1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 001-11963
-------------------
Dailey International Inc.
- --------------------------------------------------------------------------------
(See table of additional Registrants on the following page)
(Exact Name of Registrant in its Charter)
Delaware 76-0503351
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2507 North Frazier, Conroe, Texas 77303
- --------------------------------------------------------------------------------
(Address of Principal Executive Officers) (Zip Code)
281/350/3399
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
N/A
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
Number of shares outstanding of issuer's Class A Common Stock as
of May 14, 1998 was 5,703,655.
2
TABLE OF ADDITIONAL REGISTRANTS
ADDRESS, INCLUDING
ZIP CODE, AND
TELEPHONE NUMBER,
STATE OR INCLUDING AREA
OTHER PRIMARY STANDARD CODE, OF
JURISDICTION INDUSTRIAL REGISTRANT'S
OF CLASSIFICATION IRS MPLOYER PRINCIPAL EXECUTIVE
INCORPORATION CODE NO. ID NO. OFFICES
------------- -------- ------ -------
Dailey Energy Services, Inc. ................ Delaware 8999 76-0066576 *
Dailey International Sales Corporation ...... Delaware 8999 74-1869524 *
Columbia Petroleum Services Corp. ........... Delaware 8999 76-0074604 *
International Petroleum Services, Inc. ...... Delaware 8999 76-0084387 *
Dailey Environmental Remediation
Technologies, Inc. ....................... Texas 8999 76-0276940 *
Dailey Worldwide Services, Corp. ............ Texas 8999 76-0477660 *
Air Drilling International, Inc. ............ Delaware 1380 84-1305964 *
Air Drilling Services, Inc. ................. Wyoming 1380 83-0181069 *
- -------------
* 2507 North Frazier, Conroe, Texas 77303, telephone (281) 350-3399.
Dailey International Inc. (the "Company") owns directly or indirectly
all of the outstanding capital stock of each the additional Registrants listed
above. Each of the additional Registrants is a guarantor of the Company's
obligations under its 9 1/2% Senior Notes Due 2008 (the "Senior Notes"). No
separate financial statements for the additional Registrants have been provided
or incorporated because: (1) the consolidated financial statements of the
Company included in this report include the operations of each of the Additional
Registrants and (2) Note 9 to the Company's financial statements includes
unaudited condensed consolidated financial statements of the Company separating
the financial results for the additional Registrants from the Company and any
subsidiaries that are not guarantors of the Company's obligations under the
Senior Notes.
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DAILEY INTERNATIONAL INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated balance sheets - March 31, 1998 and December 31, 1997 1
Consolidated statements of operations - Three months ended March 31, 1998 and 1997 2
Consolidated statements of cash flows - Three months ended March 31, 1998 and 1997 3
Notes to consolidated financial statements - March 31, 1998 4-14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15-19
PART II. OTHER INFORMATION 20
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures 21
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DAILEY INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31,
1998 1997
---------- ----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 101,731 $ 59,837
Accounts receivable, net ........................................... 47,727 34,601
Other current assets ............................................... 5,012 2,769
---------- ----------
Total current assets ....................................... 154,470 97,207
Revenue-producing tools and inventory, net ........................... 127,306 79,056
Property and equipment, net .......................................... 9,694 8,181
Accounts receivable from officer ..................................... 250 250
Goodwill, net ........................................................ 68,184 19,183
Intangibles and other assets ......................................... 15,712 5,400
---------- ----------
Total assets ............................................... $ 375,616 $ 209,277
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ........................... $ 29,861 $ 23,804
Accounts payable to affiliates ..................................... 371 483
Income taxes payable ............................................... 4,547 2,417
Current portion of long-term debt .................................. 1,652 146
---------- ----------
Total current liabilities .................................. 36,431 26,850
Long-term debt ....................................................... 276,024 114,229
Deferred income taxes ................................................ 3,951 1,238
Deferred revenues .................................................... 1,494 --
Other noncurrent liabilities ......................................... 2,012 1,559
Commitments and contingencies ........................................ -- --
Stockholders' equity:
Common stock ...................................................... 105 94
Treasury stock (144,000 shares at
March 31, 1998 and December 31, 1997)............................. (1,047) (1,047)
Paid-in capital .................................................... 51,003 41,335
Foreign currency translation-accumulated comprehensive income ...... (247) --
Retained earnings .................................................. 5,890 25,019
---------- ----------
Total stockholders' equity ................................. 55,704 65,401
---------- ----------
Total liabilities and stockholders' equity ................. $ 375,616 $ 209,277
========== ==========
See accompanying notes.
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DAILEY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
--------------------------------
1998 1997
------------- -------------
Revenues:
Rental income ............................................ $ 15,691 $ 12,057
Sales of products and services ........................... 11,749 4,120
Underbalanced drilling services .......................... 10,580 --
------------- -------------
38,020 16,177
Costs and expenses:
Cost of rentals .......................................... 12,176 9,259
Cost of products and services ............................ 7,159 2,167
Cost of underbalanced drilling services .................. 6,772 --
Selling, general and administrative ...................... 8,237 2,875
Non-cash compensation .................................... 185 1,050
Research and development ................................. 79 248
------------- -------------
34,608 15,599
------------- -------------
Operating income ........................................... 3,412 578
Other (income) expense:
Interest income .......................................... (962) (152)
Interest expense ......................................... 4,494 150
Other, net ............................................... 125 217
------------- -------------
Income (loss) before income taxes .......................... (245) 363
Income tax provision ....................................... 1,460 142
------------- -------------
Net income (loss) before extraordinary item ................ (1,705) 221
Extraordinary item ......................................... (17,579) --
------------- -------------
Net income (loss) .......................................... $ (19,284) $ 221
============= =============
Earnings (loss) per share before extraordinary item:
Basic .................................................. $ (.18) $ .02
============= =============
Diluted ................................................ $ (.18) $ .02
============= =============
Earnings (loss) per share:
Basic .................................................. $ (2.08) $ .02
============= =============
Diluted ................................................ $ (2.07) $ .02
============= =============
Weighted average shares outstanding:
Basic .................................................. 9,253,598 9,249,467
============= =============
Diluted ................................................ 9,298,329 9,313,974
============= =============
See accompanying notes.
