<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 14, 1996
REGISTRATION NO. 333-03405
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------
DRILEX INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
DELAWARE 1389 76-0438889
-------- ---- ----------
<S> <C> <C>
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
15151 SOMMERMEYER
HOUSTON, TEXAS 77041
(713) 937-8888
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JOHN FORREST
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DRILEX INTERNATIONAL INC.
15151 SOMMERMEYER
HOUSTON, TEXAS 77041
(713) 937-8888
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
J. DAVID KIRKLAND, JR. MARCUS A. WATTS
BAKER & BOTTS, L.L.P. LIDDELL, SAPP, ZIVLEY, HILL & LABOON,
3000 ONE SHELL PLAZA L.L.P.
HOUSTON, TX 77002-4995 TEXAS COMMERCE TOWER
(713) 229-1234 600 TRAVIS, SUITE 3400
HOUSTON, TEXAS 77002
(713) 226-1200
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
DRILEX INTERNATIONAL INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION IN FORM S-1 LOCATION OR CAPTION IN PROSPECTUS
----------------------------------- ---------------------------------
<C> <C> <S>
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus........................... Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus.................. Inside Front and Outside Back
Cover Pages of Prospectus;
Additional Information
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges... Prospectus Summary; Risk Factors;
The Company
4. Use of Proceeds....................... Use of Proceeds
5. Determination of Offering Price....... Underwriting
6. Dilution.............................. Dilution
7. Selling Security Holders.............. Selling Stockholder
8. Plan of Distribution.................. Outside Front Cover Page of
Prospectus; Underwriting
9. Description of Securities to be
Registered........................... Description of Capital Stock
10. Interests of Named Experts and
Counsel.............................. *
11. Information with Respect to the
Registrant........................... Outside Front Cover Page of
Prospectus; Prospectus Summary;
Risk Factors; The Company;
Dividend Policy; Dilution;
Capitalization; Selected
Historical Financial and Other
Data; Unaudited Pro Forma
Condensed Consolidated Statement
of Income; Management's
Discussion and Analysis of
Financial Condition and Results
of Operations; Business;
Management; Certain Transactions
and Relationships; Security
Ownership of Certain Beneficial
Owners and Management; Shares
Eligible for Future Sale;
Description of Capital Stock;
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.......................... *
</TABLE>
- --------
* Omitted from the Prospectus because item is inapplicable.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 14, 1996
PROSPECTUS
2,361,962 SHARES
[LOGO OF DRILEX INTERNATIONAL APPEARS HERE]
COMMON STOCK
-----------
Of the 2,361,962 shares of Common Stock, par value $.01 per share ("Common
Stock"), offered hereby (the "Offering"), 2,000,000 shares are being sold by
Drilex International Inc. ("Drilex" or the "Company") and 361,962 shares are
being sold by a selling stockholder (the "Selling Stockholder"). The Company
will not receive any proceeds from the sale of shares of Common Stock by the
Selling Stockholder. See "Selling Stockholder."
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price is expected to be between $17.00 and $19.00
per share. See "Underwriting" for a discussion of the factors to be considered
in determining the initial public offering price.
The Company has applied to list the Common Stock on the Nasdaq National
Market under the symbol "DRLX."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2) SELLING STOCKHOLDER
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................. $ $ $ $
- --------------------------------------------------------------------------------
Total(3).................. $ $ $ $
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) The Company and the Selling Stockholder have agreed to indemnify the
several Underwriters against certain liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the several Underwriters an option for 30 days to
purchase up to an additional 354,294 shares of Common Stock at the Price to
Public, less Underwriting Discount, solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
-----------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to the
approval of certain legal matters by counsel for the Underwriters and to
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the shares of Common Stock will be made in New York,
New York on or about , 1996.
-----------
MERRILL LYNCH & CO.
CS FIRST BOSTON
SIMMONS & COMPANY
INTERNATIONAL
-----------
The date of this Prospectus is , 1996.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
<PAGE>
DRILLING PRODUCTS
[Photo: multi-lobe rotor]
Multi-lobe rotor used in Drilex motor power sections
[Photo: CNC Lathe]
CNC Lathe used in the manufacture of Drilex motors.
[Photo: Multi-lobe stator]
Multi-lobe stator used in Drilex motor power sections.
[Photo: Motorhead assembly]
Motorhead assembly which connects coiled tubing to a small motor.
DRILEX PRODUCTS
[Photo: Downhole motor]
The Drilex downhole precision steerable motor.
Drilex Products are at the core of all Drilex services and sales. Each Drilex
precision drilling motor is designed and manufactured to meet the highest
standards of performance and reliability.
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
INSIDE FOLD OUT
ENERGY SERVICES
[Photos of: three drilling rigs and one coiled tubing unit]
Multiple wells drilled from a fixed platform.
[Image of: multiple wells]
[Photo of: Drilex Motor]
Drilex motor assembled in the drilling rig.
Drilex Services meets the needs of specialized drilling markets, such as:
Directional drilling--multiple deviated wells from a single platform.
Horizontal drilling--wells drilled laterally from a conventional well.
Slim hole and re-entry drilling--tapping wells for greater production.
Coiled tubing operations--drilling and well servicing that employs hydraulic
tubing rather than a conventional derrick and pipe.
[Image of: map of world marked per caption]
Spider plot of multiple wells at an offshore location.
[Photo of: steering tools and surface equipment per caption]
Steering tool probes with surface readout and survey equipment.
[graph showing: well depth as a function of planned vs actual number of days]
DRILEX SERVICES
[Photo of: computer and personnel]
Computerized well planning.
[Photos of: MWD equipment]
MWD surface system and downhole probes.
<PAGE>
PROSPECTUS SUMMARY
This summary should be read in conjunction with, and is qualified in its
entirety by, the more detailed information and financial statements, including
the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise
indicated, (i) information in this Prospectus assumes that the Underwriters'
over-allotment option is not exercised, (ii) all share and per share data in
this Prospectus have been adjusted to reflect an approximately 1.81-for-one
stock split of the Common Stock effected in May 1996, and (iii) industry data
relating to the worldwide drilling industry or precision drilling segment
excludes the Commonwealth of Independent States and China. The pro forma
amounts set forth in this Prospectus, unless otherwise indicated, reflect the
pro forma effects of the Sharewell Acquisition and the ENSCO Technology
Acquisition (each as defined herein) on the operations of the Company on the
basis set forth in the Unaudited Pro Forma Condensed Consolidated Statement of
Income of the Company included in this Prospectus.
THE COMPANY
BUSINESS OVERVIEW
Drilex is a leading provider of products and services used in directional,
horizontal and other precision drilling of oil and gas wells, oilfield
workover operations, environmental remediation applications, and trenchless
pipeline and cable laying applications. Precision drilling involves the
combined use of a steerable downhole positive displacement drilling motor and
a guidance system to enable the controlled placement of a borehole through
predetermined locations. Drilex employs this technology to drill to depths
ranging from near surface to more than four miles. The Company's products and
services include comprehensive computerized well planning and engineering
services, supervision of drilling operations and project management, a full
range of high performance downhole positive displacement motor systems,
guidance systems (such as measurement-while-drilling ("MWD") instrument
systems and steering tools), and other related downhole tools. Oilfield
applications accounted for approximately 86% of the Company's revenues (on a
pro forma basis) in 1995. The Company currently operates from 23 locations
around the world and has approximately 390 employees.
Drilex was one of the pioneers in the development of downhole drilling
motors in the early 1980s and is now a worldwide leader in the design and
manufacture of high-performance, multi-lobed positive displacement drilling
motors. A positive displacement drilling motor, one of the key components in a
precision drilling project, is hydraulically powered by the drilling fluids
pumped into the wellbore during normal drilling operations. In addition to
providing directional control, a downhole drilling motor provides the primary
rotational power to the drill bit, in contrast to conventional vertical
drilling, in which spinning the drillstring at the surface is the primary
method for rotating the drill bit. The Company employs its drilling motors in
its own service operations and also provides motors for sale or rent under the
internationally recognized "Drilex" brand name to oil and gas exploration and
development companies and oilfield service contractors. Drilex has designed
its drilling motors to optimize flexibility, power and reliability, resulting
in some of the highest power and quality ratings in the industry. Drilex
believes it is the only independent company focused on providing precision
drilling services that designs and manufactures the primary components of its
own drilling motors. The Company believes that its ability to design and
manufacture its own drilling motors provides it with distinct competitive
advantages, both in terms of the performance characteristics of its motors and
the quality of service that Drilex is able to provide to its customers.
Industry Overview. Oilfield applications currently comprise the largest part
of the precision drilling market, which is a relatively new segment of the
overall drilling industry. Based on industry sources, the Company estimates
that the number of oil and gas wells drilled in the United States using
precision drilling technology increased 56% from 2,110 in 1990 to 3,288 in
1995. As a result of an overall decrease in oil and gas drilling activity,
this growth has resulted in the proportion of oil and gas wells drilled in the
United States employing
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING IN
THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES 10B-6,
10B-7 AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
3
<PAGE>
precision drilling technology increasing from 7% in 1990 to 17% in 1995. This
growth has been driven primarily by the substantial cost savings, improvements
to drilling efficiency and enhancements to reservoir production that precision
drilling can provide to oilfield operators. The Company believes that these
factors will continue to produce growth in the market for precision drilling
services.
Precision drilling can be used to develop a field with multiple wells drilled
from the same offshore platform or, in environmentally sensitive areas (such as
the Alaskan North Slope), from fewer surface facilities than conventional
drilling would require. In addition, by drilling horizontally through a
formation characterized by multiple vertical fractures, well productivity can
be significantly increased and drilling costs can be reduced substantially
(because fewer wells are required compared to a vertical development program).
Recent developments in multilateral technology, which allow two or more
horizontal wells to be drilled from the same vertical wellbore, have further
enhanced well productivity and development efficiency.
The technological and operational advantages of precision drilling combined
with advances in the identification and location of hydrocarbons have made many
marginal or otherwise uneconomical or depleted reservoirs economically feasible
to produce. In addition, new "extended-reach" precision drilling technology
allows many smaller offshore reservoirs, which may not be economic to develop
on a stand-alone basis, to now be developed from existing offshore platforms.
Advances in subsurface geological analysis (such as 3-D seismic technologies
and computer-aided exploration ("CAEX") techniques), which have enhanced the
identification and location of hydrocarbon deposits, combined with recent
improvements in precision drilling technologies, are creating new opportunities
for precision drilling services. In addition, new "slim-hole" precision
drilling technology used in conjunction with small-diameter drill pipe or
coiled tubing (a substitute for drill pipe) is permitting operators to re-enter
old wells and drill from the existing wellbore to develop previously untapped
deposits.
The Company believes that North and South America currently represent a
majority of the worldwide market for oilfield precision drilling services
(excluding the Commonwealth of Independent States and China). The Company's
oilfield activities are primarily focused on the major precision drilling
markets in the United States (including the Austin Chalk formation and the U.S.
Gulf of Mexico), Venezuela, the North Sea, Argentina and Canada. The Company
has a significant presence in each of these markets.
Oilfield Precision Drilling Applications. The Company provides comprehensive
precision drilling services for oil and gas drilling and workover applications,
including computerized well planning, on-site drilling supervision, maintenance
and support, and post-well analysis. In many oilfield applications, precision
drilling techniques offer significant economic advantages over conventional
vertical drilling techniques, such as reduced drilling time and expense,
increased well production and enhanced reservoir recovery. The high torque,
speed and performance offered by current-generation downhole drilling motors
permit the use of precision drilling techniques as a practical alternative to
conventional drilling even for vertically drilled wells. Customers for oilfield
precision drilling services are concentrated primarily among major and large
independent oil and gas companies. Because of the complexity involved in
precision drilling, these customers typically rely on specialized precision
drilling service contractors to manage the entire process of drilling the
horizontal or directional portion of a well. Precision drilling services
require high performance drilling motors, sophisticated guidance systems and
analytical tools, and an experienced staff of wellsite and technical support
personnel. The Company's drilling motors operate in conjunction with various
guidance systems (including MWD instrument systems and steering tools) provided
by the Company or other oilfield service companies. While the Company has its
own line of steering instruments, which it assembles from sub-assemblies
obtained from various third parties, Drilex currently obtains its MWD
instrument systems from third-party manufacturers.
Environmental Remediation and Trenchless Applications. The Company has
applied its technical drilling capabilities to the development of new services
for the emerging environmental remediation and trenchless
4
<PAGE>
services markets. Drilex has become a leader in the use of shallow well
horizontal drilling for remediation applications, with a particular focus on
groundwater remediation activities. Horizontal drilling provides total cost and
performance advantages to conventional vertical drilling of sampling and
treatment wells, primarily because horizontal drilling requires fewer wells and
surface installation facilities and allows contaminants beneath fixed
structures to be reached. The Company's customers for environmental remediation
services include environmental service contractors, engineering consulting
firms, petrochemical companies, hydrocarbon transportation companies and
military and other governmental organizations.
The Company also provides precision drilling services and equipment and
related surveying services for trenchless pipeline and cable laying
applications, which primarily involve horizontal boring underneath city streets
and structures to enable the "trenchless" delivery of conduits in densely built
areas, as well as subsurface crossings of rivers, streams and other bodies of
water. Applications for trenchless services include subsurface installations of
fiber optics lines, cable systems and utility pipelines and wiring. Customers
for the Company's trenchless services include telephone and other utilities, as
well as general contractors.
The Company's environmental remediation and trenchless services operations
accounted for approximately 14% of the Company's revenues (on a pro forma
basis) in 1995. The Company believes the markets for these services offer
significant opportunities for growth, and they are not subject to the same
degree of cyclicality that affects the oil and gas exploration and development
market.
Product Rentals and Sales. In addition to manufacturing drilling motors for
use in its own service operations, the Company provides its full line of
manufactured drilling motors and related products for rent and for sale
directly to end users. Customers for product rentals and sales include oil and
gas exploration and development companies, environmental service contractors
and contractors engaged in providing trenchless services. The Company's third-
party rental revenues currently represent approximately 20% of the Company's
total revenues. Sales of drilling motors and other products to third parties
also currently account for approximately 20% of total revenues.
BUSINESS STRATEGY
The Company's business strategy is built upon Drilex's premier line of
downhole positive displacement drilling motors and emphasizes (i) providing the
highest quality oilfield precision drilling and related customer support
services in key geographic markets where demand for precision drilling services
is concentrated, (ii) maximizing delivery of its core products, either through
sales, rentals or alliance arrangements, into other geographic markets where
the Company does not focus its service efforts, and (iii) capitalizing on its
technical strengths by developing opportunities to deliver its core products
and services into emerging oilfield and non-oilfield markets where the
Company's technical expertise can provide significant advantages. The Company
also intends to explore additional opportunities for external growth through
acquisitions of businesses to complement the Company's existing operations.
Drilex intends to maintain its position as the leading independent provider
of oilfield precision drilling services by continuing its emphasis on
delivering responsive, reliable and high quality services in key geographic
markets. The Company currently concentrates its activities in the Austin Chalk
formation (a large formation extending from South Texas to parts of Louisiana),
the Gulf of Mexico, Venezuela, the North Sea, Argentina and Canada. Each of
these markets is characterized by substantial field development activity (as
opposed to new exploration activity) and a relatively high number of
technically challenging situations that require high quality precision drilling
operations. A recent independent market study conducted for the Company
confirmed the Company's belief that service quality, reliability of equipment,
localized knowledge of drilling conditions and experience and expertise of
field personnel are the most important factors in competing for business in
these markets. The Company believes that maintaining control over the entire
design, engineering and manufacturing
5
<PAGE>
processes for its drilling motors provides the Company with distinct advantages
in providing high quality service. The Company designs and builds its motors to
optimize precision, power and reliability. Drilex also maintains a flexible
manufacturing process that includes a continuous improvement program, which
produces quality and performance improvements that enable Drilex to meet the
leading-edge needs of its customers. In addition, the Company concentrates its
service activities in its key geographic markets in order to develop and
capitalize on the Company's local knowledge and to take advantage of the
regional experience and expertise of its drilling supervisors and other
technical field personnel, as well as to achieve scale operating efficiencies.
Furthermore, the high level of activity conducted by the Company in
concentrated geographic areas permits a focused application engineering effort,
which allows the Company to refine its products and services to meet the needs
of its customers on a more effective basis.
The Company also utilizes other distribution channels to maximize delivery of
its products to areas outside of its key geographic markets. Since its
inception, the Company has successfully marketed its drilling motors on a sale
and rental basis to oil and gas exploration and development companies and other
oilfield service contractors under the internationally recognized "Drilex"
brand name. These efforts have been particularly successful in the North Sea
market, where the Company has become an established provider of drilling motors
to operators and other service companies for various directional drilling and
coiled tubing applications. The Company intends to strengthen its existing
distribution channels and expand its product distribution in those markets
where the Company is not a significant service competitor. In particular, the
Company is in the process of establishing alliance arrangements with several
large oilfield service companies, which would permit these companies to include
Drilex motors in their comprehensive offerings of oilfield products and
services in certain markets where the Company does not focus its service
efforts.
The Company plans to continue to build upon its technical drilling
capabilities by further developing opportunities in emerging markets where the
Company's expertise can provide competitive advantages. In particular, the
Company believes that the development and rapid growth in the use of coiled
tubing for oilfield workover, redrilling and recompletion operations has
provided a significant opportunity for growth in the use of precision drilling
technology for slim-hole applications. The Company has become the leading
supplier of smaller diameter drilling motors and related equipment for coiled
tubing operations and intends to maintain this leadership position as coiled
tubing operations increasingly become a substitute for conventional drilling
operations. Drilex has also been successful in developing opportunities for
precision drilling in the environmental remediation and trenchless services
markets, which the Company believes offer significant opportunities for growth.
The Company is focusing its efforts on the high-end segments of these markets
and is pursuing long-term relationships with large customers that generate
substantial demand for services that can be provided by Drilex.
The Company continually reviews opportunities for growth through the
acquisition of other businesses to complement its existing operations. The
recent Cobb and ENSCO Technology Acquisitions expanded the Company's presence
in certain of its key geographic markets for oilfield precision drilling
services and provided the Company with significant opportunities to expand its
distribution of Drilex-manufactured motors by employing them in the newly
acquired operations. In addition, the ENSCO Technology Acquisition
significantly expanded the Company's MWD capabilities, providing the Company
additional opportunities to deploy its products and services. The Sharewell
Acquisition also provided the opportunity to expand the Company's product
distribution and significantly increased the Company's service capabilities in
the emerging environmental remediation and trenchless services markets. The
Company will continue to explore opportunities involving acquisitions of other
businesses to expand distribution of the Company's products and services, to
add key technologies, to gain access to attractive industry niches, and to
otherwise enhance its market presence.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Shares of Common Stock
offered:
By the Company......... 2,000,000
By the Selling
Stockholder........... 361,962*
Shares of Common Stock
outstanding:
Before the Offering.... 4,391,778
After the Offering..... 6,753,740
Use of Proceeds to the
Company................. To repay long-term indebtedness, a substantial
portion of which was incurred in connection with
acquisitions, and for general corporate purposes.
See "Use of Proceeds."
Proposed Nasdaq National
Market Symbol........... DRLX
</TABLE>
- --------
* Such shares are issuable upon conversion of a $2.5 million convertible note
held by the Selling Stockholder, which is being converted in connection with
the Offering.
RISK FACTORS
Prospective purchasers should consider all of the information contained in
this Prospectus before making an investment in shares of Common Stock. In
particular, prospective purchasers should consider the factors set forth herein
under "Risk Factors."
7
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION AND OTHER DATA
The summary historical financial information presented below as of and for
the year ended December 31, 1995 and for the periods ended December 31, 1994,
March 30, 1994 and December 31, 1993, is derived from the audited consolidated
financial statements of the Company and its predecessor company, Drilex
Systems, Inc. ("DSI"). The summary historical financial information presented
below as of and for the three months ended March 31, 1996 and for the three
months ended March 31, 1995 is derived from unaudited consolidated financial
statements of the Company, which include all adjustments that the Company
considers necessary for a fair presentation of the financial position and
results of operations for those periods. Operating results for the three months
ended March 31, 1996 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1996. The summary unaudited
pro forma financial information presented below is derived from the Unaudited
Pro Forma Condensed Consolidated Statement of Income of the Company included
elsewhere in this Prospectus and gives effect to the Sharewell and ENSCO
Technology Acquisitions and the Offering. The pro forma information is
presented for illustrative purposes only and is not necessarily indicative of
actual results of operations that would have been achieved had the transactions
been consummated on the dates reflected in such assumptions, and is not
necessarily indicative of future results of operations. The summary historical
and pro forma financial information below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Unaudited Pro Forma Condensed Consolidated Statement of
Income and the Consolidated Financial Statements of the Company and of DSI,
including the Notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR COMPANY(c)
------------------------------------------------------------ -----------------------
THREE MONTHS
ENDED MARCH 31, PRO FORMA
---------------- ----------- MARCH 30, 1994 JANUARY 1,
YEAR ENDED YEAR ENDED (INCEPTION) TO 1994 TO YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 30, DECEMBER 31,
1996(a) 1995 1995 1995(a) 1994(b) 1994 1993
------- ------- ------------ ------------ -------------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net revenues............ $19,457 $10,527 $73,557 $57,526 $25,209 $6,357 $25,871
Costs of sales and
operations............. 12,018 6,462 44,865 34,606 12,924 3,364 14,093
Selling, general and
administrative
expenses............... 4,243 2,644 16,150 13,448 6,711 2,029 8,286
Depreciation and
amortization........... 1,580 761 6,354(d) 4,492(d) 1,855 775 3,107
------- ------- ------- ------- ------- ------ -------
Operating income........ 1,616 660 6,188 4,980 3,719 189 385
Interest expense........ (811) (203) (715) (1,935) (478) (481) (1,893)
------- ------- ------- ------- ------- ------ -------
Income (loss) before
income taxes and
minority interests..... 805 457 5,473 3,045 3,241 (292) (1,508)
Provision for income
taxes.................. (290) (164) (1,970) (1,097) (1,166) (3) (152)
Minority interests...... 11 (88) (100) (164) (66) -- --
------- ------- ------- ------- ------- ------ -------
Net income (loss)....... $ 526 $ 205 $ 3,403 $ 1,784 $ 2,009 $ (295) $(1,660)
======= ======= ======= ======= ======= ====== =======
Net income per common
and common equivalent
share:
Primary................ $ .12 $ .05 $ .49 $ .40 $ .57
======= ======= ======= ======= =======
Fully diluted.......... $ .11 $ .05 $ .49 $ .40 $ .57
======= ======= ======= ======= =======
Weighted average common
and common equivalent
shares outstanding:
Primary................ 4,552 4,390 6,938 4,411 3,507
======= ======= ======= ======= =======
Fully diluted.......... 4,914 4,390 6,938 4,501 3,507
======= ======= ======= ======= =======
OTHER DATA:
Capital expenditures.... $ 1,816 $ 773 $ 9,553 $ 5,408 $ 707 $ 195 $ 252
EBITDA(e)............... 3,196 1,421 12,542 9,472 5,574 964 3,492
Summary cash flow
information:
Net cash provided by
(used for) operating
activities............ 1,249 (55) (185) 877 663 277
Net cash used for
investing activities.. (1,124) (616) (19,360) (22,893) (195) (252)
Net cash provided by
financing activities.. 444 638 19,415 22,965 28 503
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
-------------------------
HISTORICAL AS ADJUSTED(f)
---------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital......... $13,653 $21,339
Total assets............ 78,455 81,439
Long-term debt, less
current maturities..... 32,945 5,131
Total stockholders'
equity................. 24,266 59,766
</TABLE>
- --------
(a) Results for the period are not comparable to prior periods due to the ENSCO
Technology and Sharewell Acquisitions.
(b) Results for the period are not comparable to prior years due to the Cobb
Acquisition.
(c) The predecessor company, DSI, was a wholly owned subsidiary of MascoTech,
Inc. prior to its acquisition by the Company on March 30, 1994. As a wholly
owned subsidiary of MascoTech, Inc., DSI was allocated interest and other
expenses by its parent. Earnings per share are not presented for periods
during which DSI was wholly owned by MascoTech, Inc.
(d) Effective April 1, 1995, the Company changed its estimated useful life for
certain drilling motor components from five to seven years. This change was
made to better reflect the estimated period during which these assets will
remain in service. The effect of this change was an increase in net income
of $248,000, or $.06 per share, for the year ended December 31, 1995.
(e) EBITDA means operating income (loss) plus depreciation and amortization and
is a supplemental financial measurement used by the Company in the
evaluation of its business. EBITDA is not intended to represent cash flow,
an alternative to net income or any other measure of performance in
accordance with generally accepted accounting principles. Reference is made
to the Consolidated Statement of Cash Flows contained in the Consolidated
Financial Statements of the Company included elsewhere in this Prospectus
for a complete presentation of cash flows from operating, investing and
financing activities prepared in accordance with generally accepted
accounting principles.
(f) Gives effect to the Offering (which includes the conversion of a $2.5
million principal amount convertible note held by the Selling Stockholder
into 361,962 shares of Common Stock) and the application of the net
proceeds to the Company therefrom (assumed to be $33.0 million) as
described under "Use of Proceeds." See "Capitalization."
9
<PAGE>
RISK FACTORS
Prospective purchasers of Common Stock should consider the following
factors, as well as the information contained elsewhere in the Prospectus.
RELIANCE ON THE OIL AND GAS INDUSTRY
The Company's business is substantially dependent upon the condition of the
oil and gas industry and the industry's willingness to spend capital on
drilling operations. The level of expenditures on such activities is generally
dependent on the prevailing view of future hydrocarbon product prices, which
are affected by the numerous factors affecting the supply and demand for oil
and gas, including worldwide economic activity, interest rates and the cost of
capital, environmental regulation, tax policies, political requirements of
national governments, coordination by the Organization of Petroleum Exporting
Countries ("OPEC"), the cost of producing oil and gas and technological
advances. Oil and gas prices and drilling activity have been characterized by
significant volatility in recent years. No assurance can be given that there
will not be continued volatility or that the future price of oil and gas will
be sufficient to support the level of drilling-related activities necessary
for the Company to grow or maintain its business.
RELIANCE ON NEW PRODUCT DEVELOPMENT AND POSSIBLE TECHNOLOGICAL OBSOLESCENCE
The market for the Company's products and services is characterized by
changing technology. As a result, the Company's success is dependent upon its
ability to develop new products and services on a cost-effective basis and to
introduce them into the marketplace in a timely manner. Drilex intends to
continue committing financial resources and effort to the development of new
products and services. There can be no assurance that the Company will
successfully differentiate itself from its competitors, that the market will
consider the Company's products and services to be superior to its
competitors' products and services or that the Company will be able to adapt
to evolving markets and technologies, develop new products, or achieve and
maintain technological advantages. See "Business."
EXTENT OF PROTECTION OF PROPRIETARY TECHNOLOGIES
The Company relies upon, among other things, a combination of patent,
copyright and trade secret laws to protect its intellectual property rights
covering certain aspects of its products and services. There can be no
assurance that the steps taken by the Company to protect its proprietary
rights will be adequate to prevent misappropriation of its intellectual
property rights or independent development by others of competitive products
or services. In addition, the laws of certain foreign countries may not
protect such rights to the same extent as to the laws of the United States.
Although the Company is not involved in any pending litigation with respect to
its intellectual property rights, and is not aware of any threatened
litigation with respect thereto, litigation may be necessary to enforce
patents or other intellectual property rights of the Company. Any such
litigation would demand financial and management resources. See "Business--
Patents and Other Intellectual Property."
DEPENDENCE ON CERTAIN THIRD-PARTY SUPPLIERS
The Company's two independent suppliers for MWD instrument systems are
essentially the only two sources for such equipment available to the Company.
The Company's reliance on these limited sources subjects it to the risks of,
among other things, delays in the receipt of desired quantities of MWD
equipment (as a result of manufacturing delays or other reasons) and increases
in prices for such equipment. The Company also relies on single suppliers for
the stator molding and the thrust bearings used in the manufacture of its
downhole positive displacement motors. While the Company does not anticipate
any difficulties in continuing to obtain product from these single suppliers,
the Company believes that adequate alternative sources are available should
the need arise. Such alternative sources may, however, involve increased costs
to the Company and shipment delays. See "Business--Products and Services" and
"--Engineering and Manufacturing."
10
<PAGE>
RELIANCE ON SIGNIFICANT CUSTOMERS
The Company's business is dependent on securing and maintaining customers by
delivering prompt, reliable and high quality service and reliable, high-
performance products. For the year ended December 31, 1995, one of the
Company's customers accounted for approximately 10% of the Company's revenues.
While the Company is not dependent on any one customer, the loss of one or
more of its significant customers could, at least on a short-term basis, have
an adverse effect on the Company's results of operations. See "Business--
Customers."
OPERATIONAL HAZARDS AND INSURANCE
The Company's operations are subject to many hazards inherent in the
drilling and workover of oil and gas wells (including explosions, blow-outs,
reservoir damage, loss of well control, cratering and fires), the occurrence
of which could result in the suspension of drilling operations, damage to or
destruction of equipment and injury or death to field personnel. Damage to the
environment could also result from operations that may involve the Company or
its products. The Company maintains insurance coverage in such amounts and
against such risks as it believes to be in accordance with normal industry
practice. Such insurance does not, however, provide coverage for all
liabilities (including liabilities for certain events involving pollution),
and there can be no assurance that such insurance will be adequate to cover
all losses or liabilities that may be incurred by the Company in its
operations. Moreover, no assurance can be given that the Company will, in the
future, be able to maintain insurance at levels it deems adequate and at rates
it considers reasonable or that any particular types of coverage will be
available.
RISKS OF INTERNATIONAL OPERATIONS
Drilex maintains facilities in five countries and, from time to time,
conducts operations in numerous other countries. On a pro forma basis, the
Company's non-U.S. operations accounted for approximately 23% of the Company's
revenues during the year ended December 31, 1995 (and the Company's operations
in Venezuela accounted for approximately 39% of these foreign-sourced
revenues). The Company's business outside the United States is subject to
various risks of international operations that are beyond its control, such as
instability of foreign economies and governments, currency fluctuations,
overlap of different tax structures, risks of expropriation, and changes in
laws and policies affecting trade and investment. The Company attempts to
limit its exposure to foreign currency fluctuations by limiting the amount by
which its foreign contracts are denominated in a currency other than U.S.
dollars to an amount generally equal to expenses expected to be incurred in
such foreign currency. The Company has not historically engaged in and does
not currently intend to engage in any significant hedging or currency trading
transactions designed to compensate for adverse currency fluctuations.
SEASONALITY
The Company's business is somewhat seasonal, since domestic oil and gas
drilling activities are generally lower in the first and second quarters. In
addition, adverse weather conditions can curtail operations in certain regions
during different parts of the year.
COMPETITION
The industry in which the Company operates is highly competitive. Several of
the Company's competitors are divisions or subsidiaries of companies that are
substantially larger and have greater financial and other resources than the
Company. See "Business--Competition."
POTENTIAL FUTURE SALES OF SHARES
Upon completion of the Offering, DRLX Partners, L.P. will own 4,119,207
shares of Common Stock, constituting approximately 61% of the then outstanding
shares of Common Stock. DRLX Partners, L.P., together with each of the
Company's directors and executive officers, have agreed not to sell or
otherwise voluntarily dispose of any Common Stock for a period of 90 days
after the date of this Prospectus without the prior consent
11
<PAGE>
of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), as
representative of the Underwriters, with certain exceptions. After such period
all or any of such shares may be sold pursuant to a registration statement
under the Securities Act of 1933, as amended (the "Securities Act"), or
pursuant to an exemption from the registration requirements under the
Securities Act. The Company has entered into agreements with DRLX Partners,
L.P. and certain other stockholders that provide such stockholders with
certain rights to have their shares of Common Stock registered under the
Securities Act, in order to permit the public sale of such shares. See
"Certain Transactions and Relationships--Registration Rights Agreements." In
addition, shares of Common Stock held by the Company's existing stockholders
will be eligible for resale in the future pursuant to Rule 144 promulgated
under the Securities Act. Sales or the possibility of sales of substantial
amounts of Common Stock in the public market could adversely affect the
prevailing market price of the Common Stock. See "Shares Eligible for Future
Sale" and "Underwriting."
INFLUENCE OF PRINCIPAL STOCKHOLDER AND MANAGEMENT
Upon completion of the Offering, DRLX Partners, L.P. will beneficially own
approximately 61% of the outstanding Common Stock. Accordingly, such
stockholder would have the ability to control matters requiring stockholder
approval, including the election of directors and certain extraordinary
transactions. See "Security Ownership of Certain Beneficial Owners and
Management."
DEPENDENCE ON KEY MANAGEMENT AND TECHNICAL EMPLOYEES
The Company's success will continue to depend to a significant extent on its
executive officers and other key management personnel. The loss of one or more
of these individuals could have a material adverse effect on the Company. The
Company does not have any employment agreements or covenants not to compete
with any of its executive officers other than (i) an employment agreement with
Archie A. Cobb, III entered into in connection with the Cobb Acquisition and
(ii) a non-compete agreement with Samuel R. Anderson entered into in
connection with the Sharewell Acquisition. In addition, the Company's success
is also substantially dependent upon its ability to attract and retain
qualified drilling supervisors and other technical field personnel. Although
the Company has never experienced a prolonged shortage of qualified personnel
in any of its operations (and does not currently anticipate any such
shortage), if demand for precision drilling services were to increase rapidly,
retention of qualified field personnel might become more difficult without
significant increases in compensation. See "Business--Employees" and
"Management."
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
Many aspects of the Company's operations are affected by political
developments and are subject to both domestic and foreign governmental
regulation, including those relating to oilfield operations, worker safety and
the protection of the environment. In addition, the Company depends on the
demand for its services from the oil and gas industry and, therefore, is
affected by changing taxes, price controls and other laws and regulations
relating to the oil and gas industry generally. The adoption of laws and
regulations curtailing exploration and development drilling for oil and gas
for economic or other policy reasons could adversely affect the Company's
operations by limiting demand for precision drilling services. The Company
cannot determine to what extent its future operations and earnings may be
affected by new legislation, new regulations or changes in existing
regulations.
The Company's operations are affected by numerous foreign, federal, state
and local environmental laws and regulations. The technical requirements of
these laws and regulations are becoming increasingly expensive, complex and
stringent. These laws may provide for "strict liability" for damages to
natural resources or threats to public health and safety, rendering a party
liable for the environmental damage without regard to negligence or fault on
the part of such party. Sanctions for noncompliance may include revocation of
permits, corrective action orders, administrative or civil penalties, and
criminal prosecution. Certain environmental laws provide for joint and several
strict liability for remediation of spills and releases of hazardous
substances. In addition, companies may be subject to claims alleging personal
injury or property damage as a result of alleged exposure to hazardous
substances, as well as damage to natural resources. Such laws and regulations
may also expose the Company to liability for the conduct of or conditions
caused by others, or for acts of the Company that were in compliance with all
applicable laws at the time such acts were performed. See "Business--
Governmental Regulation and Environmental Matters."
12
<PAGE>
POTENTIAL ADVERSE EFFECTS OF PREFERRED STOCK AUTHORIZED FOR ISSUANCE
The authorized capital stock of the Company includes unissued shares of
preferred stock, par value $.01 per share ("Preferred Stock"). The Board of
Directors is authorized to provide for the issuance of Preferred Stock in one
or more series and to fix the designations, preferences, powers and relative,
participating, optional and other rights and restrictions thereof.
Accordingly, the Company may issue a series of Preferred Stock in the future
that will have preference over the Common Stock with respect to the payment of
dividends and upon liquidation, dissolution, winding up or otherwise, or which
may have significant voting rights. In addition, the ability of the Board of
Directors to set the terms of Preferred Stock could have the effect of
discouraging unsolicited acquisition proposals. See "Description of Capital
Stock--Preferred Stock."
POSSIBLE ANTITAKEOVER EFFECTS
The Company's Restated Certificate of Incorporation and Bylaws and the
Delaware General Corporation Law contain provisions that may have the effect
of delaying, deferring or preventing a change of control of the Company. These
provisions, among other things, provide for a classified Board of Directors
with staggered terms, restrict the ability of stockholders to take action by
written consent, impose certain supermajority voting requirements, authorize
the Board of Directors to set the terms of Preferred Stock and impose
restrictions on business combinations with certain interested parties. See
"Description of Capital Stock."
NO ANTICIPATED DIVIDENDS ON COMMON STOCK
The Company's Board of Directors does not currently anticipate authorizing
the payment of dividends in the foreseeable future. In addition, the payment
of dividends is prohibited by the terms of certain of the Company's existing
financing arrangements. See "Dividend Policy."
ABSENCE OF PRIOR PUBLIC MARKET
Prior to the Offering, there has been no public market for the Common Stock.
There can be no assurance that an active public market for the Common Stock
will develop or be sustained after the Offering. The initial public offering
price was determined by negotiation among the Company, the Selling Stockholder
and representatives of the Underwriters and may not be indicative of the
market price for the Common Stock after the Offering. For a discussion of the
factors considered in determining the initial public offering price, see
"Underwriting." The trading price of the Common Stock may be subject to
significant fluctuations in respect to variations in the Company's results of
operations, actual or anticipated announcements of technical innovations or
new products and services by the Company or its competitors, general
conditions in the oilfield services industry and regional economies, and other
events or factors. In addition, the global stock markets have from time to
time experienced extreme price and volume fluctuations, which in the future
could adversely affect the market price of the Common Stock.
DILUTION
The initial public offering price is substantially higher than the book
value per outstanding share of Common Stock and the effective price per share
paid by DRLX Partners, L.P., the Selling Stockholder and other current
stockholders to purchase their interests in the Company. Purchasers of the
shares of Common Stock offered hereby will, therefore, incur immediate
dilution. See "Dilution."
BENEFITS OF OFFERING TO EXISTING STOCKHOLDERS
Approximately $3.6 million of the net proceeds to the Company from the
Offering will be used to repay a note to the Selling Stockholder incurred in
connection with the ENSCO Technology Acquisition. In addition, a convertible
note received by the Selling Stockholder as part of the consideration for the
ENSCO Technology Acquisition will be converted into Common Stock and such
Common Stock will be sold in the Offering. The net proceeds to the Selling
Stockholder from such sale of approximately $6.1 million are approximately
$3.6 million in excess of the principal amount of the note. The Offering will
benefit the existing stockholders of the Company other than the Selling
Stockholder by creating a public market for the Common Stock.
13
<PAGE>
THE COMPANY
Drilex is a leading provider of products and services used in directional,
horizontal and other precision drilling of oil and gas wells, oilfield
workover operations, environmental remediation applications, and trenchless
pipeline and cable laying applications. Precision drilling involves the
combined use of a steerable downhole positive displacement drilling motor and
a guidance system to enable the controlled placement of a borehole through
predetermined locations. Drilex employs this technology to drill to depths
ranging from near surface to more than four miles. The Company's products and
services include comprehensive computerized well planning and engineering
services, supervision of drilling operations and project management, a full
range of high performance downhole positive displacement motor systems,
guidance systems (such as MWD instrument systems and steering tools), and
other related downhole tools. Oilfield applications accounted for
approximately 86% of the Company's revenues (on a pro forma basis) in 1995.
The Company currently operates from 23 locations around the world and has
approximately 390 employees.
Drilex was one of the pioneers in the development of downhole drilling
motors in the early 1980s and is now a worldwide leader in the design and
manufacture of high-performance, multi-lobed positive displacement drilling
motors. A positive displacement drilling motor, one of the key components in a
precision drilling project, is hydraulically powered by the drilling fluids
pumped into the wellbore during normal drilling operations. In addition to
providing directional control, a downhole drilling motor provides the primary
rotational power to the drill bit, in contrast to conventional vertical
drilling, in which spinning the drillstring at the surface is the primary
method for rotating the drill bit. The Company employs its drilling motors in
its own service operations and also provides motors for sale or rent under the
internationally recognized "Drilex" brand name to oil and gas exploration and
development companies and oilfield service contractors. Drilex has designed
its drilling motors to optimize flexibility, power and reliability, resulting
in some of the highest power and quality ratings in the industry. Drilex
believes it is the only independent company focused on providing precision
drilling services that designs and manufactures the primary components of its
own drilling motors. The Company believes that its ability to design and
manufacture its own drilling motors provides it with distinct competitive
advantages, both in terms of the performance characteristics of its motors and
the quality of service that Drilex is able to provide to its customers.
Drilex was originally formed in Scotland in 1981 to design, manufacture and
rent a series of downhole drilling motors based on early technology licensed
from the Ministry of Oil of the Union of Soviet Socialist Republics. In
connection with the introduction of Drilex motors into the U.S. markets in
1982, DSI established an association with Grant Oil Tool Company ("Grant"), a
subsidiary of MascoTech, Inc. ("MascoTech"). In January 1984, MascoTech
acquired DSI and integrated its product lines with the other oilfield product
lines of Grant. In 1989, MascoTech split out DSI as an autonomous unit within
the MascoTech group of energy companies. On March 31, 1994, DRLX Partners,
L.P. and John Forrest (a founder of DSI and the current President and Chief
Executive Officer of the Company) purchased DSI (the "DSI Acquisition") from
MascoTech following MascoTech's decision to exit the oilfield services
business. The Company has since grown substantially through the expansion of
its product and service offerings and the acquisitions of complementary
businesses.
On September 30, 1994, the Company acquired substantially all of the fixed
assets of Cobb Directional Drilling Company, Inc. ("Cobb") and its affiliate,
Posi-Trak Mud Motors, Inc. ("Posi-Trak"), in an asset purchase transaction
(the "Cobb Acquisition") with a purchase price of approximately $8.2 million,
consisting of approximately $3.6 million in cash, a $1.3 million promissory
note due September 1997, the issuance of 241,307 shares of Common Stock (then
valued at $1.3 million) and a one-third equity interest (then valued at $2.0
million) in Cobb Directional Drilling Company, L.L.C., a subsidiary of the
Company formed to hold the assets acquired in the transaction. The Company
also entered into a five-year employment agreement with Mr. Archie A. Cobb,
III, the owner of Cobb and Posi-Trak. On March 23, 1995, the Company
repurchased 144,785 of such 241,307 shares of Common Stock and the one-third
equity interest in Cobb Directional Drilling Company, L.L.C. for a combined
purchase price consisting of approximately $1.0 million in cash, a $1.0
million
14
<PAGE>
amortizing note with a final maturity in 1998, and a $1.2 million short-term
note due July 1995 (which was paid at maturity). Cobb was founded in 1979 by
Mr. Cobb and became a leading independent directional drilling contractor and
provider of drilling motors for the U.S. Gulf of Mexico region. See
"Management--Employment Agreements" and "Certain Transactions and
Relationships."
On May 5, 1995, the Company acquired the stock (the "Sharewell Acquisition")
of Sharewell, Inc. ("Sharewell") for a purchase price consisting of $1.0
million cash, amortizing notes aggregating $2.8 million in principal amount,
after reflecting certain adjustments, and having final maturities in 2000 (the
"Sharewell Promissory Notes"), and warrants for the purchase of 180,981 shares
of Common Stock at an exercise price of $5.53 per share, subject to certain
antidilution adjustments. In addition, at closing the Company caused Sharewell
to (i) repay certain bank debt in the approximate amount of $1.2 million and
(ii) pay $2.0 million in cash to a Sharewell stockholder in full satisfaction
of an obligation under a non-compete agreement and in partial repayment of a
promissory note issued by Sharewell to that stockholder. The balance of such
promissory note was replaced with a $1.9 million amortizing promissory note
from the Company maturing April 2000 (the "Sharewell Replacement Note").
Sharewell was founded in 1984 initially to provide steering services to
pipeline construction contractors that were beginning to use slant rigs to
directionally drill underground river crossings for the installation of
pipelines. Sharewell has grown to become a leading provider of guidance
services and equipment to the trenchless drilling market worldwide and a
significant supplier of guidance and survey instruments to the oilfield
precision drilling industry. Sharewell currently offers steering tools and
survey instrumentation for sale or rental, as well as complete trenchless
drilling services. Additionally, Sharewell offers a guidance system for use in
areas affected by magnetic interference, where the use of conventional
guidance systems may be precluded.
On September 30, 1995, the Company acquired substantially all of the net
assets of ENSCO Technology Company ("ENSCO Technology"), a wholly owned
subsidiary of ENSCO International Incorporated ("ENSCO" or the "Selling
Stockholder"), in an asset purchase transaction (the "ENSCO Technology
Acquisition") with a purchase price of approximately $17.9 million, consisting
of approximately $11.8 million in cash, a $3.6 million amortizing promissory
note with a final maturity in 2000 (the "ENSCO Promissory Note") and a $2.5
million convertible amortizing note with a final maturity in 2000 (the
"Convertible Note"). The ENSCO Convertible Note is convertible into 361,962
shares of Common Stock at a conversion price of $6.91 per share, subject to
certain antidilution adjustments. The ENSCO Promissory Note will be repaid
with part of the net proceeds to the Company from the Offering. In connection
with the Offering, the Convertible Note will be converted into 361,962 shares
of Common Stock so that such shares may be sold pursuant to the Offering. See
"Use of Proceeds," "Certain Transactions and Relationships" and "Selling
Stockholder." ENSCO Technology was a leading provider of precision drilling
services, with special emphasis on horizontal drilling. It was among the
largest precision drilling service companies in the Austin Chalk formation.
Unless the context otherwise requires, references in this Prospectus to the
"Company" or "Drilex" refer to Drilex International Inc. and its consolidated
subsidiaries viewed as a single entity and include its predecessors.
The Company's principal executive offices are located at 15151 Sommermeyer,
Houston, Texas 77041, and its telephone number at such address is (713) 937-
8888.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of Common Stock
offered hereby are estimated to be approximately $33.0 million, assuming a
public offering price of $18.00 per share (the midpoint of the estimated
initial public offering price range). Of such net proceeds, (i) $3.6 million
will be used to repay the entire principal amount outstanding on the ENSCO
Promissory Note, (ii) $27.3 million will be used to repay all borrowings
outstanding under a term note and bank credit agreement with Texas Commerce
Bank National Association ("TCB"), as lender (collectively, with their related
interest rate agreements, the "Credit Facility"), and (iii) the remaining
approximately $2.1 million will be used for general corporate purposes. A
substantial portion of the indebtedness outstanding under the Credit Facility
was originally incurred in connection with the DSI Acquisition, the Cobb
Acquisition, the Sharewell Acquisition and the ENSCO Technology Acquisition.
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Stockholder offered hereby.
The ENSCO Promissory Note bears interest at a floating rate equal to the
interest rate established from time to time by Chemical Bank as its "base
rate," and is payable in annual installments of approximately $0.7 million
commencing September 30, 1996, with final maturity on September 30, 2000. The
ENSCO Promissory Note is subject to mandatory prepayment upon completion of
the Offering.
As of May 1, 1996, the outstanding indebtedness under the Credit Facility
was $27.3 million, consisting of $11.6 million under a $13.0 million revolving
credit and letter of credit facility (the "Revolving Credit Facility") and a
$15.7 million term loan (the "Term Loan"). Borrowings under the Term Loan and
Revolving Credit Facility generally bear interest at a Eurodollar or
Eurosterling interbank offered rate plus a margin (currently 2.0% for both
facilities) or TCB's prime rate plus a margin (currently 0.5%). The margins
vary based on the Company's ratio of total debt to net worth plus total debt.
At May 1, 1996, the effective interest rates applicable to borrowings under
the Revolving Credit Facility and the Term Loan (giving effect to an interest
rate swap agreement applicable to the Term Loan, see Note 6 to the
Consolidated Financial Statements of the Company) were 7.79% and 8.22%,
respectively. The Term Loan requires quarterly principal payments of
approximately $0.9 million, with final maturity on September 30, 2000. Certain
prepayments of the Term Loan from excess cash flow are also required if the
Company does not meet a financial test. The Revolving Credit Facility has a
term that expires on September 30, 1998. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
16
<PAGE>
DIVIDEND POLICY
Drilex International Inc. has not paid dividends on its Common Stock since
its inception and does not anticipate paying dividends on the Common Stock in
the foreseeable future. The Company expects that it will retain funds
generated by the Company's operations for the development and growth of its
business. The Company's future dividend policy will be determined by its Board
of Directors on the basis of various factors, including, among other things,
the Company's financial condition, cash flows from operations, the level of
its capital expenditures, its future business prospects, the requirements of
Delaware law, and any restrictions imposed by the Company's current or future
credit facilities. Provisions contained in the Credit Facility currently
prohibit the payment of dividends on the Common Stock. In addition, the
Sharewell Replacement Note contains a covenant that requires the maintenance
of $9.5 million of consolidated net worth. This covenant could, under certain
circumstances, limit the Company's ability to pay dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
DILUTION
After giving effect to the conversion of the Convertible Note (assuming
conversion on March 31, 1996), the pro forma net tangible book value (total
assets less goodwill and other intangibles less liabilities) of the Company at
March 31, 1996 was $1.81 per share of Common Stock. After giving effect to the
receipt of an assumed $33.0 million of net proceeds to the Company from the
Offering (based on the sale of Common Stock pursuant to the Offering at an
assumed initial public offering price of $18.00 per share (the midpoint of the
estimated initial public offering price range) and net of estimated
underwriting discounts and commissions and offering expenses), pro forma net
tangible book value per share would have been $6.16 per share of Common Stock
outstanding after the Offering, representing an immediate increase in net
tangible book value of $4.35 per share of Common Stock to the existing
stockholders and an immediate dilution of $11.84 per share to the new
investors purchasing Common Stock in the Offering. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $18.00
Pro forma net tangible book value per share before the
Offering.................................................... $1.81
Increase in pro forma net tangible book value per share
attributable to sale of Common Stock by the Company in
the Offering................................................ 4.35
Pro forma net tangible book value per share after the Offering....... 6.16
------
Dilution in pro forma net tangible book value per share to new
investors purchasing Common Stock offered hereby.................... $11.84
======
</TABLE>
The following table sets forth, as of March 31, 1996, the number of shares
of Common Stock purchased or to be purchased from the Company, the total
consideration paid or to be paid to the Company and the average price per
share paid or to be paid by existing stockholders (including the Selling
Stockholder, assuming conversion of the Convertible Note, as if such
conversion had occurred as of March 31, 1996) and by new investors, based on
the assumed initial public offering price:
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
----------------- ------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders............. 4,753,740 70.4% $22,398,225 38.4% $ 4.71
New investors..................... 2,000,000 29.6 36,000,000 61.6 18.00
--------- ----- ----------- -----
Total........................... 6,753,740 100.0% $58,398,225 100.0% $ 8.65
========= ===== =========== ===== ======
</TABLE>
17
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated short-term debt and
capitalization of the Company at March 31, 1996 and as adjusted to give effect
to the Offering (which includes the conversion of the $2.5 million principal
amount Convertible Note into 361,962 shares of Common Stock) and the
application of the net proceeds to the Company therefrom (assumed to be $33.0
million) as described under "Use of Proceeds." This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Unaudited Pro Forma Condensed Consolidated
Statement of Income and the Consolidated Financial Statements of the Company,
including the Notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED
------------ -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Short-term debt:
Current maturities of long-term debt............... $ 5,852 $ 1,150
============ ============
Long-term debt (less current maturities):
Credit Facility.................................... $ 22,965 $ --
ENSCO Promissory Note.............................. 2,849 --
Convertible Note................................... 2,000 --
Cobb Promissory Notes.............................. 1,666 1,666
Sharewell Promissory Notes......................... 1,802 1,802
Sharewell Replacement Note......................... 1,663 1,663
------------ ------------
Total long-term debt............................. 32,945 5,131
------------ ------------
Minority interests................................... 794 794
Stockholders' equity:
Preferred Stock, $.01 par value, 10,000,000 shares
authorized, none issued........................... -- --
Common Stock, $.01 par value, 25,000,000 shares
authorized, 4,391,778 shares outstanding
(historical), 6,753,740 shares outstanding (as
adjusted)......................................... 44 68
Additional paid-in capital......................... 19,903 55,379
Retained earnings.................................. 4,319 4,319
------------ ------------
Total stockholders' equity....................... 24,266 59,766
------------ ------------
Total capitalization........................... $ 63,857 $ 66,841
============ ============
</TABLE>
18
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OTHER DATA
The following table sets forth selected historical financial and other data
for the Company. The information presented as of and for the periods ended
December 31, 1995 and 1994, March 30, 1994 and December 31, 1993 is derived
from the audited consolidated financial statements of the Company and its
predecessor company, DSI. The information presented as of and for the years
ended December 31, 1992 and 1991 is derived from the unaudited consolidated
financial statements of DSI. The information as of and for the three months
ended March 31, 1996 and 1995 is derived from unaudited consolidated financial
statements of the Company, which include all adjustments that the Company
considers necessary for a fair presentation of the financial position and
results of operations for those periods. Operating results for the three
months ended March 31, 1996 are not necessarily indicative of the results that
may be expected for the entire year ending December 31, 1996. The following
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements of the Company, including the Notes thereto,
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR COMPANY(c)
---------------------------------------------- ---------------------------------------
THREE MONTHS MARCH 30, 1994 JANUARY 1,
ENDED MARCH 31, YEAR ENDED (INCEPTION) TO 1994 TO YEARS ENDED DECEMBER 31,
---------------- DECEMBER 31, DECEMBER 31, MARCH 30, ----------------------------
1996 1995 1995(a) 1994(b) 1994 1993 1992 1991
------- ------- ------------ -------------- ---------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net revenues............ $19,457 $10,527 $57,526 $25,209 $6,357 $25,871 $24,349 $28,302
Costs of sales and
operations............. 12,018 6,462 34,606 12,924 3,364 14,093 14,326 14,625
Selling, general and
administrative
expenses............... 4,243 2,644 13,448 6,711 2,029 8,286 10,573 9,226
Depreciation and
amortization........... 1,580 761 4,492(d) 1,855 775 3,107 2,942 3,489
------- ------- ------- ------- ------- -------- -------- --------
Operating income (loss). 1,616 660 4,980 3,719 189 385 (3,492) 962
Interest expense........ (811) (203) (1,935) (478) (481) (1,893) (1,667) (1,686)
------- ------- ------- ------- ------- -------- -------- --------
Income (loss) before
income taxes and
minority interests..... 805 457 3,045 3,241 (292) (1,508) (5,159) (724)
Provision for income
taxes.................. (290) (164) (1,097) (1,166) (3) (152) (84) (71)
Minority interests...... 11 (88) (164) (66) -- -- -- --
------- ------- ------- ------- ------- -------- -------- --------
Net income (loss)....... $ 526 $ 205 $ 1,784 $ 2,009 $ (295) $ (1,660) $ (5,243) $ (795)
======= ======= ======= ======= ======= ======== ======== ========
Net income per common
and common equivalent
share:
Primary................ $ .12 $ .05 $ .40 $ .57
======= ======= ======= =======
Fully diluted.......... $ .11 $ .05 $ .40 $ .57
======= ======= ======= =======
Weighted average common
and common equivalent
shares outstanding:
Primary................ 4,552 4,390 4,411 3,507
======= ======= ======= =======
Fully diluted.......... 4,914 4,390 4,501 3,507
======= ======= ======= =======
OTHER DATA:
Capital expenditures.... $ 1,816 $ 773 $ 5,408 $ 707 $ 195 $ 252 $ 1,364 $ 3,196
EBITDA(e)............... 3,196 1,421 9,472 5,574 964 3,492 (550) 4,451
Summary cash flow
information:
Net cash provided by
(used for) operating
activities............ 1,249 (55) (185) 877 663 277 (3,752) (3,334)
Net cash used for
investing
activities............ (1,124) (616) (19,360) (22,893) (195) (252) (1,364) (3,196)
Net cash provided by
financing
activities(c)......... 444 638 19,415 22,965 28 503 5,379 6,378
BALANCE SHEET DATA:
Working capital......... $13,653 $10,620 $13,365 $ 9,511 $10,533 $ 10,717 $ 10,581 $ 11,839
Total assets............ 78,455 36,965 77,754 36,292 24,965 26,196 26,793 28,033
Long-term debt, less
current maturities..... 32,945 9,825 32,467 7,633 -- -- -- --
Total stockholders'
equity(c)(f)........... 24,266 18,762 23,682 19,557 22,794 22,990 24,459 26,177
</TABLE>
- -------
(a) Results for the year are not comparable to prior periods due to the ENSCO
Technology and Sharewell Acquisitions.
