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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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 as specified in its charter)
DELAWARE 76-0503351
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
2507 NORTH FRAZIER
CONROE, TEXAS 77303
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (281) 350-3399
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to section 12(g) of the Act:
CLASS A COMMON STOCK, PAR VALUE $.01 NASD OTC BULLETIN BOARD
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 registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
State the aggregate market value of the voting stock held by nonaffiliates
of the registrant. $2,863,928 at March 26, 1999
(APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares
outstanding of each class of registrant's common stock, as of the latest
practicable date. 5,135,504 shares of Class A Common Stock and 5,000,000 shares
of Common B Common Stock at March 26, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 1999 Annual Meeting of Stockholders. (Part III)
Exhibit Index Begins on Page 22.
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TABLE OF ADDITIONAL REGISTRANTS
ADDRESS, INCLUDING
ZIP CODE, AND
TELEPHONE
NUMBER,
INCLUDING AREA
STATE OR PRIMARY STANDARD CODE, OF
OTHER INDUSTRIAL REGISTRANT'S
JURISDICTION OF CLASSIFICATION IRS EMPLOYER PRINCIPAL EXECUTIVE
NAME INCORPORATION CODE NO. ID NO. OFFICES
------------------------------- ---------------- -------------- ------------- --------------------
Dailey Energy Services, Inc....... Delaware 8999 76-0066576 *
Dailey International Sales
Corporation..................... Delaware 8999 74-1869524 *
Colombia 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 *
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* 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 has 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 19 to the Company's financial statements includes
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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PART I
ITEM 1. BUSINESS AND PROPERTIES
GENERAL
Dailey International Inc. ("Dailey" or the "Company") is an integrated
provider of specialty services and technologically-advanced downhole tools to
the oil and gas industry on a worldwide basis. The Company currently manages its
operations in two business segments: (i) downhole products and services and (2)
underbalanced drilling services. Downhole products and services are comprised of
the Company's directional drilling services, electric wireline services, tubing
conveyed perforating services and downhole tool rentals. The Company's
underbalanced drilling services were acquired through the Company's acquisition
of Air Drilling International, Inc. in June 1997. For additional information
relating to the Company's business segments, see Note 20 to the Company's
Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K.
ACQUISITIONS
During 1998 Dailey completed four major acquisitions, each of which is
summarized below.
o International Nitrogen Services, LLC. In December 1998, the Company,
through its subsidiary Air Drilling International, Inc., purchased a 51%
interest in International Nitrogen Services, LLC., ("INS"), a joint
venture with MG Generon (the "INS Acquisition"). INS, based in Houston,
Texas, provides non-cryogenic nitrogen generators and production units
for use in the on-site production of nitrogen for injection in downhole
drilling of oil and gas wells. The Company paid $7.1 million cash,
subject to a purchase price adjustment based on future earnings.
o Transocean. In August 1998, Dailey acquired substantially all of the
assets of the directional drilling business of Transocean Petroleum
Technology Limited ("Transocean"), a company located in Aberdeen,
Scotland, for approximately $10 million cash (the "Transocean
Acquisition"). As a result of this acquisition, the Company expanded its
directional drilling services to the North Sea.
o Integrated Drilling Services Limited. In March 1998, the Company
acquired the outstanding capital stock of Integrated Drilling Services
Limited ("IDS"), a specialized provider of directional drilling services,
for $18.8 million in cash and 755,084 shares of Class A Common Stock,
plus assumption or repayment of debt of approximately $6.5 million (the
"IDS Acquisition"). The Company believes that the acquisition of IDS
provided it with key directional drilling technologies, including a
resistivity tool for logging while drilling.
o DWS/DAMCO. In January 1998, Dailey acquired substantially all of the
operating assets and liabilities of Directional Wireline Services, Inc.,
DAMCO Services, Inc. and DAMCO Tong Services, Inc. (collectively
"DWS/DAMCO") for $61 million in cash, subject to adjustment based on
levels of working capital (the "DWS/DAMCO Acquisition"). DWS/DAMCO
provides electric wireline and tubular services in the U.S. Gulf of
Mexico region and, to a lesser extent, Nigeria.
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DOWNHOLE PRODUCTS AND SERVICES
Directional Drilling Services
Directional drilling services involve assisting oil and gas operators in the
controlled drilling of a wellbore to a prescribed bottomhole location.
Directional drilling can be used to develop a field with multiple wells drilled
from the same offshore platform or, in environmentally sensitive areas, from
fewer surface facilities than conventional drilling would require. In addition,
drilling horizontally through a formation characterized by multiple vertical
fractures can result in substantial reductions in drilling costs and improved
well productivity because fewer wells are required compared to a vertical
development program. Recent developments in multilateral technology, which
allows two or more wells to be drilled from the same vertical wellbore, have
further enhanced well productivity and development efficiency.
Dailey began offering directional drilling services in 1984, primarily along
the Texas and Louisiana Gulf Coast, and has since expanded both its directional
drilling technical capabilities and the geographic areas in which its services
are regularly offered. Dailey currently participates in selected international
markets including Abu Dhabi, Thailand, the North Sea and Venezuela.
The Company provides skilled personnel to manage the drilling of directional
wells. The directional drilling services offered by the Company consist of well
planning, on-site supervisory services to maximize drilling efficiency,
measurement-while-drilling ("MWD") services and related equipment rentals,
downhole motor rentals and post-well analysis. The Company also derives revenue
from its directional drilling services by renting MWD units, downhole motors and
nonmagnetic stabilizers. Through the acquisition of IDS, the Company acquired
key technologies, including a resistivity tool for logging-while-drilling
("LWD") that is compatible with Dailey's MWD equipment. The Company believes
that the addition of LWD technology to Dailey's MWD fleet will enable it to
offer more fully integrated directional drilling systems in the Gulf of Mexico,
North Sea, and selected international markets once a sizeable inventory of LWD
units can be manufactured. The Company currently has two LWD units available for
rental.
The skill, experience and reputation of a service company's directional
drillers are the primary competitive factors in the directional drilling
services market. Because of this, the competition among directional drilling
service companies to employ the most reputable, qualified and experienced
directional drilling personnel is intense. In addition, the scope of services
offered as well as price are important competitive factors. As of January 31,
1999, Dailey employed 36 directional drillers.
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Electric Wireline and Tubing Conveyed Perforating Services
As a result of the DWS/DAMCO Acquisition, the Company provides electric
wireline and tubing conveyed perforation ("TCP") services in the U.S. Gulf of
Mexico region and Nigeria. The Company's electric wireline services are utilized
in both the exploration and production phases of an oil and gas well and include
pipe recovery, cased hole logging, electric wireline perforating services and
other cased hole services such as installation of bridge plugs, packers,
retainers, pressure control equipment and thru-tubing bridge plugs. TCP
services involve the use of tubing string to lower and retrieve perforating
charges from the wellbore.
Tubular Testing and Handling Services
As a result of the DWS/DAMCO Acquisition, the Company provides tubular
testing and handling services to the onshore and offshore oil and gas industry
in the U.S. Gulf of Mexico region. The Company's tubular testing services
consist of hydrostatic and gas pressure testing services that detect leaks and
flaws in tubulars as they are run into the wellbore. Operators contract tubular
testing services to avoid incurring costly downtime and the expense of pulling a
defective tubular string.
The Company's tubular handling services include assembling production pipe
and tubing, dual completion strings, premium threaded connectors and ultra-high
torque tubulars. Mistakes in torquing tubulars can be costly in terms of
downtime and damaged equipment; therefore, operators rely on experienced tubular
companies for handling services.
Downhole Tools
The Company currently offers an array of technologically-advanced downhole
tools, which it selectively markets in every major oil and gas exploration and
production region in the world. Dailey began renting downhole tools in 1945 and
introduced the first drilling jar to the oil and gas industry in 1965. The
Company is currently the leading supplier of drilling jars to the rental tool
market worldwide.
The Company's line of drilling jars and related products include mechanical
and hydraulic drilling jars and jar slingers. A drilling jar is an impact tool
that is placed in the lower section of a drillstring as part of the bottomhole
assembly. Activated from the surface, the drilling jar delivers a sharp,
powerful impact to free the drillstring should it become lodged in the hole. The
potential risks of the drillstring becoming stuck in the hole include
interruption of the drilling process, loss of drillstring components and loss of
the well. Drilling jars must be capable of reliably delivering frequent and
consistent impacts to the drillstring, sometimes over a period of many days. As
a result, reliability and consistent performance and service by qualified
personnel are key criteria in a customer's selection of drilling jars.
Drilling jars and jar slingers generally are used in drilling applications
where there is significant risk of, or cost associated with, the bottomhole
assembly of the drillstring becoming stuck in the wellbore. As the risk or
potential cost of a stuck drillstring increases, the likelihood that the
operator of the well will employ a drilling jar typically increases. Drilling
applications where drilling jars are used regularly include high-cost wells,
wells drilled using directional, horizontal or underbalanced techniques, deeper
wells, and wells penetrating unstable geologic formations that increase the risk
of well bore collapse. Drilling jars generally are considered essential
components in most directional drilling bottomhole assemblies. The Company
believes that the proprietary designs of its drilling jars deliver superior
performance over competing jars for longer periods of time in their intended
operating environments and are compatible with virtually any drilling condition
a customer may encounter.
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In addition to drilling jars, the Company rents other proprietary downhole
tools including hydraulic fishing jars, coiled tubing jars, drilling shock
absorbers, drilling thrusters and drilling slingers. The Company also derives
revenues from the sale of mechanical drilling jars and from downhole tools that
are lost-in-hole by the operator.
UNDERBALANCED DRILLING SERVICES
Underbalanced drilling involves maintaining the pressure in a well at less
than that of the surrounding formation using air, nitrogen, mist, foam or
lightweight drilling fluids as the circulation medium instead of mud. The
Company is a worldwide leader in providing air drilling services, which are used
in underbalanced drilling applications, and has developed internally the ability
to provide other services utilized in underbalanced drilling applications. The
Company provides underbalanced drilling equipment packages consisting of
compressors, boosters, mist pumps and related equipment along with specially
trained personnel to operate the equipment. Underbalanced drilling techniques
can lead to substantial increases in rates of penetration and drill bit life
resulting in substantially less time and cost for a drilling program and can
reduce substantially the risks of formation damage.
Horizontal and directional wells frequently are drilled using underbalanced
drilling technology to reduce the risk of formation damage and improve the flow
of hydrocarbons in low pressure or depleted reservoirs. The use of underbalanced
drilling in geothermal wells often avoids the problem of losing drilling fluids
in porous geothermal formations or, in certain cases, causing the formation to
be plugged.
A typical package of equipment used in an underbalanced drilling job
consists of two compressors, a booster and a mist pump. Compressors are used to
force air into the borehole. Depending on the pressure and air volume
requirements, additional compressors may be needed. Boosters are used to
increase the pressure of air exiting a compressor and can increase the air
pressure up to fivefold. Mist pumps are used to mix and distribute water, soaps
and other fluids in underbalanced drilling applications.
In addition, in connection with its underbalanced drilling operations, the
Company is one of the largest fully-integrated pipeline testing companies in
Canada and is the leading provider of hydrostatic testing services to major
Canadian pipeline construction companies that lack the capability to perform
such testing in-house.
MARKETING AND DISTRIBUTION
The Company markets its products and services primarily to major oil
companies, independent oil and gas exploration companies, drilling contractors
and drilling services consultants. In international markets, state-owned oil and
gas companies also are a significant customer group. Domestic marketing of the
Company's products and services is conducted by the Company's direct sales
force. International marketing of the Company's products and services is
conducted through the Company's direct sales force or through independent
international agents and also through cooperative marketing arrangements with
local companies.
INTERNATIONAL OPERATIONS
Dailey's international operations (including Canada) accounted for
approximately 42%, 39%, 52% and 48% of total revenues for fiscal 1996 and 1997,
the eight months ended December 31, 1997 and the twelve months ended December
31, 1998, respectively. As of January 31, 1999, Dailey had operations in
approximately 41 foreign countries. See Note 20 of the Notes to Consolidated
Financial Statements of Dailey contained elsewhere in this Form 10-K for
additional information regarding foreign and domestic revenues.
The Company's international agents are responsible for international
marketing of the Company's downhole tools and air drilling services in certain
of its markets. International agents also perform maintenance of the Company's
downhole tools in their custody at their own facilities. International marketing
and distribution is organized into four major regions: Europe/West Africa, the
Middle East, Southeast Asia and Latin America. Each region is further divided
into multiple and sometimes overlapping territories, generally based on
political boundaries. Regional supervisors are assigned by the Company to
oversee international operations, particularly with respect to proper
maintenance and redressing of tools and to provide sales support and technical
assistance to customers.
The Company's international operations (including Canada) are subject to
special risks inherent in doing business outside the United States, including
governmental instability, war and other international conflicts, civil and labor
disturbances, requirements of local ownership, partial or total expropriation,
nationalization, currency devaluation, foreign exchange controls, and foreign
laws and policies, each of which may limit the movement of assets or funds or
result in the deprivation of contract rights or the taking of property without
fair compensation. Although the Company maintains insurance to protect itself
from such risks, such insurance may be insufficient to protect the Company in
all circumstances, and any failure to do so could have a material adverse effect
on the Company's results of operations and financial condition. In addition,
although most of the Company's international revenues are derived from
transactions denominated in United States dollars, the Company has and likely
will continue to conduct some business in currencies other than the United
States dollar. The Company currently does not hedge against foreign currency
fluctuations. Accordingly, its profitability has been and will continue to be
affected by fluctuations in foreign exchange rates. The Company believes
revenues from transactions denominated in foreign currencies will increase as a
percentage of total revenues due to the Transocean Acquisition, the DWS/DAMCO
Acquisition and the IDS Acquisition. In addition, collections and recovery of
rental tools from international customers and agents may prove more difficult
due to the uncertainties of foreign law and judicial procedure. The Company may
therefore experience significant difficulty resulting from the political or
judicial climate in countries in which it operates. From time to time the United
States has passed laws and imposed regulations prohibiting or restricting trade
with certain nations. There can be no assurance that future laws and regulations
will not limit materially the Company's international business.
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MANUFACTURING AND MAINTENANCE
The manufacturing processes generally required to produce the Company's
downhole tools are machining, fabrication, assembly of components manufactured
by the Company or outside suppliers, and quality control testing. The Company
attempts to outsource those manufacturing processes that can be performed more
efficiently and cost effectively by outside third parties. The Company believes
that its manufacturing capabilities and arrangements are sufficient in order to
meet the demand and timing needs of the Company's customers for the next twelve
months. Machining of larger components and spare parts, including the most
complex components, is done by the Company at its manufacturing plant in Conroe,
Texas. Fabrication, assembly and packaging of the Company's wireline units,
compression equipment and tubular handling equipment are performed at the
Company's Houma, Louisiana, Casper, Wyoming and Edmonton, Canada locations.
Through the IDS Acquisition, the Company acquired IDS' manufacturing operations
in Scotland relating to various directional drilling equipment. The
manufacturing processes performed in-house by the Company require a ready supply
of high-quality, special alloy steel and other raw materials. The Company
purchases its raw materials from various vendors, none of which supplied a
majority of Dailey's supply of such materials during fiscal 1998. Although the
Company typically places orders for its steel at least three months in advance
and usually stores with a third party a reserve supply of steel adequate to
cover the Company's demand for steel for at least one month, any prolonged
disruption in steel supply could affect the Company's ability to meet production
schedules and commitments, which could have a material adverse effect on the
Company's financial condition and results of operations.
Maintenance of the Company's downhole tools is conducted in the United
States at six of the Company's facilities, each of which is specially equipped
for that purpose. In the United Kingdom, Colombia and Venezuela, maintenance is
conducted by Company personnel, and elsewhere by the Company's international
agents who are subject to periodic quality control inspection and supervision by
Company personnel.
RELIANCE ON CERTAIN SUPPLIERS
Most of the Company's downhole tools incorporate certain products or
technology supplied in part by third parties. Although the Company is not
presently experiencing and does not anticipate any significant supply or quality
control problems with its vendors, such problems, if they were to occur, could
have a material adverse effect on the Company's ability to meet future
production and sales commitments, which could adversely affect the Company's
results of operations. In addition, during the past five years, one vendor has
been the Company's only supplier of filters used in the Company's hydraulic
downhole tools. The Company has not identified alternative suppliers for such
filters. To date, the Company has not experienced supply problems with this
vendor; however, any difficulty with such supplier combined with any difficulty
in finding and utilizing alternative sources for these filters could have a
material adverse effect on the Company's results of operations.
The Company purchases all of its MWD units used in connection with its
directional drilling services from a single supplier. The Company believes that
reliable MWD units are available for third-party purchase from only a few
vendors worldwide. In addition, the Company's LWD technology currently functions
only when operated in connection with MWD units provided by the Company's
current supplier, and any inability to obtain MWD units from this supplier could
adversely affect the Company's ability to utilize this LWD technology. Although
the Company has not experienced significant supply or quality control problems
to date with its supplier, there can be no assurance that the Company will be
able to purchase reliable, high-quality MWD units from other vendors at
competitive prices and terms. Any difficulty in obtaining MWD units from its
supplier, as a result of manufacturing delays or other reasons, could have a
material adverse effect on the Company's results of operation and financial
condition.
INTELLECTUAL PROPERTY
The markets for the Company's specialized services and downhole tools are
characterized by continual technological developments that have resulted in, and
likely will continue to result in, substantial improvements in the scope and
quality of directional drilling and underbalanced drilling services and product
function and performance. Whether the Company can develop and produce
successfully, on a timely basis, new and enhanced downhole tools that embody new
technology, meet evolving industry standards and practice, and achieve levels of
capability and price that are acceptable to its customers will be significant
factors in determining the Company's ability to compete. There can be no
assurance that the Company will not encounter resource constraints or technical
or other difficulties that could delay introduction of new products and services
in the future. If the Company is unable, for technological or other reasons, to
develop and commercialize competitive products in a timely manner in response to
changes in the directional drilling, underbalanced drilling or rental tool
industries, its results of operations and financial condition could be
materially adversely affected.
The Company believes that the proprietary aspects of many of its products
and services provide it with certain competitive advantages. In particular, the
Company believes that the trademarks and servicemarks protecting the Dailey name
in domestic and international markets are of primary importance. In addition,
pursuant to the DWS/DAMCO Acquisition and IDS Acquisition, the
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Company acquired additional key patents relating to its TCP services and
directional drilling services. The Company relies on a combination of patents,
trade secrets, trademarks and servicemarks and copyrights to protect its
proprietary technologies and intellectual properties. Patents protect features
of the Dailey Hydraulic Jar and Dailey Hydraulic Fishing Jar, as well as other
of the Company's products and services. Although the Company does not consider
its business to be wholly dependent on any single patent or trademark, the
unexpected loss of patent protection for the Dailey Hydraulic Jar or Dailey
Hydraulic Fishing Jar could have a material adverse effect on the Company.
COMPETITION
The markets for the Company's products and services are highly competitive
and characterized by continual changes in technology. Many of the Company's
existing and potential competitors have substantially greater marketing,
distribution, financial and technical resources than the Company. There can be
no assurance that the Company's services, rentals and sales will continue at
current volumes or prices if its current competitors or new market entrants
introduce new products or services with better features, performance, prices or
characteristics than the Company's products and services. Competitive pressures
or other factors also may result in significant price competition that could
have a material adverse effect on the Company's results of operations and
financial condition. In this regard, during the past 18 months, there has been
increased consolidation of oil service companies with which the Company competes
as well as a consolidation of customers for the Company's products and services.
The Company believes this consolidation has increased competitive pressures
within the industries and markets that it operates. Furthermore, the competition
among energy service companies to employ the most reputable, qualified and
experienced personnel is intense. There can be no assurance that the Company
will be able to continue to recruit and retain highly-qualified personnel. Any
difficulty in recruiting or retaining such personnel could have a material
adverse effect on the Company's results of operations and financial condition.
The Company believes that its leading competitors are fully-integrated
service companies, but it also competes on a regional basis with numerous
smaller, independent companies that offer only relatively limited lines of
products and services compared to fully-integrated competitors. Management
expects competition and customer price pressures to continue for the foreseeable
future.
EMPLOYEES
At January 31, 1999, the Company had 759 employees, approximately 70% of
whom were located in the United States. The Company has never experienced a work
stoppage and considers its employee relations to be excellent.
The Company has no collective bargaining agreements.
OPERATING RISKS AND INSURANCE
The operations of the Company's customers are subject to hazards inherent in
the oil and gas industry, such as fires, explosions, craterings, blowouts and
oil spills, which can cause serious personal injury or loss of life, damage to
or destruction of property, equipment, the environment and marine life, and
suspension of operations. Claims for loss of oil and gas production and damages
to formations can occur in drilling and workover operations. If a catastrophic
event were to occur at a location where the Company's products or services are
being provided, the Company could be named as a defendant or third-party
defendant in lawsuits asserting potentially large claims. The Company maintains
insurance coverage that it believes to be customary in the industry against
certain of these hazards, however, such insurance provides for substantial
deductibles and premium adjustments based on claims experience and excludes
coverage for damages resulting from environmental damage and pollution or breach
of contract or claims based on alleged fraud or deceptive trade practices.
Insurance cannot provide complete protection against casualty losses. There can
be no assurance that the Company will be able to maintain adequate insurance in
the future at rates it considers reasonable or that insurance will continue to
be available on terms as favorable as those of its existing arrangements. A
claim or suit against the Company in excess of the coverage limits maintained by
the Company or for which the Company is not insured could have a material
adverse effect on the Company's financial condition and results of operations.
REGULATION
Various federal, state and local laws and regulations covering the release
of materials into the environment, or otherwise relating to the protection of
the public health and the environment, affect the Company's and its customers'
domestic operations, expenses and costs. The trend in environmental regulation
has been to place more restrictions and limitations on activities that may
impact the environment, such as emissions of pollutants, generation and disposal
of wastes, and use and handling of chemical substances. Increasingly strict
environmental restrictions and limitations, as well as the obligation to
remediate existing contamination, have resulted in increased operating costs for
the Company and other similar businesses throughout the United States. The costs
of compliance with environmental laws and regulations may continue to increase,
both for the Company and its customers. In this regard,
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the Resource Conservation and Recovery Act ("RCRA"), a federal statute governing
the disposal of solid and hazardous wastes, includes a statutory exemption that
allows oil and gas exploration and production wastes to be classified as
nonhazardous waste. A similar exemption is contained in many of the state
counterparts to RCRA. If oil and gas exploration and production wastes were
required to be managed and disposed of as hazardous waste, either as a result of
a change in RCRA or the imposition of more stringent state regulations, domestic
oil and gas producers, including many of the Company's customers, could be
required to incur substantial obligations with respect to such wastes. Because
of the potential impact on the Company's customers, any regulatory changes that
impose additional restrictions or requirements on the disposal of oil and gas
wastes could adversely affect demand for the Company's products and services. In
addition, the Company is subject to laws and regulations concerning occupational
health and safety. The Company's international operations also are subject to
international laws respecting environmental and worker safety matters in the
countries in which they operate. The Company believes that it is in substantial
compliance with the requirements of environmental and occupational health and
safety laws and regulations, but inasmuch as such laws and regulations are
frequently changed, the Company is unable to predict the ultimate impact of such
laws and regulations on the Company's business. Any violation of such laws could
subject the Company to fines, penalties or other liabilities.