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DAILEY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
---------------------------
1998 1997
---------- ----------
OPERATING ACTIVITIES:
Net income (loss) .................................................... $ (19,284) $ 221
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ...................................... 4,634 1,801
Deferred income taxes .............................................. 173 (100)
Write-off of unamortized debt issuance costs........................ 4,929 --
Provision for doubtful accounts .................................... 220 74
Loss on sale and disposition of property and equipment ............. -- 172
Provision for stock awards ......................................... 185 1,050
Changes in operating assets and liabilities
(net of the effects of acquisitions):
Accounts receivable-- trade ..................................... (4,812) 1,169
Accounts receivable from/payable to officers and affiliates...... (112) 5,235
Prepaid expenses and other ...................................... (4,233) (280)
Accounts payable and accrued liabilities ........................ 3,743 (2,418)
Income taxes payable ............................................ 821 45
---------- ----------
Net cash provided by (used in) operating activities .................. (13,736) 6,969
INVESTING ACTIVITIES:
Additions to revenue-producing tools and inventory ................... (17,056) (5,039)
Inventory transferred to cost of rentals ............................. 2,317 1,394
Revenue-producing tools lost in hole, abandoned, and sold ........... 645 476
Additions to property and equipment .................................. (1,824) (425)
Proceeds from sale of property and equipment ......................... 1,293 117
Acquisitions ......................................................... (76,903) --
---------- ----------
Net cash used in investing activities ................................ (91,528) (3,477)
FINANCING ACTIVITIES:
Net proceeds from the issuance of Senior Notes ....................... 268,125 --
Payments on outstanding debt ......................................... (120,874) (427)
Purchase of treasury stock ........................................... -- (234)
---------- ----------
Net cash provided by (used in) financing activities .................. 147,251 (661)
---------- ----------
Effect of foreign exchange rate changes on cash ...................... (92)
Increase in cash and cash equivalents ................................ 41,895 2,831
Cash and cash equivalents at beginning of period ..................... 59,836 11,557
---------- ----------
Cash and cash equivalents at end of period ........................... $ 101,731 $ 14,388
========== ==========
See accompanying notes.
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DAILEY INTERNATIONAL INC..
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements include
the accounts of Dailey International Inc. and its subsidiaries ("Dailey" or the
"Company"), and have been prepared in accordance with United States generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. For further information,
reference is made to the consolidated financial statements and footnotes
thereto included in the Company's Form 10-K filed with the Securities and
Exchange Commission on March 31, 1998. Certain reclassifications have been made
to the December 31, 1997 financial information to conform to the current period
presentation.
As of January 1, 1998, the Company adopted Financial Accounting
Standards Board Statement No. 130, Reporting Comprehensive Income (SFAS No.
130). SFAS No. 130 established new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this statement
had no impact on the Company's net income (loss) or stockholder's equity. SFAS
No. 130 requires the Company's foreign currency translation adjustments to be
included in comprehensive income. For the three months ended March 31, 1998 and
1997, total comprehensive income (loss) was ($19,531,000) and $221,000,
respectively.
2. ORGANIZATION
The accompanying consolidated financial statements reflect the
operations of Dailey International Inc. (formerly Dailey Petroleum Services
Corp.), a Delaware corporation. In October 1997, Dailey Petroleum Services
Corp. changed its name to Dailey International Inc.
In July 1997, the Company changed its fiscal year end to December 31,
effective December 31, 1997.
The Company is an integrated supplier of specialty services and a
provider of technologically-advanced downhole tools to the oil and gas industry
on a worldwide basis. Founded in 1945 as a rental tool company, Dailey began
offering directional drilling services in 1984 and currently provides such
services in the Gulf of Mexico, the United States Gulf Coast region, and most
recently, Venezuela, Louisiana and the Austin Chalk formation in Texas. In June
1997, the Company acquired Air Drilling International, Inc. ("ADI" and the "ADI
Acquisition") and, as a result, became a leading provider worldwide of air
drilling services for underbalanced drilling applications. In January 1998, the
Company acquired the operating assets and liabilities of Directional Wireline
Services, Inc. ("DWS"), DAMCO Tong Services, Inc. and DAMCO Services, Inc.
(collectively, "DAMCO", and with DWS, "DWS/DAMCO" or the "Companies"), which
are headquartered in Houma, Louisiana. The Companies provide specialized
drilling, workover, completion and production services to the Gulf of Mexico
and Nigerian markets. In March 1998, the Company acquired Integrated Drilling
Systems, Limited ("IDS"), which is headquartered in Aberdeen, Scotland. IDS
manufactures directional drilling tools. The Company operates in one business
segment.
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3. ACQUISITIONS
ADI Acquisition. On June 20, 1997, the Company purchased the stock of
ADI (a provider of air drilling services for underbalanced drilling
applications) for $46.4 million, including the repayment of approximately $16.8
million of ADI indebtedness, financed with bank debt of $45.5 million and
proceeds from the 1996 IPO. The ADI Acquisition was accounted for under the
purchase method of accounting. As a result, the assets and liabilities of ADI
were recorded at their estimated fair market values as of the date of the ADI
Acquisition. The Company recorded goodwill of approximately $18.9 million
relating to the excess of the purchase price over the fair market value of ADI's
assets, which will be amortized over 20 years and result in approximately
$943,000 in amortization expense per year. The purchase price allocation was
based on preliminary estimates and may be revised at a later date.
DWS/DAMCO Acquisition. On January 28, 1998, the Company acquired the
operating assets and liabilities of DWS/DAMCO. The aggregate purchase price for
the Companies was $61 million financed with proceeds from a $115 million 9 3/4%
senior notes offering in August 1997 and borrowings under its revolving credit
facility. The acquisition was accounted for under the purchase method of
accounting, accordingly the assets and liabilities of DWS/DAMCO were recorded at
their estimated fair market values as of the date of acquisition. The Company
recorded goodwill of approximately $32.0 million relating to the excess of the
purchase price over the fair market value of the net assets, which will be
amortized over 25 years and result in approximately $1.3 million in amortization
expense per year. The purchase price allocation was based on preliminary
estimates and may be revised at a later date.
IDS Acquisition. The Company acquired the outstanding capital stock of
IDS on March 23, 1998 for approximately $11.9 million in cash and 1,064,600
shares of Class A Common Stock, plus assumption of debt of approximately $10.6
million. The IDS Acquisition was accounted for under the purchase method of
accounting. The assets and liabilities of IDS were recorded at their estimated
fair market values of the date of acquisition. The Company recorded
approximately $16.6 million in goodwill, representing the excess of the purchase
price over the estimated fair market value of IDS' assets, which will be
amortized over 25 years and result
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in additional annual amortization expense of $664,000.