(b) Results for the period are not comparable to prior years due to the Cobb
Acquisition.
(c) The predecessor company, DSI, was a wholly owned subsidiary of MascoTech
prior to its acquisition by the Company on March 30, 1994. As a wholly
owned subsidiary of MascoTech, DSI was allocated interest and other
expenses by its parent, and had no long-term indebtedness since its
financing requirements were met through advances from MascoTech. For
purposes of this presentation, such advances from MascoTech are reflected
in stockholders' equity. Earnings per share are not presented for periods
during which DSI was wholly owned by MascoTech.
(d) Effective April 1, 1995, the Company changed its estimated useful life for
certain drilling motor components from five to seven years. This change
was made to better reflect the estimated period during which these assets
will remain in service. The effect of this change was an increase in net
income of $248,000, or $.06 per share, for the year ended December 31,
1995.
(e) EBITDA means operating income (loss) plus depreciation and amortization
and is a supplemental financial measurement used by the Company in the
evaluation of its business. EBITDA is not intended to represent cash flow,
an alternative to net income or any other measure of performance in
accordance with generally accepted accounting principles. Reference is
made to the Consolidated Statement of Cash Flows contained in the
Consolidated Financial Statements of the Company included elsewhere in
this Prospectus for a complete presentation of cash flows from operating,
investing and financing activities prepared in accordance with generally
accepted accounting principles.
(f) No cash dividends were declared or paid on Common Stock during any of the
periods presented.
19
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
The following unaudited pro forma condensed consolidated statement of income
for the year ended December 31, 1995 has been prepared to reflect adjustments
to the Company's historical results of operations as if (i) the Sharewell and
ENSCO Technology Acquisitions had occurred on January 1, 1995 and (ii) the
Offering had occurred on January 1, 1995 and the net proceeds from the
Offering had been used for the repayment of indebtedness as described under
"Use of Proceeds." The pro forma financial information should be read in
conjunction with "Selected Historical Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and the Notes thereto
contained elsewhere herein. The pro forma information does not necessarily
reflect the actual results that would have been achieved, nor is it
necessarily indicative of future consolidated results for the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------------------------------------------
ENSCO PRO FORMA
SHAREWELL TECHNOLOGY PRO FORMA ADJUSTMENTS
PRO FORMA ENSCO PRO FORMA FOR FOR PRO
HISTORICAL SHAREWELL(a) ADJUSTMENTS TECHNOLOGY(b) ADJUSTMENTS ACQUISITIONS OFFERING FORMA
---------- ------------ ----------- ------------- ----------- ------------ ----------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $57,526 $2,664 $ -- $13,367 $ -- $73,557 $ -- $73,557
Operating expenses:
Costs of sales and
operations............ 34,606 1,790 -- 8,469(f) -- 44,865 -- 44,865
Selling, general and
administrative
expenses.............. 13,448 815 -- 1,887 -- 16,150 -- 16,150
Depreciation and
amortization.......... 4,492 179 143(c) 1,797 (257)(c) 6,354 -- 6,354
------- ------ ----- ------- ----- ------- ------ -------
52,546 2,784 143 12,153 (257) 67,369 -- 67,369
------- ------ ----- ------- ----- ------- ------ -------
Operating income (loss). 4,980 (120) (143) 1,214 257 6,188 -- 6,188
Interest expense........ (1,935) (30) (198)(d) -- (854)(d) (3,017) 2,302(g) (715)
------- ------ ----- ------- ----- ------- ------ -------
Income (loss) before
income taxes and
minority interests..... 3,045 (150) (341) 1,214 (597) 3,171 2,302 5,473
Credit (provision) for
income taxes........... (1,097) 44 133(e) (538) 316 (e) (1,142) (828)(e) (1,970)
Minority interests...... (164) 2 -- 62 -- (100) -- (100)
------- ------ ----- ------- ----- ------- ------ -------
Net income (loss)....... $ 1,784 $ (104) $(208) $ 738 $(281) $ 1,929 $1,474 $ 3,403
======= ====== ===== ======= ===== ======= ====== =======
Net income per common
and common equivalent
share.................. $ .40 $ .42 $ .49
======= ======= =======
Weighted average common
and common equivalent
shares outstanding..... 4,411 4,576 6,938(h)
======= ======= =======
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated statement
of income.
20
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF INCOME
(a) Represents Sharewell's results of operations for the period from
January 1, 1995 to May 5, 1995 (the date of acquisition).
(b) Represents ENSCO Technology's results of operations for the period from
January 1, 1995 to September 30, 1995 (the date of acquisition).
(c) Adjusts depreciation expense (for property and equipment) and
amortization expense (for goodwill and other intangible assets) as a
result of purchase price accounting adjustments for the related assets.
(d) Adjusts interest expense as if the indebtedness related to the
acquisitions had been outstanding for the period from January 1, 1995
to the date of acquisition.
(e) Adjusts the provision for income taxes based on the Company's statutory
income tax rate of 36%.
(f) Includes a net gain of approximately $0.6 million resulting primarily
from reimbursements from customers for MWD equipment that was lost in
hole.
(g) Represents interest expense related to indebtedness which is assumed to
be retired with proceeds to the Company from the Offering and interest
expense on the Convertible Note. See "Use of Proceeds."
(h) Includes the weighted average number of common and common equivalent
shares outstanding during the year, as adjusted to reflect the
Sharewell and ENSCO Technology Acquisitions and the Offering (including
the conversion of the Convertible Note) as of January 1, 1995.
- --------
Note: The Company expects to realize future cost savings through reduced
rentals of drilling motors from third parties and increased utilization
of MWD equipment. While there are various uncertainties involved in
projecting future results, the amount of these cost savings is expected
to be approximately $3.0 million per year. The pro forma results of
operations do not reflect these expected cost savings. In addition, the
Company expects that its status as a corporation with publicly traded
securities will result in certain additional administrative, accounting,
legal and other costs, which the Company estimates will initially amount
to approximately $0.3 million annually. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding the
Company's financial condition and results of operations as of March 31, 1996
and for the three-month periods ended March 31, 1996 and 1995 and each year in
the three-year period ended December 31, 1995. The statements in this
discussion regarding the industry outlook, the Company's expectations
regarding growth in the precision drilling segment, the Company's expectations
regarding the future performance of its businesses, and the other non-
historical statements in this discussion are forward-looking statements. These
forward-looking statements are subject to numerous risks and uncertainties,
including but not limited to the uncertainties relating to exploration and
development decisions to be made in the future by oil and gas exploration and
development companies and the risks and uncertainties described in "Risk
Factors," particularly those under the captions "Reliance on the Oil and Gas
Industry," "Reliance on New Product Development and Possible Technological
Obsolescence," "Risks of International Operations" and "Governmental
Regulation and Environmental Matters." This discussion should be read in
conjunction with the Unaudited Pro Forma Condensed Consolidated Statement of
Income and the Consolidated Financial Statements of the Company and of DSI,
including the Notes thereto, included elsewhere in this Prospectus.
OVERVIEW
The Company's business is substantially dependent upon the condition of the
oil and gas industry and the willingness of oil and gas companies to spend
capital on drilling and workover operations, which is generally dependent on
the prevailing view of future hydrocarbon product prices. This is particularly
the case in the United States, where the Company generates approximately 74%
of its revenues. Expectations relative to such future prices are affected by
numerous factors affecting the supply and demand for oil and natural gas,
including worldwide economic activity, interest rates and the cost of capital,
environmental regulation, tax policies, political requirements of national
governments, coordination by OPEC, the cost of producing oil and gas, and
technological advances. Oil and gas prices and exploration and development
activity have been characterized by significant volatility in recent years.
Although overall oil and gas drilling activity as measured by the rotary rig
count has declined significantly over the past 15 years, rapid increases in
precision drilling technology, enhanced geological prospecting technologies
(such as 3-D seismic technologies and CAEX techniques), and the demands of
exploration and development companies for more precise and less costly
drilling systems have driven growth in the precision drilling segment of the
oilfield drilling market. Based on industry sources, the Company estimates
that the number of oil and gas wells drilled in the United States using
precision drilling technology increased 56% from 2,110 in 1990 to 3,288 in
1995. As a result of an overall decrease in oil and gas drilling activity,
this growth has resulted in the proportion of oil and gas wells drilled in the
United States employing precision drilling technology increasing from 7% in
1990 to 17% in 1995.
Drilex anticipates continued growth in the market for precision drilling
services and expects the number of oilfield jobs employing precision drilling
techniques to grow at a higher rate than the number of jobs in the overall
drilling market. Moreover, with respect to jobs employing precision drilling
techniques, the Company expects continued increases in the average number of
feet per well drilled using a downhole drilling motor, particularly in slim-
hole applications. The Company believes the growth in the number of precision
drilling jobs and the increase in the utilization of precision drilling
technology per job will be driven by the requirements of exploration and
production companies for more precision and cost efficiency in their drilling
operations, as well as the greater acceptance of precision drilling technology
in the drilling industry, which has resulted from technological advancements,
product improvements (which have extended equipment lives and increased
penetration rates), and the expansion of downhole drilling motor technology to
a wide variety of slim-hole applications. The Company also believes that, over
time, the demand for hydrocarbon products will grow and that exploration and
development activity will increase. The Company expects this increase in
activity to be primarily driven by lower oil and gas company cost structures,
technological advances and the interest of foreign countries in maintaining or
expanding their production.
22
<PAGE>
Drilex International Inc. was organized by DRLX Partners L.P. and John
Forrest (a founder of DSI and the current President and Chief Executive
Officer of the Company) to acquire DSI (also referred to herein as the
"Predecessor") from MascoTech on March 31, 1994. The Company's predecessor was
originally formed in 1981.
Since the DSI Acquisition, the Company has grown substantially through the
expansion of its product and service offerings and acquisitions of
complementary businesses. The recent Cobb and ENSCO Technology Acquisitions
(completed on September 30, 1994 and 1995, respectively) expanded the
Company's presence in certain of its key geographic markets for oilfield
precision drilling services and provided the Company with significant
opportunities to expand its distribution of Drilex-manufactured motors by
employing them in the newly acquired operations. In addition, the ENSCO
Technology Acquisition significantly expanded the Company's MWD capabilities,
providing the Company additional opportunities to deploy its products and
services. The Sharewell Acquisition (completed on May 5, 1995) also provided
the opportunity to expand the Company's product distribution and significantly
increased the Company's service capabilities in the emerging environmental
remediation and trenchless services markets.
The Company's recent acquisitions have also created opportunities for
reduced costs and improved efficiencies. While the Company has taken a number
of actions to consolidate the operations of the acquired entities, the Company
is still in the process of implementing its consolidation plan, which includes
several actions that are expected to result in margin improvements. In
particular, the Company expects to realize significant cost savings by
employing Drilex motors in the operations acquired in the ENSCO Technology and
Sharewell Acquisitions in place of leased drilling motors that have been
provided by third parties. The Company expects to substantially complete this
motor replacement program in the second half of 1996 and, as a result, expects
to generate annualized net cost savings of approximately $2.1 million by
eliminating the associated rental expense. The Company also expects to realize
additional margin improvement of approximately $0.9 million as a result of the
increased utilization of the MWD systems acquired in the ENSCO Technology
Acquisition, resulting from the employment of this equipment in the Company's
other oilfield precision drilling services operations. Aside from the
improvements expected to result from its acquisitions, the Company also
expects to realize cost improvements and/or growth as a result of several
other initiatives, including the introduction of a new concept power section
for its primary line of downhole drilling motors (see "Business--Engineering
and Manufacturing"), the completion of the startup of the Company's Western
Venezuela operations, a reorganization of the Company's Louisiana Gulf Coast
operations and anticipated increases in sales of new hole openers and a new
line of low cost motors for trenchless services applications.
As an important part of its business strategy, the Company will continue to
seek acquisitions of other businesses to expand distribution of the Company's
products and services, to add key technologies, to gain access to industry
niches, and to otherwise enhance its market presence. Upon completion of the
Offering, the Company should have available to it (i) internally generated
cash in excess of working capital, capital expenditure and debt service
requirements, (ii) borrowing capacity under the Credit Facility, and (iii) the
ability to issue additional publicly traded Common Stock, which may be used to
acquire other businesses. See "--Liquidity and Capital Resources."
RESULTS OF OPERATIONS
Drilex International Inc. began operations on March 30, 1994, the effective
date of the DSI Acquisition. As a result, for purposes of the following
discussion, the amounts from the consolidated statement of income of Drilex
International Inc. from March 30, 1994 through December 31, 1994 have been
combined with the statement of income for the Predecessor for the three months
ended March 31, 1994 (adjusted to a pro forma basis as if the DSI Acquisition
had occurred as of January 1, 1994). The following discussion presents an
analysis of such combined results for 1994 compared to the results of
operations of Drilex International Inc. for 1995 and the results of operations
of the Predecessor for 1993.
The Company's business is somewhat seasonal, since domestic oil and gas
drilling activities are generally lower in the first and second quarters.
Adverse weather conditions can curtail operations in certain regions during
different parts of the year. Accordingly, the Company's results of operations
for any one quarter are not necessarily indicative of results to be expected
for the full year.
23
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS YEAR ENDED YEAR ENDED YEAR ENDED
ENDED MARCH 31, ENDED MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1995 1994 1993
----------------- ----------------- ----------------- ----------------- -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF NET OF NET OF NET OF NET OF NET
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
------- -------- ------- -------- ------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $19,457 100.0% $10,527 100.0% $57,526 100.0% $31,566 100.0% $25,871 100.0%
Operating expenses:
Costs of sales and
operations........... 12,018 61.8 6,462 61.4 34,606 60.1 16,288 51.6 14,093 54.5
Selling, general and
administrative
expenses............. 4,243 21.8 2,644 25.1 13,448 23.4 8,605 27.2 8,286 32.0
Depreciation and
amortization......... 1,580 8.1 761 7.2 4,492 7.8 2,324 7.4 3,107 12.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Operating income........ 1,616 8.3 660 6.3 4,980 8.7 4,349 13.8 385 1.5
Interest expense........ (811) (4.2) (203) (1.9) (1,935) (3.4) (567) (1.8) (1,893) (7.3)
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income (loss) before
income taxes and
minority interests..... 805 4.1 457 4.4 3,045 5.3 3,782 12.0 (1,508) (5.8)
Provision for income
taxes.................. (290) (1.5) (164) (1.6) (1,097) (1.9) (1,362) (4.3) (152) (0.6)
Minority interests...... 11 0.1 (88) (0.8) (164) (0.3) (66) (0.2) -- --
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Net income (loss)....... $ 526 2.7% $ 205 2.0% $ 1,784 3.1% $ 2,354 7.5% $(1,660) (6.4)%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
Comparison of Three Months Ended March 31, 1996 and 1995
Consolidated revenues for the three months ended March 31, 1996 were $19.5
million, an increase of 85% from revenues of $10.5 million for the
corresponding period in the prior year. Of the $9.0 million increase, $2.2
million was attributable to the Sharewell Acquisition (which was effective as
of May 5, 1995), and approximately $4.8 million was attributable to the ENSCO
Technology Acquisition (which was effective as of September 30, 1995). The
remainder of the increase is primarily attributable to increased drilling
services revenue in Texas and Eastern Venezuela.
Costs of sales and operations increased from $6.5 million in the first
quarter of 1995 to $12.0 million in the first quarter of the current year. As
a percent of revenues, costs of sales and operations were essentially
unchanged from the first quarter of 1995 to the first quarter of the current
year. Of the $5.5 million increase, $4.6 million was due to the ENSCO
Technology and Sharewell Acquisitions.
Excluding the Sharewell and ENSCO Technology Acquisitions, cost of sales and
operations were $7.4 million in the first quarter of 1996, or 59.5% of
revenues, compared to $6.5 million in the first quarter of 1995, or 61.4% of
revenues. In the first quarter of 1995, the Company's trenchless business unit
absorbed a $0.6 million charge related to an operational dispute, which was
settled in full during May 1996. Such settlement did not result in any further
income statement impact after March 31, 1995.
Costs of sales and operations for the operations acquired in both the
Sharewell and ENSCO Technology Acquisitions were approximately 66% of
revenues. Sharewell's margin was lower than that of the Company's pre-existing
oilfield drilling services (excluding the Sharewell and ENSCO Technology
Acquisitions) due to sales of third-party equipment. Similarily, ENSCO
Technology's margin has historically been less than that of the Company's pre-
existing oilfield drilling services due to higher costs associated with
measurement-while-drilling (or MWD) equipment and third-party rentals.
Selling, general and administrative expenses increased from $2.6 million in
the first quarter of 1995 to $4.2 million in the first quarter of 1996. As a
percentage of revenues, such expenses decreased from 25.1% in the first
quarter of 1995 to 21.8% in the first quarter of 1996. Of the increase, $1.2
million resulted from the ENSCO Technology and Sharewell Acquisitions.
Corporate overhead increased $0.3 million for additional advertising,
marketing and personnel costs associated with the support of these newly
acquired operations.
2 As a result of events occurring after the end of the 1996 quarter, the
Company expects to increase its allowance for doubtful accounts relating to
two Australian customers of Sharewell. The impact on the Company's net income
is expected to be approximately $150,000.
24
<PAGE>
Depreciation and amortization increased from $0.8 million in the first
quarter of 1995 to $1.6 million in the first quarter of 1996. This increase
was primarily associated with the ENSCO Technology and Sharewell Acquisitions.
Interest expense increased from $0.2 million in the first quarter of 1995 to
$0.8 million in the first quarter of 1996 due to an increase in debt to $38.8
million at March 31, 1996. Substantially all of this increase in debt was
incurred in connection with the ENSCO Technology and Sharewell Acquisitions.
Comparison of Years Ended December 31, 1995 and 1994
Consolidated revenues for 1995 were $57.5 million, an increase of 82% from
revenues of $31.6 million for the prior year. Of the $25.9 million increase,
$7.9 million was attributable to the Sharewell Acquisition (which was
effective as of May 5, 1995), $5.3 million was attributable to the ENSCO
Technology Acquisition (which was effective as of September 30, 1995), and
$5.2 million resulted from the effect of a full year's activity for the
operations acquired in the Cobb Acquisition, as compared to the inclusion of
only three months of such operations in 1994 (following the September 30, 1994
effective date of the Cobb Acquisition). The remaining increase in revenues
resulted from an increase in the Company's drilling services revenues, due
primarily to increased operations in Texas, Europe (including the North Sea)
and Eastern Venezuela. The increase in activity in Texas was a result of
increased drilling activity by several major customers. Increased revenues
attributable to the European markets were due to greater small motor activity,
including motor sales to the Commonwealth of Independent States, and expanded
market penetration. Revenues in Eastern Venezuela more than doubled to $6.2
million from 1994 levels, as drilling activity significantly expanded in this
area.
Costs of sales and operations increased from $16.3 million in 1994 to $34.6
million in 1995. As a percent of revenues, costs of sales and operations
increased from 51.6% in 1994 to 60.1% in 1995. Of the $18.3 million increase,
$12.0 million was due to the ENSCO Technology and Sharewell Acquisitions and
the effect of a full year's activity for the operations acquired in the Cobb
Acquisition. Margins for the operations acquired in the Cobb Acquisition
decreased in 1995 due to increased field expenses, a greater proportion of
lower-margin onshore activity than higher-margin offshore activity compared to
the prior year, and increased costs associated with third party motor rentals.
Sharewell's margins were adversely affected in 1995 due to a greater
proportion of lower-margin sales of third-party equipment compared to higher-
margin service billings, as compared to the prior year. The margins for the
operations acquired in the ENSCO Technology Acquisition were lower than the
Company's other drilling operations due to low utilization of MWD equipment
and the expenses associated with rentals of third-party motors.
Costs of sales and operations related to the Company's pre-existing oilfield
drilling services (excluding the recent acquisitions) were adversely impacted
in 1995 by increased engineering and manufacturing costs of approximately $0.6
million. These increases resulted from costs incurred in 1995 for development
of newly designed small-diameter motors, a new concept power section for the
Company's primary line of drilling motors, and equipment for slim-hole reentry
drilling and workover applications. The Company began operations in Western
Venezuela in 1995 and incurred $0.3 million in startup expenses for staffing
personnel, freight and duties on imported equipment and facilities. Operations
in this location generated only minimal revenues in 1995, but are expected to
generate increased revenues in 1996. In 1995, the Company's trenchless
business unit absorbed a $0.6 million charge related to an operational
dispute, which was settled in full during May 1996.
Selling, general and administrative expenses increased from $8.6 million in
1994 to $13.4 million in 1995. As a percentage of revenues, selling, general
and administrative expenses decreased from 27.2% in 1994 to 23.4% in 1995. Of
the $4.8 million increase, $3.1 million was due to the ENSCO Technology,
Sharewell and Cobb Acquisitions. Corporate overhead increased $0.8 million due
to additional advertising, marketing and personnel costs associated with the
support of these three acquisitions, in particular the ENSCO Technology
Acquisition because of its size and complexity.
Depreciation and amortization increased from $2.3 million in 1994 to $4.5
million in 1995. This increase was primarily due to the ENSCO Technology,
Sharewell and Cobb Acquisitions, partially offset by a $0.4 million decrease
resulting from an increase in the estimated useful lives for certain drilling
equipment effective April 1, 1995.
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Interest expense increased from $0.6 million in 1994 to $1.9 million in 1995
due to an increase in debt to $38.4 million at December 31, 1995.
Substantially all of this increase in debt was due to the ENSCO Technology,
Sharewell and Cobb Acquisitions.
Comparison of Years Ended December 31, 1994 and 1993
Consolidated revenues increased from $25.9 million in 1993 to $31.6 million
in 1994, an increase of 22%. Of the $5.7 million increase, $1.7 million was
due to the Cobb Acquisition, which occurred in September 1994. The remaining
increase was primarily attributable to increased oilfield drilling revenues
attributable to markets in Texas and in Eastern Venezuela, which was a startup
operation in 1993, and increased sales coverage. These increases were
partially offset by a $0.4 million decrease in trenchless revenues compared to
1993, reflecting the completion of a large fiber optic cable installation job
in 1993.
Costs of sales and operations increased from $14.1 million in 1993 to $16.3
million in 1994, or 16%. As a percentage of revenues, these costs decreased
from 54.5% in 1993 to 51.6% in 1994. Approximately $0.8 million of the
increase was attributable to the Cobb Acquisition. The 1993 results included
approximately $1.1 million of nonrecurring charges related to the
consolidation of certain operating, manufacturing, engineering and
administrative functions. The 1993 margins were positively affected by the
above-referenced fiber optic installation job in the Company's trenchless
operations.
Selling, general and administrative expenses increased slightly from $8.3
million in 1993 to $8.6 million in 1994. Approximately $0.4 million was
attributable to the Cobb Acquisition. These expenses decreased as a percentage
of revenues from 32.0% in 1993 to 27.3% in 1994.
Depreciation and amortization decreased from $3.1 million in 1993 to $2.3
million in 1994. The decrease was primarily due to an approximately $1.0
million reduction resulting from a lower depreciable basis in 1994 as a result
of the purchase price allocation associated with the DSI Acquisition.
Interest expense for 1994 of $0.6 million is principally due to the DSI and
Cobb Acquisitions. Interest expense in 1993 of $1.9 million for the
Predecessor consisted entirely of intercompany interest allocated from its
parent entity.
LIQUIDITY AND CAPITAL RESOURCES
Since the DSI Acquisition, the Company has generally funded its activities
(other than its acquisitions) through cash generated from operations and
short-term borrowings. The cash portion of the purchase price for each of the
Cobb, Sharewell and ENSCO Technology Acquisitions was funded through
borrowings under the Credit Agreement and, in the case of the Cobb and ENSCO
Technology Acquisitions, from the issuance of capital stock. For a description
of the other financing arrangements for these acquisitions, see "The Company."
At March 31, 1996, the Company had working capital of $13.7 million,
compared to working capital of $13.4 million at December 31, 1995 and $9.5
million at December 31, 1994. The increase from 1994 primarily reflects
increases in accounts receivable and inventory, partially offset by increases
in accounts payable and current maturities of long-term debt. Each of these
increases was primarily due to the effects of the ENSCO Technology and
Sharewell Acquisitions.
Capital expenditures (excluding acquisitions) for 1995 were $5.4 million, as
compared to $0.9 million for the prior year. The 1995 expenditures included
$3.0 million for acquisitions of new MWD systems and $0.7 million for a new
slant drilling rig for the Company's trenchless services operations. The
Company has budgeted approximately $7.3 million for capital expenditures
(excluding acquisitions) in 1996. Such expenditures are expected to relate
primarily to acquisitions of new MWD systems. The Company believes that it
will be able to increase its current production to support higher revenues
without material additional capital investment.
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During the remainder of 1996, the Company expects to fund its working
capital, anticipated capital expenditures and debt maturity requirements
(excluding debt to be repaid with proceeds from the Offering) primarily
through cash provided by operating activities. The Company carries substantial
inventory and accounts receivable, and will require increased working capital
as its revenues grow.
Borrowings outstanding under the Revolving Credit Facility may not exceed
$13.0 million at any time, of which up to $3.0 million may be used for letters
of credit. The Revolving Credit Facility has a term that expires on September
30, 1998. The Revolving Credit Facility requires the Company to maintain
certain financial covenants (including a minimum tangible net worth, a minimum
fixed charge coverage ratio and maximum debt to capitalization ratios) and
limits borrowings of the Company (other than under the Revolving Credit
Facility) to no more than $2.0 million. The Revolving Credit Facility also
places restrictions on the Company's ability to, among other things, pay
dividends, enter into unrelated lines of business, undertake transactions with
affiliates and make investments. For additional description of the Credit
Facility's terms, see Note 6 to the Consolidated Financial Statements of the
Company included elsewhere in this Prospectus.
As of May 1, 1996, the Company had available revolving credit borrowing
capacity of $1.4 million under the Credit Facility. The Company intends to use
a portion of the net proceeds it will receive from the Offering to repay all
borrowings under the Term Loan and Revolving Credit Facility, amounting to
$15.7 million and $11.6 million, respectively, at May 1, 1996. The Company
will be able to reborrow amounts paid under the Revolving Credit Facility,
while the Term Loan commitment will terminate upon prepayment. In connection
with the termination of the Term Loan, the Company intends to terminate a
related interest rate swap agreement (described in Note 6 to the Consolidated
Financial Statements of the Company). The Company anticipates that the
termination of such swap agreement will not involve any material expense to
the Company.
The Company intends to continue pursuing attractive acquisition
opportunities. The timing, size or success of any acquisition effort and the
associated potential capital commitments are unpredictable. The Company
expects to fund future acquisitions primarily through a combination of working
capital, cash flow from operations and bank borrowings, including the
unborrowed portion of the Revolving Credit Facility, as well as issuances of
additional equity.
Due to the relatively low levels of inflation experienced in 1993, 1994 and
1995, inflation did not have a significant effect on the Company's results in
such years.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"). SFAS 121 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS 121 is effective for fiscal years beginning after December
15, 1995. The Company believes that the adoption of SFAS 121 will not have a
material impact on its consolidated financial statements.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123
establishes alternative methods of accounting and disclosure for employee
stock-based compensation arrangements. The Company has elected to continue the
use of the "intrinsic value based method" of accounting for its employee stock
option plan. This method does not result in the recognition of compensation
expense when employee stock options are granted if the exercise price of the
options equals or exceeds the fair market value of the stock at the date of
grant. The Company will adopt the disclosure requirements of SFAS 123 when it
becomes effective in 1996.
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BUSINESS
GENERAL
Drilex is a leading provider of products and services used in directional,
horizontal and other precision drilling of oil and gas wells, oilfield
workover operations, environmental remediation applications, and trenchless
pipeline and cable laying applications. Precision drilling involves the
combined use of a steerable downhole positive displacement drilling motor and
a guidance system to enable the controlled placement of a borehole through
predetermined locations. Drilex employs this technology to drill to depths
ranging from near surface to more than four miles. The Company's products and
services include comprehensive computerized well planning and engineering
services, supervision of drilling operations and project management, a full
range of high performance downhole positive displacement motor systems,
guidance systems (such as MWD instrument systems and steering tools), and
other related downhole tools. Oilfield applications accounted for
approximately 86% of the Company's revenues (on a pro forma basis) in 1995.
The Company currently operates from 23 locations around the world and has
approximately 390 employees.
Drilex was one of the pioneers in the development of downhole drilling
motors in the early 1980s and is now a worldwide leader in the design and
manufacture of high-performance, multi-lobed positive displacement drilling
motors. A positive displacement drilling motor, one of the key components in a
precision drilling project, is hydraulically powered by the drilling fluids
pumped into the wellbore during normal drilling operations. In addition to
providing directional control, a downhole drilling motor provides the primary
rotational power to the drill bit, in contrast to conventional vertical
drilling, in which spinning the drillstring at the surface is the primary
method for rotating the drill bit. The Company employs its drilling motors in
its own service operations and also provides motors for sale or rent under the
internationally recognized "Drilex" brand name to oil and gas exploration and
development companies and oilfield service contractors. Drilex has designed
its drilling motors to optimize flexibility, power and reliability, resulting
in some of the highest power and quality ratings in the industry. Drilex
believes it is the only independent company focused on providing precision
drilling services that designs and manufactures the primary components of its
own drilling motors. The Company believes that its ability to design and
manufacture its own drilling motors provides it with distinct competitive
advantages, both in terms of the performance characteristics of its motors and
the quality of service that Drilex is able to provide to its customers.
INDUSTRY OVERVIEW
Oilfield applications currently comprise the largest part of the precision
drilling market, which is a relatively new segment of the overall drilling
industry. Based on industry sources, the Company estimates that the number of
oil and gas wells drilled in the United States using precision drilling
technology increased 56% from 2,110 in 1990 to 3,288 in 1995. As a result of
an overall decrease in oil and gas drilling activity, this growth has resulted
in the proportion of oil and gas wells drilled in the United States employing
precision drilling technology increasing from 7% in 1990 to 17% in 1995.
Because of the complexity involved in precision drilling, oil and gas
operators typically rely on specialized precision drilling service contractors
to manage the entire process of drilling the horizontal or directional portion
of a well.
To a large extent, the development of precision drilling is attributable to
exploration and development activities in offshore areas as well as the Austin
Chalk formation. In regard to offshore areas, precision drilling provides the
ability to drill numerous offshore wells from a single fixed platform and the
ability to control the placement of a large number of wellpaths in a
relatively small area while avoiding the operational problems that would
result if the wellpaths intersected. In addition, new "extended-reach"
precision drilling technology allows many smaller offshore reservoirs, which
may not be economic to develop on a stand-alone basis, to now be developed
from existing offshore platforms.
The Austin Chalk formation, a large formation extending from South Texas to
parts of Louisiana, is characterized by vertical fractures containing
recoverable quantities of oil and gas in closely grouped pay zones.
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This formation has served as an excellent "proving ground" for new precision
drilling technologies, which have significantly improved the ability of the
directional drilling contractor to control the location and direction of the
drill bit reaching over 6,000 feet horizontally from the vertical section of
the well. Horizontal drilling is valuable and prevalent in this area because
it allows the operator to intersect multiple vertical fractures with a single
horizontal wellbore, thereby increasing well productivity and the total amount
of reserves that can be economically recovered (particularly in the early life
of the well), while reducing overall drilling costs (because fewer wells are
required compared to a vertical development program).
Building upon its success in offshore areas and the Austin Chalk formation,
precision drilling has gained increased acceptance throughout the oil and gas
industry and has spread rapidly to other producing areas. This growth has been
driven primarily by the substantial cost savings, improvements to drilling
efficiency and enhancement to reservoir production that precision drilling can
provide to operators. Precision drilling can be used to develop a field with
multiple wells drilled from the same offshore platform or, in environmentally
sensitive areas (such as the Alaskan North Slope), from fewer surface
facilities than conventional drilling would require. In addition, horizontal
drilling is also important to development of hydrocarbon deposits in sandstone
formations (prevalent in such areas as the Gulf of Mexico, South America,
Alaska and the Far East), because it allows the placement of the wellbore in
the reservoir over an extended length, thus exposing a greater area of the
productive formation and thereby increasing well productivity while reducing
overall drilling costs.
The technological and operational advantages of precision drilling combined
with advances in the identification and location of hydrocarbons have made
many marginal or otherwise uneconomical or depleted reservoirs economically
feasible to produce. A good example of this transformation is the Austin Chalk
formation, which the Company believes accounts for approximately one-third of
the U.S. market for oilfield precision drilling services. The Austin Chalk
formation is an extremely challenging and difficult environment in which to
operate. It requires durable equipment and accurate drilling capabilities.
Recent developments in multilateral technology, which allows two or more
horizontal wells to be drilled from the same vertical wellbore, have further
enhanced well productivity and development efficiency in this area. As one of
the leading precision drilling contractors in the Austin Chalk formation, the
Company has completed numerous multilateral drilling projects in this
formation, including several wells involving vertical depths greater than
14,000 feet and bottom-hole temperatures in excess of 300(degrees) F. Recent
advances in subsurface geological analysis, such as 3-D seismic technologies
and CAEX techniques, which have enhanced the identification and location of
hydrocarbon deposits, combined with recent improvements in precision drilling
technologies, are creating new opportunities for precision drilling services.
Small deposits, which would not be economical to develop on a stand-alone
basis, can be successfully developed utilizing precision drilling techniques
and, in the case of offshore deposits, utilizing existing offshore platforms.
In addition, new "slim-hole" (drilling tool sizes 3-1/2 inches or less in
outside diameter) precision drilling technology used in conjunction with
small-diameter drill pipe or coiled tubing (a substitute for drill pipe) is
permitting operators to re-enter old wells and drill from the existing
wellbore to develop previously untapped deposits.
BUSINESS STRATEGY
The Company's business strategy is built upon Drilex's premier line of
downhole positive displacement drilling motors and emphasizes (i) providing
the highest quality oilfield precision drilling and related customer support
services in key geographic markets where demand for precision drilling
services is concentrated, (ii) maximizing delivery of its core products,
either through sales, rentals or alliance arrangements, into other geographic
markets where the Company does not focus its service efforts, and (iii)
capitalizing on its technical strengths by developing opportunities to deliver
its core products and services into emerging oilfield and non-oilfield markets
where the Company's technical expertise can provide significant advantages.
The Company also intends to explore additional opportunities for external
growth through acquisitions of businesses to complement the Company's existing
operations.
Drilex intends to maintain its position as the leading independent provider
of oilfield precision drilling services by continuing its emphasis on
delivering responsive, reliable and high quality services in key geographic
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markets. The Company currently concentrates its activities in the Austin Chalk
formation (a large formation extending from South Texas to parts of
Louisiana), the Gulf of Mexico, Venezuela, the North Sea, Argentina and
Canada. Each of these markets is characterized by substantial field
development activity (as opposed to new exploration activity) and a relatively
high number of technically challenging situations that require high quality
precision drilling operations. A recent independent market study conducted for
the Company confirmed the Company's belief that service quality, reliability
of equipment, localized knowledge of drilling conditions and experience and
expertise of field personnel are the most important factors in competing for
business in these markets. The Company believes that maintaining control over
the entire design, engineering and manufacturing processes for its drilling
motors provides the Company with distinct advantages in providing high quality
service. The Company designs and builds its motors to optimize precision,
power and reliability. Drilex also maintains a flexible manufacturing process
that includes a continuous improvement program, which produces quality and
performance improvements that enable Drilex to meet the leading-edge needs of
its customers. In addition, the Company concentrates its service activities in
its key geographic markets in order to develop and capitalize on the Company's
local knowledge and to take advantage of the regional experience and expertise
of its drilling supervisors and other technical field personnel, as well as to
achieve scale operating efficiencies. Furthermore, the high level of activity
conducted by the Company in concentrated geographic areas permits a focused
application engineering effort, which allows the Company to refine its
products and services to meet the needs of its customers on a more effective
basis.
The Company also utilizes other distribution channels to maximize delivery
of its products to areas outside of its key geographic markets. Since its
inception, the Company has successfully marketed its drilling motors on a sale
and rental basis to oil and gas exploration and development companies and
other oilfield service contractors under the internationally recognized
"Drilex" brand name. These efforts have been particularly successful in the
North Sea market, where the Company has become an established provider of
drilling motors to operators and other service companies for various
directional drilling and coiled tubing applications. The Company intends to
strengthen its existing distribution channels and expand its product
distribution in those markets where the Company is not a significant service
competitor. In particular, the Company is in the process of establishing
alliance arrangements with several large oilfield service companies, which
would permit these companies to include Drilex motors in their comprehensive
offerings of oilfield products and services in certain markets where the
Company does not focus its service efforts. The alliance agreements the
Company is seeking to establish could take various forms, including agreements
under which the other party would include the Company's services in a packaged
or integrated service offering or agreements whereby the Company would be an
approved provider to the other company. These alliances do not, in general,
constitute long-term purchase commitments by the other party.
The Company plans to continue to build upon its technical drilling
capabilities by further developing opportunities in emerging markets where the
Company's expertise can provide competitive advantages. In particular, the
Company believes that the development and rapid growth in the use of coiled
tubing for oilfield workover, redrilling and recompletion operations has
provided a significant opportunity for growth in the use of precision drilling
technology for slim-hole applications. The Company has become the leading
supplier of smaller diameter drilling motors and related equipment for coiled
tubing operations and intends to maintain this leadership position as coiled
tubing operations increasingly become a substitute for conventional drilling
operations. Drilex has also been successful in developing opportunities for
precision drilling in the environmental remediation and trenchless services
markets, which the Company believes offer significant opportunities for
growth. The Company is focusing its efforts on the high-end segments of these
markets and is pursuing long-term relationships with large customers that
generate substantial demand for services that can be provided by Drilex.
The Company continually reviews opportunities for growth through the
acquisition of other businesses to complement its existing operations. The
recent Cobb and ENSCO Technology Acquisitions expanded the Company's presence
in certain of its key geographic markets for oilfield precision drilling
services and provided the Company with significant opportunities to expand its
distribution of Drilex-manufactured motors by employing them in the newly
acquired operations. In addition, the ENSCO Technology Acquisition
significantly expanded the Company's MWD capabilities, providing the Company
additional opportunities to deploy its products and services. The Sharewell
Acquisition also provided the opportunity to expand the Company's
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product distribution and significantly increased the Company's service
capabilities in the emerging environmental remediation and trenchless services
markets. The Company will continue to explore opportunities involving
acquisitions of other businesses to expand distribution of the Company's
products and services, to add key technologies, to gain access to attractive
industry niches, and to otherwise enhance its market presence.
PRODUCTS AND SERVICES
OILFIELD PRECISION DRILLING APPLICATIONS
Precision Drilling Services. The Company provides comprehensive precision
drilling services for oil and gas drilling and workover applications,
including computerized well planning, on-site drilling supervision,
maintenance and support, and post-well analysis. In many oilfield
applications, precision drilling techniques offer significant economic
advantages over conventional vertical drilling techniques, such as reduced
drilling time and expense, increased well production and enhanced reservoir
recovery. The high torque, speed and performance offered by current-generation
downhole drilling motors permit the use of precision drilling techniques as a
practical alternative to conventional drilling even for vertically drilled
wells. Customers for oilfield precision drilling services are concentrated
primarily among major and large independent oil and gas companies. Because of
the complexity involved in precision drilling, these customers typically rely
on specialized precision drilling service contractors to manage the entire
process of drilling the horizontal or directional portion of a well. Precision
drilling services require high performance drilling motors, sophisticated
guidance systems and analytical tools, and an experienced staff of wellsite
and technical support personnel. The Company's drilling motors operate in
conjunction with various guidance systems (including MWD instrument systems
and steering tools) provided by the Company or other oilfield service
companies. While the Company has its own line of steering instruments, which
it assembles from sub-assemblies obtained from various third parties, Drilex
currently obtains all its MWD instrument systems from two third-party
manufacturers. These two suppliers are essentially the only two sources of
such equipment available to the Company. See "Risk Factors--Dependence on
Certain Third-Party Suppliers." In addition, certain vertical drilling
operations employ precision drilling services, particularly in situations
where tight vertical tolerances and sloping formations dictate a need for
downhole directional control to keep the wellpath proceeding vertically.
The Company's precision drilling services emphasize pre-job planning as well
as on-site performance. Utilizing a specialized software system and drawing
upon the Company's expertise in motor technology, guidance systems and field
experience, the Company's well planning services involve precisely plotting a
wellpath and developing a comprehensive technical proposal that specifies the
particular motor technology, guidance systems and other equipment
configurations to be employed to achieve the drilling objective most
efficiently. The technical proposal is typically based on the most detailed
data available, including drilling records from the area, bit records from
offset wells, data provided by the customer, correlation logs and the
Company's own database. A typical technical proposal will specify various
items, including optimal wellpath, motor system configuration and drillstring
component recommendations, operating procedures and drilling parameters
(including trouble-shooting methods), hydraulic calculations (including data
on pressure loss, annular velocities and bit performance), bottomhole assembly
graphical representations with component dimensions, motor system
configuration analyses, and complete technical specifications for each
recommended motor system to ensure compatibility with other equipment and job
objectives.
The Company's on-site operations are conducted by the Company's precision
drilling specialists and drilling supervisors, who are based out of the
Company's regional offices. The local knowledge and regional experience
provided by the Company's drilling supervisors at the well site is key to
successful field operations. The Company's drilling supervisors are backed by
on-site computing and the Company's engineering and support services team.
During drilling operations, a continuous stream of data is transmitted from
the bottom of the wellbore to the drilling team for evaluation of the well's
progress. The supervisor on site, with the assistance of engineers at the
Company's regional offices, works to interpret this information to make
critical decisions that may involve altering the wellpath or reconfiguring the
bottomhole assembly to enhance performance. Additional technical support is
available from the Company's headquarters engineering staff.
Through its network of sales and service locations, the Company provides
maintenance and support services for precision drilling operations. The
Company's maintenance and service personnel inspect, test and (if necessary)
repair the Company's drilling motors and guidance systems prior to dispatch to
the drilling sites to
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ensure normal operations and to prolong the life of the Company's equipment.
The Company maintains extensive records on all maintenance and service
support. These records allow the Company to make comparative assessments of
performance and repair costs and are used to provide direct input for
fundamental design changes.
After the Company completes a precision drilling job, it typically prepares
a post-well analysis that is used by the customer to, among other things,
evaluate drilling motor and bit performance and provide insight into its
ongoing drilling operations. The Company utilizes these analyses to evaluate
possible improvements in efficiency and performance in future drilling
projects in the same geographic area or in formations with similar geological
and geophysical characteristics. The Company maintains a substantial database
of these performance records relating to its operations worldwide.
Drilex has applied its technical drilling expertise to the development of
services for slim-hole production service and workover applications.
Production services typically involve running small-diameter (3-1/2 inches or
less) drilling motors on either coiled tubing or workover strings to clean out
a contaminated wellbore, deepen a well or drill a sidetrack well. Workover
applications involving the Company's services frequently entail re-entering a
well and replacing its existing completion with horizontal drain holes to
increase the well's production performance and extend the life of the well.
Other workover services provided by the Company include drilling out cement
and removing fill, scale or heavy wax; cleaning production tubing and casing;
milling casings, packers, junk and plugs; fishing; and well deepening.
The Company believes that recent developments in advanced drilling
technology, such as coiled tubing systems and "extended-reach" drilling,
provide significant opportunities for growth in the precision drilling market.
The development of large diameter coiled tubing for downhole use has generated
significant opportunities for oil and gas companies to reduce costs in deep
exploration, enhanced recovery and recompletion/workover projects. Coiled
tubing systems require specialized services, which utilize small diameter
drilling motors to develop mechanical power downhole. With the power generated
by the downhole drilling motor, coiled tubing systems can be used for a
variety of drilling operations, including conventional open-hole drilling,
coring, under-reaming, well deepening, medium-radius drilling, horizontal
drilling, setting whipstocks and milling. Extended-reach development projects
typically involve the drilling of numerous wells from a single, stationary
drilling location. Current extended-reach drilling technology provides the
capability of drilling to a wellbore target that has a horizontal displacement
extending for over 10,000 feet. This technology can provide substantial
reductions in capital requirements for development drilling, particularly in
offshore locations. The Company provides a full range of precision drilling
services for coiled tubing operations and extended-reach drilling utilizing
the Company's drilling motors and guidance systems.
Precision Drilling Products. Drilex was one of the early pioneers in the
development of downhole drilling motors in the early 1980s and is now a
worldwide leader in the design and manufacture of high-performance, multi-
lobed positive displacement drilling motors. Drilex was the first manufacturer
to produce a high-torque downhole motor designed to drive a rock bit at its
optimal (relatively low) speed, thereby increasing the life of the bit and
reducing the risk of the bit breaking apart in the wellbore. Through its
manufacturing operations, Drilex is able to maintain close control over the
performance and quality characteristics and pricing of the drilling motors
used in its service operations. The Company's drilling motors have the ability
to generate power from a wide range of drilling fluids (both oil-based and
water-based fluids and compressed air) and to operate at both high and low
speeds.
Downhole positive displacement drilling motors consist of four basic
elements: the power section, the transmission section, the output shaft
assembly and the motor casing. Each of the components of the drilling motor
must be engineered and precision manufactured so as to be compatible with the
motor's other components, in order to achieve optimal performance with
predictable wear patterns.
The Company's positive displacement motors utilize a multi-lobed power
section consisting of a rotor/stator combination that is attached directly to
the drillstring and is driven by drilling fluid pumped down the drillstring to
turn the drill bit. The power section operates without lubrication (other than
from the drilling fluid itself) and
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is designed to withstand the highly abrasive drilling fluids being passed
through it. The stator and rotor comprising the power section act together as
a system of gears--one inside the other. The outer gear (the stator) consists
of a molded elastomer with at least three gears (or lobes), and is enclosed on
the outside by a metal tube. Positioned inside the stator is an internal gear
called the rotor, which is made of steel and has one fewer lobe than the
stator. The difference between the rotor/stator lobe configuration creates a
spiral series of gaps, which, during drilling operations, are filled with
drilling fluid. Under pressure, the fluid within this spiral acts as a wedge.
Hydraulic force applied to the top of the wedge applies a force on the rotor.
Due to the helical shape of the rotor, this application of fluid force onto
the rotor causes rotation.
The rotation from the power section is applied to the transmission section,
which is a drive shaft that converts the rotary motion from inside the power
section to transmit high downward thrusts and torque to the output shaft
assembly at varying rotational speeds. The transmission section can be
configured in a variety of forms to meet differing drilling objectives. The
output shaft assembly provides the drive to the drill bit. The complex, multi-
stack ball track bearing design mounted on this element must be able to
tolerate the maximum bit thrust as well as high levels of vibration and the
reactive force of the weight on the bit, which operates in an upward
direction. The motor casing is a precision-manufactured shell that encases the
other elements of the motor. While the motor casings are thin-walled, they are
designed to maximize the structural integrity of the motor.
Drilex has designed its drilling motors to optimize flexibility, power and
reliability. The Company's drilling motors have achieved some of the highest
power and quality ratings in the industry. Drilex motors have demonstrated
high performance capabilities and reliability even in arctic locations and in
severe downhole environments, both onshore and offshore, where the motors
encounter extremely high temperatures, hard rock, sour gas, high sand content
formations, highly abrasive muds and environmentally sensitive fluids. The
Company's motors are used for a wide variety of wellbore drilling
applications, including initial spudding of wells, vertical drilling,
directional drilling, horizontal drilling, tangent drilling, under-reaming,
casing cutting, coring, conductor drill down, and fishing.
In addition, the Company's motors are used in a variety of production
services and workover applications. The Company has recently developed an
extensive line of powerful, long-endurance, small-diameter (1-11/16 to 3-1/2
inches in outside diameter) motors for use in conjunction with coiled tubing
operations, a rapidly growing segment of the oilfield services market. Before
the introduction of small-diameter motors, coiled tubing operations were
limited to certain pumping services and fishing applications. The downhole
mechanical power generated by the small-diameter motors has permitted a
significantly greater variety of operations utilizing coiled tubing. As coiled
tubing operations continue to become more widespread, the Company expects to
further expand its line of small-diameter motors to meet the demand for more
specialized applications.
Drilex maintains a large inventory of drilling motors in sizes ranging from
1-11/16 to 9-1/2 inches in outside diameter, which are capable of drilling
holes in sizes ranging from six inches to 36 inches in diameter, depending on
the application. Approximately 30.3% of the Company's drilling motor inventory
is designed for slim-hole applications, such as workover, redrilling and
recompletion tasks. The Company's slim-hole product line has increased
substantially over the past three years, primarily reflecting the Company's
product development efforts to meet the substantial growth in coiled tubing
operations since 1993. The Company's wide range of drilling motors permits the
selection of the precise combination of size, torque, speed and bearing
configuration to meet the anticipated drilling conditions for a specified
project.
Drilex uses its motors as a service tool, a rental tool and a direct sale
product, although rentals and sales have become a less significant part of the
Company's business in recent years. Motor rental involves renting the
equipment directly to oil and gas companies or oilfield service contractors
for use in the drilling of vertical, horizontal and directional wells. Drilex
delivers the motors and spares to the customer's location and is generally
paid a standby rate when the equipment is idle but at the rig site, and a
circulating rate when the drilling motor is downhole. Drilex's wide range of
motor types and reputation for high reliability makes the Company a market
leader in drilling motor rental.
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<PAGE>
The Company's drilling motors operate in conjunction with various guidance
systems (including MWD instrument systems and steering tool systems) provided
by the Company or other oilfield service companies. The Company's drilling
motors are also sometimes operated together with logging-while-drilling
equipment, which the Company does not provide. While the Company has its own
line of steering instruments, which it assembles from sub-assemblies obtained
from various third parties, it obtains its MWD instrument systems from third-
party manufacturers. The Company's MWD instrument systems and steering tools
are modular and readily transportable.
The MWD systems provided by the Company employ state-of-the-art technology
to provide positional and some geological information, downhole temperature
readings, magnetic or gravity toolface readings, and three-dimensional
directional measurement information from the bottom of the wellbore to the
precision drilling team, thereby facilitating guidance of the trajectory of
the drill bit from the surface and enabling continuous drilling operations
over long intervals. The information is transmitted from a downhole probe to a
surface computer (which provides a display of data on a driller's console
located on the deck of the drilling rig) through the use of mud-pulse
telemetry, which involves the transmission of pressure-pulse signals from the
downhole MWD unit up through the column of drilling mud in the drillstring.
MWD systems are sometimes configured with gamma ray sensors to recognize
changes in subsurface lithology, thereby enhancing the ability to steer the
drill bit through various types of formations. The Company obtains
substantially all of its MWD systems from two different manufacturers.
The Company's steering tool systems consist of various components designed
to provide a continuous, real-time display of measurement-while-drilling data
through the use of downhole probes, which contain orientation modules for
gravity and magnetic survey measurements, temperature sensors and signal
digitizing circuitry. Steering tool systems are functionally similar to MWD
systems, but differ in that, instead of using mud-pulse telemetry to
communicate with the surface, they use wireline cables that run from the
downhole probe to the surface. The downhole probe conveys the bottomhole data
via the wireline to a surface computer that provides a continuous display (on
a driller's console located on the deck of the drilling rig) of data regarding
the toolface's inclination, orientation and direction relative to magnetic
north, as well as information regarding magnetic field strength and dip angle,
temperature and wireline voltage. While steering tools are generally less
costly to operate than MWD systems and are not subject to the signal
attenuation that may affect MWD systems (generally related to the depth of the
well and the physical characteristics of the drilling mud being used),
steering tools sometimes involve more operational difficulty than MWD systems,
generally related to the need to run a wireline from the surface through the
drillstring to connect with the downhole probe. In certain applications where
more frequent transmission of data is important (such as slim-hole workover
and reentry applications), a steering tool is more effective than an MWD
system.
ENVIRONMENTAL REMEDIATION APPLICATIONS
The Company has applied its technical drilling capabilities to pioneer the
use of shallow well horizontal drilling for environmental remediation
applications and trenchless pipe, line and cable installations.
In its environmental remediation operations, Drilex focuses on groundwater
remediation activities, the largest of the high-end segments of the
environmental remediation market. The Company uses its well-proven drilling
systems to drill horizontal wellbores beneath contaminated sites, so that
extraction and remediation of the contamination can take place at a much
improved rate.
Horizontal drilling provides numerous advantages for environmental
remediation compared to conventional vertical drilling. A single horizontal
well can perform most aspects of remediation more efficiently and economically
than the multiple wells required in a vertical drilling system. Horizontal
drilling can accurately access contaminants that are unreachable with vertical
wellbores, such as contaminants beneath immovable structures. In addition,
horizontal wells can traverse the entire length of the contaminant plume,
maximizing wellbore exposure and contaminant recovery for remediation
applications. Moreover, the risk of cross
34
<PAGE>
contamination due to hydraulic channeling is reduced by fewer wellbores
penetrating impermeable layers between aquifers. The need for fewer wells and
fewer wellheads in a horizontal system generally reduces total drilling time
and drilling cost per foot of exposed plume and reduces surface system
installation costs. In addition, higher yields due to increased hydraulic
characteristics can significantly reduce the time required for remediation,
reducing operating and maintenance costs over the life of the project.
Each remediation project undertaken by the Company is analyzed based on such
customer-supplied details as the purpose of the well, the type of
contaminants, the formation characteristics, the target depth, the groundwater
flows, the surface obstacles and well placement. Based upon this analysis,
Drilex prepares a technical proposal. Drilex personnel provide all services
from well planning through well completion. Typical projects include:
. Sampling conduits for soil gas monitoring and leachate sampling.
. In-situ remediation of contaminated soil or groundwater by soil vapor
extraction and bio-remediation.
. Installation of transport/pressure barriers to prevent contaminant
migration using slurry walls and pressure curtains.
. Pump and treat systems for contaminated groundwater recovery, free
product recovery and vapor recovery.
The Company attempts to provide its environmental remediation services in a
manner so as to minimize its handling of materials that may be classified as
hazardous substances or wastes. In addition, the Company generally obtains
indemnity agreements from its environmental remediation services customers
requiring such customers to indemnify the Company against any liability that
may arise from the Company's handling of such materials in the course of
performing a contract for these services. There is no assurance, however, that
such contractual indemnity will, in all instances, be effective or sufficient
to protect the Company from liability for claims arising from its handling of
hazardous materials in connection with its environmental services operations.
TRENCHLESS APPLICATIONS
Through its Sharewell subsidiary, the Company also provides precision
drilling services and equipment for trenchless pipe, line and cable laying
applications, which primarily involve horizontal boring underneath city
streets and structures to enable the "trenchless" delivery of conduits in
densely built areas, as well as subsurface crossings of rivers, streams and
other bodies of water. Applications for trenchless services include subsurface
installations of fiber optics lines, cable systems and utility pipelines and
wiring. Sharewell focuses its trenchless services operations on the high-end
segment of the market, which typically involves applications that require a
high level of directional precision and/or boring through hard rock.
