assurance that we will 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, 2007 through the year
ended December 31, 2010, our Adjusted EBITDA increased
$69.9 million from $12.7 million to
$82.6 million, representing a compound annual growth rate
of 86.7%. 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 on-order
fracturing fleets, Fleet 5 and Fleet 6; 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 may seek to grow our business through
acquisitions that enhance our existing operations. The success
of any completed acquisition will depend on our ability to
integrate effectively the acquired business into our existing
operations. The process of integrating acquired businesses
14
may involve unforeseen difficulties and may require a
disproportionate amount of our managerial and 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
15
our competitors provide a broader array of services and have a
stronger presence in more geographic 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. We cannot
assure you that our reputation for safety and quality will be
sufficient to enable us to maintain our competitive position.
Covenants in
our debt agreements 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 $40.0 million in any
calendar year, provided that 50% of unused amounts in any year
may be rolled over to the subsequent fiscal year and that
capital expenditures in excess of $20.0 million are subject
to certain liquidity requirements. The capital expenditure
restrictions do not apply to capital expenditures financed with
new cash proceeds from permitted subordinated debt and the
issuance of equity interests, maintenance capital expenditures
and capital expenditures relating to the purchase of Fleet 3 and
Fleet 4.
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 cannot assure you that we will
have sufficient assets to repay indebtedness under such
facilities and our other indebtedness.
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 of control.
Energy Spectrum Partners IV LP, whom we refer to herein as
Energy Spectrum, and 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 refer to herein as
Citigroup/StepStone and collectively with Energy
Spectrum, as the Sponsors, collectively hold
approximately 30.3% of our outstanding common stock prior to
giving effect to this offering. In addition, pursuant to our
Amended and Restated Stockholders Agreement, each of
Citigroup/StepStone and Energy Spectrum 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, the Sponsors have
influence over our decisions to enter into any corporate
transaction regardless of whether others believe that the
transaction is in our best interests. As long as the 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. Please read Certain Relationships
and Related Party Transactions Amended and Restated
Stockholders Agreement.
16
The 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. The
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. The
concentration of ownership may have the effect of delaying,
preventing or deterring a change of 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.
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.
17
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, 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
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, 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. Please read
Business Environmental Matters 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 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
18
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.
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. Although we
believe our equipment and processes currently give us a
competitive advantage, as competitors and others use or develop
new or comparable technologies in the future, we may lose market
share or be placed at a competitive disadvantage. Further, we
may face competitive pressure to implement or acquire certain
new technologies at a substantial cost. Some of our competitors
have greater financial, technical and personnel resources that
may allow them to enjoy technological advantages and implement
new technologies before we can. We cannot be certain that we
will be able to implement new technologies or products on a
timely basis or at an acceptable cost. Thus, limits on our
ability to effectively use or implement new emerging technology
may have a material adverse effect on our business, financial
condition or results of operations.
19
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.
The initial public offering price will be negotiated between us,
the selling stockholders and representatives of the
underwriters, based on numerous factors which we discuss in the
Underwriting section of this prospectus, and may not
be indicative of the market price of our common stock after this
offering. Consequently, you may not be able to sell shares of
our common stock at prices equal to or greater than the price
paid by you in the offering.
Even if an active trading market develops, the market price for
shares of 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 Risk Factors section,
some of the factors that could negatively affect our share price
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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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
December 31, 2010 after giving effect to this offering
would be $ per share. Please read
Dilution for a complete description of the
calculation of net tangible book value.
20
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 and our subordinated term loan
restrict 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 statutes, 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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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 our common stock or convertible securities
could lower our stock price and dilute your ownership in
us.
We may issue additional shares of our common stock or securities
convertible into shares of our common stock in public offerings
or privately negotiated transactions following this offering. As
of March 25, 2011, we had 47,499,074 shares of common
stock outstanding. We are currently authorized to issue up to
100,000,000 shares of our 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.
21
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. In connection
with the private offering, we agreed to file a shelf
registration statement covering the resale of the common stock
sold in the private offering on or before March 31, 2011,
which we intend to file by such date in addition to this
registration statement. Pursuant to the terms of the
registration rights agreement, we anticipate that the shelf
registration statement covering the shares sold in the private
offering 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 investor 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 for additional
information regarding the registration rights agreement and the
commitments we have made thereunder.
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 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. 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.
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. As
restrictions on resale end, the market price of our stock could
decline if the holders of restricted shares sell them or are
perceived by the market as intending to sell them. 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.
For additional information regarding shares of our common stock
available for sale, please read Shares Eligible for
Future Sale.
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
22
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 of 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.
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 overall financial
position.
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 overall financial position.
Future
offerings of debt securities and preferred stock, which would
rank senior to our common stock upon our 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.
23
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 and Managements Discussion and
Analysis of Financial Condition and Results of Operations,
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:
|
|
|
|
|
a sustained decrease in domestic spending by the oil and natural
gas exploration and production industry;
|
|
|
|
a decline in or substantial volatility of crude oil and natural
gas commodity prices;
|
|
|
|
delay in or failure of delivery of our new fracturing fleets or
future orders of specialized equipment;
|
|
|
|
the loss of or interruption in operations of one or more key
suppliers;
|
|
|
|
overcapacity and competition in our industry;
|
|
|
|
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;
|
|
|
|
the loss of, or inability to attract new, key management
personnel;
|
|
|
|
the loss of, or failure to pay amounts when due by, one or more
significant customers;
|
|
|
|
unanticipated costs, delays and other difficulties in executing
our long-term growth strategy;
|
|
|
|
a shortage of qualified workers;
|
|
|
|
operating hazards inherent in our industry;
|
|
|
|
accidental damage to or malfunction of equipment;
|
|
|
|
an increase in interest rates;
|
|
|
|
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;
|
|
|
|
the potential failure to establish and maintain effective
internal control over financial reporting; and
|
|
|
|
our inability to operate effectively as a publicly traded
company.
|
24
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. If
the underwriters option to purchase additional shares is
exercised in full, we estimate that our net proceeds will be
approximately $ million. We
will not receive any of the proceeds from the sale of shares of
our common stock by the selling stockholders.
We intend to use the net proceeds we receive from this offering,
and the net proceeds from any exercise of the underwriters
option to purchase additional shares, to repay all outstanding
indebtedness under our credit facility, approximately
$54.1 million of which was outstanding on March 25,
2011, to repay in full $25.0 million outstanding debt under
our subordinated term loan, to fund future capital expenditures
and working capital, and for general corporate purposes,
including acquisitions and expansion of our hydraulic fracturing
fleets.
As of March 25, 2011, we had up to $26.5 million
available for borrowing under the delayed-draw term loan of our
credit facility and $36.5 million available for borrowing
under the revolving portion of our credit facility. Our
subordinated term loan matures on June 30, 2014 and the
interest rate under the term loan was 14% as of March 25,
2011. Please read Managements Discussion and
Analysis of Financial Condition and Results of
Operations Description of Our Indebtedness for
a description of our credit facility and subordinated term loan.
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, after deducting underwriting discounts and commissions.
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, or
$ million if the
underwriters option to purchase additional shares is
exercised in full.
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.
25
CAPITALIZATION
The following table shows our cash and cash equivalents and
capitalization as of December 31, 2010, on an actual basis
and as adjusted to give effect to this offering and the
application of the net proceeds of this offering as described in
Use of Proceeds. You should refer to Use of
Proceeds, Selected Consolidated Financial
Data, Managements Discussion and Analysis of
Financial Condition and Results of Operations and the
financial statements included elsewhere in this prospectus in
evaluating the material presented below.
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(In thousands, except
|
|
|
|
per share data)
|
|
|
Cash and cash equivalents
|
|
$
|
2,817
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current maturities:
|
|
|
|
|
|
|
|
|
Credit facility(1)
|
|
$
|
47,039
|
|
|
$
|
|
|
Subordinated term loan
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
72,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock par value $0.01 per share,
20,000,000 shares authorized, no shares issued and
outstanding
|
|
|
|
|
|
|
|
|
Common stock par value $0.01 per share,
100,000,000 shares authorized, 47,499,074 shares
issued and outstanding(2)
|
|
|
475
|
|
|
|
|
|
Additional paid-in capital
|
|
|
78,288
|
|
|
|
|
|
Retained earnings
|
|
|
30,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
109,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
181,485
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of March 25, 2011, we had $54.1 million outstanding
under our credit facility, up to $26.5 million available
for borrowing under the delayed-draw term loan portion of our
credit facility and $36.5 million available for borrowing
under the revolving portion of our credit facility. |
|
(2) |
|
The number of outstanding shares excludes (i)
5,790,254 shares of common stock issuable upon exercise of
options to be outstanding immediately after this offering,
1,949,318 of which are exercisable, and (ii) an aggregate
of approximately 1,858,953 shares of common stock reserved
and available for future issuance under the 2010 Plan. |
26
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 December 31, 2010 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 December 31, 2010 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 December 31, 2010
|
|
$
|
|
|
|
|
|
|
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
December 31, 2010, 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. |
Assuming the underwriters option to purchase additional
shares is exercised in full, sales by us in this offering will
reduce the percentage of shares held by existing stockholders
to % and will increase the number
of shares held by new investors
to ,
or % on an adjusted basis as of
December 31, 2010.