The pro forma unaudited results of operations for the three months
ended March 31, 1998 and 1997, assuming consummation of the purchases of ADI,
IDS and DWS/DAMCO as of January 1, 1997, utilizing a portion of the proceeds
from the issuance of the $275 million Senior Notes, are as follows:
THREE MONTHS ENDED MARCH 31,
1998 1997
---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues ............................................................. $ 41,679 $ 34,283
Net income (loss) before extraordinary item .......................... (2,103) 460
Net income (loss) .................................................... (19,682) 460
Net income (loss) before extraordinary item per common share:
Basic ......................................................... (0.23) .05
Diluted ....................................................... (0.23) .05
Net income (loss) per common share:
Basic ......................................................... (2.13) .05
Diluted ....................................................... (2.12) .05
The pro forma information for the three months ended March 31, 1998 and
1997, includes adjustments for additional depreciation and amortization expense
associated with the purchase price allocation using the respective lives for
goodwill and an average life of seven years for fixed assets, increased interest
expense for additional borrowings as if they were incurred at the beginning
of the period and related adjustments for income taxes. The pro forma
information is not necessarily indicative of the results of operations had the
acquisition been affected on the assumed dates or the results of operations for
any future period.
4. REVENUE-PRODUCING TOOLS AND INVENTORY
MARCH 31, DECEMBER 31,
1998 1997
---------- ----------
(IN THOUSANDS)
Revenue-producing tools .................................... $ 140,056 $ 95,266
Accumulated depreciation ................................... (41,161) (37,284)
---------- ----------
98,895 57,982
Inventory:
Components, subassemblies and expendable parts ....... 22,475 17,748
Rental tools and expendable parts under production ... 4,414 2,100
Raw materials ........................................ 1,522 1,226
---------- ----------
28,411 21,074
---------- ----------
Revenue-Producing Tools and Inventory ....... $ 127,306 $ 79,056
========== ==========
5. STOCK OPTIONS AND AWARDS
Pursuant to the 1996 Key Employee Stock Plan (the "1996 Plan"), the
Board of Directors of the Company is authorized to issue up to 900,000 shares of
the Company's Class A Common Stock. On October 7, 1997, the Board of Directors
approved the 1997 Long-Term Incentive Plan (the "1997 Plan"). Pursuant to the
1997 Plan, the Board of Directors of the Company is authorized to issue up to
720,000 shares of the Company's Class A Common Stock.
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There was no option activity for the three months ended March 31, 1998.
Restricted stock activity for the three months ended March 31, 1998 was
as follows:
NUMBER OF
RESTRICTED SHARES
-----------------
Outstanding at December 31, 1997 ..................................... 230,000
Granted at fair value of $8.50 ................................... 6,000
-------
Outstanding at March 31, 1998 ........................................ 236,000
=======
The 236,000 shares granted under the 1997 Plan vest over a four year
period.
6. BORROWING ARRANGEMENTS AND EXTRAORDINARY ITEM
Long-term debt consisted of the following:
MARCH 31, DECEMBER 31,
1998 1997
---------- ----------
(IN THOUSANDS)
9 1/2% Senior Notes ......................... $ 275,000 $ --
9 3/4% Senior Notes ......................... -- 114,223
Note payable to a bank ...................... 2,298 --
Other notes payable ......................... 378 152
---------- ----------
277,676 114,375
Less current portion of long-term debt ...... (1,652) 146
---------- ----------
Total long-term debt ......... $ 276,024 $ 114,229
========== ==========
On February 13, 1998, the Company issued $275 million of 9 1/2% Senior
Notes due 2008 (the "Senior Notes"). Of the $268.1 million net proceeds to the
Company, approximately $127.7 million were utilized to repurchase at a premium
of 111% of their principal amount all of the outstanding principal amount of the
Company's 9 3/4% Senior Notes (the "Old Notes") and approximately $7.5 million
were utilized to repay outstanding debt under the Company's revolving credit
facility. As a result of the repurchase of the Old Notes, the Company recorded
an extraordinary loss of approximately $17.6 million, or $1.89 per diluted
share, with no related income tax benefit, representing the excess of the
purchase price for the Old Notes over their carrying value on the date of
repurchase. The Senior Notes are unsecured senior obligations of the Company.
The Senior Notes are redeemable at the option of the Company on or after
February 15, 2003 at stipulated redemption prices.
7. INCOME TAXES
Income tax expense exceeded the amount that would have resulted from
applying the U.S. federal statutory tax rate due to foreign income taxes and
withholding taxes with no offsetting benefit from U.S. net operating losses,
net of valuation allowances.
8. EARNINGS PER SHARE
The reconciliation of the numerator and denominator used for the
computation of basic and diluted earnings per share is as follows:
THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1997
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net income (loss) for basic and diluted earnings per share ........ $(19,284) $ 221
-------- -------
Weighted-average shares for basic earnings per share .............. 9,254 9,249
Effect of dilutive securities
Employee stock options and unvested stock grants ................ 44 65
-------- -------
Adjusted weighted-average shares and assumed conversions
for diluted earnings per share .................................. 9,298 9,314
-------- -------
Basic earnings (loss) per share ................................... $ (2.08) $ .02
-------- -------
Diluted earnings (loss) per share ................................. $ (2.07) $ .02
-------- -------
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9. CONSOLIDATING FINANCIAL STATEMENTS
The $275 million 9 1/2% Senior Notes due 2008 issued on February 13,
1998 are unconditionally guaranteed on a joint and several basis by certain
subsidiaries of the Company. Accordingly, the following condensed consolidating
balance sheets as of March 31, 1998 and December 31, 1997 and the related
condensed consolidating statements of operations and cash flows for the three
months ended March 31, 1998 and March 31, 1997 have been provided. The condensed
consolidating financial statements herein are followed by notes which are an
integral part of these statements.
DAILEY INTERNATIONAL INC.