Sharewell is the largest supplier of guidance systems to the trenchless
drilling industry worldwide. Founded in 1984, Sharewell initially offered
steering tools and electronic multi-shot survey tools for sale or lease to
oilfield customers. These tools are now widely supplied to companies that
install pipelines by trenchless methods. Sharewell's complete service offering
includes a surveyor (the equivalent of an oilfield directional driller) on
location to guide the drilling of the bore. In addition, Sharewell provides a
unique guidance system, which is used in areas of high magnetic interference
where the use of conventional guidance tools is normally precluded. The
Company also sells a number of specialist drilling tools to the trenchless
services industry, including hole openers, reamers, non-magnetic collars and
bits.
The Company provides complete horizontal drilling services for environmental
remediation and trenchless services using two highly specialized mobile slant
drilling rigs that it designed and built in 1992 and 1995. The rigs utilize a
closed-loop circulation system that captures, cleans and recirculates the
drilling fluid, eliminating the need for earthen mud pits at the well site.
The rigs are compact, requiring an area as small as 50 feet x 100 feet for
four trailer-mounted rig components. Surface rotary power and downhole motors
may be used to advance
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<PAGE>
the drillstring. This equipment provides the Company with the capability to
drill a six-inch diameter hole approximately 30 feet below surface and hit a
two-feet in diameter target point 1,500 feet away. During 1995, Drilex
completed two significant environmental remediation projects, which involved
drilling 20 wells having total footage of more than 15,000 feet.
CUSTOMERS
The Company's customers for oilfield precision drilling services and
products are concentrated primarily among major and large independent oil and
gas companies, conventional drilling contractors and certain other oilfield
service contractors. Customers for the Company's environmental remediation
services include environmental service contractors, engineering consulting
firms, petrochemical companies, hydrocarbon transportation companies and
military and other governmental organizations. Customers for trenchless
services include telephone and other utilities, as well as general
contractors. The following is a list (in alphabetical order) of the Company's
20 largest customers during 1995:
Amerada Hess Corporation Horizontal Drilling International, Inc.
Amoco Corporation Pennzoil Company
Atlantic Richfield Company Perez Companc SA
Bexco Operating Inc. Radian International L.L.C.
BP Exploration Company Limited Rowan Companies, Inc.
Chesapeake Energy Corporation Seneca Resources Corporation
Chevron Corporation Sonat Exploration Company
Corpoven Anaco, S.A. Texaco Inc.
Exxon Corporation Torch Operating Company
Halliburton Company Union Pacific Resources Company
For the year ended December 31, 1995, one of the Company's customers
accounted for approximately 10% of the Company's revenues. While the Company
is not dependent on any one customer, the loss of one of its significant
customers could, at least on a short-term basis, have an adverse effect on the
Company's results of operations.
MARKETING AND SALES
The Company markets and sells its services and products directly through its
sales force and operating managers, utilizing the Company's 14 domestic and 9
international locations. In addition, in certain foreign markets where the
Company does not maintain offices, the Company utilizes sales representatives
and local agents to enhance its marketing and sales efforts. The Company also
places print advertising from time to time in trade and technical publications
targeted to the Company's customer base and publishes technical papers, which
it presents at technical conferences and seminars. Most of the Company's jobs
are on a per well basis; the Company does not have a significant number of
long-term service contracts.
The Company's marketing and sales resources are generally focused in the
United States, Canada, Venezuela, the North Sea, Argentina and Canada, which
comprise the largest segments of the worldwide market for precision drilling
services.
A significant element of the Company's sales effort involves the preparation
of a comprehensive technical proposal in the well planning stage of
prospective projects. The technical proposal is typically provided to the
customer before the customer makes its decision regarding the selection of a
precision drilling contractor. The Company utilizes the regional knowledge and
expertise of its drilling and engineering staffs in the preparation of the
technical proposal. See "--Products and Services--Oilfield Precision Drilling
Services."
Significant factors considered by customers in selecting from among
qualified contractors are service quality, reliability of equipment, local
knowledge of drilling conditions and the regional experience and expertise of
the drilling team proposed to be utilized for the particular drilling
operations out for bid. See
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<PAGE>
"--Competition." Drilex regards its staff of highly qualified, experienced
technical personnel as one of its greatest strengths, and draws upon the
experience of these employees and their existing relationships with customers
as an important part of the Company's sales effort.
ENGINEERING AND MANUFACTURING
The Company's drilling motors are designed and manufactured to satisfy the
highest standards of performance and reliability. Producing a reliable
downhole drilling motor requires sophisticated geometric power section
designs, precision machining of the rotor, and forming of a matching stator.
Drilex has designed its own motors since the Company's founding and holds a
number of patents on various aspects of their design and manufacture. At the
current time, Drilex can perform all manufacturing functions with the
exception of stator molding and thrust bearing manufacturing, each of which is
done under close relationship with a long-time supplier. The Company's
manufacturing operations are conducted at its principal Houston facility.
The Company uses special machinery required for the precision machining of
the various special components of its motors. The Company tracks the progress
of each manufactured component from original material through the entire
machining and assembly process. By maintaining in-house control of the
manufacturing process and through continued design improvements from the
Company's 23-member engineering staff, Drilex is able to maintain the highest
levels of product quality and reliability.
Drilex maintains its leadership role in motor product development by
employing a continuous improvement process involving the close integration of
design, manufacturing and field operations. Based on continuous feedback from
the field, the Company focuses on developments expected to yield both cost
improvements and product enhancements. The Company's integrated approach has
led to many design innovations that have improved the structural integrity,
performance and lives of the Company's drilling motors and reduced through-
life costs (the total of the manufacturing costs and repair and maintenance
expenses for a motor throughout its entire useful life). To date, the
Company's product development efforts have been primarily related to the
mechanics of its downhole drilling motors, although the Company has also
developed improvements to downhole orienting devices and other guidance system
components.
Among the Company's most recent product innovations is the development of a
new concept power section for positive displacement drilling motors.
Manufacturing development of the new power section was taken to a prototype
stage in late 1995 for a cold forming process that manufactures rotor and
stator components. The new-design rotors are now in an advanced stage of field
testing. The new power section will be introduced in phases: initially an
alternative rotor, followed by a new form of composite stator. The
manufacturing process for the new power section is expected to generate
significant cost savings and reduce manufacturing lead times. The new rotor
components should reduce vibration during operations, resulting in extended
lives of both rotors and stators. The reduced vibration is also expected to
contribute significantly to the operating environment for downhole
instrumentation used in the drillstring, resulting in increased life, reduced
costs and higher mean times between failures. The Company has obtained a
patent covering the design of this new power section.
Various aspects of the Company's operations have been awarded ISO 9001
certification, and the Company expects to complete the ISO 9001 certification
process for all of its operations by late 1997. ISO 9001 is an internationally
recognized verification system for quality management that has been
established by the International Standards Organization. The Company believes
that ISO 9001 certification is becoming increasingly important to maintaining
and expanding its participation in a number of markets, particularly
international markets.
The raw materials used by the Company in its operations, such as carbon and
alloy steel in various forms, lubricants, fuels and welding gases, are
available from many sources and the Company is not dependent upon any single
supplier or source for those materials. The Company does, however, rely on
single suppliers for the stator molding and the thrust bearings for its
drilling motors. Both of these suppliers developed the technology for the
manufactured product with the Company and provide the product to the Company
on an exclusive basis.
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While the Company does not have any long-term supply contracts, the Company's
arrangements with these single suppliers have been in place for over 12 years,
and have been very effective in terms of reliability and cost and in terms of
providing the Company with substantial control over the product design and
improvement and quality control functions relative to these components. While
the Company does not anticipate any difficulties in continuing to obtain
product from these single suppliers, the Company believes that adequate
alternative sources are available should the need arise. Such alternative
sources may, however, involve increased costs to the Company and shipment
delays.
Due to the relatively short manufacturing lead time for the Company's
drilling motors, backlog is not generally significant to the Company.
PATENTS AND OTHER INTELLECTUAL PROPERTY
The Company currently holds 16 U.S. patents and has two U.S. patent
applications pending (and 31 foreign patents covering many of the same
inventions), most of which relate to the Company's positive displacement
drilling motors. Although in the aggregate these patents are important to the
Company, the Company generally depends on technological capabilities,
manufacturing quality control and the application of know-how rather than
patents in the conduct of its business. The Company does benefit from service
and product name brand recognition, principally through its Drilex trademark,
and considers such trademark to be important. In general, the Company will
seek to protect its intellectual property rights in all jurisdictions where
the Company believes the cost of such protection is warranted.
COMPETITION
The industry in which the Company operates is highly competitive. The
Company's ability to compete successfully depends on elements both within and
outside of its control, including successful and timely development of new
products and services, performance and quality, customer service, pricing,
industry trends, and general economic trends. Several of the Company's
competitors are divisions or subsidiaries of companies that are substantially
larger and have greater financial and other resources than the Company,
including Baker Hughes Incorporated, Dresser Industries, Inc., Halliburton
Company and Schlumberger Limited.
Competition in the oilfield services market is primarily on the basis of
service quality, experience of personnel and equipment reliability, although
price competition is also a significant factor. The Company believes that, in
selecting from among qualified contractors for a particular precision drilling
service contract, customers also consider, among other things, bidding
responsiveness, the availability and technical capabilities of equipment and
personnel, and the flexibility of equipment to work within the technical
constraints imposed by other aspects of the drilling project (such as drill
bit sizes and types, hydraulics limitations, and differing drilling fluids and
borehole sizes). Based on a recent independent survey conducted on behalf of
the Company, the Company believes that the range of services provided by an
oilfield service contractor is generally not as important an element in the
selection process as the foregoing factors (although the ability to offer
comprehensive oilfield services is important to some customers, particularly
in certain foreign regions).
EMPLOYEES
As of May 1, 1996, the Company had approximately 390 employees. The
Company's future success will depend, in part, on its ability to continue to
attract, retain and motivate highly qualified technical, marketing,
engineering and management personnel.
The precision drilling business is characterized by, among other things,
high turnover rates among field employees engaged in drilling operations.
Although Drilex believes that its turnover rate for field drilling employees
is below the industry average, the Company's turnover rate for these employees
is high relative to the Company's other employees. The Company seeks to
attract and retain qualified drilling supervisors and other technical field
personnel by paying competitive salaries and dayrates, and by maximizing the
opportunities for
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<PAGE>
these employees to earn their dayrates. Although the Company has never
experienced a prolonged shortage of qualified personnel in any of its
operations (and does not currently anticipate any such shortage), if demand
for precision drilling services were to increase rapidly, retention of
qualified field personnel might become more difficult without significant
increases in compensation.
The Company is not a party to any collective bargaining agreements and has
not experienced any strikes or work stoppages, and management believes that
the Company's employee relations are good.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
Many aspects of the Company's operations are affected by political
developments and are subject to both domestic and foreign governmental
regulations, including those relating to oilfield operations, worker safety
and the protection of the environment. In addition, the Company depends on the
demand for its services from the oil and gas industry and, therefore, is
affected by changing taxes, price controls and other laws and regulations
relating to the oil and gas industry generally. The adoption of laws and
regulations curtailing exploration and development drilling for oil and gas
for economic or other policy reasons could adversely affect the Company's
operations by limiting demand for precision drilling services. The Company
cannot determine to what extent its future operations and earnings may be
affected by new legislation, new regulations or changes in existing
regulations.
The Company's operations are affected by numerous foreign, federal, state
and local environmental laws and regulations. The technical requirements of
these laws and regulations are becoming increasingly expensive, complex and
stringent. These laws may provide for "strict liability" for damages to
natural resources or threats to public health and safety, rendering a party
liable for the environmental damage without regard to negligence or fault on
the part of such party. Sanctions for noncompliance may include revocation of
permits, corrective action orders, administrative or civil penalties, and
criminal prosecution. Certain environmental laws provide for joint and several
strict liability for remediation of spills and releases of hazardous
substances. In addition, companies may be subject to claims alleging personal
injury or property damage as a result of alleged exposure to hazardous
substances, as well as damage to natural resources. Such laws and regulations
may also expose the Company to liability for the conduct of or conditions
caused by others, or for acts of the Company that were in compliance with all
applicable laws at the time such acts were performed. Compliance with
environmental laws and regulations may require the Company to obtain permits
or other authorizations for certain activities and to comply with various
standards or procedural requirements. The Company believes that its facilities
are in substantial compliance with current regulatory standards.
The Company has completed a Phase I Site Assessment for each of its
principal operating facilities within the past three years. The results of
these assessments have been used to improve operations and ensure compliance
with environmental laws. In addition, in connection with each of its
significant property acquisitions, the Company has obtained indemnification
from the sellers with respect to environmental liabilities. The Company has
never been named as a "potentially responsible party" in any environmental
proceeding under the federal "Superfund" law or any similar state laws. The
Company has an ongoing pollution prevention program designed to ensure
compliance with environmental regulations and to institute policies to address
waste disposal and minimization and pollution prevention. The Company has also
implemented various programs to ensure compliance with applicable health and
worker safety regulations and to increase employee safety awareness.
Capital expenditures for property, plant and equipment for environmental
control facilities during fiscal year 1995 were not material. Based on the
Company's experience to date, the Company does not currently anticipate any
material adverse effect on its business or consolidated financial position 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.
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<PAGE>
LEGAL PROCEEDINGS
The Company is involved from time to time in routine litigation incidental
to its business. Drilex is not currently involved in any legal proceedings
that the Company believes will have a material adverse effect on its financial
condition or results of operations.
PROPERTIES
The Company's manufacturing and principal sales and service operations are
conducted using the following facilities:
<TABLE>
<CAPTION>
FLOOR SPACE
(SQUARE
LOCATION OWNED/LEASED FEET) DESCRIPTION
- -------- ------------ ----------- -----------
<S> <C> <C> <C>
UNITED STATES:
Anchorage, Alaska Leased 685 Sales and Service
Bakersfield, California Leased 7,500 Sales and Service
Casper, Wyoming Leased 9,500 Sales and Service
Denver, Colorado Leased 200 Sales
Fort Worth, Texas Leased 200 Sales
Houston, Texas Leased 53,750 Executive Offices, Manufacturing,
Engineering, Sales and Service
Houston, Texas Leased 23,000 Sales and Office
Houston, Texas Leased 6,045 Sales and Service
Lafayette, Louisiana Owned 20,000 Sales and Service
New Orleans, Louisiana Leased 500 Sales
Oklahoma City, Oklahoma Leased 10,500 Sales and Service
Prudhoe Bay, Alaska Leased 500 Repair and Maintenance
Stafford, Texas Leased 15,000 Sales and Service
Youngsville, Louisiana Owned 10,516 Sales and Service
INTERNATIONAL:
Aberdeen, Scotland Leased 17,523 Sales and Service
Anaco, Venezuela Leased 10,500 Sales and Service
Calgary, Alberta Leased 100 Sales
Crawley, England Leased 2,500 Sales and Service
Ciudad Ojeda, Venezuela Leased 16,666 Sales and Service
Edmonton, Alberta Leased 6,896 Sales and Service
Maturin, Venezuela Leased 2,000 Sales and Service
North Freemantle, West
Australia Leased 500 Sales and Service
Singapore Leased 4,700 Sales and Service
</TABLE>
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<PAGE>
MANAGEMENT
The following table sets forth certain information with respect to directors
and executive officers of the Company, together with their ages (as of May 1,
1996) and positions:
<TABLE>
<CAPTION>
DIRECTOR'S
TERM
NAME AGE POSITION ENDING
---- --- -------- ----------
<C> <C> <S> <C>
L.E. Simmons..................... 49 Chairman of the Board and 1999
Director
John Forrest..................... 57 President, Chief Executive 1998
Officer and Director
G. Bruce Broussard............... 52 Vice President--Finance --
and Administration and
Secretary
Samuel R. Anderson............... 48 President--Sharewell, Inc. --
Archie A. Cobb, III.............. 53 President--Cobb --
Directional Drilling
Company, L.L.C.
Lee F. Hardin.................... 48 Vice President--
Engineering and
Manufacturing --
David M. Henry................... 44 Vice President--Business --
Development
Charles Denton Kerr II........... 40 President--Drilex Energy
Services Division of
Drilex Systems, Inc. --
Harry O. Nicodemus IV............ 48 Controller --
David C. Baldwin................. 33 Director 1997
A. Clark Johnson................. 65 Director 1998
Robert P. Peebler................ 48 Director 1999
Sam S. Sorrell................... 67 Director 1997
Andrew L. Waite.................. 35 Director 1998
</TABLE>
The Company's Board of Directors is divided into three classes with
staggered terms of office, initially ending as set forth above. Thereafter,
the term for each class will expire on the date of the third annual
stockholders' meeting for the election of directors following the most recent
election of directors for such class. Each director holds the office until the
next annual meeting of stockholders for the election of directors of his class
and until his successor has been duly elected and qualified. Officers serve at
the discretion of the Board of Directors.
L.E. Simmons has served as Chairman of the Board and a director of the
Company since March 1994. Mr. Simmons has, for more than five years, served as
President of L.E. Simmons & Associates, Incorporated ("SCF G.P."), which,
through its affiliate, SCF Partners, L.P., manages private institutional
partnerships that generally invest in the oilfield service and equipment
industry. Mr. Simmons was a co-founder of Simmons & Company International, an
investment banking firm, and served as an officer and director of such firm
from 1974 through September 1993. Mr. Simmons is Chairman of the Board of
Tuboscope Vetco International Corporation. He is also a director of Zions
Bancorporation and CE Franklin, Ltd.
John Forrest has served as President, Chief Executive Officer and a director
of Drilex International Inc. since its acquisition of DSI in March 1994. Mr.
Forrest was a founder of the Company and served as its chief executive officer
from 1981 to March 1994.
G. Bruce Broussard was appointed to his current position in connection with
the DSI Acquisition. Prior thereto, Mr. Broussard served as Controller of DSI
for more than the past five years.
Samuel R. Anderson joined the Company and was appointed to his current
position at the time of the Sharewell Acquisition in May 1995. Prior thereto,
he served as President of Sharewell, Inc. since July 1991. From 1988 to July
1991, Mr. Anderson served as Senior Vice President of Noble Drilling
Corporation, an oil and gas drilling contractor.
Archie A. Cobb, III joined the Company and was appointed to his current
position in connection with the Cobb Acquisition in September 1994. Mr. Cobb
was the founder of Cobb Directional Drilling, Inc., and served as its
President from its inception in 1979 until the Cobb Acquisition.
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<PAGE>
Lee F. Hardin was appointed to his current position in October 1995, after
serving as the Company's Director of Engineering and Manufacturing since he
joined the Company in August 1995. Mr. Hardin was a focus factory manager for
the Drilling Systems Business Unit of Halliburton Company from April 1993 to
August 1995. Prior thereto, he served as a manufacturing manager for the
Directional Drilling Business Unit of Smith International, Inc. where he
oversaw the production of MWD equipment and positive displacement motors.
David M. Henry was appointed to his current position in May 1996. Prior to
joining the Company, he served as Global Operations Manager of the Drilling
Systems Business Unit of Halliburton Energy Services from March 1995 to May
1996. Prior thereto, he served in various positions, including Director of
Engineering and Marketing, and Vice President of Operations, for the Drilling
Division of Baker Hughes Incorporated from December 1980 to March 1995.
Charles Denton Kerr II was appointed to his current position in December
1995. Prior thereto, he served as DSI's Vice President--Sales and Operations
from July 1994 to December 1995, Manager, Worldwide Sales and Operations from
August 1991 to July 1994, and Western Hemisphere Manager from August 1989 to
August 1991.
Harry O. Nicodemus IV was appointed to his current position in December
1995. Prior thereto, he served as Vice President and Controller of American
Ecology Corporation since March 1993. From January 1991 to February 1993, he
served as Divisional Vice President and Assistant Controller for Browning-
Ferris Industries, Inc.
David C. Baldwin has served as a director of the Company since April 1994.
Mr. Baldwin has been Vice President of SCF G.P. since March 1993. From August
1991 to March 1993, he was an Associate with SCF G.P. Prior to attending
graduate school from 1989 to 1991, Mr. Baldwin was employed by Union Pacific
Resources Company in a variety of drilling and operations management
positions. He also serves as a director of C.E. Franklin, Ltd.
A. Clark Johnson was appointed as a director in June 1996. Prior to his
retirement in December 1995, Mr. Johnson served as Chairman of the Board of
Union Texas Petroleum Holdings, Inc. since July 1985 and as its Chief
Executive Officer since July 1984. Union Texas Petroleum Holdings, Inc. is an
independent (non-integrated) oil and gas company. Prior thereto, Mr. Johnson
served in various positions with that company's predecessor, Allied
Corporation.
Robert P. Peebler has served as a director of the Company since July 1994.
Mr. Peebler has served as Chief Executive Officer since December 1992 and
President and Chief Operating Officer since July 1992 of Landmark Graphics
Corporation, a company engaged in geoscience services and the development of
related computer software. From 1989 to July 1992, he served as a Vice
President of Landmark Graphics Corporation.
Sam S. Sorrell has served as a director of the Company since February 1995.
Mr. Sorrell is currently a consultant to SCF Partners, L.P., and has served in
such capacity since February 1994. From January 1991 to January 1994, Mr.
Sorrell held the position of Executive Vice President of Gulf Publishing Co.,
a company that publishes various types of media for the oil and gas industry.
He is currently a director of Gulf Publishing Co.
Andrew L. Waite was elected as a director of the Company in May 1996. Mr.
Waite has served as a Vice President of SCF G.P. since October 1995. Prior
thereto, Mr. Waite was employed by Simmons & Company International as an
Associate from August 1993 to August 1995 and as a Vice President in September
1995. Prior to attending graduate school from September 1991 to June 1993, Mr.
Waite was employed by the Royal Dutch/Shell Group in a number of project and
operating management roles, both in the U.S. and several international
locations.
DIRECTOR COMPENSATION
Each director who is not also an officer of the Company (a "Nonemployee
Director") receives a quarterly retainer of $2,500 and also receives (i) $500
per meeting of the Board of Directors at which such director
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participated, (ii) $500 per meeting of any committee of the Board of Directors
at which such director participated, if not in connection with a Board
meeting, and (iii) reimbursement for all reasonable out-of-pocket expenses
incurred in connection with attendance at meetings of the Board of Directors
or committees thereof. Each Nonemployee Director also receives a one-time
grant of a stock option covering 3,620 shares of Common Stock, with a term of
ten years and an exercise price equal to fair market value. See "--Stock
Option Plan."
In May 1996, the Company established a Deferred Compensation Plan for
Directors whereby each director can defer cash compensation for services as a
director, payable by the Company in the form of any retainer, annual,
committee or meeting fee, to a date subsequent to such director's death,
retirement, disability or termination of services as a director. Earnings with
respect to deferred compensation may be calculated, at the election of the
director, as if the amount deferred had been invested in Common Stock or as if
deferred compensation had been invested in an interest-bearing account.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation provided by the Company to its Chief Executive Officer and each
of the other executive officers of the Company who earned more than $100,000
in combined salary and bonus from the Company during the year ended December
31, 1995 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL SECURITIES
COMPENSATION(1) UNDERLYING
----------------- OPTIONS
NAME AND PRINCIPAL (NUMBER OF ALL OTHER
POSITION SALARY BONUS(2) SHARES) COMPENSATION(3)
- ------------------ -------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
John Forrest............ $190,117 $64,500 22,623 $1,232
President and Chief
Executive Officer
G. Bruce Broussard...... 98,055 26,600 -- 1,961
Vice President--Finance
and Administration and
Secretary
Archie A. Cobb, III..... 151,375 -- -- --
President--Cobb
Directional
Drilling Company, L.L.C.
Charles Denton Kerr II.. 111,671 28,800 -- 1,562
President--Energy
Services Division of
Drilex Systems, Inc.
</TABLE>
- --------
(1) Other annual compensation for the named individuals during 1995 did not
exceed the lesser of $50,000 or 10% of the annual compensation earned by
such individual.
(2) The bonus amounts shown were paid in 1996 for the twelve-month period
ended March 31, 1996.
(3) The amounts shown represent contributions by the Company under its 401(k)
Profit Sharing Plan for each of the Named Executive Officers.
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<PAGE>
The following table contains certain information concerning options granted
to the Named Executive Officers in 1995.
STOCK OPTION GRANTS IN 1995
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(2)
---------------------------------------- ---------------------
PERCENT
OF TOTAL
NUMBER OF OPTIONS EXERCISE
SECURITIES GRANTED OR BASE
UNDERLYING TO PRICE
OPTIONS EMPLOYEES PER EXPIRATION
NAME GRANTED IN 1995 SHARE(1) DATE 5% 10%
---- ---------- --------- -------- ---------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
John Forrest............ 22,623 100% $11.05 4/15/2002 -- $54,649
G. Bruce Broussard...... --
Archie A. Cobb, III..... --
Charles Denton Kerr II.. --
</TABLE>
- --------
(1) Prior to the Offering, there was no public market for the Common Stock
and, therefore, the exercise price of the options was based upon the
estimated fair market value of the Company as of the date of grant, as
determined by the Company's Board of Directors.
(2) Calculated based upon the indicated rates of appreciation, compounded
annually, from the date of grant to the end of each option term. Actual
gains, if any, on stock option exercises and Common Stock holdings are
dependent on the performance of the Common Stock and overall stock market
conditions. There can be no assurance that the amounts reflected in this
table will be achieved. The calculation does not take into account the
effects, if any, of provisions of the option plan governing termination of
options upon employment termination, transferability or vesting.
The following table summarizes the value of the outstanding options with
respect to the Named Executive Officers. None of the Named Executive Officers
exercised any stock options during 1995. There are no outstanding stock
appreciation rights, shares of restricted stock or long-term incentive plans
with respect to the Company.
1995 YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT IN-THE-MONEY OPTIONS AT DECEMBER 31, 1995 AT INITIAL
DECEMBER 31, 1995 DECEMBER 31, 1995 PUBLIC OFFERING PRICE
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE(2)
- ---- ------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
John Forrest............ 6,049 / 40,769 $8,348 / $25,041 $75,431 / $383,636
G. Bruce Broussard...... 3,025 / 9,074 $4,175 / $12,522 $37,722 / $113,153
Archie A. Cobb, III..... --
Charles Denton Kerr II.. 3,025 / 9,074 $4,175 / $12,522 $37,722 / $113,153
</TABLE>
- --------
(1) Based on the last price at which shares of Common Stock were sold by the
Company of $6.91 per share.
(2) Based on an assumed initial public offering price of $18.00 per share.
STOCK OPTION PLAN
In May 1996, the Company's Board of Directors and stockholders approved the
adoption of the Company's Stock Option Plan (the "Stock Option Plan"), which
amends and restates a stock option plan originally adopted in March 1994. The
Stock Option Plan provides for the granting of options covering a maximum of
440,000
44
<PAGE>
shares of Common Stock, subject to certain antidilution adjustments. No
options may be granted under the Stock Option Plan after March 2004. Under the
Stock Option Plan, stock options may be issued to certain employees of the
Company and to Nonemployee Directors. To the extent that an award lapses or
the rights of a participant terminate, any shares of Common Stock subject to
such award are again made available for grant. Stock options granted pursuant
to the Stock Option Plan may either be incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or nonqualified stock options.
The Stock Option Plan is intended to encourage certain employees of the
Company and its subsidiaries and the Nonemployee Directors to develop a sense
of proprietorship and personal involvement in the development and financial
success of the Company, and to encourage them to remain with and devote their
best efforts to the business of the Company, by granting such employees and
Nonemployee Directors options to purchase the Company's Common Stock and to
make available shares for such purpose. Options may be granted only to full-
time and part-time employees of the Company and its subsidiaries (including
officers and directors who are also employees), and options are automatically
granted to Nonemployee Directors. Awards may be made to the same person on
more than one occasion. No incentive stock option shall be granted to an
individual if, at the time the option is granted, such individual owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or of its parent or subsidiary corporation, within the
meaning of section 422(b)(6) of the Code, unless the option price is at least
110% of the fair market value of the Common Stock at the time of grant and the
option is not exercisable after the expiration of five years from the date of
grant. The Company estimates that, as of the date hereof, approximately 390
employees are eligible to participate in the Stock Option Plan.
Excluding automatic grants described below to Nonemployee Directors, prior
to May 1996 the Company granted options under the Stock Option Plan covering
71,016 shares of Common Stock at an average per share exercise price of $7.29.
Messrs. Forrest, Broussard and Kerr have been granted options to purchase
46,818, 12,099 and 12,099 shares, respectively, at a per share exercise price
of $5.53 (except for 22,623 of Mr. Forrest's options, which have a per share
exercise price of $11.05). Such options, which are intended to qualify as
incentive stock options under the Code, have a term of seven years and become
exercisable in cumulative annual installments of one-quarter each, beginning
on the first anniversary of the date of grant. Subject to completion of the
Offering, the Compensation Committee of the Company's Board of Directors has
granted options under the Stock Option Plan, effective upon the completion of
the Offering, to approximately 390 employees of the Company to purchase a
total of 143,700 shares of Common Stock at an exercise price per share equal
to the initial public offering price per share set forth on the cover page of
this Prospectus. These awards include options granted to Messrs. Forrest,
Broussard and Kerr to purchase 8,000, 5,000 and 5,000 shares of Common Stock,
respectively. All such options will have a term of five years and become
exercisable in cumulative annual installments of one-quarter each, beginning
on the first anniversary of the date of grant.
The Stock Option Plan, as amended in May 1996, provides for an automatic
grant to each Nonemployee Director, on the date of his or her first election
to the Board of Directors (or, for Mr. Johnson and the employees of SCF
Partners, L.P. who are currently directors, the date of completion of the
Offering), of an option to purchase 3,620 shares of Common Stock at an option
price equal to the fair market value of Common Stock on the date of such
grant. Prior to the May 1996 amendment, Mr. Peebler and Mr. Sorrell, upon
their first election to the Board of Directors of the Company, each received
an option to purchase 2,420 shares of Common Stock at a per share exercise
price of $5.53 pursuant to automatic grant provisions then in effect. Under
the terms of the May 1996 amendment and restatement of the Stock Option Plan,
Mr. Peebler and Mr. Sorrell will each be granted an option, effective upon
completion of the Offering, to purchase an additional 1,200 shares of Common
Stock, at an exercise price equal to the initial public offering price per
share set forth on the cover page of this Prospectus. The options granted to
all Nonemployee Directors have a term of ten years, and become exercisable in
cumulative annual installments of one-third each, beginning on the first
anniversary of the date of grant.
The Stock Option Plan is administered by the Compensation Committee of the
Company's Board of Directors (the "Compensation Committee"). Prior to May
1996, the Stock Option Plan was administered by
45
<PAGE>
nonemployee members of the Board of Directors. Members of the Compensation
Committee shall not be eligible, and shall not have been eligible at any time
within one year prior to their appointment to the Compensation Committee, to
participate in the Stock Option Plan (except with respect to automatic grants
of options) or in any other stock, stock option or stock appreciation rights
plan of the Company or any of its affiliates. The Compensation Committee
selects employees to be granted options and determines the number of shares
subject to options to be granted and the terms and conditions of each option
granted, including the option purchase price which (i) in the case of an
incentive stock option or an option granted automatically to a Nonemployee
Director, shall not be less than the fair market value of the Common Stock on
the date the option is granted and (ii) otherwise, shall be not less than 50%
of the fair market value of Common Stock on the date the option is granted.
The Stock Option Plan permits option agreements (except those relating to
option grants to Nonemployee Directors) to contain a provision (an
"appreciation right") for the surrender, in whole or in part, of the right to
purchase shares under an option in return for a payment in cash or shares of
Common Stock or both, equal in value to the excess of the fair market value of
the shares with respect to which the right to purchase is surrendered over the
option price therefor. The Compensation Committee may grant such appreciation
rights at the time an option is granted or at any time thereafter, and retains
the final authority to both determine the form in which payment of
appreciation rights will be made and approve an election by the optionee to
receive cash in whole or in part in settlement of an appreciation right.
Option agreements under the Stock Option Plan (except those relating to option
grants to Nonemployee Directors) may also provide for the payment of the
option price, in whole or in part, by the delivery of a number of shares of
Common Stock having a fair market value equal to such option price.
Except with respect to option grants to Nonemployee Directors, the Stock
Option Plan permits optionees to elect to deliver to the Company shares of
Common Stock in satisfaction of the Company's withholding tax obligations
arising from the exercise of options or dispositions of shares of Common Stock
acquired by exercise of an option, subject to the Compensation Committee's
sole discretion to consent to or disapprove such election and to certain
administrative rules. The Stock Option Plan also permits the Compensation
Committee, in its discretion, to award cash bonuses to optionees (other than
Nonemployee Directors) to reimburse such optionees, whose option is not an
incentive stock option or is disqualified as such, for (i) certain tax
consequences in connection with the exercise of options (or appreciation
rights) for Common Stock, disqualifying dispositions of Common Stock received
upon exercise of incentive stock options or the Compensation Committee's
taking any action permitted under the Stock Option Plan (including the grant
of a cash bonus) and (ii) all or a portion of an assumed interest cost for
borrowing the amount of such taxes not reimbursed by the Company during the
period prior to the sale of the Common Stock received upon exercise of the
option (or appreciation right).
The Compensation Committee has the exclusive power to interpret the Stock
Option Plan and to adopt such rules and regulations, consistent with the
provisions of the Stock Option Plan, as it may deem advisable to carry out the
Stock Option Plan. The Board of Directors has the right to amend, modify,
suspend or terminate the Stock Option Plan, except that (a) without the
consent of the affected participant, no amendment or alteration shall be made
that would impair the rights of a participant under any award theretofore
granted, (b) no amendment or alteration shall be effective prior to approval
by the Company's stockholders to the extent such approval is then required
pursuant to Rule 16b-3 (or any successor provision) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), in order to preserve
the applicability of any exemption provided by such rule to any award then
outstanding (unless the holder of such award consents) or to the extent
stockholder approval is otherwise required by applicable legal requirements,
and (c) the provisions of the Stock Option Plan relating to Nonemployee
Director options shall not be amended more than once every six months to the
extent such limitation is required by Rule 16b-3(c)(2)(ii) (or any successor
provision) under the Exchange Act as then in effect. The Securities and
Exchange Commission (the "Commission") has recently adopted rules (that are
not yet effective) that would generally eliminate Rule 16b-3's requirement of
stockholder approval of amendments to compensation plans.
Upon a "corporate change," as defined in the Stock Option Plan, the
Compensation Committee shall effect one or more of certain specified
alternatives, which may vary among individual optionees. The Compensation
Committee may choose to (i) accelerate the time at which options then
outstanding may be exercised, (ii) require
46
<PAGE>
the mandatory surrender to the Company of some or all of the outstanding
options and pay to each optionee an amount of cash per share based on the
excess, over the exercise price, of the per share price offered to
stockholders pursuant to the corporate change or the fair market value of the
Common Stock, as appropriate, (iii) make such adjustments to options then
outstanding as such committee deems appropriate to reflect such corporate
change or (iv) provide that thereafter, upon any exercise of an option
theretofore granted, the optionee shall be entitled to purchase under such
option the number and class of shares of stock or other securities or property
to which the optionee would have been entitled had the optionee been the
holder of record of the number of shares of stock covered by the option as of
the date of the corporate change.
A recipient of an incentive stock option or a nonqualified stock option will
not recognize U.S. taxable income at the time of the grant of the option. On
the exercise of a nonqualified stock option, the amount by which the fair
market value of the Common Stock on the date of exercise exceeds the option
price will generally be taxable to the holder as ordinary income, and would be
deductible for U.S. tax purposes by the employer. The disposition of shares
acquired upon exercise of a nonqualified option will ordinarily result in
capital gain or loss.
On the exercise of an option that qualifies as an "incentive stock option"
within the meaning of the Code, the holder will not recognize any income and
the employer will not be entitled to a deduction for U.S. tax
purposes. However, the difference between the exercise price and the fair
market value of the Common Stock received on the date of the exercise must be
included in the holder's alternative minimum taxable income. The disposition
of shares acquired upon exercise of an incentive stock option will ordinarily
result in capital gain or loss. However, if the holder disposes of shares
acquired upon the exercise of an incentive stock option within two years after
the date of grant or one year after the date of exercise (a "disqualifying
disposition"), the holder will recognize ordinary income, and the employer
will be entitled to a deduction for U.S. tax purposes, in the amount of the
excess of the fair market value of the shares of Common Stock on the date the
option was exercised over the option price (or, in certain circumstances, the
gain on sale, if less). Otherwise, the employer will not be entitled to any
deduction for U.S. tax purposes upon disposition of such shares. Any excess of
the amount realized by the holder on the disqualifying disposition over the
fair market value of the shares on the date of exercise of the option will be
treated as a capital gain.
This tax information is only a summary, does not purport to be complete and
does not cover, among other things, foreign, state and local tax treatment of
participation in the Stock Option Plan.
EMPLOYMENT AGREEMENT
In connection with the Cobb Acquisition, Mr. Cobb and Cobb Directional
Drilling Company, L.L.C. ("Cobb LLC") entered into an employment agreement on
September 30, 1994. The agreement provides that Mr. Cobb will be employed by
Cobb LLC as its chairman and/or president until September 30, 1999 at an
annual salary of $150,000, subject to increase as determined appropriate by
Cobb LLC, as well as the right to participate in executive compensation
programs. If Cobb LLC terminates Mr. Cobb's employment without cause, it is
required to pay him such salary for the remainder of the term of the
agreement. The employment agreement provides that all inventions, discoveries
and similar intellectual property created or conceived by Mr. Cobb in
connection with his work for Cobb LLC are the sole and exclusive property of
the Company. The agreement also requires Mr. Cobb to abide by certain
confidentiality provisions with respect to such intellectual property and
other confidential information obtained through his position. The employment
agreement provides that Mr. Cobb will not compete with Cobb LLC for a period
of five years after the termination of his employment.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of David C. Baldwin, Robert P. Peebler
and Sam S. Sorrell.
Mr. Baldwin is an executive officer of SCF G.P., the general partner of SCF
Partners, L.P., which is the general partner of DRLX Partners, L.P., a holder
of more than 5% of the Common Stock outstanding. Mr. Sorrell
47
<PAGE>
is also a consultant to SCF Partners, L.P. L.E. Simmons is the President and
sole stockholder of SCF G.P. In connection with the Company's formation in
March 1994, the Company issued to DRLX Partners, L.P., 1,990,790 shares of
Common Stock for cash consideration equal to $5.53 per share. In connection
with such formation, DRLX Partners, L.P. became one of the parties to a
registration rights agreement with the Company, which is being amended and
restated in connection with the Offering. See "Certain Transactions and
Relationships--Registration Rights Agreements." Thereafter, in two
transactions, effective on June 30, 1994 and September 30, 1994, the Company
issued to DRLX Partners, L.P. an aggregate of 882,282 shares of Common Stock
for cash consideration equal to $5.53 per share, and on September 29, 1995,
the Company issued an additional 361,962 shares of Common Stock for cash
consideration of $6.91 per share. In addition, in a July 1994 exchange
effecting the redemption of all of the then-outstanding preferred stock of
DSI, the Company issued to DRLX Partners, L.P. 884,173 shares of Common Stock
in exchange for 488.5 shares of preferred stock of DSI. As a result of these
transactions and his relationship to DRLX Partners, L.P., Mr. Simmons may be
deemed to have an indirect personal pecuniary interest in 4,119,207 shares of
Common Stock.
In connection with the ENSCO Technology Acquisition, the Company paid a
$150,000 fee to SCF Partners, L.P. for financial advisory and other
consultation services. Such fee was paid in the first quarter of 1996. The
Company believes that such fee was comparable to fees that would have been
paid to unaffiliated third parties for similar services.
SCF Partners, L.P. is the general partner of institutional investor
partnerships that invest in the oilfield service and equipment industry. As a
result, it is possible that such institutional investor partnerships may
compete with the Company for acquisition candidates, or may invest in
businesses that compete with the Company.
During 1996, the Company expects to make aggregate payments of approximately
$375,000 to Landmark Graphics Corporation in connection with anticipated
purchases of computer software. Mr. Peebler is the President and Chief
Executive Officer of Landmark Graphics Corporation. Such charges will be
incurred in the ordinary course of business, and the Company believes that the
prices to be paid in connection with such purchases will be comparable to the
prices that would be paid in similar transactions with parties not affiliated
with Mr. Peebler.
48
<PAGE>
CERTAIN TRANSACTIONS AND RELATIONSHIPS
CERTAIN TRANSACTIONS
In connection with the Company's formation in March 1994, the Company issued
36,196 shares of Common Stock to John Forrest for cash consideration equal to
$5.53 per share. Thereafter, on June 30, 1994, the Company issued shares of
Common Stock to certain of its executive officers for cash consideration of
$5.53 per share in the following amounts: 9,049 shares to John Forrest; 3,620
shares to G. Bruce Broussard; 8,144 shares to Charles Denton Kerr II; and
4,525 shares to Robert Stayton. In addition, on September 29, 1995, the
Company issued shares of Common Stock to certain of its executive officers for
cash consideration of $6.91 per share in the following amounts: 5,828 shares
to Mr. Forrest; 467 shares to Mr. Broussard; 1,050 shares to Mr. Kerr; and
4,760 to Samuel R. Anderson.
In June 1994, the stockholders of the Company acquired on a pro rata basis
all of the outstanding shares of preferred stock that had been issued by DSI
to MascoTech in connection with the DSI Acquisition. Subsequently, in July
1994, the Company issued 904,905 shares of Common Stock in the aggregate to
its stockholders in exchange for all the outstanding preferred stock of DSI.
On June 1, 1995, the Company repurchased 6,048 shares of Common Stock from
Robert Stayton for cash consideration of $4.26 per share, in connection with
Mr. Stayton's resignation from his position as a Vice President of the
Company.
On March 23, 1995, the Company repurchased, for $1.0 million in cash,
144,784 shares of Common Stock from a company owned by Archie A. Cobb, III,
the current President of Cobb LLC, a subsidiary of the Company. Also on such
date, the Company purchased from affiliates of Mr. Cobb the one-third equity
interest in Cobb LLC it did not already own for a purchase price consisting of
a $1.0 million amortizing note with a final maturity in 1998 and a $1.1
million short-term note due July 1995 (which was paid at maturity). See "The
Company."
Since the completion of the Cobb Acquisition, the Company has made payments
to Non Magnetic Rental Tools, Inc. ("NMRT"), a company owned by two brothers
of Mr. Cobb, for rental of certain tools used in the business of Cobb
Directional Drilling Company, L.L.C. Such payments totaled approximately
$161,000 in the three months ended December 31, 1994 and $555,000 in the year
ended December 31, 1995. The Company made payments in the same periods
totaling approximately $10,000 and $41,000, respectively, to Downhole
Directional Tools, Inc., a company owned by Mr. Cobb's son-in-law, in
connection with the rental of drill string stabilizers. The Company also made
payments in the same periods totaling approximately $7,000 and $33,000,
respectively, to Oilfield Manufacturing & Supply, Inc., a company owned by a
brother-in-law of Mr. Cobb, in connection with the purchase of float valves.
The Company expects to make rental payments to NMRT during 1996 in amounts not
to exceed the amounts paid in 1995. The Company does not anticipate entering
into any transactions with Downhole Directional Tools, Inc. or Oilfield
Manufacturing & Supply, Inc. in 1996. All of such transactions were entered
into in the ordinary course of business, and the Company believes that the
rental rates incurred in connection with such transactions were comparable to
rental rates that would have been incurred in similar transactions with
parties not affiliated with Mr. Cobb.
During 1995, the Company lent $250,000 to John Forrest to facilitate certain
tax payments made by Mr. Forrest. The entire principal amount of such loan
remains outstanding as of the date of this Prospectus. The loan bears interest
at a rate equal to the interest rate incurred by the Company on its borrowings
(a Eurodollar interbank offered rate plus 2%, which was 7.63% at May 1, 1996)
and is secured by 45,245 shares of Common Stock owned by Mr. Forrest. During
1995, the largest outstanding amount of this loan, including accrued interest,
was approximately $264,000. On May 1, 1996, the outstanding amount of this
loan, including accrued interest, was approximately $270,000. The loan is
payable upon the earlier of (i) sale of shares of Common Stock owned by Mr.
Forrest and (ii) the termination of Mr. Forrest's employment with the Company.
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<PAGE>
For certain other transactions between the Company and its executive
officers, directors or beneficial owners of in excess of 5% of the Company's
outstanding Common Stock, see "Management--Compensation Committee Interlocks
and Insider Participation."
REGISTRATION RIGHTS AGREEMENTS
In connection with the Offering, the Company will enter into an amendment
and restatement of an existing registration rights agreement among the
Company, DRLX Partners, L.P., and Messrs. Forrest, Broussard and Kerr (the
"Restated Registration Rights Agreement"). The Restated Registration Rights
Agreement will provide for registration rights pursuant to which, upon the
request of holders (the "Requesting Holders") of at least 51% of the shares of
Common Stock (or other securities of the Company) subject to such agreement
(the "Registrable Securities"), the Company will file a registration statement
under the Securities Act to register Registrable Securities held by the
Requesting Holders and any other stockholders who are parties to the Restated
Registration Rights Agreement and who desire to sell Registrable Securities
pursuant to such registration statement, subject to a maximum of three
requests in total. The first such request may not be made until after December
31, 1996. In addition, subject to certain conditions and limitations, the
Restated Registration Rights Agreement will provide that holders of
Registrable Securities may participate in any registration by the Company of
any of its equity securities in an underwritten offering other than the
offering made by this Prospectus. The registration rights conferred by the
Restated Registration Rights Agreement will generally be transferable to
transferees of the Registrable Securities covered thereby. The Restated
Registration Rights Agreement will terminate on December 31, 2001, or earlier
if the securities subject to the Restated Registration Rights Agreement have
been (i) distributed to the public pursuant to a registration statement
covering such securities that has been declared effective under the Securities
Act, (ii) distributed to the public in accordance with the provisions of Rule
144 (or any similar provision then in force) under the Securities Act or (iii)
repurchased by the Company. An aggregate of 4,213,342 outstanding shares of
Common Stock and 60,443 shares of Common Stock issuable upon exercise of
options will be subject to the Restated Registration Rights Agreement.
In September 1995, in connection with the ENSCO Technology Acquisition, the
Company entered into a registration rights agreement (the "ENSCO Registration
Rights Agreement") pursuant to which ENSCO Technology was granted "piggyback"
registration rights to include shares of the Company's Common Stock issuable
upon the conversion of the Convertible Note as part of certain registration
statements filed by the Company. As of May 1, 1996, the Convertible Note had
an outstanding principal balance of $2.5 million, and was convertible into
361,962 shares of Common Stock. The Selling Stockholder, as successor to ENSCO
Technology, has exercised its registration rights pursuant to the ENSCO
Registration Rights Agreement in order to include such shares of Common Stock
in the Offering. See "Selling Stockholder."
In the case of both registration rights agreements described above, the
Company is required to pay all the costs associated with such an offering
other than underwriting commissions and transfer taxes attributable to the
shares sold on behalf of the selling stockholders. In addition, in the case of
the Restated Registration Rights Agreement, the Company is obligated to pay
the fees and expenses of one firm of legal counsel retained by the holders of
a majority of the shares registered thereunder. Both registration rights
agreements provide that the number of shares of Common Stock that must be
registered on behalf of the selling stockholders is subject to limitation if
the managing underwriter determines that market conditions require such a
limitation. Under both such agreements, the Company will indemnify the selling
stockholders thereunder, and such stockholders will indemnify the Company,
against certain liabilities in respect of any registration statement or
offering covered by the registration rights agreements.
50
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table set forth certain information as of May 1, 1996, except
as otherwise noted, concerning the persons known by the Company to be
beneficial owners of more than five percent of the Company's outstanding
Common Stock, the members of the Board of Directors of the Company, the Named
Executive Officers listed in the Summary Compensation Table above and all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
BENEFICIALLY
NAME OF BENEFICIAL OWNER(1) OWNED PERCENT
--------------------------- ------------ -------
<S> <C> <C>
DRLX Partners, L.P.(2).................................... 4,119,207 93.8%
c/o SCF Partners, L.P.
6600 Travis
Suite 6600
Houston, Texas 77002
L.E. Simmons(2)........................................... 4,119,207 93.8
c/o SCF Partners, L.P.
6600 Travis
Suite 6600
Houston, Texas 77002
ENSCO International Incorporated(3)....................... 361,962 7.6
1445 Ross Avenue
Suite 2700
Dallas, Texas 75202
John Forrest(4)........................................... 82,547 1.9
G. Bruce Broussard(5)..................................... 10,595 *
Archie A. Cobb, III(6).................................... 96,523 2.2
Charles Denton Kerr II(5)................................. 17,226 *
David C. Baldwin.......................................... -- --
A. Clark Johnson.......................................... -- --
Robert P. Peebler(5)...................................... 807 *
Sam S. Sorrell(5)......................................... 807 *
Andrew L. Waite........................................... -- --
All directors and executive officers as a group (14
persons)(1)(7)............................................ 4,381,877 98.3
</TABLE>
- --------
*Less than one percent
(1) Except as otherwise noted, each stockholder has sole voting and investment
power with respect to the shares beneficially owned.
(2) The general partner of DRLX Partners, L.P. is SCF Partners, L.P. The
general partner of SCF Partners, L.P. is SCF G.P., of which L.E. Simmons
is the President and a director and sole stockholder. Each of SCF
Partners, L.P., SCF G.P. and L.E. Simmons may be deemed the beneficial
owner, within the meaning of Rule 13d-3 under the Exchange Act, of the
shares of Common Stock held by DRLX Partners, L.P.
(3) Shares shown are issuable upon conversion of the Convertible Note. The
Convertible Note was originally issued to ENSCO Technology Company, a
wholly owned subsidiary of ENSCO International Incorporated that has been
liquidated.
(4) Shares shown include 5,657 shares that could be acquired within 60 days
after May 1, 1996 upon exercise of stock options and 10,573 shares of
Common Stock acquired as of March 31, 1996 through the exercise of stock
options.
(5) Shares shown include shares that could be acquired within 60 days after
May 1, 1996 upon exercise of stock options, as follows: 5,287 for Mr.
Broussard, 5,287 for Mr. Kerr, 807 for Mr. Peebler and 807 for Mr.
Sorrell.
(6) Shares shown are owned by Posi-Trak Mud Motors, Inc., a company owned by
Mr. Cobb.
(7) Shares shown include 67,255 shares that could be acquired within 60 days
after May 1, 1996 upon exercise of warrants and stock options.
51
<PAGE>
SELLING STOCKHOLDER
In connection with the Offering, the Selling Stockholder is exercising its
rights to (i) convert the Convertible Note into 361,962 shares of Common Stock
and (ii) include such shares of Common Stock in the Offering pursuant to the
ENSCO Registration Rights Agreement. The Company issued the Convertible Note
in connection with the ENSCO Technology Acquisition. See "The Company." Upon
completion of the Offering, the Selling Stockholder will not own any shares of
capital stock (or any securities convertible into shares of capital stock) of
the Company. For additional information concerning the Selling Stockholder,
see "Security Ownership of Certain Beneficial Owners and Management."
Pursuant to the ENSCO Registration Rights Agreement, the Company is paying
all the expenses of the Offering, including the expenses attributable to the
shares being sold by the Selling Stockholder, other than underwriting
discounts and commissions, any transfer taxes attributable to such shares, and
any fees or expenses of counsel for the Selling Stockholder. See "Certain
Transactions and Relationships--Registration Rights Agreements."
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, 6,753,740 shares of Common Stock will be
outstanding. The shares of Common Stock sold in the Offering will be freely
tradeable without restriction or further registration under the Securities
Act, except for any shares purchased by an "affiliate" of the Company (as that
term is defined under the Securities Act), which will be subject to the resale
limitations of Rule 144 under the Securities Act. Substantially all of the
remaining 4,391,778 shares of Common Stock, which are held by the Company's
current stockholders, will be "restricted securities" (within the meaning of
Rule 144) and, therefore, will not be eligible for sale to the public unless
they are sold in transactions registered under the Securities Act or pursuant
to an exemption from registration, including pursuant to Rule 144 or an
offshore transaction pursuant to Regulation S under the Securities Act. The
Company has entered into registration rights agreements with certain of its
existing stockholders, which provide such stockholders with certain rights to
have their shares of Common Stock registered under the Securities Act, in
order to permit the public sale of such shares. See "Certain Transactions and
Relationships--Registration Rights Agreements."
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register the shares of Common Stock reserved or to be
available for issuance pursuant to the Stock Option Plan. Shares of Common
Stock issued pursuant to such plan generally will be available for sale in the
open market by holders who are not affiliates of the Company and, subject to
the volume and other limitations of Rule 144, by holders who are affiliates of
the Company.
In general, under Rule 144 as currently in effect, if a minimum of two years
has elapsed since the later of the date of acquisition of the restricted
securities from the issuer or from an affiliate of the issuer, a person (or
persons whose shares of Common Stock are aggregated), including persons who
may be deemed "affiliates" of the Company, would be entitled to sell within
any three-month period a number of shares of Common Stock that does not exceed
the greater of (i) 1% of the then outstanding shares of Common Stock (i.e.,
63,918 shares immediately after consummation of the Offering) and (ii) the
average weekly trading volume during the four calendar weeks preceding the
date on which notice of the sale is filed with the Commission. Sales under
Rule 144 are also subject to certain provisions as to the manner of sale,
notice requirements, and the availability of current public information about
the Company. In addition, under Rule 144(k), if a period of at least three
years has elapsed since the later of the date restricted securities were
acquired from the Company or the date they were acquired from an affiliate of
the Company, a stockholder who is not an affiliate of the Company at the time
of sale and has not been an affiliate for at least three months prior to the
sale would be entitled to sell shares of Common Stock in the public market
immediately without compliance with the foregoing requirements under Rule 144.
Rule 144 does not require the same person to have held the securities for the
applicable periods. The foregoing summary of Rule 144 is not intended to be a
complete description thereof. The Commission has proposed an amendment to Rule
144 that would shorten the three- and two-year holding periods described above
to two years and one year, respectively.
The Company, DRLX Partners, L.P. and each of the Company's directors and
executive officers have agreed with the Underwriters that they will not offer
for sale or otherwise voluntarily dispose of any shares of Common Stock or any
securities convertible into or exercisable for shares of Common Stock for a
period of 90 days after the date of this Prospectus without the prior written
consent of Merrill Lynch, as representative of the Underwriters, with certain
exceptions. See "Underwriting."
Prior to the Offering, there has been no public market for the Common Stock,
and no prediction can be made of the effect, if any, that sales of Common
Stock or the availability of shares for sale will have on the market price
prevailing from time to time. Following the Offering, sales of substantial
amounts of Common Stock in the public market or otherwise, or the perception
that such sales could occur, could adversely affect the prevailing market
price for the Common Stock.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 25,000,000 shares of
Common Stock and 10,000,000 shares of Preferred Stock. As of May 1, 1996,
there were 4,391,778 shares of Common Stock outstanding and held of record by
eight stockholders, and no shares of Preferred Stock were outstanding. The
following summary is qualified in its entirety by reference to the Company's
Restated Certificate of Incorporation (the "Certificate of Incorporation"),
which is filed as an exhibit to the registration statement of which this
Prospectus is a part.
COMMON STOCK
The Common Stock possesses ordinary voting rights for the election of
directors and in respect of other corporate matters, each share being entitled
to one vote. There are no cumulative voting rights, meaning that the holders
of a majority of the shares voting for the election of directors can elect all
the directors if they choose to do so. The Common Stock carries no preemptive
rights and is not convertible, redeemable or assessable, or entitled to the
benefits of any sinking fund. The holders of Common Stock are entitled to
dividends in such amounts and at such times as may be declared by the Board of
Directors out of funds legally available therefor. See "Dividend Policy" for
information regarding dividend policy.