Capital expenditures for property and equipment for environmental control
facilities during fiscal 1998 were not material. Based on the Company's
experience to date, the Company currently does not anticipate any material
adverse effect on its results of operations or financial condition as a result
of future compliance with existing environmental laws and regulations
controlling the discharge of materials into the environment. However, future
events, such as changes in existing laws and regulations or their
interpretation, more vigorous enforcement policies of regulatory agencies, or
stricter or different interpretations of existing laws and regulations, may
require additional expenditures by the Company, which may be material.
PROPERTIES
The following table summarizes the Company's material owned and leased
properties as of March 24, 1999:
PROPERTY
LOCATION OF FACILITY INTEREST USES
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DOMESTIC
Anchorage, Alaska......... Owned Sales, Maintenance
Bakersfield,
California................ Leased Sales
Englewood, Colorado....... Leased ADI Corporate Offices
Broussard, Louisiana...... Owned Handling/Testing
Houma, Louisiana.......... Leased/Owned Sales, Maintenance
Wireline Services, Tubular
Testing,
Lake Charles,
Louisiana................. Leased Testing/Handling
Lafayette, Louisiana...... Leased/Owned Maintenance/Office
St. Martinsville, LA...... Leased Testing
Laurel, Mississippi....... Leased Office/Warehouse
Four Corners, NM.......... Leased Office, Manufacturing,
Shipping
Oklahoma City, OK......... Leased Sales
Conroe, Texas............. Leased Corporate Offices, Sales,
Manufacturing, Maintenance,
R&D
Corpus Christi, Texas..... Owned Sales, Maintenance
Houston, Texas............ Owned/Leased Maintenance
Directional Drilling Office,
Sales
Midland, Texas............ Leased Distribution Center
Casper, Wyoming........... Leased Sales, Maintenance
INTERNATIONAL
Bolivia................... Leased Air Drilling Office
Nisku, Alberta,
Canada.................... Leased Air Drilling Office
Bogota, Colombia.......... Leased Sales, Maintenance
Pau, France............... Leased ADI Office
Lagos, Nigeria............ Leased Office
Lima, Peru................ Leased Office
Saudi Arabia.............. Leased Shop
Portlethon, Scotland...... Leased Manufacture/R&D
Bangkok, Thailand......... Leased Office
Anaco, Venezuela.......... Leased Sales, Maintenance
Directional Drilling Office
Cabimas, Venezuela........ Leased Maintenance
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LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property the subject of,
any pending legal proceedings, other than ordinary routine litigation incidental
to its business, including litigation relating to the Company's intellectual
property. Each of such matters is believed to be either covered by insurance or
not material in amount. The Company knows of no pending or threatened legal
proceedings, or judgments entered against, any director or officer of the
Company in his capacity as such.
ITEM 2. PROPERTIES
See Item 1 for information with respect to properties.
ITEM 3. LEGAL PROCEEDINGS
See Item 1 for information with respect to legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the three
months ended December 31, 1998.
10
11
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock, constituting the only class of common
equity of the Company currently outstanding that is freely tradeable, is quoted
on the NASD OTC Bulletin Board (the "OTC") under the symbol "DALY". The table
below provides price information for the Common Stock for the period beginning
August 14, 1996, the first day of trading of the Class A Common Stock following
the Company's initial public offering of the Class A Common Stock. Prior to
February 9, 1999, the Company's Class A Common Stock was quoted on the Nasdaq
National Market System. On February 8, 1999, the Company's Class A Common Stock
was delisted and now trades on the OTC.
HIGH LOW
--------- --------
August 14, 1996 through October 31,
1996.................................. $ 10.75 $ 8.00
Three months ended January 31, 1997... $ 11.00 $ 9.00
Three months ended April 30, 1997..... $ 10.50 $ 5.38
Three months ended July 31, 1997...... $ 9.13 $ 6.25
Three months ended October 31, 1997... $ 14.75 $ 8.63
Two months ended December 31, 1997.... $ 13.63 $ 10.25
Three months ended March 31, 1998..... $ 10.50 $ 7.38
Three months ended June 30, 1998...... $ 9.88 $ 5.75
Three months ended September 30, 1998. $ 6.38 $ 2.00
Three months ended December 31, 1998.. $ 2.06 $ 0.38
At March 26, 1999, the closing price for the Company's Class A Common Stock
on the OTC was $0.59. At March 22, 1999, the Company's Class A Common Stock was
held of record by approximately 130 persons, and, in management's estimation,
beneficially owned by approximately 1,247 persons.
During the two most recent fiscal years, the Company has not paid a cash
dividend on its Class A Common Stock, and it is not anticipated that any cash
dividend will be paid on the Common Stock for the foreseeable future. The
indenture governing the Company's 9 1/2% Senior Notes Due 2008 currently
prohibits the payment of dividends.
11
12
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company as of and for each of the periods indicated. The selected financial data
for each of the four years in the period ended April 30, 1997, the eight months
ended December 31, 1997, and the twelve months ended December 31, 1998 are
derived from the Company's audited consolidated financial statements. The
financial data for the twelve months ended December 31, 1997 and the eight
months ended December 31, 1996 are derived from the Company's unaudited
financial statements. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. The information presented below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and Notes thereto included elsewhere herein. See Note 2 to Consolidated
Financial Statements for a discussion of the Company's change in fiscal year.
EIGHT MONTHS ENDED
TWELVE MONTHS ENDED DECEMBER 31,
DECEMBER 31, -------------------------
1998(1) 1997(2) 1997(2) 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Rental income .................... $ 61,255 $ 58,191 $ 42,454 $ 33,761
Sales of products and services ... 40,037 20,509 15,010 11,454
Underbalanced drilling ........... 31,025 18,685 18,685 --
----------- --------- ----------- -----------
132,317 97,385 76,149 45,215
Cost and expenses:
Cost of rentals .................. 43,442 35,348 24,525 21,469
Cost of products and services .... 24,443 11,792 9,142 6,131
Cost of underbalanced drilling ... 19,559 10,098 10,098 --
----------- --------- ----------- -----------
87,444 57,238 43,765 27,600
Selling, general and administrative
expenses ......................... 34,126 16,580 13,672 7,748
Depreciation and amortization ..... 24,481 10,316 8,106 4,197
Reorganization costs(3) ........... 3,413 2,453 2,453 --
Non-cash compensation(4) .......... 711 3,468 661 --
Research and development .......... 1,192 794 190 549
Provision for asset impairment .... 53,037 -- -- --
----------- --------- ----------- -----------
Operating income (loss)............ (72,087) 6,536 7,302 5,121
Interest expense, net ............. 24,429 5,426 3,910 248
Other (income) expense, net ....... (3,383) (839) 396 (149)
----------- --------- ----------- -----------
Income (loss) before income
taxes and extraordinary item...... (93,133) 1,949 2,996 5,022
Provision for income taxes ........ 2,115 1,001 1,319 1,829
----------- --------- ----------- -----------
Income (loss) before extraordinary
item ............................. (95,248) 948 1,677 3,193
Extraordinary item net of taxes ... (17,579) -- -- --
----------- --------- ----------- -----------
Net income (loss) ................. $ (112,827) $ 948 $ 1,677 $ 3,193
=========== ========= =========== ===========
Earnings (loss) per share(5)(6):
Basic ............................ $ (11.46) $ 0.10 $ 0.18 $ 0.42
Diluted .......................... $ (11.46) $ 0.10 $ 0.18 $ 0.42
Weighted average shares
outstanding(6):
Basic ............................ 9,848,368 9,228,009 9,228,009 7,594,286
Diluted .......................... 9,848,368 9,329,400 9,329,400 7,637,214
CONSOLIDATED BALANCE SHEET DATA
AT END OF PERIOD:
Total assets ...................... $ 272,173 $ 209,277 $ 209,277 $ 78,275
Working capital ................... 40,696 70,357 70,357 25,857
Long-term debt, less current
portion .......................... 275,060 114,229 114,229 5,726
Long-term indebtedness to
affiliate, less current
portion .......................... -- -- -- --
Stockholders' equity .............. (40,185) 65,401 65,401 61,667
TWELVE MONTHS ENDED APRIL 30,
-----------------------------------------------------
1997 1996 1995 1994
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Rental income .................... $ 49,497 $ 42,987 $ 36,691 $ 32,393
Sales of products and services ... 16,954 15,952 12,172 11,422
Underbalanced drilling ........... -- -- -- --
----------- ----------- ----------- -----------
66,451 58,939 48,863 43,815
Cost and expenses:
Cost of rentals .................. 31,527 27,617 24,535 23,290
Cost of products and services .... 8,775 7,857 6,804 5,025
Cost of underbalanced drilling ... -- -- -- --
----------- ----------- ----------- -----------
40,302 35,474 31,339 28,315
Selling, general and administrative
expenses ......................... 11,543 11,829 9,414 6,955
Depreciation and amortization ..... 6,593 5,726 5,428 4,323
Reorganization costs(2) ........... -- -- -- --
Non-cash compensation(3) .......... 2,807 -- -- --
Research and development .......... 850 728 775 736
Provision for asset impairment .... -- -- -- --
----------- ----------- ----------- -----------
Operating income (loss)............ 4,356 5,182 1,907 3,486
Interest expense, net ............. 193 863 1,001 513
Other (income) expense, net ....... 188 278 100 (103)
----------- ----------- ----------- -----------
Income (loss) before income
taxes and extraordinary item...... 3,975 4,041 806 3,076
Provision for income taxes ........ 1,511 1,427 838 1,075
----------- ----------- ----------- -----------
Income (loss) before extraordinary
item ............................. 2,464 2,614 (32) 2,001
Extraordinary item net of taxes ... -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) ................. $ 2,464 $ 2,614 $ (32) $ 2,001
=========== =========== =========== ===========
Earnings (loss) per share(4)(5):
Basic ............................ $ 0.30 $ 0.40 $ (0.01) $ 0.37
Diluted .......................... $ 0.30 $ 0.40 $ (0.01) $ 0.37
Weighted average shares
outstanding(5):
Basic ............................ 8,138,104 6,614,000 5,360,000 5,360,000
Diluted .......................... 8,178,576 6,610,000 5,360,000 5,360,000
CONSOLIDATED BALANCE SHEET DATA
AT END OF PERIOD:
Total assets ...................... $ 82,359 $ 55,878 $ 54,408 $ 53,621
Working capital ................... 21,938 7,477 6,405 10,542
Long-term debt, less current
portion .......................... 5,155 6,866 8,604 9,743
Long-term indebtedness to
affiliate, less current
portion .......................... -- 1,100 1,760 2,420
Stockholders' equity .............. 63,327 35,641 33,027 33,059
- ----------
(1) The DWS/DAMCO Acquisition was consummated in January 1998. IDS was acquired
in March 1998. The Transocean Acquisition was consummated in August 1998.
The INS Acquisition was consummated in December 1998. See "Notes to
Consolidated Financial Statements."
(2) ADI was acquired on June 20, 1997. See "Notes to Consolidated Financial
Statements."
(3) Reorganization costs relate primarily to staff reductions, severance
settlements and various costs associated with a cost reduction program
implemented in June 1997 and September 1998 to flatten Dailey's management
structure and streamline its operations.
13
ITEM 7. 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 cash flows and capital
expenditure plans and information systems plans, including plans and
expectations relating to the year 2000, 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 Managements' 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.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Such forward-looking statements
are subject to certain risks, uncertainties and assumptions, including without
limitation those identified in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and in "Business and Properties"
contained elsewhere in this Annual Report on Form 10-K. 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 acquisitions including failure to successfully manage the
Company's growth and integrate the operations acquired in such acquisitions; the
Company's substantial leverage, including risks that available cash and cashflow
from operations will be insufficient to cover future interest payments; the
ability of the Company to borrow additional funds to finance capital
expenditures and other necessary operating expenses; the inability of the
Company to decrease certain costs due to unfavorable terms in
employment agreements, leases, supply contracts, licenses and other agreements
entered into by the Company; risks that the Company or its third party vendors
and customers will not be Year 2000 compliant in a timely manner; 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,
including those acquired in the Company's recent acquisitions; worldwide
political stability and economic growth and other risks associated with
international operations, including foreign exchange and other currency risks;
and the Company's successful execution of internal operating plans, including
the ability of the Company to streamline and reorganize operations in light of
current market conditions to bring its cost structure in line with current
industry conditions, as well as regulatory uncertainties and legal proceedings.
DETERIORATING OPERATING RESULTS AND FINANCIAL CONDITION
During 1998, the Company's results of operations and financial condition
deteriorated significantly over prior year levels, and have continued to decline
during the first quarter of 1999. This deterioration is a result of a
combination of factors, including adverse industry conditions, failure to
successfully integrate and realize anticipated benefits from acquired companies
and the significant debt burden incurred by the Company in 1997 and 1998 in
order to finance its acquisition strategy. The following chart sets forth
financial data for the Company as of and for the twelve month periods ending on
December 31, 1998 and 1997 and April 30, 1997 and 1996.
AS OF AND FOR THE TWELVE MONTHS ENDED
--------------------------------------------------------
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 30,
1998 1997 1997 1996
----------- ----------- --------- ---------
(in thousands, except per share data)
Revenues ........................... $ 132,317 $ 97,385 $ 66,451 $ 58,939
Earnings (loss) per share........... (11.46) 0.10 0.30 0.40
Cash flow from operations .......... (9,487) 14,732 11,663 4,906
Working capital .................... 40,696 70,357 21,938 7,477
Total debt ......................... 275,060 114,229 5,155 6,866
Stockholders equity (deficit)....... (40,185) 65,401 63,327 35,641
- ----------
(1) Revenues, earnings per share and cash flow from operations amounts are
derived from unaudited financial information.
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. During 1996 and much of 1997,
the oil field service industry experienced a general improvement in product
demand and pricing as relatively stable and improved oil and 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 1996
and 1997.
Beginning in late 1997, the worldwide price of oil began to decline
significantly and prices for natural gas weakened. As prices for oil continued
to decline throughout 1998, oil and gas companies began to curtail drilling and
reduce spending on exploration and development activities, which significantly
negatively impacted the Company's results of operations during 1998. As a
result, the Company's revenues and operations during 1998 declined significantly
from the comparable periods in 1997. Operations during 1998 also were adversely
affected by work stoppages in the Gulf of Mexico for the Company's products and
services as a result of adverse weather conditions. The Company views the
worldwide rig count, and in particular, the rig count in the United States, as a
general barometer of demand for a substantial portion of the Company's products
and services. The following chart summarizes the estimated U.S. rig count and
international rig count at various points over the past 15 months, as reported
by Baker Hughes, Inc.
February December September June March December December
1999 1998 1998 1998 1998 1997 1996
--------- ------------ ------------- -------- ---------- ------------ ------------
U. S. Rig Count....... 502 621 754 823 890 1,003 851
International
Rig Count............. 612 671 724 790 806 819 810
Acquisitions and Substantial Indebtedness. Beginning in late 1996, the
Company implemented a growth strategy aimed at completing strategic and
complementary acquisitions that would expand the products and services the
Company offered to the oil and gas industry. As a result of this strategy, the
Company completed various acquisitions during 1997 and 1998, the most
significant of which are summarized in the table set forth below:
Acquisition Date Consideration Paid Method of Financing
----------- ---- ------------------ -------------------
International Nitrogen December 1998 $7.1 million cash, plus adjustment Proceeds from senior notes
Services, LLC ("INS) based on future earnings
Assets of Transocean August 1998 $10.0 million cash Proceeds from senior notes
Petroleum Technology
Limited ("Transocean")
Integrated Drilling Services March 1998 $18.8 million cash, including Proceeds from senior notes
Limited ("IDS") assumption/repayment of debt of $6.5
million, and 755,084 shares of Class
A Common Stock
Directional Wireline January 1998 $61 million cash Proceeds from senior notes,
Services, Inc., DAMCO borrowings under credit facility
Services, Inc. and (refinanced by senior notes)
DAMCO Tong Services, Inc.,
("DWS/DAMCO")
Air Drilling International June 1997 $46.4 million, including repayment of Borrowings under credit facility
("ADI") $16.8 million of indebtedness (refinanced by senior notes)
13
14
The Company financed these acquisitions primarily through borrowings under
then-existing credit facilities and issuances of debt securities. In this
regard, in August 1997, the Company issued $115 million principal amount of its
$9 3/4 Senior Notes due 2007 (the "Old Notes"), from which the Company realized
net proceeds of approximately $109.6 million. These net proceeds were utilized
to repay outstanding borrowings under the Company's credit facility incurred to
finance the Company's acquisition of ADI in June 1997, to finance capital
expenditures of $24.8 million for the eight months ended December 31, 1997 and
to finance a portion of the DWS/DAMCO Acquisition consummated in January 1998.
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 from the sale of the Senior Notes, 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 Old Notes, approximately
$7.5 million was utilized to repay outstanding debt under the Company's credit
facility incurred to finance a portion of the purchase price for the DWS/DAMCO
Acquisition, and a portion was utilized to fund the cash portion of the purchase
price for the IDS, Transocean and INS acquisitions. The remaining net proceeds
from the sale of the Senior Notes have been utilized to fund capital
expenditures of $49.7 million for the year ended December 31, 1998 and for
general and working capital purposes. The Senior Notes require 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 approximately $17.6 million representing the excess of
the purchase price for the Old Notes over their carrying value on the date of
repurchase.
These transactions significantly increased the Company's debt over
historical levels. The Company's increased level of indebtedness has had, and
will have, several important effects on the Company's operations, including (i)
a substantial portion of the Company's cash flows from operations has been and
will be dedicated to the payment of interest and principal on its indebtedness,
(ii) the Company's leveraged position has substantially increased its
vulnerability to adverse changes in general economic and industry conditions
(including current industry conditions), as well as to competitive pressure, and
(iii) the Company's ability to obtain additional financing for working capital,
capital expenditures and general corporate and other purposes may be limited.
Due to the continued decline in industry conditions during 1998, the
Company does not believe it has yet been able to realize the anticipated
benefits from each of these acquisitions, in particular the DWS/DAMCO
acquisition, which was consummated in January 1998. Operations acquired in the
DWS/DAMCO Acquisition also have been depressed due to the loss of market share
caused by the loss of key personnel that the Company expected to, but was unable
to, retain or replace in connection with the acquisition. In this regard, the
1998 revenue and cash flow from operations acquired in the DWS/DAMCO Acquisition
are significantly lower than the revenues and cash flow from operations
generated by DWS/DAMCO during 1997. The Company also has not yet been able to
realize anticipated benefits from the IDS Acquisition due to its limited
inventory of LWD units and its unanticipated inability to manufacture and
produce additional LWD units in a timely manner. The Company currently is
generating negative cash flow from its IDS operations.
Going Concern. In response to these adverse industry conditions, the
Company began during the third quarter of 1998 to review and implement cost
saving strategies to reduce its cost structure to bring it more in line with
then current industry conditions, including consolidating or eliminating
operations and reducing overhead. As a result of these efforts, the Company
recorded a reorganization charge during 1998 of $3.4 million. The Company has
continued to review methods in which it can reduce its cost structure and reduce
overhead; however, the Company believes that its ability to further reduce costs
is severely limited due to unfavorable terms in employment agreements, which
require an aggregate of approximately $9.8 million in severance costs in the
event of early termination.
In addition, the Company retained an investment bank to advise the Company
on alternatives to enhance shareholder value, including acquisitions and/or
divestitures of certain business. Although the Company will continue to review
opportunities presented to it for the sale or divestiture of businesses, the
Company currently does not have any intention of disposing of any of its assets
or businesses.
Assuming no further deterioration in market conditions and demand for the
Company's products and services, the Company believes its existing cash as well
as its capacity to obtain additional financing from third parties will allow it
to continue to finance its operations through 1999. In this regard, the Company
currently has no outstanding debt other than under the Senior Notes and debt
assumed in the IDS acquisition, and believes that it has capacity, utilizing all
or a part of its assets as security, to borrow additional funds from a bank or
other lender that will be sufficient to allow the Company to fund its operations
through 1999. However, the Company currently does not have any commitment or
other indication from any third party of its willingness to lend the Company
such additional funds and no assurance can be given that such a financing
transaction can be completed on terms acceptable to the Company. In the event
the Company is unable to obtain such third party financing, the Company does not
believe its cash on hand and current level of operations will be sufficient to
fund its operations during 1999, in which case the Company will be required to
sell assets, negotiate a restructuring of its debt obligations with the holders
of its Senior Notes or seek protection under the United States bankruptcy code.
Based upon the Company's significant operating losses and negative operating
cash flows in recent periods and a deficiency in stockholders' equity at
December 31, 1998, the Company's independent auditors issued their audit opinion
on the Company's December 31, 1998 financial statements with a "going concern"
qualification, indicating their concern that these conditions raise substantial
doubt about the Company's ability to continue as a going concern.
Impairment of Long-Lived Assets. Statement of Financial Accounting
Standards No. 121 ("SFAS No. 121") and Accounting Principles Board Opinion No.
17 ("APB No. 17") require that long-lived assets, including goodwill, be
reviewed for impairment whenever events or changes in circumstances indicate the
carrying value of the long-lived assets may not be recoverable. Based upon the
decline in market conditions and the poor performance of acquired businesses
discussed above, the Company performed an impairment review to determine whether
any long-lived assets that had been recorded by it should be impaired. In
performing this review, the Company considered its estimates of future
undiscounted net cash flows from each of these businesses as of December 31,
1998, which estimates were based upon market conditions existing at December 31,
1998 and the size and level of activities at these businesses as of December 31,
1998. The Company also considered offers and indications of interest that it had
received on these businesses during its review of strategic alternatives.
14
15
Based upon this review, the Company recorded an impairment charge of $53.0
million to reflect the impairment of unamortized goodwill and other long-lived
assets. Of this amount, $31.3 million related to the full impairment of
unamortized goodwill associated with the DWS/DAMCO Acquisition, $19.4 million
related to the full impairment of unamortized goodwill associated with the IDS
Acquisition and $2.3 million related to the impairment of capitalized
information technology costs and other assets. No impairment charge was recorded
with respect to goodwill recorded in connection with the ADI or Transocean
acquisitions. In determining to fully impair goodwill associated with the
DWS/DAMCO Acquisition, the Company determined that due to reductions in revenues
caused by depressed industry conditions as well as losses of market share, which
the Company had not been able to recover as of December 31, 1998, its estimates
of future undiscounted net cash flows as of December 31, 1998 did not support
the goodwill recovery relating to DWS/DAMCO's operations over the remaining
amortization period, and accordingly, reduced the carrying value of these assets
to their estimated fair value based upon current estimates and conditions. In
determining to fully impair goodwill associated with the IDS Acquisition, the
Company determined that the revenues and cash flows that could be generated from
IDS' operations could not support the goodwill recovery relating to the acquired
business over the remaining amortization period, and accordingly, reduced the
carrying value of these assets to their estimated fair value based upon current
estimates and conditions. Based upon the its estimates of future undiscounted
future net cash flows as of December 31, 1998 for the businesses acquired in the
ADI and Transocean acquisitions, as well as offers and indications of interest
from third parties with respect to the purchase of such businesses, the Company
determined that the goodwill associated with such acquisitions had not been
impaired; however, there can be no assurance that, if depressed industry
conditions continue or other events occur that cause the operations of these
acquired businesses to further decline, a partial or complete impairment of
goodwill associated with these acquisitions will not be required. In determining
the impairment of capitalized information technology costs and other assets, the
Company determined these costs were not likely to provide future economic
benefit to the Company.