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS)
NON-
ASSETS PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
Current assets:
Cash and cash equivalents ............................. $ 99,022 $ 356 $ 2,353 $ -- $ 101,731
Accounts receivable, net .............................. 26,378 6,607 14,742 -- 47,727
Accounts receivable from affiliates ................... -- 9,885 (9,885) -- --
Other current assets .................................. 2,360 1,139 1,513 -- 5,012
--------- --------- --------- --------- ---------
Total current assets ............................ 127,760 17,987 8,723 -- 154,470
Revenue producing tools and inventory, net............. 67,399 35,425 24,482 -- 127,306
Property and equipment, net ........................... 6,722 1,955 1,017 -- 9,694
Investments in subsidiaries ........................... 75,206 35 (35) (75,206) --
Accounts receivable from officer ...................... 250 -- -- -- 250
Goodwill, net ......................................... 33,332 18,278 16,574 -- 68,184
Intangibles and other assets .......................... 9,988 209 5,515 -- 15,712
--------- --------- --------- --------- ---------
Total assets .................................... $ 320,657 $ 73,889 $ 56,276 $ (75,206) $ 375,616
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities .............. $ 18,611 $ 4,973 $ 6,277 $ -- $ 29,861
Accounts payable to affiliates ........................ (29,133) 14,178 15,326 -- 371
Income taxes payable .................................. 1,487 461 2,599 -- 4,547
Current portion of long-term debt ..................... 60 2 1,590 -- 1,652
--------- --------- --------- --------- ---------
Total current liabilities ....................... (8,975) 19,614 25,792 -- 36,431
Long-term debt .............................................. 275,169 38 817 -- 276,024
Deferred income taxes ....................................... (2,172) 1,595 4,528 -- 3,951
Deferred revenue ............................................ -- -- 1,494 -- 1,494
Other noncurrent liabilities ................................ 684 248 1,080 -- 2,012
Stockholders' equity:
Common stock .......................................... 105 8 1,723 (1,731) 105
Treasury stock ........................................ (1,047) -- -- -- (1,047)
Paid in capital ....................................... 51,003 23,786 23,549 (47,335) 51,003
Foreign currency translation-accumulated
comprehensive income................................. -- (1) (246) -- (247)
Retained earnings ..................................... 5,890 28,601 (2,461) (26,140) 5,890
--------- --------- --------- --------- ---------
Total stockholders' equity ............................ 55,951 52,394 22,565 (75,206) 55,704
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity ...... $ 320,657 $ 73,889 $ 56,276 $ (75,206) $ 375,616
========= ========= ========= ========= =========
See accompanying notes.
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DAILEY INTERNATIONAL INC.
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
NON-
ASSETS PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
Current assets:
Cash and cash equivalents .............................. $ 56,672 $ 860 $ 2,305 $ -- $ 59,837
Accounts receivable, net ............................... 18,220 6,580 9,801 -- 34,601
Other current assets ................................... 1,318 601 850 -- 2,769
--------- --------- --------- --------- ---------
Total current assets ............................. 76,210 8,041 12,956 -- 97,207
Revenue producing tools and inventory, net ............. 37,598 31,102 10,356 -- 79,056
Property and equipment, net ............................ 5,880 1,786 515 -- 8,181
Investments in subsidiaries ............................. 52,399 -- -- (52,399) --
Accounts receivable from officer ........................ 250 -- -- -- 250
Goodwill, net ........................................... 803 18,157 223 -- 19,183
Intangibles and other assets ............................ 5,095 146 159 -- 5,400
--------- --------- --------- --------- ---------
Total assets ..................................... $ 178,235 $ 59,232 $ 24,209 $ (52,399) $ 209,277
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ............... $ 16,270 $ 4,726 $ 2,808 $ -- $ 23,804
Accounts payable to affiliates ......................... (16,846) 835 16,494 -- 483
Income taxes payable ................................... 1,269 214 934 -- 2,417
Current portion of long-term debt ...................... 47 2 97 -- 146
--------- --------- --------- --------- ---------
Total current liabilities ....................... 740 5,777 20,333 -- 26,850
Long-term debt ............................................... 114,143 40 46 -- 114,229
Deferred income taxes ........................................ (2,172) 1,595 1,815 -- 1,238
Other noncurrent liabilities ................................. 123 296 1,140 -- 1,559
Stockholders' equity:
Common stock ........................................... 94 8 5 (13) 94
Treasury stock ......................................... (1,047) -- -- -- (1,047)
Paid in capital ........................................ 41,335 23,786 3,895 (27,681) 41,335
Retained earnings ...................................... 25,019 27,730 (3,025) (24,705) 25,019
--------- --------- --------- --------- ---------
Total stockholders' equity ............................. 65,401 51,524 875 (52,399) 65,401
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity ..... $ 178,235 $ 59,232 $ 24,209 $ (52,399) $ 209,277
========= ========= ========= ========= =========
See accompanying notes.
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DAILEY INTERNATIONAL INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
Revenues:
Rental income ............................ $ 12,762 $ 1,703 $ 1,226 $ -- $ 15,691
Sales of products and services ........... 8,428 525 2,796 -- 11,749
Underbalanced drilling services .......... -- 3,738 6,842 -- 10,580
-------- -------- -------- -------- --------
21,190 5,966 10,864 -- 38,020
Cost and expenses:
Cost of rentals .......................... 9,568 1,558 1,108 (58) 12,176
Cost of products and services ............ 5,436 57 1,666 -- 7,159
Cost of underbalanced drilling services .. -- 1,926 4,846 -- 6,772
Selling, general and administrative ...... 5,121 1,715 1,490 (89) 8,237
Non-cash compensation .................... 185 -- -- -- 185
Research and development ................. 79 -- -- -- 79
-------- -------- -------- -------- --------
20,389 5,256 9,110 (147) 34,608
-------- -------- -------- -------- --------
Operating income ............................... 801 710 1,754 147 3,412
Other (income) expense:
Interest income .......................... (970) 10 (2) -- (962)
Interest expense - nonaffiliates ......... 4,447 19 28 -- 4,494
Equity in subsidiaries, net of taxes ..... (1,280) -- -- 1,280 --
Other, net ............................... 11 (129) 96 147 125
-------- -------- -------- -------- --------
Income (loss) before taxes ..................... (1,407) 810 1,632 (1,280) (245)
Provision for income taxes ..................... 298 69 1,093 -- 1,460
-------- -------- -------- -------- --------
Net income (loss) before extraordinary item .... (1,705) 741 539 (1,280) (1,705)
Extraordinary item ............................. (17,579) -- -- -- (17,579)
-------- -------- -------- -------- --------
Net income (loss) .............................. $(19,284) $ 741 $ 539 $ (1,280) $(19,284)
======== ======== ======== ======== ========
See accompanying notes.