PREFERRED STOCK
The Board of Directors of the Company is empowered, without approval of the
stockholders, to cause shares of Preferred Stock to be issued in one or more
series, with the numbers of shares of each series to be determined by it. The
Board of Directors is authorized to fix and determine the powers,
designations, preferences, and relative, participating, optional or other
rights (including, without limitation, voting powers, full or limited,
preferential rights to receive dividends or assets upon liquidation, rights of
conversion or exchange into Common Stock, Preferred Stock of any Series or
other securities, redemption provisions and sinking fund provisions) between
series and between the Preferred Stock or any series thereof and the Common
Stock, and the qualifications, limitations or restrictions of such rights.
Although the Company has no present intention to issue shares of Preferred
Stock, the issuance of shares of Preferred Stock, or the issuance of rights to
purchase such shares, could be used to discourage an unsolicited acquisition
proposal. For instance, the issuance of a series of Preferred Stock might
impede a business combination by including class voting rights that would
enable the holders to block such a transaction; or such issuance might
facilitate a business combination by including voting rights that would
provide a required percentage vote of the stockholders. In addition, under
certain circumstances, the issuance of Preferred Stock could adversely affect
the voting power of the holders of the Common Stock. Although the Board of
Directors is required to make any determination to issue such stock based on
its judgment as to the best interests of the stockholders of the Company, the
Board of Directors could act in a manner that would discourage an acquisition
attempt or other transaction that some or a majority of the stockholders might
believe to be in their best interests or in which stockholders might receive a
premium for their stock over the then market price of such stock. The Board of
Directors does not at present intend to seek stockholder approval prior to any
issuance of currently authorized stock, unless otherwise required by law or
the rules of any market on which the Company's securities are traded.
OTHER MATTERS
Delaware law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors' fiduciary duty of care. The duty of care
requires that, when acting on behalf of the corporation, directors must
exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations authorized by Delaware
law, directors are accountable to corporations and their stockholders for
monetary damages for conduct constituting gross negligence in the exercise of
their duty of care. Delaware law enables corporations to limit available
relief to equitable remedies such as injunction or rescission. The Certificate
of Incorporation limits the
54
<PAGE>
liability of directors of the Company to the Company or its stockholders to
the fullest extent permitted by Delaware law. Specifically, directors of the
Company will not be personally liable for monetary damages for breach of a
director's fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for unlawful payments of
dividends or unlawful stock repurchases or redemptions as provided in Section
174 of the Delaware General Corporation Law, or (iv) for any transaction from
which the director derived an improper personal benefit.
The inclusion of this provision in the Certificate of Incorporation may have
the effect of reducing the likelihood of derivative litigation against
directors, and may discourage or deter stockholders or management from
bringing a lawsuit against directors for breach of their duty of care, even
though such an action, if successful, might otherwise have benefited the
Company and its stockholders. The Company's Bylaws provide indemnification to
the Company's officers and directors and certain other persons with respect to
certain matters, and the Company has entered into agreements with each of its
directors providing for indemnification with respect to certain matters.
The Certificate of Incorporation provides that stockholders may act only at
an annual or special meeting of stockholders and may not act by written
consent. The Bylaws provide that special meetings of the stockholders can be
called only by the Chairman of the Board, the President or the Board of
Directors of the Company.
Pursuant to the Certificate of Incorporation, certain transactions
involving, among other persons, any person who is a beneficial owner of 10% or
more of the aggregate voting power of all outstanding stock of the Company (a
"related person") require the affirmative vote of the holders of both (i) at
least 80% of the outstanding voting stock and (ii) at least 66% of the
outstanding voting stock not beneficially owned by the related person.
Transactions subject to such approval include certain mergers or
consolidations of the Company or sales or transfers of assets and properties
having an aggregate fair market value of $10 million or more. Notwithstanding
the foregoing, the Certificate of Incorporation provides that no person who is
the beneficial owner of 10% or more of the aggregate voting power of all
outstanding stock of the Company on May 1, 1996 shall be a related person.
Consequently, DRLX Partners, L.P. is not a related person for these purposes.
The Certificate of Incorporation provides that the Board of Directors shall
consist of three classes of directors serving for staggered three-year terms.
As a result, approximately one-third of the Company's Board of Directors will
be elected each year. The classified board provision could prevent a party who
acquires control of a majority of the outstanding voting stock of the Company
from obtaining control of the Board of Directors until the second annual
stockholders meeting following the date the acquirer obtains the controlling
interest. See "Management."
The Certificate of Incorporation provides that the number of directors will
be no greater than 12 and no less than three. The Certificate of Incorporation
further provides that directors may be removed only for cause (as defined in
the Certificate of Incorporation), and then only by the affirmative vote of
the holders of at least a majority of all outstanding voting stock entitled to
vote. This provision, in conjunction with the provisions of the Certificate of
Incorporation authorizing the Board of Directors to fill vacant directorships,
will prevent stockholders from removing incumbent directors without cause and
filling the resulting vacancies with their own nominees.
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
a corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with a Delaware corporation for three years
following the date such person became an interested stockholder unless (i)
before such person became an interested stockholder, the board of directors of
the corporation approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination; (ii)
upon consummation of the transaction that resulted in the interested
stockholder's becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced (excluding stock held by directors who are also
officers of
55
<PAGE>
the corporation and by employee stock plans that do not provide employees with
the rights to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer); or (iii) following the
transaction in which such person became an interested stockholder, the
business combination was approved by the board of directors of the corporation
and authorized at a meeting of stockholders by the affirmative vote of the
holders of two-thirds of the outstanding voting stock of the corporation not
owned by the interested stockholder. Under Section 203, the restrictions
described above also do not apply to certain business combinations proposed by
an interested stockholder following the announcement or notification of one of
certain extraordinary transactions involving the corporation and a person who
had not been an interested stockholder during the previous three years or who
became an interested stockholder with the approval of a majority of the
corporation's directors, if such extraordinary transaction is approved or not
opposed by a majority of the directors who were directors prior to any person
becoming an interested stockholder during the previous three years or were
recommended for election or elected to succeed such directors by a majority of
such directors. DRLX Partners, L.P. is not subject to the restrictions of
Section 203 with respect to the Common Stock.
STOCKHOLDER PROPOSALS
The Company's Bylaws contain provisions requiring that advance notice be
delivered to the Company of any business to be brought by a stockholder before
an annual meeting of stockholders, and providing for certain procedures to be
followed by stockholders in nominating persons for election to the Board of
Directors of the Company. Generally, such advance notice provisions provide
that written notice must be given to the Secretary of the Company by a
stockholder (i) in the event of business to be brought by a stockholder before
an annual meeting, not less than 90 days prior to the anniversary date of the
immediately preceding annual meeting of stockholders of the Company (with
certain exceptions if the date of the annual meeting is different by more than
specified amounts from the anniversary date), and (ii) in the event of
nominations of persons for election to the Board of Directors by any
stockholder, (a) with respect to an election to be held at the annual meeting
of stockholders, not less than 90 days prior to the anniversary date of the
immediately preceding annual meeting of stockholder of the Company (with
certain exceptions if the date of the annual meeting is different by more than
specified amounts from the anniversary date), and (b) with respect to an
election be held at a special meeting of stockholders for the election of
directors, not later than the close of business on the tenth day following the
day on which notice of the date of the special meeting was mailed to
stockholders or public disclosure of the date of the special meeting was made,
whichever first occurs. Such notice must set forth specific information
regarding such stockholder and such business or director nominee, as described
in the Company's Bylaws. The foregoing summary is qualified in its entirety by
reference to the Company's Bylaws, which are filed as an exhibit to the
registration statement of which this Prospectus is a part.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Chase Mellon
Shareholder Services, L.L.C.
56
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement") among the Company, the Selling Stockholder and each of
the underwriters named below (the "Underwriters"), the Company and the Selling
Stockholder have agreed to sell to each of the Underwriters, and each of the
Underwriters, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated, CS
First Boston Corporation and Simmons & Company International are acting as the
representatives (the "Representatives"), has severally agreed to purchase from
the Company and the Selling Stockholder the number of shares of Common Stock
set forth below opposite their respective names. The Underwriters are
committed to purchase all of such shares if any are purchased. Under certain
circumstances, the commitments of non-defaulting Underwriters may be increased
as set forth in the Purchase Agreement.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.............................................
CS First Boston Corporation.......................................
Simmons & Company International...................................
---------
Total........................................................ 2,361,962
=========
</TABLE>
The Representatives have advised the Company and the Selling Stockholder
that the Underwriters propose to offer the shares of Common Stock to the
public initially at the public offering price set forth on the cover page of
this Prospectus, and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a discount not in excess of $ per share on sales to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The Company has granted the Underwriters an option to purchase up to 354,294
additional shares of Common Stock at the public offering price set forth on
the cover page of this Prospectus, less the underwriting discount. Such
option, which expires 30 days after the date of this Prospectus, may be
exercised solely to cover over-allotments. To the extent that the Underwriters
exercise this option, each of the Underwriters will be obligated, subject to
certain conditions, to purchase approximately the same percentage of the
option shares that the number of shares to be purchased initially by that
Underwriter bears to the total number of shares to be purchased initially by
the Underwriters.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price of the Common Stock offered hereby will be
determined by negotiations among the Company, the Selling Stockholder and the
Representatives. Among the factors to be considered in such negotiations are
the history and the prospects for the industry in which the Company competes,
an assessment of the Company's management, the past and present operations of
the Company, the historical results of operations of the Company and the trend
of its revenues and earnings, the prospects for future earnings of the
Company, the general condition of the securities markets at the time of the
Offering and the price-earnings ratios and market prices of publicly traded
securities of companies that the Company and the Representatives believe to be
comparable to the Company. There can be no assurance that an active trading
market will develop for the Common Stock or that the Common Stock will trade
in the public market subsequent to the Offering at or above the initial public
offering price.
57
<PAGE>
At the request of the Company, the Underwriters have reserved up to 100,000
of the shares of Common Stock offered hereby for sale at the initial public
offering price to certain employees of the Company and certain other persons
designated by the Company who have expressed an interest in purchasing Common
Stock. The number of shares of Common Stock available to the general public
will be reduced to the extent these persons purchase the reserved shares. Any
reserved shares which are not so purchased will be offered by the Underwriters
to the general public on the same basis as the other shares of Common Stock
offered hereby.
The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriters may be required
to make in respect thereof.
The Company, DRLX Partners, L.P. and each of the Company's directors and
executive officers have agreed that, for a period of 90 days after the date of
this Prospectus, they will not, without the prior written consent of Merrill
Lynch, offer, sell or otherwise voluntarily dispose of any shares of Common
Stock or securities convertible into or exercisable for Common Stock, except
for (i) sales of the shares of Common Stock offered hereby, (ii) issuances
pursuant to the exercise of outstanding warrants, stock options and
convertible securities, (iii) grants of options pursuant to the Stock Option
Plan, (iv) private placements of Common Stock by the Company to purchasers who
agree to be bound by a similar agreement, and (v) bona fide gifts by
stockholders to donees who agree to be bound by a similar agreement.
The Representatives have informed the Company and the Selling Stockholder
that they do not expect the Underwriters to confirm sales of shares of Common
Stock offered hereby to any accounts over which they exercise discretionary
authority.
LEGAL MATTERS
Certain legal matters in connection with the shares of Common Stock offered
hereby are being passed upon for the Company by Baker & Botts, L.L.P.,
Houston, Texas, and for the Underwriters by Liddell, Sapp, Zivley, Hill &
LaBoon, L.L.P., Houston, Texas.
EXPERTS
The (i) consolidated financial statements of the Company as of December 31,
1995 and 1994 and for the year ended December 31, 1995 and the period from
March 30, 1994 (inception) to December 31, 1994, (ii) consolidated statements
of operations and cash flows of DSI for the three-month period ended March 30,
1994 and the year ended December 31, 1993, (iii) consolidated statements of
income and cash flows of Ensco Technology for the nine-month period ended
September 30, 1995 and the year ended December 31, 1994, and (iv) consolidated
statements of operations and cash flows of Sharewell for each of the two years
in the period ended March 31, 1995, included in this Prospectus, and the
financial statement schedule related to the financial statements referred to
in (i) above, included elsewhere in the registration statement of which this
Prospectus forms a part, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and
elsewhere in the registration statement, and have been so included in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended. The Company has filed a
Registration Statement on Form S-1 (the "Registration Statement") under the
Securities Act with the Commission with respect to the Offering. This
Prospectus, filed as a part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement, or the
exhibits and schedules thereto, in accordance with the rules and regulations
of the Commission, and reference is hereby made to such omitted information.
Each statement made in this Prospectus concerning a document filed as an
exhibit to the Registration Statement accurately describes the material
provisions of such
58
<PAGE>
document and is qualified in its entirety by reference to such exhibit for a
complete statement of its provisions. The Registration Statement and the
exhibits and schedules thereto may be inspected, without charge, at the public
reference facilities of the Commission at its principal office at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and its
regional offices at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and at 7 World Trade Center, 13th Floor, New York,
New York 10048. Copies of all or any portion of the Registration Statement can
be obtained at prescribed rates from the Public Reference Section of the
Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. The Commission maintains an Internet web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
(http://www.sec.gov).
59
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheet as of March 31, 1996 (unaudited) and as of
December 31, 1995 and 1994............................................. F-3
Consolidated Statement of Income for the Three Months Ended March 31,
1996 and 1995 (unaudited) and for the Year Ended December 31, 1995 and
the Period from March 30, 1994 (inception) to December 31, 1994........ F-4
Consolidated Statement of Cash Flows for the Three Months Ended March
31, 1996 and 1995 (unaudited) and for the Year Ended December 31, 1995
and the Period from March 30, 1994 (inception) to December 31, 1994.... F-5
Consolidated Statement of Stockholders' Equity for the Three Months
Ended March 31, 1996 (unaudited) and for the Year Ended December 31,
1995 and the Period from March 30, 1994 (inception) to December 31,
1994................................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
DRILEX SYSTEMS, INC. AND SUBSIDIARIES
Independent Auditors' Report............................................ F-18
Consolidated Statement of Operations for the Period from January 1, 1994
to March 30, 1994 and the Year Ended December 31, 1993................. F-19
Consolidated Statement of Cash Flows for the Period from January 1, 1994
to March 30, 1994 and the Year Ended December 31, 1993................. F-20
Notes to Consolidated Financial Statements.............................. F-21
ENSCO TECHNOLOGY COMPANY AND SUBSIDIARY
Independent Auditors' Report............................................ F-25
Consolidated Statement of Income for the Nine Months Ended September 30,
1995 and the Year Ended December 31, 1994.............................. F-26
Consolidated Statement of Cash Flows for the Nine Months Ended September
30, 1995 and the Year Ended December 31, 1994.......................... F-27
Notes to Consolidated Financial Statements.............................. F-28
SHAREWELL, INC. (FORMERLY SHARECO, INC.) AND SUBSIDIARIES
Independent Auditors' Report............................................ F-32
Consolidated Statement of Operations for the Years Ended March 31, 1995
and 1994............................................................... F-33
Consolidated Statement of Cash Flows for the Years Ended March 31, 1995
and 1994............................................................... F-34
Notes to Consolidated Financial Statements.............................. F-35
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Drilex International Inc.:
We have audited the accompanying consolidated balance sheets of Drilex
International Inc. and subsidiaries (the "Company") as of December 31, 1995
and 1994, and the related consolidated statements of income, cash flows, and
stockholders' equity for the year ended December 31, 1995 and the period from
March 30, 1994 (inception) to December 31, 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Drilex International Inc. and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for the year ended December 31, 1995 and the
period from March 30, 1994 (inception) to December 31, 1994 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
April 26, 1996 (May 16, 1996 as to Note 15)
F-2
<PAGE>
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------
1996 1995 1994
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 1,388 $ 819 $ 949
Receivables:
Trade, net of allowance for doubtful accounts
of $729, $933 and $308 at March 31, 1996 and
December 31, 1995 and 1994, respectively...... 20,455 20,994 8,946
Other.......................................... 736 694 101
Inventories...................................... 8,117 8,259 4,303
Prepaid expenses and other current assets........ 1,238 1,217 467
------- ------- -------
Total current assets......................... 31,934 31,983 14,766
Property and equipment, net........................ 28,371 27,557 17,545
Goodwill, net of accumulated amortization of $260,
$170 and $9 at March 31, 1996 and December 31,
1995 and 1994, respectively....................... 14,061 14,151 1,394
Other assets, net.................................. 4,089 4,063 2,587
------- ------- -------
$78,455 $77,754 $36,292
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 9,227 $ 8,706 $ 2,699
Accrued compensation and related benefits........ 1,423 1,550 800
Accrued taxes, other than on income.............. 632 1,064 741
Accrued income taxes............................. 414 476 185
Other accrued liabilities........................ 733 936 380
Long-term debt, current maturities............... 5,852 5,886 450
------- ------- -------
Total current liabilities.................... 18,281 18,618 5,255
Long-term debt, less current maturities............ 32,945 32,467 7,633
Other noncurrent liabilities....................... 2,169 2,182 1,781
------- ------- -------
Total liabilities............................ 53,395 53,267 14,669
------- ------- -------
Commitments and contingencies (Note 12)
Minority interests................................. 794 805 2,066
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000
shares authorized; none issued.................. -- -- --
Common stock, $.01 par value; 25,000,000 shares
authorized;
shares issued: March 31, 1996--4,391,778,
December 31, 1995--4,381,205 and December 31,
1994--4,080,818................................. 44 44 41
Additional paid-in capital....................... 19,903 19,845 17,507
Retained earnings................................ 4,319 3,793 2,009
------- ------- -------
Total stockholders' equity................... 24,266 23,682 19,557
------- ------- -------
$78,455 $77,754 $36,292
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS PERIOD FROM
ENDED MARCH MARCH 30, 1994
31, YEAR ENDED (INCEPTION) TO
--------------- DECEMBER 31, DECEMBER 31,
1996 1995 1995 1994
------- ------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues:
Rental and service............. $17,039 $8,437 $43,766 $21,850
Equipment sales................ 2,418 2,090 13,760 3,359
------- ------ ------- -------
19,457 10,527 57,526 25,209
------- ------ ------- -------
Operating expenses:
Costs of sales and operations
(exclusive of depreciation and
amortization):
Rental and service........... 10,836 5,573 27,956 11,714
Equipment sales.............. 1,182 889 6,650 1,210
Selling, general and
administrative expenses....... 4,243 2,644 13,448 6,711
Depreciation and amortization.. 1,580 761 4,492 1,855
------- ------ ------- -------
17,841 9,867 52,546 21,490
------- ------ ------- -------
Operating income................. 1,616 660 4,980 3,719
Interest expense................. (811) (203) (1,935) (478)
------- ------ ------- -------
Income before income taxes and
minority interests.............. 805 457 3,045 3,241
Provision for income taxes....... (290) (164) (1,097) (1,166)
Minority interests............... 11 (88) (164) (66)
------- ------ ------- -------
Net income....................... $ 526 $ 205 $ 1,784 $ 2,009
======= ====== ======= =======
Net income per common and common
equivalent share:
Primary........................ $ .12 $ .05 $ .40 $ .57
======= ====== ======= =======
Fully diluted.................. $ .11 $ .05 $ .40 $ .57
======= ====== ======= =======
Weighted average common and
common equivalent shares
outstanding (in thousands):
Primary........................ 4,552 4,390 4,411 3,507
======= ====== ======= =======
Fully diluted.................. 4,914 4,390 4,501 3,507
======= ====== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS PERIOD FROM
ENDED MARCH 30, 1994
MARCH 31, YEAR ENDED (INCEPTION) TO
-------------- DECEMBER 31, DECEMBER 31,
1996 1995 1995 1994
------ ------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income........................ $ 526 $ 205 $ 1,784 $ 2,009
Adjustments to reconcile net
income to net cash provided by
(used for) operating activities:
Depreciation and amortization.... 1,580 761 4,492 1,855
Net losses on disposition of
property and equipment.......... 193 526 1,033 883
Minority interests............... (11) 88 164 66
Changes in assets and
liabilities, excluding the
effects of acquisitions:
Increase in accounts payable.... 521 673 4,568 1,628
Increase in inventories......... (1,080) (1,605) (5,918) (2,393)
Decrease (increase) in
receivables.................... 508 124 (5,209) (3,667)
Decrease (increase) in prepaid
expenses and other assets...... (151) 104 (560) (576)
Increase (decrease) in accrued
and other liabilities.......... (837) (931) (539) 1,072
------ ------ -------- --------
Net cash provided by (used
for) operating activities... 1,249 (55) (185) 877
------ ------ -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Net proceeds from disposition of
property and equipment........... 692 157 1,263 29
Capital expenditures.............. (1,816) (773) (5,408) (707)
Acquisition of ENSCO Technology
Company net assets, net of cash
acquired......................... -- -- (11,488) --
Acquisition of Sharewell, Inc.,
net of cash acquired............. -- -- (3,727) --
Acquisition of Drilex Systems,
Inc., net of cash acquired....... -- -- -- (18,625)
Acquisition of Cobb net assets.... -- -- -- (3,590)
------ ------ -------- --------
Net cash used for investing
activities.................. (1,124) (616) (19,360) (22,893)
------ ------ -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of long-
term debt........................ -- -- 17,450 2,250
Net borrowings under revolving
credit agreements................ 1,550 1,750 4,700 4,500
Proceeds from issuance of common
stock............................ -- -- 3,117 16,215
Principal payments on long-term
debt............................. (1,106) (112) (4,826) --
Purchases of common stock......... -- (1,000) (1,026) --
------ ------ -------- --------
Net cash provided by
financing activities........ 444 638 19,415 22,965
------ ------ -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................. 569 (33) (130) 949
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD............... 819 949 949 --
------ ------ -------- --------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................ $1,388 $ 916 $ 819 $ 949
====== ====== ======== ========
SUPPLEMENTARY SCHEDULE OF NON-CASH
INVESTING AND FINANCING
ACTIVITIES:
Transfers of drilling equipment
parts from inventories to
property and equipment........... $1,222 $ 656 $ 2,926 $ 1,965
Amounts recorded in connection
with acquisitions (see Note 2):
Fair value of net assets
acquired, including goodwill.... -- -- 26,257 26,881
Issuances of long-term debt...... -- -- 10,792 1,333
Issuance of long-term debt to
reacquire equity interest in
subsidiary...................... -- 2,154 2,154 --
Issuances of common stock and
warrants........................ -- -- 250 1,333
Issuance of equity interest in
subsidiary...................... -- -- -- 2,000
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid..................... $ 800 $ 180 $ 1,689 $ 274
Income taxes paid................. 312 408 842 613
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------
ADDITIONAL
PAID-IN RETAINED
SHARES ($.01 PAR) CAPITAL EARNINGS TOTAL
--------- ---------- ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance, March 30, 1994
(inception)................ -- $ -- $ -- $ -- $ --
Issuances of common stock. 4,080,818 41 17,507 -- 17,548
Net income................ -- -- -- 2,009 2,009
--------- ---- ------- ------ -------
Balance, December 31, 1994.. 4,080,818 41 17,507 2,009 19,557
Issuances of common stock
and warrants............. 451,220 5 3,362 -- 3,367
Purchases of common stock. (150,833) (2) (1,024) -- (1,026)
Net income................ -- -- -- 1,784 1,784
--------- ---- ------- ------ -------
Balance, December 31, 1995.. 4,381,205 44 19,845 3,793 23,682
Issuance of common stock
(unaudited).............. 10,573 -- 58 -- 58
Net income (unaudited).... -- -- -- 526 526
--------- ---- ------- ------ -------
Balance, March 31, 1996
(unaudited)................ 4,391,778 $ 44 $19,903 $4,319 $24,266
========= ==== ======= ====== =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Drilex International Inc. (formerly Drilex Holdings Corp.) was organized on
March 10, 1994 by DRLX Partners, L.P. ("DRLX Partners") and Mr. John Forrest
to acquire the common stock of Drilex Systems, Inc. ("DSI") from MascoTech,
Inc. See Note 2. Mr. Forrest is a founder of DSI and the President and Chief
Executive Officer of Drilex International Inc. The initial capital
contributions of $11,200,000 were made on March 30, 1994.
The consolidated financial statements include the accounts of Drilex
International Inc. and its majority and wholly owned subsidiaries,
collectively referred to herein as the "Company." All significant intercompany
balances and transactions have been eliminated in consolidation.
The Company provides directional, horizontal and other precision drilling
services and products. Such services and products are used primarily for oil
and gas drilling, environmental remediation and trenchless service
applications.
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, the
disclosure of contingent assets and liabilities as of 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.
The consolidated financial statements as of and for the three months ended
March 31, 1996 and for the three months ended March 31, 1995 are unaudited;
however, they include all adjustments (consisting only of normal recurring
adjustments) which, in the opinion of management, are necessary to present
fairly the consolidated financial position of the Company at March 31, 1996
and the consolidated results of operations and cash flows for the three months
ended March 31, 1996 and 1995. Accounting measurements at interim dates
inherently involve greater reliance on estimates than at year end. The results
of operations for the interim periods presented are not necessarily indicative
of the results to be expected for the entire year.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents--Cash equivalents consist of highly liquid investments with
original maturities of three months or less.
Inventories--Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method. Inventory costs
represent invoice or production cost. Production costs include materials,
labor and manufacturing overhead. The largest portion of the Company's
inventories is consumed in connection with rental and service activities, and
the remainder is utilized for equipment sales. Drilling equipment parts are
transferred from inventories to property and equipment when placed in service.
Property and Equipment--Property and equipment is stated at cost, net of
accumulated depreciation. Depreciation is computed utilizing the straight-line
method at rates based upon the estimated useful lives of the various classes
of assets. Additions, renewals and improvements are capitalized, while
maintenance and repairs are expensed. Upon the sale or retirement of an asset,
the related cost and accumulated depreciation are removed from the accounts
and any gain or loss is recognized.
Goodwill and Other Intangible Assets--Goodwill represents the excess of the
purchase price for acquired businesses over the allocated value of the related
net assets (see Note 2). Goodwill is amortized on a straight-line basis over a
forty year life. The carrying value of goodwill and other intangible assets
will be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the acquired assets may not be
recoverable. If the sum of the estimated future cash flows (undiscounted)
expected to result from the use and eventual disposition of an asset is less
than the carrying amount of the asset, an impairment loss is recognized.
Measurement of an impairment loss is based on the fair value of the asset.
F-7
<PAGE>
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Included in other assets are noncompete agreements, a technology licensing
agreement, organization costs and patents. These intangible assets are
amortized on a straight-line basis over their estimated useful lives.
Revenue Recognition--Rental and service revenues are recognized as the
services are performed, generally on an hourly or daily rate basis, under
short-term contracts. Revenues from equipment sales are recognized when
products are delivered to customers.
Income Taxes--The Company accounts for income taxes using an asset and
liability approach, which requires the recognition of deferred income tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.
Deferred income tax assets and liabilities are determined based on the
temporary differences between the financial statement and tax bases of assets
and liabilities using enacted tax rates.
Foreign Currency Transactions--The Company uses the United States dollar as
the functional currency for its foreign operations. Foreign currency
transaction gains and losses are recognized in consolidated income as
incurred.
Per Share Information--Per share information is based on the weighted
average number of common shares outstanding during each period and, if
dilutive, the weighted average number of common equivalent shares resulting
from the assumed conversion of outstanding stock options and warrants. Shares
issued by the Company during the one-year period prior to the filing of its
Registration Statement (see Note 15) have been included in the computation of
weighted average shares from the date of inception (using the treasury stock
method and an anticipated initial public offering price of $18.00 per share).
The fully diluted computation assumes the conversion of the Convertible
Promissory Note as of the date of its issuance (see Note 6) and the resulting
decrease in interest expense for the applicable period.
Financial Instruments--The carrying amount of cash and cash equivalents
approximates fair value for these instruments. The estimated fair value of
long-term debt is determined based on the current rates offered for similar
borrowings. The estimated fair value of the interest rate swap agreement is
based on the amount that the Company would receive or pay to terminate the
agreement at the balance sheet date. The estimated fair values of the
Company's financial instruments, along with the carrying amounts of the
related assets (liabilities), are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
DECEMBER 31, 1995 1994
------------------ -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Cash and cash equivalents............. $ 819 $ 819 $ 949 $ 949
Long-term debt........................ (38,353) (38,594) (8,083) (8,104)
Interest rate swap agreement.......... -- (332) -- --
</TABLE>
The Company's interest rate swap agreement is used to manage interest rate
risk. The net settlement amount resulting from this agreement is recognized as
an adjustment to interest expense. The Company does not hold or issue
derivative financial instruments for trading purposes.
Recent Accounting Pronouncements--In March 1995, the Financial Accounting
Standards Board (the "FASB") issued Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of ("SFAS 121"). SFAS 121 requires that long-
lived assets and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. SFAS 121 is effective for fiscal years
beginning after December 15, 1995. The Company believes that the adoption of
SFAS 121 will not have a material impact on its consolidated financial
statements.
F-8
<PAGE>
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123
establishes alternative methods of accounting and disclosure for employee
stock-based compensation arrangements. The Company has elected to continue the
use of the "intrinsic value based method" of accounting for its employee stock
option plan (see Notes 9 and 15). This method does not result in the
recognition of compensation expense when employee stock options are granted if
the exercise price of the options equals or exceeds the fair market value of
the stock at the date of grant. The Company will adopt the disclosure
requirements of SFAS 123 when it becomes effective in 1996.
2.ACQUISITIONS
On March 31, 1994, the Company acquired all of the common stock of DSI for
cash of $20,000,000 in a transaction accounted for as a purchase. During the
remainder of 1994 and during 1995, the Company consummated three additional
business acquisitions which were also accounted for using the purchase method.
Results of operations and cash flows of the acquired businesses are included
in the consolidated financial statements for the periods subsequent to the
respective dates of acquisition.
ENSCO Technology Company and subsidiary ("ENSCO Technology")--On September
30, 1995, the Company acquired substantially all of the assets, net of
outstanding liabilities and minority interests, of ENSCO Technology. ENSCO
Technology provides precision drilling and measurement-while-drilling services
to customers primarily in Texas and Canada. The total purchase price of
$17,851,000 consisted of $11,790,000 in cash and notes payable to ENSCO
Technology totaling $6,061,000. The Company recognized goodwill of $8,586,000
in connection with this acquisition.
Sharewell, Inc. and subsidiaries ("Sharewell")--On May 5, 1995, the Company
acquired all of the common stock of Sharewell (formerly Shareco, Inc.), which
provides directional drilling guidance systems and services in both domestic
and international locations. The total purchase price of $9,167,000 consisted
of $4,186,000 in cash, notes payable to Sharewell's former stockholders
totaling $4,731,000 and warrants to purchase 180,981 shares of the Company's
common stock valued at $250,000. The Company recognized goodwill of $4,332,000
in connection with this acquisition.
Cobb Directional Drilling Company, Inc. and Posi-Trak Mud Motors, Inc.
(collectively, "Cobb")--On September 30, 1994, the Company acquired
substantially all of the fixed assets of Cobb (the "Cobb acquisition"), which
provides precision drilling services to customers primarily in Louisiana and
the Gulf of Mexico. The Company used a newly-formed subsidiary, Cobb
Directional Drilling Company LLC ("Cobb LLC"), to acquire the Cobb assets. The
total purchase price of $8,256,000 consisted of $3,590,000 in cash, a note
payable to Posi-Trak Mud Motors, Inc. for $1,333,000, a one-third equity
interest in Cobb LLC valued at $2,000,000 and 241,307 shares of the Company's
common stock valued at $1,333,000. The Company recognized goodwill of
$1,403,000 in connection with this acquisition.
On March 23, 1995, the Company repurchased 144,784 of the shares of its
common stock for $1,000,000 in cash (the estimated fair value of such common
stock on that date). This repurchase, after retirement of the resulting
treasury shares, was recorded as a reduction of common stock and additional
paid-in capital on the Company's consolidated balance sheet. On the same date,
the Company reacquired the one-third equity interest in Cobb LLC in exchange
for two notes payable to Cobb Directional Drilling Company, Inc. totaling
$2,154,000 (the estimated fair value of such equity interest on that date).
This reacquisition was recorded as a reduction of minority interests on the
Company's consolidated balance sheet. The minority stockholder's share of Cobb
LLC's earnings for the period from October 1, 1994 through March 23, 1995 is
presented as minority interests in the Company's consolidated income
statement.
Pro forma results of operations (unaudited)--The following unaudited pro
forma summary presents consolidated results of operations for the Company as
if (a) the Cobb acquisition had been consummated on March 30, 1994 and (b) the
Sharewell and ENSCO Technology acquisitions had been consummated as of the
beginning of the respective periods. Appropriate adjustments have been
reflected for depreciation and
F-9
<PAGE>
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
amortization, interest expense, income taxes and minority interests. Net
income for the period ended December 31, 1994 includes an after-tax gain of
$429,000, or $.10 per share, resulting from ENSCO Technology's sale of stock
of a foreign subsidiary. The pro forma information does not necessarily
reflect the actual results that would have been achieved, nor is it
necessarily indicative of future consolidated results for the Company.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 30, 1994
YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1995 1994
------------ --------------
(IN THOUSANDS OF DOLLARS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Net revenues..................................... $73,557 $48,719
Net income....................................... 1,929 2,905
Net income per common and common equivalent
share............................................ .42 .67
</TABLE>
3.INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------
1996 1995 1994
----------- ------ ------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Drilling equipment parts.......................... $7,363 $7,573 $4,187
Work in process................................... 754 686 116
------ ------ ------
$8,117 $8,259 $4,303
====== ====== ======
</TABLE>
4.PROPERTY AND EQUIPMENT
The major classes of property and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
ESTIMATED
USEFUL
LIVES 1995 1994
---------- ------- -------
(IN THOUSANDS
OF DOLLARS)
<S> <C> <C> <C>
Land............................................. $ 52 $ 52
Buildings and improvements....................... 5-40 years 985 867
Machinery and equipment.......................... 3-15 years 7,122 4,327
Rental tools..................................... 3-7 years 19,901 12,286
Furniture and fixtures........................... 3-10 years 2,385 1,407
Construction in progress......................... 1,844 175
------- -------
32,289 19,114
Less: accumulated depreciation................... (4,732) (1,569)
------- -------
$27,557 $17,545
======= =======
</TABLE>
Depreciation expense for the year ended December 31, 1995 and the period
ended December 31, 1994 was $3,668,000 and $1,703,000, respectively.
Accumulated depreciation on rental tools was $3,140,000 at December 31, 1995.
Effective April 1, 1995, the Company changed its estimated useful life for
certain drilling motor components from five to seven years. This change was
made to better reflect the estimated period during which these assets will
remain in service. The effect of this change was an increase in net income of
$248,000, or $.06 per share, for the year ended December 31, 1995.
F-10
<PAGE>
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5.OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
ESTIMATED
USEFUL LIVES 1995 1994
------------ ------- ------
(IN THOUSANDS
OF DOLLARS)
<S> <C> <C> <C>
Noncompete agreements........................... 5-10 years $ 2,100 $ 500
Technology licensing agreement.................. 13 1/3 years 1,465 1,465
Organization costs.............................. 5 years 1,052 633
Patents......................................... 17 years 122 122
Other........................................... 10 10
------- ------
4,749 2,730
Less: accumulated amortization.................. (686) (143)
------- ------
$ 4,063 $2,587
======= ======
</TABLE>
In conjunction with the acquisition of DSI, the Company obtained a licensing
agreement that provides it with a non-exclusive right to use a patented
technology for the remaining life of the patent. As consideration for the
license, the Company is obligated to sell or lease certain drilling systems
equipment to the licensor at a discount. The period of this obligation extends
through December 31, 1997. A liability for this obligation is included on the
Company's consolidated balance sheet in the amount of $1,238,000 and
$1,433,000 at December 31, 1995 and 1994, respectively.
6.LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------
1996 1995 1994
----------- ------- ------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Bank Credit Agreement:
Revolving Credit Facility..................... $10,750 $ 9,200 $ --
Term Note..................................... 15,705 16,578 --
Previous bank credit agreements:
Revolving credit facilities................... -- -- 4,500
Cobb term note................................ -- -- 2,250
Promissory Note payable to Posi-Trak Mud Motors,
Inc............................................ 1,333 1,333 1,333
Promissory Note payable to Cobb Directional
Drilling Company, Inc.......................... 667 750 --
Promissory Notes payable to former stockholders
of Sharewell................................... 4,281 4,431 --
Promissory Note payable to ENSCO Technology..... 3,561 3,561 --
Convertible Promissory Note payable to ENSCO
Technology..................................... 2,500 2,500 --
------- ------- ------
38,797 38,353 8,083
Less: current maturities........................ (5,852) (5,886) (450)
------- ------- ------
$32,945 $32,467 $7,633
======= ======= ======
</TABLE>
Bank Credit Agreement--On September 29, 1995, the Company entered into a
credit agreement with a bank (as amended, the "Bank Credit Agreement") which
replaced previous credit agreements entered into by the Company and its
subsidiaries. The Bank Credit Agreement consists of a secured revolving line
of credit (the
F-11
<PAGE>
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
"Revolving Credit Facility") which matures on September 30, 1998 and a
$17,450,000 term note (the "Term Note") which matures on September 30, 2000.
The Revolving Credit Facility provides for borrowings of up to $13,000,000, of
which up to $3,000,000 may be used for letters of credit. As of December 31,
1995, $3,455,000 of borrowings was available under the Revolving Credit
Facility, of which $2,655,000 was available for letters of credit. Letters of
credit outstanding amounted to $345,000 at December 31, 1995.
The Term Note calls for quarterly principal payments of $872,000. Under
certain circumstances, the Company may be required to make annual principal
prepayments on the Term Note in an amount equal to 50% of excess cash flow (as
defined).
The Bank Credit Agreement is secured by eligible receivables, inventories
and property and equipment, as well as the Company's pledge of the stock of
certain subsidiaries. Borrowings under the Bank Credit Agreement bear interest
at a rate per annum, at the Company's election, equal to the bank's prime rate
plus 1/2% or a Eurodollar or Eurosterling interbank offered rate plus 2% (9%
and 7.8%, respectively, at December 31, 1995). The interest rate margins may
be reduced by up to 1/2% (non-cumulatively) based on a financial test,
determined quarterly. As of December 31, 1995, the financial test did not
permit a reduction in the interest rate margins. The Bank Credit Agreement
requires the Company to maintain certain financial covenants and places
restrictions on the Company's ability to, among other things, incur debt and
liens, pay dividends, enter into unrelated lines of business, undertake
transactions with affiliates and make investments.
Promissory Note payable to Posi-Trak Mud Motors, Inc.--This note matures on
September 30, 1997, bears interest at a rate of 7% per annum and is secured by
a pledge of the Company's equity interest in Cobb LLC.
Promissory Note payable to Cobb Directional Drilling Company, Inc.--This
note matures on March 23, 1998, bears interest at a rate of 7 1/2% per annum,
calls for quarterly principal payments of $83,000 and is secured by a pledge
of a one-third equity interest in Cobb LLC. A related promissory note for
$1,154,000 was repaid on July 1, 1995.
Promissory Notes payable to former stockholders of Sharewell--These
unsecured notes mature on April 30, 2000 and bear interest at a rate of 8% per
annum. Six of the notes call for quarterly principal payments aggregating
$150,000. The remaining note calls for annual principal payments of $250,000
and a final payment of $913,000 at maturity, and requires that the Company
maintain a minimum consolidated net worth.
Promissory Note and Convertible Promissory Note payable to ENSCO
Technology--These unsecured notes mature on September 30, 2000 and bear
interest at the prime rate (8.5% at December 31, 1995). The Promissory Note
calls for annual principal payments of $712,000, and the Convertible
Promissory Note calls for annual principal payments of $500,000. The terms of
the notes require the Company to maintain a minimum consolidated tangible net
worth and place restrictions on the Company's ability to pay dividends. The
notes also provide that the outstanding principal balances may be called for
prepayment, at ENSCO Technology's option, in the event of a public offering of
the Company's stock or a change in control of the Company (as defined).
The Convertible Promissory Note provides that ENSCO Technology has the
option, at any time, to convert such note, in whole or in part, into shares of
the Company's common stock at a conversion price of $6.91 per share. The
conversion price is subject to adjustment in the event of certain transactions
involving the Company's common stock.
Maturities--Scheduled maturities of long-term debt outstanding at December
31, 1995 are as follows: years ending December 31, 1996--$5,886,000; 1997--
$7,167,000; 1998--$14,784,000; 1999--$5,500,000; 2000--$5,016,000.
Restricted Net Assets of Subsidiaries--Certain debt instruments restrict the
ability of the Company's subsidiaries to transfer assets, make loans and
advances and pay dividends to the Company. The restricted net assets of the
Company's subsidiaries totaled approximately $40,000,000 at December 31, 1995.
F-12
<PAGE>
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Interest Rate Swap Agreement--The interest rate swap agreement has an
outstanding notional amount of $16,578,000 at December 31, 1995 and terminates
on September 29, 2000. The Company pays a fixed rate of 6.22% on the notional
amount and receives a floating rate based on LIBOR. This agreement effectively
changes the interest rate on the Term Note from a floating rate to a fixed
rate of 6.22% plus the applicable margin. The Company does not believe there
is any significant exposure to credit risk due to the creditworthiness of the
counterparty. In the event of nonperformance by the counterparty, the
Company's loss would be limited to any unfavorable interest rate differential.
7.INCOME TAXES
The domestic and foreign components of income before income taxes and
minority interests are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 30, 1994
YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1995 1994
------------ --------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Domestic.......................................... $ 951 $2,217
Foreign........................................... 2,094 1,024
------ ------
$3,045 $3,241
====== ======
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 30, 1994
YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1995 1994
------------ --------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Current:
Federal......................................... $ 301 $ 682
State........................................... 41 23
Foreign......................................... 670 170
------ ------
1,012 875
------ ------
Deferred:
Federal......................................... 85 291
------ ------
$1,097 $1,166
====== ======
</TABLE>
A reconciliation between the provision for income taxes and the amount
computed by applying the federal statutory income tax rate to income before
income taxes and minority interests is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 30, 1994
YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1995 1994
------------ --------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Provision for income taxes at statutory rate..... $1,035 $1,102
Nondeductible goodwill amortization.............. 24 --
Expenses for which no federal tax benefit was
recognized...................................... 29 22
Other............................................ 9 42
------ ------
$1,097 $1,166
====== ======
</TABLE>
F-13
<PAGE>
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the net deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER
31,
---------
1995 1994
---- ----
(IN
THOUSANDS
OF
DOLLARS)
<S> <C> <C>
Deferred income tax liabilities:
Property and equipment........................................... $626 $194
Basis difference in foreign subsidiaries, net of foreign tax
credits......................................................... 72 151
Other............................................................ 236 3
---- ----
Total deferred income tax liabilities.......................... 934 348
---- ----
Deferred income tax assets:
Receivables allowance............................................ 65 52
Other............................................................ 52 5
---- ----
Total deferred income tax assets............................... 117 57
---- ----
Net deferred income tax liabilities................................ $817 $291
==== ====
</TABLE>
No valuation allowances are required for the deferred income tax assets. The
deferred income tax assets are included in prepaid expenses and other current
assets, and the deferred income tax liabilities are included in other
noncurrent liabilities, on the consolidated balance sheet.
8.MINORITY INTERESTS
Minority interests at December 31, 1995 represent minority stockholders'
interests in certain foreign subsidiaries of acquired companies. Minority
interests at December 31, 1994 represent the interest in Cobb LLC held by
Cobb's former stockholder.
9.STOCKHOLDERS' EQUITY
Stock options--In 1994, the Company adopted the Drilex Holdings Corp. 1994
Stock Option Plan (the "1994 Stock Option Plan"). Up to 226,226 shares of the
Company's common stock are reserved for awards or for payment of rights
granted to certain employees and to non-employee directors of the Company and
its subsidiaries. These options are exercisable ratably over periods of three
to four years beginning one year from the date of grant. During 1994, options
to purchase 62,911 shares of common stock were granted at an exercise price of
$5.53 per share (the estimated fair value at the date of grant). None of these
options were exercisable at December 31, 1994. During 1995, 2,420 options and
22,624 options were granted at exercise prices of $5.53 and $11.05 per share,
respectively (which were equal to or in excess of the estimated fair value at
the date of grant), no options were exercised, and options to purchase 12,099
shares were canceled. At December 31, 1995, options to purchase 75,856 shares
of the Company's common stock were outstanding at exercise prices of $5.53 to
$11.05 per share, and 12,905 of such options were exercisable.
Warrants--On May 5, 1995, in connection with the Sharewell acquisition (see
Note 2), the Company issued warrants to purchase an aggregate 180,981 shares
of its common stock at an exercise price of $5.53 per share. The warrants are
exercisable, in whole or in part, at any time until May 5, 2000. None of the
warrants were exercised during 1995.
F-14
<PAGE>
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Shares reserved for issuance--At December 31, 1995, the Company had the
following shares of common stock reserved for future issuance:
<TABLE>
<S> <C>
Convertible Promissory Note payable to ENSCO Technology............... 361,962
1994 Stock Option Plan................................................ 226,226
Warrants.............................................................. 180,981
-------
769,169
=======
</TABLE>
Restrictions on payment of dividends--As of December 31, 1995, the Company
is precluded from paying dividends on its common stock by the provisions of
various debt agreements (see Note 6).
10.RELATED PARTY TRANSACTIONS
The Company purchases equipment and services from parties related to Cobb's
former stockholder. Charges for such purchases amounted to $629,000 and
$178,000 for the periods ended December 31, 1995 and 1994, respectively.
In connection with the ENSCO Technology acquisition (see Note 2), the
Company was charged a $150,000 fee for investment banking and consulting
services by an affiliate of DRLX Partners. This fee is included in other
accrued liabilities on the Company's consolidated balance sheet as of December
31, 1995.
Included in other receivables at December 31, 1995 are advances to employees
of the Company amounting to $334,000.
11.EMPLOYEE BENEFIT PLAN
On April 1, 1994, the Company adopted a defined contribution savings plan
covering substantially all of its employees. Employees may elect to contribute
up to 15% of their eligible compensation to the plan. For those participants
who have elected to make voluntary contributions to the plan, the Company's
contributions consist of a matching amount of up to 2% of the eligible
compensation of participants. The cost to the Company of this plan amounted to
$207,000 and $87,000 for the periods ended December 31, 1995 and 1994,
respectively.
12.COMMITMENTS AND CONTINGENCIES
Commitments--Minimum rental commitments under operating leases at December
31, 1995 are as follows: years ending December 31, 1996--$1,123,000; 1997--
$776,000; 1998--$559,000; 1999--$504,000; 2000--$326,000; thereafter--
$1,311,000. Rental expense for operating leases was $993,000 and $565,000 for
the periods ended December 31, 1995 and 1994, respectively.
The Company has a licensing agreement that provides it with a non-exclusive
right to purchase and use certain measurement-while-drilling systems
equipment. Most of this equipment was obtained in connection with the ENSCO
Technology acquisition (see Note 2). As consideration for this license, the
Company is obligated to make annual royalty payments of $360,000 to the
supplier of the equipment. The Company is entitled to receive discounts on the
royalty payments for the ENSCO Technology equipment amounting to $46,000 per
year for the first three years of the agreement and $260,000 per year for the
fourth and fifth years of the agreement. The terms of this licensing agreement
are to be reviewed and renegotiated in September 2000.
Contingencies--The Company is involved in various claims, lawsuits and
proceedings arising in the ordinary course of business. While there are
uncertainties inherent in the ultimate outcome of such matters and it is
impossible to presently determine the ultimate costs that may be incurred,
management believes the resolution of such uncertainties and the incurrence of
such costs should not have a material adverse effect on the Company's
consolidated financial position or results of operations.
F-15
<PAGE>
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13.CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk are primarily cash and cash equivalents and trade receivables.
The Company mitigates its risk with respect to cash and cash equivalents by
maintaining such deposits at high credit quality financial institutions and
monitoring the credit ratings of those institutions.
The Company derives a significant portion of its revenues from sales and
services to customers in the energy industry. In addition, the Company has
concentrations of operations in certain geographic areas (primarily Texas, the
Louisiana Gulf Coast, Venezuela and the North Sea). At December 31, 1995,
outstanding receivables from two significant customers accounted for
approximately 13% and 11% of total trade receivables, respectively. The
Company mitigates its concentrations of credit risk with respect to trade
receivables by actively monitoring the creditworthiness of its customers.
Historically, the Company has not incurred any significant credit related
losses.
14.GEOGRAPHIC INFORMATION
Summarized information by geographic area is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 30, 1994
YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1995 1994
------------ --------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Net revenues from unaffiliated customers:
Domestic........................................ $42,557 $18,460
Latin America................................... 6,635 2,544
Europe.......................................... 5,378 2,023
Other foreign................................... 2,956 2,182
------- -------
Total......................................... $57,526 $25,209
======= =======
Operating income (loss):
Domestic........................................ $ 3,180 $ 3,287
Latin America................................... 355 522
Europe.......................................... 1,292 42
Other foreign................................... 153 (132)
------- -------
Total......................................... $ 4,980 $ 3,719
======= =======
Identifiable assets:
Domestic........................................ $59,492 $28,836
Latin America................................... 7,170 2,560
Europe.......................................... 4,633 2,518
Other foreign................................... 6,459 2,378
------- -------
Total......................................... $77,754 $36,292
======= =======
</TABLE>
Sales and transfers among geographic areas are not significant. Included in
results of operations are aggregate foreign currency transaction gains
(losses) of $(43,000) and $30,000 for the periods ended December 31, 1995 and
1994, respectively. Export sales were less than 10% of total net revenues for
the periods ended December 31, 1995 and 1994.
F-16
<PAGE>
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the periods ended December 31, 1995 and 1994, the Company had revenues
from one customer of $5,844,000 and $2,604,000, respectively.
15.SUBSEQUENT EVENTS
On May 7, 1996, in anticipation of a proposed initial public offering of the
Company's common stock (the "Proposed Offering"), the Company's Board of
Directors approved resolutions to authorize the filing of a Registration
Statement on Form S-1 with the United States Securities and Exchange
Commission. In connection with the Proposed Offering, the Board also approved
the following resolutions: (i) an increase in the number of authorized common
shares to 25,000,000 and a stock split to effect the issuance of approximately
1.81 shares of common stock in exchange for each share of common stock then
outstanding; (ii) the retirement of all treasury shares of common stock
purchased since the Company's inception; (iii) the authorization of 10,000,000
shares of $.01 par value preferred stock; and (iv) the amendment and
restatement of the 1994 Stock Option Plan to, among other things, authorize
the issuance of up to 440,000 shares of common stock pursuant to awards made
thereunder. On May 16, 1996, the Company filed an amendment to its certificate
of incorporation to effect the stock split, the increases in the number of
authorized shares of common and preferred stock, and the retirement of the
treasury shares. The effect of the stock split and the retirement of treasury
shares has been presented retroactively to the date of inception in the
Company's consolidated financial statements.
16.QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summary quarterly financial information for the year ended December 31, 1995
and the period from March 30, 1994 (inception) to December 31, 1994 is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS OF DOLLARS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1995:
Net revenues..................... $10,527 $12,343 $14,493 $20,163
Operating income................. 660 1,023 1,411 1,886
Net income....................... 205 361 574 644
Net income per common and common
equivalent share................ .05 .08 .13 .14
1994:
Net revenues..................... $ 6,689 $ 7,770 $10,750
Operating income................. 846 1,101 1,772
Net income....................... 426 631 952
Net income per common and common
equivalent share................ .18 .17 .22
</TABLE>
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Drilex International Inc.:
We have audited the accompanying consolidated statements of operations and
cash flows of Drilex Systems, Inc. and subsidiaries (the "Company") for the
period from January 1, 1994 to March 30, 1994 and the year ended December 31,
1993. These statements of operations and cash flows are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements 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 statements of operations and
cash flows are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
statements of operations and cash flows. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statements of operations
and cash flows. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated statements of operations and cash flows of
the Company and its subsidiaries present fairly, in all material respects, the
results of their operations and their cash flows for the period from January
1, 1994 to March 30, 1994 and the year ended December 31, 1993 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
April 26, 1996
F-18
<PAGE>
DRILEX SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1994 YEAR ENDED
TO MARCH 30, DECEMBER 31,
1994 1993
--------------- ------------
<S> <C> <C>
Net revenues:
Rental and service.............................. $5,479 $23,371
Equipment sales................................. 878 2,500
------ -------
6,357 25,871
------ -------
Operating expenses:
Costs of sales and operations (exclusive of
depreciation and amortization):
Rental and service............................ 3,042 13,094
Equipment sales............................... 322 999
Selling, general and administrative expenses.... 2,029 8,286
Depreciation and amortization................... 775 3,107
------ -------
6,168 25,486
------ -------
Operating income.................................. 189 385
Interest and other expense, net................... (481) (1,893)
------ -------
Loss before income taxes.......................... (292) (1,508)
Income tax provision.............................. (3) (152)
------ -------
Net loss.......................................... $ (295) $(1,660)
====== =======
</TABLE>
See notes to consolidated financial statements.
F-19
<PAGE>
DRILEX SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1994 YEAR ENDED
TO MARCH 30, DECEMBER 31,
1994 1993
--------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $ (295) $(1,660)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization................. 775 3,107
Deferred income tax provision (benefit)....... 131 (252)
(Increase) decrease in:
Accounts receivable......................... 1,386 (2,180)
Inventory................................... (249) 328
Prepaids and other assets................... (50) 62
Increase (decrease) in:
Accounts payable............................ (490) 344
Accrued liabilities......................... (545) 528
------ -------
Net cash provided by operating activities. 663 277
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................ (195) (252)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from parent...................... 28 503
------ -------
NET INCREASE IN CASH AND CASH EQUIVALENTS......... 496 528
------ -------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.. 879 351
------ -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........ $1,375 $ 879
====== =======
SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Transfer of drilling equipment inventory to
property and equipment......................... $ 804 $ 2,119
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE>
DRILEX SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Drilex Systems, Inc. (the "Company") was a wholly owned subsidiary of
MascoTech, Inc. ("MascoTech") during the period from January 1, 1994 to March
30, 1994 and the year ended December 31, 1993. Effective March 30, 1994,
Drilex International Inc. ("Drilex," formerly Drilex Holdings Corp.), an
unrelated third party, entered into an Asset Purchase Agreement with
MascoTech, under which Drilex purchased all of the Company's common stock and
assets and assumed all of the Company's liabilities. The Company manufactures,
sells, leases, and services directional drilling equipment, primarily for the
oil field services industry. As used herein, the term "Company" refers to
Drilex Systems, Inc. and its subsidiary companies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--The accompanying consolidated statements of
operations and cash flows include the accounts of the Company and its
subsidiaries for the period from January 1, 1994 to March 30, 1994 ("three-
month period") and for the year ended December 31, 1993. All significant
intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents--Cash and cash equivalents consist of all cash
balances and highly liquid investments with original maturities at purchase of
three months or less.
Inventories--Inventories consist of parts to support directional drilling
equipment and work-in-process which are stated at the lower of cost, based on
a first-in first-out ("FIFO") basis, or market. Inventory costs represent
invoice or production cost. Production costs include materials, labor and
manufacturing overhead.
Revenue Recognition--The Company generally recognizes revenue when services
are rendered or products are shipped.
Property and Equipment--Property and equipment is stated at cost, net of
accumulated depreciation. Additions, renewals and improvements are
capitalized, while maintenance and repairs are expensed. Upon the sale or
retirement of an asset, the related cost and accumulated depreciation are
removed from the accounts and any gain or loss is recognized.
Depreciation of property and equipment is provided on a straight-line basis
over the estimated useful lives of assets as follows:
<TABLE>
<CAPTION>
ASSET YEARS
----- -----
<S> <C>
Buildings........................................................... 40
Rental tools........................................................ 5-7
Machinery and equipment............................................. 3-10
Furniture and fixtures.............................................. 5-7
</TABLE>
The Company recorded depreciation expense of approximately $624,000 and
$2,511,000 for the three-month period ended March 30, 1994 and the year ended
December 31, 1993, respectively.
