Grifco Inc (GFCI)

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DTCC/DTC, Grifco & Dial Litigation

On or around July 30, 2008, the Company, Coil Tubing and the Company's President, Jerry Swinford ("Plaintiffs"), filed a lawsuit against Grifco, Depository Trust & Clearing Corporation ("DTCC/DTC") and the president of Grifco, James Dial (the "Defendants"). The case is pending as Cause No. 08-07-07397-CV in the Montgomery County, Texas, District Court, 9th Judicial District. The suit stems from Grifco's distribution of its 75,000,000 shares of Coil Tubing in August 2007 ("Grifco Distribution"). Additionally, without informing Coil Tubing or providing any consideration to Coil Tubing, the DTCC/DTC made “book entries” for its participating members thereby unilaterally creating additional shares of Coil Tubing stock.

In August 2007, Grifco attempted to distribute 75,000,000 shares of Coil Tubing common stock which it held to its shareholders based on a record date of May 1, 2006. Certain Grifco shareholders who held Grifco shares on the record date were not issued shares of Coil Tubing in connection with the Grifco Distribution. Generally only Grifco shareholders who held their shares in street name on the record date were distributed shares in the Grifco Distribution. Thus, shareholders who held their shares in certificate form did not receive shares in the Grifco Distribution. Mr. Swinford was one such record shareholder of Grifco, who did not receive shares in the Grifco Distribution.

It is believed Grifco did not hold a sufficient number of shares to distribute to its shareholders who held their shares in street name at the distribution ratio announced by Grifco. Grifco announced that each of its shareholders would receive 1.89 shares of CTBG stock for each share of Grifco stock held as of the record date. In late April 2008, the DTCC/DTC informed Coil Tubing (for the first time) that Grifco did not transfer to DTCC/DTC's agent, Cede & Co., a sufficient number of shares to affect the distribution at the ratio announced. The 1.89 ratio announced by Grifco implied that Grifco had approximately 40,000,000 shares outstanding as of the record date. DTCC/DTC contends, however, that Grifco had approximately 68,000,000 shares outstanding in street name as of the record date, May 1, 2006.

Between the time Grifco distributed its shares (August 2007) until the DTCC/DTC contacted Coil Tubing (late April 2008), the DTCC/DTC contends it made various demands on Grifco for additional shares. Grifco provided the DTCC/DTC with waivers from certain shareholders, but such waivers were not sufficient to address the deficiency in its entirety.

Coil Tubing was contacted by the DTCC/DTC regarding the shortfall in shares in April 2008. Coil Tubing immediately took steps to have Grifco contact shareholders who did not receive shares in the distribution and obtain signed waivers of their right to receive shares in the stock dividend. To date, a limited number of such waivers have been obtained. Because of Grifco's failure to obtain waivers from a sufficient number of shareholders, DTCC/DTC demanded that Coil Tubing acquire additional free trading shares in the market or issue additional free trading shares to satisfy the shortfall. Coil Tubing did not purchase the additional shares demanded by DTCC/DTC and Coil Tubing does not have a registration statement on file allowing it to issue additional free trading shares. Additionally, issuing additional shares of Coil Tubing would substantially dilute the interests of Coil Tubing’s existing shareholders and would have affected Coil Tubing's planned distribution of the Company's shares to its shareholders.


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On July 10, 2008, DTCC/DTC issued a Stock Dividend E-Mail Alert to its participating members. The Alert stated that DTCC/DTC had not received sufficient shares from Grifco in order to affect the stock dividend at the ratio Grifco announced. DTCC/DTC further stated that unless it received the necessary shares by July 31, 2008, it would unilaterally adjust the ratio of shares received in the stock dividend from the rate originally declared, 1.89 shares of Coil Tubing common stock for each share of Grifco common stock which shareholders of Grifco held, to a reduced rate of approximately 1.29 shares of Coil Tubing for each share of Grifco held.

On July 30, 2008, Coil Tubing filed suit against Defendants. In the suit Coil Tubing sought and obtained a temporary restraining order to restrain the DTCC/DTC from adjusting shareholder accounts and against any Defendant destroying any documentation in connection with the lawsuit. While Coil Tubing was in the process of obtaining the temporary restraining order from the Court, and a day in advance of its announced adjustment date, DTCC/DTC adjusted the ratio of the dividend with most of its participating members. Despite the restraining order, DTCC/DTC's participating members adjusted customers’ accounts on July 31, 2008 and thereafter.

The Plaintiffs believe that all of the Defendants were aware or should have been aware that a shortfall in the Grifco Distribution would occur, but negligently allowed the stock distribution to go forward. Additionally, the Plaintiffs believe that the Defendants engaged in additional acts and omissions which may give rise to other damages. Coil Tubing has and expects to continue to expend funds on the litigation which may negatively impact operations. The Court granted Plaintiffs’ Temporary Injunction and denied DTCC/DTC's Motion to Dismiss. However, it is premature to speculate regarding the final outcome of the litigation.

Litigation Generally

From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not currently involved in legal proceedings that could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations. We may become involved in material legal proceedings in the future.
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http://www.sec.gov/Archives/edgar/data/1399247/000143209309000048/coiltubings1a021309.htm