10
14
DAILEY INTERNATIONAL INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
Revenues:
Rental income ............................ $ 8,736 $ 1,549 $ 1,772 $ -- $ 12,057
Sales of products and services ........... 3,144 613 363 -- 4,120
-------- -------- -------- -------- --------
11,880 2,162 2,135 -- 16,177
Cost and expenses:
Cost of rentals .......................... 6,309 1,595 2,568 (1,213) 9,259
Cost of products and services ............ 2,125 40 2 -- 2,167
Selling, general and administrative ...... 2,476 173 226 -- 2,875
Non-cash compensation .................... 1,050 -- -- -- 1,050
Research and development ................. 248 -- -- -- 248
-------- -------- -------- -------- --------
12,208 1,808 2,796 (1,213) 15,599
-------- -------- -------- -------- --------
Operating income ............................... (328) 354 (661) 1,213 578
Other (income) expense:
Interest income .......................... (145) (7) -- -- (152)
Interest expense ......................... 148 2 -- -- 150
Equity in subsidiaries, net of taxes ..... (27) -- -- 27 --
Other, net ............................... (499) (258) (239) 1,213 217
-------- -------- -------- -------- --------
Income (loss) before taxes ..................... 195 617 (422) (27) 363
Provision (benefit) for income taxes ........... (26) 61 107 -- 142
-------- -------- -------- -------- --------
Net income (loss) .............................. $ 221 $ 556 $ (529) $ (27) $ 221
======== ======== ======== ======== ========
See accompanying notes.
11
15
DAILEY INTERNATIONAL INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
OPERATING ACTIVITIES:
Net income (loss) .......................................... $ (19,230) $ 834 $ 539 $ (1,427) $ (19,284)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Equity in earnings of subsidiaries ................... (1,427) -- -- 1,427 --
Depreciation and amortization ........................ 2,009 2,199 426 -- 4,634
Deferred income taxes ................................ (123) 283 13 -- 173
Write-off unamortized debt issuance costs............. 4,929 -- -- -- 4,929
Provision for doubtful accounts ...................... 83 129 8 -- 220
Provision for stock awards ........................... 186 (1) -- -- 185
Changes in operating assets and liabilities
(net of the effects of acquisitions):
Accounts receivable - trade ..................... (774) (1,388) (2,650) -- (4,812)
Accounts receivable from/payable to
officer and affiliates ........................ (6,485) 4,181 2,192 -- (112)
Prepaid expenses and other ...................... (3,528) (614) (91) -- (4,233)
Accounts payable and accrued liabilities ........ 1,354 714 1,675 -- 3,743
Income taxes payable ............................ 192 35 594 -- 821
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities ........ (22,814) 6,372 2,706 -- (13,736)
INVESTING ACTIVITIES:
Additions to revenue-producing tools and inventory ......... (11,630) (3,003) (2,423) -- (17,056)
Inventory transferred to cost of rentals ................... 1,405 896 16 -- 2,317
Revenue-producing tools lost in hole, abandoned,
and sold ............................................. 1,103 (409) (49) -- 645
Additions to property and equipment ........................ (1,632) (79) (113) -- (1,824)
Proceeds from sale of property and equipment ............... 1,225 68 -- -- 1,293
Acquisitions................................................ (73,518) (3,385) -- -- (76,903)
--------- --------- --------- --------- ---------
Net cash used in investing activities ...................... (83,047) (5,912) (2,569) -- (91,528)
FINANCING ACTIVITIES:
Proceeds from the issuance of Senior Notes.................. 268,125 -- -- -- 268,125
Payments on outstanding debt ............................... (120,848) (4) (22) -- (120,874)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities ........ 147,277 (4) (22) -- 147,251
--------- --------- --------- --------- ---------
Effect of foreign exchange rate changes on cash ............ -- -- (92) -- (92)
--------- --------- --------- --------- ---------
Increase in cash and cash equivalents ...................... 41,416 456 23 -- 41,985
Cash and cash equivalents at beginning of period ........... 56,672 859 2,305 -- 59,836
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period ................. $ 98,088 $ 1,315 $ 2,328 $ -- $ 101,731
========= ========= ========= ========= =========
See accompanying notes.
12
16
DAILEY INTERNATIONAL INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
OPERATING ACTIVITIES:
Net income (loss) .......................................... $ 221 $ 556 $ (529) $ (27) $ 221
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Equity in earnings of subsidiaries ................... (27) -- -- 27 --
Depreciation and amortization ........................ 1,371 394 36 -- 1,801
Deferred income taxes ................................ (100) -- -- -- (100)
Provision for doubtful accounts ...................... 55 10 9 -- 74
Provision for stock awards ........................... 1,050 -- -- -- 1,050
Loss on sale and disposition of
property and equipment .......................... 172 -- -- -- 172
Changes in operating assets and liabilities
(net of the effects of acquisitions):
Accounts receivable - trade ..................... 415 (66) 820 -- 1,169
Accounts receivable from/payable to officers
and affiliates ................................ 6,003 (736) (32) -- 5,235
Prepaid expenses and other ...................... (689) (129) 538 -- (280)
Accounts payable and accrued liabilities ........ (2,041) 190 (567) -- (2,418)
Income taxes payable ............................ (113) 51 107 -- 45
-------- -------- -------- -------- --------
Net cash provided by operating activities .................. 6,317 270 382 -- 6,969
INVESTING ACTIVITIES:
Additions to revenue-producing tools and inventory ......... (4,146) (504) (389) -- (5,039)
Inventory transferred to cost of rentals ................... 624 474 296 -- 1,394
Revenue-producing tools lost in hole, abandoned,
and sold ............................................. 676 (200) -- -- 476
Additions to property and equipment ........................ (655) 251 (21) -- (425)
Proceeds from sale of property and equipment ............... 419 (298) (4) -- 117
-------- -------- -------- -------- --------
Net cash used in investing activities ...................... (3,082) (277) (118) -- (3,477)
FINANCING ACTIVITIES:
Net proceeds from the issuance of Senior Notes ............. -- -- -- -- --
Payments on outstanding debt ............................... (427) -- -- -- (427)
Purchase of treasury stock ................................. (234) -- -- -- (234)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing activities ........ (661) -- -- -- (661)
-------- -------- -------- -------- --------
Increase (decrease) in cash and cash equivalents ........... 2,574 (7) 264 -- 2,831
Cash and cash equivalents at beginning of period ........... 10,814 553 190 -- 11,557
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period ................. $ 13,388 $ 546 $ 454 $ -- $ 14,388
======== ======== ======== ======== ========
See accompanying notes.