Intangible Assets--The Company has certain intangible assets, including
patents and goodwill. Amortization of these assets is provided on a straight-
line basis over their estimated useful lives, which range from five to fifteen
years. The carrying value of intangible assets will be reviewed and adjusted
whenever events or changes in circumstances indicate that the value of the
assets has been impaired.
Income Taxes--The Company was included in the consolidated U.S. federal
income tax returns of MascoTech for the periods presented in these financial
statements. Through March 30, 1994, current federal income taxes (benefits)
were recognized based on the income or losses utilized in MascoTech's
consolidated
F-21
<PAGE>
DRILEX SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
income tax return. The Company's federal, state, and foreign taxes are
presented on a stand-alone basis in the consolidated financial statements in
conformity with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires an asset and liability approach
for recording deferred taxes. The asset and liability approach accounts for
deferred income taxes by applying statutory rates in effect at the balance
sheet date to the temporary differences between the financial statement basis
and tax basis of such assets and liabilities. The resulting deferred tax
assets and liabilities are adjusted to reflect changes in tax laws or rates.
Foreign Currency Transactions--The Company uses the United States dollar as
the functional currency for its foreign operations. Foreign currency
transaction gains and losses are recognized in consolidated income as
incurred.
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.
3. INCOME TAXES
The provision (benefit) for income taxes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED YEAR ENDED
MARCH 30, DECEMBER 31,
1994 1993
------------ ------------
<S> <C> <C>
Current:
U.S. Federal.................................. $(137) $379
Foreign....................................... 9 25
Deferred--U.S. Federal.......................... 131 (252)
----- ----
Total provision for income taxes............ $ 3 $152
===== ====
</TABLE>
Temporary differences giving rise to the deferred tax provision related
primarily to property and equipment.
The differences between the income tax expense (benefit) recorded for the
three-month period ended March 30, 1994 and the year ended December 31, 1993,
and the income tax computed using the U.S. federal statutory rate of 34% were
as follows (in thousands):
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED YEAR ENDED
MARCH 30, DECEMBER 31,
1994 1993
------------ ------------
<S> <C> <C>
At statutory income tax rate................... $(99) $(513)
Foreign losses for which no benefit was
recognized.................................... 92 634
Meals and entertaiment......................... 1 6
Foreign taxes.................................. 9 25
---- -----
Total...................................... $ 3 $ 152
==== =====
</TABLE>
As discussed in Note 2, the Company was included in the consolidated U.S.
federal tax returns of MascoTech for the periods presented in these financial
statements. Accordingly, payments or benefits related to
F-22
<PAGE>
DRILEX SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the U.S. federal current tax provision (benefit) were recorded as an
increase/decrease to the payable to MascoTech. Foreign income tax payments of
$9,000 and $18,000 were made during the three-month period ended March 30,
1994 and year ended December 31, 1993, respectively.
4. RELATED PARTY
The Company conducted numerous transactions with MascoTech, the net effect
of which resulted in either increases or decreases in its noncurrent payable
to MascoTech which was subject to interest charges at a rate determined by
MascoTech. In addition, MascoTech provided the Company with certain general
and administrative services which were allocated by MascoTech based on a
predetermined formula. The Company recorded interest expense and general and
administrative expenses allocated from MascoTech as follows (in thousands):
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED YEAR ENDED
MARCH 30, DECEMBER 31,
1994 1993
------------ ------------
<S> <C> <C>
Interest........................................ $482 $1,892
General and administrative...................... 135 492
</TABLE>
5. EMPLOYEE BENEFITS
During the periods presented, certain of the Company's employees were
eligible to participate in a profit sharing plan sponsored by MascoTech (the
Masco Industries, Inc. Master Defined Contribution Plan). Profit sharing
contributions required approval by MascoTech's Board of Directors and could
range from 0% to 15% of all eligible employees' compensation for the plan
year. The Company recorded profit sharing contribution expense for the three-
month period ended March 30, 1994 of approximately $32,000. No contributions
were recorded for the year ended December 31, 1993.
6. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk are primarily cash and cash equivalents and trade receivables.
The Company mitigates its risk with respect to cash and cash equivalents by
maintaining such deposits at high credit quality financial institutions and
monitoring the credit ratings of those institutions.
The Company derives a significant portion of its revenues from sales and
services to customers in the energy industry. In addition, the Company has
concentrations of operations in certain geographic areas (primarily Texas, the
Louisiana Gulf Coast, Venezuela and the United Kingdom). During the three-
month period ended March 30, 1994 and the year ended December 31, 1993, the
Company derived approximately 16% and 17% of its revenues, respectively, from
a single customer. The Company mitigates its concentrations of credit risk
with respect to trade receivables by actively monitoring the creditworthiness
of its customers.
F-23
<PAGE>
DRILEX SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
Lease Commitments--The Company leases office and warehouse space under
noncancellable operating leases. The annual future minimum lease payments
under these leases are as follows (in thousands):
<TABLE>
<S> <C>
1995............................................................. $ 702
1996............................................................. 677
1997............................................................. 643
1998............................................................. 549
1999............................................................. 504
Thereafter........................................................ 2,375
------
Total......................................................... $5,450
======
</TABLE>
Rental expense incurred for all operating leases during the three-month
period ended March 30, 1994 and the year ended December 31, 1993 totaled
$167,000 and $679,000, respectively.
Contingencies--The Company is involved in various claims, lawsuits and
proceedings arising in the ordinary course of business. While there are
uncertainties inherent in the ultimate outcome of such matters and it is
impossible to presently determine the ultimate costs that may be incurred,
management believes the resolution of such uncertainties and the incurrence of
such costs should not have a material adverse effect on the Company's
consolidated financial position or results of operations.
F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Drilex International Inc.:
We have audited the accompanying consolidated statements of income and cash
flows of ENSCO Technology Company and subsidiary (the "Company") for the nine-
month period ended September 30, 1995 and the year ended December 31, 1994.
These statements of income and cash flows are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements 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 statements of income and cash
flows are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statements
of income and cash flows. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statements of income and cash
flows. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated statements of income and cash flows of the
Company and its subsidiary present fairly, in all material respects, the
results of their operations and their cash flows for the nine-month period
ended September 30, 1995 and the year ended December 31, 1994 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
April 26, 1996
F-25
<PAGE>
ENSCO TECHNOLOGY COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
<S> <C> <C>
Revenue.............................................. $13,367 $16,522
Costs and expenses:
Operating expenses................................. 11,012 13,060
Depreciation and amortization...................... 1,797 2,403
------- -------
12,809 15,463
------- -------
Income from operations............................... 558 1,059
Other income (expenses):
Gain on disposal of assets......................... 608 474
Gain on sale of stock of subsidiary................ -- 670
Currency transaction losses........................ (2) (237)
Minority interest in loss of subsidiary............ 62 22
Other income....................................... 50 30
------- -------
718 959
------- -------
Income before income taxes........................... 1,276 2,018
Provision for income taxes........................... (538) (105)
------- -------
Net income........................................... $ 738 $ 1,913
======= =======
</TABLE>
See notes to consolidated financial statements.
F-26
<PAGE>
ENSCO TECHNOLOGY COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 738 $1,913
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 1,797 2,403
Deferred income tax provision (benefit)......... 144 (77)
Minority interest in loss of subsidiary......... (62) (22)
Other........................................... -- 150
Gain on disposal of assets...................... (608) (474)
Gain on sale of stock of subsidiary............. -- (670)
(Increase) decrease in:
Accounts receivable--trade.................... (1,453) 1,176
Inventory..................................... (3) (112)
Prepaid and other current assets.............. 92 (105)
Increase (decrease) in:
Accounts payable.............................. 449 138
Accrued expenses.............................. (195) (196)
Income tax payable............................ 289 182
------ ------
Net cash provided by operating activities... 1,188 4,306
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................. (3,943) (2,788)
Proceeds from the sale of assets.................. 1,254 1,068
------ ------
Net cash used in investing activities....... (2,689) (1,720)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock by a subsidiary....... -- 1,200
Net borrowings from (repayments to) related party. 1,522 (3,574)
------ ------
Net cash provided by (used in) financing
activities................................. 1,522 (2,374)
------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS........... 21 212
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.... 358 146
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......... $ 379 $ 358
====== ======
SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES--Reduction of payable to
related party due to capital contribution from
related party..................................... $9,095 $ --
</TABLE>
See notes to consolidated financial statements.
F-27
<PAGE>
ENSCO TECHNOLOGY COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
ENSCO Technology Company (the "Company") was a subsidiary of ENSCO
International Incorporated ("ENSCO") during the nine months ended September
30, 1995 and the year ended December 31, 1994. Effective September 30, 1995,
ENSCO entered into an Asset Purchase Agreement with Drilex International Inc.
("Drilex") under which substantially all of the assets of the Company were
sold to Drilex. The Company provides horizontal drilling and measurement while
drilling ("MWD") services to the petroleum industry. MWD tools provide
directional and locational readings to drillers. The Company's operations are
presently conducted in the United States, Canada, and the United Kingdom.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of the Company and its subsidiary, ENSCO
Technology Canada, Inc. ("ETC"). All significant intercompany balances and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents--Cash and cash equivalents consist of all cash
balances and highly liquid investments which have an original maturity at
purchase of three months or less.
Revenue Recognition--The Company generally recognizes revenue when services
are rendered.
Inventory--Inventory consists primarily of replacement parts and supplies
held for use in the operations of the Company. Inventory is stated at the
lower of cost or estimated market value.
Property and Equipment--Property and equipment are recorded at cost.
Additions, improvements, and renewals that significantly add to production
capacity or extend the life of an asset are capitalized. Maintenance, repairs,
and minor renewals are charged to expense as incurred.
The cost of property sold or retired is credited to the asset account, and
the related depreciation is charged to the accumulated depreciation account.
Gain or loss resulting from the sale or retirement is included in income. For
the nine months ended September 30, 1995 and the year ended December 31, 1994,
the Company recorded gains of $608,000 and $474,000, respectively, on asset
retirements. These gains relate primarily to "lost-in-hole" equipment
reimbursements whereby a customer reimburses the Company for the replacement
cost of MWD tools that become irretrievable during the drilling operations.
Depreciation of property and equipment is provided on a straight-line basis
over the estimated useful lives of the various classes of assets as follows:
<TABLE>
<CAPTION>
ASSETS YEARS
------ -----
<S> <C>
Technology equipment................................................ 3-5
Furniture and fixtures and other equipment.......................... 5-7
</TABLE>
Income Taxes--The Company was included in the consolidated U.S. federal
income tax return of ENSCO for the periods presented in these financial
statements. The Company's federal, state, and foreign taxes are presented on a
stand-alone basis in the consolidated financial statements in conformity with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," which requires an asset and liability approach for recording deferred
taxes. The asset and liability approach accounts for deferred income taxes by
applying statutory rates in effect at the balance sheet date to the
differences between the financial statement basis and tax basis of such assets
and liabilities. The resulting deferred tax assets and liabilities are
adjusted to reflect changes in tax laws or rates.
F-28
<PAGE>
ENSCO TECHNOLOGY COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Minority Interest--The minority interest in loss of subsidiary represents
the minority stockholder's share of the losses of ETC. (See Note 5.)
Currency Translation--The Company's primary functional currency is the U.S.
dollar. ETC uses the Canadian dollar as its functional currency. ETC
translates its assets and liabilities at year end exchange rates while income
and expense accounts are translated at average exchange rates. Translation
adjustments are reflected in the Company's stockholders' equity section as
"cumulative translation adjustment." Currency transaction gains and losses are
included in current operating results.
Sale of Subsidiary Stock--The Company has adopted the income statement
recognition method as its accounting policy with respect to gains and losses
associated with the sale of subsidiary stock. A gain of $670,000 is included
in the Company's consolidated statement of operations for the year ended
December 31, 1994 related to the sale of stock of ETC. (See Note 5.)
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.
3. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
<S> <C> <C>
Current:
Federal...................................... $342 $ 77
Foreign...................................... 52 105
---- ----
394 182
---- ----
Deferred:
Federal...................................... 144 (77)
---- ----
$538 $105
==== ====
</TABLE>
The Company had established a 100% valuation allowance against federal net
operating loss carryforwards ("NOL carryforwards") available at December 31,
1993, as there was not sufficient evidence to support future utilization of
such deferred tax assets at that time. All NOL carryforwards were fully
utilized during 1994.
The differences between the income tax expense recorded for the periods
ended September 30, 1995 and December 31, 1994, and the income tax computed
using the U.S. federal statutory rate of 34% were as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
<S> <C> <C>
At statutory income tax rate.................. $434 $ 686
Foreign losses for which no benefit was
recognized................................... 52 345
Change in valuation allowance................. -- (1,031)
Foreign taxes................................. 52 105
---- ------
Total..................................... $538 $ 105
==== ======
</TABLE>
Deferred income taxes reflected the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Temporary differences
resulted primarily from the use of accelerated depreciation methods for
federal income tax purposes, which gave rise to a book basis in fixed assets
greater than the tax basis.
F-29
<PAGE>
ENSCO TECHNOLOGY COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Foreign tax expense of $52,000 and $105,000 was recognized for income earned
on jobs performed in the United Kingdom during the nine-month period ending
September 30, 1995 and the year ended December 31, 1994, respectively.
During the nine-month period ending September 30, 1995 and the year ending
December 31, 1994, the Company made income tax payments of $105,000 and $0,
respectively.
4. RELATED PARTIES
During the nine-month period ending September 30, 1995 and the year ending
December 31, 1994, substantially all of the Company's payables were paid by
ENSCO and substantially all of the Company's cash receipts were received into
ENSCO's corporate bank account. Such amounts were recorded as increases and
decreases, respectively, in the Company's payable to ENSCO. As of September
30, 1995 and December 31, 1994, the Company had payables to ENSCO of
$5,422,000 and $12,995,000, respectively. During the nine-month period ending
September 30, 1995, ENSCO made a capital contribution to the Company of
$9,095,000 by reducing the Company's payable to ENSCO.
ENSCO also provided certain general and administrative services for the
Company including accounting, data processing, legal, and other administrative
and managerial functions. The accompanying consolidated statements of income
do not include any allocations from ENSCO for such services or for the cost of
capital related to the Company's payable to ENSCO.
5. GAIN ON SALE OF SUBSIDIARY STOCK
In October 1994, a 30% equity interest in ETC was sold to Lateral Vector
Resources, Inc. ("LVR"), a Canadian company, for $1.2 million in cash. A gain
of $670,000 was recognized on the sale. The purpose of the sale was to combine
forces with LVR to conduct horizontal and directional drilling services in
Canada and certain areas of the United States.
6.BENEFIT PLANS
During the periods presented, certain of the Company's employees were
eligible to participate in a profit sharing plan sponsored by ENSCO (the
"ENSCO Savings Plan"). Profit sharing contributions require approval by
ENSCO's Board of Directors and may be in cash or grants of ENSCO's common
stock. The Company recorded profit sharing contribution provisions for the
nine-month period ended September 30, 1995 and the year ended December 31,
1994 of $81,000 and $75,000, respectively.
The ENSCO Savings Plan included a 401(k) savings plan feature, which allowed
eligible employees with more than three months of service to make tax deferred
contributions to the plan. ENSCO made matching contributions equivalent to 25%
of all employee contributions, subject to a maximum employee contribution of
6% of their compensation, which amounted to $57,000 and $32,000 for the nine-
month period ended September 30, 1995 and the year ended December 31, 1994,
respectively.
7. COMMITMENTS AND CONTINGENCIES
License and Lease Commitments--The Company was a party to license agreements
with certain entities from which the Company purchased its MWD equipment.
These license agreements gave the Company a non-exclusive right to use the MWD
systems. Under these agreements, the Company was required to make 20 quarterly
license fee payments on each of its 17 MWD systems, for a total payment of
$76,500 per system. Total license fee commitments remaining under these
arrangements prior to the sale of the Company's assets
F-30
<PAGE>
ENSCO TECHNOLOGY COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(see Note 1) were $1,071,000. The license agreements were changed after the
asset sale to reflect an annual fee of $18,000 per MWD system (or $306,000
annually for the MWD systems covered by the agreements). Expense amounts
recorded related to the license fees totaled $92,000 and $197,000 for the
nine-month period ended September 30, 1995 and the year ended December 31,
1994, respectively.
The Company has a drilling motor rental and license agreement with the
Company's supplier of drilling motors. The agreement, which expires December
31, 1996, grants to the Company the right and license to use and rent to
customers certain drilling motors manufactured by this supplier. The Company
is required to pay for each calendar quarter, as a minimum, a motor rental and
license fee that considers the number of motors available, a defined revenue
rate per hour and defined utilization percentage of motors available and
number of hours of use per motor. During the nine-month period ended September
30, 1995 and the year ended December 31, 1994, the Company recorded motor
rental expense of $3,007,000 and $3,764,910, respectively, and exceeded the
minimum utilization rate in each quarter.
The Company leases a facility under an operating lease agreement expiring
September 30, 1998, which requires annual rent of $60,000.
Contingencies--The Company is involved in various lawsuits and subject to
various claims and proceedings encountered in the normal conduct of business.
In the opinion of management, any uninsured losses that might arise from those
lawsuits and proceedings would not have a material adverse effect on the
business or consolidated financial position of the Company.
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Drilex International Inc.:
We have audited the accompanying consolidated statements of operations and
cash flows of Sharewell, Inc. and subsidiaries (the "Company") for the years
ended March 31, 1995 and 1994. These statements of operations and cash flows
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements 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 statements of operations and
cash flows are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
statements of operations and cash flows. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statements of operations
and cash flows. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated statements of operations and cash flows
present fairly, in all material respects, the results of the Company's
operations and its cash flows for the years ended March 31, 1995 and 1994 in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated statements of operations and cash
flows, the Company changed its method of accounting for income taxes,
effective April 1, 1993, to conform with Statement of Financial Accounting
Standards No. 109.
DELOITTE & TOUCHE LLP
Houston, Texas
June 23, 1995
F-32
<PAGE>
SHAREWELL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED
MARCH 31,
--------------
1995 1994
------ ------
<S> <C> <C>
Revenue:
Sales and service............................................ $7,021 $6,137
Rental....................................................... 2,729 3,210
------ ------
9,750 9,347
Cost of revenue................................................ 5,951 5,491
------ ------
Gross profit................................................... 3,799 3,856
Depreciation and amortization.................................. 985 831
Selling, general and administrative expenses................... 2,063 2,594
------ ------
Income from operations......................................... 751 431
Interest and other expense, net................................ (431) (338)
Minority interest.............................................. (66) (64)
------ ------
Income before income taxes and cumulative effect of a change in
accounting principle.......................................... 254 29
Income tax provision........................................... (129) (49)
------ ------
Income (loss) before cumulative effect of a change in
accounting principle.......................................... 125 (20)
Cumulative effect of a change in accounting principle.......... -- (43)
------ ------
Net income (loss).............................................. $ 125 $ (63)
====== ======
</TABLE>
See notes to consolidated financial statements.
F-33
<PAGE>
SHAREWELL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED
MARCH 31,
----------------
1995 1994
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ 125 $ (63)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................ 985 831
Deferred income tax provision (benefit).................. 57 (94)
Minority interest........................................ 66 64
Loss on sale of assets................................... 61 --
Cumulative effect of a change in accounting principles... -- 43
Other.................................................... -- (1)
Changes in the following operating assets and
liabilities:
Decrease (increase) in:
Accounts and notes receivable--trade................. (251) 264
Inventory............................................ (277) (47)
Other current assets................................. 291 --
Income taxes receivable.............................. (128) (74)
Increase (decrease) in:
Accounts payable--trade and accrued expenses......... (432) (3)
Other long-term liabilities.......................... 127 341
------- -------
Net cash provided by operating activities........... 624 1,261
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures....................................... (664) (1,039)
Proceeds from sale of assets............................... 385 --
------- -------
Net cash used in investing activities............... (279) (1,039)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on notes payable and long-term debt................ (1,170) (1,563)
Proceeds from long-term debt............................... 849 1,170
------- -------
Net cash used in financing activities............... (321) (393)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... 24 (171)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............... 506 677
------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR..................... $ 530 $ 506
======= =======
</TABLE>
See notes to consolidated financial statements.
F-34
<PAGE>
SHAREWELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Sharewell, Inc. (the "Company," formerly Shareco, Inc.) was a holding
company formed on January 19, 1993 by the management of Sharewell Horizontal
Systems Limited ("SHSL") and Sharewell, Inc. (collectively, the
"Subsidiaries") to facilitate the buyout (the "Buyout") of the former
stockholders of the Subsidiaries. During May 1995, Drilex International Inc.
(formerly Drilex Holdings Corp.), an unrelated third party, purchased all the
Company's outstanding common stock.
The Company engages in domestic and international sales, rental, and
operation of directional drilling guidance tools. The tools are used primarily
in oil and gas exploration and pipeline river crossings.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--The accompanying consolidated statements of
operations and cash flows include the accounts of the Company and its
majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents--Cash and cash equivalents consist of all cash
balances and highly liquid investments that have a maturity at purchase of
three months or less.
Inventory--Inventory consists of directional drilling guidance tools stated
at the lower of cost, based on the specific identification method, or market.
Market is defined as the current replacement cost, except that market does not
exceed the net realizable value and is not less than the net realizable value
reduced by an allowance for an approximate normal profit margin.
Property and Equipment--Property and equipment are stated at cost.
Additions, improvements and major renewals are capitalized. Maintenance,
repairs and minor renewals are expensed as incurred. The cost of property sold
or retired is credited to the asset account, and the related depreciation is
charged to the accumulated depreciation account. Gain or loss resulting from
either the sale or retirement is included in earnings.
Depreciation of property and equipment is provided on a straight-line basis
over their estimated useful lives that range from 3 to 10 years. Depreciation
expense for the years ended March 31, 1995 and 1994 were approximately
$475,000 and $398,000, respectively.
Income Taxes--The deferred U.S. federal income taxes are calculated based on
the differences between the financial statements basis and the tax basis of
the Company's assets and liabilities. The Company is also taxed by the U.K. on
its income from sources in the U.K.
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109--Accounting for Income Taxes ("SFAS
No. 109"). SFAS No. 109 requires a balance sheet approach (the "asset and
liability approach") for recording deferred taxes instead of the income
statement approach previously required by Accounting Principles Board Opinion
No. 11. The asset and liability approach accounts for deferred income taxes by
applying statutory tax rates in effect at the balance sheet date to the
difference between the financial statement basis and the tax basis of assets
and liabilities. The resulting deferred tax assets and liabilities are
adjusted to reflect changes in tax laws or rates. The Company adopted SFAS No.
109 effective April 1, 1993, the cumulative effect of which was charged
against income during the year ended March 31, 1994.
F-35
<PAGE>
SHAREWELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Foreign Currency Translation--The Company translates assets and liabilities
of SHSL, whose local currency is considered the functional currency, into U.S.
dollars at exchange rates in effect at the balance sheet date; revenues and
expenses are translated at the average exchange rate for the year. Gains and
losses resulting from the foreign currency translation are included as an
adjustment to stockholders' equity.
Research and Development Costs--Research and development costs were expensed
as incurred. The total research and development costs incurred by the Company
during 1994 totaled approximately $181,000. There were no research and
development costs incurred during 1995.
Statement of Cash Flows--The consolidated statements of cash flows are
prepared using the indirect method. Interest payments of approximately
$380,000 and $373,000 were made during the years ended March 31, 1995 and
1994, respectively.
3. INCOME TAXES
The provision (benefit) for income taxes consisted of the following (in
thousands of dollars):
<TABLE>
<CAPTION>
YEARS
ENDED
MARCH 31,
----------
1995 1994
---- ----
<S> <C> <C>
Current:
U.S. federal................................................ $(56) $ 80
Foreign..................................................... 128 63
Deferred:
U.S. federal................................................ 57 (89)
Foreign..................................................... -- (5)
---- ----
$129 $ 49
==== ====
</TABLE>
The difference between the income tax expense recorded for 1995 and 1994 and
the income tax computed using the U.S. federal statutory rate of 34% resulted
from permanent differences in deductibility of meals and entertainment
expenses, the amortization of goodwill for financial and tax reporting
purposes and the difference between U.S. federal and foreign statutory tax
rates.
The Company made income tax payments of approximately $108,000 and $143,000
during the years ended March 31, 1995 and 1994, respectively.
4. MAJOR SUPPLIER
During the periods presented, the Company purchased a substantial amount of
the equipment used in its rental business, as well as equipment held for
resale from one supplier under an exclusive marketing agreement for certain
tools. During the years ended March 31, 1995 and 1994, purchases from this
supplier totaled approximately $891,000 and $921,000, respectively. In
addition, during such periods the Company paid a royalty based on revenue
generated from the use of a product licensed from this supplier. Royalty
expense, included in cost of revenue, was approximately $184,000 and $83,000
during the years ended March 31, 1995 and 1994, respectively.
F-36
<PAGE>
SHAREWELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS
The Company leases office space under a noncancellable long-term operating
lease which expires June 30, 1996. The Company incurred rent expense of
approximately $39,000 and $54,000 during the years ended March 31, 1995 and
1994, respectively.
Future minimum rental payments are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
YEARS ENDING MARCH 31,
----------------------
<S> <C>
1996................................................................ $41
1997................................................................ 10
---
$51
===
</TABLE>
At March 31, 1995, the Company had a compensation commitment of
approximately $88,000 to one employee to be paid in quarterly installments of
approximately $13,000 through March 31, 1997.
6. RELATED PARTIES
The Company conducted transactions with the former stockholder of the
Subsidiaries (the "Former Stockholders"). The following table reflected the
approximate amounts of such transactions as of and for the years ended March
31, 1995 and 1994, respectively (in thousands of dollars):
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Notes payable to Former Stockholder............................ $3,902 $4,417
Accounts receivable from Former Stockholder.................... 177 354
Compensation expense paid to Former Stockholder................ 237 237
Interest expense paid to Former Stockholder.................... 255 286
Compensation expense paid to Former Stockholder................ 238 69
</TABLE>
7.STOCK OPTION AGREEMENTS
During February 1993, the Company entered into stock option agreements with
two employees of Sharewell, which granted the employees options to purchase
5,000 shares of the Company's common stock at an option price equal to the
estimated fair market value at the date of grant. Such options were exercised
concurrently with the May 1995 acquisition by Drilex International Inc. (see
Note 1).
F-37
<PAGE>
TRENCHLESS SERVICES
[Photo of: cab of drilling rig]
Control cab of a Drilex slant drilling rig.
[Image of: subsurface river crossing]
Wells drilled beneath rivers for installation of pipelines and utilities.
Drilex has applied its precision drilling capabilities to the development of
services for environmental remediation and the trenchless laying of pipeline and
cable.
DRILEX ENVIRONMENTAL
[Image of: horizontal wells]
Horizontal wells used to access contaminants beneath fixed structures.
Sharewell, Inc. Directional Drilling Systems
[Photo of: surveyor]
Surveyor using a surface readout from a steering tool.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY, THE SELLING STOCKHOLDER, OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET
FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HERE-
OF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 10
The Company............................................................... 14
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 17
Dilution.................................................................. 17
Capitalization............................................................ 18
Selected Historical Financial and Other Data.............................. 19
Unaudited Pro Forma Condensed Consolidated Statement of Income............ 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 28
Management................................................................ 41
Certain Transactions and Relationships.................................... 49
Security Ownership of Certain Beneficial Owners and Management............ 51
Selling Stockholder....................................................... 52
Shares Eligible for Future Sale........................................... 53
Description of Capital Stock.............................................. 54
Underwriting.............................................................. 57
Legal Matters............................................................. 58
Experts................................................................... 58
Additional Information.................................................... 58
Index to Financial Statements............................................. F-1
</TABLE>
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIRE-
MENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,361,962 SHARES
[LOGO OF DRILEX INTERNATIONAL APPEARS HERE]
COMMON STOCK
----------------
PROSPECTUS
----------------
MERRILL LYNCH & CO.
CS FIRST BOSTON
SIMMONS & COMPANY
INTERNATIONAL
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the estimated expenses (other than underwriting discounts
and commissions) of the issuance and distribution of the securities being
registered, all of which shall be paid by the Company:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................. $17,797
NASD Filing Fee..................................................... 5,661
NASDAQ National Market Fees......................................... *
Printing Expenses................................................... *
Legal Fees and Expenses............................................. *
Accountants' Fees and Expenses...................................... *
Blue Sky Fees and Expenses.......................................... *
Transfer Agent and Registrar Fees................................... *
Miscellaneous Expenses.............................................. *
-------
Total............................................................. $ *
=======
</TABLE>
- --------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Delaware General Corporation Law
Section 145(a) of the General Corporation Law of the State of Delaware (the
"DGCL") provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgements, fines and amounts paid in settlement actually
and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the corporation,
and, with respect to any criminal action or proceeding, had reasonable cause
to believe that his conduct was unlawful.
Section 145(b) of the DGCL states that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he
is or was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation and
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon
II-1
<PAGE>
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 145(c) of the DGCL provides that to the extent that a director,
officer, employee or agent of a corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
Section 145(d) of the DGCL states that any indemnification under subsections
(a) and (b) of Section 145 (unless ordered by a court) shall be made by the
corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth
in subsections (a) and (b). Such determination shall be made (1) by the board
of directors by a majority vote of a quorum consisting of directors who were
not parties to such action, suit or proceeding, or (2) if such a quorum is not
obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (3) by the
stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he is
not entitled to be indemnified by the corporation as authorized in Section
145. Such expenses (including attorneys' fees) incurred by other employees and
agents may be so paid upon such terms and conditions, if any, as the board of
directors deems appropriate.
Section 145(f) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, the other subsections of
Section 145 shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office.
Section 145(g) of the DGCL provides that a corporation shall have the power
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of Section 145.
Section 145(j) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who
has ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
Certificate of Incorporation
The Restated Certificate of Incorporation of the Company provides that a
director of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the DGCL, or (iv) for any transaction from which the
director derived an improper personal benefit. If the DGCL is amended to
authorize the further elimination or limitation of the liability of
II-2
<PAGE>
directors, then the liability of a director of the Company, in addition to the
limitation on personal liability described above, shall be limited to the
fullest extent permitted by the amended DGCL. Further, any repeal or
modification of such provision of the Restated Certificate of Incorporation by
the stockholders of the Company shall be prospective only, and shall not
adversely affect any limitation on the personal liability of a director of the
Company existing at the time of such repeal or modification.
Bylaws
The Bylaws of the Company provide that each person who was or is made a
party or is threatened to be made a party to or is involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative,
by reason of the fact that he or she or a person of whom he or she is the
legal representative, is or was or has agreed to become a director or officer
of the Company or is or was serving or has agreed to serve at the request of
the Company as a director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including
service with respect to employee benefit plans, whether the basis of such
proceeding is alleged action in an official capacity as a director or officer
or in any other capacity while serving or having agreed to serve as a director
or officer, shall be indemnified and held harmless by the Company to the
fullest extent authorized by the DGCL, as the same exists or may thereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Company to provide broader indemnification rights than
said law permitted the Company to provide prior to such amendment) against all
expense, liability and loss (including without limitation, attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid or to be
paid in settlement) reasonably incurred or suffered by such person in
connection therewith and such indemnification shall continue as to a person
who has ceased to serve in the capacity which initially entitled such person
to indemnity thereunder and shall inure to the benefit of his or her heirs,
executors and administrators; provided, however, that the Company shall
indemnify any such person seeking indemnification in connection with a
proceeding (or part thereof) initiated by such person only if such proceeding
(or part thereof) was authorized by the board of directors of the Company. The
Bylaws further provide that the right to indemnification conferred thereby
shall be a contract right and shall include the right to be paid by the
Company the expenses incurred in defending any such proceeding in advance of
its final disposition; provided, however, that, if the DGCL requires, the
payment of such expenses incurred by a current, former or proposed director or
officer in his or her capacity as a director or officer or proposed director
or officer (and not in any other capacity in which service was or is or has
been agreed to be rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding, shall be made only upon delivery to
the Company of an undertaking, by or on behalf of such indemnified person, to
repay all amounts so advanced if it shall ultimately determine that such
indemnified person is not entitled to be indemnified under the Bylaws or
otherwise. In addition, the Bylaws provide that the Company may, by action of
its board of directors, provide indemnification to employees and agents of the
Company, individually or as a group, with the same scope and effect as the
indemnification of directors and officers provided for in the Bylaws.
Indemnification Agreements
The Company has entered into Indemnification Agreements with each of its
directors. The Indemnification Agreements provide that the Company shall
indemnify the director and hold him harmless from any losses and expenses
which, in type or amount, are not insured under the directors and officers'
liability insurance maintained by the Company, and generally indemnifies the
director against losses and expenses as a result of a claim or claims made
against him for any breach of duty, neglect, error, misstatement, misleading
statement, omission or other act done or wrongfully attempted by the director
or any of the foregoing alleged by any claimant or any claim against the
director solely by reason of him being a director or officer of the Company,
subject to certain exclusions. The Indemnification Agreements also provide
certain procedures regarding the right to indemnification and for the
advancement of expenses.
II-3
<PAGE>
Underwriting Agreement
The Underwriting Agreement provides for the indemnification of the directors
and officers of the Company in certain circumstances.
Insurance
The Company has obtained a policy of liability insurance to insure its
officers and directors against losses resulting from certain acts committed by
them in their capacities as officers and directors of the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The securities of the Company that were sold by the Company within the past
three years and not registered with the Commission are described below.
On March 31, 1994, Drilex Systems, Inc., a subsidiary of the Company, issued
to MascoTech, Inc. 500 shares of preferred stock of Drilex Systems, Inc. and
the Company issued a Promissory Note in the principal amount of $6.5 million,
in connection with the Company's purchase of all of the issued and outstanding
common stock of Drilex Systems, Inc. Such 500 shares of preferred stock were
subsequently transferred from MascoTech, Inc. to the stockholders of the
Company. On June 30, 1994, the Company repaid the aggregate principal amount
of and accrued interest on such Promissory Note. On July 11, 1994, the Company
issued 904,905 shares of Common Stock, in the aggregate, to Drilex Partners,
L.P., John Forrest, Charles Denton Kerr II, Robert Stayton and G. Bruce
Broussard, in exchange for the 500 shares of preferred stock of Drilex
Systems, Inc. Such transactions were exempt from the registration requirements
of the Securities Act by virtue of Section 4(2) thereof as transactions not
involving any public offering.
The following table sets forth certain information with respect to certain
unregistered sales of the Company's securities for consideration consisting of
cash and short-term promissory notes (all of which have since been repaid):
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE
DATE SHARES CONSIDERATION PURCHASER(S)
---- --------- ------------- ------------
<S> <C> <C> <C>
March 30, 1994 2,026,986 $11,200,000 DRLX Partners, L.P.
John Forrest
June 30, 1994 658,770 3,640,000 DRLX Partners, L.P.
John Forrest
Charles Denton Kerr II
Robert Stayton
G. Bruce Broussard
September 30, 1994 248,849 1,375,000 DRLX Partners, L.P.
September 29, 1995 451,220 3,116,475 Chase Capital Ventures
DRLX Partners, L.P.
John Forrest
Charles Denton Kerr II
G. Bruce Broussard
Sam Anderson
Todd Caspary
</TABLE>
Such transactions were exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof as transactions not involving
any public offering.
In connection with Mr. Stayton's resignation, the Company purchased, on June
1, 1995, the shares of Common Stock held by Mr. Stayton. As required by the
stockholders' agreement such shares were subject to, the Company paid $25,740
for such stock.
II-4
<PAGE>
On September 30, 1994, the Company issued to Posi-Trak Mud Motors, Inc. a
promissory note in the principal amount of $1,333,340 million and 241,307
shares of the Company's Common Stock as partial consideration for the purchase
of substantially all of the assets of Posi-Trak Mud Motors, Inc. On March 23,
1995, the Company purchased 144,784 of such 241,307 shares of Common Stock,
for an aggregate purchase price of $1.0 million cash. Such issuances were
exempt from the registration requirements of the Securities Act by virtue of
Section 4(2) thereof as transactions not involving any public offering.
On September 30, 1994, Cobb Directional Drilling Company, L.L.C., a
subsidiary of the Company, issued to Cobb Directional Drilling Company, Inc.
200,000 shares of interest in Cobb Directional Drilling Company, L.L.C. as
partial consideration for the purchase of substantially all of the assets of
Cobb Directional Drilling Company, Inc. On March 23, 1995, the Company issued
to Cobb Directional Drilling Company, Inc. a promissory note in the principal
amount of $1.0 million as partial consideration for the purchase of such
200,000 shares of interests in Cobb Directional Drilling Company, L.L.C. Such
issuances were exempt from the registration requirements of the Securities Act
by virtue of Section 4(2) thereof as transactions not involving any public
offering.
On May 5, 1995, as partial consideration for the purchase of all of the
issued and outstanding capital stock of Sharewell, Inc., the Company issued
promissory notes in the aggregate principal amount of approximately $2.8
million, after reflecting certain adjustments, and warrants for the purchase,
in the aggregate, of 180,981 shares of Common Stock at an exercise price of
$5.53 per share to Sam Anderson, John Teer, Todd Caspary, Frank Forest, George
Kowalczuk and Andy F. Brown. In connection with the Sharewell Acquisition, the
Company also issued a $1.9 million amortizing promissory note to Frank Forest
that replaced, in part, a note originally issued by Sharewell, Inc. to Mr.
Forest. With the exception of the issuances to Messrs. Kowalczuk and Brown,
such issuances were exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof as transactions not involving
any public offering. The issuances to Messrs. Kowalczuk and Brown were exempt
from the registration requirements of the Securities Act by virtue of Rule 701
thereunder as issuances of stock pursuant to contracts relating to
compensation.
On September 30, 1995, the Company issued to ENSCO Technology Company a
promissory note in the principal amount of approximately $3.6 million (as
subsequently adjusted to reflect a purchase price adjustment) and a
convertible note in the principal amount of $2.5 million as partial
consideration for the purchase of substantially all of the assets of ENSCO
Technology Company. Such convertible note is convertible into Common Stock at
a conversion price of $6.91 per share. Such issuances were exempt from the
registration requirements of the Securities Act by virtue of Section 4(2)
thereof as transactions not involving any public offering.
In connection with the exercise of stock options held by John Forrest
effective as of March 31, 1996, the Company issued 10,573 shares of Common
Stock to Mr. Forrest. Such issuance was exempt from the registration
requirements of the Securities Act by virtue of Rule 701 thereunder.
On May 16, 1996, each outstanding share of Common Stock was reclassified
into 1.809809 shares of Common Stock (the "Stock Split"). All share amounts
reflected in the preceding paragraphs of this Item 15 have been adjusted to
reflect the Stock Split. The Stock Split was exempt from the registration
requirements of the Securities Act as it did not involve a "sale" as defined
in Section 2(3) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
**1.1 Form of Purchase Agreement.
+3.1 Restated Certificate of Incorporation of the Company.
+3.2 Bylaws of the Company, as amended.
**4.1 Form of certificate representing Common Stock.
+4.2 Restated Registration Rights Agreement dated as of May 15, 1996, among
the Company and the stockholders listed on the signature pages
thereto.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*4.3 Registration Rights Agreement dated as of October 4, 1995 between the
Company and ENSCO Technology Company.
*4.4 Form of Employee Stockholders Agreement among the Company and certain
stockholders of the Company.
*4.5 Stockholders' Agreement dated as of September 30, 1994 among the
Company and Posi-Trak Mud Motors, Inc.
*4.6 Stockholders' Agreement dated as of May 5, 1995 among the Company and
the stockholders and holders of warrants to purchase Common Stock
listed on the signature pages thereto.
*4.7 Stockholders Agreement dated as of October 4, 1995 among the Company,
ENSCO Technology Company and certain permitted assigns.
*4.8 Convertible Promissory Note of the Company dated September 30, 1995 in
the original principal amount of $2,500,000 payable to ENSCO
Technology Company.
*4.9 Amended and Restated Credit Agreement dated as of September 29, 1995,
among the Company, Drilex Systems, Inc., Cobb Directional Drilling
Company, L.L.C., Sharewell, Inc., Drilex Systems Limited and Texas
Commerce Bank National Association, as lender, as amended.
*4.10 Dollar Note dated September 29, 1995 of the Company, Drilex Systems,
Inc., Sharewell, Inc. and Cobb Directional Drilling Company, L.L.C.
payable to the order of Texas Commerce Bank National Association.
*4.11 Term Note dated September 29, 1995 of the Company, Sharewell, Inc.,
Cobb Directional Drilling Company, L.L.C. and Drilex Systems, Inc.
payable to the order of Texas Commerce Bank National Association.
*4.12 Interest Rate Agreement (Revolver) dated as of September 29, 1995
among Texas Commerce Bank National Association, the Company, Drilex
Systems, Inc., Cobb Directional Drilling Company, L.L.C., Sharewell,
Inc. and Drilex Systems Limited.
*4.13 Interest Rate Agreement (Term Loan) dated as of September 29, 1995
between Texas Commerce Bank National Association, the Company,
Sharewell, Inc., Cobb Directional Drilling Company, L.L.C. and Drilex
Systems, Inc.
*4.14 Security Agreements dated as of September 29, 1995 of each of the
Company, Drilex Systems, Inc., Sharewell, Inc. and Cobb Directional
Drilling Company, L.L.C. in favor of Texas Commerce Bank National
Association.
The Company is a party to several debt instruments under which the
total amount of securities authorized does not exceed 10% of the
total assets of the Company and its subsidiaries on a consolidated
basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Regulation
S-K, the Company agrees to furnish a copy of such instruments to the
Commission upon request.
+5.1 Opinion of Baker & Botts, L.L.P.
*10.1 Stock Purchase Agreement dated March 31, 1994 between the Company and
MascoTech, Inc.
*10.2 Repurchase Agreement dated June 30, 1994 between Drilex Systems, Inc.
and MascoTech, Inc.
*10.3 Asset Purchase Agreement dated September 30, 1994 among the Company,
Cobb Directional Drilling Company, L.L.C., Cobb Directional Drilling
Company, Inc., Posi-Trak Mud Motors, Inc. and Archie A. Cobb, III.
*10.4 Stock Purchase Agreement dated as of March 23, 1995 among the Company,
Drilex Systems, Inc., Cobb Directional Drilling, Inc. and Archie A.
Cobb, III.
*10.5 Stock Repurchase Agreement dated as of March 23, 1995 among the
Company, Posi-Trak Mud Motors, Inc. and Archie A. Cobb, III.
*10.6 Stock Purchase Agreement dated as of May 5, 1995 between the Company
and the Sellers listed on the signature pages thereto.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*10.7 Asset Purchase Agreement dated September 29, 1995 among the Company,
Drilex Systems, Inc., ENSCO Technology Company and ENSCO
International Incorporated.
+10.8 Form of Indemnification Agreement between the Company and each of its
directors.
+10.9 Stock Option Plan of the Company.
*10.10 Employment Agreement dated September 30, 1994 between Cobb Directional
Drilling Company, L.L.C. and Archie A. Cobb, III.
+11.1 Computation of Net Income Per Common and Common Equivalent Share.
+21.1 Subsidiaries of the Company.
+23.1 Consent of Deloitte & Touche LLP.
+23.2 Consent of Baker & Botts, L.L.P. (contained in Exhibit 5.1).
+24.1 Power of Attorney (included on the signature page of this registration
statement as originally filed and as an exhibit to Amendment No. 2).
*27.1 Financial Data Schedule.
</TABLE>
- --------
+ Filed herewith.
* Previously filed.
** To be filed by amendment.
(b) Financial Statement Schedules.
Schedule I--Condensed Financial Information of Registrant
All other schedules are omitted because they are not applicable or because
the required information is contained in the financial statements or notes
thereto included in this registration statement.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriters,
at the closing specified in the Purchase Agreement, certificates representing
the shares of Common Stock offered hereby in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to
each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as a
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
HOUSTON, STATE OF TEXAS, ON THE 13TH DAY OF JUNE, 1996.
DRILEX INTERNATIONAL INC.
By: /s/ John Forrest
-----------------------------------
John Forrest
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON JUNE 13, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ John Forrest
- -------------------------------------------
John Forrest President, Chief Executive Officer and
Director (Principal Executive Officer)
/s/ G. Bruce Broussard
- -------------------------------------------
G. Bruce Broussard Vice President--Finance and Administration
and Secretary (Principal Financial Officer
and Principal Accounting Officer)
*
- -------------------------------------------
L.E. Simmons Chairman of the Board and Director
*
- -------------------------------------------
David C. Baldwin Director
*
- -------------------------------------------
A. Clark Johnson Director
*
- -------------------------------------------
Robert P. Peebler Director
*
- -------------------------------------------
Sam S. Sorrell Director
*
- -------------------------------------------
Andrew L. Waite Director
</TABLE>
/s/ G. Bruce Broussard
*By _________________________________
G. Bruce Broussard
Attorney-In-Fact
II-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Drilex International Inc.:
We have audited the consolidated financial statements of Drilex
International Inc. as of December 31, 1995 and 1994, and for the year ended
December 31, 1995 and the period from March 30, 1994 (inception) to December
31, 1994, and have issued our report thereon dated April 26, 1996 (May 16,
1996 as to Note 15). Our audits also included the financial statement schedule
listed in Item 16(b) of this Registration Statement. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
DELOITTE & TOUCHE LLP
Houston, Texas
April 26, 1996
S-1
<PAGE>
DRILEX INTERNATIONAL INC.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET (UNCONSOLIDATED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1994
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $ -- $ 40
Advances to subsidiaries, net................................ 2,177 --
Other current assets......................................... 59 18
------- -------
Total current assets....................................... 2,236 58
Investment in subsidiaries..................................... 46,850 27,420
Organization costs, net of accumulated amortization of $203 and
$41 at December 31, 1995 and 1994, respectively............... 849 592
------- -------
$49,935 $28,070
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities..................... $ 475 $ 83
Advances from subsidiaries, net.............................. -- 1,680
Long-term debt, current maturities........................... 3,490 450
------- -------
Total current liabilities.................................. 3,965 2,213
Long-term debt, less current maturities........................ 22,288 6,300
------- -------
Total liabilities.......................................... 26,253 8,513
------- -------
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; none issued..................................... -- --
Common stock, $.01 par value; 25,000,000 shares authorized;
shares issued:
1995--4,381,205 and 1994--4,080,818......................... 44 41
Additional paid-in capital................................... 19,845 17,507
Retained earnings............................................ 3,793 2,009
------- -------
Total stockholders' equity................................. 23,682 19,557
------- -------
$49,935 $28,070
======= =======
</TABLE>
See notes to consolidated financial statements and accompanying notes.
S-2
<PAGE>
DRILEX INTERNATIONAL INC.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
STATEMENT OF INCOME (UNCONSOLIDATED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 30, 1994
YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1995 1994
------------ --------------
<S> <C> <C>
Interest charged to subsidiaries................... $ 669 $ 206
General and administrative expenses................ (1,598) (739)
Interest expense................................... (1,222) (206)
------- ------
Loss before income taxes and equity in earnings of
subsidiaries...................................... (2,151) (739)
Credit for income taxes............................ 731 251
Equity in earnings of subsidiaries................. 3,204 2,497
------- ------
Net income......................................... $ 1,784 $2,009
======= ======
</TABLE>
See notes to consolidated financial statements and accompanying notes.
S-3
<PAGE>
DRILEX INTERNATIONAL INC.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
STATEMENT OF CASH FLOWS (UNCONSOLIDATED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 30, 1994
YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1995 1994
------------ --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 1,784 $ 2,009
Adjustments to reconcile net income to net cash
used for operating activities:
Amortization of organization costs............... 162 41
Equity in earnings of subsidiaries............... (3,204) (2,497)
Interest charged to subsidiaries................. (669) (206)
Incurrence of organization costs................. (419) (633)
Increase in accounts payable and accrued
liabilities..................................... 392 83
Increase in other current assets................. (41) (18)
-------- --------
Net cash used for operating activities......... (1,995) (1,221)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in subsidiaries....................... (15,976) (23,590)
Net advances from (to) subsidiaries............... (3,188) 1,886
-------- --------
Net cash used for investing activities......... (19,164) (21,704)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.......... 17,450 2,250
Net borrowings under revolving credit agreements.. 4,700 4,500
Proceeds from issuance of common stock............ 3,117 16,215
Principal payments on long-term debt.............. (3,122) --
Purchases of common stock......................... (1,026) --
-------- --------
Net cash provided by financing activities...... 21,119 22,965
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... (40) 40
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD... 40 --
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......... $ -- $ 40
======== ========
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Issuances of common stock and warrants in
connection with acquisitions of subsidiaries..... $ 250 $ 1,333
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid..................................... $ 1,130 $ 152
Income taxes paid................................. -- --
</TABLE>
See notes to consolidated financial statements and accompanying notes.
S-4
<PAGE>
DRILEX INTERNATIONAL INC.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
NOTES TO FINANCIAL STATEMENTS (UNCONSOLIDATED)
1.INVESTMENT IN AND ADVANCES TO SUBSIDIARIES
The Company's investment in subsidiaries is presented in the accompanying
unconsolidated financial statements using the equity method of accounting. The
Company records interest on net advances to or from subsidiaries at a rate of
8% per annum.
2.LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1994
------- ------
(IN THOUSANDS
OF DOLLARS)
<S> <C> <C>
Bank Credit Agreement:
Revolving Credit Facility.................................. $ 9,200 $ --
Term Note.................................................. 16,578 --
Previous bank credit agreements:
Revolving credit facilities................................ -- 4,500
Cobb term note............................................. -- 2,250
------- ------
25,778 6,750
Less: current maturities..................................... (3,490) (450)
------- ------
$22,288 $6,300
======= ======
</TABLE>
Scheduled maturities of long-term debt outstanding at December 31, 1995 are
as follows: years ending December 31, 1996--$3,490,000; 1997--$3,490,000;
1998--$12,690,000; 1999--$3,490,000; 2000--$2,618,000.
Certain debt instruments restrict the ability of the Company's subsidiaries
to transfer assets, make loans and advances and pay dividends to the Company.
The restricted net assets of the Company's subsidiaries totaled approximately
$40,000,000 at December 31, 1995.
3. INCOME TAXES
Income taxes reported in the accompanying unconsolidated financial
statements are determined by computing income tax assets and liabilities on a
consolidated basis, for the Company and members of its consolidated federal
income tax return group, and then reducing such consolidated amounts for the
amounts recorded by the Company's subsidiaries on a separate tax return basis.
S-5
<PAGE>
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
DRILEX INTERNATIONAL INC.
Drilex International Inc. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "DGCL"), hereby adopts this Restated Certificate of Incorporation,
which accurately restates and integrates the provisions of the existing
Certificate of Incorporation of the Corporation and all amendments thereto that
are in effect on the date hereof (the "Certificate of Incorporation") and
further amends the provisions of the Certificate of Incorporation as described
below, and does hereby further certify that:
1. The name of the Corporation is Drilex International Inc. The
Corporation was originally incorporated under the name "Drilex Holdings Corp."
and the original certificate of incorporation of the Corporation was filed with
the Secretary of State of the State of Delaware on March 10, 1994.
2. The Board of Directors of the Corporation duly adopted a resolution
proposing and declaring advisable the amendments to the Certificate of
Incorporation as described herein, and the Corporation's stockholders duly
adopted such amendments, all in accordance with the provisions of Sections 228,
242 and 245 of the DGCL.
3. The Certificate of Incorporation is hereby restated and further amended
to read in its entirety as follows:
RESTATED CERTIFICATE OF INCORPORATION
FIRST: The name of the Corporation is Drilex International Inc.
SECOND: The address of the registered office of the Corporation in the
State of Delaware is 1209 Orange Street, in the City of Wilmington, County of
New Castle. The name of its registered agent at such address is The Corporation
Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful business,
act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware or any successor statute (the "DGCL").
1
<PAGE>
FOURTH: The aggregate number of shares of capital stock which the
Corporation shall have authority to issue is Thirty-Five Million (35,000,000),
divided into Twenty-Five Million (25,000,000) shares of common stock, par value
$0.01 per share ("Common Stock"), and Ten Million (10,000,000) shares of
preferred stock, par value $0.01 per share ("Preferred Stock"). Shares of any
class of capital stock of the Corporation may be issued for such consideration
and for such corporate purposes as the Board of Directors of the Corporation
(the "Board of Directors") may from time to time determine. Each share of
Common Stock shall be entitled to one vote.
The Preferred Stock may be divided into and issued from time to time in one
or more series as may be fixed and determined by the Board of Directors. The
relative rights and preferences of the Preferred Stock of each series shall be
such as shall be stated in any resolution or resolutions adopted by the Board of
Directors setting forth the designation of the series and fixing and determining
the relative rights and preferences thereof, any such resolution or resolutions
being herein called a "Directors' Resolution." The Board of Directors is hereby
authorized to fix and determine the powers, designations, preferences, and
relative, participating, optional or other rights (including, without
limitation, voting powers, full or limited, preferential rights to receive
dividends or assets upon liquidation, rights of conversion or exchange into
Common Stock, Preferred Stock of any series or other securities, any right of
the Corporation to exchange or convert shares into Common Stock, Preferred Stock
of any series or other securities, or redemption provisions or sinking fund
provisions) as between series and as between the Preferred Stock or any series
thereof and the Common Stock, and the qualifications, limitations or
restrictions thereof, if any, all as shall be stated in a Directors' Resolution,
and the shares of Preferred Stock or any series thereof may have full or limited
voting powers, or be without voting powers, all as shall be stated in a
Directors' Resolution.
No stockholder shall, by reason of the holding of shares of any class or
series of capital stock of the Corporation, have a preemptive or preferential
right to acquire or subscribe for any shares or securities of any class, whether
now or hereafter authorized, which may at any time be issued, sold or offered
for sale by the Corporation, unless specifically provided for in a Directors'
Resolution with respect to a series of Preferred Stock.
Cumulative voting of shares of any class or series of capital stock having
voting rights is prohibited unless specifically provided for in a Directors'
Resolution with respect to a series of Preferred Stock.
FIFTH: (a) Directors. The business and affairs of the Corporation shall
be managed by or under the direction of the Board of Directors. In addition to
the authority and powers conferred upon the Board of Directors by the DGCL or by
the other provisions of this Restated Certificate of Incorporation (this
"Certificate of Incorporation"), the Board of Directors is hereby authorized and
empowered to exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation, subject to the provisions of the DGCL,
this Certificate of Incorporation and any Bylaws adopted by the stockholders of
the Corporation; provided, however, that no Bylaws hereafter adopted by the
stockholders of the Corporation, or any amendments thereto, shall invalidate any
prior act of the Board of Directors that would have been valid if such Bylaws or
amendment had not been adopted.
2
<PAGE>
(b) Number, Election and Terms of Directors. The number of directors which
shall constitute the whole Board of Directors shall be fixed from time to time
by a majority of the directors then in office, but shall not be less than three
nor more than twelve, except in the case of an increase in the number of
directors by reason of any provisions contained in or established pursuant to
Article Fourth. The directors, other than those who may be elected by the
holders of any series of Preferred Stock, shall be divided into three classes,
Class I, Class II and Class III. Each director shall serve for a term ending on
the third annual meeting following the annual meeting at which such director was
elected; provided, however, that the directors first elected to Class I shall
serve for a term expiring at the annual meeting next following the end of the
calendar year 1996, the directors first elected to Class II shall serve for a
term expiring at the annual meeting next following the end of the calendar year
1997, and the directors first elected to Class III shall serve for a term
expiring at the annual meeting next following the end of the calendar year 1998.