27
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 financial data have, 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 and
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated
financial statements and the notes thereto included elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 17, 2006
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception Date)
|
|
|
January 1, 2006 to
|
|
|
|
Year Ended December 31,
|
|
|
to December 31,
|
|
|
October 16, 2006
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(Predecessor)1
|
|
|
|
(In thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
244,157
|
|
|
$
|
67,030
|
|
|
$
|
62,441
|
|
|
$
|
28,022
|
|
|
$
|
6,677
|
|
|
$
|
22,088
|
|
Cost of sales
|
|
|
154,297
|
|
|
|
54,242
|
|
|
|
42,401
|
|
|
|
14,227
|
|
|
|
2,504
|
|
|
|
7,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
89,860
|
|
|
|
12,788
|
|
|
|
20,040
|
|
|
|
13,795
|
|
|
|
4,173
|
|
|
|
14,862
|
|
Selling, general and administrative expenses
|
|
|
17,998
|
|
|
|
9,533
|
|
|
|
8,950
|
|
|
|
7,427
|
|
|
|
2,283
|
|
|
|
4,691
|
|
Loss on sale/disposal of assets
|
|
|
1,571
|
|
|
|
920
|
|
|
|
397
|
|
|
|
129
|
|
|
|
96
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
70,291
|
|
|
|
2,335
|
|
|
|
10,693
|
|
|
|
6,239
|
|
|
|
1,794
|
|
|
|
10,142
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
9
|
|
|
|
4
|
|
|
|
5
|
|
|
|
50
|
|
|
|
15
|
|
|
|
81
|
|
Interest expense
|
|
|
(17,350
|
)
|
|
|
(4,712
|
)
|
|
|
(6,913
|
)
|
|
|
(5,786
|
)
|
|
|
(1,055
|
)
|
|
|
(2,742
|
)
|
Lender fees
|
|
|
(322
|
)
|
|
|
(391
|
)
|
|
|
(511
|
)
|
|
|
(341
|
)
|
|
|
(114
|
)
|
|
|
|
|
Other income
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
18
|
|
Other expense
|
|
|
(150
|
)
|
|
|
(52
|
)
|
|
|
(68
|
)
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
(17,650
|
)
|
|
|
(5,151
|
)
|
|
|
(7,487
|
)
|
|
|
(6,094
|
)
|
|
|
(1,153
|
)
|
|
|
(2,643
|
)
|
Income (loss) before income taxes
|
|
|
52,641
|
|
|
|
(2,816
|
)
|
|
|
3,206
|
|
|
|
145
|
|
|
|
641
|
|
|
|
7,499
|
|
Provision (benefit) for income taxes
|
|
|
20,369
|
|
|
|
(386
|
)
|
|
|
2,085
|
|
|
|
868
|
|
|
|
199
|
|
|
|
2,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
32,272
|
|
|
$
|
(2,430
|
)
|
|
$
|
1,121
|
|
|
$
|
(723
|
)
|
|
$
|
442
|
|
|
$
|
4,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.70
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.01
|
|
|
$
|
0.04
|
|
Diluted net income (loss) per share
|
|
$
|
0.67
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.01
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 17, 2006
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception Date)
|
|
|
January 1, 2006 to
|
|
|
|
Year Ended December 31,
|
|
|
to December 31,
|
|
|
October 16, 2006
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(Predecessor)1
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
Statement of Cash Flows Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
44,473
|
|
|
$
|
4,301
|
|
|
$
|
21,526
|
|
|
$
|
30,152
|
|
|
$
|
9,282
|
|
|
$
|
11,360
|
|
Cash flow provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
44,723
|
|
|
|
12,056
|
|
|
|
8,611
|
|
|
|
8,377
|
|
|
|
855
|
|
|
|
6,240
|
|
Investing activities
|
|
|
(43,818
|
)
|
|
|
(4,254
|
)
|
|
|
(20,673
|
)
|
|
|
(30,054
|
)
|
|
|
(108,760
|
)
|
|
|
(7,538
|
)
|
Financing activities
|
|
|
734
|
|
|
|
(6,733
|
)
|
|
|
11,921
|
|
|
|
21,305
|
|
|
|
106,700
|
|
|
|
1,000
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
October 16, 2006
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(Predecessor)1
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,817
|
|
|
$
|
1,178
|
|
|
$
|
109
|
|
|
$
|
250
|
|
|
$
|
622
|
|
|
$
|
1,827
|
|
Accounts receivable, net
|
|
|
44,354
|
|
|
|
12,668
|
|
|
|
13,362
|
|
|
|
4,409
|
|
|
|
5,557
|
|
|
|
4,842
|
|
Inventories, net
|
|
|
8,182
|
|
|
|
2,463
|
|
|
|
861
|
|
|
|
581
|
|
|
|
440
|
|
|
|
450
|
|
Property, plant and equipment, net
|
|
|
88,395
|
|
|
|
65,404
|
|
|
|
71,441
|
|
|
|
57,991
|
|
|
|
31,593
|
|
|
|
22,999
|
|
Total assets
|
|
|
226,088
|
|
|
|
150,231
|
|
|
|
155,212
|
|
|
|
133,711
|
|
|
|
111,467
|
|
|
|
56,455
|
|
Accounts payable
|
|
|
13,084
|
|
|
|
10,598
|
|
|
|
6,519
|
|
|
|
1,705
|
|
|
|
690
|
|
|
|
773
|
|
Long-term debt and capital lease obligations, excluding current
portion
|
|
|
44,817
|
|
|
|
60,668
|
|
|
|
25,041
|
|
|
|
56,773
|
|
|
|
51,700
|
|
|
|
28,755
|
|
Total stockholders equity
|
|
|
109,446
|
|
|
|
65,799
|
|
|
|
68,099
|
|
|
|
66,797
|
|
|
|
56,265
|
|
|
|
24,173
|
|
|
|
|
(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 from our predecessor company,
C&J Spec-Rent Services, Inc.
|
29
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 and our audited 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 Statement Concerning Forward-Looking
Statements and Risk Factors. 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 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
8,000 coiled tubing projects. During the three months ended
December 31, 2010, we completed 389 fracturing stages and
530 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.
Our revenues are derived from three sources:
|
|
|
|
|
monthly payments for the committed hydraulic fracturing fleets
under term contracts as well as prevailing market rates for spot
market work;
|
|
|
|
sales of chemicals and proppant materials that are consumed
during the fracturing process and that we source from third
parties; and
|
|
|
|
coiled tubing, pressure pumping and related services.
|
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 and Anadarko Petroleum
contracts in July 2010, August 2010 and February 2011,
respectively. We anticipate beginning service under the EXCO
Resources contract in April 2011 and under the Plains
Exploration contract in July 2011. Our existing hydraulic
fracturing fleets (Fleets 1, 2, 3 and 4) are dedicated
through mid-2011, 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.
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
maximums, we will be paid a pre-agreed amount for the provision
of such additional
30
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 with respect to
each of our hydraulic fracturing fleets, we also maintain 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
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 our term contracts and in connection with spot market
work, we source the chemicals and proppants used in connection
with our services and charge our clients for those materials as
part of the services we provide, or we charge our customers a
handling fee for proppants supplied by the customer.
Our coiled tubing and pressure pumping services are typically
contracted for much shorter periods of time than our hydraulic
fracturing services and are usually billed on an hourly basis or
on a per-job basis. 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.
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. Direct labor
costs represented approximately 10.7% of our revenues for the
year ended December 31, 2010. Other costs, including sand,
chemical and freight costs, represented approximately 34.7% of
our revenues for the year ended December 31, 2010. 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 December 31, 2010, we completed 51 fracturing
jobs and 389 fracturing stages, and we generated average revenue
per fracturing job of $1.3 million and average revenue per
fracturing stage of $169,695. Additionally, our hydraulic
fracturing fleets worked on average 93.7% of the available
working days per month, which excludes scheduled maintenance
days. During the three
31
months ended December 31, 2010, we completed 530 coiled
tubing jobs, and we generated average revenue per job of $29,383.
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. 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 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.
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 fracturing service agreements
covering each of our four existing fleets and one of our two
on-order hydraulic fracturing fleets.
32
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 was $244.2 million for the year ended
December 31, 2010 compared to $67.0 million for the
year ended December 31, 2009, an increase of 264%. This
increase was primarily due to the increase in demand for our
services and an overall increase in activity levels for the
energy industry during 2010 compared to 2009, resulting in
higher pricing and higher utilization of our equipment. Activity
levels and pricing began to improve during the fourth quarter of
2009 and continued improving throughout 2010.
Fracturing services revenue increased $144.6 million, or
379%, for the year ended December 31, 2010 compared to the
comparable period in 2009 primarily due to an increase in
pricing and activity on a
year-over-year
basis and the deployment of Fleet 2 in July 2010. Coiled Tubing
Services revenue increased $32.6 million, or 113%, for the
year ended December 31, 2010 compared to the comparable
period in 2009 primarily due to higher activity levels, improved
pricing and the expansion of customer relationships.
Cost of
Sales
Cost of sales increased $100.1 million, or 184%, for the
year ended December 31, 2010 compared to the comparable
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 year ended December 31, 2009 due primarily to
improved utilization and pricing for all services. As a
percentage of revenue, labor expense and fluid supplies
(chemicals) decreased for the year ended December 31, 2010
compared to the same period in 2009 by 8% and 0.4%,
respectively. As a percentage of revenue, proppants expense
increased for the year ended December 31, 2010 compared to
the same period in 2009 by 3%.
Selling, General
and Administrative Expenses (SG&A)
SG&A increased 89%, or $8.5 million, for the year
ended December 31, 2010 compared to the year ended
December 31, 2009. As a percentage of revenue, SG&A
decreased to 7% for the year
33
ended December 31, 2010 from 14% for the year ended
December 31, 2009 due primarily to the significant growth
in
year-over-year
revenue. Payroll, insurance and other SG&A costs increased
$4.4 million, $1.1 million and $2.5 million,
respectively, for the year ended December 31, 2010 compared
to the same period in 2009. The portion of labor expenses
included in SG&A increased 136% for the year ended
December 31, 2010 compared to the same period in 2009 due
to the increase in personnel required to support the increase in
activity levels as well as a full accrual for management bonuses.
Operating Income,
Adjusted EBITDA and Net Income (Loss)
Operating income was $70.3 million for the year ended
December 31, 2010 compared to operating income of
$2.3 million for the same period in 2009, an increase of
$68.0 million. As a percentage of revenue, operating income
increased to 29% in the year ended December 31, 2010
compared to operating income of 3% for the year ended
December 31, 2009. Adjusted EBITDA increased
$69.5 million for the year ended December 31, 2010 to
$82.6 million compared to $13.1 million in the same
period in 2009. For the definition of Adjusted EBITDA, a
discussion of Adjusted EBITDA as a performance measure and a
reconciliation of Adjusted EBITDA to net income (loss), please
read Prospectus Summary Summary Consolidated
Financial Data. Net income increased $34.7 million to
a net gain of $32.3 million for the year ended
December 31, 2010 compared to a net loss of
$2.4 million during the same period in 2009 due to the
foregoing factors.
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue was $67.0 million for the year ended
December 31, 2009 compared to $62.4 million for the
year ended December 31, 2008, an increase of 7%. This
increase was primarily due to revenue that was attributable to a
full-year operation of our fracturing services and East Texas
operations, which were started in late 2007. Overall, revenues
were negatively impacted in 2009 due to a significant decline in
our customers capital spending.
34
Fracturing Services revenue increased $10.6 million, or
39%, for the year ended December 31, 2009 compared to the
comparable period in 2008 primarily due to an increase in
utilization and pricing on a
year-over-year
basis. Our fracturing services were negatively impacted by the
decrease in drilling levels in both the second and third
quarters of 2009; however, in the fourth quarter of 2009, we
experienced an increase in revenues and margins as market
conditions showed signs of improvement. Coiled Tubing Services
revenue decreased $6.0 million, or 17%, for the year ended
December 31, 2009 compared to the same period in 2008
primarily due to an overall decline in investment by our
customers in oil and natural gas exploration and development
activities resulting from lower oil and natural gas commodity
prices. Our coiled tubing services experienced lower utilization
and pricing on a
year-over-year
basis.
Cost of
Sales
Cost of sales increased 28%, or $11.8 million, for the year
ended December 31, 2009, compared to the year ended
December 31, 2008. As a percentage of revenue, cost of
sales increased to 81% for the year ended December 31, 2009
from 68% for the year ended December 31, 2008 due primarily
to lower activity and pricing and resulting margin contraction.
However, we saw a rebound in drilling activity towards the end
of 2009 as conditions began to improve with higher commodity
prices and growing interest in the Eagle Ford Shale. As a
percentage of revenue, labor expense, proppants and fluid
supplies (chemicals) increased for the year ended
December 31, 2009 compared to the same period in 2008 by
1%, 4% and 3%, respectively.
Selling, General
and Administrative Expenses (SG&A)
SG&A increased 7%, or $0.6 million, for the year ended
December 31, 2009 compared to the year ended
December 31, 2008. SG&A, as a percentage of revenue,
remained unchanged at 14% for the year ended December 31,
2009 compared to the same period in 2008. Property taxes,
insurance and other SG&A costs increased $0.3 million,
$0.2 million and $0.7 million, respectively, and
payroll decreased $0.6 million for the year ended
December 31, 2009 compared to the same period in 2008. As a
percentage of revenue, the portion of labor expenses included in
SG&A decreased 1% in the year ended December 31, 2009
compared to the same period in 2008 due to payroll concessions
and the elimination of management bonuses for such year.
Operating Income,
Adjusted EBITDA and Net Income (Loss)
Operating income was $2.3 million for the year ended
December 31, 2009 compared to operating income of
$10.7 million for the same period in 2008, a decrease of
$8.4 million. As a percentage of revenue, operating income
decreased to 3% in the year ended December 31, 2009
compared to 17% for the year ended December 31, 2008.
Adjusted EBITDA decreased $6.8 million for the year ended
December 31, 2009 to $13.1 million compared to
$19.9 million in the same period in 2008. For the
definition of Adjusted EBITDA, a discussion of Adjusted EBITDA
as a performance measure and a reconciliation of Adjusted EBITDA
to net income (loss), please read Prospectus
Summary Summary Consolidated Financial Data.
Net income decreased $3.6 million to a net (loss) of
$2.4 million for the year ended December 31, 2009
compared to a net gain of $1.1 million during the same
period in 2008 due to the foregoing factors.
Liquidity and
Capital Resources
Our primary sources of liquidity to date have been capital
contributions and borrowings from stockholders, borrowings under
our credit facility and subordinated term loan 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 two new hydraulic fracturing fleets, Fleet
5 and Fleet 6, which are scheduled for delivery in June 2011 and
the fourth quarter of 2011, respectively. Fleet 5 has an
35
aggregate cost of approximately $25.2 million, of which
approximately $1.9 million has already been funded. Fleet 6
has an aggregate cost of approximately $26.1 million, of
which approximately $0.2 million has already been funded.
We intend to fund the remaining costs of Fleet 5 and Fleet 6
through a combination of internally generated cash flow and an
aggregate $26.5 million in borrowings under the
delayed-draw term loan of our credit facility.
On October 28, 2010, we entered into an amended and
restated credit facility and an amendment to our subordinated
term loan agreement. The total commitment under our credit
facility was increased to $126.7 million from
$56.7 million and is comprised of three components: a
$50.0 million undrawn delayed-draw term loan, a
$40.0 million undrawn working capital revolver and a
$36.7 million term loan that is fully drawn. The amendment
to our subordinated term loan permitted the increased amount of
the senior loans and commitments and provided for certain
additional changes, including conforming changes to the credit
facility.
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 our borrowings available under
our credit facility will be adequate to meet operational and
capital expenditure needs for the next 12 months.
The credit agreements evidencing our credit facility and our
subordinated term loan contain covenants which require us to
maintain a debt coverage ratio, to maintain a fixed charge
coverage ratio and to satisfy certain other conditions. These
covenants are subject to a number of exceptions and
qualifications set forth in the credit agreements that evidence
each such credit facility. Please read
Description of Our Indebtedness. In
addition, our credit facility contains covenants that limit our
ability to make capital expenditures in excess of
$40.0 million in any calendar year, provided that 50% of
unused amounts may be rolled over to the subsequent fiscal year,
capital expenditures in excess of $20.0 million are subject
to certain liquidity requirements, and the capital expenditure
restrictions do not apply to capital expenditures financed with
net cash proceeds from permitted subordinated debt and the
issuance of equity securities, maintenance capital expenditures
and capital expenditures relating to the purchase of Fleet 3 and
Fleet 4. 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. As of December 31,
2010, we were in compliance with each of these covenants.
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.
|
36
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 $44.4 million
on capital expenditures. Assuming the timely delivery of Fleet 5
and Fleet 6 and no additional fleet acquisitions, we expect our
total 2011 capital expenditure budget to be approximately
$119.2 million, of which $23.7 million has been spent
as of March 25, 2011.
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. For a
discussion of the capital resources and liquidity needed to fund
our routine operations and capital expenditures, please read
Liquidity and Capital Resources.
Financial
Condition and Cash Flows
The following table sets forth historical cash flow information
for each of the years ended December 31, 2010, 2009 and
2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash flow provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
44,723
|
|
|
$
|
12,056
|
|
|
$
|
8,611
|
|
Investing activities
|
|
|
(43,818
|
)
|
|
|
(4,254
|
)
|
|
|
(20,673
|
)
|
Financing activities
|
|
|
734
|
|
|
|
(6,733
|
)
|
|
|
11,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
$
|
1,639
|
|
|
$
|
1,069
|
|
|
$
|
(141
|
)
|
Cash Provided by
Operating Activities
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
$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 operations. 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.
Cash Flows
Provided by (Used in) Financing Activities
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,
37
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)
|
|
$
|
49,408
|
|
|
$
|
28,946
|
|
|
$
|
20,462
|
|
|
$
|
|
|
|
$
|
|
|
Subordinated term loan(2)
|
|
|
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 4 and Fleet 5 as of December 31, 2010. |
For additional discussion related to our short and long-term
obligations, please read Note 4 to the historical
consolidated financial statements for the year ended
December 31, 2010 included elsewhere in this prospectus.
Off-Balance Sheet
Arrangements
We had no off-balance sheet arrangements as of December 31,
2010.
Description of
Our Indebtedness
Senior Secured Credit Agreement. On
May 28, 2010, we entered into an Amended and Restated
Revolving Credit and Term Loan Agreement with Comerica Bank, as
administrative agent, and various lenders, which was amended and
restated on October 28, 2010 (the Effective
Date) by the Second Amended and Restated Credit Agreement,
which we refer to herein as the credit facility. We
are the parent guarantor and our subsidiary C&J Spec-Rent
Services, Inc. (the Borrower Subsidiary) is the
borrower under the credit facility. Prior to the Effective Date,
the credit facility provided for a three-year $40.0 million
term loan and a three-year $20.0 million revolving credit
facility, enabling the Borrower Subsidiary to borrow funds on a
revolving basis for working capital needs and letters of credit.
In connection with the amendment and restatement on the
Effective Date, the total commitment under our credit facility
was increased to $126.7 million from $56.7 million and
is comprised of three components: a $50.0 million undrawn
delayed-draw term loan, a $40.0 million working capital
revolver (of which $2.0 million was drawn and
$1.5 million was committed as undrawn letters of credit,
leaving approximately $36.5 million available for borrowing
as of March 25, 2011) and a $54.1 million term
loan that is fully drawn. As of March 25, 2011, total debt
outstanding under this
38
credit facility was $54.1 million. The credit facility also
has a sublimit of $5.0 million for letters of credit and a
sublimit of $5.0 million for swing line loans.
Loans under the credit facility are denominated in
U.S. dollars and will mature on June 1, 2013.
Outstanding loans bear interest at either LIBOR or a base rate,
at the Borrower Subsidiarys election, plus an applicable
margin based on a Debt to EBITDA Ratio. As of December 31,
2010, the interest rate under the credit facility was 5.0%.
Borrowings under the term loan facility are subject to
amortization. The Borrower Subsidiary repaid a principal
installment of approximately $3.3 million on
December 15, 2010, approximately $1.1 million on each
of January 1, 2011 and February 1, 2011, and is
required to repay principal installments of $2.5 million on
the first day of each month thereafter during the remainder of
the term of the facility. The remaining outstanding principal
amount and accrued interest of equipment line of credit loans
shall be paid in full in cash on the maturity date.
Borrowings under the revolving line of credit are limited to an
amount based on a borrowing base calculation using a percentage
of eligible accounts receivable and inventory satisfying certain
criteria, subject to certain reserves and other adjustments.
All obligations under the credit facility are guaranteed by us
and secured, subject to agreed upon exceptions, by a first
priority perfected security position on all real and personal
property of the Borrower Subsidiary and of us, as guarantor.
Voluntary prepayments are permitted under the terms of the
credit facility at any time without penalty or premium.
Mandatory prepayments are required in amounts equal to the net
proceeds of certain asset sales, certain insurance proceeds,
condemnation proceeds and extraordinary proceeds, and net
proceeds of issuance of debt and equity, in each case subject to
certain exceptions and carve outs.
The credit facility provides for payment of certain fees and
expenses, including (i) fees on the revolving loan
commitments and the undrawn amount of equipment line of credit
loan commitments, which vary depending on the Debt to EBITDA
Ratio, (ii) a letter of credit fee on the stated amount of
issued and undrawn letters of credit and a facing fee to the
issuing lender, and (iii) other customary fees, including
an agents fee.
Our credit facility contains customary affirmative covenants
including financial reporting, governance and notification
requirements. In addition, the credit facility contains, among
other things, restrictions on our and our Borrower
Subsidiarys 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
$40.0 million in any fiscal year, provided that 50% of
unused amounts may be rolled over to the subsequent fiscal year
and that capital expenditures in excess of $20.0 million
are subject to a liquidity requirement. The restrictions on
capital expenditures do not apply to capital expenditures
financed with net cash proceeds from permitted subordinated debt
and the issuance of equity interests, maintenance capital
expenditures and expenditures relating to the purchase of Fleet
3 and Fleet 4.
Our credit facility requires us to maintain, measured on a
consolidated basis, a Fixed Charge Coverage Ratio of
not less than 1.25 to 1.0 for the quarters ending on
December 31, 2010 and 1.40 to 1.0 thereafter, a Debt
to EBITDA Ratio of not more than 2.5 to 1.0, a Net
Worth of not less than $77.0 million and a
Consolidated Current Ratio of not less than 1.05 to
1.00, in each case as such terms are defined in the credit
facility.
Our credit facility provides that, upon the occurrence of
certain events of default, our obligations thereunder may be
accelerated and the lending commitments terminated. Such events
of default include, among other things, payment defaults to
lenders, failure to meet covenants, material inaccuracies of
representations or warranties, cross defaults to other
indebtedness, insolvency,
39
bankruptcy, ERISA and judgment defaults, change of control,
termination of employment of chief executive officer of the
Borrower Subsidiary, pro forma compliance certificate and
financial projections delivered in connection with termination,
cancellation or modifications of certain key contracts would
indicate a violation (on a pro forma basis) of financial
covenants.
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.
Rate Cap Agreement. Effective as of
September 7, 2010, we entered into a Rate Cap Agreement
with Wells Fargo Bank, N.A. to limit a portion of our interest
rate exposure from our credit facility. Pursuant to the Rate Cap
Agreement, we have capped our maximum aggregate interest rate
risk at 2.50% on $10.0 million of our outstanding
borrowings under our credit facility. The Rate Cap Agreement is
effective through July 13, 2012 with floating amounts
payable by Wells Fargo Bank, N.A. quarterly on each 7th of
December, March, June and September.
Subordinated Term Loan. On May 28,
2010, we entered into a term loan agreement with Chambers Energy
Management, LP, as administrative agent, which provides for term
loans in the aggregate principal amount of up to
$25.0 million. We refer herein to the term loan agreement,
as amended by the subordinated term loan amendment, as the
subordinated term loan. We intend to repay the
subordinated term loan in full prior to or concurrent with the
closing of this offering.
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 and our subordinated term
loan, each of which have variable interest rates. The impact of
a 1% increase in interest rates on our outstanding debt as of
December 31, 2010, 2009 and 2008 would have resulted in an
increase in interest expense and a corresponding decrease in net
income of approximately $0.7 million, $0.7 million and
$0.7 million, respectively.
To partially reduce our interest rate risk caused by borrowings
under our credit facility, we have entered into the Rate Cap
Agreement. Pursuant to the Rate Cap Agreement, we have capped
our maximum aggregate interest rate risk at 2.50% on
$10.0 million of our outstanding borrowings under our
credit facility. Please read Description of
Our Indebtedness Rate Cap Agreement above for
additional information on our Rate Cap Agreement. Reducing our
exposure to interest rate volatility helps ensure that we have
adequate funds available for capital expenditures.
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 90.2%, 90.6% and 79.9%
of our revenues for the years ended December 31, 2010, 2009
and 2008, respectively. In 2010, sales to
40
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.
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 $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
41
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 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.
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. Revenue is
recognized from hydraulic fracturing services and coiled tubing
services as the services are performed, based on contractual
terms.
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
December 31, 2010 and 2009, the allowance for doubtful
accounts totaled $0.5 million and $0.3 million,
respectively. 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
42
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.
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 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 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
43
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 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. We 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. We
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.
44
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 in connection with well completion and
production enhancement operations. We have historically operated
in 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 and continued fleet
expansion. This revenue increase represents a compound annual
growth rate of approximately 98%. For the year ended
December 31, 2010, we generated revenues of
$182.7 million in our hydraulic fracturing operations (75%
of the total), $50.6 million in our coiled tubing
operations (21% of the total) and $10.9 million in our
pressure pumping operations (4% of the total). Adjusted
EBITDA for the year ended December 31, 2010 was
$82.6 million and net income for the year ended
December 31, 2010 was $32.3 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
two additional hydraulic fracturing fleets, which, upon
delivery, will increase our aggregate horsepower to 206,000. 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 13 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 fourth quarter of
2010, our fracturing operations generated monthly revenue per
unit of horsepower of approximately $379, 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
a typical well, 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.
45
Industry
Overview
The pressure pumping industry provides hydraulic fracturing and
other well stimulation and related 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 pressure pumping 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 North America 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 North America.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Horizontal North American Land Rig Count(1)
|
|
|
947
|
|
|
|
571
|
|
|
|
587
|
|
As a Percentage of Total North American Land Rigs
|
|
|
55.9
|
%
|
|
|
48.0
|
%
|
|
|
34.1
|
%
|
|
|
|
(1) |
|
As of
December 31st
of the applicable year. Estimate of activity as measured by
Baker Hughes Incorporated. |
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
46
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, 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 985 as
of March 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, 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. 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, 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
47
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
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 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/or
equipment to perform various applications on either a completion
or workover assignment. 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 potential
coiled tubing work.
Our Competitive
Strengths
Operational Expertise in Service-Intensive
Basins. We have focused our hydraulic
fracturing fleets in some of the most service-intensive domestic
basins, which require technically challenging, high-pressure
fracturing services. During the fourth quarter of 2010, our
fracturing operations generated monthly revenue per unit of
horsepower of approximately $379, 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
site-by-site
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.
48
This 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, executed contracts as well as contract
negotiations in progress that we believe will support and
sustain our growth for the foreseeable future. Three of our four
existing hydraulic fracturing fleets are committed through
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 and the extension of
our current term contract with Penn Virginia. 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 has been delivered and is expected to be
deployed in April 2011; Fleet 5 is expected to be delivered and
deployed in June 2011; and Fleet 6 is expected to be delivered
and deployed in the fourth quarter of 2011. 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 more 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 with 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.
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Our
Strategies
Capitalize on Growth in Development of Shale and Other
Resource Plays. The U.S. Energy
Information Administration (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. 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
corporate headquarters about our services, several of which have
led to hydraulic fracturing and coiled tubing jobs.
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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. 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 two 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 some of
the most demanding safety requirements, including
ConocoPhillips, Exxon Mobil Corporation and Royal Dutch Shell.
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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 below 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 E&S, Inc., or
Total, SPM and Sintex Minerals & Services,
Inc.
Equipment
We operate fleets of hydraulic fracturing, coiled tubing and
pressure pumping equipment. Our fleets include four hydraulic
fracturing fleets rated at 142,000 horsepower, 13 coiled tubing
units, 16 double pump pressure pumps and nine single pump
pressure pumps. We have the ability to extend the useful life of
our equipment through capital refurbishment at periodic
intervals. We are also capable of modifying our highly
specialized equipment.
In January 2011, we received delivery of Fleet 3, which consists
of 21 pressure pumps representing 42,000 horsepower of capacity,
along with the necessary blending units, manifolds, data vans
and other ancillary equipment to provide customers with the
fracturing capabilities required for the challenging conditions
found in our core operating regions. In March 2011, we received
delivery of Fleet 4, which consists of 21 pressure pumps
representing 42,000 horsepower of capacity and ancillary
equipment. In addition, we have ordered two additional hydraulic
fracturing fleets, Fleet 5, which consists of 15 pressure pumps
representing 30,000 horsepower of capacity and ancillary
equipment, and Fleet 6, which consists of 17 pressure pumps
representing 34,000 horsepower of capacity and ancillary
equipment. We expect delivery of Fleet 5 in June 2011 and
delivery of Fleet 6 in the fourth quarter of 2011.
We purchase the majority of our hydraulic fracturing equipment
from Stewart & Stevenson and Total. 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.
We believe that our equipment is rigorously maintained and
suitable for our current operations. Most of our 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
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lease expires on January 31, 2017. As of December 31,
2010, 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.
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
53
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.
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, 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
54
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 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.
55
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 operations, 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 is also conducting 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.
Bills have been introduced into the Texas Senate and House of
Representatives that would require the disclosure of information
regarding the substances used in the hydraulic fracturing
process to the Railroad Commission of Texas and, in the case of
the Texas House bill, to the public. These bills are in the
early stages of the legislative process, and we cannot predict
whether they or some version of them eventually may be enacted
as a law. 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. Moreover, 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.
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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 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
57
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.
Employees
As of March 25, 2011, we had 580 employees, 126 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 all of our assets.
58
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 Description of
Capital Stock Amended and Restated
Stockholders Agreement. Under the terms of the
Amended and Restated Stockholders Agreement, subject to
retaining certain ownership thresholds:
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Energy Spectrum Partners IV LP is entitled to appoint one
director, currently Mr. Benson; and
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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. are collectively
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 March 30, 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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62
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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.
59
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 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.
60
Darren M. Friedman Mr. Friedman
is a Managing Director of StepStone Group LLC focusing on
private equity partnership, equity and mezzanine investments.
Prior to joining StepStone, Mr. Friedman was a 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 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
61
knowledge from serving as chairman and chief executive officer
of a company that went through an 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
Related Party Transactions Supplier
Agreements 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. The 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
the 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.
62
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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James P. Benson
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*
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Michael Roemer
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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. The 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 the Audit Committee; and
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perform such other functions as our board may assign to the
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. The 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
63
matters and our significant policies. In particular, the 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. The 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 the Audit Committee has the responsibilities and powers
set forth in its charter, it is not the duty of the 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 the 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, the Audit Committee has
met once 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 the 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 the 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. The
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 the 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 the
Compensation Committee from time to time.
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In connection with these purposes, our board has delegated to
the Compensation Committee the overall responsibility for
establishing, implementing and monitoring the compensation for
our corporate
64
officers. The Compensation Committee was established in February
2011. Going forward, the 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. The 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 the Compensation Committee, the
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, the 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. The Compensation
Committees chairman then will report the Compensation
Committees recommendation for approval by the full board
or, in certain cases, by the independent directors.
Under its charter, the 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 the Compensation
Committee are independent as that term is defined in the
NYSEs listing standards. The 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. The 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 the
Nominating and Governance Committee from time to time.
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The Nominating and Governance Committee was formed in February
2011. In connection with these purposes, the 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.
65
The 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, the
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 the 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 the Nominating and Governance
Committees perceptions about future issues and needs.
However, while the Nominating and Governance Committee does not
maintain a formal list of qualifications, in making its
evaluation and recommendation of candidates, the 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.
The Nominating and Governance Committee may consider candidates
for our board from any reasonable source, including from a
search firm engaged by the Nominating and Governance Committee
or stockholder recommendations. The 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, the Nominating
and Governance Committee may consider previous experience as a
member of our board.
In addition, our board has delegated to the Nominating and
Governance Committee the responsibility for establishing,
implementing and monitoring the compensation for our directors.
In the future, the 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. The
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 the Nominating and
Governance Committee are independent as defined under the
NYSEs listing standards. The Nominating and Governance
Committee, consists of Mr. Benson (Chairman),
Mr. Roemer and Mr. Stewart. Since its formation in
February 2011, the 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 the
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 Compensation
Committee.
Code of Ethics
for Chief Executive Officer, Chief Financial Officer, Controller
and Certain Other Officers
Prior to the closing 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
66
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 the 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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67
EXECUTIVE
COMPENSATION AND OTHER INFORMATION
Compensation
Discussion and Analysis
The Sponsors and certain members of senior management have
historically been responsible for implementing and administering
our executive compensation program. Due to our status as a
private company, our executive compensation program has not
historically consisted of formal policies or procedures outside
of the employment agreements that we have maintained with
certain individuals within our senior management team. In
February 2011, however, we created a compensation committee of
our board of directors that has the authority to oversee our
executive compensation program and implement any formal
equity-based compensation plans or policies that the committee
deems appropriate for our employees, including those individuals
that are considered to be named executive officers. Each of the
Sponsors has the right to appoint one member to our compensation
committee for so long as such Sponsor holds 10% of our common
stock.
The named executive officers for 2010, and who are described in
this section, are:
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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 the named executive officers for 2011 will
include Mr. Theodore R. Moore, who became our Vice
President General Counsel and Corporate Secretary
effective February 1, 2011, but who was not in our service
at the end of 2010.
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
Policy. Our compensation and benefits
programs have historically consisted of the following
components, which are described in greater detail below:
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Base salary;
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Bonus awards;
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Options;
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Severance provisions;
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Participation in broad-based retirement, health and welfare
benefits; and
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Limited perquisites.
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We maintain employment agreements with certain of the named
executive officers that will continue to provide each of these
compensation elements in 2011, and we anticipate that our
compensation committee will provide other executives with a
compensation program that includes certain of the above elements
for 2011.
Setting Executive
Compensation
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
68
board of directors, after consultation with our chief executive
officer, determined the appropriate compensation and benefits
for Messrs. Foret and Winstead. Following 2010, our
compensation philosophy and specific compensatory policies will
be determined by our compensation committee, and consequently,
may differ in certain respects from the historical practices we
describe below, but we anticipate that our compensation
committee will continue to consult with Mr. Comstock
regarding the compensation and benefit programs applicable to
our named executive officers, other than with respect to his own
compensation. The 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.
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 herein as the Previous Employment
Agreements, contained provisions that set base salary,
bonuses, and employee benefits such as medical benefits and
vacation time. The Previous Employment Agreements also provided
for certain severance payments in connection with a termination
of the executives employment under certain conditions. On
December 23, 2010, Messrs. Comstock and McMullen
entered into amended employment agreements, and Mr. Barrier
entered into an employment agreement, which we refer to herein
as the 2011 Employment Agreements, that currently
govern all elements of their compensation packages, which are
detailed below. We do not currently maintain employment
agreements with Messrs. Foret or Winstead.
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. Base salaries are determined for
each named executive officer based on his position and
responsibility. 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. Effective December 23, 2010,
the named executive officers base salaries were as
follows: Mr. Comstock, $ ;
Mr. McMullen, $ ;
Mr. Barrier, $ ;
Mr. Foret, $ and
Mr. Winstead, $ . The total
base salary received by each named executive for 2010 is
reported in the succeeding Summary Compensation Table. The base
salaries set in December 2010 were set at levels that will
reflect the increase in duties and responsibilities that the
named executive officers will be expected to perform in
connection with this offering and on a going forward basis from
those that they were required to perform in a private company
setting.
Bonuses.
The total cash bonus awarded to each named executive officer for
2010 is reported in the succeeding Summary Compensation Table.
Annual 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 $ million.
For purposes of the Previous Employment Agreements, EBITDA was
defined to mean, with respect to any year, our net income for
such year, determined in accordance with generally accepted
accounting principles, plus, without duplication, the sum of
(a) income tax expense, (b) interest expense,
amortization or write-off of debt discount and debt issuance
costs and commissions, discounts and other fees and charges
associated with indebtedness, (c) depreciation and
amortization expense, (d) amortization of intangibles
(including goodwill) and organization costs, (e) any
extraordinary, unusual or non-recurring expenses or losses, and
any prepayment fees paid to existing lenders (including losses
on sales of assets outside of the ordinary course of business),
(f) any other non-cash charges, and (g) any incentive
compensation paid to our employees, including any bonuses
payable in respect of such year
69
under the applicable Previous Employment Agreements and any
other employment agreement between us and our employees.
Based upon our EBITDA achieved in 2010, Mr. Comstock
received a cash bonus of $ and
Mr. McMullen received a cash bonus of
$ .
The 2011 Employment Agreements for Mr. Comstock and
Mr. McMullen provide for an annual bonus structure for
fiscal years 2011 and beyond like that described for
Mr. Barrier below except that Mr. Comstocks
target range will be from %
to % of his base salary and
Mr. McMullens target range will be
from %
to % of his base salary.
Mr. Barriers 2011 Employment Agreement provides that
so long as we achieve the performance targets set by the
Compensation Committee, he will receive a bonus, the amount of
which shall have a target range
of %
to % of his base salary.
Discretionary Bonus. In addition to the annual
bonus, the Compensation Committee has the authority to award
additional incentive bonus compensation to the named executive
officers. The Compensation Committee did not award additional
incentive bonus compensation to the named executive officers for
2010. The Compensation Committee determined that
Messrs. Comstock, McMullen and Barrier should receive
discretionary bonuses subject to the successful closing of this
offering, in amounts of
$ ,
$
and
$ ,
respectively.
For 2010, the named executive officers received transaction
bonuses primarily from our Sponsors in connection with the
completion of the offering 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. We and the Sponsors
paid out a total of approximately
$ in transactional bonuses to
management employees, approximately
$ of which was received by our
named executive officers during 2010 and
$ in February 2011. Individual
transactional bonuses provided to our named executive officers
are included in the Summary Compensation Table below.
Registration Statement
Bonus. Messrs. Comstock and McMullens
2011 Employment Agreements provide for the payment of a bonus to
each in the amount of
$ in
the event that a shelf 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 shelf registration statement, but in no
event later than 30 days following the effective date of
the shelf registration statement.
Options. Prior to December 23,
2010 all options granted to named executive officers were
granted under the C&J Energy Services, Inc. 2006 Stock
Option Plan, or the 2006 Plan. The 2006 Plan allows
us to grant 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
only been granted non-qualified stock options. Non-statutory
stock options granted to the 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 that plan, (ii) all awards
outstanding under the 2006 Plan will continue to be subject to
the terms of the 2006 Plan, and (iii) 237,927 shares,
representing all outstanding options granted under the 2006 Plan
that were not previously vested, were deemed to be vested and
exercisable in connection with the completion of the offering of
our common stock in December 2010.
On December 23, 2010 the C&J Energy Services, Inc.
2010 Stock Option Plan, or the 2010 Plan, became
effective and thereafter became the long term incentive plan we
intend to use to grant equity awards to employees, consultants,
and outside directors. We have reserved 5,699,889 of our 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 ,
70
,
and ,
respectively. All of the December 23, 2010 option grants to
the 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. Messrs. Comstock, McMullen and
Barrier are entitled to receive severance benefits and
accelerated vesting of their options in the event of certain
types of termination of employment in accordance with their
employment agreements and option grant agreements. 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. More information
regarding when these benefits are paid and estimates of the
total value of these benefits can be found below in the section
entitled Potential Payments Upon Termination and Change of
Control.
Other Benefits. Each of the named
executive officers is provided with certain limited perquisites,
including an automobile and related insurance coverage, a health
care subsidy and, for 2011, reimbursement for the cost of their
relocation to Houston, Texas in February 2011. Amounts
applicable to each officer for 2010 are disclosed in the Summary
Compensation Table.
We believe that it important to provide a means by which our
employees are assisted in providing for their retirement. We
thus maintain a retirement plan that is qualified under
Section 401(k) of the Internal Revenue Code of 1986, as
amended, or the Code (the 401(k) Plan). We provide
matching contributions for each of our employees up to 4% of
their qualifying compensation each year, subject to certain
limitations imposed by the Code. Amounts that we provided to the
401(k) Plan during 2010 on behalf of the named executive
officers are described in the Summary Compensation Table.
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
set forth above is more important than the benefit of tax
deductibility, and we reserve the right to maintain flexibility
in how we compensate our executive officers that may result in
limited deductibility of amounts of compensation from time to
time.
Risk
Assessment
We believe that our compensation program is structured in such a
way as to discourage excessive risk-taking. In making this
determination, we considered various aspects of our compensation
program, including the mix of fixed, discretionary and long-term
incentive compensation for management and other key employees.
By linking a portion of total compensation to our long-term
performance with our equity-based compensation awards, we
mitigate any short-term risk that could be detrimental to our
long-term best interests and the creation of our security
holders value. Our equity-based awards are subject to
multi-year vesting periods and derive their value from our total
performance, which we believe further encourages decision-making
that is in the long-term best
71
interests of us and our shareholders. We believe that in the
aggregate, our compensation program discourages any risk-taking
that could be detrimental to the long-term interests of our
company, our performance, or our stock price. In conclusion, we
believe that our compensation policies and practices for all
employees, including named executive officers, do not create
risks that 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 anticipate that
Mr. Moore will be a named executive officer in the
2011 year, we felt 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 held by other members of our senior management team.
In February 2011, the Board of Directors determined that for
incentive and retention purposes certain employees, including
Mr. Winstead and Mr. Foret, should receive grants of
stock options under the 2010 Plan. All of the February 2011
option grants 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, as of December 31, 2010:
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Non-Equity
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Option
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Incentive Plan
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All Other
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Name and Principal
Position
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Year
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Salary
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Bonus
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Awards
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Compensation
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Compensation
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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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$
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$
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$
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$
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$
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Chief Executive Officer, President
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and Chairman
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Randall C. McMullen, Jr.
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2010
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Executive Vice President, Chief
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Financial Officer
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Bretton W. Barrier
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2010
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Chief Operations Officer
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J.P. Pat Winstead.
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2010
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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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Vice President Coiled Tubing
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Grants of
Plan-Based Awards for the 2010 Fiscal Year
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All Other
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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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Estimated Future Payouts
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Estimated Future Payouts
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Number of
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or Base
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Value of
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Under Non-Equity Incentive
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Under Equity Incentive
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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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Plan Awards
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Plan Awards
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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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Threshold
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Target
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Maximum
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Threshold
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Target
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Maximum
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Options
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Awards
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Awards
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Joshua E. Comstock.
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$
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$
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$
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$
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Randall C. McMullen, Jr.
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Bretton W. Barrier.
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J.P. Pat Winstead
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John D. Foret
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72
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 award are shown in the accompanying footnotes. The market
value of the stock awards is based on the fair market value of
our common stock as of December 31, 2010, which was
determined to be $10.00 based on the $10.00 per share offering
price in the December 23, 2010 common stock offering. There
were no other outstanding equity awards as of December 31,
2010 other than options.
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|
Option Awards
|
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|
|
Equity
|
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|
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|
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|
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|
|
Incentive
|
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|
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|
|
|
|
|
|
|
|
Plan Awards:
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
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|
Number of
|
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|
|
|
|
|
|
Securities
|
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|
Securities
|
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|
Securities
|
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Underlying
|
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|
Underlying
|
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|
Underlying
|
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Unexercised
|
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Unexercised
|
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Unexercised
|
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|
Option
|
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|
Option
|
|
|
|
Options
|
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|
Options
|
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|
Unearned
|
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|
Exercise
|
|
|
Expiration
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Options
|
|
|
Price
|
|
|
Date
|
|
|
Joshua E. Comstock.
|
|
|
|
|
|
|
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|
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|
|
$
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|
|
|
|
|
|
Randall C. McMullen, Jr.
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
Bretton W. Barrier.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
J.P. Pat Winstead.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John D. Foret
|
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|
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|
|
|
|
|
|
Option Exercises
and Stock Vested in the 2010 Fiscal Year
The following table provides information, on an aggregate basis,
about stock options that were exercised and stock awards that
vested during the fiscal year ended December 31, 2010 for
each of the named executive officers.
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|
|
Option Awards
|
|
|
|
Number of
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
|
Acquired on
|
|
|
Realized on
|
|
Name
|
|
Exercise
|
|
|
Exercise
|
|
|
Joshua E. Comstock.
|
|
|
|
|
|
$
|
|
|
Randall C. McMullen, Jr.
|
|
|
|
|
|
|
|
|
Bretton W. Barrier.
|
|
|
|
|
|
|
|
|
J.P. Pat Winstead
|
|
|
|
|
|
|
|
|
John D. Foret
|
|
|
|
|
|
|
|
|
Pension
Benefits
While we provide our employees with the 401(k) Plan, we do not
currently maintain a defined benefit pension plan.
Nonqualified
Deferred Compensation
We do not provide a nonqualified deferred compensation plan for
our employees at this time.
Employment
Agreements
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 agreements as a means of attracting and retaining
executives and to provide replacement income if
73
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 for an
executives termination.
If we terminate Messrs. Comstock, McMullen or
Barriers employment for Cause (as defined in
the employment agreements) or if such an executive resigns
without good reason (as defined in the employment agreements),
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) 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 of 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 of 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.
74
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 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.
Stock Option
Plans and Agreements
The stock option agreements for the 2010 Plan grants to the
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 the
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 following table quantifies the amounts that each of the
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
75
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.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
|
|
|
|
Without Cause or
|
|
|
Due to
|
|
|
|
|
|
|
Good Reason
|
|
|
Death or
|
|
|
Change in
|
|
Name and Principal
Position
|
|
Termination
|
|
|
Disability
|
|
|
Control
|
|
|
Joshua E. Comstock.
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Salary and Bonus
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued Medical
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Randall C. McMullen, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary and Bonus
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued Medical
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Bretton W. Barrier.
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary and Bonus
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued Medical
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
J.P. Pat Winstead
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary and Bonus
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued Medical
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
John D. Foret.
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary and Bonus
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued Medical
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
76
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. The audit
committee chairman will receive an annual fee of $15,000, while
the nominating and governance committee chairman and the
compensation committee chairman will each be eligible to receive
a $10,000 fee. Currently, Mr. Roemer serves as the chairman
of the audit committee, Mr. Benson serves as the chairman
of the nominating and governance committee, and Mr. Wommack
serves as the chairman of the 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 approximate $25,000 on the date of
the grant of the award, based on a Black-Scholes valuation
model. As of December 31, 2010, our directors did not hold
any outstanding equity awards.
77
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 March 25, 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 March 25, 2011.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially
|
|
|
|
|
|
|
Owned
|
|
|
|
|
|
|
After the Offering
|
|
|
Shares Beneficially
|
|
Shares Beneficially
|
|
(Option to Purchase
|
|
|
Owned
|
|
Owned
|
|
Additional Shares
|
|
|
Prior to the Offering
|
|
After the 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joshua E. Comstock(7)
|
|
|
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(8)
|
|
|
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
|
|
|
|
|
|
|
|
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*
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Less than 1%.
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(1)
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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 March 25, 2011, but that no
other person exercises any options.
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(2)
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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.
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78
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(3)
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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.
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(4)
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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.
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(5)
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The address of Citigroup Capital
Partners II Employee Master Fund, L.P. is 388 Greenwich
Street, 21st Floor, New York, NY 10013. 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.
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(6)
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The address of Energy Spectrum
Partners IV LP is 5956 Sherry Lane, Suite 900, Dallas,
Texas 75225.
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(7)
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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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(8)
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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.
|
79
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. 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 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 is
filed as an exhibit 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 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
80
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 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.
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
81
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
$ 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.
The Compensation Committee determined that
Messrs. Comstock, McMullen and Barrier should receive
discretionary bonuses subject to the successful closing of this
offering, in amounts of
$ ,
$
and
$ ,
respectfully, for the 2011 year.
Supplier
Agreements
We purchase a significant portion of machinery and equipment
from Total, which is 8.0% owned by Mr. Comstock. 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. Deposits with Total on
equipment to be purchased at December 31, 2010, 2009 and
2008 were $4.2 million, $0, and $94,500, respectively.
Amounts payable to Total at December 31, 2010, 2009 and
2008 were $73,783, $293,083 and $59,484, respectively, and were
included in accounts payable. As of December 31, 2010, we
had $36.0 million in purchase commitments for Total.
On March 2, 2007, HKW Capital Partners, II, L.P., or
HKW, acquired a controlling interest in Total.
Although Mr. Comstock, along with two HKW partners, served
on Totals board, he resigned in March 2011. Since
March 2, 2007, Total has 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 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. Additionally, 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 $0.8 million. Supreme is
wholly owned by Stewart & Sons Holding Co., which in
turn is wholly owned by C. James Stewart, III.
Mr. Stewart is a member of our board. We plan to continue
our purchasing relationship with Supreme in 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
82
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
Sales Registration Rights for additional
information of the terms of the Registration Rights Agreement.
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 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.
83
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.
84
PRINCIPAL AND
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 of
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Number of Shares
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Shares of
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Number of
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of Common
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Common Stock
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Shares of Common
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Number of Shares of
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Stock Owned
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Owned After
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Stock Owned Prior to
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Common Stock
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After the
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Completion of
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Selling Stockholder:
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the Offering(1)
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Offered Hereby
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Offering(1)
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the Offering
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%
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Total
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* |
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Less than 1%. |
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(1) |
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For each individual, this percentage is determined by assuming
the named stockholder exercises all options which the
stockholder has the right to acquire within 60 days of
March 25, 2011, but that no other person exercises any
options. |
85
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
March 25, 2011, 5,790,254 shares of our common stock
were issuable upon exercise of outstanding options, 1,949,318 of
which were exercisable, and an aggregate of approximately
1,858,953 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.
86
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, please read
Certain Relationships and Related Party
Transactions Amended and Restated Stockholders
Agreement.
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 intend to apply 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.
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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 issued to our
Sponsors in certain private placements, 5,790,254 options to
purchase shares issued to our employees and former employees
under compensatory plans or arrangements, 31,914,626 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 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 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. (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 intend to file such a shelf registration statement on or
before March 31, 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 Internal
Revenue Code of 1986, as amended, or 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 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
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status of the partner and the activities of the partnership. If
you are a partner of a partnership (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
(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 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.
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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., and J.P. Morgan Securities LLC are
the representatives of the underwriters.
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Number of
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Underwriters
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Shares
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Goldman, Sachs & Co.
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J.P. Morgan Securities LLC
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Citigroup Global Markets Inc.
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Simmons & Company International
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Total
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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 us. 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.
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, the Sponsors and the other
selling stockholders have agreed with the underwriters, subject
to certain exceptions, 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 consent
of the representatives. This agreement does not apply to any
existing employee benefit plans. Please read
Shares Eligible for Future Sale for a
discussion of certain transfer restrictions.
96
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 the 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 the above
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.
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
97
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 (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.
98
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.
Conflict 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 for us, for which they received or will receive
customary fees and expenses.
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.
99
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 hereby. 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
100
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.
101
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
|
|
|
|
|
|
|
|
|
|
|
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 $6,348,183
and $5,279,308
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
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: Revenue is
recognized from hydraulic fracturing services and coiled tubing
services as the services are performed, based on contractual
terms.
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 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.
F-9
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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).
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
F-10
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
|
|
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.
F-11
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
|
|
|
|
|
|
|
|
|
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
|
|
F-12
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
$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
|
|
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
|
|
|
|
|
|
|
F-13
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
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.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-14
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
F-17
C&J ENERGY
SERVICES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 2,026,318 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 5,699,899 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-18
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
|
|
|
1,991,318
|
|
|
$
|
1.43
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,359,936
|
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
5,351,254
|
|
|
$
|
6.81
|
|
|
|
8.55
|
|
|
$
|
17,068,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010
|
|
|
2,026,318
|
|
|
$
|
1.58
|
|
|
|
6.19
|
|
|
$
|
17,068,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 8% owned by a stockholder of the
Parent. 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-19
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-20
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-21
C&J Energy Services,
Inc.
Common Stock
PROSPECTUS
Joint Book-Running
Managers
Goldman, Sachs & Co.
J.P. Morgan
Senior Co-Manager
Citi
Co-Managers
Simmons & Company
International
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
|
|
Supply Contract dated as of May 14, 2010 between Liang
Investment Inc. (as Seller) and C&J Spec-Rent Services,
Inc. (as Buyer)
|
|
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
|
|
Second Amended and Restated Credit Agreement, dated as of
October 28, 2010, among C&J Spec-Rent Services, Inc. as
Borrower, C&J Energy Services, Inc., as Parent Guarantor,
Comerica Bank, as Administrative Agent, Syndication Agent,
Documentation Agent, and Lead Arranger, and Certain Financial
Institutions, as Lenders
|
|
*10
|
.19
|
|
Second Amended and Restated Term Loan Agreement among C&J
Energy Services, Inc. as Parent, C&J Spec-Rent Services,
Inc. as Borrower, the Several Lenders, and Chambers Energy
Management, LP as Agent dated as of May 28, 2010
|
|
*10
|
.20
|
|
Amendment No. 1 to Second Amended and Restated Term Loan
Agreement, dated as of October 28, 2010, among C&J
Spec-Rent Services, Inc. as Borrower, C&J Energy Services,
Inc. as Parent, Several Banks and Other Financial Institutions
as Lenders, and Chambers Energy Management, LP as Administrative
Agent
|
|
*10
|
.21
|
|
Subordination and Intercreditor Agreement, dated May 28, 2010,
among Comerica Bank as administrative agent for the Senior
Lenders, Chambers Energy Management, LP, as administrative agent
for the Junior Lenders, C&J Spec-Rent Services, Inc. as
Borrower, C&J Energy Services, Inc. as Parent, and each of
the other Credit Parties party thereto
|
|
*10
|
.22
|
|
First Amendment to Subordination and Intercreditor Agreement,
dated October 28, 2010, among Comerica Bank as administrative
agent for the Senior Lenders, Chambers Energy Management, LP, as
administrative agent for the Junior Lenders, C&J Spec-Rent
Services, Inc. as Borrower, C&J Energy Services, Inc. as
Parent, and each of the other Credit Parties 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.
|
II-3
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
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 (included on the signature page of this
registration statement)
|
|
|
|
* |
|
To be filed by amendment. |
|
|
|
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 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
March 30, 2011.
C&J Energy Services, Inc.
|
|
|
|
By:
|
/s/ Joshua
E. Comstock
|
Joshua E. Comstock
Chief Executive Officer, President and Chairman
Each person whose signature appears below appoints Randall C.
McMullen, Jr. and Theodore R. Moore, and each of them, any
of whom may act without the joinder of the other, as his true
and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this
registration statement and any registration statement (including
any amendment thereto) for this offering that is to be effective
upon filing pursuant to Rule 462(b) under the Securities
Act of 1933, as amended, and to file the same, with all exhibits
thereto, and all other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to
be done, as fully to all intents and purposes as he might or
would do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents or any of them or their or his
substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
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)
|
|
March 30, 2011
|
/s/ Randall
C. McMullen, Jr.
Randall
C. McMullen, Jr.
|
|
Executive Vice President, Chief Financial Officer, Treasurer and
Director (principal financial and accounting officer)
|
|
March 30, 2011
|
/s/ Darren
M. Friedman
Darren
M. Friedman
|
|
Director
|
|
March 30, 2011
|
/s/ James
P. Benson
James
P. Benson
|
|
Director
|
|
March 30, 2011
|
/s/ Michael
Roemer
Michael
Roemer
|
|
Director
|
|
March 30, 2011
|
/s/ H.
H. Tripp Wommack, III
H.
H. Tripp Wommack, III
|
|
Director
|
|
March 30, 2011
|
/s/ C.
James Stewart, III
C.
James Stewart, III
|
|
Director
|
|
March 30, 2011
|
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
|
|
Supply Contract dated as of May 14, 2010 between Liang
Investment Inc. (as Seller) and C&J Spec-Rent Services,
Inc. (as Buyer)
|
|
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
|
|
Second Amended and Restated Credit Agreement, dated as of
October 28, 2010, among C&J Spec-Rent Services, Inc. as
Borrower, C&J Energy Services, Inc., as Parent Guarantor,
Comerica Bank, as Administrative Agent, Syndication Agent,
Documentation Agent, and Lead Arranger, and Certain Financial
Institutions, as Lenders
|
|
*10
|
.19
|
|
Second Amended and Restated Term Loan Agreement among C&J
Energy Services, Inc. as Parent, C&J Spec-Rent Services,
Inc. as Borrower, the Several Lenders, and Chambers Energy
Management, LP as Agent dated as of May 28, 2010
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
*10
|
.20
|
|
Amendment No. 1 to Second Amended and Restated Term Loan
Agreement, dated as of October 28, 2010, among C&J
Spec-Rent Services, Inc. as Borrower, C&J Energy Services,
Inc. as Parent, Several Banks and Other Financial Institutions
as Lenders, and Chambers Energy Management, LP as Administrative
Agent
|
|
*10
|
.21
|
|
Subordination and Intercreditor Agreement, dated May 28, 2010,
among Comerica Bank as administrative agent for the Senior
Lenders, Chambers Energy Management, LP, as administrative agent
for the Junior Lenders, C&J Spec-Rent Services, Inc. as
Borrower, C&J Energy Services, Inc. as Parent, and each of
the other Credit Parties party thereto
|
|
*10
|
.22
|
|
First Amendment to Subordination and Intercreditor Agreement,
dated October 28, 2010, among Comerica Bank as administrative
agent for the Senior Lenders, Chambers Energy Management, LP, as
administrative agent for the Junior Lenders, C&J Spec-Rent
Services, Inc. as Borrower, C&J Energy Services, Inc. as
Parent, and each of the other Credit Parties 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 (included on the signature page of this
registration statement)
|
|
|
|
* |
|
To be filed by amendment. |
|
|
|
Management contract or compensatory plan or arrangement. |