13
17
DAILEY PETROLEUM SERVICES CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
From time to time, the Company may make certain statements that contain
"forward-looking" information (as defined in the Private Securities Litigation
Reform Act of 1995) and that involve risk and uncertainty. Words such as
"anticipate", "expect", "estimate", "project" and similar expressions are
intended to identify such forward-looking statements. These forward-looking
statements may include, but are not limited to, future capital expenditure
plans, anticipated results from current and future operations, earnings,
margins, acquisitions, market trends in the oilfield services industry,
including demand for the Company's drilling services and downhole tools,
competition and various business trends. Forward-looking statements may be made
by management orally or in writing including, but not limited to, the
Management's Discussion and Analysis of Financial Condition and Results of
Operations section and other sections of the Company's filings with the
Securities and Exchange Commission under the Securities Act of 1933 and the
Securities Exchange Act of 1934.
Such forward-looking statements are subject to certain risks,
uncertainties and assumptions, including without limitation those identified
below. Should one or more of these risks or uncertainties materialize, or
should any of the underlying assumptions prove incorrect, actual results of
current and future operations may vary materially from those anticipated,
estimated or projected. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates.
Among the factors that may have a direct bearing on the Company's
results of operations and the oilfield services industry in which it operates
are changes in the price of oil and natural gas; the impact of competitive
products and pricing; the presence of competitors with greater financial
resources; product demand and acceptance risks, including product obsolescence
risks with respect to its downhole tools and directional drilling technology;
risks associated with the DWS/DAMCO Acquisition and the IDS Acquisition,
including failure to successfully manage the Company's growth and integrate the
operations acquired in such acquisitions; the Company's substantial leverage
following its recent offering of senior notes; typical operating risks inherent
in the oilfield services industry, including risks of environmental liability;
delays in receiving raw materials utilized in the manufacture and assembly of
the Company's downhole tools and other difficulties in the manufacture, assembly
or delivery of the company's downhole tools; worldwide political stability and
economic growth and other risks associated with international operations,
including foreign exchange risk; and the Company's successful execution of
internal operating plans as well as regulatory uncertainties and legal
proceedings.
CHANGE IN FISCAL YEAR
Effective December 31, 1997, the Company changed its fiscal year end to
December 31 from April 30. The Company believes such a change will allow the
Company's stockholders and other investors to more easily compare the Company's
operating results with those of other oil field services companies.
RECENT DEVELOPMENTS
Industry Conditions. Demand for the Company's products and services
depends to a large extent upon the level of exploration and production activity
in the oil and gas industry and the industry's willingness to spend capital on
drilling operations, which in turn depends in part on oil and gas prices,
expectations about future prices, the cost of exploring for, producing and
delivering oil and gas, the discovery rate of new oil and gas reserves, domestic
and international political, military, regulatory and economic conditions and
the ability of oil and gas companies to raise capital. Prices for oil and gas
historically have been extremely volatile and have reacted to changes in the
supply of and demand for oil and natural gas, domestic and worldwide economic
conditions and political instability in oil producing countries.
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18
During 1996 and much of 1997, including the three months ended March
31, 1997, the oil field service industry experienced a general improvement in
product demand and pricing as relatively stable and improved oil and or natural
gas prices combined with a strong world economy to increase exploration and
development activity worldwide. This trend benefited the Company and its results
during the three months ended March 31, 1997. Beginning in late 1997, the
worldwide price of oil declined significantly and prices for natural gas have
weakened slightly. These declines have been attributed to, among other things,
an excess supply of oil in the world markets, reduced domestic demand associated
with an unseasonably warm winter and the potential for lower worldwide demand
due to the impact of the economic downturn in Southeast Asia. As prices for oil
have continued to decline, the Company and others in the oil field services
industry have begun to experience a softening in demand for their products and
services, in particular products associated with exploration activity and oil
production. Although the Company believes that demand for its products and
services remains relatively strong and the softening of the market has mainly
impacted demand for products associated with the production of oil from marginal
wells, the Company believes that such conditions put downward pressure on
the Company's operations during the first quarter of 1998. Although the short
term outlook in the industry remains uncertain, the Company currently expects
demand for its products and services to remain steady during the second quarter
of 1998, and absent a significant downturn in the U.S. and world economies, the
Company believes that market conditions in the industry should improve over the
long term as the demand and supply for oil and natural gas become more in
balance. The timing of such recovery, however, cannot be predicted with
certainty.
Issuance of Senior Notes. On February 13, 1998, the Company issued $275
million principal amount of its 9 1/2% Senior Notes due 2008 (the "Senior
Notes"). Of the $268.1 million net proceeds to the Company, approximately $127.7
million were utilized to repurchase at a premium of 111% of their principal
amount all of the outstanding principal amount of the Company's 9 3/4% Senior
Notes due 2007 (the "Old Notes") and approximately $7.5 million were utilized to
repay outstanding debt under the Company's credit facility. The remaining net
proceeds were used to fund the acquisition of IDS and will be utilized to fund
capital expenditures, to fund future acquisitions and for general and working
capital purposes. The Company is currently investing the net proceeds in
temporary short-term investments. The Senior Notes significantly increased the
Company's debt levels and will result in annualized interest payments of
approximately $26.1 million per year. As a result of the repurchase of the Old
Notes, the Company recorded an extraordinary loss in the first quarter of 1998
of $17.6 million representing the excess of the purchase price for the Old Notes
over their carrying value on the date of repurchase.
IDS Acquisition. Utilizing a portion of the proceeds from the issuance
of the Senior Notes, the Company acquired the outstanding capital stock of IDS
in March 1998 for approximately $11.9 million in cash and 1,064,600 shares of
Class A Common Stock, plus assumption of debt of approximately $10.6 million. As
a result of the IDS Acquisition, the Company acquired key technologies,
including a resistivity tool for LWD equipment that is compatible with Dailey's
MWD equipment. The Company believes that the addition of LWD technology to its
MWD equipment allows the Company to offer more fully integrated directional
drilling services. As result of the IDS Acquisition, which was accounted for
under the purchase method of accounting, the Company recorded approximately
$16.6 million in goodwill, representing the excess of the purchase price over
the estimated fair market value of IDS' assets, which will be amortized over 25
years and result in additional annual amortization expense of $664,000. Since
the goodwill associated with the IDS Acquisition will not be deductible for tax
purposes, the effective tax rate on Dailey's financial statements will increase
as a result of the acquisition.
