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EXHIBIT 99.3
DAILEY INTERNATIONAL INC.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Consolidated balance sheets - March 31, 1999 and December 31, 1998 2
Consolidated statements of operations - Three months ended March 31, 1999 and 1998 3
Consolidated statements of cash flows - Three months ended March 31, 1999 and 1998 4
Notes to consolidated financial statements - March 31, 1999 5-8
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DAILEY INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
--------- ---------
(UNAUDITED)
Current assets:
Cash and cash equivalents............................. $ 19,185 $ 32,843
Accounts receivable, net.............................. 32,634 32,803
Accounts receivable from affiliates................... 368 362
Prepaid expenses and other current assets............. 3,142 4,778
--------- ---------
Total current assets........................... 55,329 70,786
Revenue-producing tools and inventory, net.............. 136,655 141,524
Property and equipment, net............................. 13,019 13,255
Goodwill, net........................................... 21,979 22,275
Investment in joint venture............................. 7,609 7,100
Other assets............................................ 16,445 17,233
--------- ---------
Total assets................................... $ 251,036 $ 272,173
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities............... $ 12,426 $ 15,258
Accrued interest on senior notes....................... 3,266 9,797
Income taxes payable................................... 4,682 3,987
Current portion of long-term debt...................... 736 1,048
--------- ---------
Total current liabilities....................... 21,110 30,090
Long-term debt........................................... 275,067 275,060
Deferred income taxes.................................... 5,946 5,910
Other noncurrent liabilities............................. 1,065 1,298
Stockholders' equity (deficit):
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 5,703,655 issued
and 5,129,004 and 5,135,504 outstanding at
March 31, 1999 and December 31, 1998, respectively;
Class B, $0.01 par value: 10,000,000 shares
authorized, 5,000,000 shares issued and outstanding
at March 31, 1999 and December 31, 1998,
respectively........................................ 106 106
Treasury stock (574,651 and 568,151 shares at
March 31, 1999 and December 31, 1998,
respectively)....................................... (4,061) (4,048)
Paid-in capital....................................... 53,062 52,437
Accumulated other comprehensive income................ (1,069) (1,026)
Retained earnings (deficit)........................... (100,190) (87,654)
--------- ---------
Total stockholders' equity (deficit)........... (52,152) (40,185)
--------- ---------
Total liabilities and stockholders' equity
(deficit).................................... $ 251,036 $ 272,173
========= =========
See accompanying notes.
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DAILEY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
------------------------------
1999 1998
------------ ------------
Revenues:
Rental income..................................... $ 9,736 $ 15,691
Sales of products and services ................... 10,993 11,749
Underbalanced drilling services .................. 7,610 10,580
------------ ------------
28,339 38,020
Costs and expenses:
Cost of rentals................................... 8,493 10,055
Cost of products and services..................... 5,666 6,368
Cost of underbalanced drilling services........ 4,864 5,765
Selling, general and administrative............... 7,463 7,528
Depreciation and amortization .................... 6,410 4,628
Reorganization costs.............................. 1,239 --
Non-cash compensation ............................ 55 185
Research and development ......................... 232 79
------------ ------------
34,422 34,608
------------ ------------
Operating income (loss)............................. (6,083) 3,412
Other (income) expense:
Interest income................................... (747) (962)
Interest expense.................................. 6,900 4,494
Equity in earnings of joint venture............... (509) --
Other, net........................................ (272) 125
------------ ------------
Loss before income taxes and
extraordinary item ............................... (11,455) (245)
Provision for income taxes ......................... 1,081 1,460
------------ ------------
Loss before extraordinary item ..................... (12,536) (1,705)
Extraordinary item, net of taxes ................... -- (17,579)
------------ ------------
Net loss............................................ $ (12,536) $ (19,284)
============ ============
Loss per share before extraordinary item:
Basic .......................................... $ (1.24) $ (.18)
============ ============
Diluted ........................................ $ (1.24) $ (.18)
============ ============
Loss per share:
Basic........................................... $ (1.24) $ (2.08)
============ ============
Diluted ........................................ $ (1.24) $ (2.08)
============ ============
Weighted average shares outstanding:
Basic........................................... 10,077,321 9,253,598
============ ============
Diluted ........................................ 10,077,321 9,253,598
============ ============
See accompanying notes.