RESIGNATION OF OFFICERS AND OUTSIDE DIRECTORS
In August, 1998, James F. Farr resigned as CEO of the Company. Mr. Farr was
later replaced by Mr. Al Kite as interim CEO. As a result of Mr. Farr's
resignation, the Company incurred a severance charge of approximately $1.8
million that was included with restructuring charges in the Company's financial
statements. On January 27, 1999, David Tighe resigned as CFO and as a Director
and the Company recorded a severance charge of approximately $500,000 during the
first quarter of 1999 relating to Mr. Tighe's resignation. In February 1999,
each of the Company's outside Directors resigned from the Board of Directors.
Currently, the Company's Board of Directors consists of Mr. J.D. Lawrence, Mr.
Al Kite and Mr. William D. Sutton, each of which is an employee of the Company.
The Company has not yet identified any individuals to replace the current
vacancies on the Company's Board of Directors.
DELISTING OF SECURITIES
The Nasdaq National Market rules, which govern the listing of securities
such as the Company's Class A Common Stock on the Nasdaq National Market System
("Nasdaq NMS"), require that the Company maintain a minimum bid price of $5.00
per share on its Class A Common Stock and a minimum market value for the Class A
Common Stock's public float (i.e., securities not owned by officers, directors
or 10% stockholders) of $15 million. The market value of the Company's Class A
Common Stock has deteriorated, and, as a result, the Company no longer meets the
Nasdaq NMS' standards with respect to minimum bid price or public float market
value. The Company's Class A Common Stock began trading on the NASD OTC Bulletin
Board on February 9, 1999.
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 allows the
Company's stockholders and other investors to more easily compare the Company's
operating results with those of other oil field services companies. The
operating results and financial condition of the Company for the year ended
December 31, 1998 represents the first full calendar year reported since the
Company changed from an April 30 fiscal year. Previously reported amounts have
not been restated in the consolidated financial statements. The unaudited
results for the year ended December 31, 1997 have been included in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations to assist in the analysis of the operating results of the Company. In
addition, since the eighth-month period ending December 31, 1997 is not
considered a full fiscal year, the Company's analysis of results of operations
also includes a comparison between the twelve month periods ending April 30,
1997 and 1996.
RESULTS OF OPERATIONS
The Company currently manages its operations in two business segments: (1)
downhole products and services and (2) underbalanced drilling services. Downhole
products and services are comprised of the Company's directional drilling
services, electric wireline services, tubing conveyed perforating services and
downhole tool rentals. The Company's underbalanced drilling services were
acquired through the Company's acquisition of ADI in June 1997. Revenues derived
from the Company's downhole products and services are reported as rental income
and sales of products and services and the direct costs associated with such
operations are reported as cost of rentals and cost of products and services.
Revenues and costs from the Company's underbalanced drilling services are
reported as underbalanced drilling service revenue and cost of underbalanced
drilling service.
The Company derives rental income from its fleet of downhole tools and, to a
lesser extent, from downhole tools owned by third parties. The Company typically
charges its customers a daily rental rate for downhole tools, except for its
downhole drilling motors, which are rented at an hourly rate. In international
markets, the Company also often charges its customers a refurbishment charge,
which is included in rental income.
Revenues from sales of products and services consist of directional drilling
services, lost-in-hole charges and sales of its mechanical drilling jars and, to
a lesser extent, from pipeline testing operations acquired in the ADI
Acquisition. Although pipeline testing operations are managed as part of the
Company's underbalanced drilling segment, the Company does not believe their
inclusion with operations of the Company's downhole products and services
segment is material to the reporting of such segments due to the insignificant
nature of these pipeline testing operations. Revenues from the acquired
DWS/DAMCO operations also are reflected in sales of products and services.
Revenues from services of the Company's directional drillers and MWD technicians
are generally billed on a per person/per day basis for the time on assignment at
the customer's drill site. Although the Company considers rentals of its
downhole drilling motors and MWD equipment to be a significant part of its
directional drilling services, revenues from such rentals are currently recorded
as rental income for financial statement purposes. The Company's lost-in-hole
revenues consist of replacement charges that its customers pay each time a
downhole tool is lost-in-hole. The Company sells mechanical drilling jars in a
limited number of international markets, primarily to state-owned oil and gas
companies.
The Company derives underbalanced revenues from rentals of air drilling
equipment used for underbalanced drilling applications, including compressors,
boosters, mist pumps and related equipment, which are typically rented at an
hourly or daily rate. The Company also derives underbalanced revenues by
providing specially-trained personnel, who are typically billed out on a per
person/per day basis, to operate its air drilling equipment.
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The operating costs associated with the Company's rentals consist primarily
of expenses associated with depreciation, transportation, maintenance and repair
and related direct overhead. The costs associated with the Company's sales of
products and services consist primarily of the undepreciated portion of the
capitalized cost of its downhole tools sold or lost-in-hole and the salaries and
related costs associated with the Company's directional drillers and MWD
technicians and, to a lesser extent, costs associated with its pipeline testing
operations. The costs associated with the Company's underbalanced drilling
services consist of costs of third party rentals, repair and maintenance costs
and personnel costs.
TWELVE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THE UNAUDITED TWELVE MONTHS
ENDED DECEMBER 31, 1997
Rental Income. Rental income for the year ended December 31, 1998 was $61.3
million, an increase of 5% from $58.2 million for the same period last year.
Exclusive of revenues from IDS, which was acquired in March 1998, and
Transocean, which was acquired in August 1998, of $3.9 million, rental revenues
decreased 2% from the same period last year. Domestic rental income increased
$435,000. Rental income from domestic directional drilling activities increased
$3.3 million primarily from the expansion of these activities into the U.S.
mid-continent region. This increase in domestic rental income was partially
offset by decreased rental income of $2.8 million from downhole tools as the
result of decreased demand caused by adverse industry conditions.
Internationally, rental income decreased $1.4 million. This was the result of
decreased directional drilling revenues of $2.3 million in Venezuela due to
adverse market conditions in this region resulting in the curtailment by the
Company of directional drilling activity in that area and a decrease in rental
income from downhole tools primarily in Latin America and Europe of $1.3 million
as a result of decreased demand due to adverse industry conditions. This
decrease in international rental income was offset by increased downhole tool
rental income in the Middle East, Far East and East Africa of $1.9 million and
to the expansion of directional drilling activities into Thailand in the third
quarter of 1998 of $150,000.
Sales of Products and Services. Sales of products and services for the year
ended December 31, 1998 were $40.0 million compared to $20.5 million for the
same period last year. Excluding revenues of $22.2 million associated with
DWS/DAMCO, which was acquired in January 1998, Transocean, which was acquired in
August 1998, and the first two quarters of 1998 for pipeline testing operations
acquired in June 1997, revenues decreased $2.7 million primarily due to
decreased directional revenue in Venezuela of $850,000 resulting from the
decline in directional drilling activity in that region, decreased revenue from
tools lost-in-hole of $1.3 million, decreased pipeline service revenues of $1.0
million and decreased sales of $352,000. This was partially offset by increased
revenues from domestic directional drilling operations of $385,000, domestic
downhole tool rentals of $299,000, and the expansion of directional drilling
operations into Thailand of $392,000.
Underbalanced Drilling Services Revenue. Underbalanced drilling services
revenue for the year ended December 31, 1998 was $31.0 million compared to $18.7
million for the same period last year resulting from the acquisition of ADI on
June 20, 1997. Revenues for the last two quarters of 1998 were $15.2 million
compared to $18.0 million for the same two quarters last year.
Cost of Rentals. Cost of rentals for the twelve months ended December 31,
1998 was $43.4 million, an increase of 23% from $35.3 million for the same
period last year. Excluding costs associated with IDS, which was acquired in
March 1998, and Transocean, which was acquired in August 1998, of $2.8 million,
costs increased 15%. Margins, exclusive of IDS and Transocean, decreased from
39% for the twelve months ended December 31, 1997 to 29% for the twelve months
ended December 31, 1998, primarily due to an increase in fixed costs associated
with the expansion of directional drilling operations in the U.S. mid-continent
region and the increased use of third party tools which typically generated
lower margins as a result of expansion into new applications for the Company's
directional drilling services. The margins on IDS and Transocean from their
respective acquisition dates were 28% and 31%, respectively.
Cost of Products and Services. Cost of products and services for the twelve
months ended December 31, 1998 was $24.4 million, which was a $12.7 million
increase from the same twelve months last year. Excluding costs associated with
DWS/DAMCO, which was acquired in January 1998, Transocean, which was acquired in
August 1998, and the first two quarters of 1998 for pipeline testing operations,
which were acquired in June 1997, of $11.6 million, costs increased $1.1
million. The margin on sales of products and services for the twelve months
ended December 31, 1998, excluding the impact of acquisitions, decreased to 28%
from 43% for the same twelve 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 and to decreased revenues
from tools lost-in-hole.
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Cost of Underbalanced Drilling Services. Cost of underbalanced drilling
services for the twelve months ended December 31, 1998 was $19.6 million
compared to $10.1 million for the same period last year. Excluding costs
incurred during the first two quarters of 1998 for ADI, which was acquired in
June 1997, costs decreased $1.2 million. Margins on underbalanced drilling
services were 45% compared to 48% during the same period last year, primarily
due to the increase in lower margin project management services in Venezuela
during the third quarter and to start up costs associated with the expansion of
underbalanced drilling services in the U.S. net of this start-up activity,
margins increased to 49%.
Selling, General and Administrative. Selling, general and administrative
expenses for the twelve months ended December 31, 1998 were $34.1 million,
compared to $16.6 million for the same twelve months last year. Excluding costs
of $12.9 million associated with ADI for the first and second quarters,
DWS/DAMCO and IDS, costs increased by $5.0 million primarily as a result of
increased personnel and compensation costs, increased costs related to business
expansion and development activity and increased costs related to an evaluation
of an enterprise-wide computer system.
Depreciation and Amortization. Depreciation and amortization expenses for
the twelve months ended December 31, 1998 were $24.5 million compared to $10.3
million for the same twelve months last year. Depreciation expense increased
$10.7 million due primarily to increased depreciation expense related to assets
acquired in the acquisitions of ADI, DWS/DAMCO, IDS and Transocean and the
increased manufacture and purchase of downhole tools and directional equipment.
Amortization expense increased $3.4 million primarily as the result of the
amortization of goodwill associated with these acquisitions.
Reorganization Costs. Reorganization costs for the twelve months ended
December 31, 1998 were $3.4 million compared to $2.5 million for the same period
last year. These costs, which were incurred in the third quarter of 1998, were
primarily related to the resignation of the former chief executive officer and
to the elimination of corporate leased facilities.
Non-cash Compensation. Non-cash compensation for the twelve months ended
December 31, 1998 was $711,000 which was primarily related to vesting of
restricted stock granted to certain executive officers of the Company on October
7, 1997 in connection with the 1997 Long-Term Incentive Plan, compared to $3.5
million for the same period last year related to the vesting of prior grants.
Research and Development. Research and development expense for the twelve
months ended December 31, 1998 was $1.2 million compared to $794,000 during
1997. The increase was primarily the result of costs incurred by IDS in the
development of a resistivity tool for its LWD technology.
Provision for Asset Impairment. As previously discussed, the Company
recognized a $53.0 million impairment charge in 1998 primarily relating to the
impairment of goodwill.
Interest Income. Interest income for the twelve months ended December 31,
1998 was $3.4 million compared to $1.6 million for the same twelve 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 Old Notes through mid-February and the Senior Notes from that date forward.
Interest Expense. Interest expense for the twelve months ended December 31,
1998 was $24.4 million compared to $5.4 million for the same twelve months last
year. This increase was due to the interest on the Old Notes through
mid-February and the Senior Notes from that date forward.
Income Tax Provision. Income tax expense for the twelve months ended
December 31, 1998 was $2.1 million, an increase from $1.1 million for the same
twelve 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 Old Notes, the
Company recorded an extraordinary loss in the first quarter of 1998 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.
TRANSITION PERIOD ENDED DECEMBER 31, 1997 COMPARED TO THE
CORRESPONDING PERIOD ENDED DECEMBER 31, 1996
Rental Income. Rental income for the eight months ended December 31, 1997
(the "Transition Period"), was $42.5 million, an increase of 26% from $33.8
million for the corresponding period ended December 31, 1996. This increase was
due primarily to increased demand for directional drilling services and related
products in Latin America, the Gulf of Mexico and the U.S. Gulf Coast region,
which resulted in a $4.5 million increase in rentals from MWD equipment,
downhole motors and other directional drilling tools. In addition, rental
income from drilling and fishing jars and slingers increased $1.6 million
domestically primarily due to increased demand as the average rig count in the
United States increase 21% and $2.5 million internationally, primarily in the
Far East, Australia, Middle East and Europe.
Sales of Products and Services. Sales of products and services for the
Transition Period ended December 31, 1997, were $15.0 million, an increase of
31% from $11.5 million for the corresponding period ended December 31, 1996.
This increase was primarily the result of pipeline testing revenue of $1.5
million being included in operating results for the first time, an increase in
revenue from tools lost-in-hole of $1.1 million and increased demand for
directional drilling services and related products in Latin America, the Gulf
of Mexico and the U.S. Gulf Coast region, which resulted in a $1.2 million
increase in directional services revenue. This was partially offset by
decreased sales of tools and parts of $388,000.
Underbalanced Drilling Services Revenue. Underbalanced drilling services
revenue for the Transition Period ended December 31, 1997 was $18.7 million
resulting from ADI revenue being included in operating results since June 20,
1997.
Cost of Rentals. Cost of rentals for the Transition Period ended December
31, 1997, was $29.6 million, an increase of 17% from $25.4 million for the
corresponding period ended December 31, 1996. This increase in cost was due
primarily to increased variable costs, primarily tool repair costs and
commissions, associated with increased rental activity in regions where Dailey
had an existing operating and administrative infrastructure. Gross margins
increased from 25% for the eight months ended December 31, 1996 to 30% for the
eight months ended December 31, 1997 due to the primarily fixed nature of
Dailey's cost base.
Cost of Products and Services. Cost of products and services for the
Transition Period ended December 31, 1997, was $9.2 million, including a
$904,000 increase due to ADI being included in operating results since June 20,
1997, an increase of 49% from $6.2 million for the corresponding period ended
December 31, 1996. Excluding the impact of ADI, the gross profit margin on
sales of products and services for the Transition Period ended December 31,
1997 was 38% compared to 46% for the corresponding period last year. This
decrease in margin was primarily due to a decrease in higher margin export
sales of mechanical jars combined with increased revenues from lower margin
directional drilling services.
Cost of Underbalanced Drilling Services. Cost of underbalanced drilling
services for the Transition Period ended December 31, 1997 was $12.0 million
resulting from ADI being included in operating results since June 20, 1997.
Selling, General and Administrative Expenses. For the Transition Period
ended December 31, 1997, selling, general and administrative expenses were
$14.7 million, an increase of 84% from $8.0 million for the corresponding
period ended December 31, 1996. This increase was primarily the result of
increased compensation expense related to salary increases and incentive
compensation programs, costs related to Dailey's acquisition program,
amortization of costs related to the ADI Acquisition and the inclusion of ADI
in operating results since June 20, 1997. Cost savings from reorganization
efforts partially offset this increase.
Reorganization Costs. Reorganization costs for the Transition Period ended
December 31, 1997 were $2.5 million. In June 1997, a cost-reduction program was
implemented to flatten the corporate management structure and streamline
operations. The reorganization costs primarily consist of the cost of staff
reductions, severance settlements and various restructuring costs.
Non-cash Compensation Expense. Non-cash compensation for the Transition
Period ended December 31, 1997 was $661,000, which related to restricted stock
that had been granted to certain executive officers of Dailey in connection
with the 1996 IPO and the Company's 1997 Long-Term Incentive Plan (the "1997
Plan").
Research and Development Expenses. Research and development expenses for
the Transition Period ended December 31, 1997, were $190,000, compared to
$549,000 for the corresponding period ended December 31, 1996. This decrease is
the result of having substantially completed research and development projects
related to mud motors, fishing jars, and adapting fishing jars to coiled tubing
operation.
Interest Income. Interest income for the Transition Period ended December
31, 1997, was $1.3 million, compared to $410,000 from the corresponding period
ended December 31, 1996. This was the result of interest earned on short-term
investments utilizing net proceeds from the issuance of the Old Notes in August
1997.
Interest Expense - Nonaffiliates. Interest expense to nonaffiliates for
the Transition Period ended December 31, 1997 was $5.3 million compared to
$486,000 for the corresponding period ended December 31, 1996. This increase
was primarily the result of interest incurred on the Old Notes issued in August
1997.
Income Tax Expense. Income tax expense for the Transition Period ended
December 31, 1997, was $1.3 million, a decrease of 28% from $1.8 million for
the corresponding period ended December 31, 1996. This decrease was primarily
the result of lower income before income taxes. This decrease was partially
offset by an increase in the effective tax rate to 44% for the Transition
Period from 36% for the corresponding period due to the full utilization of
state net operating loss carryforwards during the year ended April 30, 1996 and
the non-deductibility of goodwill recorded in connection with the ADI
Acquisition.
YEAR ENDED APRIL 30, 1997 COMPARED TO YEAR ENDED APRIL 30, 1996
Rental Income. Rental income for the year ended April 30, 1997, was $49.5
million, an increase of 15% from $43.0 million for the year ended April 30,
1996. This increase was due primarily to increased demand for directional
drilling services and related products in Latin America, the Gulf of Mexico and
the U.S. Gulf Coast region, which resulted in a $5.8 million increase in rentals
from MWD equipment, downhole motors and other directional drilling tools. In
addition, domestic rental income from drilling and fishing jars and slingers
increased $1.3 million which was partially offset by decreased foreign rental
income from drilling and fishing jars and slingers of $892,000.
Sales of Products and Services. Sales of products and services for the year
ended April 30, 1997, were $17.0 million, an increase of 6% from $16.0 million
for the year ended April 30, 1996. This increase was due primarily to increased
demand for directional drilling services and related products in Latin America,
the Gulf of Mexico and the U.S. Gulf Coast region, which resulted in a $1.4
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million increase in directional services revenue. In addition, revenues from
license fees related to a proprietary directional drilling method increased by
$300,000. This was partially offset by decreased sales of tools and parts of
$684,000.
Cost of Rentals. Cost of rentals for the year ended April 30, 1997, was
$37.7 million, an increase of 14% from $33.0 million for the year ended April
30, 1996. This increase was due primarily to the variable costs associated with
an increase in rental activity, such as tool repair costs and third-party tool
charges. As a percentage of rental income, cost of rentals decreased from 77% in
the fiscal year ended April 30, 1996 to 76% in the fiscal year ended April 30,
1997, which reflects the fixed nature of the cost base.
Cost of Products and Services. Cost of products and services for the year
ended April 30, 1997, was $8.9 million, an increase of 12% from $7.9 million for
the year ended April 30, 1996. The increase was due primarily to higher
personnel costs associated with an increase in directional drilling services in
the Gulf of Mexico, the U.S. Gulf Coast region and Venezuela. The gross profit
margin on sales of products and services for the fiscal year ended April 30,
1997 was 48% compared to 50% for the fiscal year ended April 30, 1996. This
decrease in gross profit margin was due to a decrease in higher margin export
sales of mechanical jars.
Selling, General and Administrative Expenses. For the year ended April 30,
1997, selling, general and administrative expenses, including a $2.8 million
non-cash compensation expense, were $14.7 million, an increase of 22% from the
$12.1 million for the year ended April 30, 1996. The noncash compensation
expense was the result of noncash stock awards granted to certain officers
pursuant to the 1996 Key Employee Stock Plan. Exclusive of these non-cash
changes, selling, general and administrative expenses were $11.9 million, a 2%
decrease from the fiscal year ended April 30, 1996.
Interest Income. Interest income for the year ended April 30, 1997, was
$640,000, an increase of $536,000 from the year ended April 30, 1996. This was
the result of interest earned on short-term investments utilizing net proceeds
from the 1996 IPO.
Interest Expense -- Nonaffiliates. Interest expense to nonaffiliates for the
year ended April 30, 1997 was $671,000, a decrease of 15% from $785,000 for the
year ended April 30, 1996. This decrease was primarily the result of scheduled
payments of principal and interest on bank debt.
Interest Expense -- Affiliate. Interest expense to affiliate for the year
ended April 30, 1997, was $162,000, a 11% decrease from $182,000 for the year
ended April 30, 1996. This decrease was primarily the result of the repayment of
a term loan to an affiliate with proceeds from the 1996 IPO, partially offset by
interest paid on a promissory note to an affiliate that was issued in connection
with a dividend on June 27, 1996 and repaid with proceeds from the 1996 IPO.
Income Tax Expense. Income tax expense for the year ended April 30, 1997,
was $1.5 million, an increase of 6% from $1.4 million for the year ended April
30, 1996. This increase was primarily the result of an increase in the effective
tax rate to 38% for the fiscal year ended April 30, 1997 from 35% for the fiscal
year ended April 30, 1996 due to the full utilization of state net operating
loss carryforwards for the fiscal year ended April 30, 1996.
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LIQUIDITY AND CAPITAL RESOURCES
Working Capital. Cash used in operating activities was $9.5 million during
the twelve months ended December 31, 1998. The primary source of cash was the
net proceeds from the issuance of the Senior Notes of $268.1 million. Principal
uses of cash were to fund acquisitions (net of cash acquired) of $104.0 million,
repurchase the Old Notes at a premium for $127.7 million, pay interest on the
Senior Notes of $13.2 million and fund capital expenditures of $49.7 million.
During the past several years, working capital requirements have been funded
through cash generated from operations, additional borrowings, credit
facilities, asset sales and proceeds from equity and debt offerings.
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 has had, and
will have several important affects on the Company's 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 (including current
industry conditions), as well as to competitive pressure, and (iii) the
Company's ability to obtain additional financing for working capital, capital
expenditures and general corporate and other purposes may be limited.
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Capital Expenditures. Capital expenditures, exclusive of acquisitions, of
approximately $49.7 million were made during the twelve months ended December
31, 1998. Of this amount, $40.3 million was for downhole tools, primarily MWD
and other directional equipment, hydraulic drilling jars, hydraulic fishing jars
and related inventory. The Company currently has budgeted capital expenditures
for 1999 of $6.5 million. The level of capital expenditures in 1999 will be
determined based upon a variety of factors, including the Company's assessment
of future demand for its products and services, the level of cash flows being
generated by the Company's operations and the success of the Company's plans for
streamlining and reorganizing operations to current industry conditions and the
level of funds necessary to service the Company's debt burden.
Funding of 1999 Operations. The Company believes that, assuming no further
deterioration in market conditions and demand for the Company's products and
services, the Company's existing cash as well as additional capacity to obtain
financing from third parties will allow it to continue to finance its operations
through 1999. In this regard, the Company currently has no significant
outstanding debt other than under the Senior Notes and debt assumed in the IDS
acquisition, and believes that it has capacity, utilizing all or a part of its
assets as security, to borrow additional funds from a bank or other lender that
will be sufficient to allow the Company to fund its operations through 1999.
However, the Company currently does not have any commitment or other indication
from any third party of its willingness to lend the Company such additional
funds and no assurance can be given that such a financing transaction can be
completed on terms acceptable to the Company. In the event the Company is unable
to obtain such third party financing, the Company does not believe its cash on
hand and current level of operations will be sufficient to fund its operations
during 1999 or make the August 1999 interest payment due on the Senior Notes, in
which case the Company will be required to sell assets, negotiate a
restructuring of its debt obligations with the holders of its Senior Notes or
seek protection under the United States bankruptcy code.
INFLATION AND FOREIGN EXCHANGE
Inflation has not had a significant impact on Dailey's comparative results
of operations. For the year ended December 31, 1998, transactions conducted in
United States dollars accounted for approximately 84% of the Company's total
revenues. The Company believes that the percentage of its total revenues
relating to transactions conducted in foreign currencies will continue to
increase due to continued expansion of the Company's international operations
and the DWS/DAMCO Acquisition. The Company currently does not engage in hedging
transactions to protect itself against foreign currency fluctuations but rather
seeks to protect itself from fluctuations in foreign currencies by accelerating
conversion of such currencies into United States dollars and by continual
evaluation of the Company's level of operations in such markets.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 130. In June 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income, which establishes standards for reporting and display of
comprehensive income and its components. SFAS No. 130 requires that all items
that are recognized under accounting standards as components of comprehensive
income be reported in a financial statement displayed in equal prominence with
the other financial statements. SFAS No. 130 is effective for both interim and
annual periods beginning after December 15, 1997. The Company adopted the
provisions on January 1, 1998.
SFAS No. 131. Also, in June 1997, the FASB issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which is
effective for fiscal years beginning after December 15, 1997. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company adopted the new requirements
on October 1, 1998.
SFAS NO. 133. In June 1998, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards No. 133 ("SFAS
No. 133"), Accounting for Derivative Instruments and Hedging Activities, which
establishes standards for the recognition and measurement of derivatives and
hedging activities. SFAS No. 133 requires all derivatives to be recorded on the
balance sheet at fair value and establishes "special accounting" for the
following three different types of hedges: hedges of changes in the fair value
of assets, liabilities, or firm commitments (referred to as fair value hedges);
hedges of the variable cash flows of forecasted transactions (cash flow hedges);
and hedges of foreign currency exposures of net investments in foreign
operations. Changes in fair value of derivatives that do not meet the criteria
of one of these three categories of hedges are included in income. SFAS No. 133
is effective for years beginning after June 15, 1999, at which time the Company
will adopt this provision. The Company does not expect SFAS No. 133 to have a
material effect on the Company's financial statements.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs being 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, temporary inability to process transactions, send invoices
or engage in similar normal business activities.
The Company's plan to resolve the Year 2000 issue involves the following
four phases for both internal systems and operating equipment and third party
systems: assessment, remediation, testing and implementation. For internal
systems and operating equipment, the Company has reviewed all domestic systems
and hardware and is in the process of performing the same for international
systems and hardware and operating equipment. The Company estimates that it is
approximately 90% complete in the assessment and remediation phases and 50%
complete in the testing and implementation phases for internal systems and
operating equipment. For third party systems, the Company has mailed a survey to
all customers and vendors requesting evaluation of their Year 2000 issues and
currently expects receipt of responses by June, 1999. The Company will compile
and analyze these responses and establish appropriate action at that time.
The Company will utilize both internal and external resources to reprogram,
or replace, test, and implement software and operating equipment for Year 2000
modifications. The total cost of the Year 2000 project is estimated to be
$350,000 and is being
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funded using existing working capital. To date, the Company has expensed
approximately $39,000 related to all phases of the Year 2000 project. Of the
total remaining costs, approximately $250,000 is attributable to the purchase of
new software and operating equipment, which will be capitalized. The remaining
$61,000 relates to repair of hardware and software and will be expensed as
incurred.
The Company believes that it has an effective program in place to resolve
the Year 2000 issue in a timely manner. As noted above, the Company has not
completed all phases of the Year 2000 project. Although the Company currently
expects to complete its Year 2000 project prior to the millennium, in the event
the Company does not complete additional phases or if such phases are
ineffective in addressing the Year 2000 issue, the Company would be unable to
perform certain international directional drilling operations, process
international financial ledgers, and track inventory. In addition, disruptions
in the economy generally resulting from Year 2000 issues could also materially
adversely affect the Company. In addition, if the Company's third party vendors,
suppliers or customers are not Year 2000 compliant, the Company's operations
could be adversely affected if such third parties cannot supply goods and
services required by the Company in a timely manner, causing the Company to be
unable to provide its goods and services in a timely manner or at the Company's
current standards of quality, which could subject the Company to third party
lawsuits and reduce demand for the Company's goods and services. In addition,
demand for the Company's goods and services will be adversely affected if its
customers operations are adversely affected by the Year 2000 issue. The Company
could be subject to litigation for computer systems product failure, for
example, equipment shutdown or failure to properly date business records. The
amount of potential liability and lost revenue cannot be reasonably estimated at
this time.
The Company has no contingency plans in the event it does not complete all
phases of the Year 2000 program. The Company plans to evaluate the status of
completion of its Year 2000 project in July 1999 and determine whether such
plans are necessary.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's long-term debt obligations. The tables below provide
information about the Company's financial instruments that are sensitive to
changes in interest rates.
For debt obligations, the tables below present expected cash flows and
related weighted-average interest rates expected by maturity dates. The fair
value of the Senior Notes is based on information provided by an investment bank
at year end. The fair value of the Company's long-term bank notes and other debt
are estimated using discounted cash flow analyses, based on the Company's
current incremental borrowing rates for similar types of borrowing arrangements.
Expected Maturity Date FAIR
---------------------------------------------------- VALUE
1999 2000 2001 2002 THEREAFTER TOTAL 12/31/98
---- ---- ---- ---- ---------- ----- --------
(IN MILLIONS, EXCEPT INTEREST RATE PERCENTAGE)
Long Term Debt
Debt Service(a) $26.3 26.3 26.3 26.3 143.9 $537.4 $130.4
Average effective
interest rate 9.9% 9.9% 9.9% 9.9% 9.9% 9.9%
EXPECTED MATURITY DATE
FAIR
VALUE
1998 1999 2000 2001 THEREAFTER TOTAL 12/31/97
---- ---- ---- ---- ---------- ----- --------
(IN MILLIONS, EXCEPT INTEREST RATE PERCENTAGE)
Long Term Debt
Debt Service(a) $11.4 11.2 11.2 11.2 67.3 $227.3 $120.9
Average effective
interest rate 10.3% 10.2% 10.2% 10.2% 10.2% 10.2%
(a) Assumes scheduled maturities are funded with available resources.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements of the Company meeting the requirements of Regulation
S-X (except Section 210.305 and Article 11 thereof) are included herein on pages
F-1 through F-32 hereof.
Other financial statements and schedules required under Regulation S-X, if
any, are filed pursuant to Item 14, Exhibits, Financial Statement Schedules and
Reports on Form 8-K of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information required by Part III, Items 10 through 13, inclusive, of
Form 10-K is hereby incorporated by reference from the Company's Definitive
Proxy Statement for the 1999 Annual Meeting of Stockholders, which shall be
filed with the Securities and Exchange Commission not later than 120 days after
the end of the fiscal year to which this Annual Report on Form 10-K relates.
21
22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following consolidated financial statements are filed as part of
this Annual Report on Form 10-K:
PAGE
----
Index..................................................................... F-1
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets at December 31, 1998 and 1997................. F-3
Consolidated Statements of Operations for the Year Ended December 31,
1998, Eight Months Ended December 31, 1997 and 1996 and the Years
Ended April 30, 1997 and 1996........................................... F-4
Consolidated Statements of Stockholders' Equity for the Year Ended
December 31, 1998, Eight Months Ended December 31, 1997 and the Years
Ended April 30, 1997 and 1996........................................... F-5
Consolidated Statements of Cash Flows for the Year Ended December 31,
1998, Eight Months Ended December 31, 1997 and 1996 and the Years
Ended April 30, 1997 and 1996........................................... F-6
Notes to Consolidated Financial Statements................................ F-7
The following consolidated financial statement schedule is included in
Item 14(d):
Schedule II Valuation and Qualifying Accounts......................... F-32
All other schedules are omitted because either they are not applicable or
because the required information is included in the consolidated financial
statements or notes thereto.
(b) The following Exhibits are filed as part of this Annual Report on
Form 10-K:
EXHIBIT
NUMBER DESCRIPTION
----------- ------------------------------------------------------
3.1 -- Restated Certificate of Incorporation.
(Incorporated by reference from the Company's
Registration Statement on Form S-1 (File No.
333-04593))
3.2 -- Restated Bylaws of the Company. (Incorporated by
reference from the Company's Registration Statement
on Form S-1 (File No. 333-04593))
3.3 -- Amendment to Restated Certificate of Incorporation
dated October 7, 1997. (Incorporated by reference
from the Company's Registration Statement on Form S-4
(File No. 333-47345))
4.1 -- Form of Class A Common Stock Certificate.
(Incorporated by reference from the Company's
Registration Statement on Form S-4 (File No.
333-47345))
4.2 -- See Exhibits 3.1, 3.2 and 3.3 for provisions of
the Restated Certificate of Incorporation and
Restated Bylaws of the Company defining the rights of
the holders of Class A Common Stock.
4.3 -- 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 Form S-4 (File No. 333-47345))
4.4 -- 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))
22
23
4.5 -- 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)).
4.6 -- See Exhibits 10.3 through 10.5 and Exhibit 10.12 for
additional instruments defining the rights of holders
common stock of the Company and of long-term debt of
the Company and its Subsidiaries.
10.1 -- Relationship Agreement by and between the Company
and Lawrence Industries, Inc. (Incorporated by
reference from the Company's Registration Statement
on Form S-1 (File No. 333-04593))
10.2 -- Office Lease Agreement by and between the Company
as lessee and Lawrence International, Inc. as lessor.
(Incorporated by reference from the Company's
Registration Statement on Form S-1 (File No.
333-04593))
10.3 -- Registration Rights Agreement by and between the
Company and Lawrence Industries, Inc. (Incorporated
by reference from the Company's Registration
Statement on Form S-1 (File No. 333-04593))
+10.4 -- Dailey Petroleum Services Corp. 1996 Key Employee
Stock Plan. (Incorporated by reference from the
Company's Registration Statement on Form S-1 (File
No. 333-04593))
+10.5 -- Dailey Petroleum Services Corp. 1996 Non-Employee
Director Stock Option Plan. (Incorporated by
reference from the Company's Registration Statement
on Form S-1 (File No. 333-04593))
10.6 -- Tax Allocation Agreement by and between the
Company and Lawrence Industries, Inc. (Incorporated
by reference from the Company's Registration
Statement on Form S-1 (File No. 333-04593))
10.7 -- Form of Indemnification Agreement between the
Company and its directors. (Incorporated by reference
from the Company's Registration Statement on Form S-1
(File No. 333-04593))
10.8 -- Form of Indemnification Agreement between the
Company and its executive officers. (Incorporated by
reference from the Company's Registration Statement
on Form S-1 (File No. 333-04593))
23
24
+10.9 -- Amended Employment Agreement between the Company
and William D. Sutton dated December 31, 1997.
(Incorporated by reference from the Company's
Registration Statement on Form S-4 (File No.
333-47345))
+10.10 -- Employment Agreement between the Company and J.D.
Lawrence dated November 27, 1996. (Incorporated by
reference from the Company's Quarterly Report on Form
10-Q for the three months ended January 31, 1997)
10.11 -- 1997 Long-Term Incentive Plan. (Incorporated by
reference from the Company's Registration Statement
on Form S-4 (File No. 333-47345))
10.12 -- Employment Agreement between the Company and John
Beard, as amended
10.13 -- Employment Agreement between the Company and Al Kite
21.1 -- List of Subsidiaries of the Company. (Incorporated
by reference from the Company's Registration
Statement on Form S-4 (File No. 333-47345))
23.1 -- Consent of Ernst & Young LLP
27.1 -- Financial Data Schedule.
- ----------
+ Management Contract.
As permitted by Item 601(b)(4)(iii)(A) of Regulation S-K, the Company has
not filed with this Annual Report certain instruments defining the rights of
holders of long-term debt of the Company and its subsidiaries because the total
amount of securities authorized under any of such instruments does not exceed
10% of the total assets of the Company and its subsidiaries on a consolidated
basis. The Company agrees to furnish a copy of any such agreement to the
Commission upon request.
24
25
SIGNATURES
Pursuant to the requirements of Section 13 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.
By: /s/ AL KITE
-------------------------------
A. E. Kite
Interim Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME POSITION DATE
- ----------------------------- ------------------------------- -------------------
/s/ J. D. LAWRENCE Chairman of the Board March 31, 1999
- -----------------------------
J. D. Lawrence
/s/ A.E. KITE Interim Chief Executive March 31, 1999
- ----------------------------- Officer and Director
A. E. Kite
/s/ WILLIAM D. SUTTON Senior Vice President, General March 31, 1999
- ----------------------------- Counsel, Corporate Secretary
William D. Sutton and Director
/s/ JOHN BEARD Interim Chief Financial March 31, 1999
- ----------------------------- Officer
John Beard
25
26
SIGNATURES
Pursuant to the requirements of Section 15 of the Securities Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on the 31st day of March, 1999.
AIR DRILLING SERVICES, INC.
By: /s/ CHAMAN MALHOTRA
---------------------------------
Chaman Malhotra
President
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons in the capacities indicated on the 31st day
of March, 1999.
NAME POSITION DATE
- ----------------------------- --------------------------------- -------------------
/s/ A. E. KITE Chairman of the Board and March 31, 1999
- ------------------------- Director
A. E. Kite
/s/ JAMES C. BRAME Vice President, Treasurer and March 31, 1999
- ------------------------- Director (Principal
James C. Brame Financial and Accounting
Officer)
/s/ CHAMAN MALHOTRA President and Director March 31, 1999
- ------------------------- (Principal Executive
Chaman Malhotra Officer)
26
27
SIGNATURES
Pursuant to the requirements of Section 15 of the Securities Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on the 31st day of March, 1999.
AIR DRILLING INTERNATIONAL, INC.
By: /s/ CHAMAN MALHOTRA
-----------------------------------
Chaman Malhotra
President
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons in the capacities indicated on the 31st day
of March, 1999.
NAME POSITION DATE
- ----------------------------- --------------------------------- -------------------
/s/ A. E. KITE Chairman of the Board and March 31, 1999
- ------------------------- Director
A. E. Kite
/s/ WILLIAM D. SUTTON Director March 31, 1999
- -------------------------
William D. Sutton
/s/ JAMES C. BRAME Vice President, and Director March 31, 1999
- ------------------------- (Principal Financial and
James C. Brame Accounting Officer)
/s/ CHAMAN MALHOTRA President and Director March 31, 1999
- ------------------------- (Principal Executive
Chaman Malhotra Officer)
27
28
SIGNATURES
Pursuant to the requirements of Section 15 of the Securities Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on the 31st day of March, 1999.
DAILEY WORLDWIDE SERVICES, CORP.
By: /s/ A. E. KITE
----------------------------------
A. E. Kite
President
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons in the capacities indicated on the 31st day
of March, 1999.
NAME POSITION DATE
- ----------------------------- --------------------------------- -------------------
/s/ A. E. KITE President and Sole Director March 31, 1999
- ------------------------- (Principal Executive Officer)
A. E. Kite
/s/ JOHN BEARD Vice President and Treasurer March 31, 1999
- ------------------------- (Principal Financial and
John Beard Accounting Officer)
28
29
SIGNATURES
Pursuant to the requirements of Section 15 of the Securities Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on the 31st day of March, 1999.
DAILEY ENVIRONMENTAL
REMEDIATION TECHNOLOGIES, INC.
By: /s/ A. E. KITE
----------------------------------
A. E. Kite
President
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons in the capacities indicated on the 31st day
of March, 1999.
NAME POSITION DATE
- ----------------------------- --------------------------------- -------------------
/s/ A. E. KITE President and Sole Director March 31, 1999
- ------------------------- (Principal Executive Officer)
A. E. Kite
/s/ JOHN BEARD Vice President and Treasurer March 31, 1999
- ------------------------- (Principal Financial and
John Beard Accounting Officer)
29
30
SIGNATURES
Pursuant to the requirements of Section 15 of the Securities Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on the 31st day of March, 1999.
INTERNATIONAL PETROLEUM
SERVICES, INC.
By: /s/ A. E. KITE
----------------------------------
A. E. Kite
President
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons in the capacities indicated on the 31st day
of March, 1999.
NAME POSITION DATE
- ----------------------------- --------------------------------- -------------------
/s/ A. E. KITE President and Sole Director March 31, 1999
- ------------------------- (Principal Executive Officer)
A. E. Kite
/s/ JOHN BEARD Vice President and Treasurer March 31, 1999
- ------------------------- (Principal Financial and
John Beard Accounting Officer)
30
31
SIGNATURES
Pursuant to the requirements of Section 15 of the Securities Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on the 31st day of March, 1999.
COLUMBIA PETROLEUM SERVICES CORP.
By: /s/ A. E. KITE
----------------------------------
A. E. Kite
President
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons in the capacities indicated on the 31st day
of March, 1999.
NAME POSITION DATE
- ----------------------------- --------------------------------- -------------------
/s/ A. E. KITE President and Sole Director March 31, 1999
- ------------------------- (Principal Executive Officer)
A. E. Kite
/s/ JOHN BEARD Vice President and Treasurer March 31, 1999
- ------------------------- (Principal Financial and
John Beard Accounting Officer)
31
32
SIGNATURES
Pursuant to the requirements of Section 15 of the Securities Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on the 31st day of March, 1999.
DAILEY INTERNATIONAL SALES
CORP.
By: /s/ A. E. KITE
----------------------------------
A. E. Kite
President
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons in the capacities indicated on the 31st day
of March, 1999.
NAME POSITION DATE
- ----------------------------- --------------------------------- -------------------
/s/ A. E. KITE President and Sole Director March 31, 1999
- ------------------------- (Principal Executive Officer)
A. E. Kite
/s/ JOHN BEARD Vice President and Treasurer March 31, 1999
- ------------------------- (Principal Financial and
John Beard Accounting Officer)
32
33
SIGNATURES
Pursuant to the requirements of Section 15 of the Securities Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on the 31st day of March, 1999.
DAILEY ENERGY SERVICES, INC.
By: /s/ A. E. KITE
----------------------------------
A. E. Kite
President
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons in the indicated on the 31st day of March,
1999.
NAME POSITION DATE
- ----------------------------- --------------------------------- -------------------
/s/ DWIGHT GOOLSBAY Director March 31, 1999
- -------------------------
Dwight Goolsbay
/s/ A. E. KITE President and Director March 31, 1999
- ------------------------- (Principal Executive Officer)
A. E. Kite
/s/ JOHN BEARD Vice President and Treasurer March 31, 1999
- ------------------------- (Principal Financial and
John Beard Accounting Officer)
33
34
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors......................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets............................................ F-3
Consolidated Statements of Operations.................................. F-4
Consolidated Statements of Stockholders' Equity........................ F-5
Consolidated Statements of Cash Flows.................................. F-6
Notes to Consolidated Financial Statements............................. F-7
F-1
35
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Dailey International Inc.
We have audited the accompanying consolidated balance sheets of Dailey
International Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended December 31, 1998, the eight month period ended December 31, 1997
and for each of the two years in the period ended April 30, 1997. Our audits
also included the consolidated financial statement schedule listed in the Index
at Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Dailey International Inc. at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for the year ended December 31,
1998, eight month period ended December 31, 1997 and for each of the two years
in the period ended April 30, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As more fully described in Note 1, the
Company has incurred significant operating losses and negative operating cash
flows in recent periods and has a deficiency in stockholders' equity at December
31, 1998. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regards to these matters
are also described in Note 1. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts or classifications of liabilities that
may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Houston, Texas
March 29, 1999
F-2
36
DAILEY INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------
ASSETS 1998 1997
--------- ---------
(IN THOUSANDS)
Current assets:
Cash and cash equivalents ..................................... $ 32,843 $ 59,837
Accounts receivable, net ...................................... 32,803 34,601
Accounts receivable from affiliates ........................... 362 --
Deferred income taxes ......................................... -- 465
Prepaid expenses and other current assets ..................... 4,778 2,304
--------- ---------
Total current assets ................................... 70,786 97,207
Revenue-producing tools and inventory, net ...................... 141,524 79,056
Property and equipment, net ..................................... 13,255 8,181
Deferred income taxes ........................................... -- --
Accounts receivable from officer ................................ -- 250
Goodwill, net ................................................... 22,275 19,183
Investment in joint venture ..................................... 7,100 --
Other assets .................................................... 17,233 5,400
--------- ---------
Total assets ........................................... $ 272,173 $ 209,277
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ...................... $ 25,055 $ 23,804
Accounts payable to affiliate ................................. -- 483
Income taxes payable .......................................... 3,987 2,417
Current portion of long-term debt ............................. 1,048 146
--------- ---------
Total current liabilities .............................. 30,090 26,850
Long-term debt .................................................. 275,060 114,229
Deferred income taxes ........................................... 5,910 1,238
Other noncurrent liabilities .................................... 1,298 1,559
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value: 5,000,000 shares authorized;
none issued ................................................. -- --
Common stock, Class A, $0.01 par value: 20,000,000 shares
authorized; 5,703,655 and 4,627,598 issued
and 5,135,504 and 4,483,598 outstanding at
December 31, 1998 and 1997, respectively;
Class B, $0.01 par value: 10,000,000 shares
authorized, 5,000,000 shares issued and outstanding at
December 31, 1998 and 1997................................... 106 94
Treasury stock (568,151 and 144,000 shares at
December 31, 1998 and 1997, respectively) ................... (4,048) (1,047)
Paid-in capital ............................................... 52,437 41,335
Accumulated other comprehensive income ........................ (1,026) (154)
Retained earnings ............................................. (87,654) 25,173
--------- ---------
Total stockholders' equity ............................. (40,185) 65,401
--------- ---------
Total liabilities and stockholders' equity ............. $ 272,173 $ 209,277
========= =========
See accompanying notes.
F-3
37
DAILEY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
EIGHT MONTHS ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED APRIL 30,
DECEMBER 31, -------------------------- --------------------------
1998 1997 1996 1997 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Revenues:
Rental income ............................... $ 61,255 $ 42,454 $ 33,761 $ 49,497 $ 42,987
Sales of products and
services ................................. 40,037 15,010 11,454 16,954 15,952
Underbalanced drilling ...................... 31,025 18,685 -- -- --
----------- ----------- ----------- ----------- -----------
132,317 76,149 45,215 66,451 58,939
Costs and expenses:
Cost of rentals ............................. 43,442 24,525 21,469 31,527 27,617
Cost of products and
services ................................. 24,443 9,142 6,131 8,775 7,857
Cost of underbalanced
drilling ................................. 19,559 10,098 -- -- --
Selling, general and
administrative ........................... 34,126 13,672 7,748 11,543 11,829
Depreciation and amortization ............... 24,481 8,106 4,197 6,593 5,726
Reorganization cost ......................... 3,413 2,453 -- -- --
Non-cash compensation ....................... 711 661 -- 2,807 --
Research and development .................... 1,192 190 549 850 728
Provision for asset impairment .............. 53,037 -- -- -- --
----------- ----------- ----------- ----------- -----------
204,404 68,847 40,094 62,095 53,757
----------- ----------- ----------- ----------- -----------
Operating income (loss)........................ (72,087) 7,302 5,121 4,356 5,182
Other (income) expense:
Interest income ............................. (3,425) (1,342) (410) (640) (104)
Interest expense-nonaffiliates .............. 24,429 5,252 486 671 785
Interest expense-affiliate .................. -- -- 172 162 182
Other, net .................................. 42 396 (149) 188 278
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes and
extraordinary item .......................... (93,133) 2,996 5,022 3,975 4,041
Provision for income taxes .................... 2,115 1,319 1,829 1,511 1,427
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary item ....... (95,248) 1,677 3,193 2,464 2,614
Extraordinary item, net of taxes .............. (17,579) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) ............................. $ (112,827) $ 1,677 $ 3,193 $ 2,464 $ 2,614
=========== =========== =========== =========== ===========
Earnings (loss) per share before
extraordinary item:
Basic ....................................... $ (9.67) $ 0.18 $ 0.42 $ 0.30 N/A
Diluted ..................................... $ (9.67) $ 0.18 $ 0.42 $ 0.30 N/A
Earnings (loss) per share:
Basic ....................................... $ (11.46) $ 0.18 $ 0.42 $ 0.30 N/A
Diluted ..................................... $ (11.46) $ 0.18 $ 0.42 $ 0.30 N/A
Pro forma earnings per share:
Basic ....................................... N/A N/A N/A N/A $ 0.40
Diluted ..................................... N/A N/A N/A N/A $ 0.40
Weighted average shares
outstanding:
Basic ....................................... 9,848,368 9,228,009 7,594,286 8,138,104 N/A
Diluted ..................................... 9,848,368 9,329,400 7,637,214 8,178,576 N/A
Pro forma weighted average shares
outstanding:
Basic ....................................... N/A N/A N/A N/A 6,610,000
Diluted ..................................... N/A N/A N/A N/A 6,610,000
See accompanying notes.
F-4
38
DAILEY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CLASS CLASS ACCUMULATED
A B OTHER TOTAL
PREFERRED COMMON COMMON TREASURY PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
STOCK STOCK STOCK STOCK CAPITAL INCOME EARNINGS EQUITY
--------- -------- -------- -------- -------- ------------- --------- -------------
(IN THOUSANDS)
Balance at April 30, 1995 ....... $-- $ -- $ 50 $ -- $ 4,559 $ -- $ 28,418 $ 33,027
Net income .................... -- -- -- -- -- -- 2,614 2,614
----- -------- -------- -------- -------- -------- -------- --------
Balance at April 30, 1996 ....... -- -- 50 -- 4,559 -- 31,032 35,641
----- -------- -------- -------- -------- -------- -------- --------
Net income .................... -- -- -- -- -- -- 2,464 2,464
Dividend ...................... -- -- -- -- -- -- (10,000) (10,000)
Net proceeds from sale of stock -- 39 -- -- 27,610 -- -- 27,649
Capital contribution .......... -- -- -- -- 5,000 -- -- 5,000
Purchases of treasury stock ... -- -- -- (234) -- -- -- (234)
Provision for stock awards .... -- 4 -- -- 2,803 -- -- 2,807
----- -------- -------- -------- -------- -------- -------- --------
Balance at April 30, 1997 ....... -- 43 50 (234) 39,972 -- 23,496 63,327
----- -------- -------- -------- -------- -------- -------- --------
Net income .................... -- -- -- -- -- -- 1,677 1,677
Translation adjustment ........ -- -- -- -- -- (154) -- (154)
--------
Comprehensive income .......... 1,523
--------
Purchases of treasury stock ... -- -- -- (813) -- -- -- (813)
Provision for stock awards .... -- -- -- -- 661 -- -- 661
Exercise of stock options ..... -- 1 -- -- 702 -- -- 703
----- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1997 .... -- 44 50 (1,047) 41,335 (154) 25,173 65,401
----- -------- -------- -------- -------- -------- -------- --------
Net loss ...................... -- -- -- -- -- -- (112,827) (112,827)
Translation adjustment ........ -- -- -- -- -- (1,080) -- (1,080)
Unrealized gain on cash
equivalent investments ..... -- -- -- -- -- 208 -- 208
--------
Comprehensive income (loss) ... (113,699)
--------
Stock issuance for
acquisition, including
returned shares ............ -- 11 -- (2,747) 9,437 -- -- 6,701
Provision for stock awards .... -- 1 -- 1,665 -- -- 1,666
Purchase of treasury stock .... -- -- -- (254) -- -- -- (254)
----- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1998 .... $-- $ 56 $ 50 $ (4,048) $ 52,437 $ (1,026) $(87,654) $(40,185)
===== ======== ======== ======== ======== ======== ======== ========
See accompanying notes.
F-5
39
DAILEY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
EIGHT MONTHS ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED APRIL 30,
DECEMBER 31, -------------------------- --------------------------
1998 1997 1996 1997 1996
------------- ----------- ----------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss) .............................. $ (112,827) $ 1,677 $ 3,193 $ 2,464 $ 2,614
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Extraordinary loss on repurchase of notes .... 17,579
Depreciation ................................. 20,432 7,339 4,157 6,530 5,689
Amortization ................................. 4,049 767 40 63 37
Deferred income taxes ........................ 2,437 100 511 (783) (816)
Write-off/amortization of debt
issuance costs............................. 806 -- -- -- --
Provision for asset impairment............... 53,037 -- -- -- --
Provision for doubtful accounts ................ 2,176 561 208 305 256
(Gain) loss on sale and disposition of
property and equipment .................... (311) 10 (11) 159 6
Provision for stock awards ..................... 1,665 661 -- 2,807 --
Changes in operating assets and liabilities
(net of the effects of acquisitions):
Accounts receivable trade .................... 9,058 (9,497) (5,960) (2,605) (2,498)
Accounts receivable from/payable to
officers and affiliates ................... 4,780 41 (4,570) 628 (538)
Prepaid expenses and other ................... (9,677) (171) (1,716) (972) 347
Accounts payable and accrued liabilities ..... (3,261) 10,526 4,823 1,575 (932)
Income taxes payable ......................... 570 (1,322) 690 1,492 741
------------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities ................................... (9,487) 10,692 1,365 11,663 4,906
INVESTING ACTIVITIES:
Additions to revenue-producing tools and
inventory .................................... (47,473) (22,792) (15,696) (21,825) (12,173)
Inventory transferred to cost of rentals ....... 7,138 6,386 4,311 5,913 5,521
Revenue-producing tools lost in hole,
abandoned and sold ........................... 2,364 1,976 1,419 1,983 2,551
Additions to property and equipment ............ (9,382) (8,394) (509) (660) (883)
Proceeds from sale of property and equipment ... 1,923 617 94 126 916
Investment in joint venture..................... (7,100) -- -- -- --
Acquisitions ................................... (96,884) (46,226) -- (1,584) --
Unrealized gain on cash equivalent investments . 208 -- -- -- --
------------- ----------- ----------- ----------- -----------
Net cash used in investing activities .......... (149,206) (68,433) (10,381) (16,047) (4,068)
FINANCING ACTIVITIES:
Proceeds from the issuance of debt ............. 268,125 159,597 400 400 1,300
Payments on outstanding debt ................... (122,442) (52,826) (4,628) (5,198) (1,967)
Extraordinary loss on repurchase of notes ...... (12,650)
Financing costs ................................ -- (4,129) -- -- --
Payment of promissory note ..................... -- -- (5,000) (5,000) --
Purchase of treasury stock ..................... (254) (813) -- (234) --
Exercise of stock options ...................... -- 703 -- -- --
Net proceeds from sale of common stock ......... -- -- 27,834 27,649 --
------------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities ................................... 132,779 102,532 18,606 17,617 (667)
Effect of foreign exchange rate changes
on cash....................................... (1,080) (154) -- -- --
------------- ----------- ----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents .................................. (26,994) 44,637 9,590 13,233 171
Cash and cash equivalents at beginning of
period ....................................... 59,837 15,200 1,967 1,967 1,796
------------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period ..... $ 32,843 $ 59,837 $ 11,557 $ 15,200 $ 1,967
============= =========== =========== =========== ===========
See accompanying notes.
F-6
40
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. GOING CONCERN
In response to adverse industry conditions, the Company began during the
third quarter of 1998 to review and implement cost saving strategies to reduce
its cost structure to bring it more in line with then current industry
conditions, including consolidating or eliminating operations and reducing
overhead. As a result of these efforts, the Company recorded a reorganization
charge during 1998 of $3.4 million. (See Note 17). The Company has continued to
review methods in which it can reduce its cost structure and reduce overhead;
however, the Company believes that its ability to further reduce costs is
severely limited due to unfavorable terms in employment agreements, which
require an aggregate of approximately $9.8 million in severance costs in the
event of early termination.
In addition, the Company retained an investment bank to advise the Company
on alternatives to enhance shareholder value, including acquisitions and/or
divestitures of certain businesses. Although the Company will continue to review
opportunities presented to it for the sale or divestiture of businesses, the
Company currently does not have any intent of disposing of any of its assets or
businesses.
Assuming no further deterioration in market conditions and demand for the
Company's products and services, the Company believes its existing cash as well
as its capacity to obtain additional financing from third parties will allow it
to continue to finance its operations through 1999. In this regard, the Company
currently has no outstanding debt other than under the Senior Notes (see Note
10) and debt assumed in the IDS acquisition (see Note 4), and believes that it
has capacity, utilizing all or part of its assets as security, to borrow
additional funds from a bank or other lender, that will be sufficient to allow
the Company to fund its operations through 1999. However, the Company currently
does not have any commitment or other indication from any third party of its
willingness to lend the Company such additional funds and no assurance can be
given that such a financing transaction can be completed on terms acceptable to
the Company. In the event the Company is unable to obtain such third party
financing, the Company does not believe its cash on hand and current level of
operations will be sufficient to fund its operations during 1999, in which case
the Company will be required to sell assets, negotiate a restructuring of debt
obligations with the holders of its Senior Notes or seek protection under the
United States bankruptcy code. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts or classifications of liabilities that
may result from the outcome of this uncertainty.
2. ORGANIZATION AND PUBLIC OFFERING
The accompanying consolidated financial statements reflect the operations of
Dailey International Inc. (formerly Dailey Petroleum Services Corp.), a Delaware
corporation. In June 1996, Dailey Petroleum Services Corp. was merged with
Dailey Corporation (which changed its name to Dailey Petroleum Services Corp.).
In October 1997, Dailey Petroleum Services Corp. changed its name to Dailey
International Inc., hereinafter referred to as the "Company" or "Dailey."
In October 1997, the Company changed its fiscal year end to December 31,
effective December 31, 1997. For purposes of this financial statement
presentation, the eight month period ended December 31, 1997 represents the
transition period from May 1, 1997 (April 30, 1997 being the last fiscal year
end) through December 31, 1997. The unaudited results for the eight months ended
December 31, 1996 have been presented for comparative purposes.
The Company currently manages its operations in two business segments: (1)
downhole products and services and (2) underbalanced drilling services. Downhole
products and services are comprised of the Company's directional drilling
services, electric wireline services, tubing conveyed perforating services and
downhole tool rentals. The Company's underbalanced drilling services were
acquired through the Company's acquisition of Air Drilling International, Inc.
("ADI") in June 1997. 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 ADI and, as a result, became a leading provider
worldwide of air drilling services for underbalanced drilling applications. The
Company operates in one business segment. 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"), which are headquartered in Houma,
Louisiana. DWS/DAMCO provides 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. In August 1998, the Company acquired substantially all of the assets of
the directional drilling business of Transocean Petroleum Technology Limited
("Transocean") located in Aberdeen, Scotland. In December 1998 Dailey, through
its subsidiary Air Drilling Services, Inc., acquired 51% of International
Nitrogen Services, Inc. ("INS"), a joint venture with MG Generon, Inc. The
company, headquartered in Houston, Texas, provides non-cryogenic nitrogen
generators and production units for use in the on-site production of nitrogen
for injection in downhole drilling of oil and gas.
Prior to June 1996, Dailey was a wholly-owned subsidiary of Lawrence
Industries, Inc. ("Lawrence"). In June 1996, in preparation for the initial
public offering of Class A Common Stock of Dailey, Lawrence reorganized its
ownership of the Company into a holding company structure through a forward
triangular merger of Dailey Petroleum Services Corp., into a newly-formed,
wholly-owned indirect subsidiary of Lawrence called Dailey Corporation (the
"Reorganization"), which is now Dailey International Inc. The effect of the
forward triangular merger has been reflected retroactively in the accompanying
financial statements. In August 1996, the Company completed its initial public
offering of 3,910,000 shares of Class A Common Stock (the "1996 IPO").
Dailey's Restated Certificate of Incorporation provides for three classes of
stock: Class A Common Stock, Class B Common Stock and Preferred Stock. The Board
of Directors is empowered to authorize the issuance of Preferred Stock in one or
more series and to fix the rights, powers, preferences and limitations of each
series. A holder of Class B Common Stock may convert its Class B Common Stock
into Class A Common Stock at any time at the ratio of one share of Class A
Common Stock for each share of Class B Common Stock. In the event of
liquidation, holders of Class A Common Stock and Class B Common Stock share with
each other on a ratable basis as a single class in the net assets of the Company
available for distribution. In addition, shares of Class B Common Stock convert
automatically into a like number of shares of Class A Common Stock upon the sale
or transfer of such shares to a person or entity that is not a member of the
Lawrence Group (as defined in the Company's Restated Certificate of
Incorporation).
Net proceeds from the sale of the stock in the 1996 IPO were $27.6 million.
The Company used $5.0 million of the proceeds from the 1996 IPO to repay the
outstanding balance of a $10.0 million promissory note, which was incurred in
connection with a dividend declared on June 27, 1996 (the "Dividend"). Prior to
commencement of the IPO, the Company's sole stockholder contributed to the
capital of the Company $5.0 million of the outstanding principal of such note.
The statement of operations for the year ended April 30,
F-7
41
1996 includes pro forma per share data which gives effect to the number of
shares from which proceeds would have been used to pay the Dividend (an
additional 1,250,000 shares assuming a per share offering price of $8.00, thus
earnings per share for the year ended April 30, 1996, were based on 6,610,000
shares of Common Stock outstanding). Historical earnings per share excluding the
pro forma effect of the dividend was $0.49 per share for the year ended April
30, 1996.
Effective July 14, 1998, the shareholders of Dailey's Class B Common Stock
changed the structure under which they owned their Class B Common Stock through
a reorganization whereby the shareholders contributed all of the stock in a
company controlled by the shareholders (which company's assets consisted solely
of 5,000,000 shares of Class B Common Stock of Dailey) to Dailey in exchange for
5,000,000 new shares of Dailey's Class B Common Stock. As a result of these
transactions, Dailey acquired the net operating loss carryforward of the
company, for which an offsetting allowance was provided. These transactions had
no effect on Dailey's financial position or results of operation or number of
outstanding shares of Class B Common Stock.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances are eliminated in consolidation.
The Company has historically had significant transactions with Lawrence and
its affiliates which are reflected in the accompanying consolidated financial
statements on the basis established between the Company and Lawrence. See Notes
9 and 13.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all investments with maturities of three months or
less when purchased to be cash and cash equivalents.
Accounts Receivable
Accounts receivable are net of allowances for doubtful accounts of $4.4
million and $1.8 million at December 31, 1998 and 1997,respectively.
Revenue-Producing Tools and Inventory
Revenue-producing tools and inventory are stated at cost utilizing the
first-in, first-out method. Revenue-producing tools are depreciated on the
straight-line method over their estimated useful lives of 5 to 7 years. Tools
lost in hole and billed to customers and tools abandoned are included in sales
of products and services and the related write-off of the tools' net book values
are included in costs of products and services in the accompanying consolidated
statements of operations.
Tools manufactured and assembled are transferred to revenue-producing tools
as completed at the total cost of components, subassemblies, expendable parts,
direct labor and indirect costs of each tool. For U.S. and certain international
locations, components, subassemblies and expendable parts are capitalized as
inventory and expensed as tools are repaired and maintained. Components,
subassemblies and expendable parts are expensed when shipped to certain
international locations.
Capitalized Interest
Interest costs for the construction of revenue-producing tools are
capitalized. The Company capitalized interest costs of $1.2 million and $396,000
on work in progress for the twelve months ended December 31, 1998 and eight
months ended December 31, 1997, respectively. Such amounts were not significant
in other prior periods.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated
primarily on the straight-line method over the estimated useful lives of 5 to 30
years for buildings and improvements, 3 to 10 years for machinery and equipment,
4 to 10 years for furniture and fixtures and 3 to 7 years for other property and
equipment.
F-8
42
Maintenance and repairs are charged to expense as incurred. Major repairs
and improvements are capitalized and depreciated. The cost and accumulated
depreciation of property and equipment retired or otherwise disposed of are
removed from the related accounts and any gain or loss is recognized in
operations.
Investment in Joint Venture
The Company accounts for its 51% investment in INS using the equity method
of accounting. The equity method is utilized due to the participating rights of
the minority shareholder.
Intangible Assets
Patents and other intangibles are amortized over 5 to 17 years and goodwill
is amortized over 20 to 40 years. Accumulated amortization, including goodwill
amortization, was $4.0 million and $1.2 million, as of December 31, 1998 and
December 31, 1997, respectively. (See Note 18).
Impairment of Long-Lived Assets
The carrying value of long-lived assets, principally revenue-producing
tools, goodwill and property and equipment, is reviewed for potential impairment
when events or changes in circumstance indicate that the carrying amount of such
assets may not be recoverable. The determination of recoverability is made based
upon the estimated undiscounted future net cash flows of the related asset. The
amount of impairment, if any, is determined by comparing the carrying value of
the related asset to its determined current fair value. (See Note 18).
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123") establishes alternative methods of
accounting and disclosure for employee stock-based compensation arrangements.
The Company has elected to use the "intrinsic value based method" of accounting
for its stock option plans. This method does not result in the recognition of
compensation expense at the time employee stock options are granted, if the
exercise price of the option equals or exceeds the fair market value of the
stock at the date of grant. (See Note 16).
Income Taxes
The Company was included in the consolidated U.S. federal income tax return
of Lawrence for taxable periods ending on the closing of the 1996 IPO. The
Company and Lawrence are jointly and severally liable with respect to taxes
related to periods prior to the 1996 IPO. The Company and its subsidiaries
currently file separate income tax returns. The accompanying consolidated
financial statements reflect the income tax provisions of the Company on a
separate return basis for all years with no U.S. federal tax operating loss, tax
credit, or foreign credit carryforwards generated prior to May 1, 1988 allocated
to the Company by Lawrence.
Pursuant to the Tax Allocation Agreement entered into by the Company and
Lawrence, the Company paid to Lawrence an amount equal to the federal income tax
computed on the Company's (and its subsidiaries) taxable income less any tax
credits generated by the Company or its subsidiaries. The Tax Allocation
Agreement applies to the Company for all years in which the Company (or any
predecessor) is or was included in the Lawrence consolidated federal income tax
return. To the extent a state or other taxing jurisdiction requires or permits a
consolidated, combined or unitary tax return to be filed by Lawrence and its
affiliates and such return includes the Company, the principles expressed with
respect to the consolidated federal tax allocation will apply.
Foreign Currency Exchange
The U.S. dollar is the functional currency for the majority of the Company's
operations. Foreign exchange gain (loss) for the twelve months ended December
31, 1998 was $256,000, and for the eight months ended December 31, 1997 and 1996
was $296,000 and ($135,000), respectively, and for the fiscal years ended April
30, 1997 and 1996 was $19,000 and $239,000, respectively.
Earnings Per Share
The Company has reported earnings per share for all periods in accordance
with Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"). Under
the new requirements for calculating basic earnings per share, the dilutive
effect of stock options has been excluded. The method of calculating diluted
earnings
F-9
43
per share is similar to fully diluted earnings per share which was previously
not required to be reported if the effect of the dilution was less than three
percent. Earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to the SFAS No. 128 requirements. SFAS
No. 128 resulted in no change in restated basic earnings per share for the years
ended April 30, 1997 and 1996.
Reclassifications
Certain reclassifications have been made to the eight months ended December
31, 1997 and years ended April 30, 1997 and 1996 financial statements to conform
to the current year presentation.
New Accounting Pronouncements
SFAS No. 130. In June 1997, the Financial Accounting Standards Board ("the
FASB") issued SFAS No. 130, "Reporting Comprehensive Income", which establishes
standards for reporting and display of comprehensive income and its components.
SFAS No. 130 requires that all items that are recognized under accounting
standards as components of comprehensive income be reported in a financial
statement displayed in equal prominence with the other financial statements.
SFAS No. 130 is effective for both interim and annual periods beginning after
December 15, 1997. The Company adopted the provisions on January 1, 1998.
SFAS No. 131. Also in June 1997, the FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information", which is effective for
fiscal years beginning after December 15, 1997. SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company adopted the new requirements at December 31, 1998.
SFAS NO. 133. In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities", which establishes standards for the
recognition and measurement of derivatives and hedging activities. SFAS No. 133
requires all derivatives to be recorded on the balance sheet at fair value and
establishes "special accounting" for the following three different types of
hedges: hedges of changes in the fair value of assets, liabilities, or firm
commitments (referred to as fair value hedges); hedges of the variable cash
flows of forecasted transactions (cash flow hedges); and hedges of foreign
currency exposures of net investments in foreign operations. Changes in fair
value of derivatives that do not meet the criteria of one of these three
categories of hedges are included in income. SFAS No. 133 is effective for years
beginning after June 15, 1999, at which time the Company will adopt this
provision. The Company does not expect SFAS No. 133 to have a material effect on
the Company's financial statements.
4. ACQUISITIONS
ADI Acquisition: In June 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
Company's initial public offering in 1996. 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 $21.1 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 $1.1
million in amortization expense per year.
DWS/DAMCO Acquisition: In January 1998, the Company acquired the
operating assets and liabilities of DWS/DAMCO. The aggregate purchase price for
DWS/DAMCO was $61 million financed with proceeds from a $115 million 9 3/4%
senior notes offering in August 1997 and borrowings under the Company's
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 $32.5 million relating to the
excess of the purchase price over the fair market value of the assets, which
was to be amortized over 25 years and result in approximately $1.2 million in
amortization expense per year. Based on the Company's review of long-lived
assets, including goodwill, the remaining unamortized goodwill balance of $31.3
million at December 31, 1998 was deemed to be fully impaired. (See Note 18).
IDS Acquisition: The Company acquired the outstanding capital stock of IDS
in March 1998 (with additional consideration paid in July 1998 in connection
with the resolution of certain contingencies) for approximately $18.8 million in
cash and 1,064,000 shares of Class A Common Stock (309,516 shares were returned
in July 1998), plus assumption of debt of approximately $6.5 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 as of the date of acquisition. The Company recorded approximately $20.3
million in goodwill, representing the excess of the purchase price over the
estimated fair market value of the IDS assets, which was to be amortized over 25
years and result in additional annual amortization expense of $788,000. Based on
the Company's review of long-lived assets, including goodwill, the remaining
unamortized goodwill of $19.7 million at December 31, 1998 was deemed to be
fully impaired. (See Note 18).
Transocean Acquisition: In August 1998, the Company acquired substantially
all of the assets of the directional drilling business of Transocean located in
Aberdeen, Scotland for $10 million in cash. The Company assumed certain
Transocean directional contracts and operations in the North Sea and Europe. The
Transocean Acquisition was accounted for under the purchase method of
accounting. The assets and liabilities were recorded at their estimated fair
market value as of the date of the acquisition. The Company recorded goodwill of
$1.2 million relating to the excess of purchase price over the fair market value
of the assets, which will be amortized over 25 years and result in approximately
$48,000 in amortization expense per year. The purchase price allocation was
based on preliminary estimates and may be revised at a later date.
INS Acquisition: In December 1998, the Company acquired 51% of INS for
approximately $7.1 million cash, subject to a purchase price adjustment of up to
$500,000 based on future earnings. INS, a joint venture with MG Generon,
provides non-cryogenic nitrogen generators and production units for use in the
on-site production of nitrogen for injection in downhole drilling of oil and gas
wells. The joint venture is accounted for using the equity method of
accounting.
F-10
44
The pro forma unaudited results of operations for the years ended December
31, 1998 and April 30, 1997 and the eight months ended December 31, 1997 and
1996, assuming consummation of the purchase of ADI 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:
EIGHT MONTHS ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED
DECEMBER 31, --------------------------- APRIL 30,
1998 1997 1996(a) 1997(a)
------------- ------------ ------------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues ............................. $ 134,534 $ 80,364 $ 60,129 $ 92,592
Income (loss) before
extraordinary item.................. (95,225) 1,755 (686) 1,964
Net income (loss) .................... (112,804) 1,755 (686) 1,964
Basic earnings (loss) per share ...... (11.45) 0.19 (0.09) 0.24
Diluted earnings (loss) per share .... (11.45) 0.19 (0.09) 0.24
(a) Before extraordinary item related to ADI.
The pro forma information 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 the additional borrowings under the
credit facility 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
effected on the assumed dates or the results of operations for any future
period. The IDS Acquisition, Transocean Acquisition and the INS joint venture
were not significant acquisitions and have not been included in the pro forma
unaudited results above.
5. REVENUE-PRODUCING TOOLS AND INVENTORY
DECEMBER 31,
----------------------------
1998 1997
------------ ------------
(IN THOUSANDS)
Revenue-producing tools ............................ $ 159,993 $ 95,266
Accumulated depreciation ........................... (53,325) (37,284)
------------ ------------
106,668 57,982
Inventory:
Components, subassemblies and expendable parts ... 30,711 17,748
Rental tools and expendable parts under
production .................................... 2,247 2,100
Raw materials .................................... 1,898 1,226
------------ ------------
34,856 21,074
------------ ------------
Revenue-Producing Tools and Inventory ..... $ 141,524 $ 79,056
============ ============
6. PROPERTY AND EQUIPMENT
DECEMBER 31,
------------------------
1998 1997
---------- ----------
(IN THOUSANDS)
Land ........................................ $ 2,305 $ 1,072
Buildings and improvements .................. 7,363 6,624
Machinery and equipment ..................... 16,960 15,312
Furniture and fixtures ...................... 1,736 1,825
Other ....................................... 2,031 1,421
---------- ----------
30,395 26,254
Accumulated Depreciation .................... (17,140) (18,073)
---------- ----------
Property and Equipment ............ $ 13,255 $ 8,181
========== ==========
7. OTHER ASSETS
December 31,
--------------------------
1998 1997
----------- ----------
(IN THOUSANDS)
Debt issuance costs.................................... $ 8,768 $ 4,443
Patents................................................ 4,566 460
Convenants not to compete.............................. 2,050 50
----------- ----------
15,384 4,953
Other.................................................. 4,655 2,021
Accumulated amortization............................... (2,806) (1,574)
----------- ----------
Other Assets......................................... $ 17,233 $ 5,400
=========== ==========
8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
DECEMBER 31,
---------------------
1998 1997
--------- ---------
(IN THOUSANDS)
Trade accounts payable ................................ $ 3,549 $ 9,637
Accrued salaries and vacation ......................... 5,194 3,451
Agent commissions payable ............................. 237 1,256
Accrued expenses and other ............................ 16,075 9,460
--------- ---------
Accounts Payable and Accrued Liabilities .... $ 25,055 $ 23,804
========= =========
F-11
45
9. RELATED PARTY TRANSACTIONS
The accompanying consolidated statements of operations include annual rental
charges from Lawrence and from Company executives for office facilities and
manufacturing and service center facilities. See Note 13.
The affiliate balances are non-interest bearing and have no fixed repayment
terms.
During 1998 the Company paid an aggregate of $167,000 to relatives of, and
entities controlled by, the Company's Chairman of the Board relating to
miscellaneous goods and services.
The Company provided Lawrence and certain of its affiliates with various
administrative and management services including cash management, accounting,
tax, data processing, human resources and legal services in all periods
presented. During the year ended April 30, 1996, the Company also utilized from
time to time the aircraft owned by a Lawrence subsidiary. The effect of the
estimated fair values of these services rendered less services received was not
significant to the results of operations.
The Company participates in the "Lawrence Companies Retirement Plan", a
defined contribution benefit plan, covering all Dailey employees. Contributions
are determined as 50% of the employee's contribution up to 3% of the employee's
total compensation. Amounts charged to benefit costs and contributed to the plan
for the years ended December 31, 1998 and April 30, 1997 and 1996 totaled
$527,000, $203,000 and $178,000, respectively and for the eight months ended
December 31, 1997 and 1996 were $212,000 and $142,000, respectively.
10. BORROWING ARRANGEMENTS AND EXTRAORDINARY ITEM
Long-term debt consisted of the following:
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
(IN THOUSANDS)
9 1/2% Senior Notes ......................... $ 275,000 $ --
9 3/4% Senior Notes ......................... -- 114,223
Loans payable to a bank ..................... 1,102 --
Other ....................................... 6 152
----------- -----------
276,535 114,375
Less current portion of long-term debt ...... (1,048) 146
----------- -----------
Total long-term debt .............. $ 275,060 $ 114,229
=========== ===========
Interest paid during the years ended December 31, 1998 and April 30, 1997
and 1996 was $24,429,000, $858,000 and $956,000, respectively. Interest paid for
the eight months ended December 31, 1997 and 1996 was $683,000 and $658,000,
respectively.
At December 31, 1998, the Company had term loans of $1.1 million with a
bank, approximately $1 million of which mature in 1999. The term loans were
assumed in the IDS Acquisition and bear interest at various rates ranging from
8.75% to 10.50%.
On August 19, 1997, the Company issued $115.0 million of 9 3/4% Senior Notes
due 2007 at a discount of 0.785%, and a portion of the proceeds was used to
repay the outstanding note payable to a bank.
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 $1.79 per diluted
share, with no related
F-12
46
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.
The Company had two letters of credit outstanding totaling $281,000 and
$384,000 at December 31, 1998 and 1997, respectively.
11. INCOME TAXES
EIGHT MONTHS ENDED YEAR ENDED
YEAR ENDED DECEMBER 31, APRIL 30,
DECEMBER 31, -------------------------- --------------------------
1998 1997 1996 1997 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS)
Income (loss) before income taxes and
extraordinary item:
U.S. operations ........................... $ (66,043) $ 2,135 $ 4,583 $ 3,858 $ 4,072
Foreign operations ........................ (27,090) 861 439 117 (31)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes
and extraordinary item ............... $ (93,133) $ 2,996 $ 5,022 $ 3,975 $ 4,041
=========== =========== =========== =========== ===========
Income tax provision (benefit):
U.S. current .............................. $ (357) $ (987) $ 857 $ 679 $ 941
Foreign current ........................... 2,267 1,222 1,716 1,358 1,302
U.S. deferred ............................. 183 978 (1,069) (783) (816)
State and local current ................... 22 106 325 257 --
----------- ----------- ----------- ----------- -----------
Income tax provision ................... $ 2,115 $ 1,319 $ 1,829 $ 1,511 $ 1,427
=========== =========== =========== =========== ===========
Deferred income taxes arise from temporary differences between the tax basis
of assets and liabilities and their reported amounts in the financial
statements. A summary of the components of deferred tax liabilities and assets
are as follows:
DECEMBER 31,
------------------------
1998 1997
---------- ----------
(IN THOUSANDS)
Deferred tax liabilities:
Revenue-producing tools and property and
equipment ................................... $ 8,237 $ 3,840
---------- ----------
Deferred tax assets:
Stock award salary expense ..................... 399 62
Net operating loss carryforward ................ 21,362 1,510
Provision for doubtful accounts ................ 1,250 900
Uniform capitalization costs and inventory
reserve ..................................... 1,176 640
Vacation and workers' compensation accruals .... 1,137 248
Foreign tax credit carryforward ................ -- --
Intangibles .................................... 10,318 --
Other .......................................... 562 260
---------- ----------
Total deferred tax assets ................... 36,204 3,620
Valuation allowance for deferred tax assets ...... (33,877) (553)
---------- ----------
2,327 3,067
---------- ----------
Net deferred tax assets (liabilities) ............ $ (5,910) $ (773)
========== ==========
The difference between the United States statutory rate and the Company's
effective income tax rate is reconciled as follows:
EIGHT MONTHS ENDED
YEAR ENDED DECEMBER 31, APRIL 30,
DECEMBER 31, ---------------------- ----------------------
1998 1997 1996 1997 1996
------------ --------- ---------- --------- ---------
(UNAUDITED)
United States statutory rate ................ (34.0%) 34.0% 34.0% 34.0% 34.0%
Increases (reductions) in tax rate
resulting from:
Meals and entertainment ................... .2 4.3 2.7 2.7 2.2
State taxes, net of federal benefit ....... -- 2.3 4.2 4.2 --
Dissolution of partnership ................ -- -- -- -- 20.0
Benefit of net operating loss
carryforward ........................... -- (31.4) -- -- (23.2)
Foreign income and withholding,
net of federal benefit ................. 4.7 25.5 3.1 3.1 2.6
Nondeductible goodwill amortization ....... .4 6.4 -- -- --
Increase in valuation allowance ........... 23.7 -- -- -- --
Goodwill impairment ....................... 7.1 -- -- -- --
Other ..................................... .2 2.9 (7.6) (6.0) (.3)
------------ --------- ---------- --------- ---------
Effective income tax rate............ 2.3% 44.0% 36.4% 38.0% 35.3%
============ ========= ========== ========= =========
At December 31, 1998, the Company had foreign net operating loss
carryforwards of approximately $9.1 million which can be carried forward
indefinitely. A valuation allowance in the amount of $1.9 million has been
recorded as the Company believes the corresponding deferred tax asset will not
be realized. The Company also had approximately $54.5 million of domestic net
operating loss carryforwards which
F-13
47
will begin to expire in 2011. Approximately $1.6 million of the domestic net
operating loss carryforwards are subject to certain separate return and change
in ownership limitations. Accordingly, the Company has recorded a valuation
allowance of $553,000 against these net operating loss carryforwards as the
Company believes that the corresponding deferred tax asset may not be
realizable. In addition, the Company has recorded a valuation allowance of $31.5
million against the remaining domestic net operating loss carryforward as the
Company believes the corresponding deferred tax asset may not be realizable.
The valuation allowance increased from $553,000 to $33.9 million at December
31, 1998 due to foreign and domestic operating losses generated during the year,
which the Company believes may not be realizable. The valuation allowance
decreased from $1.1 million to $553,000 at December 31, 1997. In connection with
the Company's decision to change its fiscal year end to December 31, the Company
determined that the net foreign tax credit carryforward could not be utilized
and was therefore written off resulting in a $1.1 million decrease in the
valuation allowance. In addition, the Company recorded a $553,000 valuation
allowance against its domestic net operating loss carryforwards.
There was no income tax expense or benefits associated with the components
of accumulated other comprehensive income for the year ended December 31, 1998
and the eight month period ended December 31, 1997.
No provision is made for U.S. income and foreign withholding taxes
applicable to undistributed earnings of foreign subsidiaries as those earnings
are considered to be permanently reinvested.
The Company is currently engaged in tax audits and appeals in various tax
jurisdictions. The years covered by each audit or appeal vary considerably among
legal entities. Assessments, if any, are not expected to have a material adverse
effect on the financial statements.
Income taxes paid during the year ended December 31, 1998 and April 30, 1997
and 1996 were $ 785,000, $608,000 and $538,000, respectively. Income taxes paid
for the eight months ended December 31, 1997 and 1996 were $2.0 million and
$461,000, respectively.
12. ROYALTIES
In 1986, the Company purchased the design, patents and rights to certain
hydraulic tools and entered into a royalty agreement with the seller which
expires in 1999 and 2003. Royalty agreements were executed between the Company
and the royalty owner in 1993 and 1994 on patents related to a double-acting
drilling accelerator and improvements to hydraulic drilling jars. In March 1994,
the royalty agreements were amended to cap royalties through December 1999, with
the royalty percentage decreasing from January 2000 to expiration of the
applicable patents. Upon expiration of the patents, no royalties will be
required. For the years ended December 31, 1998 and April 30, 1997 and 1996,
royalty expense was $1,068,000 $879,000 and $843,000, respectively. For the
eight months ended December 31, 1997 and 1996 royalty expense was $742,000 and
$608,000, respectively. The owner of the royalty was an officer of the Company
until October 1994.
13. COMMITMENTS AND CONTINGENCIES
The Company leases office space, transportation equipment and other property
under noncancelable operating leases with third parties and office facilities
and manufacturing and service center facilities with related parties. See Note
9. Future minimum lease commitments under noncancelable operating leases at
December 31, 1998 are as follows:
THIRD
PARTIES AFFILIATES TOTAL
---------- ------------ ----------
(IN THOUSANDS)
1999 .................... $ 1,194 $ 1,123 $ 2,317
2000 .................... 528 1,142 1,670
2001 .................... 312 464 776
2002 .................... 149 109 258
2003 .................... 105 109 214
---------- ------------ ----------
$ 2,288 $ 2,947 $ 5,235
========== ============ ==========
Rental expense under operating leases with third parties, inclusive of
month-to-month rentals, totaled $4.7 million, $2.2 million and $2.4 million for
the years ended December 31, 1998, and April 30, 1997 and 1996, respectively,
and, with related parties, totaled $1.1 million, $915,000, and $1.3 million for
the years ended December 31, 1998 and April 30, 1997 and 1996, respectively. For
the eight months ended December 31, 1997 and 1996, rental expense under
operating leases with third parties, inclusive of month-to-month rentals,
totaled $2.7 million and $2.0 million respectively, and, with related parties,
totaled $671,000 and $593,000, respectively. Rental expense is included in
selling, general and administrative expenses and cost of rentals.
The Company is the defendant in various legal proceedings and claims which
arise in the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not materially
affect the consolidated financial statements of the Company. The Company is also
the plaintiff in certain actions defending its patents and proprietary designs.
The Company has employment agreements with several of its employees. The
aggregate amount of these employment agreements is approximately $9.8 million
at December 31, 1998. The average remaining length of these agreements is
approximately 1.5 years.
F-14
48
14. CONCENTRATIONS OF CREDIT RISK AND FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company is subject to credit risk and other risks inherent in
international operations. Generally, in excess of 50% of the Company's
receivables are due from oil and gas exploration companies and drilling
contractors operating in countries other than the United States and from the
Company's international agents. United States receivables are generally due from
major oil and gas exploration and drilling contractors throughout the oil field
areas of the United States. The Company routinely monitors its cash and
receivable positions with customers and international agents.
Carrying amount and fair values: The carrying amount and estimated fair
values of financial instruments are as follows:
CARRYING AMOUNT FAIR VALUE
------------------------ -----------------------
DECEMBER 31, DECEMBER 31,
------------------------ -----------------------
1998 1997 1998 1997
----------- ----------- ------------ ----------
(IN THOUSANDS)
Financial assets:
Cash and short-term
financial assets ..... $ 32,843 $ 59,837 $ 32,843 $ 59,837
Financial liabilities:
Senior Notes ............ 275,000 114,223 129,250 120,750
Bank notes and other .... 1,108 152 1,108 152
Fair value methods: The following methods and assumptions were used in
estimating fair values:
For cash and short-term financial assets, the carrying amount is a
reasonable estimate of fair value due to the short maturity of those
instruments.
For Senior Notes, estimated fair value is based on information provided by
an investment bank at year end. The fair values of the Company's long-term bank
notes and other debt are estimated using discounted cash flow analyses, based on
the Company's current incremental borrowing rates for similar types of borrowing
arrangements.
15. EARNINGS PER SHARE
The reconciliation of the numerator and denominator used for the computation
of basic and diluted earnings per share is as follows:
EIGHT MONTHS ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED APRIL 30,
DECEMBER 31, ----------------------- -----------------------
1998 1997 1996 1997 1996
----------- ---------- ---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Income (loss) before extraordinary item for
basic and diluted earnings per share ............. $ (95,248) $ 1,677 $ 3,193 $ 2,464 $ 2,614
========== ========== ========== ========== ==========
Weighted average shares for basic earnings per
share .......................................... 9,848,368 9,228,009 7,594,286 8,138,104 N/A
Pro forma average shares for basic earnings per
share .......................................... N/A N/A N/A N/A 6,610,000
Effect of dilutive securities:
Stock options and unvested stock grants ........ -- 101,391 42,928 40,472 --
---------- ---------- ---------- ---------- ----------
Adjusted weighted average shares and assumed
conversions for diluted earnings per share ..... 9,848,368 9,329,400 7,637,214 8,178,576 6,610,000
========== ========== ========== ========== ==========
Earnings (loss) per share before
extraordinary item:
Basic .......................................... $ (9.67) $ 0.18 $ 0.42 $ 0.30 N/A
Diluted ........................................ $ (9.67) $ 0.18 $ 0.42 $ 0.30 N/A
Pro forma earnings per share:
Basic ........................................ N/A N/A N/A N/A $ 0.40
Diluted ...................................... N/A N/A N/A N/A $ 0.40
Options to purchase 976,031 shares of common stock at prices from $2.06 to
$13.25 per share were outstanding during the year ended December 31,1998 but
were not included in the computation of diluted earnings per share because the
exercise price was greater than the average market price of the common shares,
and therefore, the effect would be antidilutive.
Restricted stock grants of 130,000 shares of common stock were unvested at
December 31, 1998, but were not included in the computation of diluted earnings
per share because their inclusion would be antidilutive.
F-15
49
16. STOCK OPTIONS AND AWARDS
Prior to the 1996 IPO, the Company established the 1996 Key Employee Stock
Plan (the "1996 Plan") and the 1996 Non-Employee Director Stock Option Plan (the
"1996 Director Plan"). Pursuant to 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.
The Company applied Accounting Principals Board Opinion No. 25 ("APB No.
25") and related interpretations in accounting for these plans. Accordingly, no
compensation cost has been recognized during the year ended December 31, 1998,
eight months ended December 31,1997 and the year ended April 30, 1997 for these
plans. Based on information available at the grant date, the Company estimated a
five to eight year expected life for options granted during the year, volatility
of .84 and risk free interest rates ranging from 4.30% to 4.78%. The Company
does not presently anticipate issuing dividends in the future. Had compensation
cost for the Company's stock-based compensation plans been determined based on
the fair value at the grant dates for awards under those plans consistent with
the method available under SFAS No. 123, the Company's net income and earnings
per share for the year ended December 31, 1998, eight months ended December
31,1997 and the year ended April 30, 1997 would have been reduced to the pro
forma amounts listed below. There were no options issued in the year ended
April 30, 1996.
EIGHT MONTHS
ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED
DECEMBER 31, --------------------------- APRIL 30,
1998 1997 1996 1997
------------ ----------- ------------ ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Income (Loss):
As reported .............. $ (112,827) $ 1,677 $ 3,193 $ 2,464
Pro forma ................ (113,169) 1,397 2,459 1,325
Earnings (loss) per share:
As reported:
Basic ................. (11.46) 0.18 0.42 0.30
Diluted ............... (11.46) 0.18 0.42 0.30
Pro forma:
Basic ................. (11.49) 0.15 0.32 0.16
Diluted ............... (11.49) 0.15 0.32 0.16
Stock options under the Plans are for Class A Common Stock and have exercise
prices equal to fair market values at dates of grant. Options issued under the
1996 Plan may not be exercised within six months of, nor after ten years from,
the date of grant. Options issued under the 1996 Director Plan may not be
exercised within one year of, nor after ten years from, the date of grant.
Options issued under the 1997 plan may not be exercised after ten years from the
date of grant. The average remaining contractual life of options outstanding is
approximately nine years. Effective August 12, 1998, all options outstanding
with employees which had an option price above $6.00 were repriced to $6.00.
Option activity for the year ended December 31, 1998, the eight months ended
December 31, 1997 and year ended April 30, 1997 was as follows:
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
---------- ----------------
Outstanding at April 30, 1996 .............................. 0 $ 0.00
Granted
1996 Plan -- at fair values from $8.00 to $10.75 ...... 513,328 8.36
1996 Director Plan at fair value of $6.50 and $8.88 ... 40,000 7.69
Forfeiture
1996 Plan-- at fair value of $8.00 .................... (19,199) 8.00
----------
Outstanding at April 30, 1997 .............................. 534,129 8.32
----------
Granted
1997 Plan -- at fair values from $6.38 to $13.25 ...... 150,000 6.84
1996 Director Plan -- at fair value of $13.25 ......... 20,000 13.25
Forfeiture
1996 Plan-- at fair value of $10.75 ................... (3,000) 10.75
Exercised 1996 Plan-- at fair values from
$8.00 to $10.75 ....................................... (82,598) 8.51
----------
Outstanding at December 31, 1997 ........................... 618,531 8.08
----------
Granted
1996 Director Plan - at fair values from $2.06 to $9.00 30,000 5.94
1997 Plan - at fair values from $3.75 to $6.00 ..... 327,500 4.42
----------
Outstanding at December 31, 1998 ........................... 976,031 5.68
==========
At December 31, 1998, 515,200 of the 976,031 options outstanding were
exercisable.
F-16
50
Immediately following the 1996 IPO, restricted stock awards totaling 360,000
shares of Class A Common Stock were granted to key officers. In October 1996, a
restricted stock award of 45,000 shares of Class A Common Stock was granted to
an executive officer. Awards do not require any payment by the executive
officers and were to vest over a three year period. Subsequently, the Board
approved accelerated vesting of the restricted stock awards which resulted in
the Company recognizing $2.8 million and $478,000 in non-cash compensation
expense for the year ended April 30, 1997 and the eight months ended December
31, 1997, respectively. In October 1997, restricted stock awards totaling
230,000 shares of Class A Common Stock were granted to certain officers. The
awards do not require any payment by the officers and vest over a four year
period. During the eight months ended December 31, 1997, the Company recognized
$183,000 of non-cash compensation expense related to these awards. During 1998,
the Board approved accelerated vesting of 100,000 shares of the 230,000 shares
that were granted as restricted stock awards in October 1997. The non-cash
compensation expense recognized by the Company for the year ended December 31,
1998 was $711,000. Restricted stock activity for the year ended December 31,
1998, the eight months ended December 31, 1997 and the year ended April 30, 1997
was as follows:
NUMBER OF
RESTRICTED SHARES
-----------------
Outstanding at April 30, 1996 .................. 0
Granted at fair values of $8.00 and $9.00... 405,000
Forfeiture ................................... 0
Vested ....................................... (349,803)
------------
Outstanding at April 30, 1997 .................. 55,197
------------
Granted at fair value of $12.75 .............. 230,000
Forfeiture ................................... 0
Vested ....................................... (55,197)
------------
Outstanding at December 31, 1997 ............... 230,000
------------
Granted at fair value of $8.50 ............... 6,000
Forfeiture ................................... 0
Vested ....................................... (100,000)
------------
Outstanding at December 31, 1998 ............... 136,000
============
17. REORGANIZATION
Reorganization costs of $3.4 million incurred in 1998 were primarily related
to the resignation of the former chief executive officer and to the
consolidation of corporate leased facilities, termination of aircraft lease and
other employee severance costs.
In June 1997, the Company implemented a cost reduction program to flatten
its corporate management structure and streamline the Company's operations. As a
result, the Company incurred a $2.5 million restructuring charge during June
1997 associated primarily with staff reductions, severance settlements and
various reorganization costs.
18. IMPAIRMENT OF LONG-LIVED ASSETS
SFAS No. 121 and Accounting Principles Board Opinion No. 17 ("APB 17")
require that long-lived assets, including goodwill, be reviewed for impairment
whenever events or changes in circumstances indicate the carrying value of the
long-lived assets may not be recoverable. Based upon depressed market conditions
and the size and level of activities at each of the businesses acquired by the
Company during the past two years, the Company performed an impairment review to
determine whether any long-lived assets that had been recorded by it should be
impaired. In performing this review, the Company considered its estimates of
future undiscounted net cash flows from each of these businesses as of December
31, 1998, which estimates were based upon market conditions existing at December
31, 1998 and the size and level of activities at these business as of December
31, 1998. The Company also considered offers and indications of interest that it
had received during its review of strategic alternatives.
Based upon this review, the Company recorded an impairment charge of $53.0
million to reflect the impairment of unamortized goodwill and other long-lived
assets. Of this amount, $31.3 million related to the full impairment of
unamortized goodwill associated with the DWS/DAMCO acquisition, $19.4 million
related to the full impairment of unamortized goodwill associated with the IDS
acquisition, and $2.3 million related to the impairment of capitalized
information technology costs and other assets. No impairment charge was recorded
with respect to goodwill recorded in connection with the ADI or Transocean
acquisitions. In determining to fully impair goodwill associated with the
DWS/DAMCO acquisition, the Company determined that due to reductions in revenues
caused by depressed industry conditions as well as losses of market share, which
it had not been able to recover as of December 31, 1998, its estimates of future
undiscounted net cash flows as of December 31, 1998 and offers and indications
of interest from third parties with respect to the purchase of DWS/DAMCO did not
support the goodwill amortization related to DWS/DAMCO's operations over the
remaining amortization period. In determining to fully impair goodwill
associated with the IDS acquisition, the Company determined that the revenues
and cash flows that could be generated from IDS' operations could not support
the goodwill amortization relating to the acquired business over the remaining
amortization period. Based on the estimated undiscounted future net cash flows
as of December 31, 1998 for the businesses acquired in the ADI and Transocean
acquisitions, as well as offers and indications of interest from third parties
with respect to the purchase of such businesses, the Company determined that the
goodwill associated with such acquisitions had not been impaired; however, there
can be no assurance that, if depressed industry conditions continue or other
events occur that cause the operations of these acquired businesses to further
decline, a partial or complete impairment of goodwill associated with these
acquisitions will not be required. In assessing the impairment of capitalized
information technology costs and other assets, the Company determined these
costs were not likely to provide future economic benefit to the Company. Assets
have been written down to estimated fair values based on current estimates and
market conditions. The Company's estimates of future cash flows and estimated
fair values are based on reasonable and supportable assumptions.
F-17
51
19. 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 December 31, 1998 and 1997, and the related condensed
consolidating statements of operations and cash flows for the twelve months
ended December 31, 1998, and for the eight months ended December 31, 1997 and
1996, and the years ended April 30, 1997 and 1996 have been provided. The
condensed consolidating financial statements herein are followed by notes which
are an integral part of these statements.
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS)
ASSETS
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------------- ------------------ ----------- ------------- -------------
Current assets:
Cash and cash equivalents....... $ 31,149 $ 370 $ 1,324 $ -- $ 32,843
Accounts receivable, net........ 15,504 6,854 10,445 -- 32,803
Accounts receivable from
affiliates .................. 69,625 (24,254) (45,009) -- 362
Other current assets............ 1,353 2,067 1,358 -- 4,778
-------------- ------------------ ----------- ------------- -------------
Total current assets.... 117,631 (14,963) (31,882) -- 70,786
Revenue producing tools and
inventory, net............... 73,021 41,304 27,199 -- 141,524
Property and equipment, net..... 7,721 2,755 2,779 -- 13,255
Investments in subsidiaries..... 41,957 -- -- (41,957) --
Goodwill, net................... 1,483 20,606 186 -- 22,275
Investment in joint venture..... -- 7,100 -- -- 7,100
Intangibles and other assets.... 10,029 2,075 5,129 -- 17,233
-------------- ------------------ ----------- ------------- -------------
Total assets............ $ 251,842 $ 58,877 $ 3,411 $ (41,957) $ 272,173
============== ================== =========== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities.................. $ 16,707 $ 4,517 $ 3,831 $ -- $ 25,055
Income taxes payable............ 1,030 750 2,207 -- 3,987
Current portion of long-term
debt......................... 24 11 1,013 -- 1,048
-------------- ------------------ ----------- ------------- -------------
Total current
liabilities........... 17,761 5,278 7,051 -- 30,090
Long-term debt.................... 275,001 24 35 -- 275,060
Deferred income taxes............. (2,299) 3,811 4,398 -- 5,910
Other noncurrent liabilities...... 371 108 819 -- 1,298
Stockholders' equity:
Common stock.................... 106 8 1,723 (1,731) 106
Treasury stock.................. (4,048) -- -- -- (4,048)
Paid in capital................. 52,437 23,786 23,549 (47,335) 52,437
Accumulated other comprehensive
income..................... 167 (1) (1,192) -- (1,026)
Retained earnings............... (87,654) 25,863 (32,972) 7,109 (87,654)
-------------- ------------------ ----------- ------------- -------------
Total stockholders'
equity................ (38,992) 49,656 (8,892) (41,957) (40,185)
-------------- ------------------ ----------- ------------ -------------
Total liabilities and
stockholders' equity.. $ 251,842 $ 58,877 $ 3,411 $ (41,957) $ 272,173
============== ================== =========== ============ =============
See accompanying notes.
F-18
52
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
ASSETS
NON-
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) --
Goodwill, net .............................. 803 18,157 223 -- 19,183
Intangibles and other assets ............... 5,345 146 159 -- 5,650
-------------- ------------ -------------- ----------- --------------
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
Accumulated other comprehensive
income .................................. -- -- (154) -- (154)
Retained earnings .......................... 25,019 27,730 (2,871) (24,705) 25,173
------------- ------------ -------------- ----------- --------------
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.
F-19
53
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------------- --------------- ------------- ------------- -------------
Revenues:
Rental income .................. $ 46,236 $ 7,391 $ 7,628 $ -- $ 61,255
Sales of products and services . 30,046 3,210 6,781 -- 40,037
Underbalanced drilling services 532 14,376 16,117 -- 31,025
--------------- --------------- ------------- ------------- -------------
76,814 24,977 30,526 -- 132,317
Cost and expenses:
Cost of rentals ................ 32,735 4,654 6,211 (158) 43,442
Cost of products and services .. 18,093 1,756 4,594 -- 24,443
Cost of underbalanced drilling . 974 6,809 11,776 -- 19,559
Selling, general and
administrative .............. 19,475 5,913 9,072 (334) 34,126
Depreciation and amortization .. 9,483 7,563 7,435 -- 24,481
Reorganization costs ........... 3,298 -- 115 -- 3,413
Non-cash compensation .......... 711 -- -- -- 711
Research and development ....... 336 1 855 -- 1,192
Provision for asset impairment.. 33,646 -- 19,391 -- 53,037
--------------- --------------- ------------- ------------- -------------
118,751 26,696 59,449 (492) 204,404
--------------- --------------- ------------- ------------- -------------
Operating income (loss)........... (41,937) (1,719) (28,923) 492 (72,087)
Other (income) expense:
Interest income ................ (3,376) (9) (40) -- (3,425)
Interest expense-nonaffiliates . 23,988 77 364 -- 24,429
Equity in subsidiaries, net
of taxes .................... 31,967 -- -- (31,967) --
Other, net ..................... 88 (776) 238 492 42
--------------- --------------- ------------- ------------- -------------
Income (loss) before taxes ....... (94,604) (1,011) (29,485) 31,967 (93,133)
Income tax provision (benefit) ... 644 858 613 -- 2,115
--------------- --------------- ------------- ------------- -------------
Income (loss) before extraordinary
item .......................... (95,248) (1,869) (30,098) 31,967 (95,248)
Extraordinary item ............... (17,579) -- -- -- (17,579)
--------------- --------------- ------------- ------------- -------------
Net income (loss) ................ $ (112,827) $ (1,869) $ (30,098) $ 31,967 $ (112,827)
=============== =============== ============= ============= =============
See accompanying notes.
F-20
54
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE EIGHT MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ---------------- ------------- ------------- -------------
Revenues:
Rental income .................. $ 32,563 $ 5,046 $ 4,845 $ -- $ 42,454
Sales of products and services . 11,081 1,013 2,916 -- 15,010
Underbalanced drilling services -- 8,666 10,019 -- 18,685
---------------- ---------------- ------------- ------------- -------------
43,644 14,725 17,780 -- 76,149
Cost and expenses:
Cost of rentals ................ 18,431 2,965 3,427 (298) 24,525
Cost of products and services .. 7,116 189 1,837 -- 9,142
Cost of underbalanced drilling . -- 2,446 7,652 -- 10,098
Selling, general and
administrative .............. 7,880 3,339 2,877 (424) 13,672
Depreciation and amortization... 4,309 3,085 712 -- 8,106
Reorganization costs ........... 2,453 -- -- -- 2,453
Non-cash compensation .......... 661 -- -- -- 661
Research and development ....... 190 -- -- -- 190
---------------- ---------------- ------------- ------------- -------------
41,040 12,024 16,505 (722) 68,847
---------------- ---------------- ------------- ------------- -------------
Operating income ................. 2,604 2,701 1,275 722 7,302
Other (income) expense:
Interest income ................ (1,320) (19) (3) -- (1,342)
Interest expense-nonaffiliates . 5,165 44 43 -- 5,252
Equity in subsidiaries, net
of taxes .................... (2,790) -- -- 2,790 --
Other, net ..................... 108 (642) 208 722 396
---------------- ---------------- ------------- ------------- -------------
Income (loss) before taxes........ 1,441 3,318 1,027 (2,790) 2,996
Income tax provision (benefit) ... (236) 916 639 -- 1,319
---------------- ---------------- ------------- ------------- -------------
Net income (loss) ................ $ 1,677 $ 2,402 $ 388 $ (2,790) $ 1,677
================ ================ ============= ============= =============
See accompanying notes.
F-21
55
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE EIGHT MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ---------------- ------------- ------------- -------------
Revenues:
Rental income .................... $ 24,919 $ 4,451 $ 4,391 $ -- $ 33,761
Sales of products and services ... 9,043 1,487 941 (17) 11,454
---------------- ---------------- ------------- ------------- -------------
33,962 5,938 5,332 (17) 45,215
Cost and expenses:
Cost of rentals .................. 15,366 2,324 6,590 (2,811) 21,469
Cost of products and services .... 5,944 151 43 (7) 6,131
Selling, general and
administrative ................ 7,020 345 383 -- 7,748
Depreciation and amortization..... 3,103 1,017 77 -- 4,197
Research and development ......... 549 -- -- -- 549
---------------- ---------------- ------------- ------------- -------------
31,982 3,837 7,093 (2,818) 40,094
---------------- ---------------- ------------- ------------- -------------
Operating income (loss) ............ 1,980 2,101 (1,761) 2,801 5,121
Other (income) expense:
Interest income .................. (401) (9) -- -- (410)
Interest expense-nonaffiliates ... 480 6 -- -- 486
Interest expense-affiliates ...... 172 -- -- -- 172
Equity in subsidiaries, net
of taxes ...................... (1,071) -- -- 1,071 --
Other, net ....................... (1,731) (789) (430) 2,801 (149)
---------------- ---------------- ------------- ------------- -------------
Income (loss) before taxes ......... 4,531 2,893 (1,331) (1,071) 5,022
Income tax provision ............... 1,338 218 273 -- 1,829
---------------- ---------------- ------------- ------------- -------------
Net income (loss) .................. $ 3,193 $ 2,675 $ (1,604) $ (1,071) $ 3,193
================ ================ ============= ============= =============
See accompanying notes.
F-22
56
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1997
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ---------------- ------------- ------------- -------------
Revenues:
Rental income ................... $ 36,603 $ 6,470 $ 6,424 $ -- $ 49,497
Sales of products and services ... 13,385 2,188 1,397 (16) 16,954
--------------- --------------- ------------- ------------- -------------
49,988 8,658 7,821 (16) 66,451
Cost and expenses:
Cost of rentals .................. 21,961 3,729 10,193 (4,356) 31,527
Cost of products and services .... 8,546 191 45 (7) 8,775
Selling, general and
administrative ................ 10,257 594 692 -- 11,543
Depreciation and amortization..... 4,926 1,545 122 -- 6,593
Non-cash compensation ............ 2,807 -- -- -- 2,807
Research and development ......... 850 -- -- -- 850
--------------- --------------- ------------- ------------- -------------
49,347 6,059 11,052 (4,363) 62,095
--------------- --------------- ------------- ------------- -------------
Operating income (loss) ............ 641 2,599 (3,231) 4,347 4,356
Other (income) expense:
Interest income .................. (624) (16) -- -- (640)
Interest expense ................. 824 9 -- -- 833
Equity in subsidiaries, net
of taxes ...................... (960) -- -- 960 --
Other, net ....................... (2,406) (1,080) (673) 4,347 188
--------------- --------------- ------------- ------------- -------------
Income (loss) before taxes ......... 3,807 3,686 (2,558) (960) 3,975
Income tax provision ............... 816 292 403 -- 1,511
--------------- --------------- ------------- ------------- -------------
Net income (loss) .................. $ 2,991 $ 3,394 $ (2,961) $ (960) $ 2,464
=============== =============== ============= ============= =============
See accompanying notes.
F-23
57
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1996
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ---------------- ------------- ------------- -------------
Revenues:
Rental income .................... $ 31,391 $ 4,948 $ 6,648 $ -- $ 42,987
Sales of products and services ... 13,486 1,166 1,500 (200) 15,952
--------------- --------------- ------------- ------------- -------------
44,877 6,114 8,148 (200) 58,939
Cost and expenses:
Cost of rentals .................. 19,780 4,355 6,455 (2,973) 27,617
Cost of products and services .... 7,434 381 89 (47) 7,857
Selling, general and
administrative ................ 10,946 497 426 (40) 11,829
Depreciation and amortization .... 4,324 1,345 57 -- 5,726
Research and development ......... 728 -- -- -- 728
--------------- --------------- ------------- ------------- -------------
43,212 6,578 7,027 (3,060) 53,757
--------------- --------------- ------------- ------------- -------------
Operating income (loss) ............ 1,665 (464) 1,121 2,860 5,182
Other (income) expense:
Interest income .................. (89) (13) (2) -- (104)
Interest expense ................. 959 8 -- -- 967
Equity in subsidiaries, net
of taxes ...................... (1,018) -- -- 1,018 --
Other, net ....................... (2,048) (731) 197 2,860 278
--------------- --------------- ------------- ------------- -------------
Income (loss) before taxes ......... 3,861 272 926 (1,018) 4,041
Income tax provision ............... 764 404 259 -- 1,427
--------------- --------------- ------------- ------------- -------------
Net income (loss) .................. $ 3,097 $ (132) $ 667 $ (1,018) $ 2,614
=============== =============== ============= ============= =============
See accompanying notes.
F-24
58
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------------- --------------- ------------ ------------ ------------
OPERATING ACTIVITIES:
Net (loss) .................................. $ (112,827) $ (1,869) $ (30,098) $ 31,967 $ (112,827)
Adjustments to reconcile net (loss) to
net cash provided by (used in) operating
activities:
Extraordinary loss on repurchase of notes.. 17,579 -- -- -- 17,579
Equity in earnings of subsidiaries ........ 31,967 -- -- (31,967) --
Depreciation and amortization ............. 9,483 7,563 7,435 -- 24,481
Provision for asset impairment ............ 33,646 -- 19,391 -- 53,037
Deferred income taxes ..................... (402) 2,957 (118) -- 2,437
Write off/amortization debt issuance
costs ................................... 806 -- -- -- 806
Provision for doubtful accounts
receivable .............................. 119 1,025 1,032 -- 2,176
Provision for stock awards ................ 1,676 (11) -- -- 1,665
(Gain) loss on sale and disposition of
property and equipment .................. 141 (312) (140) -- (311)
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Accounts receivable-- trade ............. 7,739 (324) 1,643 -- 9,058
Accounts receivable from/payable to
officers and affiliates ............... (36,541) 22,296 19,025 -- 4,780
Prepaid expenses and other .............. (1,214) (4,853) (3,610) -- (9,677)
Accounts payable and accrued
liabilities ........................... (303) (375) (2,583) -- (3,261)
Income taxes payable .................... (18) 536 52 -- 570
--------------- --------------- ------------ ------------ ------------
Net cash provided by (used in) operating .... (48,149) 26,633 12,029 -- (9,487)
INVESTING ACTIVITIES:
Additions to revenue-producing tools and
inventory ................................. (33,444) (6,698) (7,331) -- (47,473)
Inventory transferred to cost of rentals .... 4,876 1,763 499 -- 7,138
Revenue-producing tools lost in hole,
abandoned, and sold ....................... 5,856 (1,308) (2,184) -- 2,364
Additions to property and equipment ......... (6,016) (1,491) (1,875) -- (9,382)
Proceeds from sale of property and
equipment ................................. 345 1,061 517 -- 1,923
Investment in joint venture ................. -- (7,100) -- -- (7,100)
Acquisition ................................. (83,365) (13,519) -- -- (96,884)
Unrealized gain on cash equivalent
investments ................................ 208 -- -- -- 208
--------------- --------------- ------------ ------------ ------------
Net cash used in investing activities ....... (111,540) (27,292) (10,374) -- (149,206)
FINANCING ACTIVITIES:
Proceeds from the issuance of debt .......... 268,125 -- -- -- 268,125
Payments on outstanding debt ................ (121,055) (7) (1,380) -- (122,442)
Extraordinary loss of notes ................. (12,650) (12,650)
Financing costs ............................. -- -- -- -- --
Exercise of stock options ................... -- -- -- -- --
Purchase of treasury stock .................. (254) -- -- -- (254)
--------------- --------------- ------------ ------------ ------------
Net cash provided by (used in) financing
activities ................................ 134,166 (7) (1,380) -- 132,779
--------------- --------------- ------------ ------------ ------------
Effect of foreign exchange rate changes
on cash ................................... -- 176 (1,256) -- (1,080)
--------------- --------------- ------------ ------------ ------------
Decrease in cash and cash equivalents ....... (25,523) (490) (981) -- (26,994)
Cash and cash equivalents at beginning
of period ................................. 56,672 860 2,305 -- 59,837
--------------- --------------- ------------ ------------ ------------
Cash and cash equivalents at end
of period ................................. $ 31,149 $ 370 $ 1,324 $ -- $ 32,843
=============== =============== ============ ============ ============
See accompanying notes.
F-25
59
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE EIGHT MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------------- --------------- ------------ ------------ ------------
OPERATING ACTIVITIES:
Net income (loss) ........................ $ 1,677 $ 2,402 $ 388 $ (2,790) $ 1,677
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Equity in earnings of subsidiaries ..... (2,790) -- -- 2,790 --
Depreciation and amortization .......... 4,303 3,126 677 -- 8,106
Deferred income taxes .................. 42 123 (65) -- 100
Provision for doubtful accounts
receivable ........................... 231 97 233 -- 561
Provision for stock awards ............. 661 -- -- -- 661
Loss on sale and disposition of
property and equipment ............... 9 1 -- -- 10
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Accounts receivable-- trade .......... (5,124) 505 (4,878) -- (9,497)
Accounts receivable from/payable to
officers and affiliates ............ (27,741) 19,533 8,249 -- 41
Prepaid expenses and other ........... (301) 767 (637) -- (171)
Accounts payable and accrued
liabilities ........................ 9,265 515 746 -- 10,526
Income taxes payable ................. (942) 487 (867) -- (1,322)
--------------- --------------- ------------ ------------ ------------
Net cash provided by (used in) operating . (20,710) 27,556 3,846 -- 10,692
INVESTING ACTIVITIES:
Additions to revenue-producing tools and
inventory .............................. (18,575) (668) (3,549) -- (22,792)
Inventory transferred to cost of rentals . 3,906 1,840 640 -- 6,386
Revenue-producing tools lost in hole,
abandoned, and sold .................... 3,565 (1,518) (71) -- 1,976
Additions to property and equipment ...... (2,044) (6,132) (218) -- (8,394)
Proceeds from sale of property and
equipment .............................. 626 (45) 36 -- 617
Acquisition .............................. (27,629) (18,535) (62) -- (46,226)
--------------- --------------- ------------ ------------ ------------
Net cash used in investing activities .... (40,151) (25,058) (3,224) -- (68,433)
FINANCING ACTIVITIES:
Proceeds from the issuance of debt ....... 159,597 -- -- -- 159,597
Payments on outstanding debt ............. (52,300) (1,958) 1,432 -- (52,826)
Financing costs .......................... (4,129) -- -- -- (4,129)
Exercise of stock options ................ 703 -- -- -- 703
Purchase of treasury stock ............... (813) -- -- -- (813)
--------------- --------------- ------------ ------------ ------------
Net cash provided by (used in) financing
activities ............................. 103,058 (1,958) 1,432 -- 102,532
--------------- --------------- ------------ ------------ ------------
Effect of foreign exchange rate changes
on cash ................................ -- -- (154) -- (154)
--------------- --------------- ------------ ------------ ------------
Increase in cash and cash equivalents .... 42,197 540 1,900 -- 44,637
Cash and cash equivalents at beginning
of period .............................. 14,475 320 405 -- 15,200
--------------- --------------- ------------ ------------ ------------
Cash and cash equivalents at end
of period .............................. $ 56,672 $ 860 $ 2,305 $ -- $ 59,837
=============== =============== ============ ============ ============
See accompanying notes.
F-26
60
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE EIGHT MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------------- --------------- ------------ ------------ ------------
OPERATING ACTIVITIES:
Net income (loss) .................... $ 3,193 $ 2,675 $ (1,604) $ (1,071) $ 3,193
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Equity in earnings of subsidiaries . (1,071) -- -- 1,071 --
Depreciation and amortization ...... 3,102 1,018 77 -- 4,197
Deferred income taxes .............. 511 -- -- -- 511
Provision for doubtful accounts
receivable ....................... 155 29 24 -- 208
(Gain) on sale and disposition of
property and equipment ........... (11) -- -- -- (11)
Changes in operating assets and
liabilities:
Accounts receivable-- trade ...... (3,095) 158 (3,023) -- (5,960)
Accounts receivable from/payable
to affiliates .................. (5,527) (2,594) 3,551 -- (4,570)
Prepaid expenses and other ....... (795) (550) (371) -- (1,716)
Accounts payable and accrued
liabilities .................... 3,296 490 1,037 -- 4,823
Income taxes payable ............. 357 67 266 -- 690
--------------- --------------- ------------ ------------ ------------
Net cash provided by (used in)
operating activities ............... 115 1,293 (43) -- 1,365
INVESTING ACTIVITIES:
Additions to revenue-producing tools
and inventory ...................... (13,954) (1,295) (447) -- (15,696)
Inventory transferred to cost of
rentals ............................ 3,197 613 501 -- 4,311
Revenue-producing tools lost in hole,
abandoned and sold ................. 1,869 (450) -- -- 1,419
Additions to property and equipment .. (467) 31 (73) -- (509)
Proceeds from sale of property and
equipment .......................... 20 (2) 76 -- 94
--------------- --------------- ------------ ------------ ------------
Net cash provided (used in) investing
activities ......................... (9,335) (1,103) 57 -- (10,381)
FINANCING ACTIVITIES:
Proceeds from the issuance of debt ... 400 -- -- -- 400
Payments on outstanding debt ......... (4,628) -- -- -- (4,628)
Payment of promissory note ........... (5,000) -- -- -- (5,000)
Proceeds from sale of common stock,
net ................................ 27,834 -- -- -- 27,834
--------------- --------------- ------------ ------------ ------------
Net cash provided by financing
activities ......................... 18,606 -- -- -- 18,606
--------------- --------------- ------------ ------------ ------------
Increase in cash and cash equivalents 9,386 190 14 -- 9,590
Cash and cash equivalents at beginning
of period .......................... 1,428 363 176 -- 1,967
--------------- --------------- ------------ ------------ ------------
Cash and cash equivalents at end of
period ............................. $ 10,814 $ 553 $ 190 $ -- $ 11,557
=============== =============== ============ ============ ============
See accompanying notes.
F-27
61
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR YEAR ENDED APRIL 30, 1997
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------------- --------------- ------------- ------------- -------------
OPERATING ACTIVITIES:
Net income (loss) .................... $ 2,991 $ 3,394 $ (2,961) $ (960) $ 2,464
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Equity in earnings of subsidiaries . (960) -- -- 960 --
Depreciation and amortization ...... 4,926 1,545 122 -- 6,593
Deferred income taxes .............. (783) -- -- -- (783)
Provision for doubtful accounts
receivable ....................... 229 40 36 -- 305
Provision for stock awards ......... 2,807 -- -- -- 2,807
Loss on sale and disposition of
property and equipment ........... 21 138 -- -- 159
Changes in operating assets and
liabilities:
Accounts receivable-- trade ...... (2,110) 264 (759) -- (2,605)
Accounts receivable from/payable
to affiliates .................. 722 (3,872) 3,778 -- 628
Prepaid expenses and other ....... (617) (25) (330) -- (972)
Accounts payable and accrued
liabilities .................... 1,130 48 397 -- 1,575
Income taxes payable ............. 975 114 403 -- 1,492
--------------- --------------- ------------- ------------- -------------
Net cash provided by operating
activities ......................... 9,331 1,646 686 -- 11,663
INVESTING ACTIVITIES:
Additions to revenue-producing tools
and inventory ...................... (18,474) (2,099) (1,252) -- (21,825)
Inventory transferred to cost of
rentals ............................ 3,805 1,207 901 -- 5,913
Revenue-producing tools lost in hole,
abandoned and sold ................. 2,622 (639) -- -- 1,983
Additions to property and equipment .. (547) (22) (91) -- (660)
Proceeds from sale of property and
equipment .......................... 277 (136) (15) -- 126
Acquisition .......................... (1,584) -- -- -- (1,584)
--------------- --------------- ------------- ------------- -------------
Net cash used in investing activities (13,901) (1,689) (457) -- (16,047)
FINANCING ACTIVITIES:
Proceeds from the issuance of debt ... 400 -- -- -- 400
Payments on outstanding debt ......... (5,198) -- -- -- (5,198)
Payment of promissory note ........... (5,000) -- -- -- (5,000)
Net proceeds from sale of common
stock .............................. 27,649 -- -- -- 27,649
Purchase of treasury stock ........... (234) -- -- -- (234)
--------------- --------------- ------------- ------------- -------------
Net cash provided by financing
activities ......................... 17,617 -- -- -- 17,617
--------------- --------------- ------------- ------------- -------------
Increase (decrease) in cash and cash
equivalents ........................ 13,047 (43) 229 -- 13,233
Cash and cash equivalents at beginning
of period .......................... 1,428 363 176 -- 1,967
--------------- --------------- ------------- ------------- -------------
Cash and cash equivalents at end of
period ............................. $ 14,475 $ 320 $ 405 $ -- $ 15,200
=============== =============== ============= ============= =============
See accompanying notes.
F-28
62
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR YEAR ENDED APRIL 30, 1996
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------------- --------------- ------------- ------------- -------------
OPERATING ACTIVITIES:
Net income (loss) ..................... $ 3,097 $ (132) $ 667 $ (1,018) $ 2,614
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Equity in earnings of subsidiaries .. (1,018) -- -- 1,018 --
Depreciation and amortization ....... 4,324 1,344 58 -- 5,726
Deferred income taxes ............... (816) -- -- -- (816)
Provision for doubtful accounts
receivable ........................ 204 52 -- -- 256
Loss on sale and disposition of
property and equipment ............ 6 -- -- -- 6
Changes in operating assets and
liabilities:
Accounts receivable-- trade ....... (278) (437) (1,783) -- (2,498)
Accounts receivable from/payable to
affiliates ...................... (3,251) 1,644 1,069 -- (538)
Prepaid expenses and other ........ 332 2 13 -- 347
Accounts payable and accrued
liabilities ..................... (1,138) 105 101 -- (932)
Income taxes payable .............. 338 92 311 -- 741
--------------- --------------- ------------- ------------- -------------
Net cash provided by operating
activities .......................... 1,800 2,670 436 -- 4,906
INVESTING ACTIVITIES:
Additions to revenue-producing tools
and inventory ....................... (9,267) (2,576) (330) -- (12,173)
Inventory transferred to cost of
rentals ............................. 4,078 1,107 336 -- 5,521
Revenue-producing tools lost in hole,
abandoned and sold .................. 3,988 (1,437) -- -- 2,551
Additions to property and equipment ... (870) 320 (333) -- (883)
Proceeds from sale of property and
equipment ........................... 1,247 (307) (24) -- 916
--------------- --------------- ------------- ------------- -------------
Net cash used in investing activities . (824) (2,893) (351) -- (4,068)
FINANCING ACTIVITIES:
Proceeds from the issuance of debt .... 1,300 -- -- -- 1,300
Payments on outstanding debt .......... (1,967) -- -- -- (1,967)
--------------- --------------- ------------- ------------- -------------
Net cash provided by financing
activities .......................... (667) -- -- -- (667)
--------------- --------------- ------------- ------------- -------------
Increase (decrease) in cash and cash
equivalents ......................... 309 (223) 85 -- 171
Cash and cash equivalents at beginning
of period ........................... 1,119 586 91 -- 1,796
--------------- --------------- ------------- ------------- -------------
Cash and cash equivalents at end of
period .............................. $ 1,428 $ 363 $ 176 $ -- $ 1,967
=============== =============== ============= ============= =============
See accompanying notes.
F-29
63
A. SIGNIFICANT ACCOUNTING POLICIES
Elimination Entries
Revenues and related cost of sales have been presented net of intercompany
transactions.
B. OTHER
Notes 1 through 18 should be read in conjunction with the Condensed
Consolidating Financial Statements.
20. REPORTABLE SEGMENTS
The Company has two reportable segments: Downhole Products and Services and
Underbalanced Drilling. The Downhole Products and Services segment primarily
provides downhole hole tools for rental, directional drilling services,electric
wireline and tubing conveyed perforating services and tubular testing and
handling services. The Underbalanced Drilling segment provides air drilling
services and underbalanced drilling equipment packages. The accounting policies
used to determine the segment information are the same as those described
in Note 3.
Export sales to unaffiliated customers included in domestic revenues were
$406,000, $977,000 and $1.8 million in the years ended December 31, 1998 and
April 30, 1997 and 1996, respectively. $430,000 for the eight month period ended
December 31, 1997.
8 MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 APRIL 30, 1997 APRIL 30, 1996
----------------- ----------------- -------------- --------------
Revenues:
Downhole Products & Services
Rental Revenue $ 61,255 $ 42,454 $ 49,497 $ 42,987
Products & Services 37,483 13,519 16,954 15,952
------------- ------------- ------------- -------------
Total 98,738 55,973 66,451 58,939
Underbalanced Drilling
Products & Services 2,554 1,491 -- --
Underbalanced Drilling 31,025 18,685 -- --
------------- ------------- ------------- -------------
Total 33,579 20,176 -- --
------------- ------------- ------------- -------------
Total Reportable Segment Revenue $ 132,317 $ 76,149 $ 66,451 $ 58,939
============= ============= ============= =============
Interest Expense
Downhole Products & Services $ -- $ 966 $ 833 $ 967
Underbalanced Drilling 144 81 -- --
------------- ------------- ------------- -------------
Total Reportable Segment Interest $ 144 $ 1,047 $ 833 $ 967
============= ============= ============= =============
Depreciation and Amortization Expense:
Downhole Products & Services $ 10,249 $ 5,020 $ 6,289 $ 5,522
Underbalanced Drilling 6,395 2,554 -- --
------------- ------------- ------------- -------------
Total Reportable Segment
Depreciation and Amortization $ 16,644 $ 7,574 $ 6,289 $ 5,522
============= ============= ============= =============
Reorganization Costs:
Downhole Products & Services $ 406 $ 2,449 $ -- $ --
Underbalanced Drilling -- -- -- --
------------- ------------- ------------- -------------
Total Reportable Segment
Reorganization Costs $ 406 $ 2,449 $ -- $ --
============= ============= ============= =============
Provision for Asset Impairment:
Downhole Products & Services $ 50,681 $ -- $ -- $ --
Underbalanced Drilling -- -- -- --
------------- ------------- ------------- -------------
Total Reportable Segment
Asset Impairment $ 50,681 $ -- $ -- $ --
============= ============= ============= =============
Operating Income:
Downhole Products & Services
Underbalanced Drilling $ (54,163) $ 6,360 $ 13,852 $ 11,910
7,148 7,255 -- --
------------- ------------- ------------- -------------
Total Reportable Segment
Operating Income $ (47,015) $ 13,615 $ 13,852 $ 11,910
============= ============= ============= =============
Segment Assets:
Downhole Products & Services $ 143,084 $ 77,580 $ 61,820 $ 52,684
Underbalanced Drilling 79,578 66,017 -- --
------------- ------------- ------------- -------------
Total Reportable Segment
Assets $ 222,662 $ 143,597 $ 61,820 $ 52,684
============= ============= ============= =============
Underbalanced drilling segment assets include the Company's investment in joint venture.
Expenditure for Long-Lived Assets:
Downhole Products & Services $ 38,541 $ 16,917 $ 15,968 $ 6,840
Underbalanced Drilling 8,722 7,382 -- --
------------- ------------- ------------- -------------
Total Reportable Segment Expenditures $ 47,263 $ 24,299 $ 15,968 $ 6,840
============= ============= ============= =============
A reconciliation of operating income from segments to consolidated total operating income is as follows:
8 MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 APRIL 30, 1997 APRIL 30, 1996
----------------- ----------------- -------------- --------------
Operating Income (Loss)
Total Operating Income/Loss for
Reportable Segments $(47,015) $13,615 $13,852 $11,910
Non-Operating Segments
Selling, General and Administrative 13,649 6,163 7,218 7,491
Depreciation & Amortization 7,837 532 304 204
Reorganization Costs 3,007 4 -- --
Non-Cash Compensation Expense 711 661 2,807 --
Provision for Asset Impairment 12 -- -- --
Interest Expense 24,285 4,205 -- --
Other Income/Expense (3,383) (946) (452) 174
-------- ------- ------ ------
Consolidated Income (Loss) Before
Taxes and Extraordinary Item $(93,133) $ 2,996 $ 3,975 $ 4,041
======== ======= ======= =======
A reconciliation of segment assets to consolidated assets impairment is as follows:
8 MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 APRIL 30, 1997 APRIL 30, 1996
----------------- ----------------- -------------- --------------
Total Assets Impairment for
Reportable Segments $50,681 $ -- $ -- $ --
Total Assets Impairment for
Non-Operating Segment 2,376 -- -- --
------- ------- ------- -------
Total Asset Impairment 53,057 -- -- --
======= ======= ======= =======
A reconciliation of segment assets to consolidated total assets is as follows:
8 MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 APRIL 30, 1997 APRIL 30, 1996
----------------- ----------------- -------------- --------------
Total Assets for Reportable Segments 222,662 143,597 61,820 52,013
Non-Operating Segment Assets 49,511 65,680 20,538 3,865
------- ------- ------ ------
Consolidated Assets 272,173 209,277 82,358 55,878
======= ======= ====== ======
Non-operating segment assets primarily consists of cash and cash equivalents,
corporate property and equipment and certain deferred costs.
A reconciliation of expenditures for reportable segments to consolidated
expenditures is as follows:
8 MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 APRIL 30, 1997 APRIL 30, 1996
----------------- ----------------- -------------- --------------
Total Expenditures for Reportable
Segments 47,263 24,299 15,968 6,840
Total Expenditures for Non-Operating
Segments 2,454 501 604 695
------- ------- ------ ------
Total Consolidated Expenditures 49,717 24,800 16,572 7,535
======= ======= ====== =====
Operating revenues for reportable segments by geographic area are as follows:
8 MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 APRIL 30, 1997 APRIL 30, 1996
----------------- ----------------- -------------- --------------
Domestic 68,833 36,555 40,223 34,370
Canada 10,203 5,167 -- --
Europe 10,970 4,979 7,297 7,349
West Africa 6,530 1,879 2,559 2,059
Latin America 21,790 18,337 11,670 11,032
Middle East 5,440 2,204 1,036 563
Southeast Asia 8,551 7,028 3,666 3,566
------- ------- ------ ------
Total 132,317 76,149 66,451 58,939
======= ======= ====== ======
Long-lived assets by geographic area are as follows:
8 MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 APRIL 30, 1997 APRIL 30, 1996
----------------- ----------------- -------------- --------------
Domestic 146,079 88,989 35,371 26,425
Canada 12,671 10,082 -- --
Europe 25,473 6,248 5,884 5,119
West Africa 4,182 122 178 221
Latin America 5,502 4,063 3,434 3,205
Middle East 3,375 1,147 307 121
Southeast Asia 3,004 1,419 1,529 1,114
------- ------- ------ ------
Total 201,387 112,070 46,703 36,205
======= ======= ====== ======
F-30
64
21. QUARTERLY INFORMATION
Selected unaudited quarterly data for the years ended December 31 are as
follows:
FOR THE QUARTER ENDED
-----------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------- -------------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AND COMMON STOCK PRICE)
Year Ending December 31,
1998
Operating revenues..... $ 38,020 $ 33,779 $ 31,220 $ 29,298
Operating income (loss) 3,412 (1,989) (8,195)(d) (65,315)(b),(c),(d)
Loss before
extraordinary item... (1,705) (7,709) (15,043)(d) (70,791)(b),(c),(d)
Net loss .............. (19,284) (7,709) (15,043)(d) (70,791)(b),(c),(d)
Dividends.............. 0.00 0.00 0.00 0.00
Loss per share before
extraordinary item:
Basic................ (0.18) (0.77) (1.50) (7.05)
Diluted.............. (0.18) (0.77) (1.50) (7.05)
Loss per share:
Basic................ (2.08) (0.77) (1.50) (7.05)
Diluted.............. (2.07) (0.77) (1.50) (7.05)
Common stock price:
High................. 10.50 9.88 6.38 2.06
Low.................. 7.38 5.75 2.00 .38
Year Ending December 31,
1997
Operating revenues..... $ 16,177 $ 18,896 $ 29,801 $ 32,511
Operating income (loss) 578 (1,387) 3,395 3,950
Net income (loss)...... 221 (1,526) 1,243 1,010(a)
Dividends.............. 0.00 0.00 0.00 0.00
Earnings (loss) per
share:.................
Basic................ 0.02 (0.16) 0.14 0.11
Diluted.............. 0.02 (0.16) 0.13 0.11
Common stock price:
High................. 11.00 7.25 12.38 14.75
Low.................. 6.75 5.38 6.25 10.25
- ----------
(a) Reflects the impact of non-cash compensation expense during the period
of $894,000 pretax and $572,000 after tax in the third quarter and $1.9
million pretax and $1.3 million after tax in the fourth quarter.
(b) Reflects the impact of non-cash compensation expensed during the
period of $185,000, $286,000, $133,000, and $107,000 pretax in the
first, second, third and fourth quarters, respectively.
(c) Reflects the impact of the provision for asset impairment of $53.0
million incurred in the fourth quarter.
(d) Reflects the impact of reorganization costs of $2.4 million and $1.0
million in the third and fourth quarters, respectively.
F-31
65
DAILEY INTERNATIONAL INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
BALANCE ----------------------
AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS WRITE-OFFS PERIOD
------------------ ---------- --------- --------- ------------ ----------
Fiscal year ended April
30, 1996................. Allowance for
doubtful accounts $1,356,000 $ 256,000 $ 0 $(287,000) $1,325,000
========== ========= ========= ========= ==========
Inventory reserve $ 892,000 $ 0 $ 0 $ (88,000) $ 804,000
========== ========= ========= ========= ==========
Fiscal year ended April
30, 1997................. Allowance for
doubtful accounts $1,325,000 $ 305,000 $ 0 $(154,000) $1,476,000
========== ========= ========= ========= ==========
Inventory reserve $ 804,000 $ 0 $ 0 $(242,000) $ 562,000
========== ========= ========= ========= ==========
Eight months ended
December 31, 1997........ Allowance for
doubtful accounts $1,476,000 $ 490,000 $ 0 $(182,000) $1,784,000
========== ========= ========= ========= ==========
Inventory reserve $ 562,000 $ 46,000 $ 0 $ (2,000) $ 606,000
========== ========= ========= ========= ==========
Fiscal year ended
December 31, 1998........ Allowance for
doubtful accounts $1,784,000 $2,783,000 $ (15,000) $(126,000) $4,426,000
========== ========== ========== ========== ==========
Inventory reserve $ 606,000 $ 676,000 $ 0 $(158,000) $1,124,000
========== ========= ========= ========== ==========
F-32
66
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
----------- ------------
3.1 -- Restated Certificate of Incorporation.
(Incorporated by reference from the Company's
Registration Statement on Form S-1 (File No.
333-04593))
3.2 -- Restated Bylaws of the Company. (Incorporated by
reference from the Company's Registration Statement
on Form S-1 (File No. 333-04593))
3.3 -- Amendment to Restated Certificate of Incorporation
dated October 7, 1997. (Incorporated by reference
from the Company's Registration Statement on Form S-4
(File No. 333-47345))
4.1 -- Form of Class A Common Stock Certificate.
(Incorporated by reference from the Company's
Registration Statement on Form S-4 (File No.
333-47345))
4.2 -- See Exhibits 3.1, 3.2 and 3.3 for provisions of
the Restated Certificate of Incorporation and
Restated Bylaws of the Company defining the rights of
the holders of Class A Common Stock.
4.3 -- 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 Form S-4 (File No. 333-47345))
4.4 -- 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))
4.5 -- 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)).
4.6 -- See Exhibits 10.3 through 10.5 and Exhibit 10.12 for
additional instruments defining the rights of holders
common stock of the Company and of long-term debt of
the Company and its Subsidiaries.
10.1 -- Relationship Agreement by and between the Company
and Lawrence Industries, Inc. (Incorporated by
reference from the Company's Registration Statement
on Form S-1 (File No. 333-04593))
10.2 -- Office Lease Agreement by and between the Company
as lessee and Lawrence International, Inc. as lessor.
(Incorporated by reference from the Company's
Registration Statement on Form S-1 (File No.
333-04593))
10.3 -- Registration Rights Agreement by and between the
Company and Lawrence Industries, Inc. (Incorporated
by reference from the Company's Registration
Statement on Form S-1 (File No. 333-04593))
+10.4 -- Dailey Petroleum Services Corp. 1996 Key Employee
Stock Plan. (Incorporated by reference from the
Company's Registration Statement on Form S-1 (File
No. 333-04593))
+10.5 -- Dailey Petroleum Services Corp. 1996 Non-Employee
Director Stock Option Plan. (Incorporated by
reference from the Company's Registration Statement
on Form S-1 (File No. 333-04593))
10.6 -- Tax Allocation Agreement by and between the
Company and Lawrence Industries, Inc. (Incorporated
by reference from the Company's Registration
Statement on Form S-1 (File No. 333-04593))
10.7 -- Form of Indemnification Agreement between the
Company and its directors. (Incorporated by reference
from the Company's Registration Statement on Form S-1
(File No. 333-04593))
10.8 -- Form of Indemnification Agreement between the
Company and its executive officers. (Incorporated by
reference from the Company's Registration Statement
on Form S-1 (File No. 333-04593))
+10.9 -- Amended Employment Agreement between the Company
and William D. Sutton dated December 31, 1997.
(Incorporated by reference from the Company's
Registration Statement on Form S-4 (File No.
333-47345))
+10.10 -- Employment Agreement between the Company and J.D.
Lawrence dated November 27, 1996. (Incorporated by
reference from the Company's Quarterly Report on Form
10-Q for the three months ended January 31, 1997)
10.11 -- 1997 Long-Term Incentive Plan. (Incorporated by
reference from the Company's Registration Statement
on Form S-4 (File No. 333-47345))
10.12 -- Employment Agreement between the Company and John
Beard, as amended
10.13 -- Employment Agreement between the Company and Al Kite
21.1 -- List of Subsidiaries of the Company. (Incorporated
by reference from the Company's Registration
Statement on Form S-4 (File No. 333-47345))
23.1 -- Consent of Ernst & Young LLP
27.1 -- Financial Data Schedule.
- ----------
+ Management Contract.
As permitted by Item 601(b)(4)(iii)(A) of Regulation S-K, the Company has
not filed with this Annual Report certain instruments defining the rights of
holders of long-term debt of the Company and its subsidiaries because the total
amount of securities authorized under any of such instruments does not exceed
10% of the total assets of the Company and its subsidiaries on a consolidated
basis. The Company agrees to furnish a copy of any such agreement to the
Commission upon request.