DWS/DAMCO Acquisition. The Company's operations and future results will
be significantly impacted by the DWS/DAMCO Acquisition, which was consummated in
January 1998. Dailey acquired the operating assets and liabilities of DWS/DAMCO
for $61 million in cash and financed the acquisition with remaining proceeds
from its offering of the Old Notes in August 1997 and borrowings under its
credit facility. As a result of the DWS/DAMCO Acquisition, the Company became a
leading supplier of electric wireline services and tubular testing and handling
services in the U.S. Gulf of Mexico region and Nigeria. The DWS/DAMCO
Acquisition was accounted for under the purchase method of accounting. As a
result, the assets and liabilities of DWS/DAMCO were recorded at their estimated
fair market values as of the date of the DWS/DAMCO Acquisition. The Company
recorded goodwill of approximately $32.0 million relating to the excess of the
purchase price paid for the
15
19
assets over their fair market value, which will be amortized over 25 years and
result in approximately $1.3 million in annualized amortization expense.
ADI Acquisition. The Company's operations have been and will be
significantly impacted by the ADI Acquisition which was consummated in June
1997. Dailey acquired ADI for $46.4 million, including the repayment of
approximately $16.8 million in debt. As a result of the ADI Acquisition, Dailey
became a leading worldwide provider of air drilling services for underbalanced
drilling applications.
The ADI Acquisition was accounted for under the purchase method of
accounting. As a result, the operations of ADI following June 20, 1997 are
reflected in Dailey's historical operations and the assets and liabilities of
ADI were recorded at their estimated fair market values as of the date of the
ADI Acquisition. Dailey recorded goodwill of approximately $18.9 million
relating to the excess of the purchase price paid for the assets over their fair
market value, which is being amortized over 20 years and is resulting in
approximately $943,000 in annualized amortization expense. Since the goodwill
associated with the ADI Acquisition is not amortized for tax purposes, the
effective tax rate shown on Dailey's financial statements has increased
significantly as a result of the ADI Acquisition.
RESULTS OF OPERATIONS
16
20
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1997
Rental Income. Rental income for the three months ended March 31, 1998
was $15.7 million, an increase of 30% from $12.1 million for the same three
months last year. The increase was due to increased utilization of directional
rental products, which was favorably impacted by a 16% increase in the average
domestic rig count and the expansion of directional drilling operations into the
U.S. mid-continent, resulting in a $2.8 million increase in rental income.
Internationally, rental income increased $655,000 as a result of increased
demand for downhole tools primarily in Indonesia and Saudi Arabia.
Sales of Products and Services. Sales of products and services for the
three months ended March 31, 1998 were $11.7 million compared to $4.1 million
for the same three months last year. Excluding revenues associated with ADI and
DWS/DAMCO of $6.4 million, revenues increased 31% due to an increase in tools
lost-in-hole revenues of $745,000 and increased revenue from domestic
directional services of $675,000.
Underbalanced Drilling Services. Underbalanced drilling services
revenue for the three months ended March 31, 1998 was $10.6 million resulting
from the acquisition of ADI in June 1997.
Cost of Rentals. Cost of rentals for the three months ended March 31,
1998 was $12.2 million, an increase of 32% from $9.3 million for the same three
months last year. Margins decreased from 23% for the three months ended March
31, 1997 to 22% for the three months ended March 31, 1998 primarily due to
increased depreciation expense related to the increase in directional rental
products and to an increase in fixed costs associated with the expansion of
directional drilling operations in the U.S. mid-continent region. In addition,
the margin was unfavorably impacted by the increased use of third party tools
which typically generated lower margins.
Cost of Products and Services. Cost of products and services for the
three months ended March 31, 1998 was $7.2 million, which was a $5.0 million
increase from the same three months last year. Excluding costs associated with
ADI and DWS/DAMCO of $3.6 million, costs increased $1.4 million. The margin on
sales of products and services for the three months ended March 31, 1998,
excluding the impact of ADI and DWS/DAMCO, was 33% compared to 47% for the same
three months last year primarily due to the hiring of additional directional
drillers and MWD technicians combined with increased costs to retain qualified
personnel in those positions.
Cost of Underbalanced Drilling Services. Cost of underbalanced drilling
services for the three months ended March 31, 1998 was $6.8 million resulting
from the acquisition of ADI in June 1997.
Selling, General and Administrative. Selling, general and
administrative expenses for the three months ended March 31, 1998 were $8.2
million, compared to $2.9 million for the same three months last year. Excluding
costs associated with ADI and DWS/DAMCO of $4.0 million, costs increased by $1.4
million primarily as a result of increased personnel and compensation due to
increased activity levels and due to the amortization of costs related to the
acquisitions of ADI and DWS/DAMCO.
Non-cash Compensation. Non-cash compensation for the three months ended
March 31, 1998 was $185,000 which related to restricted stock that had been
granted to certain executive officers of the Company on October 7, 1997 in
connection with the 1997 Long-Term Incentive Plan, compared to $1.1 million for
the same period last year related to the 1996 Long-Term Incentive Plan.
17
21
Interest Income. Interest income for the three months ended March 31,
1998 was $962,000 compared to $152,000 for the same three months last year. This
increase in interest income was the result of interest earned on temporary,
short term investments utilizing excess funds from the issuance of the Senior
Notes.
Interest Expense. Interest expense for the three months ended March 31,
1998 was $4.5 million compared to $150,000 for the same three months last year.
This increase was due to the interest on the $115 million 9 3/4% senior notes
through mid-February and the $275 million 9 1/2% Senior Notes from that
date forward.
Income Tax Provision. The provision for income taxes for the three
months ended March 31, 1998 was $1.5 million, an increase from $142,000 for the
same three months last year. Income tax expense exceeded the amount that would
have resulted from applying the U.S. federal statutory tax rate due to foreign
income taxes and withholding taxes with no offsetting benefit from U.S. net
operating losses, net of valuation allowances.