Each director shall hold office until the annual meeting at which such
director's term expires and, the foregoing notwithstanding, shall serve until
his successor shall have been duly elected and qualified or until his earlier
death, resignation or removal.
At each annual election, the directors chosen to succeed those whose terms
then expire shall be of the same class as the directors they succeed, unless, by
reason of any intervening changes in the authorized number of directors, the
Board of Directors shall designate one or more directorships whose term then
expires as directorships of another class in order more nearly to achieve
equality of number of directors among the classes.
In the event of any change in the authorized number of directors, each
director then continuing to serve as such shall nevertheless continue as a
director of the class of which he is a member until the expiration of his
current term, or his prior death, resignation or removal. The Board of
Directors shall specify the class to which a newly created directorship shall be
allocated.
Election of directors need not be by written ballot unless the Bylaws of
the Corporation shall so provide.
(c) Removal of Directors. No director of the Corporation shall be removed
from office as a director by vote or other action of the stockholders or
otherwise except for cause, and then only by the affirmative vote of the holders
of at least a majority of the voting power of all outstanding shares of capital
stock of the Corporation generally entitled to vote in the election of
directors, voting together as a single class. Except as may otherwise be
provided by law, cause for removal of a director shall be deemed to exist only
if: (i) the director whose removal is proposed has been convicted, or where a
director is granted immunity to testify where another has been convicted, of a
felony by a court of competent jurisdiction and such conviction is no longer
subject to direct appeal; (ii) such director has been found by the affirmative
vote of a majority of the entire Board of Directors at any regular or special
meeting of the Board of Directors called for that purpose or by a court of
competent jurisdiction to have been grossly negligent or guilty of misconduct in
the performance of his duties to the Corporation in a matter of substantial
importance to the Corporation; or (iii) such director has been adjudicated by a
court of competent
3
<PAGE>
jurisdiction to be mentally incompetent, which mental incompetency directly
affects his ability as a director of the Corporation.
(d) Vacancies. Except as provided in Article Fourth hereof, newly created
directorships resulting from any increase in the number of directors and any
vacancies on the Board of Directors resulting from death, resignation, removal
or other cause shall be filled by the affirmative vote of a majority of the
remaining directors then in office, even though less than a quorum of the Board
of Directors. Any director elected in accordance with the preceding sentence
shall hold office for the remainder of the full term of the class of directors
in which the new directorship was created or the vacancy occurred and until such
director's successor shall have been elected and qualified or until his earlier
death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
SIXTH: From and after the first date as of which the Corporation has a
class or series of capital stock registered under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), any action required or permitted to be
taken by the stockholders of the Corporation must be effected at an annual or
special meeting of stockholders of the Corporation and may not be effected by
any consent in writing by such stockholders. Except as otherwise required by
law, or as may be prescribed in a Directors' Resolution, special meetings of
stockholders of the Corporation may be called only by the Chairman of the Board
of Directors or by the President of the Corporation or by the Board of Directors
pursuant to a resolution approved by the affirmative vote of a majority of the
entire Board of Directors.
SEVENTH: No director of the Corporation shall be personally liable to the
Corporation or any of its stockholders for monetary damages for breach of
fiduciary duty as a director; provided, however, that the foregoing provisions
shall not eliminate or limit the liability of a director (i) for any breach of
such director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL, as the same
exists or as such provision may hereafter be amended, supplemented or replaced,
or (iv) for any transactions from which such director derived an improper
personal benefit. If the DGCL is amended after the filing of this Certificate
of Incorporation to authorize corporate action further eliminating or limiting
the personal liability of directors, then the liability of a director of the
Corporation, in addition to the limitation on personal liability provided
herein, shall be limited to the fullest extent permitted by such law, as so
amended. Any repeal or modification of this Article Seventh by the stockholders
of the Corporation shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Corporation existing
at the time of such repeal or modification.
4
<PAGE>
EIGHTH: (a) In addition to any affirmative vote that may be required by
law, this Certificate of Incorporation or the Bylaws of the Corporation, and
except as otherwise expressly provided in paragraph (b) of this Article Eighth:
(i) any merger, consolidation or share exchange of the Corporation or any
subsidiary of the Corporation with (A) any Related Person or (B) any other
Person (whether or not itself a Related Person) that is, or after such merger,
consolidation or share exchange would be, an Affiliate of a Related Person; or
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition by the Corporation or any subsidiary of the Corporation to any
Related Person or any Affiliate of any Related Person, or by any Related Person
or any Affiliate of any Related Person to the Corporation or any subsidiary of
the Corporation, of any assets or properties having an aggregate Fair Market
Value of $10,000,000 or more; or
(iii) any issuance or transfer by the Corporation or any subsidiary of the
Corporation of any securities of the Corporation or any subsidiary of the
Corporation to any Related Person or any Affiliate of any Related Person (except
(A) pursuant to the exercise, exchange or conversion of securities exercisable
for, exchangeable for or convertible into stock of the Corporation or any
subsidiary of the Corporation, which securities were acquired by the Related
Person prior to becoming a Related Person, or (B) pursuant to a dividend or
distribution paid or made, or the exercise, exchange or conversion of securities
exercisable for, exchangeable for or convertible into stock of the Corporation
or subsidiary of the Corporation, which security is distributed pro rata to all
holders of a class or series of stock of the Corporation subsequent to the time
the Related Person became such, and provided in the case of this clause (B) that
there is not an increase of more than 1% in the Related Person's proportionate
share of the stock of any class or series of the Corporation or of the Voting
Stock of the Corporation as a result of such dividend or distribution); or
(iv) any dissolution of the Corporation voluntarily caused or proposed by
or on behalf of a Related Person or any Affiliate of any Related Person; or
(v) any reclassification of securities (including any reverse stock split)
or recapitalization of the Corporation, or any merger, consolidation or share
exchange of the Corporation with any of its subsidiaries or any other
transaction (whether or not with or into or otherwise involving a Related
Person) that has the effect, either directly or indirectly, of increasing by
more than 1% the proportionate share of the outstanding stock of any class or
series or the securities convertible into stock of any class or series of the
Corporation or any subsidiary of the Corporation which is directly or indirectly
owned by any Related Person or any Affiliate of any Related Person or otherwise
increasing the voting power of the outstanding stock of the Corporation or any
subsidiary of the Corporation possessed by any such Related Person or Affiliate;
or
5
<PAGE>
(vi) any series or combination of transactions having, directly or
indirectly, the same effect as any of the foregoing; or
(vii) any agreement, contract or other arrangement providing, directly or
indirectly, for any of the foregoing,
shall require the affirmative vote of the holders of (x) not less than 80% of
the then outstanding Voting Stock held by stockholders voting together as a
single class and (y) not less than 66-2/3% of the then outstanding Voting Stock
not Beneficially Owned, directly or indirectly, by any Related Person with
respect to such Business Combination, voting together as a single class. Such
affirmative vote shall be required, notwithstanding the fact that no vote may be
required, or that a lesser percentage may be specified, by law, elsewhere in
this Certificate of Incorporation, in the Bylaws of the Corporation or in any
agreement with any national securities exchange or otherwise.
(b) The provisions of paragraph (a) shall not be applicable to any
particular Business Combination, and such Business Combination shall require
only such affirmative vote as is required by law, the Bylaws of the Corporation
and any other provision of this Certificate of Incorporation, if all of the
conditions specified in either of the following subparagraphs (i) and (ii) are
met:
(i) the cash, property, securities or other consideration to be received
per share by holders of each and every outstanding class or series of shares of
the Corporation in the Business Combination is, with respect to each such class
or series, either (A) the same in form and amount per share as that paid by the
Related Person in a tender offer in which such Related Person acquired at least
50% of the outstanding stock of such class or series and which was consummated
not more than one year prior to the date of such Business Combination or (B)
not less in amount (as to cash) or Fair Market Value (as to consideration other
than cash) as of the date of the determination of the Highest Per Share Price
(as to property, securities or other consideration) than the Highest Per Share
Price applicable to such class or series of shares; provided that in the event
of any Business Combination in which the Corporation survives, any shares
retained by the holders thereof shall constitute consideration other than cash
for purposes of this subparagraph (i); or
(ii) a majority of the Continuing Directors shall have expressly approved
such Business Combination either in advance of or subsequent to such Related
Person's having become a Related Person.
In the case of any Business Combination with a Related Person to which
subparagraph (ii) above does not apply, a majority of the Continuing Directors,
promptly following the request of a Related Person, shall determine the Highest
Per Share Price for each class or series of stock of the Corporation. Such
determination shall be announced not less than five days prior to the meeting at
which holders of shares vote on the Business Combination. Such determination
shall be final, unless the Related Person becomes the Beneficial Owner of
additional
6
<PAGE>
shares after the date of the earlier determination, in which case the Continuing
Directors shall make a new determination as to the Highest Per Share Price for
each class or series of shares prior to the consummation of the Business
Combination.
A Related Person shall be deemed to have acquired a share at the time that
such Related Person became the Beneficial Owner thereof. With respect to shares
owned by Affiliates, Associates and other Persons whose ownership is
attributable to a Related Person, if the price paid by such Related Person for
such shares is not determinable by a majority of the Continuing Directors, the
price so paid shall be deemed to be the higher of (i) the price paid upon the
acquisition thereof by the Affiliate, Associate or other Person or (ii) the
Share Price of the shares in question at the time when the Related Person became
the Beneficial Owner thereof.
(c) For purposes of this Article Eighth:
(i) The term "Affiliate," used to indicate a relationship to a specified
Person, shall mean a Person that directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with,
such specified Person.
(ii) The term "Associate," used to indicate a relationship with a specified
Person, shall mean (A) any corporation, partnership, limited liability company,
association, joint venture or other organization (other than the Corporation or
any wholly owned subsidiary of the Corporation) of which such specified Person
is an officer or partner or is, directly or indirectly, the Beneficial Owner of
10% or more of any class of equity securities; (B) any trust or other estate in
which such specified Person has a beneficial interest of 10% or more or as to
which such specified Person serves as trustee or in a similar fiduciary
capacity; (C) any Person who is a director or officer of such specified Person
or any of its parents or subsidiaries (other than the Corporation or any wholly
owned subsidiary of the Corporation); and (D) any relative or spouse of such
specified Person or of any of its Associates, or any relative of any such
spouse, who has the same home as such specified Person or such Associate.
(iii) A Person shall be a "Beneficial Owner" of any stock (A) which such
Person or any of its Affiliates or Associates beneficially owns, directly or
indirectly; or (B) which such Person or any of its Affiliates or Associates
has, directly or indirectly, (1) the right to acquire (whether such right is
exercisable immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise, or (2) the right to
vote pursuant to any agreement, arrangement or understanding; or (C) which is
beneficially owned, directly or indirectly, by any other Person with which such
Person or any of its Affiliates or Associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or disposing of
such stock; or (D) of which such Person would be the Beneficial Owner pursuant
to the terms of Rule 13d-3 of the Exchange Act, as in effect on May 1, 1996.
Stock shall be deemed "Beneficially Owned" by the Beneficial Owner or Owners
thereof.
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(iv) The term "Business Combination" shall mean any transaction which is
referred to in any one or more of clauses (i) through (vii) of paragraph (a) of
this Article Eighth.
(v) The term "Continuing Director" shall mean, with respect to a Business
Combination with a Related Person, any director of the Corporation who is
unaffiliated with the Related Person and was a director prior to the time that
the Related Person became a Related Person, and any successor of a Continuing
Director who is unaffiliated with the Related Person and is recommended or
nominated to succeed a Continuing Director by a majority of the Continuing
Directors. Without limiting the generality of the foregoing, a director shall
be deemed to be affiliated with a Related Person if such director (A) is an
officer, director, employee or general partner of such Related Person; (B) is an
Affiliate or Associate of such Related Person; (C) is a relative or spouse of
such Related Person or of any such officer, director, general partner, Affiliate
or Associate; (D) performs services, or is a member, employee, greater than 5%
stockholder or other equity owner of any organization (other than the
Corporation and its subsidiaries) which performs services for such Related
Person or any Affiliate of such Related Person, or is a relative or spouse of
any such Person; or (E) was nominated for election as a director by such Related
Person.
(vi) The term "Fair Market Value" shall mean, in the case of securities,
the average of the closing sales prices during the 30-day period immediately
preceding the date in question of such security on the principal United States
securities exchange registered under the Exchange Act on which such security is
listed (or the composite tape therefor) or, if such securities are not listed on
any such exchange, the average of the last reported sales price (if so reported)
or the closing bid quotations with respect to such security during the 30-day
period preceding the date in question on the NASDAQ system or any similar system
then in use or, if no such quotations are available, the fair market value on
the date in question of such security as determined in good faith by a majority
of the Continuing Directors; and in the case of property other than cash or
securities, the fair market value of such property on the date in question as
determined in good faith by a majority of the Continuing Directors.
(vii) The term "Highest Per Share Price" shall mean (A) as to any class or
series of stock of which the Related Person Beneficially Owns 10% or more of the
outstanding shares, the highest price that can be determined to have been paid
or agreed to be paid for any share or shares of that class or series by such
Related Person in a transaction that either (1) resulted in such Related
Person's Beneficially Owning 10% or more thereof or (2) was effected at a time
when such Related Person Beneficially Owned 10% or more thereof, (B) as to any
class or series of stock of which the Related Person Beneficially Owns shares,
but not 10% or more of the outstanding shares, the highest price that can be
determined to have been paid or agreed to be paid at any time by such Related
Person for any share or shares of that class or series that are then
Beneficially Owned by such Related Person or (C) as to any other class or series
of stock, the amount determined by a majority
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of the Continuing Directors, on whatever basis they believe is appropriate, to
be the per share price equivalent of the highest price that can be determined to
have been paid or agreed to be paid at any time by the Related Person for any
other class or series of stock. In determining the Highest Per Share Price, all
purchases by the Related Person shall be taken into account regardless of
whether the shares were purchased before or after the Related Person became a
Related Person and the Highest Per Share Price will be appropriately adjusted to
take into account (w) distributions paid or payable in stock, (x) subdivisions
of outstanding stock, (y) combinations of shares of stock into a smaller number
of shares and (z) similar events.
(viii) The term "Person" shall mean any individual, corporation, limited
liability company, association, partnership, joint venture, trust, estate or
other entity or organization.
(ix) The term "Related Person" shall mean any Person (other than the
Corporation or any subsidiary of the Corporation and other than any profit
sharing, employee ownership or other employee benefit plan of the Corporation or
any subsidiary of the Corporation or any trustee of or fiduciary with respect to
any such plan when acting in such capacity) who or which (A) is the Beneficial
Owner of 10% or more of the aggregate voting power of all outstanding stock of
the Corporation; or (B) is an Affiliate of the Corporation and at any time
within the two-year period immediately prior to the date in question was the
Beneficial Owner of 10% or more of the aggregate voting power of all outstanding
stock of the Corporation; or (C) is an assignee of or has otherwise succeeded to
any shares of stock of the Corporation which were at any time within the two-
year period immediately prior to the date in question Beneficially Owned by any
Related Person, if such assignment or succession shall have occurred in the
course of a privately negotiated transaction rather than an open market
transaction. For the purposes of determining whether a Person is a Related
Person, the number of shares of any class or series deemed to outstanding shall
include shares of such class or series of which the Person is deemed the
Beneficial Owner, but shall not include any other shares which may be issuable
pursuant to any agreement, arrangement or understanding, or upon exercise of
conversion rights, warrants or options, otherwise. Notwithstanding the
foregoing, no Person who is the Beneficial Owner of 10% or more of the aggregate
voting power of all outstanding stock of the Corporation on May 1, 1996 shall be
a Related Person.
(x) The term "Voting Stock" shall mean all outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of
directors, considered for the purpose of this Article Eighth as one class. If
the Corporation has shares of Voting Stock entitled to more or less than one
vote for any such share, each reference in this Article Eighth to a proportion
or percentage in voting power of Voting Stock shall be calculated by reference
to the portion or percentage of votes entitled to be cast by the holders of such
shares.
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(d) Nothing contained in this Article Eighth shall be construed to relieve
any Related Person from any fiduciary obligation imposed by law.
(e) Notwithstanding any other provision of this Certificate of
Incorporation (and notwithstanding that a lesser percentage may be specified by
law), the affirmative vote of the holders of (x) not less than 80% of the then
outstanding Voting Stock held by stockholders, voting together as a single
class, and (y) not less than 66-2/3% of the then outstanding Voting Stock not
Beneficially Owned, directly or indirectly, by any Related Person, voting
together as a single class, shall be required to amend or repeal, or adopt any
provisions inconsistent with, this Article Eighth.
NINTH: In furtherance of, and not in limitation of, the powers conferred
by statute, the Board of Directors is expressly authorized to adopt, amend or
repeal the Bylaws of the Corporation, or adopt new Bylaws, without any action on
the part of the stockholders, except as may be otherwise provided by applicable
law or the Bylaws of the Corporation.
TENTH: Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for the Corporation under
Section 291 of Title 8 of the Delaware Code, or on the application of trustees
in dissolution or of any receiver or receivers appointed for the Corporation
under Section 279 of Title 8 of the Delaware Code, order a meeting of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of the Corporation, as the case may be, to be summoned in such
manner as the said court directs. If the majority in number representing three-
fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders, of the Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of the
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
executed this ___ day of June, 1996.
DRILEX INTERNATIONAL INC.
By: /s/ JOHN FORREST
________________________
John Forrest
President
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EXHIBIT 3.2
BYLAWS
OF
DRILEX INTERNATIONAL INC.
(As amended through June 11, 1996)
ARTICLE I
OFFICES
1.1 Registered Office. The registered office of Drilex International Inc. (the
"Corporation") required by the General Corporation Law of the State of
Delaware or any successor statute (the "DGCL"), to be maintained in the
State of Delaware, shall be the registered office named in the Restated
Certificate of Incorporation of the Corporation, as it may be amended or
restated in accordance with the DGCL from time to time (the "Restated
Certificate of Incorporation"), or such other office as may be designated
from time to time by the Board of Directors of the Corporation (the "Board
of Directors") in the manner provided by law. Should the Corporation
maintain a principal office within the State of Delaware such registered
office need not be identical to such principal office of the Corporation.
1.2 Other Offices. The Corporation may also have offices at such other places
both within and without the State of Delaware as the Board of Directors may
determine from time to time or as the business of the Corporation may
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 Place of Meetings. Meetings of stockholders shall be held at such place
within or without the State of Delaware as may be designated by the Board
of Directors or the officer calling the meeting.
2.2 Annual Meeting. An annual meeting of the stockholders, for the election of
directors to succeed those whose terms expire and for the transaction of
such other business as may properly come before the meeting, shall be held
at such place, within or without the State of Delaware, on such date, and
at such time as the Board of Directors shall fix and set forth in the
notice of the meeting, which date shall be within thirteen months
subsequent to the last annual meeting of stockholders. At the annual
meeting of the stockholders, only such business shall be conducted as shall
have been properly brought before the annual meeting as set forth in
Section 2.8 hereof. Failure to hold the annual meeting at the designated
time shall not work a dissolution of the Corporation.
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2.3 Special Meetings. Special meetings of the stockholders may be called at
any time by the Chairman of the Board, the President or the Board of
Directors. Upon written request of any person or persons who have duly
called a special meeting, it shall be the duty of the Secretary of the
Corporation to fix the date of the meeting to be held not less than ten nor
more than 60 days after the receipt of the request and to give due notice
thereof. If the Secretary shall neglect or refuse to fix the date of the
meeting and give notice thereof, the person or persons calling the meeting
may do so. Every special meeting of the stockholders shall be held at such
place within or without the State of Delaware as the Board of Directors may
designate, or, in the absence of such designation, at the registered office
of the Corporation in the State of Delaware.
2.4 Notice of Meeting. Written or printed notice of all meetings stating the
place, day and hour of the meeting and, in the case of a special meeting,
the purpose or purposes for which the meeting is called, shall be delivered
not less than ten nor more than 60 days before the date of the meeting,
either personally or by mail, by or at the direction of the Chairman of the
Board, President or Secretary of the Corporation, to each stockholder
entitled to vote at such meeting. If mailed, such notice shall be deemed to
be delivered to a stockholder when deposited in the United States mail
addressed to such stockholder at such stockholder's address as it appears
on the stock transfer records of the Corporation, with postage thereon
prepaid.
2.5 Registered Holders of Shares; Closing of Share Transfer Records; and Record
Date.
(a) Registered Holders as Owners. Unless otherwise provided under
Delaware law, the Corporation may regard the person in whose name any
shares issued by the Corporation are registered in the stock transfer
records of the Corporation at any particular time (including, without
limitation, as of a record date fixed pursuant to paragraph (b) of
this Section 2.5) as the owner of those shares at that time for
purposes of voting those shares, receiving distributions thereon or
notices in respect thereof, transferring those shares, exercising
rights of dissent with respect to those shares, entering into
agreements with respect to those shares, or giving proxies with
respect to those shares; and neither the Corporation nor any of its
officers, directors, employees or agents shall be liable for regarding
that person as the owner of those shares at that time for those
purposes, regardless of whether that person possesses a certificate
for those shares.
(b) Record Date. For the purpose of determining stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment
thereof, or entitled to receive a distribution by the Corporation
(other than a distribution involving a purchase or redemption by the
Corporation of any of its own shares) or a share dividend, or in order
to make a determination of stockholders for any other proper purpose,
the Board of Directors may fix in advance a date as the record date
for any such determination of stockholders, such date in any case to
be not more than
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60 days and, in the case of a meeting of stockholders, not less than
ten days, prior to the date on which the particular action requiring
such determination of stockholders is to be taken. The Board of
Directors shall not close the books of the Corporation against
transfers of shares during the whole or any part of such period.
If the Board of Directors does not fix a record date for any meeting of the
stockholders, the record date for determining stockholders entitled to
notice of or to vote at such meeting shall be at the close of business on
the day next preceding the day on which notice is given, or, if in
accordance with Section 7.3 of these Bylaws notice is waived, at the close
of business on the day next preceding the day on which the meeting is held.
2.6 Quorum of Stockholders; Adjournment. Unless otherwise provided in the
Restated Certificate of Incorporation, a majority of the outstanding shares
of capital stock of the Corporation entitled to vote, present in person or
represented by proxy, shall constitute a quorum at any meeting of the
stockholders, and the stockholders present at any duly convened meeting may
continue to do business until adjournment notwithstanding any withdrawal
from the meeting of holders of shares counted in determining the existence
of a quorum. Unless otherwise provided in the Restated Certificate of
Incorporation or these Bylaws, any meeting of the stockholders may be
adjourned from time to time by the chairman of the meeting or the holders
of a majority of the issued and outstanding stock, present in person or
represented by proxy, whether or not a quorum is present, without notice
other than by announcement at the meeting at which such adjournment is
taken, and at any such adjourned meeting at which a quorum shall be present
any action may be taken that could have been taken at the meeting
originally called; provided that if the adjournment is for more than 30
days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the adjourned meeting.
2.7 Voting by Stockholders.
(a) Voting on Matters Other than the Election of Directors. With
respect to any matters as to which no other voting requirement is
specified by the DGCL, the Restated Certificate of Incorporation or
these Bylaws, the affirmative vote required for stockholder action
shall be that of a majority of the shares present in person or
represented by proxy at the meeting (as counted for purposes of
determining the existence of a quorum at the meeting). In the case of
a matter submitted for a vote of the stockholders as to which a
stockholder approval requirement is applicable under the stockholder
approval policy of any stock exchange or quotation system on which the
capital stock of the Corporation is traded or quoted, the requirements
of Rule 16b-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), or any provision of the Internal Revenue Code,
in each case for which no higher voting requirement is specified by
the DGCL, the Restated
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Certificate of Incorporation or these Bylaws, the vote required for
approval shall be the requisite vote specified in such stockholder
approval policy, Rule 16b-3 or Internal Revenue Code provision, as the
case may be (or the highest such requirement if more than one is
applicable). For the approval of the appointment of independent public
accountants (if submitted for a vote of the stockholders), the vote
required for approval shall be a majority of the votes cast on the
matter.
(b) Voting in the Election of Directors. Unless otherwise provided in the
Restated Certificate of Incorporation or these Bylaws in accordance
with the DGCL, directors shall be elected by a plurality of the votes
cast by the holders of outstanding shares of capital stock of the
Corporation entitled to vote in the election of directors at a meeting
of stockholders at which a quorum is present.
2.8 Business to be Conducted.
(a) At an annual meeting of stockholders, only such business shall be
conducted, and only such proposals shall be acted upon, as shall have
been brought before the annual meeting (i) by or at the direction of
the Board of Directors or (ii) by any stockholder of the Corporation
who is a stockholder of record at the time of the giving of such
stockholder's notice provided for in this Section 2.8, who shall be
entitled to vote at such meeting and who complies with the
requirements of this Section 2.8 and as shall otherwise be proper
subjects for stockholder action and shall be properly introduced at
the meeting. For a proposal to be properly brought before an annual
meeting by a stockholder, in addition to any other applicable
requirements, the stockholder must have given timely advance notice
thereof in writing to the Secretary of the Corporation. To be timely,
a stockholder's notice must be delivered to, or mailed and received
at, the principal executive offices of the Corporation not later than
the close of business on the 90th day prior to the first anniversary
of the preceding year's annual meeting; provided, however, that in the
event that the date of the annual meeting is more than 30 days before
or more than 60 days after such anniversary date, notice by the
stockholder to be timely must be so delivered not later than the close
of business on the later of the 90th day prior to such annual meeting
or the 10th day following the day on which public announcement of the
date of such meeting is first made by the Corporation. Any such
stockholder's notice to the Secretary of the Corporation shall set
forth as to each matter the stockholder proposes to bring before the
annual meeting (i) a description of the proposal desired to be brought
before the annual meeting and the reasons for conducting such business
at the annual meeting, (ii) the name and address, as they appear on
the Corporation's books, of the stockholder proposing such business
and any other stockholders known by such stockholder to be supporting
such proposal, (iii) the class and number of shares of the
Corporation's stock which are
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beneficially owned by the stockholder on the date of such notice, (iv)
any financial interest of the stockholder in such proposal and (v) a
representation that the stockholder intends to appear in person or by
proxy at the meeting to bring the proposed business before the annual
meeting. The presiding officer of the annual meeting shall determine
whether the requirements of this paragraph (a) have been met with
respect to any stockholder proposal. If the presiding officer
determines that a stockholder proposal was not made in accordance with
the terms of this paragraph (a), he shall so declare at the meeting
and any such proposal shall not be acted upon at the meeting. At a
special meeting of stockholders, only such business shall be acted
upon as shall have been set forth in the notice relating to the
meeting required by Section 2.4 hereof or as shall constitute matters
incident to the conduct of the meeting as the presiding officer of the
meeting shall determine to be appropriate.
(b) Notwithstanding the foregoing provisions of this Section 2.8, a
stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to
the matters set forth in this Section 2.8.
2.9 Proxies. Each stockholder entitled to vote at a meeting of stockholders
may authorize another person or persons to act for him by proxy. Proxies
for use at any meeting of stockholders shall be filed with the Secretary,
or such other officer as the Board of Directors may from time to time
determine by resolution, before or at the time of the meeting. All proxies
shall be received and taken charge of and all ballots shall be received and
canvassed by the secretary of the meeting who shall decide all questions
relating to the qualification of voters, the validity of the proxies, and
the acceptance or rejection of votes, unless an inspector or inspectors
shall have been appointed by the chairman of the meeting, in which event
such inspector or inspectors shall decide all such questions.
2.10 Approval or Ratification of Acts or Contracts by Stockholders. The Board
of Directors in its discretion may submit any act or contract for approval
or ratification at any annual meeting of the stockholders, or at any
special meeting of the stockholders called for the purpose of considering
any such act or contract, and any act or contract that shall be approved or
be ratified by the vote of the stockholders holding a majority of the
issued and outstanding shares of stock of the Corporation entitled to vote
and present in person or by proxy at such meeting (provided that a quorum
is present), shall be as valid and as binding upon the Corporation and upon
all the stockholders as if it has been approved or ratified by every
stockholder of the Corporation.
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ARTICLE III
DIRECTORS
3.1 Number, Classification and Tenure.
(a) The powers of the Corporation shall be exercised by or under the
authority of, and the business and affairs of the Corporation shall be
managed under the direction of, the Board of Directors. The Board of
Directors shall be divided into three classes as provided in the
Restated Certificate of Incorporation. Each director shall hold office
for the full term for which such director is elected and until such
director's successor shall have been duly elected and qualified or
until his earlier death or resignation or removal in accordance with
the Restated Certificate of Incorporation or these Bylaws.
(b) Within the limits specified in the Restated Certificate of
Incorporation, the number of directors that shall constitute the whole
Board of Directors shall be fixed by, and may be increased or
decreased from time to time by, the affirmative vote of a majority of
the members at any time constituting the Board of Directors. Except as
provided in the Restated Certificate of Incorporation of the
Corporation, newly created directorships resulting from any increase
in the number of directors and any vacancies on the Board of Directors
resulting from death, resignation, disqualification, removal or other
cause shall be filled by the affirmative vote of a majority of the
remaining directors then in office, even though less than a quorum of
the Board of Directors. Any director elected in accordance with the
preceding sentence shall hold office for the remainder of the full
term of the class of directors in which the new directorship was
created or the vacancy occurred and until such director's successor
shall have been elected and qualified or until his earlier death,
resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any
incumbent director.
3.2 Qualifications. Directors need not be residents of the State of Delaware
or stockholders of the Corporation.
3.3 Nomination of Directors. Subject to such rights of the holders of one or
more outstanding series of Preferred Stock of the Corporation to elect one
or more directors in case of arrearages in the payment of dividends or
other defaults as shall be prescribed in the Restated Certificate of
Incorporation or in the resolutions of the Board of Directors providing for
the establishment of any such series, only persons who are nominated in
accordance with the procedures set forth in this Section 3.3 shall be
eligible for election as, and to serve as, directors. Nominations of
persons for election to the Board of Directors may be made at a meeting of
the stockholders at which Directors are to be
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elected (i) by or at the direction of the Board of Directors or (ii) by any
stockholder of the Corporation who is a stockholder of record at the time of the
giving of such stockholder's notice provided for in this Section 3.3, who shall
be entitled to vote at such meeting in the election of directors and who
complies with the requirements of this Section 3.3. Such nominations, other
than those made by or at the direction of the Board of Directors, shall be
preceded by timely advance notice in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice shall be delivered to, or
mailed and received at, the principal executive offices of the Corporation (i)
with respect to an election to be held at the annual meeting of the stockholders
of the Corporation, not later than the close of business on the 90th day prior
to the first anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is more than 30
days before or more than 60 days after such anniversary date, notice by the
stockholder to be timely must be so delivered not later than the close of
business on the later of the 90th day prior to such annual meeting or the 10th
day following the day on which public announcement of the date of such meeting
is first made by the Corporation; and (ii) with respect to an election to be
held at a special meeting of stockholders of the Corporation for the election of
directors not later than the close of business on the tenth day following the
day on which notice of the date of the special meeting was mailed to
stockholders of the Corporation as provided in Section 2.4 hereof or public
disclosure of the date of the special meeting was made, whichever first occurs.
Any such stockholder's notice to the Secretary of the Corporation shall set
forth (x) as to each person whom the stockholder proposes to nominate for
election or re-election as a director, (i) the name, age, business address and
residence address of such person, (ii) the principal occupation or employment of
such person, (iii) the number of shares of each class of capital stock of the
Corporation beneficially owned by such person, (iv) the written consent of such
person to having such person's name placed in nomination at the meeting and to
serve as a director if elected and (v) any other information relating to such
person that is required to be disclosed in solicitations of proxies for election
of directors, or is otherwise required, pursuant to Regulation 14A under the
Exchange Act, and (y) as to the stockholder giving the notice, (i) the name and
address, as they appear on the Corporation's books, of such stockholder and (ii)
the number of shares of each class of voting stock of the Corporation which are
then beneficially owned by such stockholder. The presiding officer of the
meeting of stockholders shall determine whether the requirements of this Section
3.3 have been met with respect to any nomination or intended nomination. If the
presiding officer determines that any nomination was not made in accordance with
the requirements of this Section 3.3, he shall so declare at the meeting and the
defective nomination shall be disregarded. Notwithstanding the foregoing
provisions of this Section 3.3, a stockholder shall also comply with all
applicable requirements of the Exchange Act and the rules and regulations
thereunder with respect to the matters set forth in this Section 3.3.
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3.4 Place of Meeting; Order of Business. Except as otherwise provided by law,
meetings of the Board of Directors, regular or special, may be held either
within or without the State of Delaware, at whatever place is specified by
the person or persons calling the meeting. In the absence of specific
designation, the meetings shall be held at the principal office of the
Corporation. At all meetings of the Board of Directors, business shall be
transacted in such order as shall from time to time be determined by the
Chairman of the Board (if any), or in his absence by the President, or by
resolution of the Board of Directors.
3.5 Regular Meetings. Regular meetings of the Board of Directors shall be held
at such place or places within or without the State of Delaware, at such
hour and on such day as may be fixed by resolution of the Board of
Directors, without further notice of such meetings. The time or place of
holding regular meetings of the Board of Directors may be changed by the
Chairman of the Board or the President by giving written notice thereof as
provided in Section 3.7 hereof.
3.6 Special Meetings. Special meetings of the Board of Directors shall be
held, whenever called by the Chairman of the Board, the President or by
resolution adopted by the Board of Directors, at such place or places
within or without the State of Delaware as may be stated in the notice of
the meeting.
3.7 Attendance at and Notice of Meetings. Written notice of the time and place
of, and general nature of the business to be transacted at, all special
meetings of the Board of Directors, and written notice of any change in the
time or place of holding the regular meetings of the Board of Directors,
shall be given to each director personally or by mail or by telegraph,
telecopier or similar communication at least one day before the day of the
meeting; provided, however, that notice of any meeting need not be given to
any director if waived by him in writing, or if he shall be present at such
meeting. Participation in a meeting of the Board of Directors shall
constitute presence in person at such meeting, except where a person
participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
3.8 Quorum of and Action by Directors. A majority of the directors in office
shall constitute a quorum of the Board of Directors for the transaction of
business; but a lesser number may adjourn from day to day until a quorum is
present. Except as otherwise provided by law or in these Bylaws, all
questions shall be decided by the vote of a majority of the directors
present.
3.9 Board and Committee Action Without a Meeting. Unless otherwise restricted
by the Restated Certificate of Incorporation or these Bylaws, any action
required or permitted to be taken at a meeting of the Board of Directors or
any committee thereof may be taken without a meeting if a consent in
writing, setting forth the action so taken, is signed by all
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the members of the Board of Directors or such committee, as the case may
be, and shall be filed with the Secretary of the Corporation.
3.10 Board and Committee Telephone Meetings. Subject to the provisions
required or permitted by the DGCL for notice of meetings, unless otherwise
restricted by the Restated Certificate of Incorporation or these Bylaws,
members of the Board of Directors, or members of any committee designated
by the Board of Directors, may participate in and hold a meeting of such
Board of Directors or committee by means of conference telephone or
similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a
meeting pursuant to this Section 3.10 shall constitute presence in person
at such meeting, except where a person participates in the meeting for the
express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called or convened.
3.11 Compensation. Directors shall receive such compensation for their
services as shall be determined by the Board of Directors.
3.12 Removal. No director of the Corporation shall be removed from office as a
director by vote or other action of the stockholders or otherwise except
for cause, and then only by the affirmative vote of the holders of at
least a majority of the voting power of all outstanding shares of capital
stock of the Corporation generally entitled to vote in the election of
directors, voting together as a single class. Cause for removal of a
director shall be as provided by law or in the Restated Certificate of
Incorporation. Any proposal by a stockholder to remove a director of the
Corporation, in order to be validly acted upon at any meeting, shall
comply with paragraph (a) of Section 2.8 hereof.
Notwithstanding the first paragraph of this Section 3.12, whenever
holders of outstanding shares of one or more series of Preferred Stock are
entitled to elect members of the Board of Directors pursuant to the
provisions applicable in the case of arrearages in the payment of
dividends or other defaults contained in the resolution or resolutions of
the Board of Directors providing for the establishment of any such series,
any such director of the Corporation so elected may be removed in
accordance with the provision of such resolution or resolutions.
3.13 Committees of the Board of Directors.
(a) The Board of Directors, by resolution adopted by a majority of the
full Board of Directors, may designate from among its members one or
more committees, each of which shall be comprised of one or more of
its members, and may designate one or more of its members as
alternate members of any committee, who may, subject to any
limitations by the Board of Directors, replace absent or disqualified
members at any meeting of that committee. Any such committee, to the
extent provided in such resolution or in the Restated Certificate of
Incorporation or these
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Bylaws, shall have and may exercise all of the authority of the
Board of Directors to the extent permitted by the DGCL, including,
without limitation, the power and authority to declare a dividend,
to authorize the issuance of stock or to adopt a certificate of
ownership and merger pursuant to Section 253 of the DGCL. Any such
committee may authorize the seal of the Corporation to be affixed to
all papers which may require it. In addition to the above, such
committee or committees shall have such other powers and limitations
of authority as may be determined from time to time by resolution
adopted by the Board of Directors.
(b) The Board of Directors shall have the power at any time to change
the membership of any such committee and to fill vacancies in it. A
majority of the number of members of any such committee shall
constitute a quorum for the transaction of business unless a greater
number is required by a resolution adopted by the Board of
Directors. The act of the majority of the members of a committee
present at any meeting at which a quorum is present shall be the act
of such committee, unless the act of a greater number is required by
a resolution adopted by the Board of Directors. Each such committee
may elect a chairman and appoint such subcommittees and assistants
as it may deem necessary. Except as otherwise provided by the Board
of Directors, meetings of any committee shall be conducted in
accordance with Sections 3.5, 3.6, 3.7, 3.8, 3.9, 3.10 and 7.3
hereof. In the absence or disqualification of a member of a
committee, the member or members present at any meeting and not
disqualified from voting, whether or not constituting a quorum, may
unanimously appoint another member of the Board of Directors to act
at the meeting in the place of the absent or disqualified member.
Any member of any such committee elected or appointed by the Board
of Directors may be removed by the Board of Directors whenever in
its judgment the best interests of the Corporation will be served
thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of
a member of a committee shall not of itself create contract rights.
(c) Any action taken by any committee of the Board of Directors shall
promptly be recorded in the minutes and filed with the Secretary of
the Corporation.
ARTICLE IV
OFFICERS
4.1 Designation. The officers of the Corporation shall consist of a Chairman
of the Board, President, Secretary, Treasurer and such Executive, Senior or
other Vice Presidents, Assistant Secretaries and other officers as may be
elected or appointed by the Board of Directors. Any number of offices may
be held by the same person.
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4.2 Powers and Duties. The officers of the Corporation shall have such powers
and duties as generally pertain to their offices, except as modified herein
or by the Board of Directors, as well as such powers and duties as from
time to time may be conferred by the Board of Directors. The Chairman of
the Board shall have such duties as may be assigned to him by the Board of
Directors and shall preside at meetings of the Board of Directors and at
meetings of the stockholders. The President shall be the chief executive
officer of the Corporation and shall have general supervision over the
business, affairs and property of the Corporation.
4.3 Vacancies. Whenever any vacancies shall occur in any office by death,
resignation, increase in the number of offices of the Corporation, or
otherwise, the same shall be filled by the Board of Directors, and the
officer so elected shall hold office until such officer's successor is
elected or appointed or until his earlier death, resignation or removal.
4.4 Removal. Any officer or agent elected or appointed by the Board of
Directors may be removed by the Board of Directors whenever in its judgment
the best interests of the Corporation will be served thereby, but such
removal shall be without prejudice to the contract rights, if any, of the
person so removed. Election or appointment of an officer or agent shall not
of itself create contract rights.
4.5 Action with Respect to Securities of Other Corporations. Unless otherwise
directed by the Board of Directors, the Chairman of the Board, the
President, any Vice President and the Treasurer of the Corporation shall
each have power to vote and otherwise act on behalf of the Corporation, in
person or by proxy, at any meeting of security holders of or with respect
to any action of security holders of any other corporation in which this
Corporation may hold securities and otherwise to exercise any and all
rights and powers which this Corporation may possess by reason of its
ownership of securities in such other corporation.
ARTICLE V
CAPITAL STOCK
5.1 Certificates for Shares. The certificates for shares of the capital stock
of the Corporation shall be in such form as may be approved by the Board of
Directors or may be uncertificated shares. In the case of certificated
shares, the Corporation shall deliver certificates representing shares to
which stockholders are entitled. Certificates representing such
certificated shares shall be signed by the Chairman of the Board, the
President or a Vice President and either the Secretary or an Assistant
Secretary of the Corporation, and may bear the seal of the Corporation or a
facsimile thereof. The signatures of such officers upon a certificate may
be facsimiles. The stock record books and the blank stock certificate books
shall be kept by the Secretary of the Corporation, or
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at the office of such transfer agent or transfer agents as the Board of
Directors may from time to time by resolution determine. In case any
officer who has signed or whose facsimile signature has been placed upon
such certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the Corporation with the same
effect as if such person were such officer at the date of its issuance.
5.2 Transfer of Shares. The shares of stock of the Corporation shall be
transferable only on the books of the Corporation by the holders thereof in
person or by their duly authorized attorneys or legal representatives upon
surrender and cancellation of certificates for a like number of shares.
5.3 Ownership of Shares. The Corporation shall be entitled to treat the holder
of record of any share or shares of capital stock of the Corporation as the
holder in fact thereof and, accordingly, shall not be bound to recognize
any equitable or other claim to or interest in such share or shares on the
part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Delaware.
5.4 Regulations Regarding Certificates. The Board of Directors shall have the
power and authority to make all such rules and regulations as they may deem
expedient concerning the issue, transfer and registration or the
replacement of certificates for shares of capital stock of the Corporation.
5.5 Lost or Destroyed Certificates. The Board of Directors may determine the
conditions upon which a new certificate of stock may be issued in place of
a certificate which is alleged to have been lost, stolen or destroyed; and
may, in its discretion, require the owner of such certificate or his legal
representative to give bond, with sufficient surety, to indemnify the
Corporation and each transfer agent and registrar against any and all
losses or claims that may arise by reason of the issue of a new certificate
in the place of the one so lost, stolen or destroyed.
ARTICLE VI
INDEMNIFICATION
6.1 General. The Corporation shall, to the fullest extent permitted by
applicable law in effect on the date of effectiveness of these Bylaws, and
to such greater extent as applicable law may thereafter permit, indemnify
and hold Indemnitee harmless from and against any and all losses,
liabilities, claims, damages and, subject to Section 6.2, Expenses (as this
and all other capitalized words used in this Article VI not previously
defined in these Bylaws are defined in Section 6.16 hereof), whatsoever
arising out of any event or occurrence related to the fact that Indemnitee
is or was a director or officer of the Corporation or is or was serving in
another Corporate Status.
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6.2 Expenses. If Indemnitee is, by reason of his Corporate Status, a party to
and is successful, on the merits or otherwise, in any Proceeding, he shall
be indemnified against all Expenses actually and reasonably incurred by him
or on his behalf in connection therewith. If Indemnitee is not wholly
successful in such Proceeding but is successful, on the merits or
otherwise, as to any Matter in such Proceeding, the Corporation shall
indemnify Indemnitee against all Expenses actually and reasonably incurred
by him or on his behalf relating to such Matter. The termination of any
Matter in such a Proceeding by dismissal, with or without prejudice, shall
be deemed to be a successful result as to such Matter. To the extent that
the Indemnitee is, by reason of his Corporate Status, a witness in any
Proceeding, he shall be indemnified against all Expenses actually and
reasonably incurred by him or on his behalf in connection therewith.
6.3 Advances. In the event of any threatened or pending action, suit or
proceeding in which Indemnitee is a party or is involved and that may give
rise to a right of indemnification under this Article VI, following written
request to the Corporation by Indemnitee, the Corporation shall promptly
pay to Indemnitee amounts to cover expenses reasonably incurred by
Indemnitee in such proceeding in advance of its final disposition upon the
receipt by the Corporation of (i) a written undertaking executed by or on
behalf of Indemnitee providing that Indemnitee will repay the advance if it
shall ultimately be determined that Indemnitee is not entitled to be
indemnified by the Corporation as provided in this Agreement and (ii)
satisfactory evidence as to the amount of such expenses.
6.4 Repayment of Advances or Other Expenses. Indemnitee agrees that Indemnitee
shall reimburse the Corporation for all expenses paid by the Corporation in
defending any civil, criminal, administrative or investigative action, suit
or proceeding against Indemnitee in the event and only to the extent that
it shall be determined pursuant to the provisions of this Article VI or by
final judgment or other final adjudication under the provisions of any
applicable law that Indemnitee is not entitled to be indemnified by the
Company for such expenses.
6.5 Request for Indemnification. To obtain indemnification, Indemnitee shall
submit to the Secretary of the Corporation a written claim or request. Such
written claim or request shall contain sufficient information to reasonably
inform the Corporation about the nature and extent of the indemnification
or advance sought by Indemnitee. The Secretary of the Corporation shall
promptly advise the Board of Directors of such request.
6.6 Determination of Entitlement; No Change of Control. If there has been no
Change of Control at the time the request for indemnification is submitted,
Indemnitee's entitlement to indemnification shall be determined in
accordance with Section 145(d) of the DGCL. If entitlement to
indemnification is to be determined by Independent Counsel, the Corporation
shall furnish notice to Indemnitee within 10 days after receipt of the
request for indemnification, specifying the identity and address of
Independent Counsel. The
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Indemnitee may, within 14 days after receipt of such written notice of
selection, deliver to the Corporation a written objection to such
selection. Such objection may be asserted only on the ground that the
Independent Counsel so selected does not meet the requirements of
Independent Counsel and the objection shall set forth with particularity
the factual basis for such assertion. If there is an objection to the
selection of Independent Counsel, either the Corporation or Indemnitee may
petition the Court for a determination that the objection is without a
reasonable basis and/or for the appointment of Independent Counsel selected
by the Court.
6.7 Determination of Entitlement; Change of Control. If there has been a
Change of Control at the time the request for indemnification is submitted,
Indemnitee's entitlement to indemnification shall be determined in a
written opinion by Independent Counsel selected by Indemnitee. Indemnitee
shall give the Corporation written notice advising of the identity and
address of the Independent Counsel so selected. The Corporation may, within
seven days after receipt of such written notice of selection, deliver to
the Indemnitee a written objection to such selection. Indemnitee may,
within five days after the receipt of such objection from the Corporation,
submit the name of another Independent Counsel and the Corporation may,
within seven days after receipt of such written notice of selection,
deliver to the Indemnitee a written objection to such selection. Any
objections referred to in this Section 6.7 may be asserted only on the
ground that the Independent Counsel so selected does not meet the
requirements of Independent Counsel and such objection shall set forth with
particularity the factual basis for such assertion. Indemnitee may petition
the Court for a determination that the Corporation's objection to the first
and/or second selection of Independent Counsel is without a reasonable
basis and/or for the appointment as Independent Counsel of a person
selected by the Court.
6.8 Procedures of Independent Counsel. If a Change of Control shall have
occurred before the request for indemnification is sent by Indemnitee,
Indemnitee shall be presumed (except as otherwise expressly provided in
this Article VI) to be entitled to indemnification upon submission of a
request for indemnification in accordance with Section 6.5 hereof, and
thereafter the Corporation shall have the burden of proof to overcome the
presumption in reaching a determination contrary to the presumption. The
presumption shall be used by Independent Counsel as a basis for a
determination of entitlement to indemnification unless the Corporation
provides information sufficient to overcome such presumption by clear and
convincing evidence or the investigation, review and analysis of
Independent Counsel convinces him by clear and convincing evidence that the
presumption should not apply.
Except in the event that the determination of entitlement to
indemnification is to be made by Independent Counsel, if the person or
persons empowered under Section 6.6 or 6.7 hereof to determine entitlement
to indemnification shall not have made and furnished to Indemnitee in
writing a determination within 60 days after receipt by the Corporation of
the request therefor, the requisite determination of entitlement to
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indemnification shall be deemed to have been made and Indemnitee shall be
entitled to such indemnification unless Indemnitee knowingly misrepresented
a material fact in connection with the request for indemnification or such
indemnification is prohibited by applicable law. The termination of any
Proceeding or of any Matter therein, by judgment, order, settlement or
conviction, or upon a plea of nolo contendere or its equivalent, shall not
(except as otherwise expressly provided in this Article VI) of itself
adversely affect the right of Indemnitee to indemnification or create a
presumption that Indemnitee did not act in good faith and in a manner that
he reasonably believed to be in or not opposed to the best interests of the
Corporation, or with respect to any criminal Proceeding, that Indemnitee
had reasonable cause to believe that his conduct was unlawful. A person who
acted in good faith and in a manner he reasonably believed to be in the
interest of the participants and beneficiaries of an employee benefit plan
of the Corporation shall be deemed to have acted in a manner not opposed to
the best interests of the Corporation.
For purposes of any determination hereunder, a person shall be deemed
to have acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Corporation, or, with respect
to any criminal action or Proceeding, to have had no reasonable cause to
believe his conduct was unlawful, if his action is based on the records or
books of account of the Corporation or another enterprise or on information
supplied to him by the officers of the Corporation or another enterprise in
the course of their duties or on the advice of legal counsel for the
Corporation or another enterprise or on information or records given or
reports made to the Corporation or another enterprise by an independent
certified public accountant or by an appraiser or other expert selected
with reasonable care by the Corporation or another enterprise. The term
"another enterprise" as used in this Section shall mean any other
corporation or any partnership, limited liability company, association,
joint venture, trust, employee benefit plan or other enterprise of which
such person is or was serving at the request of the Corporation as a
director, officer, employee or agent. The provisions of this paragraph
shall not be deemed to be exclusive or to limit in any way the
circumstances in which an Indemnitee may be deemed to have met the
applicable standards of conduct for determining entitlement to rights under
this Article.
6.9 Independent Counsel Expenses. The Corporation shall pay any and all
reasonable fees and expenses of Independent Counsel incurred acting
pursuant to this Article VI and in any proceeding to which it is a party or
witness in respect of its investigation and written report and shall pay
all reasonable fees and expenses incident to the procedures in which such
Independent Counsel was selected or appointed. No Independent Counsel may
serve if a timely objection has been made to his selection until a court
has determined that such objection is without a reasonable basis.
6.10 Adjudication. In the event that (i) a determination is made pursuant to
Section 6.6 or 6.7 hereof that Indemnitee is not entitled to
indemnification under this Article VI; (ii) advancement of Expenses is not
timely made pursuant to Section 6.3 hereof; (iii)
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Independent Counsel has not made and delivered a written opinion
determining the request for indemnification (a) within 90 days after being
appointed by the Court, (b) within 90 days after objections to his
selection have been overruled by the Court or (c) within 90 days after the
time for the Corporation or Indemnitee to object to his selection; or (iv)
payment of indemnification is not made within five days after a
determination of entitlement to indemnification has been made or deemed to
have been made pursuant to Section 6.6, 6.7 or 6.8 hereof, Indemnitee shall
be entitled to an adjudication in an appropriate court of the State of
Delaware, or in any other court of competent jurisdiction, of his
entitlement to such indemnification or advancement of Expenses. In the
event that a determination shall have been made that Indemnitee is not
entitled to indemnification, any judicial proceeding or arbitration
commenced pursuant to this Section 6.10 shall be conducted in all respects
as a de novo trial on the merits and Indemnitee shall not be prejudiced by
reason of that adverse determination. If a Change of Control shall have
occurred, in any judicial proceeding commenced pursuant to this Section
6.10, the Corporation shall have the burden of proving that Indemnitee is
not entitled to indemnification or advancement of Expenses, as the case may
be. If a determination shall have been made or deemed to have been made
that Indemnitee is entitled to indemnification, the Corporation shall be
bound by such determination in any judicial proceeding commenced pursuant
to this Section 6.10, or otherwise, unless Indemnitee knowingly
misrepresented a material fact in connection with the request for
indemnification, or such indemnification is prohibited by law.
The Corporation shall be precluded from asserting in any judicial
proceeding commenced pursuant to this Section 6.10 that the procedures and
presumptions of this Article VI are not valid, binding and enforceable and
shall stipulate in any such proceeding that the Corporation is bound by all
provisions of this Article VI. In the event that Indemnitee, pursuant to
this Section 6.10, seeks a judicial adjudication to enforce his rights
under, or to recover damages for breach of, this Article VI, Indemnitee
shall be entitled to recover from the Corporation, and shall be indemnified
by the Corporation against, any and all Expenses actually and reasonably
incurred by him in such judicial adjudication, but only if he prevails
therein. If it shall be determined in such judicial adjudication that
Indemnitee is entitled to receive part but not all of the indemnification
or advancement of Expenses sought, the Expenses incurred by Indemnitee in
connection with such judicial adjudication or arbitration shall be
appropriately prorated.
6.11 Participation by the Corporation. With respect to any such claim, action,
suit, proceeding or investigation as to which Indemnitee notifies the
Corporation of the commencement thereof: (a) the Corporation will be
entitled to participate therein at its own expense; (b) except as otherwise
provided below, to the extent that it may wish, the Corporation (jointly
with any other indemnifying party similarly notified) will be entitled to
assume the defense thereof, with counsel reasonably satisfactory to
Indemnitee. After receipt of notice from the Corporation to Indemnitee of
the Corporation's election so to assume the defense thereof, the
Corporation will not be liable to Indemnitee under this Article VI for
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any legal or other expenses subsequently incurred by Indemnitee in
connection with the defense thereof other than reasonable costs of
investigation or as otherwise provided below. Indemnitee shall have the
right to employ his own counsel in such action, suit, proceeding or
investigation but the fees and expenses of such counsel incurred after
notice from the Corporation of its assumption of the defense thereof shall
be at the expense of Indemnitee unless (i) the employment of counsel by
Indemnitee has been authorized by the Corporation, (ii) Indemnitee shall
have reasonably concluded that there is a conflict of interest between the
Corporation and Indemnitee in the conduct of the defense of such action or
(iii) the Corporation shall not in fact have employed counsel to assume the
defense of such action, in each of which cases the fees and expenses of
counsel employed by Indemnitee shall be subject to indemnification pursuant
to the terms of this Article VI. The Corporation shall not be entitled to
assume the defense of any action, suit, proceeding or investigation brought
in the name of or on behalf of the Corporation or as to which Indemnitee
shall have made the conclusion provided for in (ii) above; and (c) the
Corporation shall not be liable to indemnify Indemnitee under this Article
VI for any amounts paid in settlement of any action or claim effected
without its written consent, which consent shall not be unreasonably
withheld. The Corporation shall not settle any action or claim in any
manner which would impose any limitation or unindemnified penalty on
Indemnitee without Indemnitee's written consent, which consent shall not be
unreasonably withheld.
6.12 Nonexclusivity of Rights. The rights of indemnification and advancement
of Expenses as provided by this Article VI shall not be deemed exclusive of
any other rights to which Indemnitee may at any time be entitled to under
applicable law, the Restated Certificate of Incorporation, the Bylaws, any
agreement, a vote of stockholders or a resolution of directors, or
otherwise. No amendment, alteration or repeal of this Article VI or any
provision hereof shall be effective as to any Indemnitee for acts, events
and circumstances that occurred, in whole or in part, before such
amendment, alteration or repeal. The provisions of this Article VI shall
continue as to an Indemnitee whose Corporate Status has ceased for any
reason and shall inure to the benefit of his heirs, executors and
administrators. Neither the provisions of this Article VI or those of any
agreement to which the Corporation is a party shall be deemed to preclude
the indemnification of any person who is not specified in this Article VI
as having the right to receive indemnification or is not a party to any
such agreement, but whom the Corporation has the power or obligation to
indemnify under the provisions of the DGCL.
6.13 Insurance and Subrogation. The Corporation shall not be liable under this
Article VI to make any payment of amounts otherwise indemnifiable hereunder
if, but only to the extent that, Indemnitee has otherwise actually received
such payment under any insurance policy, contract, agreement or otherwise.
In the event of any payment hereunder, the Corporation shall be
subrogated to the extent of such payment to all the rights of recovery of
Indemnitee, who shall execute all
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papers required and take all action reasonably requested by the Corporation
to secure such rights, including execution of such documents as are
necessary to enable the Corporation to bring suit to enforce such rights.
6.14 Severability. If any provision or provisions of this Article VI shall be
held to be invalid, illegal or unenforceable for any reason whatsoever, the
validity, legality and enforceability of the remaining provisions shall not
in any way be affected or impaired thereby; and, to the fullest extent
possible, the provisions of this Article VI shall be construed so as to
give effect to the intent manifested by the provision held invalid, illegal
or unenforceable.
6.15 Certain Actions Where Indemnification Is Not Provided. Notwithstanding
any other provision of this Article VI, no person shall be entitled to
indemnification or advancement of Expenses under this Article VI with
respect to any Proceeding, or any Matter therein, brought or made by such
person against the Corporation.
6.16 Definitions. For purposes of this Article VI:
"Change of Control" means a change in control of the Corporation after the
date Indemnitee acquired his Corporate Status, which shall be deemed to
have occurred in any one of the following circumstances occurring after
such date: (i) there shall have occurred an event required to be reported
with respect to the Corporation in response to Item 6(e) of Schedule 14A of
Regulation 14A (or in response to any similar item on any similar schedule
or form) promulgated under the Exchange Act, whether or not the Corporation
is then subject to such reporting requirement; (ii) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Exchange Act) shall have
become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Corporation representing
40% or more of the combined voting power of the Corporation's then
outstanding voting securities without prior approval of at least two-thirds
of the members of the Board of Directors in office immediately prior to
such person attaining such percentage interest; (iii) the Corporation is a
party to a merger, consolidation, sale of assets or other reorganization,
or a proxy contest, as a consequence of which members of the Board of
Directors in office immediately prior to such transaction or event
constitute less than a majority of the Board of Directors thereafter; or
(iv) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (including, for
this purpose, any new director whose election or nomination for election by
the Corporation's stockholders was approved by a vote of at least two-
thirds of the directors then still in office who were directors at the
beginning of such period) cease for any reason to constitute at least a
majority of the Board of Directors.
"Corporate Status" describes the status of Indemnitee as a director,
officer, employee, agent or fiduciary of the Corporation or of any other
corporation, partnership, limited
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liability company, association, joint venture, trust, employee benefit plan
or other enterprise which Indemnitee is or was serving at the request of
the Corporation.
"Court" means the Court of Chancery of the State of Delaware or any other
court of competent jurisdiction.
"Expenses" shall include all reasonable attorneys' fees, retainers, court
costs, transcript costs, fees of experts, witness fees, travel expenses,
duplicating costs, printing and binding costs, telephone charges, postage,
delivery service fees, and all other disbursements or expenses of the types
customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, or being or preparing to be a
witness in a Proceeding.
"Indemnitee" includes any person who is, or is threatened to be made, a
witness in or a party to any Proceeding as described in Section 6.1 or 6.2
hereof by reason of his Corporate Status.
"Independent Counsel" means a law firm, or a member of a law firm, that is
experienced in matters of corporation law and neither presently is, nor in
the five years previous to his selection or appointment has been, retained
to represent: (i) the Corporation or Indemnitee in any matter material to
either such party or (ii) any other party to the Proceeding giving rise to
a claim for indemnification hereunder.
"Matter" is a claim, a material issue or a substantial request for relief.
"Proceeding" includes any action, suit, arbitration, alternate dispute
resolution mechanism, investigation, administrative hearing or any other
proceeding, whether civil, criminal, administrative or investigative,
except one initiated by an Indemnitee pursuant to Section 6.10 hereof to
enforce his rights under this Article VI.
6.17 Notices. Promptly after receipt by Indemnitee of notice of the
commencement of any action, suit or proceeding, Indemnitee shall, if he
anticipates or contemplates making a claim for expenses or an advance
pursuant to the terms of this Article VI, notify the Corporation of the
commencement of such action, suit or proceeding; provided, however, that
any delay in so notifying the Corporation shall not constitute a waiver or
release by Indemnitee of rights hereunder and that any omission by
Indemnitee to so notify the Corporation shall not relieve the Corporation
from any liability that it may have to Indemnitee otherwise than under this
Article VI. Any communication required or permitted to the Corporation
shall be addressed to the Secretary of the Corporation and any such
communication to Indemnitee shall be addressed to Indemnitee's address as
shown on the Corporation's records unless he specifies otherwise and shall
be personally delivered or delivered by overnight mail delivery. Any such
notice shall be effective upon receipt.
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6.18 Contractual Rights. The right to be indemnified or to the advancement or
reimbursement of Expenses (i) is a contract right based upon good and
valuable consideration, pursuant to which Indemnitee may sue as if these
provisions were set forth in a separate written contract between
Indemnitee and the Corporation, (ii) is and is intended to be retroactive
and shall be available as to events occurring prior to the adoption of
these provisions and (iii) shall continue after any rescission or
restrictive modification of such provisions as to events occurring prior
thereto.
ARTICLE VII
MISCELLANEOUS PROVISIONS
7.1 Bylaw Amendments. The Board of Directors shall have the power to adopt,
amend and repeal from time to time the Bylaws of the Corporation, subject
to the right of stockholders entitled to vote with respect thereto to amend
or repeal such Bylaws as adopted or amended by the Board of Directors.
Bylaws of the Corporation may be adopted, amended or repealed by the
affirmative vote of the holders of at least two-thirds of the combined
voting power of the outstanding shares of all classes of stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class, at any annual meeting, or at any special
meeting if notice of the proposed amendment be contained in the notice of
said special meeting, or by the Board of Directors as specified in the
preceding sentence.
7.2 Books and Records. The Corporation shall keep books and records of account
and shall keep minutes of the proceedings of its stockholders, its Board of
Directors and each committee of its Board of Directors.
7.3 Waiver of Notice. Whenever any notice is required to be given to any
stockholder, director or committee member under the provisions of the DGCL
or under the Restated Certificate of Incorporation, as amended, or these
Bylaws, said notice shall be deemed to be sufficient if given (i) by
telegraphic, facsimile, cable or wireless transmission or (ii) by deposit
of the same in a post office box in a sealed prepaid wrapper addressed to
the person entitled thereto at his post office address, as it appears on
the records of the Corporation, and such notice shall be deemed to have
been given on the day of such transmission or mailing, as the case may be.
Whenever any notice is required to be given to any stockholder,
director or committee member under the provisions of the DGCL or under the
Restated Certificate of Incorporation, as amended, or these Bylaws, a
waiver thereof in writing signed by the person or persons entitled to such
notice, whether before or after the time stated therein, shall be
equivalent to the giving of such notice. Attendance of a person at a
meeting shall constitute a waiver of notice of such meeting, except when
the person attends a meeting
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for the express purpose of objecting, at the beginning of the meeting, to
the transaction of any business because the meeting is not lawfully called
or convened. Neither the business to be transacted at, nor the purpose of,
any regular or special meeting of the stockholders, directors, or members
of a committee of directors need be specified in any written waiver of
notice unless so required by the Restated Certificate of Incorporation or
these Bylaws.
7.4 Resignations. Any director or officer may resign at any time. Such
resignations shall be made in writing and shall take effect at the time
specified therein, or, if no time be specified, at the time of its receipt
by the President or the Secretary of the Corporation. The acceptance of a
resignation shall not be necessary to make it effective, unless expressly
so provided in the resignation.
7.5 Seal. The seal of the Corporation shall be in such form as the Board of
Directors may adopt.
7.6 Fiscal Year. The fiscal year of the Corporation shall end on the 31st day
of December of each year or as otherwise provided by a resolution adopted
by the Board of Directors.
7.7 Facsimile Signatures. In addition to the provisions for the use of
facsimile signatures elsewhere specifically authorized in these Bylaws,
facsimile signatures of any officer or officers of the Corporation may be
used whenever and as authorized by the Board of Directors.
7.8 Reliance upon Books, Reports and Records. Each director and each member of
any committee designated by the Board of Directors shall, in the
performance of his duties, be fully protected in relying in good faith upon
the books of account or reports made to the Corporation by any of its
officers, or by an independent certified public accountant, or by an
appraiser selected with reasonable care by the Board of Directors or by any
such committee, or in relying in good faith upon other records of the
Corporation.
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EXHIBIT 4.2
RESTATED REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") entered into and made
effective as of May 15, 1996, by and among Drilex Corporation, a Delaware
corporation (the "Company"), and the stockholders of the Company whose
signatures appear on the signature pages of this Agreement under the caption
"Stockholders" (referred to herein individually as a "Stockholder" and
collectively as the "Stockholders"),
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, each of the Stockholders is a party to that certain Registration
Rights Agreement with the Company dated as of March 1, 1994, relating to
securities issued by the Company (the "Existing Registration Rights Agreement");
and
WHEREAS, in connection with the proposed initial public offering of shares
of common stock of the Company (the "IPO"), (i) the Stockholders are willing to
waive their rights under the Existing Registration Rights Agreement to
participate in the IPO in consideration of the restatement of the Existing
Registration Rights Agreement as set forth herein and (ii) the Stockholders and
the Company desire to amend and restate the Existing Registration Rights
Agreement as herein provided;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. DEFINITIONS. As used in this Agreement, the following terms shall
-----------
have the meanings indicated:
"Advice" shall have the meaning given it in Section 5 hereof.
------
"Affiliate" of a Stockholder shall mean (a) any member of the immediate
---------
family of an individual Stockholder, including parents, siblings, spouse and
children (including those by adoption); the parents, siblings, spouse or
children (including those by adoption) of such immediate family member; and in
any such case any trust whose principal beneficiary is such individual
Stockholder or one or more members of such immediate family and/or such
Stockholder's lineal descendants; (b) the legal representative or guardian of
such individual Stockholder or of any such immediate family members in the event
such individual Stockholder or any such immediate family members become mentally
incompetent; and (c) any Person controlling, controlled by or under common
control with a Stockholder. As used in this definition, the term "control,"
including the correlative terms "controlling," "controlled by" and "under common
control with," shall mean
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possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies (whether through ownership of securities
or any partnership or other ownership interest, by contract or otherwise) of a
Person.
"Agreement" shall have the meaning set forth above.
---------
"Business Day" shall mean any day other than a Saturday, Sunday or legal
------------
holiday for banks in the State of Texas.
"Commission" shall mean the Securities and Exchange Commission.
----------
"Common Stock" shall mean the Company's Common Stock, par value $.01 per
------------
share, or any successor class of the Company's Common Stock.
"Company" shall have the meaning set forth above.
-------
"Demand Registration" shall have the meaning given it in Section 3 hereof.
-------------------
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
------------
"Existing Registration Rights Agreement" shall have the meaning set forth
--------------------------------------
above.
"Holder" shall mean any Person holding Registrable Securities.
------
"Inspectors" shall have the meaning given it in Section 5(k) hereof.
----------
"Management Shareholders" means John Forrest, Denny Kerr and Bruce
-----------------------
Broussard.
"Person" shall mean any individual, corporation, limited liability company,
------
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or a political subdivision, agency or
instrumentality thereof or other entity or organization of any kind.
"Piggy-back Registration" shall have the meaning given it in Section 2(a)
-----------------------
hereof.
"Records" shall have the meaning given it in Section 5(k) hereof.
-------
"Registrable Securities" shall mean (i) the outstanding shares of Common
----------------------
Stock held by the Stockholders as of the date hereof and (ii) any securities
issued in exchange for, as a dividend on, or in replacement of, or otherwise
issued or distributed in respect of (including securities issued in a stock
dividend, split or recombination or pursuant to the exercise of preemptive
rights, if any), any shares of Common Stock referred to in clause (i) above;
provided, however, that any securities described in clause (i) or (ii) above
shall cease to be Registrable Securities when and to the extent that such
securities have been (A) distributed to the public pursuant to a registration
statement
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covering such securities that has been declared effective under the Securities
Act, (B) distributed in accordance with the provisions of Rule 144 (or any
similar provision then in force) under the Securities Act, (C) transferred to
any Person in a manner such that such securities are deemed to cease being
Registrable Securities pursuant to the provisions of Section 11(j) of this
Agreement, or (D) repurchased by the Company.
"Registration Expenses" shall have the meaning given it in Section 6
---------------------
hereof.
"Requesting Holders" shall have the meaning given it in Section 3 hereof.
------------------
"Required Percentage" shall mean (a) if no one Holder, together with the
-------------------
Affiliates of such Holder, owns 50% or more of the Registrable Securities
outstanding as of the date of the determination, "Required Percentage" shall
mean a majority of the Registrable Securities outstanding as of the date of such
determination; or (b) if any one Holder, together with the Affiliates of such
Holder, owns more than 50% of the Registrable Securities outstanding as of the
date of such determination, then "Required Percentage" shall mean a majority of
the Registrable Securities outstanding owned by such Holder and its Affiliates,
together with a majority of the Registrable Securities outstanding owned by the
other Holders as of the date of such determination.
"Securities Act" shall mean the Securities Act of 1933, as amended.
--------------
"Stockholder" and "Stockholders" shall have the meaning set forth above.
----------- ------------
2. PIGGY-BACK REGISTRATION RIGHTS.
------------------------------
(a) At any time before December 31, 2001, if the Company proposes to file a
registration statement under the Securities Act with the Commission with respect
to an offering by the Company for its own account or for the account of any
other Person of any class of equity security, including any security convertible
into or exchangeable for any equity security (other than a registration
statement on Form S-4 or S-8 (or their successor forms) or filed in connection
with an exchange offer or an offering of securities solely to the Company's
existing stockholders, and other than as set forth in Section 2(b) below), then
the Company shall in each case give written notice of such proposed filing to
the Holders at least 20 days before the anticipated filing date, and such notice
shall offer the Holders the opportunity to register such number of Registrable
Securities as each such Holder may request (a "Piggy-back Registration"). The
Company shall use reasonable efforts to cause the managing underwriter or
underwriters of a proposed underwritten offering to permit the Holders requested
to be included in the registration for such offering to include such securities
in such offering on the same terms and conditions as any similar securities of
the Company included therein. Notwithstanding the foregoing, if any managing
underwriter of such offering advises the Company that the total amount of
securities which they and any other Persons (other than the Company) intend to
include in such offering is sufficiently large to materially and adversely
affect the success of such offering, then the amount of Registrable Securities
to be offered for the accounts of Holders shall be reduced in inverse order of
the priority of registration rights held by holders of
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securities requesting inclusion therein to the extent necessary, in the opinion
of such managing underwriter, to reduce the total amount of securities to be
included in such offering to the amount recommended by such managing
underwriter; provided, however, that the reduction imposed upon Holders shall
not be greater, on a percentage basis with respect to the Registrable Securities
requested to be included, than the reduction imposed upon other Persons whose
piggy-back registration rights are pari passu with those granted hereby with
respect to the amount of securities requested for inclusion in such
registration.
(b) Notwithstanding anything to the contrary contained in this Agreement,
the Company shall not be required to include Registrable Securities in any
registration statement if the proposed registration is (i) a registration of a
stock option or other employee incentive compensation or employee benefit plan
or of securities issued or issuable pursuant to any such plan, or a registration
statement relating to warrants, options or shares of capital stock granted or to
be granted or sold primarily to employees, directors or officers of the Company,
(ii) a registration of securities issued or issuable pursuant to a stockholder
reinvestment plan or other similar plan, (iii) a registration of securities
issued in exchange for any securities or any assets of, or in connection with a
merger or consolidation with, an unaffiliated company, (iv) a registration of
securities pursuant to a "rights" or other similar plan designed to protect the
Company's stockholders from a coercive or other attempt to cause a change in
control of the Company, (v) a registration of securities filed pursuant to Rule
145 under the Securities Act or any successor rule, or (vi) a registration of
preferred stock or securities issued in connection with any debt or preferred
stock financing of the Company.
(c) The Company may withdraw any registration statement and abandon any
proposed offering initiated by the Company without the consent of any Holder,
notwithstanding the request of any such Holder to participate therein in
accordance with this provision, if the Company determines to do so in its sole
discretion.
3. DEMAND REGISTRATION RIGHTS.
--------------------------
(a) At any time after December 31, 1996 and before December 31, 2001, the
holders of at least 51% of the shares (or, if not shares, other units of
interest) of Registrable Securities then outstanding may request (the Holders
making such request being referred to herein as the "Requesting Holders") in
writing that the Company file a registration statement under the Securities Act
covering the registration of all or a part of the shares of Registrable
Securities then held by such Holders (a "Demand Registration"); provided,
however, that, for such request to be effective, it must request the
registration of at least 10% of the total number of Registrable Securities then
outstanding. Within ten days of the receipt of such request, the Company shall
give written notice of such request to all other Holders and shall use its best
efforts to effect as soon as practicable the registration under the Securities
Act in accordance with Section 5 hereof (including, without limitation, the
execution of an undertaking to file post-effective amendments) of all shares of
Registrable Securities which the Holders request be registered within 60 days
after the mailing of such notice; provided, however, that the Company shall be
obligated to effect only three Demand Registrations pursuant to this Section 3.
In connection with a Demand Registration, the holders of a majority of shares of
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<PAGE>
Registrable Securities included in such Demand Registration, in their sole
discretion, shall determine whether (a) to proceed with, withdraw from or
terminate such offering, (b) to select, subject to the approval of the Company,
a managing underwriter or underwriters in connection with such offering, (c) to
enter into an underwriting agreement for such offering, and (d) to take such
actions as may be necessary to close the sale of Registrable Securities
contemplated by such offering, including, without limitation, waiving any
conditions to closing such sale that may not have been fulfilled. In the event
such Holders exercise their discretion under this Section 3(a) to terminate a
proposed Demand Registration, the terminated Demand Registration shall not
constitute a Demand Registration under this Section 3, if the determination to
terminate such Demand Registration (i) follows the exercise by the Company of
any of its rights provided by Section 3(b) or (c) or (ii) results from a
material adverse change in the condition (financial or other), results of
operations or business of the Company.
(b) Notwithstanding the provisions of Section 3(a), if the Company shall
furnish to the Requesting Holders a certificate signed by the President of the
Company stating that in the good faith judgment of the Board of Directors of the
Company, it would be detrimental to the Company and its stockholders for such
registration statement to be filed or to become effective and it is therefore
beneficial to defer the filing or effectiveness of such registration statement,
the Company shall have the right to defer such filing or effectiveness for a
period of not more than 120 days after receipt of the request of the Requesting
Holders. The Company shall promptly give notice to the Holders at the end of
any delay period under this Section 3(b).
(c) Notwithstanding the foregoing provisions of this Section 3, if at the
time of any request by the Requesting Holders for a Demand Registration, the
Company has fixed plans to file within 120 days after such request for the sale
of any of its securities in a public offering under the Securities Act, no
Demand Registration shall be initiated under this Section 3 until 120 days after
the effective date of such registration unless the Company is no longer
proceeding diligently to effect such registration; provided, however, that the
Company shall provide the holders of Registrable Securities the right to
participate in such public offering pursuant to, and subject to, the provisions
of Section 2 hereof.
4. HOLDBACK AGREEMENTS; REQUIREMENTS OF HOLDERS.
--------------------------------------------
(a) Restrictions on Public Sale by Holders of Registrable Securities. To
----------------------------------------------------------------
the extent not inconsistent with applicable law, each Holder agrees not to
effect any public sale or other distribution of equity securities of the Company
(or any securities convertible into or exchangeable or exercisable for equity
securities of the Company) during the 90-day period beginning on the effective
date of a registration statement filed by the Company with the Commission
(except for securities that may be included in such registration pursuant to the
provisions hereof or otherwise), but only if and to the extent requested in
writing by the Company or the managing underwriter or underwriters in the case
of an underwritten public offering.
5
<PAGE>
(b) Cooperation by Holders. The offering of Registrable Securities by any
----------------------
Holder shall comply in all respects with the applicable terms, provisions and
requirements set forth in this Agreement, and such Holder shall timely provide
the Company with all information and materials required to be included in a
registration statement that relate to such Holder, and to take all such action
as may be reasonably required in order not to delay the registration and
offering of the securities by the Company. The Company shall have no obligation
to include in such registration statement shares of a Holder who has failed to
furnish such information which, in the written opinion of counsel to the
Company, is required in order for the registration statement to be in compliance
with the Securities Act.
5. REGISTRATION PROCEDURES. Whenever any Registrable Securities are to
-----------------------
be registered pursuant to Section 2 or 3 of this Agreement, the Company will use
reasonable efforts to effect the registration of such Registrable Securities as
contemplated by such Section. In connection with any Piggy-back Registration or
Demand Registration, the Company will, subject to Section 2 or 3 hereof (as
applicable), as expeditiously as possible:
(a) prepare and file with the Commission a registration statement which
includes the Registrable Securities and use reasonable diligence to cause such
registration statement to become effective;
(b) prepare and file with the Commission such amendments and post-effective
amendments to the registration statement, and such supplements to the related
prospectus, as may be necessary to keep the registration statement effective for
a period of at least 270 days (or such shorter period during which holders shall
have sold all Registrable Securities that they requested to be registered) and
to appropriately reflect the plan of distribution of the securities registered
thereunder and/or as shall be necessary so that neither such registration
statement nor the related prospectus shall contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and so that such
registration statement and the related prospectus will otherwise comply with
applicable legal requirements; and comply with the provisions of the Securities
Act applicable to it with respect to the disposition of all securities covered
by such registration statement during the applicable period;
(c) furnish to any Holder of Registrable Securities included in such
registration statement and the underwriter or underwriters thereof, if any,
without charge, such number of conformed copies of the registration statement
and any post-effective amendment thereto and such number of copies of the
prospectus (including each preliminary prospectus) and any amendments or
supplements thereto, and any documents incorporated by reference therein, as
such Holder or underwriter may reasonably request in order to facilitate the
disposition of the Registrable Securities being sold by such Holder (it being
understood that the Company consents to the use of the prospectus and any
amendment or supplement thereto by each Holder of Registrable Securities covered
by the registration statement and the underwriter or underwriters thereof, if
any, in connection with the offering and sale of the Registrable Securities
covered by the prospectus or any amendment or supplement thereto);
6
<PAGE>
(d) notify each Holder of Registrable Securities included in such
registration statement, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, when the Company becomes
aware of the happening of any event as a result of which the prospectus included
in such registration statement (as then in effect) contains any untrue statement
of a material fact or omits to state a material fact necessary to make the
statements therein (in the case of the prospectus or any preliminary prospectus,
in light of the circumstances under which they were made) not misleading and, as
promptly as practicable thereafter, prepare and file with the Commission and
furnish a supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus will
not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading;
(e) use reasonable diligence to cause all Registrable Securities included
in such registration statement to be listed, by the date of the first sale of
Registrable Securities pursuant to such registration statement, on each
securities exchange (including, for this purpose, NASDAQ) on which the Common
Stock of the Company is then listed or proposed to be listed, if any;
(f) make generally available to its security holders an earnings statement
satisfying the provisions of Section 11(a) of the Securities Act no later than
100 days after the end of the 12-month period beginning with the first day of
the Company's first fiscal quarter commencing after the effective date of the
registration statement, which earnings statement shall cover said 12-month
period, which requirement will be deemed to be satisfied if the Company complies
with Rule 158 under the Securities Act as soon as feasible;
(g) as promptly as practicable after filing with the Commission of any
document which is incorporated by reference into a registration statement,
deliver a copy of such document to each Holder of Registrable Securities covered
by such registration statement who requests such document;
(h) on or prior to the date on which the registration statement is declared
effective, use reasonable efforts to register or qualify, and cooperate with the
Holders of Registrable Securities included in such registration statement, the
underwriter or underwriters thereof, if any, and their counsel, in connection
with the registration or qualification of the Registrable Securities covered by
the registration statement for offer and sale under the securities or blue sky
laws of each state and other jurisdiction of the United States as any such
Holder or underwriter reasonably requests in writing, to use reasonable efforts
to keep each such registration or qualification effective, including through new
filings, or amendments or renewals, during the period such registration
statement is required to be kept effective and to do any and all other acts or
things necessary or advisable to enable the disposition in all such
jurisdictions of the Registrable Securities covered by the applicable
registration statement; provided, that the Company will not be required to
qualify generally to do business in any jurisdiction where it is not then so
qualified, to take any action which would subject it to general service of
process or taxation in any such jurisdiction where it is not then so subject or
to take any such actions with respect to any state or other jurisdiction if, in
the judgment of the Board
7
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of Directors of the Company, such actions with respect to such state or other
jurisdiction would be unduly burdensome;
(i) cooperate with the Holders of Registrable Securities covered by the
registration statement and the managing underwriter or underwriters thereof, if
any, to facilitate the timely preparation and delivery of certificates (not
bearing any restrictive legends) representing securities to be sold under the
registration statement, and enable such securities to be in such denominations
and registered in such names as the managing underwriter or underwriters, if
any, or such Holders may request, subject to the underwriters' obligation to
return any certificates representing securities not sold;
(j) enter into such customary agreements (including an underwriting
agreement in customary form) and take all reasonable actions as may be
appropriate in the judgment of the Company in order to facilitate the
disposition of such Registrable Securities;
(k) make available for inspection by any Holder of Registrable Securities
included in such registration statement, any underwriter participating in any
disposition pursuant to such registration statement, and any attorney,
accountant or other agent retained by any such seller or underwriter
(collectively, the "Inspectors"), all financial and other records, pertinent
corporate documents and properties of the Company (collectively, the "Records"),
as shall be reasonably necessary to enable them to exercise their due diligence
responsibilities, and cause the Company's officers, directors and employees to
supply all Records reasonably requested by any such Inspector in connection with
such registration statement; provided, that with respect to any Records that are
confidential, the Inspectors shall execute such confidentiality agreements as
the Company may reasonably request in order to ensure that the confidentiality
of confidential Records will be maintained; and
(l) use reasonable diligence to obtain a "cold comfort" letter from the
Company's independent public accountants in customary form and covering such
matters of the type customarily covered by cold comfort letters as the Holders
of a majority of the Registrable Securities being sold may reasonably request;
provided, that the Holders' sole remedy in the event such a "cold comfort"
letter is not obtained shall be the withdrawal by such Holders of their
Registrable Securities from such registration statement.
Each Holder, upon receipt of any notice from the Company of the happening
of any event of the kind described in Section 5(d), will forthwith discontinue
disposition of the Registrable Securities until such Holder's receipt of the
copies of the supplemented or amended prospectus contemplated by Section 5(d) or
until it is advised in writing (the "Advice") by the Company that the use of the
prospectus may be resumed, and has received copies of any additional or
supplemental filings that are incorporated by reference in the prospectus, and,
if so directed by the Company, such Holder will, or will request the managing
underwriter or underwriters of such Registrable Securities, if any, to deliver
to the Company (at the Company's expense) all copies in their possession or
8
<PAGE>
control, other than permanent file copies then in such Holder's possession, of
the prospectus covering such Registrable Securities current at the time of
receipt of such notice.
If such registration statement refers to any Holder by name or otherwise as
the holder of any securities it the Company, then such Holder shall have the
right to require (i) the insertion therein of language, in form and substance
satisfactory to such Holder, to the effect that the holding by such Holder of
such securities is not to be construed as a recommendation of such Holder of the
investment quality of the Company's securities covered thereby and that such
holding does not imply that such Holder will assist in meeting any future
financial requirements of the Company, or (ii) in the event that such reference
to such Holder by name or otherwise is not required by the Securities Act (or
the rules or regulations thereunder) or any similar federal statute (or
regulation) then in force, the deletion of the reference to such Holder.
6. REGISTRATION EXPENSES.
---------------------
(a) All expenses incident to the Company's performance of or compliance
with this Agreement, including, without limitation, all Commission and
securities exchange or National Association of Securities Dealers, Inc.
registration and filing fees, fees and expenses (other than the pro rata portion
of filing fees attributable, as required by state law, to the securities to be
sold) of compliance with securities or blue sky laws (including fees and
disbursements of counsel in connection with blue sky qualifications of the
Registrable Securities), rating agency fees, printing expenses, messenger and
delivery expenses, internal expenses (including, without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties), the fees and expenses incurred in connection with the
listing of the securities to be registered on each securities exchange on which
similar securities issued by the Company are then listed and fees and
disbursements of counsel for the Company and its independent certified public
accountants (including the expenses of any special audit or "cold comfort"
letters required by or incident to such performance), securities act liability
insurance (if the Company elects to obtain such insurance), and the fees and
expenses of any special experts retained by the Company in connection with such
registration, and any out-of-pocket expenses of the Holders of Registrable
Securities incurred in connection with the registration of Registrable
Securities, excluding any underwriting fees, discounts or commissions
attributable to the sale of Registrable Securities (all such expenses being
herein called "Registration Expenses"), will be borne by the Company; provided,
that, with respect to the fees and expenses of legal counsel for the Holders of
Registrable Securities, the Company shall only be obligated to pay the fees and
expenses of one firm of legal counsel retained by Holders of a majority of the
Registrable Securities to be covered by the registration statement. The Holders
of Registrable Securities to be covered by the registration statement agree to
cooperate and use reasonable procedures to select such legal counsel. All
Registration Expenses will be paid by the Company whether or not the related
registration statement is declared effective. All expenses of Holders of
Registrable Securities incident to this Agreement which are not required to be
paid for by the Company pursuant to this Section 6 (including, without
limitation, all underwriting commissions and discounts applicable to shares of
Registrable Securities included in a registration statement pursuant to this
Agreement) shall be paid by Holders of Registrable Securities included or to be
included in a registration statement, with such Holders each paying their own
expenses and a pro rata part (based on the same proportion that the number of a
Holder's Registrable Securities included
9
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or to be included in the registration statement bears to the total number of all
Holders' Registrable Securities included or to be included in the registration
statement) of the common expenses of such Holders.
(b) Notwithstanding anything herein to the contrary, each seller of
Registrable Securities shall pay such portion of the Registration Expenses as
may be required by applicable law.
7. INDEMNIFICATION; CONTRIBUTION.
-----------------------------
(a) Indemnification by the Company. The Company will, and hereby does
------------------------------
indemnify and hold harmless, with respect to any registration statement filed by
it, to the full extent permitted by law, each Holder which is a seller of
Registrable Securities covered by such registration statement, its officers,
directors, employees, agents and general or limited partners (and the directors,
officers, employees and agents thereof) and each other Person, if any, who
controls such Holder within the meaning of the Securities Act (collectively, the
"Holder Indemnitees") against all losses, claims, damages, liabilities and
expenses, joint or several (including reasonable fees of counsel and any amounts
paid in settlement effected with the Company's consent, which consent shall not
be unreasonably withheld), to which any such Holder Indemnitee may become
subject under the Securities Act, at common law or otherwise, insofar as such
losses, claims, damages, liabilities or expenses (or actions, suits,
investigations or proceedings, whether commenced or threatened, in respect
thereof) are caused by (i) any untrue statement or alleged untrue statement of a
material fact contained in any registration statement in which such Registrable
Securities were included as contemplated hereby or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary, final or summary prospectus, together with the documents
incorporated by reference therein (as amended or supplemented if the Company
shall have filed with the Commission any amendment thereof or supplement
thereto), or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary in order to make the statements
therein in the light of the circumstances under which they were made not
misleading, or (iii) any violation by the Company of any federal, state or
common law rule or regulation applicable to the Company and relating to action
of or inaction by the Company in connection with any such registration; and in
each such case the Company will reimburse each such Holder Indemnitee for any
reasonable legal or any other expenses incurred by any of them in connection
with investigating or defending any such loss, claim, damage, liability,
expense, action, suit, investigation or proceeding; provided, that the Company
shall not be liable to any such Holder Indemnitee in any such case to the extent
that any such loss, claim, damage, liability or expense (or action, suit,
investigation or proceeding, whether commenced or threatened, in respect
thereof) arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement or
amendment thereof or supplement thereto, or in any such preliminary, final or
summary prospectus, in reliance upon and in conformity with written information
furnished to the Company by or on behalf of any such Holder
10
<PAGE>
Indemnitee relating to such Holder Indemnitee for use in the preparation
thereof; and provided, further, that the Company shall not be liable to any such
Holder Indemnitee with respect to any preliminary prospectus to the extent that
any such loss, claim, damage, liability or expense of such Holder Indemnitee
results from the fact that such Holder Indemnitee sold Registrable Securities to
a person to whom there was not sent or given, at or prior to the written
confirmation of such sale, a copy of the prospectus (excluding documents
incorporated by reference) or of the prospectus as then amended or supplemented
(excluding documents incorporated by reference) if the Company has previously
furnished copies thereof to such Holder Indemnitee in compliance with Section 5
of this Agreement and the loss, claim, damage, liability or expense of such
Holder Indemnitee results from an untrue statement or omission of a material
fact contained in such preliminary prospectus which was corrected in the
prospectus (or the prospectus as amended or supplemented). Such indemnity and
reimbursement of expenses shall remain in full force and effect regardless of
any investigation made by or on behalf of such Holder Indemnitee and shall
survive the transfer of such securities by such Holder.
(b) Indemnification by Holders. Each Holder whose Registrable Securities
--------------------------
are included in any registration statement hereunder will and hereby does
severally indemnify and hold harmless, to the fullest extent permitted by law,
the Company, its directors, officers, employees and agents and each Person who
controls the Company (within the meaning of the Securities Act) (collectively,
the "Company Indemnitees") against all losses, claims, damages, liabilities and
expenses (including reasonable fees of counsel and any amounts paid in
settlement effected with such Holder's consent, which consent shall not be
unreasonably withheld) to which any Company Indemnitee may become subject under
the Securities Act, at common law or otherwise insofar as such losses, claims,
damages, liabilities or expenses (or actions, suits, investigations or
proceedings, whether commenced or threatened, in respect thereof) are caused by
(i) any untrue statement or alleged untrue statement of a material fact
contained in any registration statement in which such Holder's Registrable
Securities were included or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, (ii) any untrue statement or alleged untrue statement of
a material fact contained in any preliminary, final or summary prospectus,
together with the documents incorporated by reference therein (as amended or
supplemented if the Company shall have filed with the Commission any amendment
thereof or supplement thereto), or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary in order to
make the statements therein in the light of the circumstances under which they
were made not misleading to the extent, but only to the extent, in the cases
described in clauses (i) and (ii), that such untrue statement or omission is
contained in any information furnished in writing by such Holder relating to
such Holder for use in the preparation thereof and if the Company does not know,
at the time such information is included in the registration statement,
prospectus, preliminary prospectus, amendment or supplement, that such
information is false or misleading, (iii) any violation by such Holder of any
federal, state or common law, rule or regulation applicable to such Holder and
relating to action of or inaction by such Holder in connection with any such
registration, and (iv) with respect to any preliminary prospectus, the fact that
such Holder sold Registrable Securities to a person to whom there was not sent
or given, at or prior to the written confirmation of such sale, a copy of the
prospectus (excluding documents
11
<PAGE>
incorporated by reference) or of the prospectus as then amended or supplemented
(excluding documents incorporated by reference) if (A) the Company has
previously furnished copies thereof to such Holder in compliance with Section 5
of this Agreement and (B) the loss, claim, damage, liability or expense of such
Company Indemnitee results from an untrue statement or omission of a material
fact contained in such preliminary prospectus which was corrected in the
prospectus (or the prospectus as amended or supplemented). The aggregate amount
which any such Holder shall be required to pay pursuant to this Section 7(b)
shall be limited to the amount of the dollar amount of proceeds received by such
Holder upon the sale of the Registrable Securities and other securities of the
Company (after deducting any underwriting commissions, discounts and transfer
taxes applicable thereto) pursuant to the registration statement giving rise to
such claim. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of the Company (except as provided above)
or any of the prospective sellers or any of their respective directors,
officers, employees, agents, general or limited partners or controlling Persons
and shall survive the transfer of such securities by such Holder.
(c) Conduct of Indemnification Proceeding. Promptly after receipt by an
-------------------------------------
indemnified party under Section 7(a) or 7(b) above of written notice of the
commencement of any action, suit, proceeding, investigation or threat thereof
made in writing with respect to which a claim for indemnification may be made
pursuant to this Section 7, such indemnified party shall, if a claim in respect
thereto is to be made against an indemnifying party, give written notice to the
indemnifying party of the threat or commencement thereof, but the failure so to
notify the indemnifying party shall not relieve it from any liability which it
may have to any indemnified party except to the extent that the indemnifying
party is actually prejudiced by such failure to give notice. In case any such
claim, action, suit, proceeding or investigation referred to under Section 7(a)
or 7(b) shall be brought against any indemnified party and it shall notify the
indemnifying party of the threat or commencement thereof, the indemnifying party
shall be entitled to participate therein and, to the extent that it shall wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified party
(who shall not, except with the consent of the indemnified party, be counsel to
the indemnifying party). After notice from the indemnifying party to such
indemnified party of its election so to assume the defense of any such claim,
action, suit, proceeding or investigation, the indemnifying party shall not be
liable to such indemnified party under this Section 7 for any legal expenses of
counsel or any other expenses subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of investigation
unless the indemnifying party has failed to assume the defense of such claim,
action, suit, proceeding or investigation or to employ counsel reasonably
satisfactory to such indemnified party. The indemnifying party shall not be
required to indemnify the indemnified party with respect to any amounts paid in
settlement of any claim, action, suit, proceeding or investigation entered into
without the written consent of the indemnifying party, which consent shall not
be unreasonably withheld. No indemnifying party will consent to the entry of any
judgment or enter into any settlement without the consent of the indemnified
party, unless (i) such judgment or settlement does not impose any obligation or
liability upon the indemnified party other than the execution, delivery or
approval thereof, and (ii) such judgment or settlement includes as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a
12
<PAGE>
release from all liability in respect of such claim for all persons that may be
entitled to or obligated to provide indemnification or contribution under this
Section 7.
(d) Additional Indemnification. Indemnification similar to that specified
--------------------------
in the preceding subsections of this Section 7 (with appropriate modifications)
shall be given by the Company and each seller of Registrable Securities with
respect to any required registration or other qualification of securities under
any state securities or blue sky laws.
(e) Contribution. If the indemnification provided for in this Section 7 is
------------
unavailable to or insufficient to hold harmless an indemnified party under
Section 7(a) or 7(b) above, then each indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a result of the losses,
claims, damages, liabilities or expenses (or actions, suits, investigations or
proceedings in respect thereof) referred to in Section 7(a) or 7(b) (as
applicable) in such proportion as is appropriate to reflect the relative fault
of the indemnifying party on the one hand and of the indemnified party on the
other in connection with the statements, omissions, actions or inactions that
resulted in such losses, claims, damages, liabilities or expenses. The relative
fault of the indemnifying party and of the indemnified party shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the indemnifying party or by
the indemnifying party, any action or inaction by any such party and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement, omission, action or inaction. The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages, liabilities or expenses (or actions, suits, investigations or
proceedings in respect thereof) referred to above in this Section 7(e) shall be
deemed to include any reasonable legal or other expenses incurred by such
indemnified party in connection with investigating or defending any such action,
suit, proceeding, investigation or claim (which shall be limited as provided in
Section 7(c) if the indemnifying party has assumed the defense of any such
action, suit, proceeding, investigation or claim in accordance with the
provisions thereof) that is the subject of this Section 7(e). No person guilty
of fraudulent misrepresentation within the meaning of Section 11(f) of the
Securities Act shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. Promptly after receipt by an
indemnified party under this Section 7(e) of written notice of the commencement
of any action, suit, proceeding, investigation or threat thereof
made in writing with respect to which a claim for contribution may be made
against an indemnifying party under this Section 7(e), such indemnified party
shall, if a claim for contribution in respect thereto is to be made against an
indemnifying party, give written notice to the indemnifying party in writing of
the commencement thereof (if the notice specified in Section 7(c) has not been
given with respect to such action); but the failure to so notify the
indemnifying party shall not relieve it from any obligation to provide
contribution that it may have to any indemnified party under this Section 7(e)
except to the extent that the indemnifying party is actually prejudiced by the
failure to give notice. Notwithstanding anything in this Section 7(e) to the
contrary, no indemnifying party (other than the Company) shall be required
pursuant to this Section 7(e) to contribute any amount that exceeds the amount
by which the dollar amount of the proceeds received by such indemnifying party
from the sale of Registrable Securities and other securities of the Company
(after deducting
13
<PAGE>
any underwriting commissions, discounts and transfer taxes applicable thereto)
in the offering to which the losses, claims, damages, liabilities or expenses of
the indemnified parties relate exceeds the amount of any losses, claims,
damages, liabilities and expenses that such indemnifying party has otherwise
been required to pay as indemnity or contribution hereunder by reason of such
losses, claims, damages, liabilities or expenses.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 7(e) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
If indemnification is available under this Section 7, the indemnifying
partes shall indemnify each indemnified party to the full extent provided in
Sections 7(a) and (b) without regard to the relative fault of said indemnifying
party or indemnified party or any other equitable consideration provided for in
this Section 7(e). The provisions of this Section 7(e) shall be in addition to
any other rights to indemnification or contribution that any indemnified party
may have pursuant to law or contract and shall remain in full force and effect
regardless of any investigation made by or on behalf of any indemnified party
and shall survive the transfer of securities by any such party.
(f) Indemnification and Contribution of Underwriters. In connection with
------------------------------------------------
any underwritten offering contemplated by this Agreement that includes
Registrable Securities, the Company and all sellers of Registrable Securities
included in any registration statement will agree to customary provisions for
indemnification and contribution (consistent with the other provisions of this
Section 7, except as may be otherwise agreed in writing by the Company and such
sellers) in respect of losses, claims, damages, liabilities and expenses of the
underwriters of such offering.
8. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Holder may
-------------------------------------------
participate in any underwritten registration hereunder unless such Holder (a)
agrees to sell such Holder's securities on the terms of and on the basis
provided in any underwriting arrangements approved by the Company and (b)
completes and executes all questionnaires, powers of attorney, custody
agreements, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements.
9. RULE 144. The Company covenants that, upon any registration statement
--------
covering Company securities becoming effective, it will file the reports
required to be filed by it under the Securities Act and the Exchange Act and the
rules and regulations adopted by the Commission thereunder (or, if the Company
is not required to file such reports, it will, upon the request of any Holder,
make publicly available other nonconfidential information so long as necessary
to permit sales under Rule 144 under the Securities Act), and it will take such
other action as any Holder may reasonably request, all to the extent required
from time to time to enable such Holder to sell Registrable Securities without
registration under the Securities Act within the limitation of the exemptions
provided by (a) Rule 144 under the Securities Act, as such Rule may be amended
from time to time, or (b) any similar rule or regulation hereafter adopted by
the Commission. Upon the
14
<PAGE>
request of any Holder, the Company will deliver to such Holder a written
statement as to whether it has complied with such requirements.
10. REPRESENTATION AND WARRANTY. The Company hereby represents and
---------------------------
warrants to the Stockholders that no consent, approval, authorization or waiver
of any Person is required to permit the Company to execute or deliver this
Agreement or perform this Agreement in accordance with its terms.
11. MISCELLANEOUS.
-------------
(a) Recapitalizations, Exchanges, etc. The provisions of this Agreement
----------------------------------
shall apply, to the full extent set forth herein with respect to the Registrable
Securities, to any and all shares of equity capital of the Company or any
successor or assign of the Company (whether by merger, consolidation, sale of
assets or otherwise) that may be issued in respect of, in exchange for, or in
substitution of the Registrable Securities, in each case as the amounts of such
securities outstanding are appropriately adjusted for any equity dividends,
splits, reverse splits, combinations, recapitalizations and the like occurring
after the date of this Agreement.
(b) Opinions. When any legal opinion is required to be delivered
--------
hereunder, such opinion may contain such qualifications as may be customary or
otherwise appropriate for legal opinions in similar circumstances.
(c) Notices. For purposes of this Agreement, notices and all other
-------
communications provided for herein shall be in writing and shall be deemed to
have been duly given when personally delivered or when mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed (i) if to Company, to: 15151 Sommermeyer, Houston, Texas 77041,
Attention: President (with a copy to Baker & Botts, L.L.P., 3000 One Shell
Plaza, Houston, Texas 77002, Attention: J. David Kirkland), (ii) if to a
Stockholder, at such Stockholder's address as shown on the stock transfer
records of the Company, or to such other address (as to a Stockholder) as such
Stockholder may furnish to the Company, or (as to the Company) as the Company
may furnish to the Stockholders except that notices of changes of address shall
be effective only upon receipt.
(d) Applicable Law. This contract is entered into under, and shall be
--------------
construed in accordance with and governed for all purposes by, the laws of the
State of Delaware, without regard to any principles of conflict of laws that, if
applied, might permit or require the application of the laws of a different
jurisdiction.
(e) Amendment and Waiver. This Agreement may be amended, and the
--------------------
provisions hereof may be waived, only by a written instrument signed by (i) the
Holders of the Required Percentage and (ii) the Company. No failure by either
party hereto at any time to give notice of any breach by the other party of, or
to require compliance with, any condition or provision of this Agreement shall
be deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time.
15
<PAGE>
(f) Remedy for Breach of Contract. The parties agree that in the event
-----------------------------
there is any breach or asserted breach of the terms, covenants or conditions of
this Agreement, the remedy of the parties hereto shall be in law and in equity
and injunctive relief shall lie for the enforcement of or relief from any
provisions of this Agreement. If any remedy or relief is sought and obtained by
any party against one of the other parties pursuant to this Section 11(f), the
other party shall, in addition to the remedy of relief so obtained, be liable to
the party seeking such remedy or relief for the reasonable expenses incurred by
such party in successfully obtaining such remedy or relief, including the fees
and expenses of such party's counsel.
(g) Severability. It is a desire and intent of the parties that the terms,
------------
provisions, covenants and remedies contained in this Agreement shall be
enforceable to the fullest extent permitted by law. If any such term,
provision, covenant or remedy of this Agreement or the application thereof to
any Person or circumstances shall, to any extent, be construed to be invalid or
unenforceable in whole or in part, then such term, provision, covenant or remedy
shall be construed in a manner so as to permit its enforceability under the
applicable law to the fullest extent permitted by law. In any case, the
remaining provisions of this Agreement or the application thereof to any Person
or circumstances other than those to which they have been held invalid or
unenforceable shall remain in full force and effect.
(h) Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same agreement.
(i) Headings; Use of Certain Terms. The section and paragraph headings in
------------------------------
this Agreement have been inserted for purposes of convenience of reference only
and shall not be used for interpretive purposes. As used in this Agreement, the
words "herein", "hereof", and "hereunder" and other words of similar import
refer to this Agreement as a whole and not to any particular paragraph,
subparagraph, section, subsection, or other subdivision. Whenever the context
may require, any pronoun used in this Agreement shall include the corresponding
masculine, feminine or neuter forms, and the singular form of nouns, pronouns
and verbs shall include the plural and vice versa.
(j) Binding Effect; Transfer of Rights Under this Agreement. Unless
-------------------------------------------------------
otherwise provided herein, the provisions of this Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective heirs,
legal representatives, successors and permitted assigns, and is not intended to
confer upon any other Person any right or remedies hereunder; provided, however,
that the rights and obligations of a Holder under this Agreement may be
transferred or assigned by a Holder only to (i) a transferee of all of such
Holder's Registrable Securities or (ii) any equity owners of any Holder in the
event of the distribution of Registrable Securities by such Holder to its equity
owners, and, in any case, only if such transferee (or such distributee) shall,
in connection with the transfer (or distribution) of such Registrable
Securities, provide the Company with a duly executed addendum to this Agreement,
in form and substance reasonably satisfactory to the Company, pursuant to which
such transferee (or distributee) expressly and without qualification (A) assumes
16
<PAGE>
all of the obligations of its transferor hereunder and (B) agrees itself to be
bound by the terms hereof; provided, further, that any such transfer shall not
operate to release the transferring Holder from any of its obligations hereunder
existing on the date of such transfer. In the event any Registrable Securities
are transferred (or distributed) to a person who does not provide the addendum
referred to above in this Section 11(j), such Registrable Securities shall be
deemed to have ceased to be Registrable Securities effective upon such transfer
(or distribution).
(k) Effectiveness; Entire Agreement; Termination. This agreement shall
--------------------------------------------
become effective immediately upon the closing of the IPO. This Agreement is
intended by the parties as a final expression of their agreement and intended to
be a complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein. This Agreement
supersedes all prior agreements and understandings between the parties with
respect to such subject matter, including, without limitation, the Existing
Registration Rights Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
COMPANY:
DRILEX CORPORATION
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
17
<PAGE>
STOCKHOLDERS AND SPOUSES
------------------------
SHARES OWNED AT
STOCKHOLDERS TIME OF EXECUTION
- ------------ -----------------
- -------------------------- --------
John Forrest
- -------------------------- --------
G. Bruce Broussard
- -------------------------- --------
Charles Denton Kerr II
- -------------------------- --------
DRLX Partners, L.P.
By: SCF Partners, L.P.,
its general partner
By: SCF Investment Partners, Inc.,
its general partner
By:
---------------------------
L. E. Simmons, President
18
<PAGE>
EXHIBIT 5.1
Baker & Botts, L.L.P.
One Shell Plaza
910 Louisiana Street
Houston, Texas 77002-4995
June 13, 1996
Drilex International Inc.
15151 Sommermeyer
Houston, Texas 77041
Gentlemen:
As set forth in the Registration Statement (the "Registration
Statement") on Form S-1 (Registration No. 333-03405) filed by Drilex
International Inc., a Delaware corporation (the "Company"), with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933,
as amended, relating to the Company's Common Stock, par value $.01 per share
("Common Stock"), certain legal matters in connection with the Common Stock are
being passed upon for the Company by us. The Registration Statement relates to
the offering of an aggregate of 2,361,962 shares of Common Stock (the "Shares"),
consisting of 2,000,000 Shares to be issued and sold by the Company and 361,962
Shares to be sold by the Selling Stockholder identified in the Registration
Statement (the "Selling Stockholder"), together with up to 354,294 additional
shares of the Common Stock (the "Additional Shares") that may be issued and sold
by the Company pursuant to the underwriters' over-allotment option as described
in the Registration Statement. The Shares to be sold by the Selling Stockholder
are issuable upon conversion of a convertible note issued to ENSCO Technology
Company (the "Convertible Note"). At your request, this opinion is being
furnished to you for filing as Exhibit 5.1 to the Registration Statement.
In our capacity as your counsel in the connection referred to above, we
have examined the Restated Certificate of Incorporation and Bylaws of the
Company and the originals, or copies certified or otherwise identified, of
corporate records of the Company, including minute books of the Company as
furnished to us by the Company, certificates of public officials and of
representatives of the Company, statutes and other instruments and documents
pertaining to the Company as a basis for the opinions hereinafter expressed. In
giving such opinions, we have relied upon certificates of officers of the
Company with respect to the accuracy of the material factual matters contained
in such certificates.
Based on our examination as aforesaid, we are of the opinion that:
1. The Company is a corporation duly incorporated and validly existing
in good standing under the laws of the State of Delaware;
<PAGE>
Drilex International Inc. -2- June 13, 1996
2. When the pricing committee of the Board of Directors of the Company
has determined the price at which the Shares and the Additional Shares are
to be sold to the underwriters by the Company and has authorized the
issuance of such Shares and the Additional Shares, upon the issuance and
sale by the Company of the Shares and any Additional Shares that may be
purchased pursuant to the Purchase Agreement for the consideration so
determined, such Shares and any such Additional Shares will be duly
authorized, validly issued, fully paid and nonassessable; and
3. The shares to be sold by the Selling Stockholder have been duly
authorized and will be, when issued upon conversion of the Convertible Note
in accordance with the terms thereof, validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion with the Commission as
an exhibit to the Registration Statement
Very truly yours,
BAKER & BOTTS, L.L.P.
<PAGE>
EXHIBIT 10.8
DRILEX INTERNATIONAL INC.
INDEMNIFICATION AGREEMENT
-------------------------
This Indemnification Agreement (this "Agreement"), made and entered
into as of the ____ day of June, 1996 by and between Drilex International Inc.,
a Delaware corporation (the "Corporation"), and
___________________________________ ("Indemnitee"),
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Indemnitee is currently serving or is about to begin serving
as a director and/or officer of the Corporation and/or in another Corporate
Status, and Indemnitee is willing, subject to, among other things, the
Corporation's execution and performance of this Agreement, to continue in or
assume such capacity or capacities; and
WHEREAS, the Bylaws of the Corporation provide that the Corporation
shall indemnify and advance expense to all directors and officers of the
Corporation in the manner set forth therein and to the fullest extent permitted
by applicable law, and to such greater extent as applicable law may thereafter
permit, and Article Seventh of the Corporation's Certificate of Incorporation
provides for limitation of liability for directors; and
WHEREAS, in order to induce Indemnitee to provide services as
contemplated hereby, the Corporation has deemed it to be in its best interest to
enter into this Agreement with Indemnitee;
NOW, THEREFORE, in consideration of Indemnitee's agreement to provide
services to the Corporation and/or certain of its affiliates as contemplated
hereby, the mutual agreements contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto stipulate and agree as follows:
ARTICLE I
Certain Definitions
-------------------
As used herein, the following words and terms shall have the following
respective meanings (whether singular or plural):
"Change of Control" means a change in control of the Corporation after
the date Indemnitee acquired his Corporate Status, which shall be deemed to have
occurred in any one of the
1
<PAGE>
following circumstances occurring after such date: (i) there shall have occurred
an event required to be reported with respect to the Corporation in response to
Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item
or any similar schedule or form) promulgated under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), whether or not the Corporation is then
subject to such reporting requirement; (ii) any "person" (as such term is used
in Sections 13(d) and 14(d) of the Exchange Act) shall have become the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Corporation representing 40% or more of the
combined voting power of the Corporation's then outstanding voting securities
without prior approval of at least two-thirds of the members of the Board of
Directors in office immediately prior to such person attaining such percentage
interest; (iii) the Corporation is a party to a merger, consolidation, sale of
assets or other reorganization, or a proxy contest, as a consequence of which
members of the Board of Directors in office immediately prior to such
transaction or event constitute less than a majority of the Board of Directors
thereafter; or (iv) during any period of two consecutive years, individuals who
at the beginning of such period constituted the Board of Directors (including,
for this purpose, any new director whose election or nomination for election by
the Corporation's stockholders was approved by a vote of at least two-thirds of
the directors then still in office who were directors at the beginning of such
period) cease for any reason to constitute at least a majority of the Board of
Directors.
"Corporate Status" describes the status of Indemnitee as a director,
officer, employee, agent or fiduciary of the Corporation or of any other
corporation, partnership, limited liability company, association, joint venture,
trust, employee benefit plan or other enterprise which Indemnitee is or was
serving at the request of the Corporation.
"Court" means the Court of Chancery of the State of Delaware or any
other court of competent jurisdiction.
"DGCL" means the Delaware General Corporation Law.
"Expenses" shall include all reasonable attorneys' fees, retainers,
court costs, transcript costs, fees of experts, witness fees, travel expenses,
duplicating costs, printing and binding costs, telephone charges, postage,
delivery service fees, and all other disbursements or expenses of the types
customarily incurred in connection with prosecuting, defending, preparing to
prosecute or defend, investigating, or being or preparing to be a witness in a
Proceeding.
"Independent Counsel" means a law firm, or a member of a law firm,
that is experienced in matters of corporation law and neither presently is, nor
in the five years previous to his selection or appointment has been, retained to
represent: (i) the Corporation or Indemnitee in any matter material to either
such party or (ii) any other party to the Proceeding giving rise to a claim for
indemnification hereunder.
"Matter" is a claim, a material issue or a substantial request for
relief.
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"Proceeding" includes any action, suit, arbitration, alternate dispute
resolution mechanism, investigation, administrative hearing or any other
proceeding, whether civil, criminal, administrative or investigative, except one
initiated by Indemnitee pursuant to Section 6.1 of this Agreement to enforce his
rights under this Agreement.
ARTICLE II
Services by Indemnitee
----------------------
Section 2.1. Services by Indemnitee. Indemnitee agrees to serve or
continue to serve in his current capacity or capacities as a director, officer,
employee, agent or fiduciary of the Corporation. Indemnitee also agrees to
serve, as the Corporation may request from time to time, as a director, officer,
employee, agent or fiduciary of any other corporation, partnership, limited
liability company, association, joint venture, trust or other enterprise in
which the Corporation has an interest. Indemnitee and the Corporation each
acknowledge that they have entered into this Agreement as a means of inducing
Indemnitee to serve the Corporation in such capacities. Indemnitee may at any
time and for any reason resign from such position or positions (subject to any
other contractual obligation or any obligation imposed by operation of law).
The Corporation shall have no obligation under this Agreement to continue
Indemnitee in any such position for any period of time and shall not be
precluded by the provisions of this Agreement from removing Indemnitee from any
such position at any time.
ARTICLE III
Indemnification
---------------
Section 3.1. General. The Corporation shall, to the fullest extent
permitted by applicable law in effect on the date hereof, and to such greater
extent as applicable law may thereafter permit, indemnify and hold Indemnitee
harmless from and against any and all losses, liabilities, claims, damages and,
subject to Section 3.2, Expenses (as this and all other capitalized words are
defined in Article I of this Agreement), whatsoever arising out of any event or
occurrence related to the fact that Indemnitee is or was a director or officer
of the Corporation or is or was serving in another Corporate Status.
Section 3.2. Expenses. If Indemnitee is, by reason of his Corporate
Status a party to and is successful, on the merits or otherwise, in any
Proceeding, he shall be indemnified against all Expenses actually and reasonably
incurred by him or on his behalf in connection therewith. If Indemnitee is not
wholly successful in such Proceeding but is successful, on the merits or
otherwise, as to any Matter in such Proceeding, the Corporation shall indemnify
Indemnitee against all Expenses actually and reasonably incurred by him or on
his behalf relating to such Matter. The termination of any Matter in such a
Proceeding by dismissal, with or without prejudice, shall be deemed to be a
successful result as to such Matter. To the extent that the Indemnitee is, by
reason
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of his Corporate Status, a witness in any Proceeding, he shall be indemnified
against all Expenses actually and reasonably incurred by him or on his behalf in
connection therewith.
ARTICLE IV
Advancement of Expenses
-----------------------
Section 4.1. Advances. In the event of any threatened or pending
action, suit or proceeding in which Indemnitee is a party or is involved and
that may give rise to a right of indemnification under this Agreement, following
written request to the Corporation by Indemnitee, the Corporation shall promptly
pay to Indemnitee amounts to cover expenses reasonably incurred by Indemnitee in
such proceeding in advance of its final disposition upon the receipt by the
Corporation of (i) a written undertaking executed by or on behalf of Indemnitee
providing that Indemnitee will repay the advance if it shall ultimately be
determined that Indemnitee is not entitled to be indemnified by the Corporation
as provided in this Agreement and (ii) satisfactory evidence as to the amount of
such expenses.
Section 4.2. Repayment of Advances or Other Expenses. Indemnitee
agrees that Indemnitee shall reimburse the Corporation for all expenses paid by
the Corporation in defending any civil, criminal, administrative or
investigative action, suit or proceeding against Indemnitee in the event and
only to the extent that it shall be determined pursuant to the provisions of
this Agreement or by final judgment or other final adjudication under the
provisions of any applicable law that Indemnitee is not entitled to be
indemnified by the Corporation for such expenses.
ARTICLE V
Procedure for Determination of Entitlement
------------------------------------------
to Indemnification
------------------
Section 5.1. Request for Indemnification. To obtain indemnification,
Indemnitee shall submit to the Secretary of the Corporation a written claim or
request. Such written claim or request shall contain sufficient information to
reasonably inform the Corporation about the nature and extent of the
indemnification or advance sought by Indemnitee. The Secretary of the
Corporation shall promptly advise the Board of Directors of such request.
Section 5.2. Determination of Entitlement; No Change of Control. If
there has been no Change of Control at the time the request for indemnification
is submitted, Indemnitee's entitlement to indemnification shall be determined in
accordance with Section 145(d) of the DGCL. If entitlement to indemnification is
to be determined by Independent Counsel, the Corporation shall furnish notice to
Indemnitee within 10 days after receipt of the request for indemnification,
specifying the identity and address of Independent Counsel. The Indemnitee may,
within 14 days after receipt of such written notice of selection, deliver to the
Corporation a written objection to such selection. Such objection may be
asserted only on the ground that the Independent Counsel so
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selected does not meet the requirements of Independent Counsel and the objection
shall set forth with particularity the factual basis for such assertion. If
there is an objection to the selection of Independent Counsel, either the
Corporation or Indemnitee may petition the Court for a determination that the
objection is without a reasonable basis and/or for the appointment of
Independent Counsel selected by the Court.
Section 5.3. Determination of Entitlement; Change of Control. If
there has been a Change of Control at the time the request for indemnification
is submitted, Indemnitee's entitlement to indemnification shall be determined in
a written opinion by Independent Counsel selected by Indemnitee. Indemnitee
shall give the Corporation written notice advising of the identity and address
of the Independent Counsel so selected. The Corporation may, within seven days
after receipt of such written notice of selection, deliver to the Indemnitee a
written objection to such selection. Indemnitee may, within five days after the
receipt of such objection from the Corporation, submit the name of another
Independent Counsel and the Corporation may, within seven days after receipt of
such written notice of selection, deliver to the Indemnitee a written objection
to such selection. Any objections referred to in this Section 5.3 may be
asserted only on the ground that the Independent Counsel so selected does not
meet the requirements of Independent Counsel and such objection shall set forth
with particularity the factual basis for such assertion. Indemnitee may
petition the Court for a determination that the Corporation's objection to the
first and/or second selection of Independent Counsel is without a reasonable
basis and/or for the appointment as Independent Counsel of a person selected by
the Court.
Section 5.4. Procedures of Independent Counsel. If a Change of
Control shall have occurred before the request for indemnification is sent by
Indemnitee, Indemnitee shall be presumed (except as otherwise expressly provided
in this Agreement) to be entitled to indemnification upon submission of a
request for indemnification in accordance with Section 5.1 of this Agreement,
and thereafter the Corporation shall have the burden of proof to overcome the
presumption in reaching a determination contrary to the presumption. The
presumption shall be used by Independent Counsel as a basis for a determination
of entitlement to indemnification unless the Corporation provides information
sufficient to overcome such presumption by clear and convincing evidence or the
investigation, review and analysis of Independent Counsel convinces him by clear
and convincing evidence that the presumption should not apply.
Except in the event that the determination of entitlement to
indemnification is to be made by Independent Counsel, if the person or persons
empowered under Section 5.2 or 5.3 of this Agreement to determine entitlement to
indemnification shall not have made and furnished to Indemnitee in writing a
determination within 60 days after receipt by the Corporation of the request
therefor, the requisite determination of entitlement to indemnification shall be
deemed to have been made and Indemnitee shall be entitled to such
indemnification unless Indemnitee knowingly misrepresented a material fact in
connection with the request for indemnification or such indemnification is
prohibited by applicable law. The termination of any Proceeding or of any
Matter therein, by judgment, order, settlement or conviction, or upon a plea of
nolo contendere or its equivalent, shall not (except as otherwise expressly
provided in this Agreement) of itself adversely
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affect the right of Indemnitee to indemnification or create a presumption that
Indemnitee did not act in good faith and in a manner that he reasonably believed
to be in or not opposed to the best interests of the Corporation, or with
respect to any criminal Proceeding, that Indemnitee had reasonable cause to
believe that his conduct was unlawful. A person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan of the Corporation shall be deemed to
have acted in a manner not opposed to the best interests of the Corporation.
For purposes of any determination hereunder, a person shall be deemed
to have acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the Corporation, or, with respect to any
criminal action or Proceeding, to have had no reasonable cause to believe his
conduct was unlawful, if his action is based on the records or books of account
of the Corporation or another enterprise or on information supplied to him by
the officers of the Corporation or another enterprise in the course of their
duties or on the advice of legal counsel for the Corporation or another
enterprise or on information or records given or reports made to the Corporation
or another enterprise by an independent certified public accountant or by an
appraiser or other expert selected with reasonable care by the Corporation or
another enterprise. The term "another enterprise" as used in this Section shall
mean any other corporation or any partnership, limited liability company,
association, joint venture, trust, employee benefit plan or other enterprise of
which such person is or was serving at the request of the Corporation as a
director, officer, employee or agent. The provisions of this paragraph shall
not be deemed to be exclusive or to limit in any way the circumstances in which
an Indemnitee may be deemed to have met the applicable standards of conduct for
determining entitlement to rights under this Agreement.
Section 5.5. Independent Counsel Expenses. The Corporation shall pay
any and all reasonable fees and expenses of Independent Counsel incurred acting
pursuant to this Article and in any proceeding to which it is a party or witness
in respect of its investigation and written report and shall pay all reasonable
fees and expenses incident to the procedures in which such Independent Counsel
was selected or appointed. No Independent Counsel may serve if a timely
objection has been made to his selection until a court has determined that such
objection is without a reasonable basis.
ARTICLE VI
Certain Remedies of Indemnitee
------------------------------
Section 6.1. Adjudication. In the event that (i) a determination is
made pursuant to Section 5.2 or 5.3 hereof that Indemnitee is not entitled to
indemnification under this Agreement; (ii) advancement of Expenses is not timely
made pursuant to Section 4.1 of this Agreement; (iii) Independent Counsel has
not made and delivered a written opinion determining the request for
indemnification (a) within 90 days after being appointed by the Court, or (b)
within 90 days after objections to his selection have been overruled by the
Court or (c) within 90 days after the time for the Corporation or Indemnitee to
object to his selection; or (iv) payment of indemnification is not
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made within five days after a determination of entitlement to indemnification
has been made or deemed to have been made pursuant to Section 5.2, 5.3 or 5.4 of
this Agreement, Indemnitee shall be entitled to an adjudication in an
appropriate court of the State of Delaware, or in any other court of competent
jurisdiction, of his entitlement to such indemnification or advancement of
Expenses. In the event that a determination shall have been made that Indemnitee
is not entitled to indemnification, any judicial proceeding or arbitration
commenced pursuant to this Section 6.1 shall be conducted in all respects as a
de novo trial on the merits and Indemnitee shall not be prejudiced by reason of
that adverse determination. If a Change of Control shall have occurred, in any
judicial proceeding commenced pursuant to this Section 6.1, the Corporation
shall have the burden of proving that Indemnitee is not entitled to
indemnification or advancement of Expenses, as the case may be. If a
determination shall have been made or deemed to have been made that Indemnitee
is entitled to indemnification, the Corporation shall be bound by such
determination in any judicial proceeding commenced pursuant to this Section 6.1,
or otherwise, unless Indemnitee knowingly misrepresented a material fact in
connection with the request for indemnification, or such indemnification is
prohibited by law.
The Corporation shall be precluded from asserting in any judicial
proceeding commenced pursuant to this Section 6.1 that the procedures and
presumptions of this Agreement are not valid, binding and enforceable, and shall
stipulate in any such proceeding that the Corporation is bound by all provisions
of this Agreement. In the event that Indemnitee, pursuant to this Section 6.1,
seeks a judicial adjudication to enforce his rights under, or to recover damages
for breach of, this Agreement, Indemnitee shall be entitled to recover from the
Corporation, and shall be indemnified by the Corporation against, any and all
Expenses actually and reasonably incurred by him in such judicial adjudication,
but only if he prevails therein. If it shall be determined in such judicial
adjudication that Indemnitee is entitled to receive part but not all of the
indemnification or advancement of Expenses sought, the Expenses incurred by
Indemnitee in connection with such judicial adjudication or arbitration shall be
appropriately prorated.
ARTICLE VII
Participation by the Corporation
--------------------------------
Section 7.1. Participation by the Corporation. With respect to any
such claim, action, suit, proceeding or investigation as to which Indemnitee
notifies the Corporation of the commencement thereof: (a) the Corporation will
be entitled to participate therein at its own expense; (b) except as otherwise
provided below, to the extent that it may wish, the Corporation (jointly with
any other indemnifying party similarly notified) will be entitled to assume the
defense thereof, with counsel reasonably satisfactory to Indemnitee. After
receipt of notice from the Corporation to Indemnitee of the Corporation's
election so to assume the defense thereof, the Corporation will not be liable to
Indemnitee under this Agreement for any legal or other expenses subsequently
incurred by Indemnitee in connection with the defense thereof other than
reasonable costs of investigation or as otherwise provided below. Indemnitee
shall have the right to employ his own counsel in such action, suit, proceeding
or investigation but the fees and expenses of such counsel incurred after
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notice from the Corporation of its assumption of the defense thereof shall be at
the expense of Indemnitee unless (i) the employment of counsel by Indemnitee has
been authorized by the Corporation, (ii) Indemnitee shall have reasonably
concluded that there is a conflict of interest between the Corporation and
Indemnitee in the conduct of the defense of such action or (iii) the Corporation
shall not in fact have employed counsel to assume the defense of such action, in
each of which cases the fees and expenses of counsel employed by Indemnitee
shall be subject to indemnification pursuant to the terms of this Agreement.
The Corporation shall not be entitled to assume the defense of any action, suit,
proceeding or investigation brought in the name of or on behalf of the
Corporation or as to which Indemnitee shall have made the conclusion provided
for in (ii) above; and (c) the Corporation shall not be liable to indemnify
Indemnitee under this Agreement for any amounts paid in settlement of any action
or claim effected without its written consent, which consent shall not be
unreasonably withheld. The Corporation shall not settle any action or claim in
any manner which would impose any limitation or unindemnified penalty on
Indemnitee without Indemnitee's written consent, which consent shall not be
unreasonably withheld.
ARTICLE VIII
MISCELLANEOUS
Section 8.1. Nonexclusivity of Rights. The rights of indemnification
and advancement of Expenses as provided by this Agreement shall not be deemed
exclusive of any other rights to which Indemnitee may at any time be entitled to
under applicable law, the Corporation's Certificate of Incorporation, the
Corporation's Bylaws, any agreement, a vote of stockholders or a resolution of
directors, or otherwise. No amendment, alteration or repeal of this Agreement
or any provision hereof shall be effective as to any Indemnitee for acts, events
and circumstances that occurred, in whole or in part, before such amendment,
alteration or repeal. The provisions of this Agreement shall continue as to an
Indemnitee whose Corporate Status has ceased for any reason and shall inure to
the benefit of his heirs, executors and administrators.
Section 8.2. Insurance and Subrogation. The Corporation shall not be
liable under this Agreement to make any payment of amounts otherwise
indemnifiable hereunder if, but only to the extent that, Indemnitee has
otherwise actually received such payment under any insurance policy, contract,
agreement or otherwise.
In the event of any payment hereunder, the Corporation shall be
subrogated to the extent of such payment to all the rights of recovery of
Indemnitee, who shall execute all papers required and take all action reasonably
requested by the Corporation to secure such rights, including execution of such
documents as are necessary to enable the Corporation to bring suit to enforce
such rights.
Section 8.3. Acknowledgment of Certain Matters. Both the Corporation
and Indemnitee acknowledge that in certain instances, applicable law or public
policy may prohibit indemnification of Indemnitee by the Corporation under this
Agreement or otherwise. Indemnitee
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understands and acknowledges that the Corporation has undertaken or may be
required in the future to undertake, by the Securities and Exchange Commission,
to submit the question of indemnification to a court in certain circumstances
for a determination of the Corporation's right under public policy to indemnify
Indemnitee.
Section 8.4. Amendment. This Agreement may not be modified or
amended except by a written instrument executed by or on behalf of each of the
parties hereto.
Section 8.5. Waivers. The observance of any term of this Agreement
may be waived (either generally or in a particular instance and either
retroactively or prospectively) by the party entitled to enforce such term only
by a writing signed by the party against which such waiver is to be asserted.
Unless otherwise expressly provided herein, no delay on the part of any party
hereto in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any party hereto of any
right, power or privilege hereunder operate as a waiver of any other right,
power or privilege hereunder nor shall any single or partial exercise of any
right, power or privilege hereunder preclude any other or further exercise
thereof or the exercise of any other right, power or privilege hereunder.
Section 8.6. Entire Agreement. This Agreement and the documents
referred to herein constitute the entire agreement between the parties hereto
with respect to the matters covered hereby, and any other prior or
contemporaneous oral or written understandings or agreements with respect to the
matters covered hereby are superseded by this Agreement.
Section 8.7. Severability. If any provision or provisions of this
Agreement shall be held to be invalid, illegal or unenforceable for any reason
whatsoever, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby; and, to the
fullest extent possible, the provisions of this Agreement shall be construed so
as to give effect to the intent manifested by the provision held invalid,
illegal or unenforceable.
Section 8.8. Certain Actions Where Indemnification Is Not Provided.
Notwithstanding any other provision of this Agreement, Indemnitee shall not be
entitled to indemnification or advancement of Expenses under this Agreement with
respect to any Proceeding, or any Matter therein, brought or made by Indemnitee
against the Corporation.
Section 8.9. Notices. Promptly after receipt by Indemnitee of notice
of the commencement of any action, suit or proceeding, Indemnitee shall, if he
anticipates or contemplates making a claim for expenses or an advance pursuant
to the terms of this Agreement, notify the Corporation of the commencement of
such action, suit or proceeding; provided, however, that any delay in so
notifying the Corporation shall not constitute a waiver or release by Indemnitee
of rights hereunder and that any omission by Indemnitee to so notify the
Corporation shall not relieve the Corporation from any liability that it may
have to Indemnitee otherwise than under this Agreement. Any communication
required or permitted to the Corporation shall be addressed to the Secretary of
the Corporation and any such communication to Indemnitee shall be addressed to
the Indemnitee's
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address as shown on the Corporation's records unless the Indemnitee specifies
otherwise and shall be personally delivered or delivered by overnight mail
delivery. Any such notice shall be effective upon receipt.
Section 8.10. Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Delaware without regard
to any principles of conflict of laws that, if applied, might permit or require
the application of the laws of a different jurisdiction.
Section 8.11. Headings. The Article and Section headings in this
Agreement are for convenience of reference only, and shall not be deemed to
alter or affect the meaning or interpretation of any provisions hereof.
Section 8.12. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.
Section 8.13. Use of Certain Terms. As used in this Agreement, the
words "herein," "hereof," and "hereunder" and other words of similar import
refer to this Agreement as a whole and not to any particular paragraph,
subparagraph, section, subsection, or other subdivision. Whenever the context
may require, any pronoun used in this Agreement shall include the corresponding
masculine, feminine or neuter forms, and the singular form of nouns, pronouns
and verbs shall include the plural and vice versa.
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IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered to be effective as of the date first above written.
DRILEX INTERNATIONAL INC.
By:
----------------------------
Name:
Title:
INDEMNITEE
--------------------------------
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EXHIBIT 10.9
DRILEX INTERNATIONAL INC.
STOCK OPTION PLAN
(AS AMENDED AND RESTATED MAY 7, 1996)
I. PURPOSE OF THE PLAN
The Drilex International Inc. Stock Option Plan (the "Plan") is intended to
provide a means whereby certain employees of Drilex International Inc., a
Delaware corporation (the "Company"), and its subsidiaries, and certain non-
employee directors of the Company, may develop a sense of proprietorship and
personal involvement in the development and financial success of the Company,
and to encourage them to remain with and devote their best efforts to the
business of the Company, thereby advancing the interests of the Company and its
stockholders. The Plan was originally established March 31, 1994 as the Drilex
Holding Corp. 1994 Stock Option Plan and was amended and restated in July 1994.
Under the Plan, the Company may grant to certain employees (and, with respect to
grants pursuant to Paragraph XII, shall grant to non-employee directors) the
option ("Option") to purchase shares of Common Stock, $.01 par value, of the
Company ("Stock"), as hereinafter set forth. Options granted under the Plan may
be either incentive stock options, within the meaning of section 422(b) of the
Internal Revenue Code of 1986, as amended (the "Code") ("Incentive Stock
Options"), or options which do not constitute Incentive Stock Options, provided,
that options granted pursuant to Paragraph XII shall not constitute Incentive
Stock Options.
II. ADMINISTRATION
The Plan shall be administered by a committee (the "Committee") of two or
more directors of the Company appointed by the Board of Directors of the Company
(the "Board"). Each member of the Committee shall be a "disinterested person"
within the meaning of Rule 16b-3(c) under the Securities Exchange Act of 1934,
as amended (the "1934 Act"). Subject to the terms of this Plan (including,
without limitation, the provisions governing participation in this Plan by non-
employee directors), the Committee shall have sole discretion and authority to
select the individuals who are to be granted Options from among those eligible
hereunder and to establish the number of shares which may be issued under each
Option. The Committee is authorized to interpret the Plan and may from time to
time adopt such rules and regulations, consistent with the provisions of the
Plan, as it may deem advisable to carry out the Plan. The Committee may, in its
discretion, provide for the extension of the exercisability of an Option or
Stock Appreciation Rights (as defined herein) (an Option, Stock Appreciation
Rights or any combination thereof being referred to at times herein as an
"Award"), accelerate the vesting or exercisability of an Award, eliminate or
make less restrictive any restrictions contained in an Award, waive any
restriction or other provision of this Plan or an Award or otherwise amend or
modify an Award in any manner that is either (i) not adverse to the optionee
holding such Award or (ii) consented to by such optionee. The Committee may
correct any defect or supply any omission or reconcile any inconsistency in this
Plan or in any Award in the manner and to the extent the Committee deems
necessary or desirable to carry it into effect. Any
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decision of the Committee in the interpretation and administration of this Plan
shall lie within its sole and absolute discretion and shall be final, conclusive
and binding on all parties concerned. No member of the Committee or officer of
the Company to whom it has delegated authority shall be liable for anything done
or omitted to be done by him or her, by any member of the Committee or by any
officer of the Company in connection with the performance of any duties under
this Plan, except for his or her own willful misconduct or as expressly provided
by statute.
III. OPTION AGREEMENTS
Each Option shall be evidenced by an Option Agreement and shall contain
such terms and conditions, and may be exercisable for such periods and upon such
events, as may be approved by the Committee, subject to the terms of this Plan.
The terms and conditions of the respective Option Agreements need not be
identical. Specifically, an Option Agreement may provide for the surrender, in
whole or in part, of the right to purchase shares under the Option in return for
a payment in cash or shares of Stock or a combination of cash and shares of
Stock equal in value to the excess of the fair market value of the shares with
respect to which the right to purchase is surrendered over the option price
therefor ("Stock Appreciation Rights"), on such terms and conditions as the
Committee in its sole discretion may prescribe; provided, however, that, except
as provided in subparagraph VIII(c) hereof, the Committee shall retain final
authority (i) to determine the form in which payment of Stock Appreciation
Rights will be made or (ii) to approve an election by an optionee to receive
cash in whole or in part in settlement of Stock Appreciation Rights. Stock
Appreciation Rights as provided herein may be granted at the time an Option is
granted or at any time or from time to time thereafter. Moreover, an Option
Agreement may provide for the payment of the option price, in whole or in part,
by the delivery of a number of shares of Stock (plus cash if necessary) having a
fair market value equal to such option price. For all purposes under the Plan,
the fair market value of a share of Stock on a particular date shall mean (i) if
the shares of Stock are listed on a national securities exchange, the mean
between the highest and lowest sales price per share of Stock on the
consolidated transaction reporting system for the principal such national
securities exchange on that date, or, if there shall have been no such sale so
reported on that date, on the last preceding date on which such a sale was so
reported, (ii) if the shares of Stock are not so listed but are quoted in the
NASDAQ National Market (or any successor to such market), the mean between the
highest and lowest sales price per share of Stock on the NASDAQ National Market
on that date, or, if there shall have been no such sale so reported on that
date, on the last preceding date on which such a sale was so reported or (iii)
if the Stock is not so listed or quoted, the mean between the closing bid and
asked price on that date, or, if there are no quotations available for such
date, on the last preceding date on which such quotations shall be available, as
reported by NASDAQ, or, if not reported by NASDAQ, by the National Quotation
Bureau, Inc. In the event Stock is not listed or quoted at the time a
determination of its value is required to be made hereunder, the determination
of its fair market value shall be made by the Committee in such manner as it
deems appropriate. Each Option and all rights granted thereunder shall not be
transferable other than by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the Code or Title
I of the Employee Retirement Income Security Act, or the rules thereunder, and
shall be exercisable during the optionee's lifetime only by the optionee or the
optionee's guardian or legal representative.
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Notwithstanding anything herein to the contrary, no optionee may be granted,
during any year, awards consisting of Options or Stock Appreciate Rights
exercisable for more than 200,000 shares of Stock.
IV. ELIGIBILITY OF OPTIONEE
Options may be granted only to (i) individuals who are full-time or part-
time employees (including officers and directors who are also full-time or part-
time employees) of the Company or any parent or subsidiary corporation (as
defined in section 424 of the Code) of the Company at the time the Option is
granted (subject to any limitation on the grant of Incentive Stock Options to
part-time employees imposed by the Code) and (ii) pursuant to Paragraph XII
only, individuals who are directors of the Company and who are not employees of
the Company or of any parent or subsidiary corporation of the Company (as
defined in Rule 424 of the Code) (each such individual described in this clause
(ii) being referred to as a "non-employee director"). Options may be granted to
the same individual on more than one occasion. No Incentive Stock Option shall
be granted to an individual if, at the time the Option is granted, such
individual owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or of its parent or subsidiary
corporation, within the meaning of section 422(b)(6) of the Code, unless (x) at
the time such Option is granted the option price is at least 110% of the fair
market value of the Stock subject to the Option and (y) such Option by its terms
is not exercisable after the expiration of five years from the date of grant.
To the extent that the aggregate fair market value (determined at the time the
respective Incentive Stock Option is granted) of stock with respect to which
Incentive Stock Options are exercisable for the first time by an individual
during any calendar year under all incentive stock option plans of the Company
and its parent and subsidiary corporations exceeds $100,000, such excess
Incentive Stock Options shall be treated as options which do not constitute
Incentive Stock Options. The Committee shall determine, in accordance with
applicable provisions of the Code, Treasury Regulations and other administrative
pronouncements, which of an optionee's Incentive Stock Options will not
constitute Incentive Stock Options because of such limitation and shall notify
the optionee of such determination as soon as practicable after such
determination.
V. SHARES SUBJECT TO THE PLAN
The aggregate number of shares which may be issued under Options granted
under the Plan shall not exceed 440,000 shares of Stock, which shall be the
limitation applicable after taking into account the Stock split approved by the
Board of Directors of the Company on May 7, 1996 (the "Stock Split"). Such
shares may consist of authorized but unissued shares of Stock or previously
issued shares of Stock reacquired by the Company. Any of such shares which
remain unissued and which are not subject to outstanding Options at the
termination of the Plan shall cease to be subject to the Plan, but, until
termination of the Plan, the Company shall at all times make available a
sufficient number of shares to meet the requirements of the Plan. Should any
Option hereunder expire or terminate prior to its exercise in full, the shares
theretofore subject to such Option may again be subject to an Option granted
under the Plan to the extent permitted under Rule 16b-3. The aggregate number
of shares which may be issued under the Plan shall be subject to adjustment in
the
3
<PAGE>
same manner as provided in Paragraph VIII hereof with respect to shares of Stock
subject to Options then outstanding. Exercise of an Option in any manner,
including an exercise involving a Stock Appreciation Right, shall result in a
decrease in the number of shares of Stock which may thereafter be available,
both for purposes of the Plan and for sale to any one individual, by the number
of shares as to which the Option is exercised. Separate stock certificates
shall be issued by the Company for those shares acquired pursuant to the
exercise of an Incentive Stock Option and for those shares acquired pursuant to
the exercise of any Option which does not constitute an Incentive Stock Option.
VI. OPTION PRICE
The purchase price of Stock issued under each Option shall be determined by
the Committee (except with respect to options granted pursuant to Paragraph
XII), but (i) in the case of an Incentive Stock Option, such purchase price
shall not be less than the fair market value of Stock subject to the Option on
the date the Option is granted and (ii) in the case of an Option that does not
constitute an Incentive Stock Option and is not granted pursuant to Paragraph
XII, such purchase price shall not be less than 50% of the fair market value of
Stock subject to the Option on the date the Option is granted, and (iii) in the
case of an Option granted pursuant to Paragraph XII, such purchase price shall
be as set in Paragraph XII, but in no event shall any such purchase price be
less than the par value of the Stock.
VII. TERM OF PLAN
The Plan became effective on March 31, 1994, the date of its adoption by
the Board, and was approved by the stockholders of the Company within twelve
months thereafter. Except with respect to Options then outstanding, if not
sooner terminated under the provisions of Paragraph IX, the Plan shall terminate
upon and no further Options shall be granted after the expiration of ten years
from the date of its adoption by the Board.
VIII. RECAPITALIZATION OR REORGANIZATION
a. The existence of the Plan and the Options granted hereunder shall not
affect in any way the right or power of the Board or the stockholders of the
Company to make or authorize any adjustment, recapitalization, reorganization or
other change in the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of debt or equity securities ahead of or
affecting stock or rights thereof, the dissolution or liquidation of the Company
or any sale, lease, exchange or other disposition of all or any part of its
assets or business or any other corporate act or proceeding.
b. The shares with respect to which Options may be granted are shares of
Stock as presently constituted, but if, and whenever, prior to the expiration of
an Option theretofore granted, the Company shall effect a subdivision or stock
split or consolidation of shares of Stock or the payment of a stock dividend on
Stock without receipt of consideration by the Company, the number
4
<PAGE>
of shares of Stock with respect to which such Option may thereafter be exercised
(i) in the event of an increase in the number of outstanding shares, shall be
proportionately increased, and the purchase price per share shall be
proportionately reduced, and (ii) in the event of a reduction in the number of
outstanding shares, shall be proportionately reduced, and the purchase price per
share shall be proportionately increased.
c. If the Company recapitalizes, or reclassifies its capital stock, or
otherwise changes or reorganizes its capital structure (a "recapitalization"),
thereafter upon any exercise of an Option theretofore granted the optionee shall
be entitled to purchase under such Option, in lieu of the number of shares of
Stock then covered by such Option, the number and class of shares of stock and
securities to which the optionee would have been entitled pursuant to the terms
of the recapitalization if, immediately prior to such recapitalization, the
optionee had been the holder of record of the number of shares of Stock then
covered by such Option. If (i) the Company shall not be the surviving entity in
any merger or consolidation (or survives only as a subsidiary of an entity other
than a previously wholly owned subsidiary of the Company), (ii) the Company
sells, leases or exchanges (or agrees to sell, lease or exchange) all or
substantially all of its assets to any other person or entity (other than a
wholly owned subsidiary of the Company), (iii) the Company is to be dissolved
and liquidated, (iv) any person or entity, including a "group" as contemplated
by Section 13(d)(3) of the 1934 Act (other than DRLX Partners, L.P. or its
partners or any group including DRLX Partners, L.P. or its partners), acquires
or gains ownership or control (including, without limitation, power to vote) of
more than 50% of the outstanding shares of the Company's voting stock (based
upon voting power), or (v) as a result of or in connection with a contested
election of directors, the persons who were directors of the Company before such
election shall cease to constitute a majority of the Board (each such event is
referred to herein as a "Corporate Change"), then (except with respect to
Options granted pursuant to Paragraph XII) effective as of a date (selected by
the Committee) within (a) ten days after the approval by the stockholders of the
Company of such merger, consolidation, sale, lease or exchange of assets or
dissolution or such election of directors or (b) thirty days of such change of
control referred to in clause (iv) above, the Committee, acting in its sole
discretion without the consent or approval of any optionee, shall effect one or
more of the following alternatives, which may vary among individual optionees:
(1) accelerate the time at which Options then outstanding may be exercised so
that such Options may be exercised in full for a limited period of time on or
before a specified date (before or after such Corporate Change) fixed by the
Committee, after which specified date all unexercised Options and all rights of
optionees thereunder shall terminate, (2) require the mandatory surrender to the
Company by selected optionees of some or all of the outstanding Options held by
such optionees (irrespective of whether such Options are then exercisable under
the provisions of the Plan) as of a date, before or after such Corporate Change,
specified by the Committee, in which event the Committee shall thereupon cancel
such Options and cause the Company to pay to each optionee an amount of cash per
share equal to the excess of the amount calculated in Subparagraph (d) below
(the "Change of Control Value") of the shares subject to such Option over the
exercise price(s) under such Options for such shares, (3) make such adjustments
to Options then outstanding as the Committee deems appropriate to reflect such
Corporate Change (provided, however, that the Committee may determine in its
sole discretion that no adjustment is necessary to Options then out-
5
<PAGE>
standing) or (4) provide that thereafter upon any exercise of an Option
theretofore granted the optionee shall be entitled to purchase under such
Option, in lieu of the number of shares of Stock then covered by such Option,
the number and class of shares of stock or other securities or property
(including, without limitation, cash) to which the optionee would have been
entitled pursuant to the terms of the agreement of merger, consolidation or sale
of assets or dissolution if immediately prior to such merger, consolidation or
sale of assets or dissolution the optionee had been the holder of record of the
number of shares of Stock then covered by such Option. If a Corporate Change
occurs, then (x) on the date of approval by the stockholders of the Company of
such merger, consolidation, sale, lease or exchange of assets or dissolution or
such election of directors or (y) on the date of such change of control referred
to in clause (iv) above, all Options granted pursuant to Paragraph XII shall be
mandatorily surrendered to the Company (irrespective of whether such Options are
then exercisable under the provisions of the Plan) as of the date specified in
clause (x) or (y) above, as applicable, and such Options shall thereupon
automatically be canceled and the Company shall pay to each optionee an amount
of cash per share equal to the excess of the Change of Control Value of the
shares subject to such Option over the exercise price(s) under such Options for
such shares.
d. For the purposes of clause (2) and the last sentence in Subparagraph
(c) above, the "Change of Control Value" shall equal the amount determined in
clause (i), (ii) or (iii), whichever is applicable, as follows: (i) the per
share price offered to stockholders of the Company in any such merger,
consolidation, sale of assets or dissolution transaction, (ii) the per share
price offered to stockholders of the Company in any tender offer or exchange
offer whereby a Corporate Change takes place or (iii) if such Corporate Change
occurs other than pursuant to a tender or exchange offer, the fair market value
per share of the shares into which such Options being surrendered are
exercisable, as determined by the Committee as of the date determined by the
Committee (or required by the last sentence in Subparagraph (c) above, as the
case may be) to be the date of cancellation and surrender of such Options. In
the event that the consideration offered to stockholders of the Company in any
transaction described in this Subparagraph (d) or Subparagraph (c) above
consists of anything other than cash, the Committee shall determine the fair
cash equivalent of the portion of the consideration offered which is other than
cash.
e. Any adjustment provided for in Subparagraphs (b) or (c) above shall be
subject to any required stockholder action.
f. Except as hereinbefore expressly provided, (i) the issuance by the
Company of shares of stock of any class or securities convertible into shares of
stock of any class, for cash, property, labor or services, upon direct sale,
upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, (ii) the payment of a dividend in property other than Stock
or (iii) the occurrence of any similar transaction, and in any case whether or
not for fair value, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number of shares of Stock subject to Options
theretofore granted or the purchase price per share, unless otherwise determined
by the Board in its sole discretion.
6
<PAGE>
IX. AMENDMENT OR TERMINATION OF THE PLAN
The Board of Directors of the Company may amend, modify, alter,
suspend or terminate this Plan, except that (a) no amendment or alteration that
would impair the rights of any optionee under any Option that he has been
granted shall be made without his consent, (b) no amendment or alteration shall
be effective prior to approval by the Company's stockholders to the extent such
approval is then required pursuant to Rule 16b-3 (or any successor provision)
under the 1934 Act in order to preserve the applicability of any exemption
provided by such rule to any Option then outstanding (unless the holder of such
Option consents) or to the extent stockholder approval is otherwise required by
applicable legal requirements, and (c) subparagraph XII(a) and XII(c) shall not
be amended more than once every six months to the extent such limitation is
required by Rule 16b-3(c)(2)(ii) (or any successor provision) under the 1934 Act
as then in effect.
X. SECURITIES LAWS
a. The Company shall not be obligated to issue any Stock pursuant to
any Option granted under the Plan at any time when the shares covered by such
Option have not been registered under the Securities Act of 1933 and such other
state and federal laws, rules or regulations as the Company or the Committee
deems applicable and, in the opinion of legal counsel for the Company, there is
no exemption from the registration requirements of such laws, rules or
regulations available for the issuance and sale of such shares.
b. It is intended that the Plan and any grant of an Option made to a
person subject to Section 16 of the 1934 Act meet all of the requirements of
Rule 16b-3 thereunder. If any provision of the Plan or any such Option would
disqualify the Plan or such Option under, or would otherwise not comply with,
Rule 16b-3, such provision or Option shall be construed or deemed amended to
conform to Rule 16b-3.
XI. WITHHOLDING AND CASH BONUSES
Except with respect to Options granted pursuant to Paragraph XII, the
Committee may permit an optionee to elect (which election shall be subject to
the Committee's sole discretion to consent to or disapprove of, shall be
irrevocable and, if the optionee is subject to Section 16 of the 1934 Act, shall
be subject to such administrative rules as the Committee shall determine to
assure compliance with Rule 16b-3 under the 1934 Act) to deliver to the Company
(or have the Company withhold upon exercise of an Option) such shares of Stock
as the Company may require to meet its obligation under applicable tax laws and
regulations to the extent the exercise of an Option or the disposition of shares
of Stock acquired by exercise of an Option results in compensation income to the
optionee for federal or state income tax purposes. Except with respect to
Options granted pursuant to Paragraph XII, the Committee may, at any time and in
its discretion, grant to any optionee whose Option is not an Incentive Stock
Option (or whose Incentive Stock Option fails to quality for the favorable tax
treatment afforded to Incentive Stock Options) the right to receive, at such
time and in such amounts as determined by the Committee, a cash amount ("Cash
Award") which is intended
7
<PAGE>
to reimburse the optionee for (i) all or a portion of the federal, state and
local income taxes imposed upon such optionee as a consequence of the exercise
for Stock of such Option (or Stock Appreciation Right), or as a consequence of a
disqualifying disposition of Stock obtained upon exercise of an Incentive Stock
Option, or of the Committee's taking any action permitted under this Plan
(including the receipt of the Cash Award) and/or (ii) all or a portion of an
assumed interest cost for borrowing the amount of such taxes not reimbursed by
the Company during the period prior to the sale of the Stock received upon
exercise of the Option (or Stock Appreciation Right).
XII. AUTOMATIC OPTION GRANTS TO NON-EMPLOYEE DIRECTORS
Notwithstanding any other provision of this Plan, non-employee
directors shall participate in this Plan only to the extent set forth in this
Paragraph XII.
a. Automatic Grant of Options. Prior to the date of amendment and
--------------------------
restatement of this Plan in May 1996, Options had been awarded to two non-
employee directors. The Options previously awarded to such non-employee
directors are not Incentive Stock Options, and were awarded on the dates, at the
option price, and to purchase the number of shares of Stock indicated on Exhibit
A. Effective as of the date of consummation of the initial public offering of
the Company's Stock (the "Offering"), the non-employee directors identified on
Exhibit A will be entitled to receive an additional Option to purchase 1,200
shares of Stock, taking into account the Stock Split, at an exercise price equal
to the initial public offering price per share of Stock. Pursuant to the
amendment and restatement of this Plan in May 1996, the definition of a non-
employee director was revised such that the three directors identified on
Exhibit B are eligible to receive Options pursuant to this Section XII.
Effective as of the date of consummation of the Offering, the non-employee
directors identified on Exhibit B will be entitled to receive an Option to
purchase 3,620 shares of Stock, taking into account the Stock Split, at an
exercise price equal to the initial public offering price per share of Stock.
Each other non-employee director elected at any meeting of stockholders of the
Company who has not previously received a grant under this Section XII of the
Plan shall automatically receive, as of the date of the later of the
consummation of the Offering or the stockholders' meeting at which the director
is elected, the grant of an Option (which shall not be an Incentive Stock
Option) to purchase 3,620 shares of Stock, taking into account the Stock Split.
Options granted to non-employee directors shall become exercisable in
installments of one-third of the shares of Stock subject to the Option on each
of the first three anniversaries of the date of grant.
b. Term. The term of each Option granted to a non-employee director
----
shall be ten years from its date of grant, unless sooner terminated in
accordance with Subparagraph XII (d) below.
c. Option Price. The purchase price of Stock under each Option
------------
granted to a non-employee director shall be the fair market value of the Stock
subject to the Option on the date the Option is granted, or such price as is
more specifically described in Subparagraph XII(a).
d. Exercise After Death or Other Termination. Each Option granted to
-----------------------------------------
a non-employee director may be exercised only by such director during such
director's lifetime and while such
8
<PAGE>
director remains a member of the Board, except that
(i) if a non-employee director ceases to be a member of the Board by
reason of disability (within the meaning of section 22(e)(3) of the Code), such
non-employee director's Option may be exercised by such non-employee director
(or his or her estate or the person who acquires such Option by will or the laws
of descent and distribution or otherwise by reason of the death of such non-
employee director) at any time during the period of one year following such
cessation, but only as to the number of shares such director was entitled to
purchase under such Option as of the date such director ceased to be a member of
the Board;
(ii) if a non-employee director dies while a member of the Board, such
non-employee director's estate, or the person who acquires such non-employee
director's Option by will or the laws of descent and distribution or otherwise
by reason of the death of such non-employee director, may exercise such Option
at any time during the period of one year following the date of such non-
employee director's death, but only as to the number of shares such director was
entitled to purchase under such Option as of the date of such director's death;
and
(iii) if a non-employee director ceases to be a member of the Board
for any reason other than as described in clauses (i) or (ii) above, unless such
non-employee director voluntarily resigns his directorship without the written
consent of a majority of the remaining members of the Board or is removed from
the Board by the stockholders of the Company, such non-employee director's
Option may be exercised by such director at any time during the period of three
months following such cessation, or by such director's estate (or the person who
acquires such Option by will or the laws of decent and distribution or otherwise
by reason of the death of such director) during a period of one year following
such director's death if such director dies during such three-month period, but
in each case only as to the number of shares such director was entitled to
purchase under such Option as of the date such director ceases to be a member of
the Board.
In the event that a non-employee director voluntarily resigns his directorship
without the written consent of a majority of the remaining members of the Board
or is removed by the stockholders of the Company, any unexercised Options held
by such director on the date of such resignation or removal, as the case may be,
shall be forfeited as of such date and thereafter shall be unexercisable. No
such Option shall be exercisable in any event after the expiration of ten years
from the date of grant thereof.
e. Agreement in Writing. Each Option granted to a non-employee director
--------------------
shall be evidenced by an Option Agreement consistent with the terms and
conditions of the Plan (including this Article XII).
9
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
Option Option
Stock Subject Exercise Stock Subject Exercise
to Option Price to Option Price
Date of Grant Director (Pre-Split) (Pre-Split) (Post-Split) (Post-Split)
- --------------- ----------------- -------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
7/26/94 Robert P. Peebler 1,337 $10 2,420 $5.53
- --------------------------------------------------------------------------------------------
2/24/95 Sam S. Sorrell 1,337 $10 2,420 $5.53
- --------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
EXHIBIT B
Additional Non-employee Directors
---------------------------------
David C. Baldwin
Andrew L. Waite
L.E. Simmons
11
<PAGE>
NON-EMPLOYEE DIRECTOR'S STOCK OPTION AGREEMENT
AGREEMENT made as of the ____ day of ___________, 199__, between Drilex
International Inc., a Delaware corporation (the "Company") and
____________________ ("Director"), a non-employee director of the Company.
To carry out the purposes of the DRILEX INTERNATIONAL INC. STOCK OPTION
PLAN (as amended and restated, and as it may be further amended from time to
time, the "Plan"), by affording Director the opportunity to purchase shares of
Stock (as defined in the Plan) of the Company, and in consideration of the
mutual agreements and other matters set forth herein and in the Plan, the
Company and Director hereby agree as follows:
a. Grant of Option. The Company hereby irrevocably grants to Director the
---------------
right and option ("Option") to purchase all or any part of an aggregate of
_____________ shares of Stock, on the terms and conditions set forth herein and
in the Plan, which Plan is incorporated herein by reference as a part of this
Agreement. This Option shall not be treated as an incentive stock option within
the meaning of section 422(b) of the Internal Revenue Code of 1986, as amended
(the "Code").
b. Purchase Price. The purchase price of Stock purchased pursuant to the
--------------
exercise of this Option shall be $___ per share, subject to adjustment as set
forth herein.
c. Exercise of Option. Subject to the earlier expiration of this Option
------------------
as herein provided, this Option may be exercised, by written notice to the
Company at its principal executive office addressed to the attention of its
Chief Executive Officer, at any time and from time to time after the date of
grant hereof, but, except as otherwise provided below, this Option shall not be
exercisable for more than a percentage of the aggregate number of shares offered
by this Option determined by the number of full years from the date of grant
hereof to the date of such exercise, in accordance with the following schedule:
PERCENTAGE OF SHARES
THAT MAY
NUMBER OF FULL YEARS BE PURCHASED
------------------------ -------------------------
Less than one year 0%
1 year 33-1/3%
2 years 66-2/3%
3 years or more 100%
This Option is not transferable by Director otherwise than by will or
the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined in the Code or Title I of the Employee Retirement
Income Security Act, or the rules thereunder, and may be exercised only
1
<PAGE>
by Director during Director's lifetime and while Director remains a member of
the Board of Directors of the Company, except that:
(a) if Director ceases to be a member of the Board of Directors of the Company
by reason of disability (within the meaning of section 22(e)(3) of the
Code), this Option may be exercised by Director (or Director's estate or
the person who acquires this Option by will or the laws of descent and
distribution or otherwise by reason of the death of Director) at any time
during the period of one year following such cessation, but only as to the
number of shares Director was entitled to purchase hereunder as of the date
Director ceases to be a member of the Board of Directors of the Company;
(b) if Director dies while a member of the Board of Directors of the Company,
Director's estate, or the person who acquires this Option by will or the
laws of descent and distribution or otherwise by reason of the death of
Director, may exercise this Option at any time during the period of one
year following the date of Director's death, but only as to the number of
shares Director was entitled to purchase hereunder as of the date of
Director's death; and
(c) if Director ceases to be a member of the Board of Directors of the Company
for any reason other than as described in clauses (a) or (b) above, unless
Director voluntarily resigns his directorship without the written consent
of a majority of the remaining members of the Board of Directors of the
Company or is removed from such Board of Directors by the stockholders of
the Company, this Option may be exercised by Director at any time during
the period of three months following such cessation, or by Director's
estate (or the person who acquires this Option by will or the laws of
descent and distribution or otherwise by reason of the death of Director)
during a period of one year following Director's death if Director dies
during such three-month period, but in each case only as to the number of
shares Director was entitled to purchase hereunder as of the date Director
ceases to be a member of the Board of Directors of the Company.
In the event that Director voluntarily resigns his directorship without the
written consent of a majority of the remaining members of the Board of Directors
of the Company or is removed by the stockholders of the Company, any unexercised
portion of this Option held by Director on the date of such resignation or
removal, as the case may be, shall be forfeited as of such date and thereafter
shall be unexercisable. This Option shall not be exercisable in any event after
the expiration of ten years from the date of grant hereof. The purchase price
of shares as to which this Option is exercised shall be paid in full at the time
of exercise in cash (including check, bank draft or money order payable to the
order of the Company). Director shall exercise this Option for whole shares of
Stock only. Unless and until a certificate or certificates representing such
shares shall have been issued by the Company to Director, Director (or the
person permitted to exercise this Option in the event of Director's death) shall
not be or have any of the rights or privileges of a stockholder of the Company
with respect to shares acquirable upon an exercise of the Option.
d. Withholding of Tax. To the extent that the exercise of this
------------------
Option results in
2
<PAGE>
compensation income to Director for federal or state income tax purposes,
Director shall deliver to the Company at the time of such exercise such amount
of money as the Company may require to meet its obligation under applicable tax
laws or regulations, and, if Director fails to do so, the Company is authorized
to withhold from any cash or Stock remuneration then or thereafter payable to
Director any tax required to be withheld by reason of such resulting
compensation income.
e. Status of Stock. If the shares of Stock acquirable upon the
---------------
exercise of this Option have not been registered under the Securities Act of
1933, as amended (the "Act"), the Company will not issue such shares unless the
holder of the Option provides the Company with a written opinion of legal
counsel, who shall be satisfactory to the Company, addressed to the Company and
satisfactory in form and substance to the Company's counsel, to the effect that
the proposed issuance of such shares to such Option holder may be made without
registration under the Act. In the event exemption from registration under the
Act is available upon an exercise of this Option, Director (or the person
permitted to exercise this Option in the event of Director's death), if
requested by the Company to do so, will execute and deliver to the Company in
writing an agreement containing such provisions as the Company may require to
assure compliance with applicable securities laws.
Director agrees that the shares of Stock which Director may acquire by
exercising this Option will not be sold or otherwise disposed of in any manner
which would constitute a violation of any applicable securities laws, whether
federal or state.
In addition, Director agrees (i) that the certificates representing
the shares of Stock purchased under this Option may bear such legend or legends
as the Company deems appropriate in order to assure compliance with applicable
securities laws, (ii) that the Company may refuse to register the transfer of
the shares of Stock purchased under this Option on the stock transfer records of
the Company if such proposed transfer would in the opinion of counsel
satisfactory to the Company constitute a violation of any applicable securities
law and (iii) that the Company may give related instructions to its transfer
agent, if any, to stop registration of the transfer of the shares of Stock
purchased under this Option.
f. Board of Directors. Director understands and agrees that nothing
------------------
contained in this Agreement shall be deemed to confer on any person any rights
other than as expressly provided herein, including but not limited to any right
to continue to be nominated to, or to serve as a member of, the Board of
Directors of the Company, and acknowledges and agrees that neither the execution
of this Agreement nor any acquisition of Stock by Director creates any
obligation whatsoever by any person to nominate or vote for Director (or refrain
from removing Director) as a member of the Board of Directors of the Company.
g. Binding Effect. This Agreement shall be binding upon and inure to
--------------
the benefit of any successors to the Company and all persons lawfully claiming
under Director.
h. Governing Law. This Agreement shall be governed by, and construed
-------------
in accordance with, the laws of the State of Delaware.
3
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed by its officer thereunto duly authorized, and Director has executed
this Agreement, all as of the day and year first above written.
DRILEX INTERNATIONAL INC.
By: _________________________________
Name: _______________________________
Title:_______________________________
DIRECTOR
______________________________________
Name: ________________________________
4
<PAGE>
EXHIBIT 11
DRILEX INTERNATIONAL INC.
COMPUTATION OF NET INCOME
PER COMMON AND COMMON EQUIVALENT SHARE
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Period from
Three Months March 30, 1994
Ended March 31, Year Ended (inception) to
----------------------------- December 31, December 31,
1996 1995 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income...................................... $ 526 $ 205 $ 1,784 $ 2,009
========== ==========
Interest expense on Convertible Promissory Note,
net of tax..................................... 33 35
---------- ----------
As adjusted for fully diluted computation....... $ 559 $ 1,819
========== ==========
Weighted average common shares outstanding...... 4,381,205 4,067,948 4,067,183 3,196,757
Incremental effect of shares issued during the
twelve months prior to the filing date of the
Registration Statement......................... - 278,083 215,420 278,083
Incremental shares attributable to outstanding
stock options and warrants..................... 171,051 44,250 128,357 31,901
---------- ---------- ---------- ----------
Weighted average common and common equivalent
shares outstanding............................. 4,552,256 4,390,281 4,410,960 3,506,741
========== ==========
Incremental shares attributable to conversion
of Convertible Promissory Note................. 361,962 90,490
---------- ----------
As adjusted for fully diluted computation....... 4,914,218 4,501,450
========== ==========
Net income per common and common equivalent
share:
Primary..................................... $ .12 $ .05 $ .40 $ .57
========== ========== ========== ==========
Fully diluted............................... $ .11 $ .40
========== ==========
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF DRILEX INTERNATIONAL INC.
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
OF VOTING OF VOTING
SECURITIES SECURITIES
OWNED BY OWNED BY
DRILEX IMMEDIATE
INTERNATIONAL INC. PARENT
------------------ ----------
<S> <C> <C>
Drilex Systems, Inc. (Texas)............................. 100%
Drilex Systems, S.A. (Venezuela)....................... 100%
Drilex Systems Canada Inc. (Canada)................... 70%
Drilex U.K. Limited (United Kingdom)................... 100%
Drilex Overseas Corporation Limited (Bahamas)....... 100%
Drilex Systems Limited (United Kingdom).............. 100%
Cobb Directional Drilling Company, L.L.C. (Delaware)..... 99%*
Sharewell, Inc. (Delaware)............................... 100%
Sharewell (Far East) Limited (Hong Kong)............... 36%
Sharewell Horizontal Systems Ltd. (United Kingdom).... 100%
Sharewell Canada, Inc. (Canada)........................ 100%
</TABLE>
*Drilex Systems, Inc. owns the remaining 1% equity interest in Cobb Directional
Drilling Company, L.L.C.
**Sharewell Horizontal Systems Ltd. owns 30% of Sharewell (Far East) Limited. An
unrelated third party owns the remaining 36%.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this registration statement on Form S-1 of Drilex
International Inc. ("the Company") of our reports dated April 26, 1996 with
respect to the (i) consolidated financial statements of the Company as of
December 31, 1995 and 1994 and for the year ended December 31, 1995 and the
period from March 30, 1994 (inception) to December 31, 1994, and the related
financial statement schedule, (ii) consolidated statements of operations and
cash flows of Drilex Systems, Inc. and subsidiaries for the three-month period
ended March 30, 1994 and the year ended December 31, 1993, (iii) consolidated
statements of income and cash flows of Ensco Technology Company and subsidiary
for the nine-month period ended September 30, 1995 and the year ended December
31, 1994, and of our report dated June 23, 1995 with respect to the
consolidated statements of operations and cash flows of Sharewell, Inc. and
subsidiaries for each of the two years in the period ended March 31, 1995.
We also consent to the reference to us under the heading "Experts" in this
registration statement.
Deloitte & Touche LLP
Houston, Texas
June 13, 1996
<PAGE>
EXHIBIT 24.1
DRILEX INTERNATIONAL INC.
POWER OF ATTORNEY
WHEREAS, Drilex International Inc., a Delaware corporation (the "Company")
(formerly known as Drilex Corporation), filed with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Act"), a Registration Statement on Form S-1, including a prospectus (the
"Registration Statement"), and has and will file such amendment or amendments
thereto as may be necessary or appropriate, together with any and all exhibits
and other documents having relation to the Registration Statement, in connection
with the Company's proposed initial public offering;
NOW, THEREFORE, Clark Johnson hereby appoints John Forrest and G. Bruce
Broussard, and both of them, either of whom may act without the joinder of the
other, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign any and all amendments (including post-effective
amendments) to the Registration Statement, and any registration statement for
the same offering filed pursuant to Rule 462 under the Act, and to file the
same, with all exhibits thereto and all other documents in connection therewith,
with the Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing appropriate or
necessary to be done, as fully and for all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or their substitute or substitutes may lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this instrument this day
of June, 1996.
/s/ CLARK JOHNSON
-----------------------------
Clark Johnson, Director
Drilex International Inc.