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DAILEY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
1999 1998
---------- ----------
OPERATING ACTIVITIES:
Net loss ...................................... $ (12,536) $ (19,284)
Adjustments to reconcile net loss to
net cash used in operating activities:
Extraordinary loss on repurchase of notes.... -- 17,579
Depreciation and amortization ............... 6,410 4,628
Deferred income taxes ....................... (6) 173
Amortization of debt issuance costs ......... 216 --
Provision for doubtful accounts ............. (47) 220
Provision for stock awards .................. 625 185
Equity income of unconsolidated subsidiary... (509) --
Changes in operating assets and liabilities
(net of the effects of acquisitions):
Accounts receivable trade ................... 147 (4,812)
Accounts receivable from/payable to
officers and affiliates .................. (137) (112)
Prepaid expenses and other .................. 1,560 (4,233)
Accounts payable and accrued liabilities .... (9,014) 3,749
Income taxes payable ........................ 693 821
---------- ----------
Net cash used in operating activities ......... (12,598) (1,086)
INVESTING ACTIVITIES:
Additions to revenue-producing tools and
inventory ................................... (3,207) (17,056)
Inventory transferred to cost of rentals ...... 1,334 2,317
Revenue-producing tools lost in hole,
abandoned and sold .......................... 1,291 645
Additions to property and equipment ........... (671) (1,824)
Proceeds from sale of property and equipment .. 458 1,293
Acquisitions .................................. -- (76,903)
Unrealized loss on cash equivalent
investments............................... (59) --
---------- ----------
Net cash used in investing activities ......... (854) (91,528)
FINANCING ACTIVITIES:
Proceeds from the issuance of debt ............ -- 268,125
Payments on outstanding debt .................. (355) (120,874)
Extraordinary loss on repurchase of notes...... -- (12,650)
Purchase of treasury stock..................... (13) --
---------- ----------
Net cash provided by (used in) financing
activities .................................. (368) 134,601
---------- ----------
Effect of foreign exchange rate changes
on cash ..................................... 162 (92)
---------- ----------
Increase (decrease) in cash and cash
equivalents ................................. (13,658) 41,895
Cash and cash equivalents at beginning of
period ...................................... 32,843 59,836
---------- ----------
Cash and cash equivalents at end of period .... $ 19,185 $ 101,731
========== ==========
See accompanying notes.
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DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. SUBSEQUENT EVENTS AND 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 and $1.2 million in 1999. The Company has
continued to review methods in which it can reduce its cost structure and reduce
overhead.
In April 1999, the Company retained an investment banking firm as financial
advisor to advise the Company on its strategic and financial alternatives,
including sales and divestitures of assets, a capital infusion, or a sale of the
Company.
The Company currently has no outstanding debt other than under the Senior
Notes (see Note 7) and debt assumed in the IDS acquisition (see Note 4).
However, the Company currently does not have any commitment from any third party
to lend the Company additional funds and no assurance can be given that such a
financing transaction can be completed on terms acceptable to the Company or at
all. 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.
On May 21, 1999, the Company announced that it and certain of its
subsidiaries had entered into an agreement to be acquired by Weatherford
International, Inc.("Weatherford"), a Houston-based oilfield products and
services company. The terms of the acquisition contemplate the issuance of
shares of Weatherford common stock having a market value of $195 million. The
terms of the acquisition are set forth in an acquisition agreement between the
Company and Weatherford May 21, 1999. Under the agreement, the Company's
outstanding $275 million Senior Note indebtedness would be exchanged pro rata
for $185 million in Weatherford stock. All outstanding equity securities held by
the Company's equity security holders would be exchanged for $10 million in
Weatherford stock that would be shared pro rata based on share ownership. The
value of the Weatherford common stock would be fixed as of the date of the
consummation of the acquisition, and will be based on an average closing sales
price calculation over a 10 trading-day period preceding the date of
consummation. The acquisition agreement contemplates the filing by Dailey and
eight of its domestic subsidiaries in the United States Bankruptcy Court for the
District of Delaware of petitions for relief under Chapter 11 of the Bankruptcy
Code, along with a plan of reorganization and a disclosure statement, in order
to implement a financial restructuring of its 9 1/2% Senior Notes due 2008. The
closing of the acquisition is subject to a number of conditions, including
confirmation of the plan of reorganization by September 30, 1999, bankruptcy
court approvals, requisite regulatory approvals, and filing of the petitions in
bankruptcy along with the plan of reorganization and disclosure statement by
June 1, 1999. The agreement provides that the plan of reorganization will
contemplate the payment of all trade creditors' claims as and when they come due
in the ordinary course of business or in full on the effective date of the plan.
In May 1999, the Company implemented an incentive plan to retain certain key
personnel through December 31, 1999. The cost of the incentive plan is
approximately $800,000.
The accompanying consolidated financial statements have been prepared on a
going concern basis of accounting and do not reflect any adjustments that might
result should the Company be unable to continue as a going concern. The
Company's recent losses from operations and the acquisition agreement and
proposed bankruptcy filing raise substantial doubt about its ability to continue
as a going concern. The appropriateness of using the going concern basis is
dependent upon, among other things, (i) confirmation of the plan of
reorganization by the bankruptcy court, and (ii) consummation of the
transactions contemplated by the acquisition agreement with Weatherford.
The plan of reorganization could materially change the amounts currently
recorded in the financial statements. The financial statements do not give
effect to any adjustment to the carrying value of assets, or amounts and
classifications of liabilities that might be necessary as a consequence of this
matter.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements include the
accounts of Dailey International Inc. and its subsidiaries ("Dailey" or the
"Company") and have been prepared in accordance with United States generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included and such adjustments are of a normal, recurring nature. Operating
results for the three months ended March 31, 1999 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1999. For
further information, reference is made to the consolidated financial statements
and footnotes thereto included in the Company's Form 10-K filed with the
Securities and Exchange Commission on April 1, 1999.
As of January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130, Reporting Comprehensive Income (SFAS No. 130). SFAS No.
130 established new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this statement had no immediate
impact on the Company's net loss or stockholders' equity. SFAS No. 130 requires
the Company's foreign currency translation adjustments and unrealized gains/loss
on investments to be included in comprehensive income. For the three months
ended March 31, 1999 and 1998, the total comprehensive loss was $12,579,000 and
$19,377,000, respectively.
Certain reclassifications have been made to the March 31,1998 financial
statements to conform to the 1999 presentation.
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3. ORGANIZATION
The accompanying consolidated financial statements reflect the operations of
Dailey International Inc. (formerly Dailey Petroleum Services Corp.), a Delaware
corporation, hereinafter referred to as the "Company" or "Dailey."
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. 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.
4. ACQUISITIONS
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.
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.
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.
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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.
5. REORGANIZATION COST
Reorganization costs of $1.2 million incurred in 1999 were primarily
related to the resignation of the former chief financial officer and other
employees, and the accelerated vesting of restricted stock awards.
6. REVENUE-PRODUCING TOOLS AND INVENTORY
MARCH 31, DECEMBER 31,
1999 1998
--------- --------
(IN THOUSANDS)
Revenue-producing tools..................... $ 161,530 $159,993
Accumulated depreciation.................... (58,196) (53,325)
--------- --------
103,334 106,668
Inventory:
Components, subassemblies and expendable
parts.................................. 29,333 30,711
Rental tools and expendable parts under
production............................. 2,088 2,247
Raw materials............................. 1,900 1,898
--------- --------
33,321 34,856
--------- --------
Revenue-Producing Tools and
Inventory...................... $ 136,655 $141,524
========= ========
7. BORROWING ARRANGEMENTS AND EXTRAORDINARY ITEM
Long-term debt consisted of the following:
MARCH 31, DECEMBER 31,
1999 1998
--------- --------
(IN THOUSANDS)
9 1/2% Senior Notes............... $ 275,000 $275,000
Loans payable to a bank........... 796 1,102
Other............................. 7 6
--------- --------
275,803 276,108
Less current portion of long-term
debt........................... (736) (1,048)
--------- --------
Total long-term debt.... $ 275,067 $275,060
========= ========
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 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.
8. INCOME TAXES
Income tax expense exceeded the amount that would have resulted from
applying the U.S. federal statutory tax rate due to foreign income taxes and
withholding taxes with no offsetting benefit from U.S. net operating losses, net
of valuation allowances.
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9. REPORTABLE SEGMENTS
The Company has two reportable segments: Downhole Products and Services and
Underbalanced Drilling. The Downhole Products and Services segment primarily
provides downhole 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.
THREE MONTHS ENDED MARCH 31,
1999 1998
---------- ----------
(IN THOUSANDS)
Revenues:
Downhole Products & Services
Rental Revenue ........................ $ 9,736 $ 15,691
Products & Services ................... 9,628 9,988
---------- ----------
Total ............................. 19,364 25,679
Underbalanced Drilling
Products & Services .................... 1,365 1,761
Underbalanced Drilling ................. 7,610 10,580
---------- ----------
Total ............................. 8,975 12,341
---------- ----------
Total Reportable Segment Revenue ............ $ 28,339 $ 38,020
========== ==========
Operating Income (Loss):
Downhole Products & Services ................ $ (4,683) $ 1,939
Underbalanced Drilling ...................... 2,845 4,449
---------- ----------
Total Reportable Segment
Operating Income (Loss) ................... $ (1,838) $ 6,388
========== ==========
A RECONCILIATION OF OPERATING INCOME (LOSS) FROM SEGMENTS TO CONSOLIDATED
TOTAL OPERATING LOSS IS AS FOLLOWS:
THREE MONTHS ENDED MARCH 31,
1999 1998
---------- ----------
(IN THOUSANDS)
Operating Income (Loss)
Total Operating Income (Loss) for
Reportable Segments ....................... $ (1,838) $ 6,388
Non-Operating Segments
Selling, General and Administrative ....... 2,401 2,882
Depreciation & Amortization ............... 243 203
Reorganization Costs ...................... 1,075 --
Non-Cash Compensation Expense ............. 55 185
Interest Expense .......................... 6,862 4,200
Other Income ................................ (1,019) (837)
---------- ----------
Consolidated Loss Before
Taxes and Extraordinary Item ........ $ (11,455) $ (245)
========== ==========
SEGMENT ASSETS:
MARCH 31, DECEMBER 31,
1999 1998
---------- ----------
(IN THOUSANDS)
Downhole Products & Services ................ $ 194,631 $ 143,084
Underbalanced Drilling ...................... 32,513 79,578
---------- ----------
Total Assets for Reportable Segments ........ 227,144 222,662
Non-Operating Segment Assets ................ 23,892 49,511
---------- ----------
Consolidated Assets ......................... $ 251,036 $ 272,173
========== ==========
Non-operating segment assets primarily consist of cash and cash equivalents,
corporate property and equipment and certain deferred costs.
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