Extraordinary Item. As a result of the repurchase of the $115 million 9
3/4% senior notes, the Company recorded an extraordinary loss in the first
quarter of 1988 of approximately $17.6 million, representing the excess of the
purchase price for the notes over the carrying value on the date of
the repurchase.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital. Cash used in operating activities was $13.7 million
during the three months ended March 31, 1998. Sources of cash included net
proceeds from the issuance of debt of $268.1 million, $645,000 from
revenue-producing tools lost-in-hole, abandoned and sold, and $1.3 million
proceeds from the sale of property and equipment. Principal uses of cash were to
fund acquisitions (net of cash acquired) of $76.9 million, repay outstanding
debt of $120.9 million, and fund capital expenditures of $16.6 million. During
the past several years, working capital requirements have been funded through
cash generated from operations, additional borrowings, credit facilities and
asset sales.
Senior Notes. The Senior Notes were issued pursuant to an indenture
dated February 13, 1998 (the "Indenture"). The Indenture contains various
covenants customary in such instruments, including covenants that (i) restrict
the Company's ability to incur additional indebtedness; (ii) restrict the
Company's ability to make restricted payments, including dividends; (iii)
restrict the Company's ability to sell assets; (iv) restrict the Company's
ability to grant liens on its assets; (v) limit transactions with affiliates and
(vi) limit the Company's ability to engage in certain extraordinary
transactions, including transactions involving a change in control of the
Company or the sale of substantially all of the Company's assets. The Senior
Notes are guaranteed by all of the Company's domestic subsidiaries, bear
interest at 9 1/2% that is payable semi-annually on February 15 and August 15 of
each year, mature on February 15, 2008 and are redeemable at the option of the
Company for stipulated redemption prices on or after February 15, 2003. The
issuance of the Senior Notes substantially increased the Company's level of
indebtedness over historical levels. The Company's increased level of
indebtedness will have several important affects on the Company's future
operations, including (i) a substantial portion of the Company's cash flows from
operations must be dedicated to the payment of interest and principal on its
indebtedness, (ii) the Company's leveraged position will substantially increase
its vulnerability to adverse changes in general economic and industry
conditions, as well as to competitive pressure, and (iii) the Company's ability
to obtain additional financing for working capital, capital expenditures,
acquisitions and general corporate and other purposes may be limited.
Revolving Credit Line. The Company currently does not have any
outstanding borrowings under its Revolving Credit Line. The Company and bank
have mutually agreed that there will be no borrowings under the Revolving Credit
Line until the existing loan agreement is amended. The Company intends to
modify the agreement during the third quarter of 1998.
Capital Expenditures. Capital expenditures of approximately $16.6
million were made during the three months ended March 31, 1998. Of this amount,
$14.7 million was for downhole tools, primarily MWD and other directional
equipment, hydraulic drilling jars, hydraulic fishing jars and related
inventory. The Company believes it has available resources from the proceeds of
the Senior Notes and through internally generated cash flow for at least the
next 12 months. In addition, as part of its business strategy, the Company is
continuing to analyze potential
18
22
acquisitions of complementary businesses and assets. The Company expects to
fund any future acquisitions utilizing a portion of the proceeds from the Senior
Notes; however, depending upon the size of any future acquisition, the Company
may need additional financing to fund such acquisitions and may need to issue
additional debt or equity securities.
IMPACT OF YEAR 2000
Some of the Company's computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time sensitive software that recognizes a date using "00" as the
year 1900 rather than the year 2000. If not corrected, this could cause a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices or engage in similar normal business activities.
The Company currently is in the process of converting its information
systems as part of a total business knowledge management process conversion,
which will include all operating systems, for a total estimated cost of
approximately $3.5 million. The system conversion is estimated to be completed
no later than June 30, 1999. The greatest Year 2000 compliance risk is that
system conversion will be delayed beyond the anticipated completion date and
the severe shortage of qualified information systems personnel, both internally
and externally, could affect compliance efforts. The Company believes that with
conversions to new software, the Year 2000 issue will not pose significant
operational problems for its computer systems.
The estimated cost and the anticipated date of system implementation
are based on management's best estimates; however, there can be no assurance
that these estimates will be achieved, and actual results could differ
materially from those anticipated.
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23
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAILEY INTERNATIONAL INC.
(Registrant)
Date: May 15, 1998 */s/David T. Tighe
--------------------------------------
David T. Tighe
Senior Vice President &
Chief Financial Officer
and authorized to sign on
behalf of the Registrant
* Also signing on behalf of the Additional Registrants.
21
24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
On February 13, 1998, the Company issued $275 million of
Senior Notes pursuant to a private placement to qualified
institutional buyers and accredited investors. The Senior
Notes contain customary affirmative and negative covenants,
including limitations on restrictive payments, including
dividends and distributions to the Company's stockholders.
Utilizing a portion of the proceeds from the issuance of the
Senior Notes, the Company repurchased all of the 9 3/4% senior
notes.
On March 23, 1998, the Company issued 1,064,600 shares of
Class A Common Stock pursuant to the IDS Acquisition pursuant
to an exemption from registration under Regulations D and S of
the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Share Purchase Agreement dated January 14, 1998, between the
Company, Integrated Drilling Systems Limited ("IDS") and the
shareholders of IDS (incorporated by reference from Amendment
No. 1 to the Company's Registration Statement on Form S-4 (File
No. 333-47345)).
4.1 Indenture Dated February 13, 1998, by and between the Company,
the Subsidiary Guarantors and the U.S. Trust Company of Texas,
N.A. relating to the Company's 9 1/2% Senior Notes Due 2008.
(Incorporated by reference from the Company's Registration
Statement on From S-4 (File No. 333-47345))
4.2 Form of Note for the Company's Senior Notes Due 2008.
(Incorporated by reference from the Company's Registration
Statement on Form S-4 (File No. 333-47345))
4.3 Registration Rights Agreement dated March 23, 1998, between the
Company and the former shareholders of IDS (incorporated by
reference from Amendment No. 1 to the Company's Registration
Statement on Form S-4 (File No. 333-47345)).
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K dated February 12, 1998
to report the acquisition of the operating assets and
liabilities of Directional Wireline Services, Inc., DAMCO
Services, Inc., and DAMCO Tong Services, Inc.
The Company filed a Form 8-K dated March 23, 1998
to report the IDS Acquisition.
20
25
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule