<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 6, 1996
REGISTRATION NUMBER 333-04593
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DAILEY PETROLEUM SERVICES CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1389 76-0503351
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification No.)
incorporation or
organization)
</TABLE>
2507 NORTH FRAZIER
P.O. BOX 1863
CONROE, TEXAS 77305
(713) 350-3399
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
WILLIAM D. SUTTON
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
DAILEY PETROLEUM SERVICES CORPORATION
2507 NORTH FRAZIER
P.O. BOX 1863
CONROE, TEXAS 77305
(713) 350-3399
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<S> <C>
ROBERT F. GRAY, JR. NICK D. NICHOLAS
FULBRIGHT & JAWORSKI L.L.P. PORTER & HEDGES, L.L.P.
1301 MCKINNEY, SUITE 5100 700 LOUISIANA, 35TH FLOOR
HOUSTON, TEXAS 77010-3095 HOUSTON, TEXAS 77002-2764
(713) 651-5151 (713) 226-0600
</TABLE>
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 of 1933, please check the
following box and list the Securities Act of 1933 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 of 1933, check the following box and list the
Securities Act of 1933 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, AS AMENDED, OR UNTIL THIS 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> 2
DAILEY PETROLEUM SERVICES CORP.
---------------------
CROSS-REFERENCE SHEET
(PURSUANT TO ITEM 501(B) OF REGULATION S-K)
---------------------
<TABLE>
<CAPTION>
FORM S-1 ITEM AND CAPTION LOCATION OR PROSPECTUS CAPTION
------------------------------------------- -------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of
Prospectus.............................. Facing page of Registration Statement;
Cross Reference Sheet; Outside Front Cover
Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus........................... Inside Front Cover and Outside Back Cover
Pages of Prospectus
3. Summary Information, Risk Factors.......... Prospectus Summary; The Company; Risk
Factors
4. Use of Proceeds............................ Use of Proceeds; Management's Discussion
and Analysis of Financial Condition and
Results of Operations
5. Determination of Offering Price............ Underwriting
6. Dilution................................... Risk Factors; Dilution
7. Selling Security Holders................... *
8. Plan of Distribution....................... Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to Be
Registered.............................. The Offering; Description of Capital Stock
10. Interests of Named Experts and Counsel..... Experts; Legal Matters
11. Information with Respect to the
Registrant.............................. Outside Front Cover Page of Prospectus;
Prospectus Summary; Risk Factors; The
Company; Use of Proceeds; Dividend
Policy; Capitalization; Selected
Consolidated Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business and Properties;
Management; Certain Relationships and
Related Transactions; Security Ownership
of Management and Principal Stockholder;
Description of Capital Stock; Shares
Eligible for Future Sale; Consolidated
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities
Act Liabilities......................... *
</TABLE>
- ---------------
* Item is omitted either because it is inapplicable or the answer thereto is
negative.
<PAGE> 3
*******************************************************************************
* 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. *
*******************************************************************************
SUBJECT TO COMPLETION, DATED AUGUST 6, 1996
PROSPECTUS
4,000,000 SHARES
[DAILEY PETROLEUM SERVICES CORP. LOGO]
CLASS A COMMON STOCK
---------------------
All of the shares of Class A Common Stock, par value $.01 per share ("Class
A Common Stock"), offered hereby (the "Offering") are being sold by Dailey
Petroleum Services Corp. ("Dailey" or the "Company"). Prior to the Offering,
there has been no public market for the Class A Common Stock. The Class A Common
Stock has been approved for listing on the Nasdaq National Market under the
symbol "DALY", subject to official notice of issuance. It is currently
anticipated that the initial public offering price will be between $9 and $11
per share. See "Underwriting" for factors to be considered in determining the
initial public offering price.
The Company's authorized capital stock includes Class A Common Stock and
Class B Common Stock, par value $.01 per share ("Class B Common Stock" and,
collectively with the Class A Common Stock, the "Common Stock"). The Class A
Common Stock is substantially identical to the Class B Common Stock, except with
respect to voting rights. The Class A Common Stock is entitled to one vote per
share and the Class B Common Stock is entitled to seven votes per share. See
"Description of Capital Stock".
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
---------------------
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
PUBLIC DISCOUNT(1) COMPANY(2)
---------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $ $ $
Total (3)......................... $ $ $
</TABLE>
- ---------------
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting".
(2) Before deducting expenses payable by the Company, estimated to be $750,000.
(3) The Company has granted the several Underwriters a 30-day option to purchase
up to an aggregate of 600,000 additional shares of Class A Common Stock on
the same terms and conditions as set forth above 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 Class A Common Stock are offered by the several Underwriters,
subject to prior sale when, as and if issued to and accepted by the
Underwriters. The Underwriters reserve the right to reject orders in whole or
part. It is expected that delivery of the shares of Class A Common Stock will be
made against payment therefor in New York, New York on or about ,
1996.
---------------------
JEFFERIES & COMPANY, INC. SOUTHCOAST CAPITAL
CORPORATION
, 1996
<PAGE> 4
[GRAPHIC]
The graphics on page two of the Prospectus are contained in a two page
fold-out. Page one of the fold-out, which is seen when first opening the
Prospectus, contains at the bottom the stabilization and other language set
forth below. Page one also contains a copy of the Company's logo as well as
the following pictures: (i) drilling jars; (ii) a drilling rig; (iii) an MWD
monitoring unit; and (iv) two MWD technicians. Page two of the foldout
contains a world map and lists by geographic region the Company's offices and
international agents. Page two also contains pictures of the Conroe repair
building, an offshore drilling platform, drilling jars and a MWD sensor unit and
technician. The back drop of each page is colored in "Dailey Blue."
Prior to the Offering, the Company has not been subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements reported on by independent
public accountants following the end of each fiscal year and such interim
reports as it may determine to be necessary or desirable.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. References in this Prospectus to the
"Company" or "Dailey" shall mean Dailey Petroleum Services Corp., its
predecessors and its and their subsidiaries, unless the context otherwise
requires. Unless otherwise noted herein, the information contained in this
Prospectus gives effect to the Reorganization and assumes the Underwriters'
over-allotment option will not be exercised.
THE COMPANY
Dailey Petroleum Services Corp. provides directional drilling services and
designs, manufactures and rents technologically-advanced downhole tools for oil
and gas drilling and workover applications. Founded in 1945 as a fishing tool
company, Dailey began offering directional drilling services in 1984 and
currently provides such services in the Gulf of Mexico, the United States Gulf
Coast region, and most recently, Venezuela and the Austin Chalk formation in
Texas and Louisiana. The Company's directional drilling services include
computer-aided planning of optimum well path and drilling procedures, on-site
supervision, measurement-while-drilling ("MWD") services and sourcing and supply
of MWD equipment and related drilling tools.
The Company offers an array of downhole tools, which it selectively markets
in every major oil and gas exploration and production region in the world.
Dailey introduced its first drilling jar to the oil and gas industry in 1965 and
currently is the leading supplier of drilling jars to the rental tool market
worldwide. In addition to drilling jars, the Company's other downhole tools
include hydraulic fishing jars, coiled tubing jars, MWD equipment, downhole
drilling motors, thrusters for directional drilling and drilling shock
absorbers. The Company manufactures certain of its tools, purchases others, and
rents others from third-parties.
Recent advances in directional drilling technologies combined with advances
in the identification and location of oil and gas reserves have made many
marginal or otherwise uneconomical reservoirs economically feasible to produce.
In many oilfield applications, directional drilling techniques, which include
directional and horizontal drilling, extended-reach drilling and short-radius
drilling, offer significant economic advantages over conventional drilling, such
as reduced drilling time and expense, accelerated production rates and enhanced
reservoir recovery. The Company offers drilling services for directional and
horizontal applications and offers its downhole tools for all advanced drilling
techniques. The Company believes its products and services improve drilling
efficiency, reduce the risk that expensive drilling components will be lost
downhole and enhance overall exploration and development economics.
Dailey traditionally has marketed its downhole tools directly to the
end-user through its direct sales force and agents, rather than rely on
third-party distribution of its products and subcontracting of its services. The
Company believes this strategy has resulted in higher profit margins and intends
to continue this marketing strategy. In addition, this direct interaction with
the end-user assists the Company in identifying demand for new and improved
products and better enables it to design and develop such products in a timely
manner.
The Company also believes that its reputation for quality and reliability
has resulted in worldwide industry recognition of the Dailey(R) name.
Furthermore, the proprietary designs of many of the Company's principal
products, its ability to attract and retain highly-qualified and experienced
personnel, and its ability to design, develop and market new and complementary
products and services are believed by the Company to be important competitive
advantages.
3
<PAGE> 6
BUSINESS STRATEGY
The Company's strategy is to broaden the scope of the premium downhole
tools and services it provides
to the oil and gas industry. The Company believes this strategy is responsive to
its customers' preferences to purchase as broad a range of products and services
as possible from a single provider and that the ability to offer related
services enhances the Company's marketing of its downhole tools. The Company
intends to implement this strategy by (i) expanding its directional drilling
services and related product offerings, (ii) introducing new products and
services through technological innovation and (iii) acquiring complementary
businesses and assets.
Expand Directional Drilling Services and Related Product Offerings. The
Company's immediate strategy is to implement a significant expansion of its
directional drilling business, both in the geographic scope and in types of
drilling services it offers. Directional drilling services are becoming
increasingly important to the Company's business because a growing percentage of
the Company's downhole tools are rented in connection with providing such
services.
Introduce New Products and Services through Technological Innovation. The
Company believes that its emphasis on distribution of its downhole tools
directly to its customers has enhanced its ability to identify, design, develop
and market to these customers new products and improved products that are
responsive to its customers' needs. Dailey will continue to emphasize direct
interaction with its customers as a method of identifying new product
opportunities to keep pace with changing drilling technology trends and as a
means of refining its existing downhole tools, which the Company believes will
protect and expand its reputation for quality downhole tools and directional
drilling services.
Acquire Complementary Businesses and Assets. The Company is actively
seeking strategic acquisitions that will provide additional and complementary
products and services. The Company believes that acquisition candidates are
available that will allow Dailey to increase market share for its downhole tools
in existing markets, add new and complementary products and services and expand
marketing and distribution channels for its downhole tools and directional
drilling services. The directional drilling services industry recently has
experienced consolidation in response to increased demand for companies offering
a broad range of advanced drilling tools and services. The Company believes that
this trend will continue and will present opportunities for Dailey to increase
the breadth and geographic scope of its directional drilling services through
strategic acquisitions. In addition, the Company believes that it can expand the
scope of the products and services it offers through the purchase or manufacture
of complementary tools and technology and by hiring experienced service
personnel.
4
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock............................. 4,000,000 shares
Common Stock outstanding after the Offering:
Class A Common Stock(1)(2)..................... 4,360,000 shares
Class B Common Stock(2)........................ 5,000,000 shares
Use of Proceeds.................................. Of the net proceeds from the Offering, the
Company intends to use approximately $15.0
million for capital expenditures for
downhole tools; approximately $1.6 million
for repayment of indebtedness to Lawrence;
approximately $10.1 million for repayment
of indebtedness to a subsidiary of
Lawrence; and the balance to fund
acquisitions of complementary businesses
and assets and for working capital and
other general corporate purposes. See "Use
of Proceeds".
Nasdaq National Market Symbol.................... DALY
</TABLE>
- ---------------
(1) Includes 360,000 shares to be issued contemporaneously with the Offering as
restricted stock awards to certain key employees pursuant to the Company's
1996 Key Employee Stock Plan, but excludes 540,000 additional shares
reserved for issuance under such plan. Also excludes 100,000 shares reserved
for issuance under the Company's 1996 Non-Employee Director Stock Plan. See
"Management -- 1996 Key Employee Stock Plan" and "Management -- 1996
Non-Employee Director Stock Plan".
(2) Class A Common Stock is substantially identical to Class B Common Stock
except with respect to voting rights. Each share of Class A Common Stock
entitles the holder thereof to one vote per share, and each share of Class B
Common Stock entitles the holder thereof to seven votes per share in all
matters submitted to the stockholders for a vote. In addition, shares of
Class B Common Stock may be converted into an equal number of shares of
Class A Common Stock at any time upon election of the holder thereof. Shares
of Class B Common Stock convert automatically into an equal number of shares
of Class A Common Stock in the event such shares of Class B Common Stock are
transferred to a person or entity that is not a member of the Lawrence Group
(as defined in the Company's Restated Certificate of Incorporation). See
"Risk Factors -- Special Voting Rights of Class B Common Stock; Relationship
with Lawrence", "Certain Relationships and Related Transactions" and
"Description of Capital Stock -- Class A and B Common Stock".
PRINCIPAL STOCKHOLDER
Prior to the Offering, the Company was owned by a wholly-owned subsidiary
of Lawrence Industries, Inc. References in this Prospectus to "Lawrence" shall
mean Lawrence Industries, Inc. and its subsidiaries, other than the Company.
Following the Offering, Lawrence will own 100% of the Company's outstanding
Class B Common Stock, which will represent 53% of the total outstanding Common
Stock (50% if the Underwriters' over-allotment option is exercised in full) and
89% of the total voting power of the Company's outstanding Common Stock (88% if
the Underwriters' over-allotment option is exercised in full) and thus will be
able to elect the Company's directors and control its management. Historically,
the Company financed certain of its working capital requirements through
periodic advances, and a $3.3 million long-term note payable (the "Lawrence
Note") relating to advances prior to fiscal 1994, from Lawrence. During the past
three fiscal years, however, the Company has internally financed its working
capital requirements and has paid to (received from) Lawrence net amounts of
approximately $(52,000), $711,000 and $538,000 during fiscal 1994, 1995 and
1996, respectively. The Company also has made principal and interest payments on
the Lawrence Note, the outstanding balance of which will be repaid utilizing
proceeds from the Offering, totalling $306,000, $880,000 and $842,000 during
fiscal 1994, 1995 and 1996, respectively. The Company does not expect Lawrence
to be a source of working capital in the future. See "Risk Factors", "The
Company", "Management's Discussion and Analysis of Financial Condition and
Results of Operations", and "Certain Relationships and Related Transactions".
5
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for each of the fiscal
years in the five-year period ended April 30, 1996, have been derived from
audited consolidated financial statements of the Company. The Consolidated
Statement of Operations Data for the years ended April 30, 1994, 1995 and 1996,
and the Consolidated Balance Sheet Data as of April 30, 1996, are derived from
the Company's audited consolidated financial statements appearing elsewhere in
this Prospectus. This information should be read in conjunction with "Selected
Consolidated Financial Data", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
of the Company and the notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
-----------------------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Rental income................................... $ 30,591 $ 28,746 $ 32,393 $ 36,691 $ 42,987
Sales of products and services.................. 11,180 8,742 11,422 12,172 15,952
---------- ---------- ---------- ---------- ----------
Total revenues................................ 41,771 37,488 43,815 48,863 58,939
Cost of rentals and services:
Cost of rentals................................. 26,268 25,078 27,384 29,685 33,019
Cost of products and services................... 5,116 4,003 5,124 6,889 7,927
---------- ---------- ---------- ---------- ----------
Total cost of rentals and services............ 31,384 29,081 32,508 36,574 40,946
Selling, general and administrative expenses...... 7,422 6,783 7,085 9,607 12,083
Research and development expenses................. 1,224 1,262 736 775 728
---------- ---------- ---------- ---------- ----------
Operating income.................................. 1,741 362 3,486 1,907 5,182
Interest expense, net............................. 29 285 513 1,001 863
Other (income) expense, net....................... 78 (435) (225) 190 39
Foreign exchange (gain) loss...................... 111 228 122 (90) 239
---------- ---------- ---------- ---------- ----------
Income before income taxes and extraordinary
item............................................ 1,523 284 3,076 806 4,041
Income tax expense................................ 1,101 898 1,075 838 1,427
Extraordinary income(1)........................... 1,535 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)................................. $ 1,957 $ (614) $ 2,001 $ (32) $ 2,614
========== ========== ========== ========== ==========
Earnings (loss) per share(2)...................... $ .37 $ (.11) $ .37 $ (.01) $ --
Pro forma earnings per share(3)................... -- -- -- -- $ .41
Average common and common equivalent shares
outstanding(3).................................. 5,360,000 5,360,000 5,360,000 5,360,000 6,360,000
OTHER DATA:
Depreciation and amortization..................... $ 3,600 $ 4,114 $ 4,323 $ 5,428 $ 5,726
</TABLE>
<TABLE>
<CAPTION>
AS OF APRIL 30, 1996
--------------------------
ACTUAL AS ADJUSTED(4)
------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Total assets.............................................................................. $55,878 $ 80,568
Working capital........................................................................... 7,477 32,827
Long-term debt, less current portion and long-term debt payable to affiliate.............. 6,866 6,866
Long-term debt payable to affiliate, less current portion................................. 1,100 --
Stockholders' equity...................................................................... 35,641 62,091
</TABLE>
- ---------------
(1) Relates to proceeds received by the Company in settlement of a lawsuit.
(2) Adjusted to give effect to the Reorganization. See "The
Company -- Reorganization; Relationship with Lawrence".
(3) The average number of shares outstanding at April 30, 1992 through 1996 have
been adjusted to give pro forma effect to the Reorganization and the
issuance of an aggregate of 360,000 restricted shares of Class A Common
Stock to Messrs. Farr, Sutton and Tighe contemporaneously with the Offering.
The average number of shares outstanding at April 30, 1996, also gives pro
forma effect to the number of shares whose proceeds are deemed to be used to
repay the $10.0 million promissory note declared and paid as a dividend on
June 27, 1996. See "The Company", "Dividend Policy" and "Management -- 1996
Key Employee Stock Plan".
(4) As adjusted to give effect to the sale of 4,000,000 shares of Class A Common
Stock offered hereby at an assumed offering price of $10.00 per share and
the application of a portion of the net proceeds therefrom to repay
indebtedness to affiliates, as described under "Use of Proceeds".
6
<PAGE> 9
RISK FACTORS
Prospective Purchasers of the Class A Common Stock offered hereby should
consider carefully the following factors as well as the other information
provided elsewhere in this Prospectus before deciding to invest in the Class A
Common Stock offered hereby.
DEPENDENCE ON VOLATILE OIL AND GAS INDUSTRY
Demand for the Company's downhole tools and directional drilling services
depends to a large extent upon the level of exploration and production activity
in the oil and gas industry and the industry's willingness to spend capital on
drilling operations, which in turn depends in part on oil and gas prices,
expectations about future prices, the cost of exploring for, producing and
delivering oil and gas, the discovery rate of new oil and gas reserves, domestic
and international political, military, regulatory and economic conditions and
the ability of oil and gas companies to raise capital. Prices for oil and gas
historically have been extremely volatile and have reacted to changes in the
supply of and demand for oil and natural gas, domestic and worldwide economic
conditions and political instability in oil producing countries. No assurance
can be given that current levels of oil and gas activities will be maintained or
that demand for the Company's downhole tools and directional drilling services
will reflect the level of such activities. Prices for oil and natural gas are
expected to continue to be volatile and affect the demand for and pricing of the
Company's directional drilling services and downhole tools. A material decline
in oil or natural gas prices or activities could materially adversely affect the
demand for the Company's directional drilling services and downhole tools and,
therefore, the Company's results of operations and financial condition.
COMPETITION
The markets for the Company's directional drilling services and downhole
tools are highly competitive and characterized by continual changes in
technology. Many of the Company's existing and potential competitors have
substantially greater marketing, distribution, financial and technical resources
than the Company. There can be no assurance that the Company's directional
drilling services and downhole tool rentals will continue at current volumes or
prices if its current competitors or new market entrants introduce new products
or services with better features, performance, prices or other characteristics
than the Company's products and services. Competitive pressures or other factors
also may result in significant price competition that could have a material
adverse effect on the Company's results of operations and financial condition.
Furthermore, the competition among directional drilling service companies to
employ the most reputable, qualified and experienced directional drilling
personnel is intense, especially during times of increased drilling activity.
There can be no assurance that the Company will be able to continue to recruit
and retain highly-qualified directional drillers. Any difficulty in recruiting
or retaining such directional drilling personnel could have a material adverse
effect on the Company's results of operations. See "Business and Properties --
Competition".
TECHNOLOGICAL EVOLUTION AND PRODUCT OBSOLESCENCE
The markets for directional drilling services and specialized downhole
drilling and fishing tools used in oil and gas drilling and workover
applications are characterized by continual technological developments that have
resulted in, and likely will continue to result in, substantial improvements in
the scope and quality of directional drilling services and product function and
performance. Whether the Company can develop and produce successfully, on a
timely basis, new and enhanced downhole tools that embody new technology, meet
evolving industry standards and practice, and achieve levels of capability and
price that are acceptable to its customers, will be significant factors in
determining the Company's ability to compete. There can be no assurance that the
Company will not encounter resource constraints or technical or other
difficulties that could delay introduction of new products and services in the
future. If the Company is unable, for technological or other reasons, to develop
and commercialize competitive products in a timely manner in response to changes
in the directional drilling industry or rental tool industry or changes in
technology, its results of operations and financial condition will be materially
and adversely affected. In addition, the Company's continuing development of new
products inherently carries the risk of inventory obsolescence with respect to
its older products. See "Business and Properties -- Research and Development".
7
<PAGE> 10
INTELLECTUAL PROPERTY
Certain features of the Company's downhole tools have been granted United
States and foreign patent protection, or have patent applications pending. These
patents expire in the United States between 1999 and 2011. In addition, the
Dailey trademark is registered in the United States and various foreign
countries, and its servicemark is registered in the United States. The loss or
abandonment of such trademarks and servicemarks could have a material adverse
effect on the Company's results of operations and financial condition. There can
be no assurance that the Company's patents will prove enforceable, that any
patents for which the Company has made application will be issued, or that
competitors will not develop functionally similar products outside the
protection of any patents the Company has or may obtain. Furthermore, after
Dailey's patents expire, the Company's competitors could develop products
substantially similar to the Company's downhole tools. Litigation resulting in
the invalidation of certain of the Company's patents, or a ruling that the
Company's products infringe patents held by others, could have a material
adverse effect on the Company's results of operations and financial condition.
See "Business and Properties -- Intellectual Property".
LIQUIDITY AND WORKING CAPITAL REQUIREMENTS; UNCERTAINTY IN OBTAINING FINANCING
While the Company's operations have generated positive cash flow in each of
the past five years, the Company's future cash flow is subject to a number of
variables, including the level of domestic and worldwide oil and gas exploration
and development activity, and the Company can provide no assurance that its cash
flow from operations, net proceeds of the Offering and its borrowing capacity
will be sufficient to fund its anticipated capital expenditures and working
capital requirements. During the past several years, the Company has funded its
working capital requirements through cash generated from operations, its credit
facility and asset sales. Historically, the Company also financed certain of its
working capital requirements through periodic advances from Lawrence, and the
Lawrence Note relating to advances prior to fiscal 1994. During the past three
fiscal years, however, the Company has internally financed its working capital
requirements and has paid to (received from) Lawrence, net amounts of
approximately $(52,000), $711,000 and $538,000 during fiscal 1994, 1995 and
1996, respectively. The Company also has made principal and interest payments on
the Lawrence Note, the outstanding balance of which will be repaid utilizing
proceeds from the Offering, totalling $306,000, $880,000 and $842,000 during
fiscal 1994, 1995 and 1996, respectively. It is anticipated that Lawrence will
no longer be a source of working capital following the Offering. The Company
currently has a $3.0 million revolving credit facility, of which approximately
$1.3 million was drawn by the Company as of April 30, 1996. The Company may in
the future seek financing from third parties in addition to its existing
revolving credit facility to fund such expenditures and requirements. However,
there can be no assurance that additional financing will be available to the
Company on economically acceptable terms. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations -- Liquidity and
Capital Resources".
ACQUISITION STRATEGY
The Company anticipates that a substantial portion of the net proceeds from
the Offering may be used to finance expansion through acquisitions of existing
businesses. Nevertheless, there can be no assurance that attractive acquisitions
will be available to the Company at reasonable prices or that any acquisition
achieved ultimately will prove to be a successful undertaking by the Company.
The Company may be required to incur substantial indebtedness to finance future
acquisitions and also may issue equity securities or convertible securities in
connection with such acquisitions. Such additional debt service requirements may
represent a significant burden on the Company's results of operations and
financial condition. The issuance of additional equity or convertible securities
could result in significant additional dilution to stockholders and result in
significant additional shares available for future resale. There also can be no
assurance that the Company will successfully integrate the operations and assets
of any acquired business with its own or that the Company's management will be
able to manage effectively the increased size of the Company or operate a new
line of business. Any inability on the part of the Company to integrate and
manage acquired businesses could have a materially adverse effect on the
Company's results of operations and financial condition. See "Use of
8
<PAGE> 11
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources".
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success will depend to a significant extent
upon the continued services of certain key individuals, particularly J. D.
Lawrence, Chairman of the Board, James F. Farr, President and Chief Executive
Officer, William D. Sutton, Senior Vice President, General Counsel and Secretary
and David T. Tighe, Senior Vice-President -- Finance, Chief Financial Officer
and Treasurer. The Company has entered into employment agreements with these
individuals. The loss of the services of any of these individuals could have a
material adverse effect on the Company. The Company does not maintain key
employee insurance. See "Management".
DEPENDENCE ON LIMITED NUMBER OF PRODUCT LINES
In fiscal 1996, the Company derived approximately 57% of its total revenues
from drilling jars and related products. A sustained decrease in demand for
these products and services, whether caused by declines in drilling activity,
technological innovations or other competitive factors, could adversely affect
the Company's operating performance. The Company's future success will depend
upon continued demand for its drilling jars, and its ability to enhance its
existing products and services, develop additional products and services, and
supply its products and services to meet industry demands. See "Business and
Properties -- Directional Drilling Services and Related Products" and "Business
and Properties -- Rental Products".
OPERATING RISKS AND INSURANCE
The operations of the Company's customers are subject to hazards inherent
in the oil and gas industry, such as fires, explosions, craterings, blowouts and
oil spills, which can cause serious personal injury or loss of life, damage to
or destruction of property, equipment, the environment and marine life, and
suspension of operations. In addition, the Company's customers that are engaged
in the drilling and workover business may be subject to claims for loss of oil
and gas production and damages to formations. If a catastrophic event were to
occur at a location where the Company's products or services are being provided,
the Company could be named as a defendant or third-party defendant in lawsuits
asserting potentially large claims. The Company maintains insurance coverage
that it believes to be customary in the industry against certain of these
hazards, however, such insurance provides for substantial deductibles and
premium adjustments based on claims experience and excludes coverage for damages
resulting from environmental damage and pollution or breach of contract or
claims based on alleged fraud or deceptive trade practices. Insurance cannot
provide complete protection against casualty losses. There can be no assurance
that the Company will be able to maintain adequate insurance in the future at
rates it considers reasonable or that insurance will continue to be available on
terms as favorable as those of its existing arrangements. A claim or suit
against the Company in excess of the coverage limits maintained by the Company
or for which the Company is not insured could have a material adverse effect on
the Company's financial condition and results of operations. See "Business and
Properties -- Operating Risks and Insurance".
VENDOR SUPPLY INTERRUPTION
The Company assembles all of, and manufactures a portion of the components
for, its downhole tools. The manufacturing processes performed by the Company
require a ready supply of high-quality, special alloy steel. Consistent with the
recent upturn in the demand for steel and other raw materials used in the oil
and gas industry, the Company has begun to experience longer lead times for
delivery of raw materials, primarily steel, which requires the Company to
predict further in advance its needs for such materials. While the Company has
not experienced significant supply or quality control problems to date with its
various suppliers of steel and other raw materials, any supply or quality
control problems could significantly affect the Company's ability to meet
production schedules and commitments, which could have a material adverse effect
on the Company's results of operations. See "Business and Properties -- Raw
Materials".
9
<PAGE> 12
RELIANCE ON CERTAIN SUPPLIERS
Most of the Company's downhole tools incorporate certain products or
technology supplied in part by third parties. Although the Company is not
presently experiencing and does not anticipate any significant supply or quality
control problems with its vendors, such problems, if they were to occur, could
have a material adverse effect on the Company's ability to meet future
production and sales commitments, which could adversely affect the Company's
results of operations. In addition, during the past five years, one vendor has
been the Company's only supplier of filters used in the Company's hydraulic
downhole tools. The Company has not identified alternative suppliers for such
filters. To date, the Company has not experienced supply problems with this
vendor. However, any difficulty with such supplier combined with any difficulty
in finding and utilizing alternative sources for these filters could have a
material adverse effect on the Company's results of operations. See "Business
and Properties -- Manufacturing".
The Company purchases all of its MWD units used in connection with its
directional drilling services from a single supplier. The Company believes that
reliable MWD units are available for third party purchase from only a few
vendors worldwide. Although the Company has not experienced significant supply
or quality control problems to date with its supplier, there can be no assurance
that the Company will be able to purchase reliable, high-quality MWD units from
other vendors at competitive prices and terms. Any difficulty in obtaining MWD
units from its supplier, as a result of manufacturing delays or other reasons,
could have a material adverse effect on the Company's results of operation and
financial condition. See "Business and Properties -- Directional Drilling
Services and Related Products".
RISK OF INTERNATIONAL OPERATIONS
The Company's international operations, which accounted for approximately
42% of its total revenues in fiscal 1996, are subject to special risks inherent
in doing business outside the United States, including governmental instability,
war and other international conflicts, civil and labor disturbances,
requirements of local ownership, partial or total expropriation,
nationalization, currency devaluation, foreign exchange controls, and foreign
laws and policies, each of which may limit the movement of assets or funds or
result in the deprivation of contract rights or the taking of property without
fair compensation. Collections and recovery of rental tools from international
customers and agents may prove more difficult due to the uncertainties of
foreign law and judicial procedure. The Company may therefore experience
significant difficulty resulting from the political or judicial climate in
countries in which it operates. From time to time the United States has passed
laws and imposed regulations prohibiting or restricting trade with certain
nations. There can be no assurance that future laws and regulations will not
limit materially the Company's international business. See "Business and
Properties -- International Operations".
FOREIGN EXCHANGE RISK
Although most of the Company's international revenues are derived from
transactions denominated in United States dollars, the Company has and likely
will continue to conduct, some business in currencies other than the United
States dollar. Accordingly, its profitability has been and will continue to be
affected by fluctuations in foreign exchange rates. Foreign currency translation
gains and losses during each of fiscal 1994, 1995 and 1996 netted to a $122,000
loss, a $90,000 gain and a $239,000 loss, respectively. The Company believes
that revenues from transactions denominated in foreign currencies will increase
as a percentage of total revenues due to continued expansion of the Company's
international operations, primarily in Venezuela. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition -- Inflation and
Foreign Exchange".
10
<PAGE> 13
CREDIT RISK FROM SALES ARRANGEMENTS
In various international markets, the Company utilizes independent
international agents to market its downhole tools, who in some cases also are
responsible for the collection of, and remittance to Dailey of, the accounts
receivable from Dailey's customers in these markets. The inability of the
Company's international agents to remit accounts receivable on a timely basis,
or a significant number of payment defaults by certain of the Company's
independent agents, could have a material adverse effect on the Company's
results of operations.
SPECIAL VOTING RIGHTS OF CLASS B COMMON STOCK; RELATIONSHIP WITH LAWRENCE
Each share of Class A Common Stock is entitled to one vote and each share
of Class B Common Stock is entitled to seven votes, with both classes of Common
Stock voting together as a single class. Upon completion of the Offering,
Lawrence, which is owned by the Chairman of the Board of the Company and trusts
for his family, will beneficially own all of the Class B Common Stock, and will
thereby control approximately 89% of the combined voting power of the
outstanding Common Stock (88% if the Underwriters' over-allotment option is
exercised in full). Accordingly, Lawrence and, indirectly, the Company's
Chairman of the Board will be in a position to elect the Company's board of
directors and otherwise control the business policies of the Company. The
Company and Lawrence have entered into various ongoing contractual arrangements
including a Tax Allocation Agreement, Registration Rights Agreement and
arrangements governing the leasing by the Company of its executive offices and
certain service, storage and other facilities from Lawrence. See "Certain
Relationships and Related Transactions" and "Description of Capital
Stock -- Class A and B Common Stock".
ABSENCE OF PRIOR PUBLIC MARKET AND DETERMINATION OF OFFERING PRICE
Prior to the Offering, there has been no public market for the Class A
Common Stock. Although the Class A Common Stock has been approved for listing on
the Nasdaq National Market, subject to official notice of issuance, there can be
no assurance that an active trading market will develop or continue upon
completion of the Offering. The initial public offering price of the Class A
Common Stock will be determined by negotiations between the Company and the
representatives of the Underwriters (the "Representatives") and may not be
indicative of the market price of the Class A Common Stock after the Offering.
For a discussion of the factors to be considered in determining the initial
public offering price, see "Underwriting". The market price of the Class A
Common Stock could be subject to significant fluctuations in response to
variations in quarterly and yearly operating results, the success of the
Company's business strategy, general trends in the oil and gas industry,
competition, product obsolescence, changes in federal regulations affecting the
Company or the oil and gas industry and other factors. In addition, the stock
market in recent years has experienced extreme price and volume fluctuations
that often have been unrelated or disproportionate to the operating performance
of affected companies. Such broad fluctuations could affect adversely the market
price of the Class A Common Stock.
POSSIBLE ANTI-TAKEOVER EFFECTS
The Company's Restated Certificate of Incorporation and Bylaws (the
"Bylaws") include a number of provisions that may have the effect of encouraging
persons considering unsolicited tender offers or other unilateral takeover
proposals to negotiate with the Board of Directors rather than pursue
non-negotiated takeover attempts. These provisions may have the effect of
delaying, deferring or preventing a change in control of the Company whether or
not such person chooses to negotiate with the Board of Directors. The provisions
include super-majority stockholder approval for certain mergers with, and sales
of substantially all of the Company's assets to, third parties, authorized
"blank check" preferred stock, a classified Board of Directors and restrictions
on removal of directors. In addition, the Restated Certificate of Incorporation
provides for two classes of stock, Class A Common Stock, which is entitled to
one vote per share, and Class B Common Stock, which is entitled to seven votes
per share. The Class B Common Stock converts automatically into an equal number
of shares of Class A Common Stock upon the transfer of such shares to a member
outside the Lawrence Group. See "Description of Capital Stock".
11
<PAGE> 14
ADVERSE EFFECT ON MARKET PRICE OF SHARES ELIGIBLE FOR FUTURE SALE
Immediately following the Offering, there will be outstanding 4,360,000
shares of Class A Common Stock (4,960,000 shares if the Underwriters'
overallotment option is exercised in full), which includes 360,000 shares of
restricted stock issued contemporaneously with the Offering to certain executive
officers pursuant to the 1996 Key Employee Stock Plan. In addition, an
additional 640,000 unissued shares of Class A Common Stock have been reserved
for issuance pursuant to the 1996 Key Employee Stock Plan and 1996 Non-Employee
Director Stock Option Plan. The Company also will have outstanding 5,000,000
shares of Class B Common Stock, which converts into an equal number of shares of
Class A Common Stock at any time at the election of Lawrence and automatically
upon the transfer of such shares to any person or entity that is not a member of
the Lawrence Group. The 4,000,000 shares of Class A Common Stock offered hereby
will be eligible for resale in the public market without restriction under the
Securities Act, except to the extent that any such shares are acquired by
affiliates of the Company. The shares of Class A Common Stock held by the
Company's affiliates and the shares of Class A Common Stock issuable upon
conversion of shares of Class B Common Stock will be subject to resale in
accordance with Rule 144 under the Securities Act. Sales of a substantial number
of shares of Class A Common Stock may adversely affect the market price of the
Class A Common Stock. The Company, Lawrence and Messrs. Farr, Sutton and Tighe
have agreed that they will not, for a period of 180 days after the date of this
Prospectus, without the prior written consent of the Representatives, offer for
sale, sell or otherwise dispose of any shares of Common Stock or any securities
convertible into, or exchangeable for, shares of Common Stock in (i) a public
offering or (ii) in a private offering unless, in the case of the Company only,
(A) such private offering shall occur more than 30 days after the date of this
Prospectus, (B) the Company will issue shares of its Class A Common Stock in
such private offering as full or partial consideration for acquisition by merger
or purchase of assets or businesses, and (C) the recipient of such Class A
Common Stock shall agree not to sell, offer to sell, grant any option for the
sale of, or otherwise dispose of, such Class A Common Stock for the remaining
portion of the 180-day period from the date of this Prospectus (except for
Common Stock pursuant to the 1996 Key Employee Stock Plan or 1996 Non-Employee
Director Stock Plan.
The Company also is obligated, upon the written request of Lawrence, on up
to two separate occasions, to file a registration statement under the Securities
Act registering a minimum of 500,000 shares and up to a maximum of all 5,000,000
shares of Common Stock (subject to anti-dilution adjustments) owned by Lawrence,
which may be in the form of an underwritten offering. Additionally, if the
Company proposes to register any of its securities under the Securities Act for
its own account or for the account of other security holders, Lawrence is
entitled to notice of such registration and is entitled to include all or a
portion of its holdings of the Company's securities in such registration,
subject to certain exceptions and limitations, including the right of the
underwriters (if any) of any such offering to exclude for marketing reasons some
or all of such securities from such registration. No prediction can be made as
to the effect, if any, that the sale of shares or the availability of shares for
sale will have on the market price of the Class A Common Stock prevailing from
time to time. Nevertheless, sales of substantial amounts of Common Stock in the
public market could adversely affect prevailing market prices and the ability of
the Company to raise equity capital in the future. See "Description of Capital
Stock -- Registration Rights Agreement" and "Shares Eligible for Future Sale".
BENEFITS OF THE OFFERING TO LAWRENCE
Lawrence will benefit from the Offering, principally through the increased
liquidity of its holdings, which results from the creation of a public market
for Class A Common Stock, into which Class B Common Stock is convertible at any
time by Lawrence and automatically upon transfer to a person or entity who is
not a member of the Lawrence Group, and through the potential unrealized gains
in the value of the Class B Common Stock held by it. See "Dilution".
DILUTION
A purchaser of Class A Common Stock in the Offering will experience an
immediate and substantial dilution in the net tangible book value of its shares
of $3.13 per share. See "Dilution".
12
<PAGE> 15
ABSENCE OF DIVIDENDS
The Company expects to retain cash generated from operations to support its
cash needs and does not anticipate the payment of any dividends on the Common
Stock for the foreseeable future. In addition, the Company's loan agreement with
its bank prohibits the payment of dividends except for the dividend declared and
paid on June 27, 1996. See "Dividend Policy".
THE COMPANY
HISTORY
Dailey Petroleum Services Corp. provides directional drilling services and
designs, manufactures and rents technologically-advanced downhole tools for oil
and gas drilling and workover applications. The Company began operations in the
fishing tool business in 1945 as Dailey Oil Tools, and in 1984 changed its name
to Dailey Petroleum Services Corp. References to the "Company" or "Dailey" in
this Prospectus relate to the business now carried on by the Company and its
subsidiaries and previously carried on by their predecessors.
The Company's executive offices are located in Conroe, Texas, approximately
50 miles north of Houston, Texas. The Company's address is 2507 North Frazier,
P.O. Box 1863, Conroe, Texas 77305, and its telephone number is (713) 350-3399.
REORGANIZATION; RELATIONSHIP WITH LAWRENCE
Prior to June 1996, the Company's predecessor was a wholly-owned subsidiary
of Lawrence. On June 6, 1996, Lawrence reorganized its ownership of Dailey into
a holding company structure pursuant to a forward triangular merger of the
Company's predecessor into a newly-formed, indirect wholly-owned subsidiary
("Dailey Corporation"), which took the name Dailey Petroleum Services Corp.
following the merger (the "Reorganization"). The Company's Restated Certificate
of Incorporation provides for two classes of common stock, Class A Common Stock
and Class B Common Stock. See "Description of Capital Stock -- Class A and B
Common Stock". Following the Reorganization, all of Dailey's issued and
outstanding capital stock, which consists entirely of Class B Common Stock, has
been held by Lawrence through its wholly-owned subsidiary, Dailey Holdings, Inc.
("Dailey Holdings"). References in this Prospectus to Lawrence's ownership in,
and control of, the Company relate to Lawrence's ownership of Dailey's capital
stock through this subsidiary.
Upon completion of the Offering, Lawrence will own all of the outstanding
Class B Common Stock, which will represent approximately 53% (50% if the
Underwriters' over-allotment option is exercised in full) of the outstanding
Common Stock. Substantially all of the common stock of Lawrence is owned by the
Chairman of the Board of the Company. Lawrence is engaged in various business
activities not related to the oil and gas industry. The Company's operations do
not compete with any of Lawrence's activities. The Company has entered into
several arrangements with Lawrence, including agreements under which the Company
leases certain office space and manufacturing and service facilities from, and
provides certain services to, Lawrence as well as a Registration Rights
Agreement and Tax Allocation Agreement. See "Certain Relationships and Related
Transactions" and "Description of Capital Stock -- Registration Rights
Agreement".
13
<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $36.5 million (approximately $42.0 million if the Underwriters'
over-allotment option is exercised in full), assuming an initial public offering
price of $10.00 per share (the midpoint of the initial public offering price
range) and after deducting the underwriting discount and estimated offering
expenses payable by the Company.
The Company intends to use approximately $15.0 million of the net proceeds
from the Offering for capital expenditures to increase its fleet of downhole
tools. The Company's inventory expansion will focus primarily on the purchase or
manufacture of MWD and other directional equipment, hydraulic drilling jars,
hydraulic coiled tubing jars and hydraulic fishing jars. The Company believes
that its current inventory of many of these downhole tools is insufficient to
meet current demand in its various markets. Since tools can be transported cost
effectively between its many geographic markets, the Company intends to utilize
its expanded inventory in all or some of its markets depending on demand for
such tools at any given time.
The Company intends to use approximately $10.1 million and $1.6 million of
the net proceeds from the Offering to repay the Lawrence Note and a promissory
note to a subsidiary of Lawrence, respectively. Such amounts include accrued
interest. The Lawrence Note relates to advances by Lawrence to the Company prior
to fiscal 1994 for working capital and general corporate purposes and is payable
in consecutive monthly installments through December 1998 of $55,000 plus
accrued interest then due. It bears interest at 8.0% per annum. The second
promissory note, which was incurred in connection with a dividend declared and
paid to the subsidiary, as the Company's sole stockholder, on June 27, 1996,
accrues interest at the prime rate and is payable upon demand.
The remaining net proceeds from the Offering are expected to be used by the
Company to fund the expansion of the Company's products and services through
acquisitions of complementary businesses or assets and for working capital and
general corporate purposes. Although the Company routinely evaluates acquisition
opportunities, it does not have any current understanding, arrangement or
agreement to acquire any businesses or assets. There can be no assurance that
attractive acquisition candidates will be available to the Company at prices it
believes to be reasonable, or that any acquisition achieved will ultimately
prove to be a successful undertaking by the Company. Pending application of the
net proceeds from the Offering, the Company will invest such net proceeds in
short-term, interest-bearing, investment grade securities.
DIVIDEND POLICY
Other than the dividend of $10.0 million in the form of a promissory note
payable to a subsidiary of Lawrence, which was declared and paid on June 27,
1996, the Company has not declared or paid any dividends during the period
beginning on May 1, 1994, and ending on the date of this Prospectus. The
Company's loan agreement with its bank prohibits the payment of dividends,
except for the dividend paid on June 27, 1996. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation -- Liquidity and
Capital Resources".
The Company does not anticipate that cash dividends will be paid in the
foreseeable future. The Company presently intends to retain any future earnings
to finance the expansion and continuing development of its business. The
declaration and payment in the future of any cash dividends will be at the
election of the Company's Board of Directors and will depend upon the earnings,
capital requirements and financial position of the Company, future loan
covenants, general economic conditions and other pertinent factors. The
Company's dividend policy will be reviewed by the Board of Directors at such
future time as may be appropriate in light of relevant factors at the time.
The Company's Restated Certificate of Incorporation requires that any
dividend declared on either shares of Class A Common Stock or shares of Class B
Common Stock must be declared on shares of Class A Common Stock and shares of
Class B Common Stock alike as if all such shares were of the same class and
series.
14
<PAGE> 17
DILUTION
The net tangible book value of the Company at April 30, 1996, was $35.4
million, or $7.07 per share of Common Stock. After giving effect to the sale by
the Company of the 4,000,000 shares of Class A Common Stock offered hereby (at
an assumed initial public offering price of $10.00 per share and after deducting
the estimated offering expenses and underwriting discounts payable by the
Company), and the $10.0 million dividend paid on June 27, 1996, the pro forma
net tangible book value at such date would have been $61.8 million, or $6.87 per
share of Common Stock. This represents an immediate increase in net tangible
book value of $0.20 per share to Lawrence and an immediate dilution of $3.13 per
share to new investors purchasing shares in the Offering.
Prior to the Reorganization, Dailey Corporation issued 5,000,000 shares of
Class B Common Stock to Dailey Holdings for $50,000, the par value of such
shares. Immediately following its formation and prior to the Reorganization,
Dailey Corporation's net tangible book value was $50,000 (or $.01 per share). In
connection with the Reorganization, Lawrence merged the Company's predecessor,
which was owned entirely by Lawrence, into Dailey Corporation (which immediately
changed its name to Dailey Petroleum Services Corp.) to form the Company. Based
upon a comparison of the net tangible book value of Dailey Corporation prior to
the Reorganization to the pro forma net tangible book value of the Company after
giving effect to the Reorganization and the sale by the Company of the 4,000,000
shares of Class A Common Stock offered hereby (at an assumed initial public
offering price of $10.00 per share and after deducting the estimated offering
expenses and underwriting discounts payable by the Company) and the $10.0
million dividend paid on June 27, 1996, Lawrence will experience an immediate
increase in net book value of $7.06 per share and new investors purchasing
shares in the Offering will experience an immediate dilution in net book value
of $3.13 per share.
15
<PAGE> 18
CAPITALIZATION
The following table sets forth as of April 30, 1996, the consolidated
long-term debt and capitalization of the Company and its subsidiaries and as
adjusted to reflect the issuance of the Class A Common Stock offered hereby and
the application of a portion of the net proceeds from the Offering to repay
notes and long-term debt to affiliates, as described under "Use of Proceeds".
The information was derived from, and is qualified by reference to, the
consolidated financial statements of the Company, including the notes thereto,
included elsewhere in this Prospectus. This information should be read in
conjunction with such financial statements, including the notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
APRIL 30, 1996
--------------------------
ACTUAL AS ADJUSTED(1)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt:
Bank loan(2).............................................. $ 2,967 $ 2,967
Indebtedness to affiliate(3).............................. 660 --
Other..................................................... 71 71
------- --------
Total current debt..................................... $ 3,698 $ 3,038
Long-term debt:
Bank loan(2).............................................. 6,777 6,777
Indebtedness to affiliate(3).............................. 1,100 --
Other..................................................... 89 89
------- --------
Total long-term debt................................... $ 7,966 $ 6,866
------- --------
Total debt........................................ $11,664 $ 9,904
Stockholders' equity:
Preferred stock, no par value, 5,000,000 shares
authorized; none issued and outstanding................ -- --
Class A common stock, $.01 par value, 20,000,000 shares
authorized; none issued and outstanding (4,360,000
shares, as adjusted)(4)................................ -- 44
Class B common stock, $.01 par value, 10,000,000 shares
authorized; (5,000,000 shares issued and
outstanding)........................................... 50 50
Paid-in capital........................................... 4,559 40,965
Retained earnings......................................... 31,032 21,032
------- --------
Total stockholders' equity........................ 35,641 62,091
------- --------
Total capitalization........................................ $47,305 $ 71,995
======= ========
</TABLE>
- ---------------
(1) As adjusted to reflect net proceeds from the Offering and application of a
portion thereof to repay indebtedness to affiliate as described under "Use
of Proceeds".
(2) The Company currently makes scheduled payments of approximately $139,000 per
month, plus accrued interest, on this debt.
(3) The Company makes scheduled payments of approximately $55,000 per month,
plus accrued interest, on this debt. Excludes a $10.0 million note to a
subsidiary of Lawrence, which was issued in connection with the dividend
declared and paid on June 27, 1996. The Company intends to repay these notes
utilizing a portion of the proceeds from the Offering. See "Use of
Proceeds".
(4) Includes 360,000 shares of restricted stock to be issued to certain
executive officers of the Company contemporaneously with the Offering
pursuant to the 1996 Key Employee Stock Plan, but excludes 640,000
additional shares reserved for issuance pursuant to the 1996 Key Employee
Stock Plan and the 1996 Non-Employee Director Stock Option Plan. See
"Management -- 1996 Key Employee Stock Plan" and "-- 1996 Non-Employee
Director Stock Plan".
16
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for each of the fiscal
years in the five-year period ended April 30, 1996, have been derived from
audited consolidated financial statements of the Company. The Consolidated
Statement of Operations Data for the years ended April 30, 1994, 1995 and 1996
and the Consolidated Balance Sheet Data as of April 30, 1995 and 1996 are
derived from the Company's audited consolidated financial statements appearing
elsewhere in this Prospectus. This 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 and the
notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
-----------------------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Rental income.................................... $ 30,591 $ 28,746 $ 32,393 $ 36,691 $ 42,987
Sales of products and services................... 11,180 8,742 11,422 12,172 15,952
------- ------- ------- ------- -------
Total revenues................................. 41,771 37,488 43,815 48,863 58,939
Cost of rentals and services:
Cost of rentals.................................. 26,268 25,078 27,384 29,685 33,019
Cost of products and services.................... 5,116 4,003 5,124 6,889 7,927
------- ------- ------- ------- -------
Total cost of rentals and services............. 31,384 29,081 32,508 36,574 40,946
Selling, general and administrative expenses....... 7,422 6,783 7,085 9,607 12,083
Research and development expenses.................. 1,224 1,262 736 775 728
------- ------- ------- ------- -------
Operating income................................... 1,741 362 3,486 1,907 5,182
Interest expense, net.............................. 29 285 513 1,001 863
Other (income) expense, net........................ 78 (435) (225) 190 39
Foreign exchange (gain) loss....................... 111 228 122 (90) 239
------- ------- ------- ------- -------
Income before income taxes and extraordinary
item............................................. 1,523 284 3,076 806 4,041
Income tax expense................................. 1,101 898 1,075 838 1,427
Extraordinary income(1)............................ 1,535 -- -- -- --
------- ------- ------- ------- -------
Net income (loss).................................. $ 1,957 $ (614) $ 2,001 $ (32) $ 2,614
======= ======= ======= ======= =======
Earnings (loss) per share(2)....................... $ .37 $ (.11) $ .37 $ (.01) $ --
Pro forma earnings per share....................... -- -- -- -- $ .41
Average common and common equivalent shares
outstanding(3)................................... 5,360,000 5,360,000 5,360,000 5,360,000 6,360,000
OTHER DATA:
Depreciation and amortization...................... $ 3,600 $ 4,114 $ 4,323 $ 5,428 $ 5,726
CONSOLIDATED BALANCE SHEET DATA:
Total assets....................................... $ 49,895 $ 45,523 $ 53,621 $ 54,408 $ 55,878
Working capital.................................... 4,056 2,588 10,542 6,405 7,477
Long-term debt, less current portion and long-term
debt payable to affiliate........................ 3,431 2,814 9,743 8,604 6,866
Long-term debt payable to affiliate, less current
portion.......................................... 4,475 2,061 2,420 1,760 1,100
Stockholders' equity............................... 31,672 31,058 33,059 33,027 35,641
</TABLE>
- ---------------
(1) Relates to proceeds received by the Company in settlement of a lawsuit.
(2) Adjusted to give effect to the Reorganization. See "The
Company -- Reorganization; Relationship with Lawrence".
(3) The average number of shares outstanding at April 30, 1992 through 1996 have
been adjusted to give pro forma effect to the Reorganization and the
issuance of an aggregate of 360,000 restricted shares of Class A Common
Stock to Messrs. Farr, Sutton and Tighe contemporaneously with the Offering.
The average number of shares outstanding at April 30, 1996, also gives pro
forma effect to the number of shares whose proceeds are deemed to be used to
repay the $10.0 million promissory note declared and paid as a dividend on
June 27, 1996. See "The Company", "Dividend Policy" and "Management -- 1996
Key Employee Stock Plan".
17
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company provides directional drilling services and designs,
manufactures and rents technologically-advanced downhole tools for oil and gas
drilling and workover applications. Demand for the Company's directional
drilling services and downhole tools depends primarily upon the level of
exploration and production activity in the oil and gas industry, which in turn
depends in part on oil and gas prices, expectations about future prices, the
cost of exploring for, producing and delivering oil and gas, the discovery rate
of new oil and gas reserves, domestic and international political, military and
regulatory and economic conditions and the ability of oil and gas companies to
raise capital.
During the past five years, the Company has experienced significant growth
in revenues relating to its directional drilling services. The Company believes
this growth is consistent with trends in the oil and gas industry towards use of
technologically-advanced directional drilling services in order to develop
reservoirs that otherwise would have been marginal or uneconomical using
conventional drilling methods. Historically, the Company has provided drilling
services primarily for directionally drilled wells in the Gulf of Mexico and the
United States Gulf Coast region. During fiscal 1995, the Company expanded its
directional drilling operations into Venezuela, and in fiscal 1996, began
offering its services in the Austin Chalk. Contemporaneously with its expansion
into the Austin Chalk, the Company began providing horizontal drilling services.
The Company believes that its plans to continue expansion as well as these
industry trends will contribute to the continued growth of its directional
drilling services.
The Company also believes that rentals of its downhole tools will benefit
from the industry trend toward the use of directional drilling techniques. In
many oilfield applications, directional drilling techniques offer significant
economic advantages over conventional drilling, such as reduced drilling time
and expense, accelerated production rates and enhanced reservoir recovery. The
Company believes that its directional drilling services are becoming
increasingly important to the Company's business, in part because a growing
percentage of the Company's downhole tools are rented in connection with its
drilling services.
RESULTS OF OPERATIONS
The Company derives rental income from its fleet of downhole tools, and to
a lesser extent, third-party rentals. The Company typically charges its
customers a per-day rental rate for downhole tools, except for its downhole
drilling motors, which are rented at an hourly rate. In international markets,
the Company also often charges its customers a refurbishment charge, which is
included in its rental revenues.
The Company derives revenues from sales of products and services through
its directional drilling services, lost-in-hole revenues and sales of its
mechanical drilling jars. The services of Dailey's directional drillers and MWD
technicians are billed on a per person/per day basis for the time on assignment
at the customer's drill site. Although the Company considers rentals of its
downhole drilling motors and MWD equipment to be a significant part of its
directional drilling services, revenue from such rentals is recorded as rental
income for financial statement purposes. The Company's lost-in-hole revenues
consist of replacement charges that Dailey's customers pay each time a Dailey
downhole tool is lost in hole. The Company sells mechanical drilling jars in a
limited number of international markets, primarily to state-owned oil and gas
companies.
The operating costs associated with the Company's rentals consist primarily
of expenses associated with depreciation, transportation, and maintenance and
repair and related direct overhead. The costs associated with the Company's
sales of products and services consist primarily of the undepreciated portion of
the capitalized cost of its downhole tools sold or lost in hole and the salaries
and related costs associated with the Company's directional drillers and MWD
technicians.
With respect to allowances for bad debts, the Company's policy is to
specifically identify at risk receivables and reserve for any balances which, in
the opinion of management, are probable or reasonably possible of not being
collected. The Company's bad debt allowance primarily consists of reserves for
18
<PAGE> 21
receivables from customers that are in bankruptcy, receivables from sales to
agents (based on billings to their customers) that the agent has identified as
potentially uncollectible and receivables from extremely slow paying domestic
customers. The allowance also contains a reserve for slower paying, higher-risk
international customers, which have become an increasingly larger percentage of
the Company's customer base in recent years. Similarly, the Company identifies
inventory that, due to changes in demand for certain specialized downhole tools,
is not expected to be utilized to generate revenue in the immediate future and
establishes a reserve for that inventory. Due to the nature of Dailey's rental
tool operations, it is necessary for the Company to maintain a large supply of
specialty parts inventory on hand to support its diverse offering of downhole
tools. Many of these tools may not be currently salable due to the related tool
not being in high demand; however, the Company maintains this inventory in order
to provide its customers with the widest range of tools possible in order to
maintain its competitive position. Management believes that, while these tools
may have the ability to generate sufficient revenue to recover their costs, the
uncertainty of when, and if, this occurs requires the establishment of these
reserves. The Company has classified downhole tool replacement inventory as a
non-current asset on the balance sheet. Both the receivables and inventory
balances are not immediately written off against the related reserves since it
is management's intention to vigorously pursue collection and utilization of
such balances and to provide the appropriate visibility to management to
continue to manage these assets.
Year Ended April 30, 1996 Compared to the Year Ended April 30, 1995
Rental Income. Rental income for the year ended April 30, 1996, was $43.0
million, an increase of 17% from $36.7 million for the year ended April 30,
1995. This increase was due primarily to an increase in demand for the Company's
directional drilling services and related products in Venezuela, the Gulf of
Mexico and the United States Gulf Coast region, which resulted in a $4.2 million
increase in rentals from MWD equipment, downhole motors and other directional
drilling tools. During fiscal 1996, the Company purchased and began to utilize
additional MWD equipment in Venezuela. The Company also experienced increased
demand for its directional drilling services in the Gulf of Mexico and the
United States Gulf Coast region due to escalating gas prices and a corresponding
increase in drilling activity. In addition, rental income from the Company's
drilling jars and slingers increased $1.4 million due primarily to an increase
in demand in Latin America and to a slight increase in pricing worldwide. Also
in fiscal 1996, the Company increased its distribution of fishing jars in the
United States Gulf Coast region and expanded distribution of fishing jars into
the North Sea, which resulted in an increase in rental income of $1.0 million.
Sales of Products and Services. Sales of products and services for the year
ended April 30, 1996, were $16.0 million, an increase of 31% from $12.2 million
for the year ended April 30, 1995. This increase was due primarily to an
increase in export sales of mechanical drilling jars of approximately $1.6
million and to an increase in lost-in-hole revenues of $1.2 million. The
increase in lost-in-hole revenues was consistent with increased rental activity
during the year. The increase also was attributable to an increase in demand for
the Company's directional drilling services in the Gulf of Mexico, the United
States Gulf Coast region and Venezuela.
Cost of Rentals. Cost of rentals for the year ended April 30, 1996, was
$33.0 million, an increase of 11% from $29.7 million for the year ended April
30, 1995. This increase was due primarily to the variable costs associated with
an increase in rental activity, such as tool repair costs, agent commissions and
third party tool charges. The increase also was attributed to an increase in
import duties and fees of $709,000 associated with the importation of downhole
tools to Venezuela. The Company expenses import duties and fees as incurred
instead of capitalizing them as part of the cost of the tool. As a percentage of
rental income, cost of rentals decreased from 81% in fiscal 1995 to 77% in
fiscal 1996, which reflects the fixed nature of the Company's cost base.
Cost of Products and Services. Cost of products and services for the year
ended April 30, 1996, was $7.9 million, an increase of 15% from $6.9 million for
the year ended April 30, 1995. This increase was due primarily to an increase in
personnel costs associated with an increase in directional drilling services in
the Gulf of Mexico, the United States Gulf Coast region and Venezuela. The
increase also was attributable to the write-off of the net book value of
products lost in hole and the cost of drilling jars sold during the year.
19
<PAGE> 22
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $12.1 million for the year ended April 30, 1996, an
increase of 26% from $9.6 million for the year ended April 30, 1995. This
increase was due primarily to an increase in personnel costs associated with
bonuses and raises paid during the year as well as additional personnel, an
increase in travel and business development costs associated with higher levels
of international business and an increase in legal expenses associated with
litigation involving the Company's enforcement of its intellectual property.
Research and Development Expenses. Research and development expenses for
the year ended April 30, 1996, were $728,000, a decrease of 6% from $775,000 for
the year ended April 30, 1995, as the level of the Company's research and
development activity remained relatively constant between the two years.
Interest Expense -- Nonaffiliates. Interest expense to nonaffiliates for
the year ended April 30, 1996, was $785,000, a decrease of 7% from $841,000 for
the year ended April 30, 1995. The decrease was due primarily to the repayment
throughout fiscal 1996 of an aggregate of $1.3 million in principal on the
Company's bank debt, which was partially offset by advances in the second half
of fiscal 1996 of $1.3 million against the revolving line of credit associated
with the Company's bank debt.
Interest Expense -- Affiliate. Interest expense to affiliate for the year
ended April 30, 1996, was $182,000, a decrease of 17% from $220,000 for the year
ended April 30, 1995. The decrease was due to the repayment of $660,000 of
principal during the year.
Foreign Exchange (Gain) Loss. Foreign exchange losses of $239,000 in fiscal
1996 compared to gains of $90,000 for the year ended April 30, 1995, were due
primarily to unfavorable exchange fluctuations during fiscal 1996 with the
British pound and the Dutch guilder.
Other (Income) Expense, net. Other expense for the year ended April 30,
1996, was $39,000, a decrease of 79% from $190,000 for the year ended April 30,
1995. This decrease was due primarily to the write-off of $60,000 of unusable
fixed assets in fiscal 1995.
Income Tax Expense. Provision for income taxes for the year ended April 30,
1996, was $1.4 million, an increase of 70% from $838,000 for the year ended
April 30, 1995. The increase was due primarily to an increase in income in
countries in which the Company was subject to income or withholding taxes, which
resulted in the effective tax rate decreasing from 104% to 35% from fiscal 1995
to 1996. In fiscal 1996, the Company recorded a deferred tax asset related to
net operating loss carryforwards, which resulted in a decrease in the effective
tax rate. This decrease was predominantly offset by a gain for tax purposes
related to the dissolution of a real estate partnership, which resulted in an
increase in the effective tax rate.
Year Ended April 30, 1995 Compared to the Year Ended April 30, 1994
Rental Income. Rental income for the year ended April 30, 1995, was $36.7
million, an increase of 13% from $32.4 million for the year ended April 30,
1994. This increase was due primarily to the acquisition of MWD and other
directional equipment, which resulted in an increase in rental revenues of $3.4
million. Distribution of these products was limited to the Gulf of Mexico and
United States Gulf Coast region in fiscal 1995. Rental income from the Company's
other products increased slightly due to an increase in demand for the hydraulic
fishing jar in the United States Gulf Coast region and to a moderate increase in
pricing for the Company's drilling jar product line.
Sales of Products and Services. Sales of products and services for the year
ended April 30, 1995, were $12.2 million, an increase of 7% from $11.4 million
for the year ended April 30, 1994. This increase was due primarily to an
increase in demand for the Company's directional drilling services in the Gulf
of Mexico as escalating gas prices resulted in increased drilling in that
region. Sales of mechanical drilling jars decreased slightly due to decreased
sales to Iran, which were suspended during the year due to lack of timely
payment. Lost-in-hole revenues increased slightly due to increased rental
activity, which resulted in a corresponding increase in tools lost downhole.
Cost of Rentals. Cost of rentals for the year ended April 30, 1995, was
$29.7 million, an increase of 8% from $27.4 million for the year ended April 30,
1994. This increase was due primarily to costs associated with
20
<PAGE> 23
the routine repair and maintenance of the Company's rental tool fleet, and to a
full year of personnel expense and depreciation expense in fiscal 1995
associated with the initial purchase of MWD equipment and the hiring of related
personnel during fiscal 1994. As a percentage of rental income, cost of rentals
decreased to 81% for the year ended April 30, 1995, as compared to 85% for the
prior period, which reflected the fixed nature of the Company's cost base.
Cost of Products and Services. Cost of products and services for the year
ended April 30, 1995, was $6.9 million, an increase of 34% from $5.1 million for
the year ended April 30, 1994. This increase was due primarily to an increase in
personnel and other operating costs associated with the expansion of directional
drilling services in the Gulf of Mexico and to an increase in the write-off of
the net book value of downhole tools lost in hole during the year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended April 30, 1995, were $9.6 million, an
increase of 36% from $7.1 million for the year ended April 30, 1994. This
increase was due primarily to an increase in personnel costs and an increase in
costs associated with the outsourcing of data processing services. The increase
also was due to an increase in lease expense associated with the corporate
headquarters and an increase in legal fees.
Research and Development Expenses. Research and development expenses for
the year ended April 30, 1995 were $775,000, an increase of 5% from $736,000 for
the year ended April 30, 1994, which reflected the relatively constant level of
research and development activity between the years.
Interest Expense -- Nonaffiliates. Interest expense to nonaffiliates for
the year ended April 30, 1995 was $841,000, an increase of 60% from $527,000 for
the year ended April 30, 1994, which was primarily due to the a full year of
accruals of interest from the Company's bank loan incurred in December 1993.
Interest Expense -- Affiliate. Interest expense to affiliate for the year
ended April 30, 1995 was $220,000, an increase of 156% from $86,000 for the year
ended April 30, 1994. The increase was due to the conversion of a non-interest
bearing loan from an affiliate in December 1993 to a term loan with interest at
8.0%, which resulted in twelve months of interest accrued in 1995 compared to
five months in 1994.
Foreign Exchange(Gain) Loss. Foreign exchange gains for the year ended
April 30, 1995 were $90,000 compared to a loss of $122,000 for the year ended
April 30, 1994. The increase was due primarily to favorable exchange
fluctuations between the United States dollar and the British pound and Dutch
guilder.
Other (Income) Expense, net. Other expense for the year ended April 30,
1995, was $190,000 compared to income of $225,000 for the year ended April 30,
1994. The loss in 1995 was due primarily to the write-off of approximately
$60,000 of unusable fixed assets. The gain in fiscal 1994 was due primarily to
the recognition of gains on the sale of excess machinery and equipment
consistent with the Company's decision to outsource manufacturing of many of the
components of its rental tools.
Income Tax Expense. Provision for income taxes was $838,000 for the year
ended April 30, 1995, a decrease of 22% from $1.1 million for the year ended
April 30, 1994. The decrease was primarily due to a decrease in income in
certain foreign tax jurisdictions in which the Company was subject to income and
withholding taxes. The effective tax rate increased from 35% to 104% due
primarily to the Company's inability to offset foreign losses with United States
income in 1995.
INFLATION AND FOREIGN EXCHANGE
Inflation has not had a significant impact on the Company's comparative
results of operations. For the year ended April 30, 1996, transactions conducted
in United States dollars accounted for approximately 90% of the Company's total
revenues. The Company believes that the percentage of its total revenues
relating to transactions conducted in foreign currencies will increase due to
continued expansion of the Company's international operations, primarily in
Venezuela. The Company seeks to protect itself from fluctuations in foreign
currencies by accelerating conversion of such currencies into United States
dollars and by continual evaluation of the Company's level of operations in such
markets.
21
<PAGE> 24
LIQUIDITY AND CAPITAL RESOURCES
Working Capital. At April 30, 1996, the Company had $2.0 million in cash
and cash equivalents. For the year ended April 30, 1996, the Company had net
income of $2.6 million and cash provided by operating activities of $4.9
million. Other sources of cash included $2.6 million from revenue-producing
tools lost in hole, abandoned and sold and $1.3 million from advances under the
revolving line of credit discussed below. The Company's principal uses of cash
for the year were to fund $6.9 million for the addition of downhole tools and
$2.0 million for the repayment of long-term debt, including $660,000 to
Lawrence. During the past several years, the Company has funded its working
capital requirements through cash generated from operations, its credit
facilities and asset sales. Historically, the Company also financed certain of
its working capital requirements through periodic advances from Lawrence, and
the Lawrence Note relating to advances prior to fiscal 1994. During the past
three fiscal years, however, the Company has internally financed its working
capital requirements and has paid to (received from) Lawrence, net amounts of
approximately $(52,000), $711,000 and $538,000 during fiscal 1994, 1995 and
1996, respectively. The Company also has made principal and interest payments on
the Lawrence Note, the outstanding balance of which will be repaid utilizing
proceeds from the Offering, totalling $306,000, $880,000 and $842,000 during
fiscal 1994, 1995 and 1996, respectively. It is anticipated that Lawrence will
no longer be a source of working capital following the Offering.
Credit Facilities. At April 30, 1996, the Company had $9.7 million of bank
debt outstanding pursuant to an amended and restated credit agreement dated
December 13, 1995, as amended on June 5, 1996 (the "Credit Agreement"). The
Credit Agreement provides for a term loan and a revolving credit facility. At
April 30, 1996, the outstanding principal balance of the term loan was $8.4
million and the outstanding principal balance of advances made pursuant to the
revolving line of credit was $1.3 million. Principal payments on the term loan
are approximately $139,000 monthly through December 1999, with increasing
principal payments thereafter until maturity on December 1, 2000. The obligation
of the bank to make revolving credit advances terminates in December 1996.
Interest on the term loan was fixed at 7.9% pursuant to an interest rate swap
agreement. Interest on revolving credit advances will fluctuate at the bank's
prime rate in effect from time to time or at LIBOR-based rate plus 2.0%. At
April 30, 1996, the average interest rate on revolving advances was 7.4%.
Borrowings under the revolving credit facility are limited to the lesser of $3.0
million or a loan formula based upon the level of the Company's eligible
accounts receivable. The Company also may cause the bank to issue letters of
credit on the undrawn amount not to exceed $500,000. The outstanding undrawn
amount at any time of all letters of credit issued pursuant to the Credit
Agreement reduces the Company's ability to borrow funds pursuant to the
revolving line of credit. At April 30, 1996, there were no outstanding letters
of credit. The obligations of the Company to the bank are collateralized by
substantially all of the Company's property, equipment, inventory, intellectual
property and receivables. The Credit Agreement contains certain restrictive
covenants and customary events of default and conditions to the bank's
obligation to make advances to the Company. On June 5, 1996, the Credit
Agreement was amended so that the Reorganization would not violate certain of
these requirements. The Credit Agreement also is collateralized by certain real
estate owned by Lawrence, which the bank has agreed to release upon closing of
the Offering.
Notes to Lawrence. At April 30, 1996, the Company had approximately $1.8
million outstanding under the Lawrence Note. Principal payments on the Lawrence
Note of $55,000 plus interest at 8.0% on the unpaid balance are due monthly with
the final payment due at maturity on December 1, 1998. In addition, on June 27,
1996, the Company declared and paid a $10.0 million dividend to the Company's
sole stockholder, a subsidiary of Lawrence, in the form of a demand promissory
note accruing interest at its bank's prime rate. The Company intends to repay
these notes utilizing a portion of the net proceeds from the Offering. See "Use
of Proceeds".
Capital Expenditures. The Company anticipates that it will have capital
expenditures of approximately $16.0 million in the fiscal year ending April 30,
1997, $15.0 million of which are expected to relate to certain downhole tools,
primarily MWD and other directional equipment, hydraulic drilling jars,
hydraulic coiled tubing jars and hydraulic fishing jars. The Company believes it
has available resources through internally
22
<PAGE> 25
generated cash flow, the existing Credit Agreement and the net proceeds of the
Offering to fund its operations for at least 12 months following the Offering.
Future Acquisitions. The Company's business strategy is to broaden the
scope of the premium downhole tools and services it provides to the oil and gas
industry by expanding its directional drilling services and product lines, by
introducing new products and services through technological innovation and by
acquiring complementary businesses and assets. In connection with any future
acquisition, the Company may use a portion of the proceeds from the Offering
and, in addition, may be required to incur substantial indebtedness to finance
such acquisition and may also issue equity securities or convertible securities.
Although the Company routinely evaluates potential acquisition candidates, it
currently does not have any understanding, contract or agreement to acquire any
businesses or assets. See "Use of Proceeds".
Interest Rate Swap Agreement. In December 1993, the Company entered into an
interest rate swap agreement, which converted the interest rate on the term
portion of the Note from a floating rate of prime plus one-half of one percent
to a fixed rate of 7.9%. The financial impact of the swap was to increase
interest expense during fiscal 1994 by $47,000 and decrease interest expense in
fiscal 1995 and 1996 by $57,000 and $120,000, respectively. The Company has no
immediate plans to prepay the term portion of the Credit Agreement or unwind the
swap agreement.
Income Taxes. After completion of the Offering, the Company will no longer
be included in the federal tax return of Lawrence. The Company's allocable share
of the Lawrence net operating loss is $4.6 million. These loss carryforwards are
available to offset future income of the Company, but such losses will expire in
2004 through 2010 if not previously utilized. The Company has net deferred tax
assets at April 30, 1996 of $1.8 million.
NEW 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.
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. In connection with establishing its 1996
Key Employee Stock Plan and its 1996 Non-Employee Director Stock Plan, the
Company has elected to use 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 option 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.
23
<PAGE> 26
BUSINESS AND PROPERTIES
GENERAL
Dailey Petroleum Services Corp. provides directional drilling services and
designs, manufactures and rents technologically-advanced downhole tools for oil
and gas drilling and workover applications. Founded in 1945 as a fishing tool
company, the Company began offering directional drilling services in 1984 and
currently provides such services in the Gulf of Mexico, the United States Gulf
Coast region, and most recently, Venezuela and the Austin Chalk. The Company's
directional drilling services include computer-aided planning of optimum well
path and drilling procedures, on-site supervision, MWD services and sourcing and
supply of MWD equipment and related drilling tools.
The Company offers an array of downhole tools, which it selectively markets
in every major oil and gas exploration and production region in the world.
Dailey introduced its first drilling jar to the oil and gas industry in 1965 and
currently is the leading supplier of drilling jars to the rental tool market
worldwide. In addition to drilling jars, the Company's other downhole tools
include hydraulic fishing jars, coiled tubing jars, MWD equipment, downhole
drilling motors, thrusters for directional drilling and drilling shock
absorbers. The Company manufactures certain of its tools, purchases others, and
obtains others through third-party rentals.
Recent advances in directional drilling technologies combined with advances
in the identification and location of oil and gas reserves have made many
marginal or otherwise uneconomical reservoirs economically feasible to produce.
In many oilfield applications, directional drilling techniques, which include
directional and horizontal drilling, extended-reach drilling and short-radius
drilling, offer significant economic advantages over conventional drilling, such
as reduced drilling times and expense, accelerated production rates and enhanced
reservoir recovery. The Company offers drilling services for directional and
horizontal applications and offers its downhole tools for all advanced drilling
techniques. The Company believes its products and services improve drilling
efficiency, reduce the risk that expensive drilling components will be lost
downhole and enhance overall exploration and development economics.
Dailey traditionally has marketed its downhole tools directly to the
end-user through its direct sales force and agents, rather than rely on
third-party distribution of its products and subcontracting of its services. The
Company believes this strategy has resulted in higher profit margins and intends
to continue this marketing strategy. In addition, this direct interaction with
the end-user assists the Company in identifying demand for new and improved
products and better enables it to design and develop such products in a timely
manner.
The Company also believes that its reputation for quality and reliability
has resulted in worldwide industry recognition of the Dailey(R) name.
Furthermore, the proprietary designs of many of the Company's principal
products, its ability to attract and retain highly-qualified and experienced
personnel, and its ability to design, develop and market new and complementary
products and services are believed by the Company to be important competitive
advantages.
BUSINESS STRATEGY
The Company's strategy is to broaden the scope of the premium downhole
tools and services it provides to the oil and gas industry. The Company believes
this strategy is responsive to its customers' preference to purchase as many
products and services as possible from a single provider and that the ability to
offer related services enhances the Company's marketing of its downhole tools.
The Company intends to implement this strategy by (i) expanding its directional
drilling services and related product offerings, (ii) introducing new products
and services through technological innovation and (iii) acquiring complementary
businesses and assets.
Expand Directional Drilling Services and Related Product Offerings. The
Company's immediate strategy is to implement a significant expansion of its
directional drilling business, both in the geographic scope and in types of
drilling services it offers. Directional drilling services are becoming
increasingly important to the Company's business because a growing percentage of
the Company's downhole tools are rented in connection with providing such
services.
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<PAGE> 27
Introduce New Products and Services through Technological Innovation. The
Company believes that its emphasis on distribution of its downhole tools
directly to its customers has enhanced its ability to identify, design, develop
and market to these customers new products and improved products that are
responsive to its customers' needs. Dailey will continue to emphasize direct
interaction with its customers as a method of identifying new product
opportunities to keep pace with changing drilling technology trends and as a
means of refining its existing downhole tools, which the Company believes will
protect and expand its reputation for quality downhole tools and directional
drilling services.
Acquire Complementary Businesses and Assets. The Company is actively
seeking strategic acquisitions that will provide additional and complementary
products and services. The Company believes that acquisition candidates are
available that will allow Dailey to increase market share for its downhole tools
in existing markets, add new and complementary products and services and expand
marketing and distribution channels for its downhole tools and directional
drilling services. The directional drilling services industry recently has
experienced consolidation in response to increased demand for companies offering
a full range of advanced drilling tools and services. The Company believes that
this trend will continue and will present opportunities for Dailey to increase
the breadth and geographic scope of its directional drilling services through
strategic acquisitions. In addition, the Company believes that it can expand the
scope of the products and services it offers through the purchase or manufacture
of complementary tools and technology and by hiring experienced service
personnel.
DEMAND FOR DIRECTIONAL DRILLING SERVICES AND RENTAL PRODUCTS
Demand for the Company's directional drilling services and downhole tools
is affected by the worldwide level of, and trends in, oil and gas drilling
activity, which historically has experienced significant volatility. Demand for
the Company's directional drilling services depends upon the number of wells
being drilled using technologically-advanced directional drilling techniques,
such as directional and horizontal drilling, extended-reach drilling and
short-radius drilling. Demand for the Company's drilling tools depends primarily
upon the number of oil and gas wells being drilled, the drilling method employed
and the depth and drilling conditions of such wells. Demand for the Company's
fishing tools depends primarily upon the level of remedial or "workover"
activity in existing oil and gas fields where those products are offered and, to
a lesser extent, on the level of drilling activity in those areas.
DIRECTIONAL DRILLING SERVICES AND RELATED PRODUCTS
The Company began offering directional drilling services in 1984, primarily
along the Texas and Louisiana Gulf Coast, and has since steadily expanded both
its directional drilling technical capabilities and the geographic areas in
which its services are regularly offered. During fiscal 1994, 1995 and 1996,
revenues from directional drilling services and related products constituted
17%, 31% and 34% of total revenues, respectively.
Directional drilling can be used to develop a field with multiple wells
drilled from the same offshore platform or, in environmentally sensitive areas,
from fewer surface facilities than conventional drilling would require. In
addition, 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 directional
drilling technology allowing two or more horizontal wells to be drilled from the
same vertical wellbore have further enhanced well productivity and development
efficiency.
In fiscal 1995, the Company began providing its drilling services in
international markets by expanding into Venezuela. In fiscal 1996, the Company
began providing directional and horizontal drilling services in the Austin
Chalk. The directional drilling services offered by the Company consist of well
planning, on-site supervisory services to maximize drilling efficiency, MWD
services and equipment, downhole motors and post-well analysis. The Company
plans to continue the expansion of its drilling services both domestically and
internationally. In addition, the Company expects to keep pace with continually
evolving directional drilling techniques by developing or acquiring
extended-reach and short-radius drilling capabilities.
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The skill, experience and reputation of a service company's directional
drillers are the primary competitive factors in the directional drilling
services market. Because of this, the competition among directional drilling
service companies to employ the most reputable, qualified and experienced
directional drilling personnel is intense. In addition, the breadth of tools and
services offered as well as price are important competitive factors. The Company
believes that the quality and experience of its directional drillers provide it
with a competitive advantage and believes that it is able to recruit and retain
highly-qualified directional drillers because of its reputation in the industry
for stability and quality, because it offers competitive compensation and
because it provides a reliable, experienced support staff. As of May 17, 1996,
the Company employed 25 directional drillers, five of whom are located in
Venezuela.
Measurement-While-Drilling Services
The steering tools utilized by directional drillers typically consist of
either wireline steering tools or more advanced MWD equipment. MWD equipment
provides a directional driller with more extensive and advanced information to
"steer" the drill bit, including inclination, azimuth, tool face and temperature
plus magnetic or gravity tool face updates in steering or rotary drilling modes.
MWD units also can provide gamma ray logging.
The Company purchases its MWD units from a single outside vendor. Reliable
MWD units currently are available for third-party purchase worldwide from only a
few independent suppliers. The Company began purchasing MWD units offering
traditional MWD services from its current supplier and offering such systems and
services to its customers in fiscal 1994. The Company believes that its MWD unit
competes favorably with respect to reliability and performance with MWD units
developed in-house by fully-integrated service companies and the other reliable
MWD units currently available for third-party purchase. While the Company has
not experienced significant supply or quality control problems to date with its
supplier, no assurances can be made that its supplier will continue to be able
to supply the Company with MWD units or that the Company will be able to
purchase such products and services at competitive prices and comparable quality
from the other known vendors of MWD units. Any difficulty in obtaining MWD units
and related support services from its supplier could have a material adverse
effect on the Company's results of operation.
The most advanced guidance equipment also is capable of providing
logging-while-drilling ("LWD") information, which includes resistivity sensors
and other more sophisticated variations such as density and porosity sensors.
Currently, the Company believes guidance systems capable of providing LWD
information are not available for third-party purchase and are owned only by
large, diversified oil service companies that have developed such capabilities
in-house. The Company has been able to obtain access to LWD equipment on a very
limited basis in situations where the Company's customer can rent such equipment
directly from a supplier of such products. The Company believes that LWD
equipment may be available for purchase in the future and intends to purchase
such equipment if, and when, reliable equipment is offered; however, it has no
current understanding, agreement or contract to do so and no assurances can be
given that LWD equipment will become available for third-party purchase or that
such equipment will be made available to the Company at competitive prices.
As of the date of this Prospectus, the Company believes that its inventory
of MWD units is insufficient to meet current demand for such systems. Utilizing
net proceeds from the Offering, the Company intends to purchase additional MWD
systems to be used in domestic and international markets.
Drilling Motors
Directional drilling typically is conducted using a downhole drilling motor
attached to the drill bit and powered by the circulation of drilling fluids from
the surface, unlike conventional rotary drilling techniques in which the drill
bit is turned by rotating the drillstring from the surface. The Company
designed, developed and introduced its own downhole motor, the patented Dailey
Positive Displacement Drilling Motor, in 1991. Improved versions of this motor
are offered for rental in connection with directional drilling services provided
by the Company, rather than to third parties providing directional drilling
services.
As of the date of this Prospectus, the Company believes that its inventory
of Positive Displacement Drilling Motors is insufficient to meet current demand
for such motors. Utilizing net proceeds from the
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Offering, the Company intends to purchase additional motors to be used in
domestic and international markets.
New Markets and Applications
The Company's growth strategy includes the geographic expansion of its
directional drilling services and the addition of highly-specialized processes
such as extended-reach and short-radius drilling. Implementation of this
strategy began with expansion into Venezuela in fiscal 1995 and into the Austin
Chalk during the most recent fiscal year. Contemporaneously with its entry into
the Austin Chalk, the Company began providing horizontal drilling services. The
Company intends to implement this strategy further by expanding into new
international and domestic markets where the Company has enjoyed established
name recognition and distribution networks.
RENTAL PRODUCTS
Drilling Jars and Related Jar Products
The Company believes it has become the worldwide leader in premium drilling
jar products due primarily to superior design features, many of which are
proprietary in nature. The Company's line of drilling jars includes three
products: the mechanical Dailey L.I. Rotary Drilling Jar (the "L.I. Jar"), the
Dailey Hydraulic Drilling Jar (the "Dailey Hydraulic Jar") and the Dailey
No-Torque Jar (the "DNT Jar"). The Company believes that the designs of its
three drilling jars allow it to offer a drilling jar capable of delivering
performance superior to competing jars over larger periods of time in their
intended operating environments and compatible with virtually any drilling
condition a customer may encounter. For the three fiscal years ended April 30,
1996, revenues from the Company's drilling jars and related products constituted
71%, 63% and 57%, respectively, of the Company's total revenues during such
periods.
A drilling jar is an impact tool that is placed in the lower section of a
drillstring as part of the bottomhole assembly. Activated from the surface, the
drilling jar delivers a sharp, powerful impact to free the drillstring should it
become lodged in the hole. The potential risks of the drillstring becoming stuck
in the hole include interruption of the drilling process, loss of drillstring
components and loss of the well. Drilling jars must be capable of reliably
delivering frequent and consistent impacts to the drillstring, sometimes over a
period of many days. As a result, reliability and consistent performance and
service by qualified personnel are key criteria in a customer's selection of
drilling jars.
Drilling jars and jar slingers generally are used in drilling applications
where there is significant risk of, or cost associated with, the bottomhole
assembly of the drillstring becoming stuck in the well bore. As the risk or
potential cost of a stuck drillstring increases, the likelihood that the
operator of the well will employ a drilling jar typically increases. Drilling
applications where drilling jars are used regularly include high cost wells,
wells drilled using directional or horizontal techniques, deeper wells, and
wells penetrating unstable geologic formations that increase the risk of well
bore collapse. Drilling jars generally are considered essential components in
most directional drilling bottomhole assemblies.
The Company offers its drilling jars in several outside diameter sizes,
which can be incorporated into bottomhole assemblies utilizing most
industry-standard drill collar sizes. The Company also provides customers with
computer-aided analyses of optimal drilling jar placement in the bottom hole
assembly to maximize drilling jar performance.
Dailey Hydraulic Jar. Introduced in 1986 in response to the growing use of
directional and horizontal drilling techniques, the Dailey Hydraulic Jar
generally is suited for use in all directional drilling applications. Unlike
mechanical jars, such as the L.I. Jar, the Dailey Hydraulic Jar does not require
rotation of the drillstring to adjust the force of impact delivered. This
adjustment feature provides more reliable control of the tool in highly-deviated
or directionally drilled wells where rotating the drillstring is complicated by
increased torque and drag resulting from greater contact of the drillstring with
the walls of the well bore.
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Hydraulic drilling jars generally are more susceptible to failure caused by
heat than are mechanical drilling jars. Heat reduces the viscosity of internal
hydraulic fluids which diminishes the performance of a hydraulic drilling jar
and, at higher temperatures, may render the tool ineffective. The sources of
heat affecting hydraulic drilling jars are the internal heat generated by the
tool in operation and ambient heat downhole. As a result of its patented design,
the Dailey Hydraulic Jar is capable of operating for substantially longer
periods of time without failure induced by internally generated heat. The
Company believes this and other design features enable the Dailey Hydraulic Jar
to operate for longer periods of time and to provide more consistent performance
than competing hydraulic jars.
L.I. Jar. The Company introduced the L.I. Jar in 1965. Although most
commonly employed in conventional, "straight hole" drilling or in wells where
the well bore deviates only slightly from vertical, the L.I. Jar also is capable
of effective operation in highly-deviated drilling applications. The degree of
upward or downward force delivered by the L.I. Jar to the drillstring when
triggered can be adjusted from the surface while the tool remains downhole. The
L.I. Jar is a self-cocking (up or down) jar that trips immediately after
applying the required pull or weight. Because of its entirely mechanical
mechanism and rugged construction, the L.I. Jar is known for its reliability and
ability to deliver consistently the desired force of impact. The L.I. Jar is
able to withstand extreme temperatures and can be adapted for geothermal
drilling. Although patent protection for the L.I. Jar expired in 1983, it
continues to be one of the most widely used mechanical drilling jars in the oil
and gas drilling industry worldwide.
DNT Jar. Like the Dailey Hydraulic Jar, the DNT Jar is designed primarily
for use in directional drilling applications. The DNT Jar was introduced in 1987
and is used by customers who prefer a mechanical jar instead of a hydraulic jar.
Although the DNT Jar's impact force cannot be adjusted while downhole as can the
Dailey Hydraulic and L.I. Jars, its mechanism enables it to be reliably and
consistently activated in directionally or horizontally drilled wells where
temperatures are so great that hydraulic drilling jars would fail or be
impaired. The DNT Jar features a patented mechanism that enables an operator to
trigger the tool without affecting drillstring torque. Like all of Dailey's
drilling jars, the DNT Jar is a self-cocking jar that trips immediately after
being triggered.
Hydraulic Fishing Jar and Related Tools
Fishing operations generally are classified as either "open hole" or "cased
hole," including "through tubing" fishing. Open hole operations usually are
associated with drilling activities and are directed toward removing stuck
drilling equipment, bits, drill pipe or bottomhole assemblies from the well bore
in order to proceed with drilling operations. Cased hole operations usually are
associated with existing wells in which production casing has been set and
cemented. Workover rigs and rigs utilizing coiled tubing routinely are used to
keep the well operating at expected levels of performance. The Company
manufactures a range of sizes of jars used for fishing operations whether
employing a workover rig or coiled tubing rig. During fiscal 1996, the Company
introduced its double-acting, hydraulic coiled tubing jar (the "Dailey Coiled
Tubing Jar"), which was designed and developed through the Company's research
and development program. The Company believes that the Dailey Coiled Tubing Jar
was the first double-acting, hydraulic coiled tubing jar introduced for
commercial operation in the oil and gas industry.
The Dailey Hydraulic Fishing Jar (the "Dailey Fishing Jar"), Dailey Coiled
Tubing Jar, Dailey Bumper Subs and Dailey HyPulse(R) Jar Slingers contain
certain patented and proprietary features. Since fishing jars deliver only an
upward blow when triggered, operators often utilize a bumper sub, which delivers
a downward impact. Operators utilize fishing jar slingers to magnify the impact
of the hydraulic fishing jar. Like the Dailey Hydraulic Jar, the Dailey Fishing
Jar incorporates a patented hydraulic design that reduces internally-generated
heat, which enables the Daily Fishing Jar to operate for substantially longer
periods of time without failure induced by internally generated heat. The
Company believes that this characteristic and other proprietary designs and
manufacturing features make the Dailey Fishing Jar a reliable product, capable
of operating for longer periods of time and providing more consistent
performance than competing hydraulic fishing jars.
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As of the date of this Prospectus, the Company believes that its current
inventory of Dailey Fishing Jars and Dailey Coiled Tubing Jars is insufficient
to meet current demand for such products. Utilizing net proceeds from the
Offering, the Company intends to manufacture additional jars to be used in
international and domestic markets.
Other Products
In connection with its directional drilling services, the Company owns and
leases certain non-proprietary drilling tools that it leases to operators as
components of the bottom hole assembly, such as non-magnetic drill collars and
stabilizers, string stabilizers, near bit stabilizers, various short drill
collars and select heavyweight drill pipe. The Company believes that owning and
leasing an inventory of such products allows the Company to increase the
profitability of its directional drilling services.
MARKETING AND DISTRIBUTION
The Company traditionally has marketed its directional drilling services in
the Gulf of Mexico, the United States Gulf Coast region and Venezuela. During
the past year, the Company began offering its directional drilling services in
the Austin Chalk. Marketing for the Company's directional drilling services is
conducted entirely through the Company's direct sales force located in the
Company's principal offices in Conroe, Texas, and in its district offices
located at Houston, Texas; Lafayette, Louisiana and Venezuela. The Company's
sales representatives have extensive experience in directional drilling and
monitor the latest drilling tool developments and drilling techniques.
The Company typically provides its directional drilling services on a
per-day basis. The Company's directional drillers, at least one of whom is
always present during a directional drilling project, are billed separately to
customers at a per-day rate. The Company's MWD units and related products, if
requested by the customer, are billed to customers at a per-day rental rate.
Downhole motors typically are rented at an hourly rate. The Company considers
its directional drilling services to be an integral part of its distribution
efforts for its downhole tools.
The Company markets its downhole tools primarily to major oil companies,
independent oil and gas exploration companies, drilling contractors, and
drilling services consultants. In international markets, state-owned oil and gas
companies also are a significant customer group.
Fishing tools generally are rented or consigned on a long-term basis to
fishing services companies. In order to protect the proprietary nature of its
tools, the Company has made a strategic decision not to sell its fishing tools
to fishing service companies. Rather, the Company rents its fishing tools to the
fishing services companies or directly to the well operator. Although the
Company believes its marketing strategy has allowed it to earn higher margins on
its fishing tools while at the same time reducing the ultimate cost to the
customer, the Company believes that this strategy has limited its ability to
increase market share since fishing service companies generally prefer to
purchase their fishing tools rather than rent from third parties.
Domestic marketing of the Company's downhole tools is conducted by the
Company's direct sales force located in the Company's principal offices in
Conroe, Texas, and in five principal sales offices located at Conroe; Corpus
Christi, Texas; Houma, Louisiana; Bakersfield, California; and Anchorage,
Alaska. The Company's service representatives are trained in the basic
maintenance and operation of each of its downhole tools. Likewise, the sales
representatives have extensive personal experience in directional drilling and
monitor the latest drilling tool developments and directional drilling
techniques.
International marketing of the Company's downhole tools is conducted
primarily through the Company's direct sales force or through independent
international agents and also through cooperative marketing arrangements with
local companies. Internationally, the Company determines its method of marketing
its downhole tools on a region-by-region and country-by-country basis. The
factors that the Company considers when determining whether to operate through a
direct sales force or through independent agents include political and economic
stability in the country and region, logistics in providing the Company's
downhole tools to the customer, market size, foreign taxes, labor laws and
import and export procedures. In countries where
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management believes drilling activity is likely to remain high for a sustained
period, the Company is most likely to market and distribute its rental tools
through a direct sales force rather than through international agents, if
practical. In such instances, the Company leases facilities to accommodate
administrative, marketing, distribution, and tool maintenance functions similar
to its district facilities in the United States.
All pricing and rental terms and conditions of rental are established by
the Company and may not be varied by international agents without approval of
the Company. International agents typically offer other products and services
but substantially all of these agents are contractually prohibited from offering
competing products unless the Company does not offer the particular tool or size
of tool in the agent's territory.
The Company does not believe that any one customer accounted for more than
10% of the Company's revenues during any of the Company's three most recent
fiscal years.
INTERNATIONAL OPERATIONS
The Company's international operations accounted for approximately 46%, 39%
and 42% of total revenues for fiscal 1994, 1995 and 1996, respectively. As of
April 30, 1996, the Company had operations in approximately 34 foreign
countries. See Note 13 of notes to consolidated financial statements of the
Company contained elsewhere in this Prospectus for additional information
regarding foreign and domestic revenues.
The Company currently utilizes 12 international agents responsible for
international marketing in certain of its markets. International agents also
perform maintenance of the Company's downhole tools in their custody at their
own facilities. International marketing and distribution is organized into four
major regions: Europe/West Africa, Middle East, Southeast Asia and Latin
America. Each region is further divided into multiple and sometimes overlapping
territories, generally based on political boundaries. Regional supervisors are
assigned by the Company to oversee international operations, particularly with
respect to proper maintenance and redressing of tools and to provide sales
support and technical assistance to customers.
Dailey's international operations are subject to special considerations
inherent in doing business outside the United States, including political
instability, war, civil disturbances and governmental activities, which may
limit or disrupt markets, restrict the movement of funds or result in the
deprivation of contract rights or the taking of property without fair
compensation. Government-owned petroleum companies located in some of the
countries in which Dailey operates have adopted, or are subject to, policies
that mandate that preference be given to companies that are majority-owned by
local nationals. In addition, the Company conducts a portion of its
international operations in currencies other than the United States dollar. See
"Management's Discussion and Analysis of Financial Condition -- Results of
Operations".
ARRANGEMENTS WITH CUSTOMERS
The Company typically charges its customers a per-day rate for each
directional driller and MWD technician provided by the Company. Domestically,
the Company separately charges its customers a per-day rental rate for MWD units
and related equipment utilized by the customer. Downhole drilling motors
provided by the Company are billed based upon an hourly rate.
The Company's international directional drilling operations currently are
limited to Venezuela. The Company charges for its services based upon a per-well
basis, which charges include an estimate of the number of days the Company's
directional drillers and MWD technicians will be on-site as well as an estimate
of the MWD equipment and related tools that will be utilized in drilling the
applicable well. In situations where the Company is subcontracting its services
to another directional drilling company, it receives a per day charge for its
services, in some cases subject to a maximum possible charge.
The Company chooses to offer its downhole tools primarily for rental in
order to protect its proprietary designs and assure quality control in their
maintenance and operation. The Company believes that a substantial portion of
the drilling jars in use worldwide are rented rather than purchased by the
end-user.
The Company typically rents its drilling tools by the day on a per-rig
basis. Because many customers prefer to have additional or substitute tools of
varying sizes on site, the Company classifies its drilling tools as
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either "operational" or "standby" for purposes of calculating rental charges.
Daily rental rates for standby tools generally are less than standard rates for
operational tools, although in some international markets the same daily rent is
charged for operational and standby tools. In some domestic market areas, the
Company supplies standby tools at no additional charge.
In international markets, the Company generally receives a standard
inspection charge for drilling tools actually used and returned. Additional
charges are assessed for parts damaged beyond normal wear. A substantial
replacement or "lost-in-hole" charge is made for tools that are lost or
abandoned. Rental rates for operational and standby tools, damage charges and
lost-in-hole charges vary by product, domestic or international location, and
local competitive conditions. Longer-term tool rental contracts are negotiated,
particularly with major oil companies or with operators drilling a multiple well
program.
The Company occasionally offers its L.I. Jar and spare parts for sale in
certain international markets. Sales generally are confined to national oil
companies of countries where political risks, governmental restrictions, or
other operating conditions are such that the Company has chosen not to establish
rental operations, either directly or through agents.
MANUFACTURING
The manufacturing processes generally required to produce the Company's
downhole tools are machining, fabrication, assembly of components manufactured
by the Company or outside suppliers, and quality control testing. The Company's
downhole tools are manufactured primarily from bars and tubes of high grade
alloy and stainless steel made to the Company's proprietary metallurgical
specifications and various seal materials. While the Company chooses to purchase
some raw materials and component parts from single vendors, management believes
that the raw materials and component parts used in its tools are generally
available from multiple sources at competitive prices.
Prior to fiscal 1994, the majority of the component parts for the Company's
downhole tools were manufactured by Company personnel at locations owned or
leased by the Company, while only certain specialized manufacturing operations
were outsourced to third parties. Beginning in 1991, the Company made a
strategic decision to increase the proportion of the components of its various
downhole tools that were manufactured by outside third parties; however,
assembly of the Company's downhole tools is still done entirely in-house.
Pursuant to this strategy, the Company attempts to outsource those manufacturing
processes that can be performed more efficiently and cost effectively by outside
third parties while still satisfying Dailey's rigid quality control standards.
In order to safeguard the proprietary nature of its various downhole tools, the
Company does not outsource the manufacture of proprietary components and
maintains a policy of manufacturing at least one aspect of each of its downhole
tools in-house. The Company believes that its manufacturing capabilities and
arrangements are sufficient in order to meet the demand and timing needs of the
Company's customers for the next 12 months. Machining of larger components and
spare parts, including the most complex components, is done by the Company at
its manufacturing plant in Conroe, Texas. The Company uses independent machine
shops to produce many of the smaller spare parts, which the Company believes can
be more competitively machined by such independent shops. During the past five
years, one vendor has been the Company's only supplier of filters that go into
the Company's hydraulic downhole tools. The Company has not identified alternate
suppliers of such filters. To date, the Company has not experienced significant
supply problems with this vendor.
Quality control is stressed throughout the manufacturing process to produce
downhole tools meeting the Company's high standards for reliability and
performance. Quality control inspections are conducted by specially trained
personnel. Steel bars and tubes are inspected and tested for compliance with the
Company's metallurgical specifications. Each part, whether produced by the
Company or others, is individually inspected for conformity with design
specifications. Each critical component is also inspected for cracking by
magnetic particle inspection. Upon final assembly, drilling and fishing jars are
repeatedly triggered in specially designed test racks to assure proper
performance before shipment.
All of the Company's downhole tools except the Company's drilling motors
are currently assembled at its plant in Conroe, Texas. Drilling motors are
assembled at the Company's Houston, Texas facilities. The
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Company believes that it has sufficient manufacturing capacity to accommodate
anticipated demand for its downhole tools without expanding its manufacturing
facilities in the United States.
MAINTENANCE
Maintenance of the Company's downhole tools is conducted in the United
States at six of the Company's facilities, each of which is specially equipped
for that purpose. In the United Kingdom, Colombia and Venezuela, maintenance is
conducted by Company personnel, and elsewhere by the Company's international
agents who are subject to periodic quality control inspection and supervision by
Company personnel. The Company's emphasis on quality control also is applied to
maintenance of its downhole tools. Upon return to the Company's district service
and distribution facility, each tool is activated repeatedly in a test rack to
detect performance deficiencies. The tool is then disassembled, metallic parts
are inspected, non-metallic parts are replaced as needed, and moving parts are
examined for excessive wear. The tool is then reassembled, painted "Dailey
blue", the characteristic blue color associated with Dailey products, and
returned to the rental fleet.
RAW MATERIALS
The manufacturing processes performed in house by the Company require a
ready supply of high-quality, special alloy steel and other raw materials. The
Company purchases its raw materials from various vendors, none of which supplied
a majority of the Company's supply of steel during fiscal year 1996. Consistent
with the recent upturn in the demand for steel and other raw materials used in
the oil and gas industry, the Company has begun to experience longer lead times
for delivery of raw materials, primarily steel, which requires the Company to
predict further in advance its needs for such materials. Although the Company
typically places orders for its steel at least three months in advance and
usually stores with a third party a reserve supply of steel adequate to cover
the Company's demand for steel for at least one month, any prolonged disruption
in steel supply could affect the Company's ability to meet production schedules
and commitments, which could have a material adverse effect on the Company's
financial condition and results of operations.
INTELLECTUAL PROPERTY
The Company believes that the proprietary aspects of many of its downhole
tools provide it with certain competitive advantages. In particular, the Company
believes that the trademarks and servicemarks protecting the Dailey name in
domestic and international markets, as the case may be, are of primary
importance. The Company relies on a combination of patents, trade secrets,
trademarks and servicemarks and copyrights to protect its proprietary
technologies and intellectual properties. Dailey owns numerous patents in the
United States and other countries.
The markets for the Company's downhole tools are characterized by continual
technological developments that have resulted in, and will likely continue to
result in, improvements in product function and performance. The Company
believes that its success will depend on its ability to respond to technological
developments on a timely basis, either internally or through strategic alliances
or acquisitions. Current competitors or new market entrants may develop new
technologies, products, services or standards that could render the Company's
products and services obsolete. Furthermore, after Dailey's patents expire, the
Company's competitors could develop products substantially similar to the
Company's downhole tools. In this regard, the Company maintains an engineering
staff in Conroe, Texas, which is responsible for designing and developing new
products and improvements to existing products.
The Company holds approximately 22 patents in the United States and
numerous counterparts in other countries and has approximately 41 trademarks
registered in the United States and foreign countries. The Company has five
servicemarks that are registered in the United States. Patents protect features
of the Dailey Hydraulic Jar, Dailey Fishing Jar, DNT Jar, R.A.M. Shock Absorber
and Dailey Drilling Motor as well as other of the Company's products. The United
States patents for the Company's products expire in years ranging from 1999 to
2011. The L.I. Jar has not been protected by patent since 1983. Certain features
of other products offered by the Company have been granted United States and
foreign national patent protection, or have patent applications pending. Many of
the Company's competitors also have obtained or applied for patent
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protection for competing products offered by them. There is no assurance that
the Company's patents will prove enforceable, that any patents will be issued
for which the Company has made application or that competitors will not be able
to develop functionally similar downhole tools not violating any patents the
Company has or may obtain.
The Company regards its patents, trademarks and servicemarks, know-how and
proprietary information to be of significant value and vigorously protects its
intellectual property rights, by litigation if necessary. The Company also
believes that its engineering, manufacturing, and technical knowledge and
experience are important to its competitive position. Although the Company does
not consider its business to be wholly dependent on any single patent or
trademark, the loss of patent protection for the Dailey Hydraulic Jar or Dailey
Hydraulic Fishing Jar could have a material adverse effect on the Company.
RESEARCH AND DEVELOPMENT
The Company conducts its research and development ("R&D") activities
through its engineering department and believes that its engineering facilities
in Conroe, Texas are fully equipped to enable the Company to take a new product
from design through the evaluation and prototype manufacturing stages. The
Company's engineering department employs 12 individuals, including four design
engineers. The Company's R&D expenditures during the three fiscal years ended
April 30, 1996, were $736,000, $775,000 and $728,000, respectively, and it has
budgeted $1.0 million for fiscal 1997 expenditures.
The Company's engineering department works closely with its marketing
department when developing and evaluating new downhole tools and enhancements to
existing downhole tools. The Company believes its direct interaction with its
customers has enhanced Dailey's ability to identify and determine demand for new
products and improved products. Potential ideas and concepts are most often
introduced to the engineering department by the Company's marketing personnel
based upon requests from and needs of the Company's customers.
In connection with its R&D efforts, the Company recently introduced its
newest downhole tool, the Dailey Coiled Tubing Jar, which the Company believes
was the first double-acting, hydraulic coiled tubing jar introduced for
commercial operation in the oil and gas industry.
OPERATING RISKS AND INSURANCE
The operations of the Company's customers are subject to hazards inherent
in the oil and gas industry, such as blowouts, explosions, craterings, fires and
oil spills, that can cause personal injury or loss of life, damage to or
destruction of property, equipment, the environment and marine life, and
suspension of operations. In addition, claims for loss of oil and gas production
and damage to formations can occur in the workover process. If a serious
accident were to occur where the Company's downhole tools are used or its
directional drilling services are being provided, it could result in the Company
being named as a defendant in lawsuits asserting potentially large claims.
As protection against operating hazards, the Company maintains insurance
coverage that it believes to be customary in the industry against these hazards,
and whenever possible, obtains agreements from customers providing for
indemnification against liability. The Company maintains general liability
insurance in the primary amount of $1.0 million, policies to cover its
buildings, equipment and other property with aggregate coverage limits over
$25.0 million, as well as worker's compensation, maritime employer, auto, crime
and political risk insurance. The Company also is insured under an umbrella
liability policy with a coverage limits of $5.0 million in the aggregate. Most
of the Company's policies provide for coverage on a per-occurrence basis, rather
than a claim basis. The Company's policies generally exclude coverage for losses
and liabilities relating to environmental damage or pollution, breach of
contract or fraud or deceptive practices. The Company does not maintain
professional liability insurance.
Although historically the Company's insurance coverage has greatly exceeded
the amount of its claims, and management believes that the Company's insurance
coverage is adequate for its present operations, a successful liability claim
for which the Company is underinsured or uninsured could have a material adverse
33
<PAGE> 36
effect on the Company. The Company often is required to indemnify major
customers pursuant to master service agreements.
COMPETITION
All of the Company's products and services are offered in
highly-competitive markets in which many of the Company's competitors are
divisions or subsidiaries of larger, better capitalized corporations. In
directional drilling services, the Company believes that the principal
competitive factor is the availability of qualified experienced directional
drilling personnel, particularly personnel with whom the customer has had
satisfactory experience, and to a lesser extent, breadth of products and
services offered, price and technology. Because of this, the competition among
directional drilling service companies to employ the most reputable, qualified
and experienced directional drilling personnel is intense. The Company believes
its directional drilling personnel have excellent qualifications and experience,
and is seeking additional personnel to enhance its competitive position in the
directional drilling services industry. The Company believes that the leading
competitors in the directional drilling services industry are fully-integrated
service companies such as Anadrill/Schlumberger, Baker-INTEQ, Halliburton Energy
Services and Sperry-Sun. The Company also competes with numerous smaller,
independent companies that offer only directional drilling services or a
relatively limited line of additional tools compared to fully-integrated
competitors. The Company believes that it is among the leading independent
directional drilling companies along the Gulf Coast and in Venezuela. The
Company believes that its ability to recruit and retain highly qualified
directional drillers, and in turn, offer its customers more personalized, high
quality service, allows it to compete with the larger fully-integrated service
companies with respect to customers that emphasize service and quality over
price. The Company believes that the primary competitive advantages of the
fully-integrated service companies are their ability to offer lower prices in
certain areas and to offer certain technology, such as LWD services, which
smaller directional drilling service companies, such as Dailey, currently do not
offer.
The Company believes its primary competitive advantages with respect to
downhole tools are the dependability and performance characteristics of its
drilling tools that the Company believes has resulted in worldwide recognition
of the Dailey name, proprietary designs for many of its principal downhole
tools, its ability to design, develop and market new and complementary products
and services and its knowledgeable sales and technical service personnel. The
Company generally does not emphasize price as a competitive feature of its
drilling tools. Many of Dailey's competitors offer broader lines of drilling
products and services with larger and broader distribution networks than does
the Company. In addition, the Company competes with numerous smaller suppliers
of specialty drilling and fishing tools. The principal competitive factors
affecting the Company's drilling tools are reliability and performance,
availability of appropriate tools, technical support and price.
The Company competes with manufacturers and owners of downhole drilling
tools. The dominant competitors in downhole drilling tools are Houston
Engineers, a subsidiary of Wilson Industries, Inc., Weir-Houston, Baker Hughes,
Bowen, Weatherford Enterra, Inc. and Griffith Tool Company, a subsidiary of
Dreco Energy Services Limited. The three leading competitors with respect to
fishing tools are Anadrill/Schlumberger, Bowen and Houston Engineers. Although
the Company is a relatively small competitor among all manufacturers and owners
of drilling and fishing tools, the Company believes that it is the world-wide
leader in premium drilling jars supplied to the rental tool market. The Company
has experienced some loss of drilling jar market share in certain international
markets over the past several years due to increasing price competition.
Management expects competition and customer price pressures to continue for
the foreseeable future with respect to its downhole tools and its directional
drilling services.
EMPLOYEES
At April 30, 1996, the Company had 323 employees, approximately 84% of
which were located in the United States. The Company has never experienced a
work stoppage and considers its employee relations to be excellent. The Company
has no collective bargaining agreements.
34
<PAGE> 37
REGULATION
Various federal, state and local laws and regulations covering the release
of materials into the environment, or otherwise relating to the protection of
the public health and the environment, affect the Company's and its customers'
domestic operations, expenses and costs. The trend in environmental regulation
has been to place more restrictions and limitations on activities that may
impact the environment, such as emissions of pollutants, generation and disposal
of wastes, and use and handling of chemical substances. Increasingly strict
environmental restrictions and limitations, as well as the obligation to
remediate existing contamination, have resulted in increased operating costs for
the Company and other similar businesses throughout the United States, and it is
possible that the costs of compliance with environmental laws and regulations
will continue to increase, both for the Company and its customers. In this
regard, the Resource Conservation and Recovery Act ("RCRA"), a federal statute
governing the disposal of solid and hazardous wastes, includes a statutory
exemption that allows oil and gas exploration and production wastes to be
classified as non-hazardous waste. A similar exemption is contained in many of
the state counterparts to RCRA. If oil and gas exploration and production wastes
were required to be managed and disposed of as hazardous waste, either as a
result of change in RCRA or the imposition of more stringent state regulations,
domestic oil and gas producers, including many of the Company's customers, could
be required to incur substantial obligations with respect to such wastes.
Because of the potential impact on the Company's customers, any regulatory
changes that impose additional restrictions or requirements on the disposal of
oil and gas wastes could adversely affect demand for the Company's products and
services. In addition, the Company is subject to laws and regulations concerning
occupational health and safety. The Company's international operations also are
subject to international laws respecting environmental and worker safety matters
in the countries in which they operate. The Company believes that it is in
substantial compliance with the requirements of environmental and occupational
health and safety laws and regulations, but inasmuch as such laws and
regulations are frequently changed, the Company is unable to predict the
ultimate impact of such laws and regulations on the Company's business. Any
violation of such laws could subject the Company to fines, penalties or other
liabilities.
Capital expenditures for property, plant and equipment for environmental
control facilities during fiscal 1996 were not material. Based on the Company's
experience to date, the Company currently does not anticipate any material
adverse effect on its results of operations or financial condition as a result
of future compliance with existing environmental laws and regulations
controlling the discharge of materials into the environment. However, future
events, such as changes in existing laws and regulations or their
interpretation, more vigorous enforcement policies of regulatory agencies, or
stricter or different interpretations of existing laws and regulations, may
require additional expenditures by the Company, which may be material.
PROPERTIES
The following table summarizes the Company's significant owned and leased
properties as of April 30, 1996:
<TABLE>
<CAPTION>
LOCATION OF FACILITY PROPERTY INTEREST USES
----------------------------- ------------------ ----------------------------------------
<S> <C> <C>
Conroe, Texas................ Leased(1) Corporate Offices, Sales,
Manufacturing, Maintenance, R&D
Aberdeen, Scotland........... Leased Sales, Maintenance
Anchorage, Alaska............ Owned Sales, Maintenance
Anaco, Venezuela............. Leased Sales, Maintenance
Bakersfield, California...... Leased Sales
Bogota, Colombia............. Leased Sales, Maintenance
Cabimas, Venezuela........... Leased Directional Drilling Office,
Sales, Maintenance
Corpus Christi, Texas........ Owned Sales, Maintenance
Houma, Louisiana............. Owned Sales, Maintenance
Houston, Texas............... Owned Directional Drilling Office,
Sales, Maintenance
Lafayette, Louisiana......... Owned Directional Drilling Office,
Sales, Maintenance
</TABLE>
- ---------------
(1) Leased from Lawrence. See "Certain Relationships and Related Transactions".
35
<PAGE> 38
The Company considers all of its facilities to be in good operating
condition and adequate for their present uses. The Company believes that it has
sufficient manufacturing, maintenance, service and storage capacity to meet its
current and anticipated requirements. The Company also utilizes properties
provided by its international agents, which the Company currently does not
lease.
LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property the subject of,
any pending legal proceedings, other than ordinary routine litigation incidental
to its business, including litigation relating to the Company's intellectual
property, and which is believed to be either covered by insurance or not
material in amount.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
In connection with the Offering, the Board of Directors of the Company will
be expanded to six positions. The Company's Restated Certificate of
Incorporation provides for the classification of the Board of Directors into
three classes of directors, with the term of each class expiring at successive
annual stockholders' meetings. At and after the 1997 annual meeting of
stockholders, all nominees of the class standing for election will be elected
for three-year terms. It is intended that the directors named below will
constitute the Board of Directors of the Company at the time of the closing of
the Offering.
Set forth below is the name, age as of the date of this Prospectus, and
position of each of the directors, executive officers and other significant
employees of the Company as they will exist at the closing of the Offering, and,
with respect to each director, the year of expiration of his initial term of
office. The Company intends to add two additional outside directors as soon as
possible after the Offering. It is expected that such directors will be members
of the Audit and Compensation Committees and serve for terms expiring in 1997.
<TABLE>
<CAPTION>
YEAR TERM
AS DIRECTOR
NAME AGE POSITION WILL EXPIRE
- ----------------------------------- --- ----------------------------------- -----------
<S> <C> <C> <C>
J. D. Lawrence..................... 50 Chairman of the Board of Directors 1999
James F. Farr(1)(2)................ 39 President, Chief Executive Officer 1999
and Director
William D. Sutton(1)(2)............ 42 Senior Vice President, General 1998
Counsel, Secretary and Director
David T. Tighe(2).................. 44 Senior Vice President -- Finance, 1998
Chief Financial Officer, Treasurer
and Director
John E. Blacklaws.................. 39 President -- Production Services
James C. Brame..................... 44 Vice President -- Business
Development
Benjamin A. Brooks, Jr............. 42 Vice President -- Manufacturing,
Production Services
Dwight A. Goolsbay................. 35 Vice President -- MWD Services
Cecil W. Harvey.................... 59 President -- Drilling Systems and
Dailey Oil Tools
Gary P. Hertfelder................. 41 Vice President -- Engineering/R&D
Martin Lyons....................... 46 Senior Vice
President -- Directional Drilling
and Marketing
James J. Orr....................... 53 Vice President -- Domestic
Directional Drilling and Marketing
James J. Percle.................... 40 Vice President -- Operations
</TABLE>
- ---------------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Executive Committee of the Board of Directors.
36
<PAGE> 39
All officers of the Company are elected by the Board of Directors of the
Company and hold office until the earlier of their resignation, removal or other
termination. All of the executive officers listed above has entered into
employment agreements with the Company effective upon consummation of the
Offering pursuant to which they hold their current positions. See "-- Employment
Agreements".
J. D. Lawrence has been a director of the Company since 1973, and Chairman
of the Board of Directors since June 1989. He has been employed by the Company
since 1968, serving as its President from 1982 to 1989 and as a Vice President
from 1973 to 1982. Mr. Lawrence is Chairman of the Board of Directors, President
and the sole director of Lawrence.
James F. Farr has been President of the Company since December 1990, its
Chief Executive Officer since August 1991, and a director of the Company since
September 1991. As International Manager from October 1989 to December 1990, he
was responsible for all international activities, including the marketing,
distribution and sale of the Company's products and services, and developing and
maintaining the Company's relationships with its agents. From August 1988 to
October 1989, Mr. Farr served as Managing Director of Dailey International,
Inc., the Company's wholly-owned subsidiary, and as Regional Manager for
Europe/West Africa, with responsibility for the Company's facilities in the
United Kingdom as well as marketing operations in Europe/West Africa. From 1975
to August 1988, he served the Company in various managerial, marketing and
operating capacities.
William D. Sutton has been Senior Vice President, General Counsel and
Secretary since 1984, and a director of the Company since September 1991. He has
served as the Company's Secretary and General Counsel since 1980. He also served
as a director of the Company from 1979 to 1990, and as a Vice President from
1982 to 1984. Prior to joining the Company in 1979, Mr. Sutton was an attorney
in private practice.
David T. Tighe has been Senior Vice President -- Finance and Treasurer of
the Company since May 1988. He become a director of the Company in September
1991. From 1985 to April 1988, he served as Corporate Controller. From 1984 to
1985, he was the Company's Assistant Controller. Prior to joining the Company in
1984, Mr. Tighe, a certified public accountant, was Controller of Carolina
International, Inc. from 1982 to 1984 and Tandem Industries, Inc. from 1980 to
1982.
John E. Blacklaws has been President of Production Services since September
1994, with responsibility for the Company's manufacturing, engineering, domestic
field repairs, and management of inventory. From November 1990 to September
1994, he was Vice President for the manufacturing and production division in
Houston, Texas. From March 1989 to November 1990, he was Manager of
Manufacturing Technical Services with quality control responsibilities at the
Company's Houston facility and in the field.
James C. Brame was named Vice President -- Business Development in July
1996. From August 1991 to June 1996, he served as Senior Marketing Analyst,
Project Manager, Director of Business Development and IT Steering Committee
Chairman. Prior to joining the Company in 1991, Mr. Brame was president and
owner of a manufacturing and distribution company from 1986 to 1991. From 1977
to 1986, Mr. Brame held Assistant Controller and Manager of Financial Analysis
and Reporting positions with Hughes Production Tools.
Benjamin A. Brooks, Jr. was named Vice President -- Manufacturing,
Production Services in May 1996. From June 1994 to April 1996 he served the
Company as Western Hemisphere Manager and was responsible for the sales and
operations of Dailey Oil Tools, Inc. in North, Central, and South America. Prior
to joining Dailey, Mr. Brooks worked in manufacturing, engineering and marketing
positions of internationally known downhole drilling tool companies, both
domestically and abroad. From 1989 to 1994, Mr. Brooks was the President and
owner of B.A. Brooks Interests Inc. Mr. Brooks is a Registered Professional
Engineer in the State of Texas.
Dwight A. Goolsbay has been Vice President -- MWD Services since May 1996.
As an MWD Product Manager between December 1993 and May 1996, he was responsible
for managing Dailey's entry into the domestic and international MWD services
business. From October 1990 to December 1993, he was a drilling motor product
engineer and assisted with development and expansion of the drilling motor
product line. Prior to joining the Company in 1990, Mr. Goolsbay was the
Oklahoma City District Manager for Halliburton
37
<PAGE> 40
Drilling Systems, Inc. -- MWD Division. From 1985 to 1987, he was U.S.
Operations Coordinator for Drilex Systems, Inc. in Houston, Texas.
Cecil W. Harvey has been President of Dailey Oil Tools since June 1996 and
President of Drilling Systems since December 1993 and General Manager of Dailey
Directional from December 1990 to December 1993. From May 1989 to December 1990,
he was Vice President -- Marketing with responsibility for the Company's
domestic and international downhole tool marketing, rental, sale, distribution
and service operations. From July 1987 to May 1989, he was Vice President of
Dailey Directional. From 1985 to July 1987, he was District Manager for the
Company's Lafayette, Louisiana directional drilling operations. From 1983 to
1985, Mr. Harvey was the United States Operations Manager of AMF Scientific
Drilling Control in Houston, Texas with responsibilities for its directional
drilling, steering tool and survey operations.
Gary P. Hertfelder was named Vice President Engineering/R&D in December
1994. From February 1994 to December 1994, he served the Company as Vice
President Engineering/Operations of environmental remediation technology
division which focused on applying oil and gas industry technologies, including
horizontal drilling techniques, for remediation of petroleum contaminated sites.
As Special Projects Manager, from May 1993 to February 1994, he was responsible
for identifying new products and technologies. From November 1992 to May 1993,
he was Marketing Manager responsible for development of marketing strategies. As
International Technical Manager, from November 1991 to November 1992, he was
responsible for worldwide customer technical support concerning Company products
and services. He joined the Company in November 1987 as Technical Services
Engineer and served in this capacity to November 1991. Prior to joining Dailey,
Mr. Hertfelder was employed by several oil and gas exploration companies
including Union Oil Company of California, Grace Petroleum Company and Collet
Oil Ventures, Inc., in various drilling and production engineering capacities.
Mr. Hertfelder is a Registered Petroleum Engineer in Texas.
Martin Lyons was named Senior Vice President Directional Drilling &
Marketing in May 1996. From December 1993 through May 1996, he served as Vice
President Directional Drilling, responsible for management of all the Company's
domestic directional drilling sales and operations. His duties during this time
period also included operations and capital budgeting for all domestic
directional drilling operations. During the time period of August 1990 to
December 1993 he functioned as Western Division Manager and was responsible for
the Gulf Coast directional drilling and sales operations west of the Sabine
River. From August of 1989 to August of 1990 Mr. Lyons was a Senior Technical
Sales Representative in the Houston, Texas market. Prior to joining Dailey, Mr.
Lyons was employed by Helmer Directional Drilling, Inc. were he held the
positions of Office Manager and Directional Drilling Supervisor.
James J. Orr has been Vice President -- Domestic Directional Drilling and
Marketing since May 1996, and Vice President -- Drilling Motors and MWD Services
since December 1993 and was responsible for managing Dailey's entry into the
domestic and international drilling motor and MWD business. From November 1989
to December 1993, he was Drilling Motor Development Manager assisting in the
design, development and expansion of the drilling motor product line. Prior to
joining Dailey in 1989, Mr. Orr was Gulf Coast Regional Manager for Drilex
Systems, Inc., responsible for sales and operations from 1986 to 1989. From 1983
to 1986 he was Senior Technical Sales and Operations Representative for the
Hughes Tool Company's Drilling Motor Program.
James J. Percle joined the Company as Vice President -- Business
Development in May 1996 and was named Vice President -- Operations in July 1996.
He has served as an officer and in managerial positions with oilfield service
companies from 1975 through the present, the most recent being from December
1986 to November 1995 as Director and Chief Operating Officer and President of
Enterra International Limited.
During the past ten years, Messrs. Lawrence, Sutton and Tighe have been
directors and/or officers of over 13 subsidiaries (other than the Company) of
Lawrence Industries, Inc., each of which engaged in activities unrelated to the
oil and gas industry. Both Mr. Sutton and Mr. Tighe have resigned from these
positions, except that Mr. Sutton will remain a director and minority
shareholder of First Surety Title Company, Inc. One of these subsidiaries,
Legend Outfitters, Inc. ("Legend Outfitters"), was a sporting goods company with
annual revenues of less than $2.0 million. Legend Outfitters was operated by Mr.
Lawrence's wife, who acted as its chief executive officer and chief operating
officer, and by two other individuals who acted
38
<PAGE> 41
as Legend Outfitter's chief financial and accounting officers. Messrs. Lawrence,
Sutton and Tighe did not have significant involvement in the day-to-day
operations of Legend Outfitters. In 1993, Legend Outfitters filed for protection
under Chapter 7 of the United States bankruptcy laws and was liquidated in 1995.
COMMITTEES
Pursuant to the Company's Bylaws, the Board has established standing Audit
and Executive Committees and will establish a Compensation Committee upon
appointment of two outside directors following the Offering. The Audit Committee
recommends to the Board the selection and discharge of the Company's independent
auditors, reviews the professional services performed by, and the independence
of, the auditors, reviews the plan and results of the auditing engagement and
the amount of fees charged for audit services performed by the auditors, and
evaluates the Company's system of internal accounting controls. The Compensation
Committee will recommend to the Board the compensation to be paid to the
Company's directors, executive officers and key employees and will administer
the compensation plans for the Company's executive officers. The Executive
Committee acts on behalf of the Board between regularly scheduled meetings of
the Board.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1996 and during prior years, compensation levels were
determined by the Company's Board of Directors, each of the members of which are
officers of the Company. Following consummation of the Offering, the Company
intends to appoint two outside directors who will constitute all of the members
of the Board's Compensation Committee. The Board intends that the Compensation
Committee will determine compensation levels and other benefits payable to the
Company's executive officers following the Offering.
COMPENSATION OF DIRECTORS
Employee Directors of the Company do not receive any additional
compensation for their services as a director of the Company. The Company
intends to pay an annual retainer of $15,000 to each non-employee director. In
addition, each non-employee director will receive $1,000 for each Board of
Directors meeting attended and $750 for each committee meeting attended. The
Company will also pay reasonable out-of-pocket expenses incurred by non-employee
directors to attend Board of Directors and committee meetings. Non-employee
directors also will be entitled to receive options pursuant to the 1996
Non-Employee Director Stock Plan. See "-- 1996 Non-Employee Director Stock
Plan".
39
<PAGE> 42
COMPENSATION OF EXECUTIVE OFFICERS
The Company did not have a compensation committee prior to the Offering.
During fiscal 1996, compensation levels were determined by the Company's Board
of Directors, each of the members of which are officers of the Company. The
following Summary Compensation Table sets forth information with respect to the
President and Chief Executive Officer of the Company and the other four
most-highly compensated officers of the Company for the fiscal year ended April
30, 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED APRIL 30, 1996
-------------------------------------------
ANNUAL COMPENSATION
---------------------- OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION COMPENSATION(1)
- ------------------------------------ -------- -------- --------------- ---------------
<S> <C> <C> <C> <C>
J. D. Lawrence...................... $296,532(2) $ 73,280 * $ 2,326
Chairman of the Board
James F. Farr....................... 248,651 55,500 * 571
President and Chief Executive
Officer
Cecil W. Harvey..................... 112,441 19,520 * 3,906
President-Drilling Systems and
Dailey Oil Tools
William D. Sutton................... 230,896 55,260 * 824
Senior Vice President, General
Counsel and Secretary
David T. Tighe...................... 148,671 54,960 21,723(3) 901
Senior Vice President-Finance,
Chief Financial Officer and
Treasurer
</TABLE>
- ---------------
* Amounts exclude the value of perquisites and personal benefits because the
aggregate amount thereof did not exceed the lesser of $50,000 or 10% of the
total annual salary and bonus reported for each Executive Officer.
(1) Represents payments for premiums for group term life insurance on behalf of
such individual.
(2) Effective upon the closing of the Offering, Mr. Lawrence's salary will be
reduced to $100,000, subject to subsequent adjustment upward in the
discretion of the Compensation Committee of the Board of Directors. See
"-- Employment Agreements" below.
(3) Includes $16,618 relating to accrued vacation cashed rather than taken
during the year and $5,105 relating to a company automobile.
EMPLOYMENT AGREEMENTS
Each of Messrs. Lawrence, Farr, Sutton and Tighe (collectively, the
"Executive Officers") has entered into employment agreements (collectively, the
"Executive Employment Agreements") with the Company effective upon consummation
of the Offering. Each of the Executive Employment Agreements has an initial term
through April 30, 1999. The Executive Employment Agreements provide for a
minimum annual salary during the term of the Executive Employment Agreements of
approximately $100,000, $240,000, $228,000 and $180,000 for Messrs. Lawrence,
Farr, Sutton and Tighe, respectively. The Executive Employment Agreements
(except for Mr. Lawrence's agreement) also provide for the grant
contemporaneously with the offering of 120,000 shares of restricted Class A
Common Stock and options to purchase 71,712 additional shares to each Executive
Officer. Such restricted stock and options vest over a period of three years.
See "-- 1996 Key Employee Stock Plan." The Executive Employment Agreements also
provide for certain automobile allowances, employee benefits, vacation and
reimbursement of expenses.
40
<PAGE> 43
The Executive Employment Agreements may be terminated: (i) by the Company
with or without cause (as hereinafter defined); (ii) by the Executive Officer's
resignation; (iii) upon the death of the Executive Officer; or (iv) upon the
disability of the Executive Officer. Under the Executive Employment Agreements,
"cause" is defined to mean any of the following events: (i) an act or acts of
personal dishonesty taken by the Executive Officer and intended to result in
substantial personal enrichment of the Executive Employee at the expense of the
Company; (ii) repeated violations by the Executive Officer of his obligations
under the Executive Employment Agreement that are demonstrably willful on the
Executive Officer's part, and for which the Executive Officer has received more
than one written warning that specifies each of the Executive Officer's
violations; (iii) the conviction of the Executive Employee of a felony; (iv) the
Executive Officer's use of illegal drugs; and (v) the Executive Officer's
conviction or the entry of a plea of nolo contendere or equivalent plea of any
crime or offense involving moral turpitude.
If the Company terminates the Executive Employment Agreement for any reason
other than for "cause" and such termination is not within one year of a Change
in Control (as hereinafter defined), the Company is required to pay to the
Executive Officer an amount equal to the greater of (i) his total Base Salary
(as defined in the Executive Employment Agreement) for the remainder of the
Employment Period (as defined in the Executive Employment Agreement) or (ii) the
greater of (a) three months of his Base Salary or (b) one month of Base Salary
for each full year of service completed with the Company as of the date of
termination. If the Company terminates the Executive Employment Agreement for
any reason other than for "cause" and such termination occurs within one year of
a change in control, or if the Executive Officer terminates the Agreement for
Good Cause (as defined in the Executive Employment Agreement) and such
termination occurs within one year of a Change in Control, the Company is
required to pay to the Executive Officer an amount equal to the greater of (i)
his total Base Salary for the remainder of the Employment Period; (ii) two times
the greater of (a) his annualized Base Salary in effect upon the occurrence of
the Change in Control or (b) his annualized Base Salary in effect on the date
notice of termination is received; or (iii) one month of Base Salary for each
full year of service completed with the Company as of the date of termination.
Under the Executive Employment Agreements, a Change in Control occurs when (i)
any person (other than those persons who own more than 10% of the combined
voting power of the Company's outstanding securities on the date of the
Executive Employment Agreements) becomes the beneficial owner, directly or
indirectly, of 30% or more of the combined voting power of the Company's then
outstanding voting securities or (ii) individuals who at the beginning of any
period of two consecutive years constitute the Company's Board of Directors
cease for any reason to constitute a majority of such Board of Directors at any
time during such two-year period.
Each of Messrs. Sutton, Farr and Tighe has agreed that for the term of his
Executive Employment Agreement and (i) perpetually after termination for
whatever reason, he will not, directly or indirectly, disclose confidential
information; (ii) for a period of two years (one year for Mr. Tighe) following
termination for whatever reason, he will not participate in any business in any
geographic region in which the Company conducts business that is in competition
with the Company or employ any of the Company's employees, induce any of the
Company's employees to leave their employment or in any way interfere with the
employee relations of the Company; and (iii) will disclose and assign to the
Company all inventions developed by the officer.
Each of Messrs. Blacklaws, Brame, Brooks, Goolsbay, Harvey, Hertfelder,
Lyons, Orr and Percle have entered into an employment agreement with the Company
effective upon consummation of the Offering providing for an initial term
through April 30, 1999. Such employment agreements contain non-competition
provisions ranging from six months to two years as well as confidentiality
provisions and invention disclosure provisions. The agreements provide for
initial grants of stock options to purchase shares of Class A Common Stock
pursuant to the 1996 Plan ranging from 5,999 to 17,999 shares, which will vest
immediately. The agreements provide for a severance benefit in the event of
termination without cause ranging from three months to two years salary. The
agreements do not have provisions regarding changes in control. Prior to the
Offering, Mr. Harvey was subject to an employment agreement, which was
superceded by the agreement described above.
41
<PAGE> 44
1996 KEY EMPLOYEE STOCK PLAN
The Company has established a stock option and restricted stock plan, the
Dailey Petroleum Services Corp. 1996 Key Employee Stock Plan (the "1996 Plan"),
pursuant to which incentive and non-qualified options to purchase shares of
Class A Common Stock and awards of restricted shares of Class A Common Stock
will be available for future grants.
The 1996 Plan is designed to provide certain key employees, including
officers and employee-directors of the Company, with additional incentives to
promote the success of the Company's business and to enhance the Company's
ability to attract and retain the services of qualified persons. The 1996 Plan
will be administered by the Compensation Committee or such other committee of no
less than two persons (the "Committee") appointed by the Board of Directors.
Each Committee member must be a "disinterested person", as defined in Rule 16b-3
("Rule 16b-3") promulgated under the Exchange Act and an "outside director" as
defined under Section 422(m) of the Internal Revenue Code of 1986, as amended
(the "Code"). Under the Plan, options to purchase Class A Common Stock and
restricted stock awards up to an aggregate of 900,000 shares of Class A Common
Stock may be granted by the Committee. In the event options or restricted stock
granted under the 1996 Plan or unvested restricted stock grants expire or
terminate or are surrendered, the unexercised portion thereof may again be
available for award under the 1996 Plan.
The maximum number of shares subject to options that may be issued to, and
the maximum number shares subject to restricted stock awards that may be granted
to, any employee during any year is 120,000 and 120,000 shares, respectively.
The exercise price of an option granted pursuant to the 1996 Plan may not be
less than the fair market value of the Class A Common Stock on the date of
grant. In the case of a grant of an option designated as an "Incentive Option"
to an employee who owns more than ten percent of the total combined voting power
of all classes of Common Stock (a "10% Stockholder"), the exercise price of each
such option under the 1996 Plan may not be less than 110% of the fair market
value of the Class A Common Stock on the date of the grant. No option may be
granted under the 1996 Plan with a duration of more than ten years. In the case
of a 10% Stockholder, no option designated as an "Incentive Option" may be
granted with a duration of more than five years. Options designated as
"Incentive Options" under the 1996 Plan may be treated as such only to the
extent that the aggregate fair market value of the stock with respect to which
options are exercisable for the first time by the option holder in any calendar
year, under the 1996 Plan or any other incentive stock option plan of the
Company, does not exceed $100,000 valued as of the date of grant.
Under the 1996 Plan, the Committee may issue shares of restricted stock to
employees for no payment by the employee or for a payment below the fair market
value on the date of grant. The restricted stock is subject to certain
restrictions described in the 1996 Plan, with no restrictions continuing for
more than ten years from the date of the award. The 1996 Plan may be amended by
the Board of Directors without any requirement of stockholder approval, except
as required by Rule 16b-3 to obtain the benefits under such Rule and the
incentive option rules of the Code.
To date, no options or restricted stock awards have been granted under the
1996 Plan. Contemporaneously with the Offering, the Company intends to grant
qualified options exercisable for 378,327 shares of Class A Common Stock to
various executive officers at the initial public offering price, which will vest
immediately, except for options granted to Messrs. Farr, Sutton and Tighe, which
will vest over three years in 33.3% increments. In addition, the Company intends
to grant to each of Messrs. Farr, Sutton and Tighe restricted stock awards in
the amount of 120,000 shares contemporaneously with the Offering. These
executive officers will not be required to make any payment for these restricted
stock awards or grants of qualified options, which will vest over three years in
33.3% increments. Restrictions on transfer and forfeiture provisions upon
termination of employment will apply to the restricted stock covered by these
awards for a period of up to one year, after which time the restrictions will
lapse and all of the stock will be owned by the employees free of further
restrictions under the 1996 Plan.
1996 NON-EMPLOYEE DIRECTOR STOCK PLAN
The Company has established the Dailey Petroleum Services Corp. 1996
Non-Employee Director Stock Plan (the "1996 Director Plan"), pursuant to which
options to purchase shares of Class A Common Stock will
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<PAGE> 45
be available for future grant to non-employee directors. The 1996 Director Plan
is designed to enhance the Company's ability to attract and retain the services
of qualified persons as directors and to provide such directors with a direct
proprietary interest in the success of the Company. The 1996 Director Plan will
be administered by the Board of Directors of the Company. Under the 1996
Director Plan, an aggregate of 100,000 shares of Class A Common Stock will be
reserved for grant of options to purchase Class A Common Stock. In the event
options granted under the Director Plan expire, terminate or are cancelled, the
unexercised portion thereof may again be available for award under the Director
Plan. The exercise price of an option granted pursuant to the 1996 Director Plan
may not be less than the fair market value of the Class A Common Stock on the
date of grant. No option may be granted under such Plan with a duration of more
than ten years. The 1996 Director Plan generally may be amended by the Board of
Directors without any requirement of stockholder approval except to the extent
required by Rule 16b-3 to qualify for the benefits of such Rule. To date, no
options have been granted under the 1996 Director Plan. As soon as two outside
directors are appointed after the Offering, the Company intends to grant options
to each non-employee director to acquire 10,000 shares of Class A Common Stock
at an exercise price equal to the initial public offering price for Class A
Common Stock set forth on the cover page of this Prospectus. In addition,
options to acquire 10,000 shares automatically will be granted after each annual
meeting of stockholders to each director who served as a director during the
preceding six months and who will continue to serve as a director. Options
granted under the Director Plan vest after the first anniversary from the date
of grant.
401(K) PLAN
The Company's employees were eligible to participate in a defined
contribution retirement plan (the "Lawrence Plan") that complies with Section
401(k) of the Code and that was adopted by Lawrence for its employees and the
employees of its subsidiaries. After the Offering, the Company's employees will
continue to participate in the Lawrence Plan. Pursuant to the Lawrence Plan, the
Company provides matching contributions up to 50% of the employee's contribution
up to 2% of the employee's compensation.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the Offering, the Company has been a wholly-owned subsidiary of
Lawrence and historically has entered into certain transactions and agreements
with Lawrence. The Company intends that the terms of any future transactions and
agreements between the Company and Lawrence will be at least as favorable as
could be obtained from third parties. In this regard, the Company's Bylaws
provide that unless certain conflict of interest procedures are met the Company
will not engage in any transaction or series of related transactions in a single
fiscal year involving an aggregate of $10,000 or more in which a direct or
indirect interest is held by certain related parties including: (i) any holder
of 20% or more of any class of the Company's capital stock; (ii) any director of
the Company; (iii) any "affiliate" or "associate" (as such terms are defined in
the rules promulgated under the Act of any director or 20% stockholder; (iv) any
relative, by blood or marriage, within the third degree of consanguinity of any
director or 20% stockholder ("Related Party Transactions"). Under the Company's
Bylaws, Related Party Transactions may not be engaged in unless the proposed
transaction is: (i) approved by the affirmative vote of a majority of the
directors not having any personal direct interest in the proposed transaction,
and (ii) is proposed to a committee of the Company's non-employee directors and
the committee either affirmatively votes to approve the transaction or the
committee fails to consider and vote upon the proposal within 10 business days
of the time it is approved by a disinterested majority of the Company's Board of
Directors. Depending upon the size and nature of the transaction, in any such
review the Board may rely upon management's knowledge, utilize outside experts
or consultants, secure appraisals, refer to industry statistics or prices or
take such other actions as are appropriate under the circumstances.
PRINCIPAL STOCKHOLDER
Upon completion of the Offering, Lawrence will beneficially own all of the
outstanding Class B Common Stock, which will constitute 53% of the Company's
Common Stock (approximately 50% if the Underwriters' over-allotment option is
exercised in full) and 89% of the voting power of the Common Stock (88% if the
Underwriters' over-allotment option is exercised in full). All of the capital
stock of Lawrence is beneficially
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<PAGE> 46
owned by Mr. Lawrence and Mr. Lawrence's family. Accordingly, Mr. Lawrence will
be in a position to elect the directors of the Company and control all matters
relating to management of the Company, including corporate strategy, acquisition
or disposition of assets, issuances of Common Stock or other securities and
payment of dividends. Mr. Lawrence is the Chairman of the Company's Board of
Directors and the sole director of Lawrence. Prior to the Offering, Messrs.
Farr, Sutton and Tighe, each of whom is a director and officer of the Company,
resigned all positions held by them as officers of Lawrence or as officers
and/or directors of Lawrence subsidiaries other than the Company, except that
Mr. Sutton will remain a director and minority shareholder of First Surety Title
Company, Inc., an affiliate of Lawrence, which from time to time may provide
services to the Company.
The Company and Lawrence have entered into certain contractual arrangements
with respect to their relationship after the Offering is consummated. These
agreements were reached in anticipation of the Offering and are not the result
of arm's-length negotiation between independent parties. Copies of such
agreements are included as exhibits to the Registration Statement of which this
Prospectus is a part, and the following descriptions are qualified in their
entirety by reference to such agreements.
During the past several years, the Company has funded certain of its
working capital requirements through advances from Lawrence, which have been
evidenced by a note to Lawrence with an outstanding balance of $1.8 million at
April 30, 1996. The Company intends to repay such note utilizing a portion of
the net proceeds from the Offering. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Liquidity and Capital
Resources".
During fiscal 1996, the Company's Chairman of the Board repaid
approximately $87,000 relating to a loan made by the Company in June 1994. Such
loan was evidenced by a promissory note in the principal amount of $75,000,
accrued interest at a rate of 8% and was repayable on demand.
During the year ended April 30, 1996, the Company paid a salary of
$206,406, including bonuses, to Melissa Lawrence, the daughter of the Chairman
of the Board. This employment arrangement was terminated on April 30, 1996, and
the Company does not anticipate paying any salaries or bonuses to Ms. Lawrence
in the future. This compensation related to certain services provided by Ms.
Lawrence in fiscal 1996 and prior years in connection with a training program in
which Ms. Lawrence participated that was designed to expose Ms. Lawrence to
various aspects of the Company's business. In addition, during the fiscal years
ended April 30, 1994, 1995 and 1996, the Company purchased office supplies
totaling $131,901, $136,588 and $114,041, respectively, from a company owned and
controlled by the Chairman's wife.
LEASE AGREEMENTS
The Company maintains executive offices in a building located in Conroe,
Texas and occupies four adjacent manufacturing and maintenance research and
development, and storage facilities, all of which are owned by Lawrence. During
fiscal 1994, 1995 and 1996 the Company incurred rent expense of $1,029,000,
$1,244,000 and $1,306,000, respectively, relating to such properties. Prior to
completion of the Offering, the Company will enter into a new lease agreement
with Lawrence relating to the executive office building and a separate lease
agreement relating to the adjacent facilities. The rental rates under these new
lease agreements were determined by the Company and Lawrence based upon a survey
of rental rates prepared by an independent consulting firm. Based upon this
survey, the Company believes that the rental rates and other terms under these
lease agreements are comparable to those that would be obtained in an
arm's-length transaction with an independent third party.
The Office Lease Agreement will be for a five-year term effective as of May
1996, and covers all of the 64,368 square feet of office space in the Conroe
building, as well as the use of access roads and an adjacent outdoor parking
lot. Rent is payable monthly at the rate of $48,276 per month for the first two
years of the lease, $51,226 per month for the third year, $52,781 per month for
the fourth year and $54,390 per month for the fifth year. Additionally, the
Company will pay utilities, janitorial, security, maintenance, and personal
property taxes. The landlord will pay the real property taxes and pay for
extended coverage insurance. The Company has the option to extend the lease for
five years with monthly rent subject to annual increases based
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<PAGE> 47
upon the proportion that annual increases in the United States Consumer Price
Index for All Urban Consumers in Houston, Texas bears to that when the leased
term commenced.
The Service Center Lease Agreement will be for a five-year term effective
as of May 1996. This lease covers the combined square feet of the district
facility building, 31,316 square feet; the manufacturing building, 31,373 square
feet; the open storage building, 17,000 square feet and the separator building,
1,530 square feet. The use of access roads and immediately surrounding grounds
is also included. Rent is $28,000 per month for all four buildings in the
aggregate. The Company has an option to extend the lease for five years with
monthly rent subject to annual increases based upon the proportion that annual
increases in the United States Consumer Price Index for All Urban Consumers in
Houston, Texas bears to that when the lease term commenced.
RELATIONSHIP AGREEMENT
Under the terms of a relationship agreement to be entered into prior to
consummation of the Offering between the Company and Lawrence (the "Relationship
Agreement"), the Company will agree to provide to Lawrence and its affiliates,
upon their request and on an as-available basis, various administrative and
management services including cash management, accounting, tax, data processing,
human resources, and legal services. Lawrence will pay for such services at
rates calculated to recover the Company's reasonable costs of providing such
services. The Relationship Agreement also will provide that Lawrence will render
to the Company technical consulting services when requested by the Company. In
return, the Company will pay Lawrence approximately $250,000 per year for the
term of the Relationship Agreement. The Relationship Agreement will commence
upon the closing of the Offering and terminate on April 30, 1999, subject to
earlier termination in the event of a material breach by either party. The
Relationship Agreement will allow Lawrence to obtain, as needed, but subject to
the Company's own requirements, services that historically have been provided to
Lawrence or its affiliates by Dailey personnel.
Prior to the Offering, the Company from time to time utilized aircraft
owned by a Lawrence subsidiary. The Relationship Agreement will provide that the
Company may charter such aircraft from Lawrence or its subsidiaries, subject to
availability, at rates not exceeding those generally available for charter of
substantially similar aircraft in the Houston, Texas, metropolitan area. The
Relationship Agreement also will contemplate that the Company may, from time to
time, rent equipment or vehicles to Lawrence on an as-available basis at fair
market rental rates mutually agreed upon by the Company and Lawrence.
In addition, under the Relationship Agreement, Lawrence and the Company
have agreed to reimburse each other for the costs of certain insurance policies
purchased by one party on behalf of the other.
Pursuant to the Relationship Agreement, Lawrence must indemnify, defend and
hold harmless the Company and its directors, officers and employees from and
against any loss, liability or claim, including, without limitation, those
attributable to the negligence of the Company or Lawrence, arising out of or
relating to the Relationship Agreement and the acts or omissions of the Company
or Lawrence thereunder. During the past three years, the Company and Lawrence
have reimbursed each other for the costs of products and services that will be
governed by the Relationship Agreement following the Offering. As of April 30,
1996, Lawrence owed the Company approximately $436,000, net, for such products
and services.
TAX ALLOCATION AGREEMENT
For taxable periods ending on or before the closing of the Offering, the
Company will be included in the consolidated federal income tax returns filed by
Lawrence as the common parent for itself, its subsidiaries and affiliated
companies. Pursuant to the Tax Allocation Agreement to be entered into by the
Company and Lawrence prior to the Offering, the Company will pay to Lawrence an
amount equal to the federal income tax computed on the Company's (and its
subsidiaries) taxable income on a separate-company basis less any tax credits
generated by the Company or its subsidiaries. The Company will pay such amount
even if the consolidated federal income tax return to which such payment relates
does not set forth a net consolidated tax liability. Lawrence will not make any
payment to the Company for any of the Company's net operating losses or tax
credits, even if such net operating losses or tax credits have been used by
Lawrence to reduce its
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<PAGE> 48
separate federal income tax liability. While the Company is jointly and
severally liable for federal income tax imposed on the Lawrence consolidated
group while the Company is a member, the Tax Allocation Agreement will impose an
indemnity on Lawrence in favor of the Company for any federal income tax
relating to members of the Lawrence Group other than the Company and its
subsidiaries, including any such tax related to or arising as a result of the
Offering.
The Tax Allocation Agreement will apply to the Company for all years in
which the Company is or was included in the Lawrence consolidated federal income
tax return. The Tax Allocation Agreement will apply to Lawrence and the Company
in a comparable manner to the extent a state or other taxing jurisdiction
requires or permits a consolidated, combined or unitary tax return to be filed
by Lawrence and its affiliates and such return includes the Company.
CONFLICTS OF INTEREST
The nature of the businesses presently conducted by the Company and
Lawrence is sufficiently different that conflicts of interest are unlikely to
arise in most operating circumstances. As previously discussed, the Bylaws
require that the Company may not engage in a Related Party Transaction, unless
certain conflict of interest procedures are first satisfied. Although Lawrence
has no current intention of doing so, there can be no assurance that Lawrence
will not engage in business competitive with that conducted by the Company.
Conflicts of interest also could arise, for example, with respect to
certain matters such as the dual status of J. D. Lawrence as sole director of
Lawrence and Chairman of the Board of Directors of the Company, additional
issuances of voting securities by the Company, acquisitions or dispositions of
assets, the election of new or additional directors, or the appropriateness of
paying dividends. As described above and under "Description of Capital
Stock -- Registration Rights", the Company and Lawrence will become party to a
number of contractual arrangements that could give rise to conflicts of
interest. Such conflicts could involve, for example, insurance matters, lease
disputes, charges for administrative services, aircraft charters, tax matters
and registration rights. Additional or modified agreements, arrangements and
transactions may be negotiated among the Company, Lawrence and their respective
subsidiaries after the closing of the Offering. Any such conflicts or additional
agreements, arrangements or transactions are expected to be resolved on a
negotiated basis. Lawrence will be the majority stockholder of the Company
following the Offering and consequently such negotiations will not be at arm's
length.
CERTAIN ROYALTIES
In 1986, the Company purchased the design, patents and rights to certain
hydraulic tools and entered into a royalty agreement with an individual who
later became an officer of the Company. This individual resigned from the
Company in 1994. The royalty expires in fiscal 1999 and fiscal 2003 as to the
covered hydraulic drilling and fishing jars, respectively. Royalty agreements
were executed between the Company and the royalty owner in fiscal 1993 and
fiscal 1994 on newly issued methods and apparatus patents related to a
double-acting drilling accelerator and improvements to hydraulic drilling jars.
These new patents also were assigned to the Company. Upon expiration of the
patents, no royalties will be required. For the fiscal years ended April 30,
1994, 1995 and 1996, payments to the former officer were $466,000, $826,000 and
$843,000, respectively. See Note 9 to the notes to the consolidated financial
statements elsewhere in this Prospectus.
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<PAGE> 49
SECURITY OWNERSHIP OF MANAGEMENT AND
PRINCIPAL STOCKHOLDER
The following table sets forth certain information regarding the beneficial
ownership of the Class A Common Stock and Class B Common Stock as of the date of
this Prospectus, and as adjusted to reflect the sale of the Class A Common Stock
in the Offering, by (i) each director and director nominee of the Company, (ii)
each named executive officer, (iii) each person known or believed by the Company
to own beneficially 5% or more of either the Class A Common Stock or Class B
Common Stock and (iv) all directors and executive officers as a group. Unless
otherwise indicated, each person has sole voting and dispositive power with
respect to such shares.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING(1) AFTER THE OFFERING(1)
------------------------------------ ------------------------------------------------------------
CLASS A CLASS B CLASS A CLASS B PERCENT(2)(3)
NAME AND ADDRESS OF COMMON COMMON COMMON PERCENT COMMON PERCENT VOTING
BENEFICIAL OWNER STOCK STOCK PERCENT(2) STOCK CLASS A STOCK CLASS B POWER
- ------------------- --------- --------- ---------- ------- ------- --------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lawrence(4)........ * 5,000,000 100% * * 5,000,000 100% 89%
J.D. Lawrence(5)... * 5,000,000 100% * * 5,000,000 100% 89%
James F. Farr...... * * -- 120,000(6) 2.8% * * *
Cecil W. Harvey.... * * -- * * * * *
William D.
Sutton........... * * -- 120,000(6) 2.8% * * *
David T. Tighe..... * * -- 120,000(6) 2.8% * * *
--------- --------- ---------- ------- ------- --------- ------- -------------
All executive
officers and
directors as a
group (5 Persons) * 5,000,000 100% 360,000 8.3% 5,000,000 100% 90%
</TABLE>
- ---------------
* Less than 1%.
(1) The Securities and Exchange Commission (the "Commission") has defined
beneficial ownership to include sole or shared voting or investment power
with respect to a security or the right to acquire beneficial ownership of
a security within 60 days. The number of shares indicated are owned with
sole voting and investment power unless otherwise noted.
(2) Percent based upon both Class A Common Stock and Class B Common Stock,
combined.
(3) Assumes no exercise of the Underwriters' over-allotment option. In the event
that the Underwriters' over-allotment option is exercised in full, Lawrence
will beneficially own all of the Class B Common Stock then outstanding and
88% of the voting power of the Company. See "Description of Capital Stock
-- Class A and B Common Stock".
(4) Represents shares owned by Dailey Holdings Inc. ("Dailey Holdings"), a
wholly-owned subsidiary of Lawrence. The executive offices of Dailey
Holdings and Lawrence are located at 2507 North Frazier, P.O. Box 1803,
Conroe, Texas 77305.
(5) Includes 5,000,000 shares of Class B Common Stock held by Lawrence through
Dailey Holdings. Mr. Lawrence and trusts for his children own all of the
voting stock of Lawrence. Because of these relationships, Mr. Lawrence may
be deemed to be the beneficial owner of all shares of Class B Common Stock
owned by Lawrence.
(6) Contemporaneous with the Offering, each of Messrs. Farr, Sutton and Tighe
will be granted 120,000 shares of restricted Class A Common Stock, which
will vest over a three-year period in 33.3% increments.
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<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
The following is a summary of certain provisions of the Company's Restated
Certificate of Incorporation and the Amended Bylaws (the "Bylaws") of the
Company, which are included as exhibits to the registration statement of which
this Prospectus forms a part.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The Restated Certificate of Incorporation provides for authorized capital
stock of 35,000,000 shares, consisting of 20,000,000 shares of Class A Common
Stock, 10,000,000 shares of Class B Common Stock and 5,000,000 shares of
preferred stock, par value $.01 per share ("Preferred Stock"). Upon the
consummation of the Offering, 4,360,000 shares of Class A Common Stock
(4,960,000 shares if the Underwriters' over-allotment option is exercised in
full), and 5,000,000 shares of Class B Common Stock and no shares of Preferred
Stock will be outstanding. See "Management" and "Security Ownership of
Management and Principal Stockholder".
CLASS A AND B COMMON STOCK
Voting
Holders of Class A Common Stock are entitled to one vote per share. Holders
of Class B Common Stock are entitled to seven votes per share. All actions
submitted to a vote of stockholders are voted on by holders of Class A Common
Stock and Class B Common Stock voting together as a single class, except as
otherwise required by law. Holders of the Company's Common Stock are not
entitled to cumulative voting in the election of directors.
Conversion
Class A Common Stock has no conversion rights. A holder of Class B Common
Stock may convert its Class B Common Stock into Class A Common Stock at any time
at the ratio of one share of Class A Common Stock for each share of Class B
Common Stock. Shares of Class B Common Stock immediately and automatically
convert into an equal number of Class A Common Stock on the sale or transfer of
such shares to a person or entity not a member of the "Lawrence Group". The
"Lawrence Group" is comprised of Lawrence, James D. Lawrence, his spouse,
children, grandchildren, nieces and nephews (collectively, the "Lawrence
Family"), trusts or other entities controlled by, or for the benefit of, any
member of the Lawrence Family or any other affiliate of Lawrence or the Lawrence
Family.
Dividends
Holders of Class A Common Stock and Class B Common Stock are entitled to
receive dividends payable in cash or property other than Common Stock on an
equal basis, if and when such dividends are declared by the Board of Directors
from funds legally available, subject to any preference in favor of outstanding
preferred shares, if any. In the case of any dividend payable in Common Stock,
all holders of Common Stock shall receive the same dividend, with the holders of
Class A Common Stock receiving shares of Class A Common Stock and the holders of
Class B Common Stock receiving shares of Class A Common Stock or Class B Common
Stock, as determined by the Board of Directors when declaring such dividend.
Liquidation
In the event of liquidation, holders of Class A Common Stock and Class B
Common Stock share with each other on a ratable basis as a single class in the
net assets of the Company available for distribution after payment or provision
for liabilities of the Company and payment of the liquidation preference, if
any, on any outstanding preferred shares.
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<PAGE> 51
Other Terms
Neither the Class A Common Stock nor the Class B Common Stock may be
subdivided, consolidated, reclassified or otherwise changed unless
contemporaneously therewith the other class of shares is subdivided,
consolidated, reclassified or otherwise changed in the same proportion and in
the same manner. In any merger, consolidation, reorganization, or other business
combination, the consideration to be received per share by holders of either
Class A Common Stock or Class B Common Stock must be identical to that received
by holders of the other class of Common Stock, except that any securities
received by holders of the Class A Common Stock or Class B Common Stock may
differ as to voting rights only to the extent that voting rights now differ
between Class A and Class B Common Stock. Holders of Common Stock are not
entitled to preemptive rights and neither the Class A Common Stock nor the Class
B Common Stock is subject to redemption.
The rights, preferences and privileges of holders of Common Stock are
subject to, and may be adversely affected by, the rights of the holders of
shares of any series of Preferred Stock that the Company may designate and issue
in the future.
PREFERRED STOCK
The Board of Directors of the Company is empowered, without approval of the
stockholders, to authorize the issuance of Preferred Stock in one or more
series, to establish the number of shares to be included in each such series,
and to fix the rights, powers, preferences and limitations of each series. As a
result, the Board of Directors has the power to afford the holders of any series
of Preferred Stock preferences, powers and rights, voting or otherwise, senior
to or greater than the rights of holders of Common Stock. The ability of the
Board Directors to establish such rights, powers and preferences and to issue
the Preferred Stock could be used as an anti-takeover device without further
action on the part of the holders of Common Stock. The Company has no present
plans to issue any Preferred Stock.
SPECIAL PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION
Super-Majority Provisions
The Restated Certificate of Incorporation provides that no agreement of
merger or consolidation, agreement governing the sale of substantially all of
the Company's assets, or agreement or plan governing liquidation of the Company
that are required by Delaware law to be submitted to the stockholders of the
Corporation for approval or rejection pursuant to Subchapter IX or X of the
General Corporation Law of the State of Delaware shall be approved without the
affirmative vote of the holders of at least 66 2/3% of the voting power of all
shares of the Corporation entitled to vote thereon. This provision of the
Restated Certificate of Incorporation may delay or hinder the ability of the
Company to enter into certain transactions that a majority of the stockholders
believe to be in the best interests of the Company and the stockholders.
Limitation of Director Liability
The General Corporation Law of the State of Delaware (the "GCLD")
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. Although this law does not change
directors' duty of care, it enables corporations to limit available relief to
equitable remedies such as injunction or rescission. The Restated Certificate of
Incorporation limits the liability of directors 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 or (iv) for
any transaction from which the director derived an improper personal benefit.
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<PAGE> 52
Indemnification
The Restated Certificate of Incorporation contains provisions requiring the
indemnification of the Company's directors and officers to the fullest extent
permitted by the General Corporation Law of the State of Delaware, including
circumstances in which indemnification is otherwise discretionary. The Company
also has entered into indemnification agreements with each of its current
directors and executive officers and intends to enter into similar agreements
with individuals who become directors and officers after the closing of the
Offering. The Company believes that these provisions and agreements are
necessary to attract and retain qualified persons as directors and officers.
Classified Board of Directors; Removal of Directors
The Restated Certificate of Incorporation provides that the Board of
Directors shall be divided into three classes, the members of which will serve
staggered three-year terms. The Company believes that staggered terms of
directors could help to assure the continuity and stability of the Board's and
the Company's business strategies and policies as determined by the Board of
Directors.
The classification of directors will make changing the composition of the
Board of Directors more difficult. At least two annual meetings of stockholders
will be required to effect a change in a majority of the Board of Directors.
Such a delay may ensure that the Company's directors, if confronted by a
stockholder attempting to force a proxy contest, a tender or exchange offer or
an extraordinary corporate transaction, would have sufficient time to review the
proposal as well as any available alternatives to the proposal and to act in
what they believe to be in the best interest of the stockholders. The
classification provisions will apply to every election of directors, however,
regardless of whether a change in the composition of the Board of Directors
would be beneficial to the Company and its stockholders and whether a majority
of the Company's stockholders believes that such a change would be desirable.
The classification provisions also could discourage a third party from
initiating a proxy contest, making a tender or exchange offer or otherwise
attempting to obtain control of the Company, even though such an attempt might
be beneficial to the Company and its stockholders. Accordingly, stockholders
could be deprived of certain opportunities to sell their shares of Common Stock
at a higher market price than might otherwise be the case.
In addition, the Restated Certificate of Incorporation provides that
directors may be removed from office only "for cause" (as defined therein).
Subject to rights of any holders of preferred stock, newly created directors and
vacancies on the Board of Directors will be filled solely by the remaining
directors then in office.
Advance Notice Provisions for Certain Stockholder Actions
The Bylaws establish an advance notice procedure with regard to the
nomination, other than by or at the direction of the Board or a committee
thereof, of candidates for election as directors (the "Nomination Procedure")
and with regard to certain matters to be brought before an annual meeting of
stockholders of the Company (the "Business Procedure").
Under the Business Procedure, a stockholder seeking to have any business
conducted at an annual meeting must give prior written notice, in proper form,
to the Secretary of the Company. The requirements as to the form and timing of
that notice are specified in the Bylaws. If the Chairman or other officer
presiding at a meeting determines that other business was not properly brought
before such meeting in accordance with the Business Procedure, such business
will not be conducted at the meeting.
The Nomination Procedure requires that a stockholder give prior written
notice, in proper form, of a planned nomination for the Board to the Secretary
of the Company. The requirements as to the form and timing of that notice are
specified in the Bylaws. If the election inspectors determine that a person was
not nominated in accordance with the Nomination Procedure, such person will not
be eligible for election as a director.
50
<PAGE> 53
Although the Bylaws do not give the Board any power to approve or
disapprove stockholder nominations for the election of directors or of any other
business desired by stockholders to be conducted at an annual or any other
meeting, the Bylaws (i) may have the effect of precluding a nomination for the
election of directors or precluding the conduct of business at a particular
annual meeting if the proper procedures are not followed, or (ii) may discourage
or deter a third party from conducting a solicitation of proxies to elect its
own slate of directors or otherwise attempting to obtain control of the Company,
even if the conduct of such solicitation or such attempt might be beneficial to
the Company and its stockholders.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the terms of the Registration Rights Agreement, upon the
request of Lawrence (or certain assignees) for a period of ten years, the
Company will register, on up to two occasions, the sale of a minimum of 500,000
shares and up to all 5,000,000 shares of Common Stock (subject to anti-dilution
provisions) beneficially owned by Lawrence which Lawrence (or such assignees)
requests to be registered under the Securities Act and applicable state
securities laws. The Company will become obligated to register the sale of
Common Stock on one additional occasion if Mr. Lawrence dies during the term of
the Registration Rights Agreement and Lawrence previously has exhausted its two
demand registrations. The Company's obligations are subject to certain
limitations relating to the timing and size of registrations and other similar
matters. In addition, the Company will not be obligated to register the Common
Stock when in the good faith judgment of its Board of Directors such
registration would materially adversely affect a pending or proposed public
offering of the Company's securities or certain other transactions. The Company
also is obligated to offer Lawrence and certain assignees the right to include
shares of Common Stock owned by it in certain registration statements filed by
the Company. The Company will indemnify Lawrence and each underwriter of Common
Stock, including the officers, directors and controlling persons of such
underwriters, for certain liabilities in connection with any such offering,
other than liabilities resulting or arising from untrue statements or omissions
made in conformity with information furnished to the Company in writing by
Lawrence or such underwriter. The Company is obligated to pay all expenses
incidental to such registration of Common Stock owned by Lawrence, excluding
fees of counsel to Lawrence, underwriters' discounts and commissions, and
transfer taxes.
DELAWARE ANTI-TAKEOVER LAW
As a Delaware corporation, the Company is subject to Section 203 of the
GCLD. In general, Section 203 prohibits the Company from engaging in a "business
combination" (as defined therein) with an "interested stockholder" (defined
generally as a person owning 15% or more of a corporation's outstanding voting
stock) for three years following the time 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
stockholder becoming an interested stockholder, the interested stockholder owns
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 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 is 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.
51
<PAGE> 54
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is KeyCorp
Shareholder Services, Inc., Houston, Texas.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, Lawrence will own approximately 53% of the
outstanding Common Stock (50% if the Underwriters' over-allotment option is
exercised in full). In addition, the Executive Officers will own an aggregate of
360,000 shares of Class A Common Stock (the "Restricted Shares") pursuant to
restricted stock awards under the 1996 Plan. The Company, Lawrence and the
Executive Officers have agreed pursuant to a "lock-up" agreement that they will
not, without the prior written consent of the Representatives (defined under
"Underwriting"), offer, sell, contract to sell, or otherwise dispose of,
directly or indirectly, or announce an offering of, any shares of Common Stock
beneficially owned by such person or entity or any securities convertible into,
or exchangeable for, shares of Common Stock in (i) a public offering or (ii) in
a private offering unless, in the case of the Company only, (A) such private
offering shall occur more than 30 days after the date of this Prospectus, (B)
the Company will issue shares of its Class A Common Stock in such private
offering as full or partial consideration for acquisition by merger or purchase
of assets or businesses, and (C) the recipient of such Class A Common Stock
shall agree not to sell, offer to sell, grant any option for the sale of, or
otherwise dispose of, such Class A Common Stock for the remaining portion of the
180-day period from the date of this Prospectus (except for Common Stock or
options to purchase Common Stock pursuant to the 1996 Plan or 1996 Director
Plan). See "Underwriting".
Upon completion of the Offering, the Company will have 9,360,000 shares of
Common Stock outstanding (9,960,000 shares if the Underwriters' over-allotment
option is exercised in full). Of these shares, the 4,000,000 shares of Class A
Common Stock sold in the Offering (4,600,000 shares if the Underwriters' over-
allotment option is exercised in full) will be freely tradeable in the public
market without restriction by persons other than affiliates of the Company. The
5,000,000 shares of Class B Common Stock outstanding, which are owned by
Lawrence, will be "restricted securities" within the meaning of Rule 144 under
the Securities Act. Consequently, such shares may not be resold unless they are
registered under the Securities Act or resold pursuant to an applicable
exemption from registration under the Securities Act, such as Rule 144. Lawrence
has the right to require the Company to register such shares under the
Securities Act. See "Description of Capital Stock -- Registration Rights".
The Company plans to register the one million shares of Class A Common
Stock available for issuance pursuant to the 1996 Plan and the 1996 Director
Plan. Class A Common Stock acquired pursuant to such plans shall be available
for sale in the open market by holders who are not affiliates of the Company and
subject to volume and other limitations of Rule 144 by holders who are
affiliates of the Company. Furthermore, shares of restricted stock issued
pursuant to the 1996 Plan, such as the Restricted Shares, will be subject to
vesting requirements and will not be tradeable until vested. See
"Management -- 1996 Key Employee Stock Plan".
The Company believes that all of the outstanding shares of Class A Common
Stock, except for the Restricted Stock, will be immediately tradeable in
accordance with the provisions of Rule 144 upon expiration of the lock-up
agreements described above. In general, under Rule 144 as currently in effect, a
person (or persons whose shares are required to be aggregated) who has been
deemed to have beneficially owned, for at least two years, shares of Common
Stock that have not been registered under the Securities Act or that were
acquired from an "affiliate" of the Company, is entitled to sell within any
three-month period a number of shares of Common Stock that does not exceed the
greater of 1% of the number of then outstanding shares of the respective class
of Common Stock (49,600 shares for Class A Common Stock upon completion of the
Offering if the Underwriters' over-allotment option is not exercised) and the
average weekly reported trading volume in the respective class of Common Stock
during the four calendar weeks preceding such sale. Sales under Rule 144 also
are subject to certain notice and manner-of-sale requirements and to the
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not an "affiliate" of the Company
during the three months prior to resale and who has been deemed to have
52
<PAGE> 55
beneficially owned such shares for at least three years is entitled to sell such
shares under Rule 144 without regard to the requirements discussed above.
Prior to the Offering, there has been no public market for the Class A
Common Stock and no prediction can be made as to the effect, if any, that sales
of shares of Common Stock or the availability of such shares for sale will have
on the market price of the Class A Common Stock prevailing from time to time.
Nevertheless, sales of substantial amounts of Common Stock in the public market
could adversely affect prevailing market prices.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to the Underwriters named below (the
"Underwriters"), for whom Jefferies & Company, Inc. and Southcoast Capital
Corporation are acting as representatives (the "Representatives"), and the
Underwriters have severally agreed to purchase, the number of shares of Class A
Common Stock set forth opposite their respective names in the table below at the
public offering price less the underwriting discount set forth on the cover page
of this Prospectus:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
-------------------------------------------------------------------------- ----------
<S> <C>
Jefferies & Company, Inc..................................................
Southcoast Capital Corporation............................................
----------
Total........................................................... 4,000,000
========
</TABLE>
The Underwriting Agreement provides that the obligation of the Underwriters
to purchase the shares of Class A Common Stock offered hereby is subject to
certain conditions. The Underwriters are committed to purchase all of the shares
of Class A Common Stock offered hereby (other than those covered by the over-
allotment option described below), if any are purchased.
The Underwriters propose to offer the shares of Class A 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 to certain other
dealers. After the initial public offering of the Class A Common Stock, the
public offering price, the concession to selected dealers and the reallowance to
other dealers, may be changed by the Representatives.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 600,000 additional shares of
Class A Common Stock at the initial public offering price, less the underwriting
discount. To the extent such option is exercised, each Underwriter will
53
<PAGE> 56
become obligated, subject to certain conditions, to purchase additional shares
of Class A Common Stock proportionate to such Underwriter's initial commitment
as indicated in the preceding table. The Underwriters may exercise such right of
purchase only for the purpose of covering over-allotments, if any, made in
connection with the shares of Class A Common Stock offered by this Prospectus.
The Company, Lawrence and the Executive Officers have agreed that they will
not, for a period of 180 days following the date of this Prospectus, without the
prior written consent of the Representatives, offer, sell or contract to sell,
or otherwise dispose of, directly or indirectly, or announce an offering of, any
shares of any class of Common Stock beneficially owned by such person or entity
or any securities convertible into, or exchangeable, for, shares of Common Stock
in (i) a public offering or (ii) in a private offering unless, in the case of
the Company only, (A) such private offering shall occur more than 30 days after
the date of this Prospectus, (B) the Company will issue shares of its Class A
Common Stock in such private offering as full or partial consideration for
acquisition by merger or purchase or assets or business, and (C) the recipient
of such Class A Common Stock shall agree not to sell, offer to sell, grant any
option for the sale of, or otherwise dispose of, such Class A Common Stock for
the remaining portion of the 180-day period from the date of this Prospectus
(except for Common Stock pursuant to the 1996 Plan and 1996 Director Plan).
The Representatives have informed the Company that they do not expect the
Underwriters to confirm sales of shares of Class A Common Stock offered by this
Prospectus to any accounts over which they exercise discretionary authority.
At the request of the Company, the Underwriters have reserved up to 100,000
shares of the Class A Common Stock offered hereby for sale at the initial public
offering price to employees of the Company and certain other persons designated
by the Company who have expressed an interest in purchasing Class A Common
Stock. The number of shares of Class A Common Stock available to the general
public will be reduced to the extent these persons purchase the reserved shares.
Any reserved shares that are not so purchased will be offered by the
Underwriters to the general public on the same basis as the other shares of
Class A Common Stock offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities that may be incurred in connection with the Offering, including
liabilities under the Securities Act, or to contribute to payments that the
Underwriters may be required to make in respect thereof.
Prior to the Offering, there has been no public trading market for the
Class A Common Stock and there can be no assurance that an active trading market
will develop or be sustained upon the completion of the Offering. The initial
public offering price of the Class A Common Stock will be determined by
negotiations between the Company and the Representatives. The material factors
considered in determining such public offering price will be the history of and
the prospects for the industry in which the Company competes, an assessment of
the Company's management, the Company's past and present operations, the
Company's past and present earnings and the trend of its earnings, 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.
Pursuant to a letter agreement between the Company and Jefferies & Company,
Inc., Jefferies & Company, Inc. has acted and will continue to act as a
financial advisor to the Company in connection with the acquisition of, merger
or other combination with certain potential acquisition targets. If the Company
completes a transaction with any such target, the Company will pay Jefferies &
Company, Inc. certain usual and customary fees for such services. The Company
has not paid Jefferies & Company, Inc. and is not obligated to pay Jefferies &
Company, Inc., any compensation for services rendered under this agreement to
date.
54
<PAGE> 57
LEGAL MATTERS
In connection with the Class A Common Stock offered hereby, the validity of
the shares being offered will be passed upon for the Company by Fulbright &
Jaworski L.L.P., Houston, Texas. Certain legal matters will be passed upon for
the Underwriters by Porter & Hedges, L.L.P., Houston, Texas. Porter & Hedges,
L.L.P. also acts as counsel to the Company in connection with matters unrelated
to the Offering.
EXPERTS
The consolidated financial statements of the Company (including the related
consolidated financial statement schedule) at April 30, 1995 and 1996, and for
each of the three years in the period ended April 30, 1996, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon appearing elsewhere
herein, and are included in reliance upon such reports given upon the authority
of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to the
Class A Common Stock offered by this Prospectus. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information contained in the Registration Statement and the exhibits and
schedules thereto, certain portions of which are omitted as permitted by the
rules and regulations of the Commission. For further information with respect to
the Company and the Class A Common Stock offered by this Prospectus, reference
is made to the Registration Statement, including the exhibits thereto.
Statements contained in this Prospectus as to the contents of any contract or
other documents filed as an exhibit to the Registration Statement are not
necessarily complete, and in each instance reference is hereby made to the copy
of such contract or other documents filed as an exhibit to the Registration
Statement, each statement being qualified in all respects by such reference.
The Registration Statement and the exhibits and schedules thereto may be
inspected, without charge, at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, at the Commission's Regional Offices at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, 13th Floor,
New York, New York 10048 and on the Internet at http://www.sec.gov. Copies of
such materials can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at
prescribed rates.
55
<PAGE> 58
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors......................................................... F-2
Consolidated Financial Statements
Consolidated Balance Sheets............................................................ F-3
Consolidated Statements of Operations.................................................. F-4
Consolidated Statements of Stockholders' Equity........................................ F-5
Consolidated Statements of Cash Flows.................................................. F-6
Notes to Consolidated Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE> 59
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Dailey Petroleum Services Corp.
We have audited the accompanying consolidated balance sheets of Dailey
Petroleum Services Corp., a Delaware corporation, (as further discussed in Note
1) as of April 30, 1995 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended April 30, 1996. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Dailey Petroleum Services Corp. (as further discussed in Note 1) at April 30,
1995 and 1996, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended April 30, 1996, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
June 27, 1996
F-2
<PAGE> 60
DAILEY PETROLEUM SERVICES CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30, (NOTE 1)
------------------ PROFORMA
1995 1996 1996
------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 1,796 $ 1,967 $ 1,967
Accounts receivable, net (Note 2)........................... 14,064 16,306 16,306
Accounts receivable from officers and affiliates............ 150 436 436
Prepaid expenses............................................ 489 422 422
Deferred income taxes....................................... 392 389 389
Other current assets........................................ 422 153 153
------- ------- -------
Total current assets................................ 17,313 19,673 19,673
Revenue-producing tools and inventory, net (Note 3)........... 29,983 29,208 29,208
Property and equipment, net (Note 4).......................... 5,451 5,121 5,121
Property and equipment held for sale, net..................... 762 205 205
Deferred income taxes......................................... 565 1,384 1,384
Intangibles and other assets.................................. 334 287 287
------- ------- -------
Total assets........................................ $54,408 $55,878 $55,878
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities (Note 5)........... $ 7,681 $ 6,749 $ 6,749
Accounts payable to affiliates.............................. 252 -- --
Dividend payable............................................ -- -- 10,000
Income taxes payable........................................ 1,008 1,749 1,749
Short-term debt (Note 7).................................... -- 1,300 1,300
Current portion of long-term debt (Note 7).................. 1,307 1,738 1,738
Current portion of indebtedness to affiliate (Notes 6 and
7)....................................................... 660 660 660
------- ------- -------
Total current liabilities........................... 10,908 12,196 22,196
Long-term debt (Note 7)....................................... 8,604 6,866 6,866
Long-term indebtedness to affiliate (Notes 6 and 7)........... 1,760 1,100 1,100
Other noncurrent liabilities.................................. 109 75 75
Commitments and contingencies (Note 10)
Stockholders' equity (Note 1):
Preferred stock............................................. -- -- --
Common stock................................................ 50 50 50
Paid-in capital............................................. 4,559 4,559 4,559
Retained earnings........................................... 28,418 31,032 21,032
------- ------- -------
Total stockholders' equity.......................... 33,027 35,641 25,641
------- ------- -------
Total liabilities and stockholders' equity.......... $54,408 $55,878 $55,878
======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 61
DAILEY PETROLEUM SERVICES CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------------------
1994 1995 1996
------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Rental income................................................ $32,393 $36,691 $42,987
Sales of products and services............................... 11,422 12,172 15,952
------- ------- -------
43,815 48,863 58,939
Costs and expenses:
Cost of rentals.............................................. 27,384 29,685 33,019
Cost of products and services................................ 5,124 6,889 7,927
Selling, general and administrative.......................... 7,085 9,607 12,083
Research and development..................................... 736 775 728
------- ------- -------
40,329 46,956 53,757
------- ------- -------
Operating income............................................... 3,486 1,907 5,182
Other (income) expense:
Interest income.............................................. (100) (60) (104)
Interest expense -- nonaffiliates............................ 527 841 785
Interest expense -- affiliate................................ 86 220 182
Foreign exchange (gain) loss................................. 122 (90) 239
Other, net................................................... (225) 190 39
------- ------- -------
Income before income taxes..................................... 3,076 806 4,041
Provision for income taxes (Note 8)............................ 1,075 838 1,427
------- ------- -------
Net income (loss).............................................. $ 2,001 $ (32) $ 2,614
======= ======= =======
Earnings (loss) per share...................................... $ .37 $ (.01) --
======= ======= =======
Proforma earnings per share (Note 1)........................... $ .41
=======
</TABLE>
See accompanying notes.
F-4
<PAGE> 62
DAILEY PETROLEUM SERVICES CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A CLASS B TOTAL
PREFERRED COMMON COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK STOCK CAPITAL EARNINGS EQUITY
------ ------ ------- ------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 1, 1993 --
as restated -- (Note 1).......... -- -- $50 $4,559 $26,449 $31,058
Net income....................... -- -- -- -- 2,001 2,001
----
--
------ ------ ------ ------- -------
Balance at April 30, 1994.......... -- -- 50 4,559 28,450 33,059
Net loss......................... -- -- -- -- (32) (32)
----
--
------ ------ ------ ------- -------
Balance at April 30, 1995.......... -- -- 50 4,559 28,418 33,027
Net income....................... -- -- -- -- 2,614 2,614
----
--
------ ------ ------ ------- -------
Balance at April 30, 1996.......... -- -- $50 $4,559 $31,032 $35,641
====== ====== ==== ====== ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 63
DAILEY PETROLEUM SERVICES CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).......................................... $ 2,001 $ (32) $ 2,614
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................ 4,323 5,428 5,726
Deferred income taxes.................................... (470) (487) (816)
Provision for doubtful accounts receivable............... 184 321 256
(Gain) loss on sale and disposition of property and
equipment............................................. (533) (9) 6
Changes in operating assets and liabilities:
Accounts receivable -- trade.......................... (3,877) (663) (2,498)
Accounts receivable -- officers and affiliates........ -- (150) (286)
Prepaid expenses and other............................ (73) (3) 347
Accounts payable and accrued liabilities.............. 826 2,458 (932)
Accounts payable to affiliates........................ 52 (561) (252)
Income taxes payable.................................. (190) (319) 741
-------- -------- --------
Net cash provided by operating activities.................. 2,243 5,983 4,906
INVESTING ACTIVITIES:
Additions to revenue-producing tools and inventory......... (9,816) (13,396) (11,702)
Inventory transferred to cost of rentals................... 4,285 4,739 5,050
Revenue-producing tools lost in hole, abandoned, and
sold..................................................... 1,432 2,073 2,551
Additions to property and equipment........................ (1,316) (1,619) (883)
Proceeds from sale of property and equipment............... 880 473 916
-------- -------- --------
Net cash used in investing activities...................... (4,535) (7,730) (4,068)
FINANCING ACTIVITIES:
Proceeds from the issuance of debt......................... 5,670 -- 1,300
Payments on long-term debt................................. (261) (1,074) (1,967)
-------- -------- --------
Net cash provided by (used in) financing activities........ 5,409 (1,074) (667)
-------- -------- --------
Increase (decrease) in cash and cash equivalents........... 3,117 (2,821) 171
Cash and cash equivalents at beginning of year............. 1,500 4,617 1,796
-------- -------- --------
Cash and cash equivalents at end of year................... $ 4,617 $ 1,796 $ 1,967
======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 64
DAILEY PETROLEUM SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
1. ORGANIZATION
The accompanying financial statements reflect the operations of Dailey
Petroleum Services Corp., a Delaware corporation, which was merged with Dailey
Corporation (which changed its name to Dailey Petroleum Services Corp.) in June
1996. Dailey Corporation or new Dailey Petroleum Services Corp. had no separate
legal status or existence as of April 30, 1996. New Dailey Petroleum Services
Corp. and its predecessor, Dailey Petroleum Services Corp., are hereinafter
referred to as the "Company" or "Dailey."
The Company provides directional drilling services and designs,
manufactures and rents technologically-advanced downhole tools for oil and gas
drilling and workover applications. Founded in 1945 as a rental tool company,
Dailey began offering directional drilling services in 1984 and currently
provides such services in the Gulf of Mexico, the United States Gulf Coast
region, and most recently, Venezuela and the Austin Chalk formation in Texas and
Louisiana. The Company operates in one business segment.
Prior to June 1996, Dailey was a wholly owned subsidiary of Lawrence
Industries, Inc. ("Lawrence"). With the intent of filing a public offering of
4,000,000 shares of Class A Common Stock of Dailey (the "Offering") in June
1996, Lawrence reorganized its ownership of the Company into a holding company
structure through a forward triangular merger of Dailey Petroleum Services Corp,
into a newly-formed, wholly-owned indirect subsidiary of Lawrence, Dailey
Corporation (the "Reorganization"). The effect of the forward triangular merger
has been reflected retroactively in the accompanying financial statements.
Dailey's Restated Certificate of Incorporation provides for three classes
of stock: Class A Common Stock, $.01 par (20,000,000 shares authorized, no
shares issued or outstanding) ("Class A Common Stock"), Class B Common Stock,
$.01 par (10,000,000 shares authorized, 5,000,000 shares issued and outstanding)
("Class B Common Stock"), and Preferred Stock, $.01 par (5,000,000 shares
authorized, no shares issued or outstanding). The Board of Directors is
empowered to authorize the issuance of Preferred Stock in one or more series and
to fix the rights, powers, preferences and limitations of each series. A holder
of Class B Common Stock may convert its Class B Common Stock into Class A Common
Stock at any time at the ratio of one share of Class A Common Stock for each
share of Class B Common Stock. In the event of liquidation, holders of Class A
Common Stock and Class B Common Stock share with each other on a ratable basis
as a single class in the net assets of the Company available for distribution.
In addition, shares of Class B Common Stock convert automatically into a like
number of shares of Class A Common Stock upon the sale or transfer of such
shares to a person or entity that is not a member of the Lawrence Group (as
defined in the Company's Restated Certificate of Incorporation).
The Company intends to use $10.0 million of the proceeds from the Offering
to repay a promissory note, which was incurred in connection with a dividend
declared on June 27, 1996. The promissory note accrues interest at the prime
rate and is payable upon demand. Accordingly, the accompanying pro forma
consolidated balance sheet as of April 30, 1996, retroactively reflects the
dividend and resulting decrease in retained earnings. In the accompanying
statements of operations and retained earnings pro forma per share data is
included which gives effect to the number of shares whose proceeds would be used
to pay the dividend (the $10.0 million dividend would require an additional one
million shares assuming a $10.00 per share Offering price, thus earnings per
share for the year ending April 30, 1996, are based on 6,360,000 shares of
Common Stock outstanding).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances are eliminated in consolidation.
F-7
<PAGE> 65
DAILEY PETROLEUM SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has historically had significant transactions with Lawrence
which are reflected in the accompanying financial statements on the basis
established between the Company and Lawrence. See Notes 6, 7, 8 and 10.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all investments with a maturity of three months or
less when purchased to be cash and cash equivalents.
Accounts Receivable
Accounts receivable are net of allowances for doubtful accounts of
$1,356,000 in 1995 and $1,325,000 in 1996.
Revenue-Producing Tools and Inventory
Revenue-producing tools and inventory are stated at cost utilizing the
first-in, first-out method. Revenue-producing tools are depreciated on the
straight-line method over their estimated useful lives of 5 to 7 years. Tools
lost in hole and billed to customers and tools abandoned are included in sales
of products and services and the related write-off of the tools' net book values
are included in costs of products and services in the accompanying consolidated
statements of operations.
Tools manufactured and assembled are transferred to revenue-producing tools
as completed at the total cost of components, subassemblies, expendable parts,
direct labor and indirect costs of each tool. For U.S. locations and
international distribution centers, components, subassemblies and expendable
parts are capitalized as inventory and expensed as tools are repaired and
maintained. Components, subassemblies and expendable parts are expensed when
shipped to all international locations other than distribution centers.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated
primarily on the straight-line method over the estimated useful lives of 5 to 30
years for buildings and improvements, 3 to 10 years for machinery and equipment,
4 to 10 years for furniture and fixtures and 3 to 7 years for other property and
equipment.
Maintenance and repairs are charged to expense as incurred. Major repairs
and improvements are capitalized and depreciated. The cost and accumulated
depreciation of property and equipment retired or otherwise disposed of are
removed from the related accounts and any gain or loss is recognized in
operations.
Intangible Assets
Patents and other intangibles are amortized over 13 to 40 years and had a
net book value of $203,000 and $180,000 at April 30, 1995 and 1996,
respectively.
F-8
<PAGE> 66
DAILEY PETROLEUM SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board 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 in the first quarter of fiscal 1997 will
not have a material impact on its consolidated financial statements.
Stock Based Compensation
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. In connection with the Offering and
establishment of its "1996 Key Employee Stock Plan" and its "1996 Non-Employee
Director Stock Plan", the Company has elected to use the "intrinsic value based
method" of accounting for its stock option plans. This method does not result in
the recognition of compensation expense when employee stock options are granted
if the exercise price of the option equals or exceeds the fair market value of
the stock at the date of grant.
Income Taxes
The Company is included in the consolidated U.S. federal income tax return
of Lawrence for taxable periods ending on or before the closing of the Offering.
The Company and its subsidiaries file separate state and foreign income tax
returns. The accompanying consolidated financial statements reflect the income
tax provisions of the Company on a separate return basis with no U.S. federal
tax operating loss, tax credit, or foreign credit carryforwards generated prior
to May 1, 1988 allocated to the Company by Lawrence.
Pursuant to the Tax Allocation Agreement to be entered into by the Company
and Lawrence, the Company will pay to Lawrence an amount equal to the federal
income tax computed on the Company's (and its subsidiaries) taxable income less
any tax credits generated by the Company or its subsidiaries. The Company will
pay such amount even if the consolidated federal income tax return to which the
payment relates does not have a consolidated tax liability. Lawrence will not
make any payment to the Company for any of the Company's net operating losses or
tax credits, even if such net operating losses or tax credits have been used by
Lawrence to reduce its separate federal income tax liability.
The Tax Allocation Agreement will apply to the Company for all years in
which the Company (or any predecessor) is or was included in the Lawrence
consolidated federal income tax return. To the extent a state or other taxing
jurisdiction requires or permits a consolidated, combined or unitary tax return
to be filed by Lawrence and its affiliates and such return includes the Company,
the principles expressed with respect to the consolidated federal tax allocation
will apply.
The accompanying consolidated financial statements reflect deferred income
taxes on the liability method. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws in effect. An impairment evaluation, with reserves recorded as
necessary for any tax benefit not expected to be realized, is required of
deferred tax assets. A current tax expense or benefit is recognized for
estimated taxes payable or refundable for the current year.
Foreign Currency Translation
The U.S. dollar is the functional currency for all operations. Accordingly,
foreign currency translation gains and losses are recognized in the consolidated
statements of operations.
F-9
<PAGE> 67
DAILEY PETROLEUM SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reclassifications
Certain reclassifications have been made to the 1994 and 1995 financial
statements to conform to the current year presentation.
3. REVENUE-PRODUCING TOOLS AND INVENTORY
<TABLE>
<CAPTION>
APRIL 30,
---------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenue-producing tools................................................ $ 45,963 $ 48,024
Accumulated depreciation............................................... (27,196) (29,740)
-------- --------
18,767 18,284
Inventory:
Components, subassemblies and expendable parts....................... 9,031 9,096
Rental tools and expendable parts under production................... 1,171 1,058
Raw materials........................................................ 1,014 770
-------- --------
11,216 10,924
-------- --------
Revenue-Producing Tools and Inventory........................ $ 29,983 $ 29,208
======== ========
</TABLE>
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
APRIL 30,
---------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land................................................................... $ 1,383 $ 1,071
Buildings and improvements............................................. 5,732 5,838
Machinery and equipment................................................ 14,727 15,377
Furniture and fixtures................................................. 1,402 1,390
Other.................................................................. 499 593
-------- --------
23,743 24,269
Accumulated depreciation............................................... (18,292) (19,148)
-------- --------
Property and Equipment....................................... $ 5,451 $ 5,121
======== ========
</TABLE>
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
APRIL 30,
-----------------
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Trade accounts payable..................................................... $4,289 $2,601
Accrued salaries and vacation.............................................. 1,222 1,778
Agent commissions payable.................................................. 1,021 774
Accrued expenses and other................................................. 1,149 1,596
------ ------
Accounts Payable and Accrued Liabilities......................... $7,681 $6,749
====== ======
</TABLE>
6. RELATED PARTY TRANSACTIONS
The accompanying consolidated statements of operations include annual
rental charges from Lawrence for a corporate office facility and a manufacturing
and service center facility. See Note 10.
F-10
<PAGE> 68
DAILEY PETROLEUM SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The affiliate balances, other than the amounts included in long-term debt,
are non-interest bearing and have no fixed repayment terms.
The Company provided Lawrence and certain of its affiliates with various
administrative and management services including cash management, accounting,
tax, data processing, human resources and legal services in 1994, 1995 and 1996.
The Company also utilized from time to time aircraft owned by another Lawrence
subsidiary. The Company historically has not charged Lawrence for these
administrative and management services or reimbursed Lawrence for the use of
aircraft. The effect of not recording the fair values of these services rendered
less services received is not significant.
The Company participates in the "Lawrence Companies Retirement Plan", a
defined contribution pension plan, covering all Dailey employees. Contributions
are determined as 50% of the employee's contribution up to 2% of the employee's
total compensation. Amounts charged to pension costs and contributed to the plan
in 1994, 1995 and 1996 totaled $149,000, $152,000 and $178,000, respectively.
7. BORROWING ARRANGEMENTS
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
APRIL 30,
-------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Note payable to a bank:
Monthly interest payments at a fixed rate of 7.9% (See below);
monthly principal payments of $138,889 through December
1999, with increasing principal payments through the
maturity date of December 2000.............................. $ 9,667 $ 8,444
Note payable to affiliates:
Monthly principal payments of $55,000 plus interest at 8.0%,
with the final payment due December 1998.................... 2,420 1,760
Other notes payable.............................................. 244 160
------- -------
12,331 10,364
Less current portion of long-term debt........................... 1,967 2,398
------- -------
Total long-term debt................................... $10,364 $ 7,966
======= =======
</TABLE>
Principal payments of long-term debt are due as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997............................................................... $ 2,398
1998............................................................... 2,371
1999............................................................... 2,151
2000............................................................... 1,889
2001............................................................... 1,555
-------
$10,364
=======
</TABLE>
The note payable to a bank includes, among other things, provisions
relative to maintenance of working capital balances, limitations on additional
borrowing, debt coverage requirements and restrictions on payment of dividends.
The note payable to a bank is collateralized by a majority of the Company's
assets and a portion of other notes payable is collateralized by equipment
purchased.
F-11
<PAGE> 69
DAILEY PETROLEUM SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In conjunction with $10.0 million in borrowings and to limit interest rate
exposure, the Company entered into an interest rate swap, which converted the
floating interest rate to a fixed rate of 7.9% and matures in December 2000.
Interest paid during the years ended April 30, 1994, 1995 and 1996 amounted
to $442,000, $1,128,000 and $956,000, respectively.
In December 1995, the Company entered into a $3.0 million revolving credit
facility with a bank which provides interest at the prime rate with an option to
convert to a LIBOR-based rate plus 2.0%. At April 30, 1996, the Company had
outstanding borrowings of $1,300,000 at 7.4% against the line of credit which is
due in December 1996. The obligations of the Company to the bank are
collateralized by substantially all of the Company's property, equipment,
inventory, intellectual property and receivables. The credit facility contains
certain restrictive covenants and customary events of default and conditions to
the bank's obligation to make advances to the Company.
8. INCOME TAXES
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------------
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) before income taxes:
U.S. operations................................................ $ 130 $1,443 $4,072
Foreign operations............................................. 2,946 (637) (31)
------ ------ ------
Income (loss) before income taxes...................... $3,076 $ 806 $4,041
====== ====== ======
Income tax provision (benefit):
U.S. current................................................... $ 653 $ 737 $ 941
Foreign current................................................ 892 588 1,302
U.S. deferred.................................................. (470) (487) (816)
------ ------ ------
Income tax provision (benefit)......................... $1,075 $ 838 $1,427
====== ====== ======
</TABLE>
Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. A summary of the components of deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
APRIL 30,
-----------------
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Revenue-producing tools and property and equipment............... $ 918 $ 662
------ ------
Total deferred tax liabilities........................... 918 662
Deferred tax assets:
Net operating loss carryforward.................................. -- 1,547
Provision for doubtful accounts receivable....................... 461 504
Uniform capitalization costs..................................... 1,483 1,053
Vacation and workers' compensation accruals...................... 392 389
------ ------
Total deferred tax assets................................ 2,336 3,493
Valuation allowance for deferred tax assets........................ (461) (1,058)
------ ------
1,875 2,435
------ ------
Net deferred tax assets............................................ $ 957 $1,773
====== ======
</TABLE>
F-12
<PAGE> 70
DAILEY PETROLEUM SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The difference between the United States statutory rate and the Company's
effective income tax rate is reconciled as follows:
<TABLE>
<CAPTION>
APRIL 30,
-------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
United States statutory rate................................ 34.0% 34.0% 34.0%
Increases (reductions) in tax rate resulting from:
Meals and entertainment................................... 0.9 10.7 2.2
Dissolution of partnership................................ -- -- 20.0
Benefit of net operating loss carryforward................ -- -- (23.2)
Foreign losses............................................ -- 41.4 2.6
Other..................................................... -- 17.9 (.3)
---- ----- ----
Effective income tax rate......................... 34.9% 104.0% 35.3%
==== ===== ====
</TABLE>
Subsequent to the Offering, the Company will file U.S. federal income tax
returns on a stand alone basis. The Company and Lawrence are jointly and
severally liable with respect to taxes related to periods prior to the Offering.
Prior to the Offering, the Company and Lawrence will enter into a Tax Allocation
Agreement, pursuant to which Lawrence will agree to indemnify the Company with
respect to any federal or state taxes unrelated to Dailey for periods prior to
the Offering.
For income tax reporting at April 30, 1996, the Company has net operating
loss carryforwards of approximately $4,550,000, expiring in 2004 through 2010.
The valuation allowance relates to deferred tax assets established under SFAS
No. 109 for the provision for doubtful accounts receivable of $504,000 and net
operating loss carryforwards of $554,000. No other valuation allowances were
considered necessary. The change in the valuation allowance during fiscal 1996
is primarily due to net operating loss carryforwards. Based upon prior earnings
history, it is expected that future taxable income will be more than sufficient
to utilize the remaining deductible temporary differences.
No provision is made for U.S. income taxes applicable to undistributed
earnings of foreign subsidiaries that are indefinitely reinvested in foreign
operations.
Income taxes paid during 1994, 1995 and 1996 were $1,056,000, $917,000 and
$538,000, respectively.
9. ROYALTIES
In 1986, the Company purchased the design, patents and rights to certain
hydraulic tools and entered into a royalty agreement with the seller which
expires in 1999 and 2003 as to the covered hydraulic drilling and fishing jars,
respectively. Royalty agreements were executed between the Company and the
royalty owner in 1993 and 1994 on newly issued methods and apparatus patents
related to a double-acting drilling accelerator and improvements to hydraulic
drilling jars. In March 1994, the royalty agreements were amended to cap
royalties at 5.0% of annual net rental revenues derived from the hydraulic
drilling and fishing jars and double-acting drilling accelerators through
December 1999, with the royalty percentage decreasing to 4.0% from January 2000
to expiration of the applicable patents. Upon expiration of the patents, no
royalties will be required. The amended agreement also revised the 1.0% royalty
paid on net lost-in-hole revenue for the original hydraulic drilling jar patent
to the 2.0% provided in subsequent royalty agreements. In consideration for the
execution of the amendment to the royalty agreement, the Company agreed to pay
the owner of the royalty $250,000 in royalties. The $250,000, net of imputed
interest, was recorded as an expense at April 30, 1994, and subsequent to that
date, the Company arranged for the payment of this amount through a note
payable. For the years ended April 30, 1994, 1995 and 1996, the accompanying
consolidated statements of operations include royalty expense of $466,000,
$826,000 and $843,000, respectively, excluding the $250,000
F-13
<PAGE> 71
DAILEY PETROLEUM SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
related to the amended royalty agreement. The owner of the royalty was an
officer of the Company until October 1994.
10. COMMITMENTS AND CONTINGENCIES
The Company leases office space, transportation equipment, and other
property under noncancelable operating leases with third parties and a corporate
office facility and manufacturing and service center facility with Lawrence. See
Note 6. Future minimum lease commitments under noncancelable operating leases at
April 30, 1996 are as follows:
<TABLE>
<CAPTION>
THIRD PARTY LAWRENCE TOTAL
----------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
1997................................................ $ 372 $ 450 $ 822
1998................................................ 181 -- 181
1999................................................ 181 -- 181
2000................................................ 181 -- 181
2001................................................ 181 -- 181
Thereafter.......................................... 634 -- 634
------ ------ ------
$ 1,730 $ 450 $2,180
====== ====== ======
</TABLE>
Rental expense under operating leases with third parties, inclusive of
month-to-month rentals, totaled $1,329,000, $1,700,000 and $2,436,000 in 1994,
1995 and 1996, respectively, and with Lawrence totaled $1,029,000, $1,244,000
and $1,306,000 in 1994, 1995 and 1996, respectively and are included in selling
general and administrative expenses and cost of rentals.
Subsequent to year end, the Company entered into new lease agreements with
Lawrence effective May 1, 1996, which superceded the previous agreements for
both the office and service center. Under both agreements, the new leases expire
on March 31, 2001. Under the service center agreement, the Company will pay
$336,000 annually for a total of $1,680,000 over the life of the lease. The
office lease agreement calls for graduated payments starting at $579,312 for the
first year increasing to $652,680 in the final year, for a total of $3,059,388
over the term of the lease.
The Company is the defendant in various legal proceedings and claims which
arise in the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not materially
affect the consolidated financial statements of the Company. The Company is also
the plaintiff in certain actions defending its patents and proprietary designs.
11. CONCENTRATIONS OF CREDIT RISK AND FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company is subject to credit risk and other risks inherent in
international operations. Generally, in excess of 50% of the Company's
receivables are due from oil and gas exploration companies and drilling
contractors operating in countries other than the United States and from the
Company's international agents. United States receivables are generally due from
major oil and gas exploration and drilling contractors throughout the oil field
areas of the United States. The Company routinely monitors its cash and
receivable positions with customers and international agents.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
F-14
<PAGE> 72
DAILEY PETROLEUM SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long- and short-term debt and interest rate swap: The carrying amounts
of the Company's borrowings under its short-term revolving note payable
approximates fair value. The fair values of the Company's long-term debt
and interest rate swap are estimated using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
The carrying amounts and fair value of the Company's financial instruments
are as follows:
<TABLE>
<CAPTION>
APRIL 30, 1995 APRIL 30, 1996
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents...................... $ 1,796 $ 1,796 $ 1,967 $ 1,967
Short-term debt................................ -- -- 1,300 1,300
Long-term debt, including interest rate swap... 12,331 11,833 10,364 10,316
</TABLE>
12. SUBSEQUENT EVENT
Subsequent to April 30, 1996, and effective with the completion of a public
offering, the Board of Directors will adopt the "1996 Key Employee Stock Plan"
and the "1996 Non-Employee Director Stock Plan." The Company's "1996 Key
Employee Stock Plan," a non compensatory plan, authorized the grant of options
or restricted stock for Class A Common Stock to management personnel for up to
900,000 shares of the Company's Common Stock. The Company intends to grant
options totalling 341,129 shares contemporaneously with the offering to various
executive officers at the initial public offering price, which will vest over
three years. In addition, immediately following the Offering the Company will
grant to key officers restricted stock awards totalling 360,000 shares of Class
A Common Stock, which will vest over three years and not require any payment by
the key officers. The "1996 Non-Employee Director Stock Plan," a compensatory
plan, has 100,000 shares authorized for the granting of options to outside
directors.
13. INDUSTRY SEGMENT AND DOMESTIC AND INTERNATIONAL OPERATIONS
The Company operates in one business segment, providing directional
drilling services and technologically-advanced downhole tools for oil and gas
drilling and workover applications.
Export revenues to unaffiliated customers included in domestic sales were
$1,003,000, $274,000 and $1,833,000 in 1994, 1995 and 1996, respectively.
Revenues by geographic area are as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------
1994 1995 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic................................................ $23,736 $29,607 $34,370
Europe.................................................. 6,198 7,090 7,349
West Africa............................................. 1,565 1,446 2,059
Latin America........................................... 6,712 6,024 11,032
Middle East............................................. 984 511 563
Southeast Asia.......................................... 4,620 4,185 3,566
------- ------- -------
Total......................................... $43,815 $48,863 $58,939
======= ======= =======
</TABLE>
F-15
<PAGE> 73
===============================================================================
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER
THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED ON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES IN ANY STATE
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
STATE. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
The Company........................... 13
Use of Proceeds....................... 13
Dividend Policy....................... 14
Dilution.............................. 14
Capitalization........................ 15
Selected Consolidated Financial
Data................................ 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business and Properties............... 24
Management............................ 36
Certain Relationships and Related
Transactions........................ 43
Security Ownership of Management and
Principal Stockholder............... 47
Description of Capital Stock.......... 48
Shares Eligible for Future Sale....... 52
Underwriting.......................... 53
Legal Matters......................... 55
Experts............................... 55
Available Information................. 55
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
---------------------
UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK OFFERED HEREBY,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT 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.
===============================================================================
===============================================================================
4,000,000 SHARES
[DAILEY PETROLEUM SERVICES CORP. LOGO]
CLASS A COMMON STOCK
PROSPECTUS
JEFFERIES & COMPANY, INC.
SOUTHCOAST CAPITAL
CORPORATION
, 1996
===============================================================================
<PAGE> 74
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the Offering are:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee....................... $ 15,862
NASD Filing Fee........................................................... 5,100
Nasdaq National Market Listing Fee........................................ 25,800
Legal Fees and Expenses................................................... 225,000
Accounting Fees and Expenses.............................................. 200,000
Blue Sky Fees and Expenses (including legal fees)......................... 20,000
Printing Expenses......................................................... 200,000
Transfer Agent and Registrar Fees......................................... 10,000
Miscellaneous............................................................. 48,238
--------
TOTAL........................................................... $750,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Delaware law, a corporation may include provisions in its certificate
of incorporation that will relieve its directors of monetary liability for
breaches of their fiduciary duty to the corporation, except under certain
circumstances, including a breach of the director's duty of loyalty, acts or
omissions of the director not in good faith or which involve intentional
misconduct or a knowing violation of law, the approval of an improper payment of
a dividend or an improper stock repurchase or redemption or any transaction from
which the director derived an improper personal benefit. The Certificate of
Incorporation provides that the Company's directors are not liable to the
Company or its stockholders for monetary damages for breach of their fiduciary
duty, subject to the described exceptions specified by Delaware law.
Section 145 of the General Corporation Law of the State of Delaware grants
to the Company the authority to indemnify each officer and director of the
Company against liabilities and expenses incurred by reason of the fact that he
is or was an officer or director of the Company 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 Company and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The determination as to
whether a person seeking indemnification has met the required standard of
conduct is to be made (i) by a majority vote of a quorum of disinterested
members of the board of directors, or (ii) by independent legal counsel in a
written opinion, if such a quorum does not exist or if the disinterested
directors so direct, or (iii) by the stockholders. The Bylaws provide for
indemnification of each officer and director of the Company to the fullest
extent permitted by Delaware law.
In a suit brought to obtain a judgment in the corporation's favor, whether
by the Company itself or derivatively by a stockholder, Section 145 of the
General Corporation Law of the State of Delaware only allows the Company to
indemnify for expenses, including attorney's fees, actually and reasonably
incurred in connection with the defense or settlement of the case, and the
Company may not indemnify for amounts paid in satisfaction of a judgment or in
settlement of the claim. In any such action, no indemnification may be paid in
respect of any claim, issue or matter as to which such persons shall have been
adjudged liable to the Company except as otherwise approved by the Delaware
Court of Chancery or the court in which the claim was brought. According to the
statute, in any other type of proceeding, the indemnification may extend to
judgments, fines and amounts paid in settlement, actually and reasonably
incurred in connection with such other proceeding, as well as to expenses
(including attorneys' fees).
II-1
<PAGE> 75
Section 145 of the General Corporation Law of the State of Delaware also
allows the Company to purchase and maintain insurance on behalf of any person
who is or was an officer or director of the Company against liability asserted
against or incurred by him in any such capacity, whether or not the Company
would have the authority to indemnify such officer or director against such
liability under the provisions of Section 145. The Company has purchased and
maintains a directors' and officers' liability policy for such purposes.
The Company's Bylaws provide for the indemnification of its officers and
directors and the advancement to them of expenses in connection with proceedings
and claims, to the fullest extent permitted under the General Corporation Law of
the State of Delaware. Such indemnification may be made even though directors
and officers would not otherwise be entitled to indemnification under other
provisions by the Bylaws.
The above discussion of the General Corporation Law of the State of
Delaware and of the Certificate of Incorporation and Bylaws is not intended to
be exhaustive and is qualified in its entirety by such statute and the Restated
Certificate of Incorporation and Bylaws.
Reference is made to the form of Underwriting Agreement filed as Exhibit
1.1 to the Registration Statement for certain provisions regarding the
indemnification of the Company, its officers and directors and any controlling
persons by the Underwriters against certain liabilities for information
furnished by the Underwriters.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrants
pursuant to the foregoing provisions, the Registrants have been informed that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and therefore is unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On May 21, 1996, in connection with the Reorganization, the Company issued
1,000 shares of Class B Common Stock to Dailey Holdings Inc., a Delaware
corporation and wholly-owned subsidiary of Lawrence Industries, Inc. On June 3,
1996, the Company issued an additional 4,999,000 shares of Class B Common Stock
to Dailey Holdings Inc. The aggregate cash consideration paid for the Class B
Shares by Dailey Holdings Inc. was $50,000. All of the shares of capital stock
of the Company's predecessor, which were held by Lawrence Industries, Inc., were
then exchanged for shares of Dailey Holdings Inc. The sale of such securities
was exempt from registration under the Securities Act pursuant to Section 4(2)
of the Securities Act. See "The Company -- Reorganization; Relationship with
Lawrence".
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<S> <C>
**1.1 -- Form of Underwriting Agreement.
*2.1 -- Plan and Agreement of Merger by and between Dailey Petroleum Services
Corp., Dailey Corporation and Dailey Holdings Inc., dated May 31,
1996.
*3.1 -- Restated Certificate of Incorporation of the Company.
*3.2 -- Restated Bylaws of the Company.
**4.1 -- Form of Class A Common Stock Certificate.
4.2 -- See Exhibits 3.1 and 3.2 for provisions of the Restated Certificate
of Incorporation and Amended Bylaws of the Company defining the
rights of the holders of Common Stock.
*4.3 -- Second Amended and Restated Loan Agreement by and between Dailey
Petroleum Services Corp. and First Interstate Bank of Texas, N.A.,
dated December 13, 1995, as amended by First Amendment thereto dated
June 5, 1996.
</TABLE>
II-2
<PAGE> 76
<TABLE>
<S> <C>
*4.4 -- Revolving Credit Note in favor of First Interstate Bank of Texas,
N.A., dated December 13, 1995.
*4.5 -- Second Amended and Restated Subordination Agreement by and among
Lawrence Industries, Inc., First Interstate Bank of Texas, N.A. and
Dailey Petroleum Services Corp., dated December 13, 1995.
*4.6 -- Second Amended and Restated Commercial Security Agreement by and
between First Interstate Bank of Texas, N.A. and Dailey Petroleum
Services Corp., dated December 13, 1995.
*4.7 -- Second Amended Notice of Security Interest in Intellectual Property
in Favor of First Interstate Bank of Texas, N.A., dated December 13,
1995.
*4.8 -- Term Note in favor of First Interstate Bank of Texas, N.A., dated
December 1, 1993.
**4.9 -- Intercompany Note with Lawrence dated December 1, 1993.
*4.10 -- Promissory Note in favor of Dailey Holdings, Inc., dated June 27,
1996.
**5.1 -- Opinion of Fulbright & Jaworski L.L.P.
*10.1 -- Form of Relationship Agreement by and between the Company and
Lawrence Industries, Inc.
*10.2 -- Form of Office Lease Agreement by and between the Company as lessee
and Lawrence International, Inc. as lessor
*10.3 -- Form of Service Center Lease Agreement by and between the Company as
lessee and Lawrence International, Inc. as lessor
*10.4 -- Form of Registration Rights Agreement by and between the Company and
Lawrence
**10.5 -- Form of Employment Agreement by and between the Company and named
executive officers
*10.6 -- Dailey Petroleum Services Corp. 1996 Key Employee Stock Plan
*10.7 -- Dailey Petroleum Services Corp. 1996 Non-Employee Director Stock Plan
*10.8 -- Second Amended and Restated Loan Agreement by and between Dailey
Petroleum Services Corp. and First Interstate Bank of Texas, N.A.,
dated December 13, 1995, as amended by the First Amendment dated June
5, 1996 (set forth as Exhibit 4.3)
*10.10 -- Form of Tax Allocation Agreement
*10.11 -- Form of Indemnification Agreement for directors
**10.12 -- Form of Indemnification Agreement for executive officers
*21.1 -- List of subsidiaries of the Company
**23.1 -- Consent of Ernst & Young LLP
**23.2 -- Consent of Fulbright & Jaworski L.L.P. (included in Exhibit 5.1)
*24.1 -- Powers of Attorney from certain members of the Board of Directors of
the Company (contained on page II-5)
*27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
II-3
<PAGE> 77
(b) Financial Statement Schedules:
The following financial statement schedule is included in Part II of this
Registration Statement, can be found on the page indicated and should be read in
conjunction with the financial statements and notes thereto:
<TABLE>
<CAPTION>
ITEM PAGE
---- ----
<S> <C>
Report of Independent Auditors on Schedule.................................... S-1
Schedule II -- Valuation and Qualifying Accounts.............................. S-2
</TABLE>
All other financial statement schedules for which provision is made in the
applicable accounting regulations of the Commission are omitted because they are
not required under the related instructions, are inapplicable or the required
information is included elsewhere in the financial statements.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates 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 foregoing
provisions may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the Securities Act 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. If 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 the 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 Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
the Registration Statement in reliance upon Rule 430A and contained in the
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 the
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, 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-4
<PAGE> 78
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on August 6, 1996.
DAILEY PETROLEUM SERVICES CORP.
By: /s/ WILLIAM D. SUTTON
-----------------------------------
William D. Sutton
Senior Vice President, General
Counsel and Secretary
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------- --------------
<S> <C> <C>
*/s/ J. D. LAWRENCE Chairman of the Board August 6, 1996
- ---------------------------------------------
J. D. Lawrence
*/s/ JAMES F. FARR President and Chief Executive August 6, 1996
- --------------------------------------------- Officer and Director
James F. Farr (Principal Executive
Officer)
/s/ WILLIAM D. SUTTON Senior Vice President, General August 6, 1996
- --------------------------------------------- Counsel, Secretary and
William D. Sutton Director
*/s/ DAVID T. TIGHE Senior Vice President, August 6, 1996
- --------------------------------------------- Finance, Chief Financial
David T. Tighe Officer, Treasurer and
Director (Principal
Financial Officer and
Principal Accounting
Officer)
*By: /s/ WILLIAM D. SUTTON
- ---------------------------------------------
William D. Sutton
(Attorney-in-fact for persons indicated)
</TABLE>
II-5
<PAGE> 79
REPORT OF INDEPENDENT AUDITORS ON SCHEDULE
To the Board of Directors and Stockholders
of Dailey Petroleum Services Corp.
We have audited the consolidated financial statements of Dailey Petroleum
Services Corp., a Delaware corporation, (as further discussed in Note 1 to the
consolidated financial statements) as of April 30, 1995 and 1996, and for each
of the three years in the period ended April 30, 1996, and have issued our
report thereon dated June 27, 1996 (included elsewhere in this Registration
Statement). Our audits also included the financial statement schedule listed in
Item 16(b) of this Registration Statement. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Houston, Texas
June 27, 1996
S-1
<PAGE> 80
DAILEY PETROLEUM SERVICES CORP.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
----------------
CHARGED
BALANCE TO CHARGED
AT COSTS TO BALANCE
BEGINNING AND OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS WRITE-OFFS PERIOD
----------------------- --------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
1994 Allowance for Bad Debt $1,301,000 $184,000 0 $(175,000) $1,310,000
========== ======= == ========= ==========
Inventory Reserve $ 973,000 0 0 $ (21,000) $ 952,000
========== ======= == ========= ==========
1995 Allowance for Bad Debt $1,310,000 $321,000 0 $(275,000) $1,356,000
========== ======= == ========= ==========
Inventory Reserve $ 952,000 0 0 $ (60,000) $ 892,000
========== ======= == ========= ==========
1996 Allowance for Bad Debt $1,356,000 $256,000 0 $(287,000) $1,325,000
========== ======= == ========= ==========
Inventory Reserve $ 892,000 0 0 $ (88,000) $ 804,000
========== ======= == ========= ==========
</TABLE>
S-2
<PAGE> 81
INDEX TO EXHIBITS
<TABLE>
<S> <C>
**1.1 -- Form of Underwriting Agreement.
*2.1 -- Plan and Agreement of Merger by and between Dailey Petroleum Services
Corp., Dailey Corporation and Dailey Holdings Inc., dated May 31,
1996.
*3.1 -- Restated Certificate of Incorporation of the Company.
*3.2 -- Restated Bylaws of the Company.
**4.1 -- Form of Class A Common Stock Certificate.
4.2 -- See Exhibits 3.1 and 3.2 for provisions of the Restated Certificate
of Incorporation and Amended Bylaws of the Company defining the
rights of the holders of Common Stock.
*4.3 -- Second Amended and Restated Loan Agreement by and between Dailey
Petroleum Services Corp. and First Interstate Bank of Texas, N.A.,
dated December 13, 1995, as amended by First Amendment thereto dated
June 5, 1996.
*4.4 -- Revolving Credit Note in favor of First Interstate Bank of Texas,
N.A., dated December 13, 1995.
*4.5 -- Second Amended and Restated Subordination Agreement by and among
Lawrence Industries, Inc., First Interstate Bank of Texas, N.A. and
Dailey Petroleum Services Corp., dated December 13, 1995.
*4.6 -- Second Amended and Restated Commercial Security Agreement by and
between First Interstate Bank of Texas, N.A. and Dailey Petroleum
Services Corp., dated December 13, 1995.
*4.7 -- Second Amended Notice of Security Interest in Intellectual Property
in Favor of First Interstate Bank of Texas, N.A., dated December 13,
1995.
*4.8 -- Term Note in favor of First Interstate Bank of Texas, N.A., dated
December 1, 1993.
**4.9 -- Intercompany Note with Lawrence dated December 1, 1993.
*4.10 -- Promissory Note in favor of Dailey Holdings, Inc., dated June 27,
1996.
**5.1 -- Opinion of Fulbright & Jaworski L.L.P.
*10.1 -- Form of Relationship Agreement by and between the Company and
Lawrence Industries, Inc.
*10.2 -- Form of Office Lease Agreement by and between the Company as lessee
and Lawrence International, Inc. as lessor
*10.3 -- Form of Service Center Lease Agreement by and between the Company as
lessee and Lawrence International, Inc. as lessor
*10.4 -- Form of Registration Rights Agreement by and between the Company and
Lawrence
**10.5 -- Form of Employment Agreement by and between the Company and the named
executive officers
*10.6 -- Dailey Petroleum Services Corp. 1996 Key Employee Stock Plan
*10.7 -- Dailey Petroleum Services Corp. 1996 Non-Employee Director Stock Plan
*10.8 -- Second Amended and Restated Loan Agreement by and between Dailey
Petroleum Services Corp. and First Interstate Bank of Texas, N.A.,
dated December 13, 1995, as amended by the First Amendment dated June
5, 1996 (set forth as Exhibit 4.3)
*10.10 -- Form of Tax Allocation Agreement
*10.11 -- Form of Indemnification Agreement for directors
</TABLE>
<PAGE> 1
EXHIBIT 1.1
DAILEY PETROLEUM SERVICES CORP.
(A DELAWARE CORPORATION)
4,000,000 SHARES OF CLASS A COMMON STOCK
UNDERWRITING AGREEMENT
August, ___1996
Jefferies & Company, Inc.
Southcoast Capital Corporation
As Representatives of
the Several Underwriters
c/o Jefferies & Company, Inc.
650 Fifth Avenue, 4th Floor
New York, New York 10019
Attn: Syndicate Department
Dear Sirs:
Dailey Petroleum Services Corp., a Delaware corporation (the
"Company"), hereby confirms its agreement with you (this "Agreement"), as
representatives (the "Representatives") of the underwriters named in Schedule I
hereto (the "Underwriters"), with respect to the sale by the Company and the
purchase by the Underwriters, acting severally and not jointly, of an aggregate
of 4,000,000 shares (the "Firm Shares") of the Company's Class A Common Stock,
$.01 par value (the "Class A Common Stock"). The Company also has agreed to
sell up to 600,000 shares (the "Additional Shares") of Class A Common Stock to
cover over-allotments, if any. The Firm Shares and the Additional Shares are
hereinafter collectively referred to as the "Shares."
You have advised us that you desire to purchase the Shares and that
you propose to make a public offering of the Shares upon the terms set forth in
the Prospectus referred to below as soon as you deem advisable after the
Registration Statement referred to below becomes effective.
The terms that follow, when used in this Agreement, shall have the
meanings indicated. "Preliminary Prospectus" shall mean any preliminary
prospectus referred to in Section 1(a)(i) below and any preliminary prospectus
included in the Registration Statement on the date that the Registration
Statement becomes effective (the "Effective Date") that omits Rule 430A
Information (as defined below). "Registration Statement" shall mean the
registration statement referred to in Section 1(a)(i) below, including
exhibits, as amended at the Representation Date (as defined below) (or, if not
effective at the Representation Date, in the form in which it shall become
effective) and, in the event any post-effective amendment thereto becomes
effective prior to the Closing Date (as
<PAGE> 2
defined in Section 2 hereof), shall also mean such registration statement as so
amended. Any registration statement filed pursuant to Rule 462(b) (as defined
below) of the Act Regulations (as defined below) is herein referred to as the
"Rule 462(b) Registration Statement," and after such filing the term
"Registration Statement" shall include the Rule 462(b) Registration Statement.
Such term shall include Rule 430A Information deemed to be included therein at
the Effective Date as provided by Rule 430A (as defined below). The final
prospectus constituting a part of the Registration Statement (including the
Rule 430A Information), in the form first furnished to the Underwriters for use
in the offering of the Shares, as from time to time amended or supplemented, is
hereinafter referred to as the "Prospectus," except that if any revised
prospectus shall be provided to the Underwriters by the Company that differs
from the prospectus on file at the Securities and Exchange Commission (the
"Commission") at the Effective Date (whether or not such revised prospectus is
required to be filed by the Company pursuant to Rule 424 of the Act
Regulations), the term "Prospectus" shall refer to each such revised prospectus
from and after the time it is first provided to the Underwriters for such use.
For purposes of this Agreement, all references to the Registration Statement,
any Preliminary Prospectus, the Prospectus or any amendment or supplement of
any of the foregoing shall include the copy filed with the Commission pursuant
to the Commission's Electronic Data Gathering, Analysis and Retrieval system
("EDGAR"). "Tax" (and with correlative meaning, "Taxes") shall mean all
federal, state, local, foreign or other taxing authority net income, franchise,
sales, use, ad valorem, property, payroll, withholding, excise, severance,
transfer, employment, alternative or add-on minimum, stamp, occupation,
premium, environmental or windfall profits taxes, and other taxes, charges,
fees, levies, imposts, customs, duties, licenses or other assessments, together
with any interest and any penalties, additions to tax or additional amounts
imposed by any taxing authority. "Rule 158", "Rule 424", "Rule 430A," and
"Rule 462(b)" refer to such rules under the Securities Act of 1933, as amended
(the "Act"; and all rules and regulations under the Act, are referred to as the
"Act Regulations"). "Rule 430A Information" means information with respect to
the Shares and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A.
Pursuant to a Plan and Agreement of Merger and Certificate of Merger, each
dated May 31, 1996, Dailey Petroleum Services Corp., a Delaware corporation
("DPSC"), was merged with and into the Company on June 6, 1996, in transactions
collectively referred to in the Registration Statement and in this Agreement as
the "Reorganization." Certain agreements by and between the Company on the one
hand, and Lawrence Industries, Inc., a Delaware corporation ("Lawrence"), or
subsidiaries of Lawrence on the other, that are described in the Registration
Statement, including, without limitation, the Relationship Agreement, the Tax
Allocation Agreement, and the Lease Agreements referred to in the "Certain
Relationships and Related Transactions" section of the Prospectus and the
Registration Rights Agreement referred to in the "Description of Capital Stock"
and "Shares Eligible for Future Sale" section of the Prospectus, are referred
to in this Agreement collectively as the "Lawrence Agreements." "Class B
Common Stock" shall mean the Company's Class B Common Stock, par value $.01 per
share. "Common Stock" shall mean, collectively, the Company's Class A Common
Stock and Class B Common Stock.
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) The Company represents and warrants to the Underwriters as of
the date hereof (such date being referred to as the "Representation Date") and
as of each of the Closing Dates (as defined in Section 2(d)) as follows:
2
<PAGE> 3
(i) The Company has filed with the Commission a
registration statement on Form S-1 (Registration No. 333-04593),
including a related preliminary prospectus, and one or more amendments
thereto, each of which has previously been furnished to the
Underwriters, for the registration under the Act of the offering and
sale of the Shares. The Company will file with the Commission either
(A) prior to effectiveness of such registration statement, a further
amendment to such registration statement (including the form of
Prospectus) or (B) after effectiveness of such registration statement,
a Prospectus in accordance with Rules 430A and 424(b) or Rule 434 of
the Act Regulations. The Company has included in such registration
statement, as amended at the Effective Date, all information (other
than Rule 430A Information in the case of clause (B)) required by the
Act and the Act Regulations to be included in the Prospectus with
respect to the Shares and the offering thereof. As filed, such
amendment and form of Prospectus shall contain all Rule 430A
Information, together with all other such required information, with
respect to the Shares and the offering thereof and, except to the
extent the Underwriters shall agree in writing to a modification,
shall be in all substantive respects in the form furnished to the
Underwriters prior to the date hereof.
(ii) At the respective times the Registration Statement,
any Rule 462(b) Registration Statement and any post effective
amendments thereto become effective under the Act, and at each Closing
Date, the Registration Statement, any Rule 462(b) Registration
Statement and any amendments and supplements thereto complied and will
comply in all material respects with the Act and the Act Regulations,
and did not or will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading;
neither the Prospectus nor any amendments or supplements thereto, at
the time the Prospectus or any such amendment or supplement was
issued, and at each Closing Date, included or will include, any untrue
statement of a material fact or omitted or will omit a material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they
were made, not misleading; provided, that the Company makes no
representation or warranty as to the information provided in writing
to the Company by or on behalf of the Underwriters, expressly for use
in the Registration Statement or the Prospectus, and the Company
agrees that the only information provided in writing by or on behalf
of the Underwriters to the Company, expressly for use in the
Registration Statement or the Prospectus, is that information
contained in the table and the second, third, sixth and tenth
paragraphs following the table in the section of the Prospectus
entitled "Underwriting" and the last paragraph on the cover page of
the Prospectus. If Rule 434 is used, the Company will comply with the
Requirements of Rule 434. Each Preliminary Prospectus and the
Prospectus filed as part of the Registration Statement as originally
filed or as part of any amendment thereto, or filed pursuant to Rule
424 under the Act, complied when so filed in all material respects with
the Act Regulations. Each Preliminary Prospectus and the Prospectus
delivered to the Underwriters for use in connection with this offering
was identical to the electronically transmitted copies thereof filed
with the Commission pursuant to EDGAR, except to the extent permitted
by Regulation S-T of the Commission.
(iii) The Company is a corporation duly incorporated and
validly existing in good standing under the laws of the state of
Delaware, with full corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
3
<PAGE> 4
Registration Statement and the Prospectus, and is duly registered and
qualified to conduct its business and is in good standing in each
jurisdiction where the nature or location of its properties (owned or
leased) or the conduct of its business requires such registration or
qualification, except where the failure to so register or qualify
would not have a Material Adverse Effect. As used herein, the term
"Material Adverse Effect" shall mean an adverse effect on the
financial condition, business, business prospects, properties, net
worth or results of operations of the Company or any of the
Subsidiaries (as hereinafter defined) that would be, singly or in the
aggregate, material to the Company and the Subsidiaries, taken as a
whole, whether or not occurring in the ordinary course of business.
(iv) The only subsidiaries of the Company are the
subsidiaries listed on Schedule II hereto (collectively, the
"Subsidiaries"). Each of the Subsidiaries is a corporation duly
organized and validly existing in good standing under the laws of the
jurisdiction of its incorporation with full corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and in the
Prospectus, and is duly registered and qualified to conduct its
business and is in good standing in each jurisdiction where the nature
or location of its properties (owned or leased) or the conduct of its
business requires such registration or qualification, except where the
failure so to register or qualify would not have a Material Adverse
Effect.
(v) Each of the Company and the Subsidiaries has all
necessary authorizations, approvals, orders, licenses, rights-of-way,
operating rights, easements, certificates and permits of and from, and
has made all declarations and filings with, all regulatory or
governmental officials and bodies (whether foreign or domestic), all
self-regulatory organizations and all courts and other tribunals
("Permits"), to own or lease its respective properties and to conduct
its respective businesses described in the Registration Statement and
in the Prospectus, except where failure to have obtained or made the
same would not have a Material Adverse Effect, and neither the Company
nor any of the Subsidiaries has received any notice of proceedings
relating to the revocation or modification of any such Permits, if the
failure to be so licensed or approved or if the subject of an
unfavorable decision, ruling or finding, would have a Material Adverse
Effect; the Company and each of the Subsidiaries has fulfilled and
performed all their respective current material obligations with
respect to such Permits and no event has occurred that allows, or
after notice or lapse of time, or both, would allow, revocation or
termination thereof or result in any other material impairment of the
rights of the holder of any such Permit; and such Permits contain no
restrictions that are materially burdensome to the Company and the
Subsidiaries; and the Company and each of the Subsidiaries is in
compliance with all applicable laws, rules, regulations, orders and
consents, the violation of which could have a Material Adverse Effect.
The property and business of the Company and the Subsidiaries conform
in all material respects to the descriptions thereof contained in the
Prospectus and the Registration Statement.
(vi) All of the Company's authorized and outstanding
capital stock has been duly authorized, validly issued and is fully
paid and nonassessable and the capitalization of the Company conforms
to the descriptions thereof and the statements made with respect
thereto in the Registration Statement and the Prospectus as of the
date set forth therein. There are no outstanding securities
convertible into or exchangeable for, and no outstanding options,
warrants or other rights to purchase, any shares of the capital stock
of the Company, nor any
4
<PAGE> 5
agreements or commitments to issue any of the same, except as
described in the Registration Statement and the Prospectus, and there
are no preemptive or other rights to subscribe for or to purchase, and
no restrictions upon the voting or transfer of, any capital stock of
the Company pursuant to the Company's Certificate of Incorporation or
bylaws or any agreement or other instrument to which the Company is a
party, except as described in the Registration Statement and the
Prospectus.
(vii) All the outstanding shares of capital stock of each
Subsidiary have been duly authorized and are validly issued, fully
paid and nonassessable and were not issued in violation of or subject
to any preemptive or similar rights. Except as otherwise set forth in
the Registration Statement and the Prospectus, all outstanding shares
of capital stock of the Subsidiaries are owned by the Company,
directly or indirectly through another Subsidiary, free and clear of
any security interests, liens, encumbrances, equities or other claims.
(viii) As a result of the Reorganization, the Company has
succeeded to all of the domestic and foreign business of DPSC, and to
all assets of DPSC, real, personal or mixed. Each of the Company and
the Subsidiaries has good and indefeasible title to all real property
and good and marketable title to all personal property, in each case
owned by it, including those properties described in the Registration
Statement and Prospectus, in each case free and clear of all liens,
charges, encumbrances and restrictions, except such as are described
in the Registration Statement and Prospectus or such as would not have
a Material Adverse Effect. Each of the Company and the Subsidiaries
has valid, subsisting and enforceable leases for the properties
described in the Registration Statement and the Prospectus as leased
by it, with such exceptions as are described in the Registration
Statement and the Prospectus or that in the aggregate would not have a
Material Adverse Effect, and except to the extent enforceability of
such leases may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditor'
rights generally or by equitable principles.
(ix) The Company has all requisite power, authority,
authorizations, approvals, orders, licenses, certificates and permits
to enter into this Agreement, and to carry out the provisions and
conditions hereof, to issue and deliver the Shares to the Underwriters
as provided herein. This Agreement has been duly authorized, executed
and delivered by the Company and this Agreement constitutes a legal,
valid and binding agreement of the Company, enforceable against each
in accordance with the terms hereof, except to the extent rights to
indemnity hereunder may be limited by federal or state securities laws
or public policy underlying such laws and except to the extent the
enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by equitable principles. The
Company and Lawrence each has all requisite power, authority,
authorizations, approvals, orders, licenses, certificates and permits
to enter into the Lawrence Agreements, and to carry out the provisions
and conditions thereof. Each of the Lawrence Agreements have been
duly authorized, executed and delivered by the Company and Lawrence
(or the subsidiary of Lawrence named in such Lawrence Agreement as a
party) and each Lawrence Agreement constitutes a legal, valid and
binding agreement of the Company and Lawrence (or the subsidiary of
Lawrence named in such Lawrence Agreement as a party), enforceable
against each such party in accordance with the terms hereof, except to
the extent rights to indemnity under the Registration Rights
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<PAGE> 6
Agreement may be limited by federal or state securities laws or public
policy underlying such laws and except to the extent the enforcement
of a Lawrence Agreement may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditor' rights generally or by equitable principles.
(x) Each of the Company and the Subsidiaries owns, or
possesses adequate rights to use, all trademarks, service marks and
other rights necessary for the conduct of its business as described in
the Registration Statement and the Prospectus, and neither the Company
nor any of the Subsidiaries has received a notice, or knows of any
basis, of any conflict with the asserted rights of others in any such
respect that could have a Material Adverse Effect.
(xi) The Shares have been duly and validly authorized for
issuance by the Company, and the Company has full corporate power and
authority to issue, sell and deliver the Shares; and, when such Shares
are issued and delivered against payment therefor as provided by this
Agreement, the Shares will have been validly issued, fully paid and
nonassessable, and the issuance of such Shares will not be subject to
any statutory preemptive rights or similar statutory rights or any
other preemptive or similar rights. All corporate action required to
be taken by the Company and Lawrence for the authorization, issuance
and sale of the Shares has been duly and validly taken.
(xii) The accountants who certified the financial
statements and supporting schedules included in the Registration
Statement are independent public accountants as required by the Act
and the Act Regulations.
(xiii) The consolidated financial statements and related
notes and schedules included in the Registration Statement or in the
Prospectus present fairly the financial position of the Company and
the Subsidiaries, on the basis stated in the Registration Statement,
as of the respective dates thereof and the consolidated statements of
income, stockholders' equity and cash flows of the Company and the
Subsidiaries, for the respective periods covered thereby; and such
financial statements and the related schedules and notes have been
prepared in conformity with generally accepted accounting principles
applied on a consistent basis throughout the entire periods involved,
except as otherwise disclosed in the Registration Statement and the
Prospectus. The selected financial information included in the
Registration Statement or the Prospectus presents fairly the
information shown therein and has been compiled on a basis consistent
with that of the audited financial statements of the Company included
therein. The pro forma financial information in the Registration
Statement or in the Prospectus complies in all material respects with
the applicable accounting requirements of Article 11 of Regulation S-X
promulgated by the Commission and presents fairly the information
shown therein; the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give
effect to the transactions or circumstances referred to therein. (The
consolidated financial statements, financial information and pro forma
financial information described in this subparagraph (xiii) are
referred to as the "Financial Information"). No other financial
statements or schedules of the Company and the Subsidiaries, other
than the Financial Data Schedule required by Item 601(c) of Regulation
S-K, are required by the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the Commission promulgated thereunder
(collectively, the "Exchange Act"), the Act or the Act Regulations to
be included in the Registration Statement or Prospectus.
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(xiv) The Shares and the Company's Class B Common Stock
conform in all material respects to the descriptions thereof in the
Registration Statement and Prospectus.
(xv) Since the respective dates as of which information is
provided in the Registration Statement and Prospectus, except as
otherwise specifically stated therein, there has been no change or
development with respect to the condition (financial or otherwise),
business or business prospects of the Company and the Subsidiaries,
taken as a whole, whether or not arising in the ordinary course of
business, that would have a Material Adverse Effect.
(xvi) Neither the Company nor any Subsidiary is in
violation of its charter or bylaws or other organizational documents.
Neither the Company nor any Subsidiary is, nor with the passage of
time or the giving of notice or both would be, in violation of any
law, ordinance, administrative or governmental rule or regulation
applicable to the Company or any of the Subsidiaries, or of any
judgment, order or decree of any court or governmental agency or body
or of any arbitrator having jurisdiction over the Company or any of
the Subsidiaries, or in default in the performance or observance of
any obligation, agreement, covenant or condition contained in any
mortgage, loan agreement, note, bond, debenture, credit agreement or
any other evidence of indebtedness or in any agreement, contract,
indenture, lease or other instrument to which the Company or any of
the Subsidiaries is a party or by which it may be bound, or to which
any of the property or assets of the Company or any of the
Subsidiaries is subject, the effect of which violation or default in
performance or observance would have a Material Adverse Effect.
(xvii) There is no action, suit or proceeding pending
before or by any court, arbitrator or governmental agency or body
(whether foreign or domestic) or, to the Company's knowledge,
threatened against the Company or any of the Subsidiaries or to which
any of their respective property is subject (A) that is required to be
described in the Registration Statement or the Prospectus but is not
described as required or (B) that, if adversely determined, would have
a Material Adverse Effect. There is no agreement, contract,
indenture, lease or other document or instrument that is required to
be described in the Registration Statement or Prospectus or to be
filed as an exhibit to the Registration Statement that is not
described or filed as required.
(xviii) No person has any right to the registration of any
security of the Company by reason of the filing of the Registration
Statement with the Commission or the consummation of the transactions
contemplated hereby, which right has not been waived or lapsed, other
than as described in the Prospectus.
(xix) The Company is not, and upon the issuance and sale of
the Shares as herein contemplated and the application of the net
proceeds therefrom as described in the Prospectus will not be, an
"investment company" or an entity "controlled" by an "investment
company" as such terms are defined in the Investment Company Act of
1940, as amended (the "1940 Act").
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<PAGE> 8
(xx) As of the date of the Prospectus, neither the Company
nor any of the Subsidiaries is currently planning any probable
acquisitions for which disclosure of pro forma financial information
would be required by the Act.
(xxi) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus (or any
amendment or supplement thereto), except as otherwise stated therein,
(A) neither the Company nor any of the Subsidiaries (1) has issued any
securities other than in connection with the exercise of any
outstanding options, (2) incurred any material liability or
obligations, direct or contingent, for borrowed money, (3) entered
into any transaction not in the ordinary course of business that is
material to the Company and the Subsidiaries, taken as a whole, (4)
entered into any transaction with an affiliate of the Company (as the
term "affiliate" is defined in Rule 405 of the Act Regulations) that
would otherwise be required to be disclosed in the Prospectus or the
Registration Statement, or (5) declared or paid any dividend on its
capital stock, or made any other distribution to its equity holders,
(B) there has not been any material change in the capital stock or
other equity, or material increase in the short-term or long-term
debt, of the Company or any of the Subsidiaries and (C) there has been
no change or development with respect to the financial condition,
business or business prospects of the Company and the Subsidiaries,
taken as a whole, whether or not arising in the ordinary course of
business, that would have a Material Adverse Effect.
(xxii) The Company has not distributed and, prior to the
Effective Date, will not distribute without your prior written
consent, any offering material in connection with the offering and
sale of the Shares other than the Registration Statement, a
Preliminary Prospectus, the Prospectus or other materials, if any,
permitted by the Act.
(xxiii) The Shares have been duly authorized for listing on
the NASDAQ National Market upon official notice of issuance.
(xxiv) Neither the Company nor any Subsidiary is involved in
any labor dispute and, to the knowledge of the Company, no such
dispute is threatened. The Company is not aware of any existing or
imminent labor disturbance of the employees of any of its or any
Subsidiary's principal suppliers, customers, manufacturers or
contractors, which in either case, would result in a Material Adverse
Effect.
(xxv) Neither the Company nor any Subsidiary nor, to the
Company's knowledge, any employee or agent of the Company or any
Subsidiary has made any payment of funds of the Company or any
Subsidiary or received or retained any funds of a character required
to be disclosed in the Prospectus. Neither the Company nor any
Subsidiary has made any payment or engaged in any arrangement
prohibited by the Foreign Corrupt Practices Act of 1977, as amended.
The Company maintains a system of internal accounting controls which
is sufficient to provide reasonable assurances that (A) transactions
are executed in accordance with management's general or specific
authorization, (B) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for
assets, (C) access to assets is permitted only in accordance with
management's general or specific authorization, and
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<PAGE> 9
(D) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(xxvi) The Company, Lawrence, and each Subsidiary have filed
(or obtained extension thereto) all federal, state, local and foreign
tax returns that are required to be filed, which returns will be
complete and and correct in all material respects, and have paid all
taxes shown on such returns and all assessments with respect thereto
to the extent the same have become due.
(xxvii) Except for the shares of capital stock of each of the
Subsidiaries, neither the Company nor any of the Subsidiaries owns any
shares of stock or any other securities of any corporation or has any
equity interest in any firm, partnership, association or other entity,
other than as reflected in the consolidated financial statements
included in the Registration Statement and the Prospectus.
(xxviii) Neither the execution, delivery or performance of
this Agreement, the offer, issuance, sale or delivery of the Shares
nor the consummation by the Company of the terms of this Agreement (A)
requires the consent, approval, authorization or order of any court or
governmental agency or body, except such as have been obtained under
the Act and such as may be required under the blue sky laws of any
jurisdiction in connection with the purchase and distribution of the
Shares by the Underwriters or such as may be required by the National
Association of Securities Dealers, Inc. (the "NASD") and such other
approvals as have been obtained, (B) will conflict with, result in a
breach of, or constitute a default under the terms of any indenture,
agreement, lease or other instrument to which the Company or any of
the Subsidiaries is a party or by which any of them or any of their
respective properties may be bound, or will result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any of the Subsidiaries pursuant to the terms
of any agreement or instrument to which any of them is a party or by
which any of them may be bound or to which any of the property or
assets of any of them is subject, (C) will conflict with or violate
any law, order, statute, regulation, consent or memorandum of
understanding applicable to the Company or any Subsidiary of any
court, regulatory body, administrative agency, governmental body or
arbitrator having jurisdiction over the Company or any of the
Subsidiaries (in the case of (B) or (C) above, where such conflict,
breach, default or violation, individually or in the aggregate, would
have a Material Adverse Effect), or (D) will conflict with or violate
the charter or by-laws of the Company or any Subsidiary.
(xxix) The Company and each Subsidiary maintains insurance,
which is in full force and effect, of the types and in the amounts
customary in their respective businesses. Neither the Company nor any
Subsidiary has any reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or
to obtain similar coverage from insurers at a cost that would not have
a Material Adverse Effect.
(xxx) The Company has complied with, and is and will be in
compliance with, the provisions of that certain Florida act relating
to disclosure of doing business with Cuba, codified as Section 517.075
of the Florida statutes, and the rules and regulations thereunder or
is exempt therefrom.
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<PAGE> 10
(xxxi) The Company and each of the Subsidiaries (A) are in
compliance with any and all applicable federal, state, local and
foreign laws and regulations relating to the protection of human
health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("Environmental Laws"), (B) have
received all permits, licenses or other approvals required of them
under applicable Environmental Laws to conduct their business and (C)
are in compliance with all terms and conditions of any such permit,
license or approval, except in the case of clauses (A), (B) and (C)
above where such noncompliance with Environmental Laws, failure to
receive required permits, licenses or approvals or failure to comply
with the terms and conditions of such permits, licenses or approvals
would not have a Material Adverse Effect.
(xxxii) There are no costs or liabilities associated with the
effect of Environmental Laws on the business, business prospects,
operations and properties of the Company and its Subsidiaries that
would have a Material Adverse Effect.
(b) Any certificate signed by any officer of the Company delivered
to the Underwriters or to counsel for the Underwriters pursuant to the terms of
this Agreement shall be deemed a representation and warranty by the Company to
each Underwriter as to the matters covered thereby.
SECTION 2. SALE AND DELIVERY TO THE UNDERWRITERS: CLOSING
(a) Subject to the terms and conditions set forth herein, the
Company agrees to sell to each Underwriter, severally and not jointly, and, on
the basis of the representations and warranties herein contained and subject to
the terms and conditions herein set forth, each Underwriter, severally and not
jointly, agrees to purchase from the Company, at a purchase price of
$__________ per share (the "Initial Price"), the aggregate number of Firm
Shares set forth in Schedule I hereto opposite the name of such Underwriter.
The Company will have no obligation to sell the Underwriters any of the Firm
Shares hereunder unless the Underwriters purchase all of the Firm Shares
hereunder.
(b) The Company grants to the Underwriters an option to purchase
all or any part of the Additional Shares at the Initial Price. Additional
Shares shall be purchased from the Company, severally and not jointly, for the
accounts of the Underwriters in proportion to the number of Firm Shares set
forth in Schedule I hereto opposite the name of such Underwriter. Such option
may be exercised only to cover over-allotments in the sale of the Firm Shares
by the Underwriters and may be exercised in whole or in part at any time on or
before 12:00 noon, New York City time, on the business day before the Firm
Shares Closing Date (as hereinafter defined), and thereafter from time to time
within 30 days after the date of the Prospectus, in each case upon written or
telegraphic notice, or verbal or telephonic notice confirmed by written or
facsimile notice, by the Underwriters to the Company no later than 12 noon, New
York City time, on the business day before the Firm Shares Closing Date or at
least two business days before the Additional Shares Closing Date (as
hereinafter defined), as the case may be, setting forth the number of
Additional Shares to be purchased and the time and date (if other than the Firm
Shares Closing Date) of such purchase.
(c) Payment of the purchase prices for, and delivery of, the Firm
Shares to be purchased by the Underwriters shall be made at the offices of
Jefferies & Company, Inc., Harborside Financial Center, Plaza III, Suite 705,
Jersey City, New Jersey, 07311, Attn: Victor Polizzotto, or at such other place
as shall be agreed upon by the Underwriters and the Company, at 10 a.m., New
York City time,
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on the third (or, if pricing occurs after 4:30 p.m., New York City time, on any
given day, on the fourth) business day following the date hereof, or such other
time not later than ten business days after such date as shall be agreed upon
by the Underwriters and the Company (such time and date of payment and delivery
being herein called the "Firm Shares Closing Date"). Payment shall be made to
the Company by certified or official bank check or checks drawn in New York
Clearing House funds (or similar next day funds) payable to the order of the
Company against delivery to the Underwriters of the Firm Shares.
(d) Payment of the purchase price for, and delivery of, the
Additional Shares to be purchased by the Underwriters shall be made at the
office as set forth above or at such other place as shall be agreed upon by the
Underwriters and the Company at the time and on the date (which may be the same
as the Firm Shares Closing Date) specified in the notice referred to in Section
2(b) (such time and date of delivery and payment being herein called the
"Additional Shares Closing Date"). The Firm Shares Closing Date and the
Additional Shares Closing Date are called, individually, the "Closing Date" and
together, the "Closing Dates". Payment shall be made to the Company by
certified or official bank check or checks drawn in New York Clearing House
funds (or similar next day funds) payable to the order of the Company against
delivery to the Underwriters of the Additional Shares.
(e) Certificates representing the Shares shall be in such
denominations and registered in such names as the Underwriters may request in
writing at least two business days before the Firm Shares Closing Date or, in
the case of Additional Shares, on the day of notice of exercise of the option
as described in Section 2(b). The certificates representing the Shares will be
made available for examination and packaging by the Underwriters not later than
1 p.m., New York City time, on the last business day prior to the Firm Shares
Closing Date (or the Additional Shares Closing Date in the case of the
Additional Shares) at such place as is designated by the Underwriters.
SECTION 3. COVENANTS OF THE COMPANY.
The Company covenants and agrees with each of the Underwriters as
follows:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the Representation Date, and any
amendment thereof, to become effective, as promptly as practicable after the
date hereof. Subject to the foregoing, if the Registration Statement has
become or becomes effective pursuant to Rule 430A, or filing of the Prospectus
or supplement to the Prospectus is otherwise required under Rule 424(b), the
Company will cause the Prospectus, properly completed, or such supplement
thereto to be filed with the Commission pursuant to the applicable paragraph of
Rule 424(b) within the time period prescribed and will provide evidence
satisfactory to the Underwriters of such timely filing. The Company will
promptly advise the Underwriters (i) when the Registration Statement shall have
become effective, (ii) when the Prospectus, and any supplement thereto, shall
have been filed (if required) with the Commission pursuant to Rule 424(b),
(iii) when any amendment to the Registration Statement shall have been filed or
becomes effective, (iv) of any request by the Commission for any amendment of
the Registration Statement or supplement to any Prospectus or for any
additional information, (v) of the receipt by the Company of any notification
of, or if the Company otherwise has knowledge of, the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or the institution or threatening of any proceeding for that purpose
and (vi) of the receipt by the Company of any notification with respect
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<PAGE> 12
to the suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose. The Company will use its best efforts to prevent the issuance of any
such stop order and, if issued, to obtain as soon as possible the lifting
thereof.
(b) The Company will give the Representatives notice of its
intention to file or prepare any amendment to the Registration Statement
(including any filing under Rule 462(b)) or any amendment, supplement or
revision to either the prospectus included in the Registration Statement at the
time it became effective or to the Prospectus, whether pursuant to the Act, the
Exchange Act or otherwise, will furnish the Representatives with copies of any
such documents a reasonable amount of time prior to such proposed filing or
use, as the case may be, and will not file or use any such document to which
the Representatives shall reasonably object.
(c) The Company will comply with the Act and the Act Regulations
so as to permit the completion of the distribution of the Shares as
contemplated by this Agreement and in the Prospectus. If, at any time when a
prospectus relating to the Shares is required to be delivered under the Act or
the Act Regulations, any event occurs as a result of which the Prospectus as
then amended or supplemented would contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it shall be necessary to
amend the Registration Statement or amend or supplement the Prospectus to
comply with the Act or the Act Regulations, the Company promptly will prepare
and file with the Commission, subject to of paragraph (b) of this Section 3, an
amendment or supplement that will correct such statement or omission or effect
such compliance. Neither your consent to, nor your delivery of, any such
amendment or supplement shall constitute a waiver of any of the conditions set
forth in Section 5.
(d) The Company consents to the use of the Prospectus in
accordance with the provisions of the Act and with the securities or blue sky
laws of the jurisdictions in which the Shares are offered by the Underwriters
and by all dealers to whom Shares may be sold, both in connection with the
offering and sale of the Shares and for such period of time thereafter as the
Prospectus is required by the Act to be delivered in connection with the sales
by any Underwriter or dealer. The Company will comply with all requirements
imposed upon it by the Act, as now and hereafter amended, so far as necessary
to permit the continuance of sales of or dealing in the Shares in accordance
with the provisions hereof and the Prospectus.
(e) As soon as practicable, the Company will make generally
available to its security holders and to the Underwriters a consolidated
earnings statement covering a twelve-month period beginning after the Effective
Date that will satisfy the provisions of Section 11(a) of the Act and Rule 158
under the Act Regulations.
(f) The Company will furnish to the Representatives, without
charge, three signed copies of the Registration Statement (including exhibits
thereto and all documents incorporated by reference therein) and, so long as
delivery of a prospectus by an Underwriter or dealer may be required by the Act
or the Act Regulations, as many copies of the Prospectus and all amendments and
supplements thereto as the Underwriters may reasonably request. If applicable,
the Prospectus and any amendments or supplements thereto furnished to the
Underwriters will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T of the Commission.
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(g) During the period of five years hereafter, the Company will
furnish to you, as soon as practicable after the end of each fiscal year, a
copy of its annual report to stockholders for such year; and the Company will
furnish to you (i) as soon as available, a copy of each report or definitive
proxy statement of the Company filed with the Commission under Exchange Act or
mailed to stockholders, and (ii) from time to time, such other information
concerning the Company as you may reasonably request, provided that prior to
the Company's furnishing any such other information that is nonpublic you shall
enter into such agreement respecting the confidentiality thereof as the Company
may reasonably request.
(h) The Company will not, and will cause each of J. D. Lawrence,
James F. Farr, William D. Sutton and David T. Tighe, all directors and each
beneficial owner of 5% or more of the outstanding shares of Class A Common Stock
or Class B Common Stock to enter into agreements with the Underwriters in the
form set forth in Exhibits A-1 and A-2 to the effect that they will not, for a
period of 180 days following the date of the Prospectus, without prior written
consent of the Representatives, offer, sell or contract to sell, or otherwise
dispose of, directly or indirectly, or announce the offering of, any shares of
Class A Common Stock or Class B Common Stock or any securities convertible into,
or exchangeable for, shares of Common Stock in (i) a public offering or (ii) in
a private offering unless, in the case of the Company only, (A) such private
offering shall occur more than 30 days after the date of this Agreement, (B) the
Company will issue shares of its Class A Common Stock in such private placement
as full or partial consideration for acquisition by merger or purchase of assets
or businesses, and (C) the recipient of such Class A Common Stock shall agree
not to sell, offer to sell, grant any option for the sale of, or otherwise
dispose of, such Class A Common Stock for the remaining portion of the 180-day
period from the date of this Agreement (except for Common Stock pursuant to
reservations, agreements, employee benefit plans, the exercise of rights or the
conversion of convertible securities referred to in the Prospectus).
(i) The Company will comply with all the provisions of any
undertakings contained in the Registration Statement, the Tax Allocation
Agreement and this Agreement.
(j) The Company will not at any time, directly or indirectly, take
any action intended, or that might reasonably be expected, to cause or result
in, or that will cause, stabilization of the price of the shares of Common
Stock to facilitate the sale or resale of any of the Shares.
(k) The Company will apply the net proceeds from the offering and
sale of the Shares in accordance with the description set forth in the "Use of
Proceeds" section of the Prospectus and shall file such reports with the
Commission with respect to the sale of the Shares and the application of the
proceeds therefrom as may be required by Rule 463 under the Act. The Company
shall provide you a draft of each such report at least five days prior to its
filing, and shall furnish you with a signed copy of each such report.
(l) The Company will cooperate with the Underwriters and their
counsel in connection with endeavoring to obtain and maintain the qualification
or registration, or exemption from qualification, of the Shares for offer and
sale under the applicable securities laws of such states and other
jurisdictions of the United States as the Underwriters may designate; provided,
that in no event shall the Company be obligated to qualify to do business in
any jurisdiction where it is not now so qualified or to take any action that
would subject it to taxation or general service of process in any jurisdiction
where it is not now so subject. In each jurisdiction in which the Shares are
so qualified,
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<PAGE> 14
the Company will file all such statements and reports as may be required by the
laws of such jurisdictions to continue such qualifications in effect for a
period of not less than one year from the Effective Date of the Registration
Statement and any Rule 462(b) Registration Statement.
(m) The Company will cause the Shares to be (i) duly listed on the
Nasdaq National Market and (ii) registered under the Exchange Act.
SECTION 4. PAYMENT OF EXPENSES.
The Company will pay, or reimburse if paid by the Underwriters, all
actual and reasonable costs and expenses incident to the performance of the
obligations of the Company under this Agreement, including (i) the fees,
disbursements and expenses of counsel and accountants for the Company and all
other expenses in connection with the preparation, printing and filing of the
Registration Statement (or Rule 462(b) Registration Statement), any Preliminary
Prospectus, the Prospectus, and any amendments or supplements thereto, and the
mailing and delivery of copies thereof to the Underwriters and dealers, (ii)
the cost of printing the Agreement Among Underwriters, this Agreement, the
Selling Agreement, any Dealer Agreements, the Underwriters' Questionnaire and
the Blue Sky Memorandum (in both preliminary and final form); (iii) all
expenses in connection with qualification of the Shares for offering and sale
under state securities laws as provided in Section 3(l) hereof, including
filing and registration fees and the fees, disbursements and expenses of
counsel for the Underwriters in connection with such qualification and in
connection with Blue Sky surveys; (iv) the filing fees incident to securing any
required review by the NASD; (v) the cost of preparing stock certificates; (vi)
all fees of the Company's transfer agent and registrar; (vii) any fees for
including the Shares on the Nasdaq National Market; and (viii) all other costs
and expenses incident to the performance of its obligations hereunder that are
not otherwise specifically provided for in this Section.
If this Agreement is terminated by the Underwriters in accordance with
Section 5 hereof because of any failure or refusal on the part of the Company
to comply with the terms or fulfill any of the conditions of this Agreement,
the Company shall reimburse the Underwriters for all of their reasonable
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Underwriters but shall not be liable to the Underwriters under
this Agreement for consequential damages including lost profits.
SECTION 5. CONDITIONS OF THE UNDERWRITERS' OBLIGATION.
The obligation of the Underwriters to purchase the Shares hereunder is
subject to the continued accuracy of the representations and warranties of the
Company herein contained, to the accuracy of the statements of the Company made
in any certificates pursuant to the provisions hereof, to the performance by
the Company of its obligations and agreements hereunder and to the following
further conditions:
(a) The Registration Statement, including any Rule 462(b)
Registration Statement, shall have become effective, and you shall have
received notice thereof, not later than 5:30 p.m., Eastern time, on the date
hereof, or such later time and date as shall be approved by the Representatives
and the Company and shall remain effective at the Closing Date. No stop order
suspending the effectiveness of the Registration Statement shall have been
issued under the Act or proceedings
14
<PAGE> 15
therefor initiated or threatened by the Commission. No order suspending the
effectiveness of the Registration Statement or the qualification or
registration of the Shares under the securities or blue sky laws of any
jurisdiction shall be in effect or proceedings therefor initiated or threatened
by the Commission or the authorities of any such jurisdiction. If the Company
has elected to rely upon Rule 430A, the price of the Shares and any
price-related or other information previously omitted from the effective
Registration Statement pursuant to Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) within the prescribed time
period, and, prior to the Closing Date, the Company shall have provided
evidence satisfactory to the Underwriters of such timely filing, or a
post-effective amendment providing such information shall have been promptly
filed and declared effective in accordance with the requirement of Rule 430A.
(b) Subsequent to the execution and delivery of this Agreement,
there shall not have occurred (i) any change, or any development involving a
prospective change, in or affecting the financial condition, business, business
prospects, properties, or results of operations of the Company and the
Subsidiaries, taken as a whole, which, in the reasonable judgment of the
Underwriters, materially impairs the investment quality of the Shares and
constitutes a Material Adverse Effect; (ii) any material loss or interference
with the business, business prospects, or properties of the Company or any of
the Subsidiaries from fire, explosion, flood or other casualty, whether or not
covered by insurance, or from any labor dispute or any court or legislative or
other governmental action, order or decree, that is not set forth in the
Registration Statement and the Prospectus, if in the reasonable judgment of the
Underwriters any such development makes it impracticable or inadvisable to
proceed with completion of the sale of and payment for the Shares; (iii) any
suspension or limitation of trading in securities generally on the New York
Stock Exchange or the NASDAQ National Market System, or any setting of minimum
prices for trading on such exchange or system, or any suspension of trading of
any securities of the Company on any exchange or system or in the over-the-
counter market; (iv) any banking moratorium declared by federal or New York
authorities; or (v) any outbreak or escalation of major hostilities in which
the United States is involved, any declaration of war by Congress or any other
substantial national or international calamity or emergency if, in the
reasonable judgment of the Underwriters, the effect of any such outbreak,
escalation, declaration, calamity or emergency makes it impractical or
inadvisable to proceed with completion of the sale of and payment for the
Shares.
(c) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there shall have been no
litigation or other proceeding instituted against the Company, any of the
Subsidiaries, Lawrence or any of its subsidiaries, or any of their respective
officers or directors in their capacities as such, before or by any federal,
state or local court, commission, regulatory body, administrative agency or
other governmental body, domestic or foreign, or arbitrator, in which
litigation or proceeding an unfavorable ruling, decision or finding would have
a Material Adverse Effect.
(d) Each of the representations and warranties of the Company
contained herein shall be true and correct in all material respects at the
Closing Date, as if made at the Closing Date, and all covenants and agreements
contained herein to be performed on the part of the Company, and all conditions
contained herein to be fulfilled or complied with by the Company at or prior to
the Closing Date, shall have been duly performed, fulfilled or complied with.
15
<PAGE> 16
(e) The Underwriters shall have received an opinion from Fulbright
& Jaworski L.L.P., counsel for the Company and an opinion from William D.
Sutton, General Counsel to the Company, in each case satisfactory in form and
substance to counsel for the Underwriters, dated as of each Closing Date, to
the effect set forth in Exhibits B-1 and B-2.
(f) The Company shall have received written advice from Fulbright
& Jaworski, L.L.P. and William D. Sutton to the effect that nothing has come to
their attention that cause them to believe that the Registration Statement, at
the time it became effective, contained an untrue statement of material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus, at the date
of the Prospectus (unless the term "Prospectus" refers to a Prospectus which
has been provided to the Underwriters by the Company for use in connection with
the Offering of the Shares that differs from the Prospectus on file at the
Commission at the date of the Prospectus, in which case at the time it is first
provided to the Underwriters for such use) or at Closing Date, contained an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; it being understood
that such counsel need render no advice as to the financial statements,
schedules and other financial or statistical data contained in the
Registration Statement or the Prospectus.
(g) The following conditions contained in clauses (i), (ii) and
(iii) of this Section 5(g) shall have been satisfied on and as of each
Closing Date and the Company shall have furnished to the Underwriters a
certificate of the Company, signed by the Chief Executive Officer and the
principal financial or accounting officer of the Company, dated such Closing
Date to the effect that the signers of such certificate have carefully examined
the Registration Statement, the Prospectus, any supplement or amendment to the
Prospectus, and this Agreement and that:
(i) the representations and warranties of the Company in
this Agreement are true and correct in all material respects on and as
of the Closing Date with the same effect as if made on the Closing
Date and the Company has complied with all the agreements and
satisfied all the conditions under this Agreement on its part to be
performed or satisfied at or prior to the Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or, to the Company's knowledge,
threatened; and
(iii) since the date of the most recent financial
statements included in the Prospectus, there has been no change that
would have a Material Adverse Effect.
(h) At the Representation Date and at each Closing Date, Ernst &
Young LLP shall have furnished to the Underwriters a letter or letters, dated
respectively as of the date of this Agreement and each Closing Date, in form
and substance satisfactory to the Underwriters, containing statements and
information of the type customarily included in accountants' "comfort letters"
to underwriters with respect to the financial statements and certain financial
and statistical information pertaining to the Company and the Subsidiaries
contained in the Registration Statement and the Prospectus.
16
<PAGE> 17
(i) At the Representation Date, the Company shall have furnished to
the Underwriters a letter substantially in the form of Exhibits A-1 and A-2
hereto from Lawrence and each of J. D. Lawrence, James F. Farr, William D.
Sutton and David T. Tighe, each director of the Company and each beneficial
owner of 5% or more of the outstanding shares of the Company's Class A Common
Stock or Class B Common Stock, addressed to the Underwriters, in which each such
person or entity agrees that they will not, for a period of 180 days following
the date of the Prospectus, without the prior written consent of the
Representatives, offer, sell or contract to sell, or otherwise dispose of,
directly or indirectly, or announce an offering of, any shares of any class of
the Company's Common Stock beneficially owned by such person or entity or any
securities convertible into, or exchangeable for, shares of Common Stock in (i)
a public offering or (ii) in a private offering unless, in the case of the
Company only, (A) such private offering shall occur more than 30 days after the
date of this Agreement, (B) the Company will issue shares of its Class A Common
Stock in such private placement as full or partial consideration for acquisition
by merger or purchase of assets or businesses, and (C) the recipient of such
Class A Common Stock shall agree not to sell, offer to sell, grant any option
for the sale of, or otherwise dispose of, such Class A Common Stock for the
remaining portion of the 180-day period from the date of this Agreement (except
for Common Stock pursuant to reservations, agreements, employee benefit plans,
the exercise of rights or the conversion of convertible securities referred to
in the Prospectus).
(j) At the Closing Date, counsel for the Underwriters shall have
been furnished with such information, certificates and documents as they may
reasonably require for the purpose of enabling them to pass upon the issuance
and sale of the Shares as contemplated herein and related proceedings, or to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions herein contained, or otherwise in
connection with the offering contemplated hereby; and all opinions and
certificates mentioned above or elsewhere in this Agreement shall be reasonably
satisfactory in form and substance to the Underwriters and counsel for the
Underwriters.
(k) The NASD shall not have raised any objection with respect to
the fairness and reasonableness of the underwriting terms and arrangements.
If any condition specified in this Section 5 shall not have been
fulfilled in all material respects when and as required to be fulfilled, this
Agreement may be terminated by the Underwriters by notice to the Company and
such termination shall be without liability of any party to any other party
except as provided in Section 4.
SECTION 6. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify, defend and hold harmless each
Underwriter and its respective officers, shareholders, employees and directors
and any person who controls any Underwriter within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act from and against any loss, expense,
liability or claim (including the reasonable cost of investigating such claim)
that, jointly or severally, any such Underwriter or any such officer,
shareholder, employee, director or controlling person may incur under the Act,
the Exchange Act or otherwise, as such expenses are incurred, insofar as such
loss, expense, liability or claim arises out of or is based upon any untrue
statement or alleged untrue statement of a material fact contained in this
Agreement, the Registration Statement (or in the Registration Statement as
amended by any post-effective amendment thereof) or any omission or alleged
omission to state a material fact required to be stated in such Registration
17
<PAGE> 18
Statement or necessary to make the statements made therein not misleading or
any untrue statement or alleged untrue statement of a material fact contained
in a Prospectus (the term Prospectus for the purpose of this Section 6 being
deemed to include any Preliminary Prospectus, the Prospectus, and the
Prospectus as amended or supplemented) or any omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, the Company will not be liable in any
such case to the extent any such loss, expense, liability or claim arises out
of or is based upon any untrue statement or omission or alleged untrue
statement or omission that has been made therein or omitted therefrom in
reliance upon and in conformity with the information provided in writing to the
Company by or on behalf of any Underwriter, expressly for use in the
Registration Statement or the Prospectus; and provided, further that with
respect to any untrue statement or omission or alleged untrue statement or
omission made in any Preliminary Prospectus the indemnity agreement contained
in this Section 6(a) shall not inure to the benefit of any such indemnified
Underwriter or its respective officers, shareholders, employees and directors,
and the Company shall not be liable to any such indemnified Underwriter or its
respective officers, shareholders, employees and directors, from whom the
person asserting any such losses, claims, damage, or liabilities purchased the
Shares concerned, to the extent that any such loss, claim, damage or liability
of such indemnified Underwriter or its respective officers, shareholders,
employees and directors results from the fact that there was not sent or given
to such person at or prior to the written confirmation of the sale of such
Shares to such person, a copy of the Prospectus, as the same may be amended or
supplemented, and the untrue statement or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact in such
Preliminary Prospectus was corrected in such Prospectus and the Company had
previously furnished copies thereof to such indemnified Underwriter on a timely
basis to permit the Prospectus (as the same may be amended or supplemented) to
be sent or given. The Company agrees that the only such information provided
in writing by or on behalf of any Underwriter to the Company, expressly for use
in the Registration Statement or the Prospectus, is that information contained
in the table and the second, third, sixth and tenth paragraphs in the section
of the Prospectus entitled "Underwriting" and the last paragraph on the cover
page of the Prospectus. The foregoing indemnity agreement shall be in addition
to any liability that the Company may otherwise have.
(b) Each Underwriter, severally and not jointly, agrees to
indemnify, defend and hold harmless the Company and its officers, shareholders,
employees and directors and any person who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act from and
against any loss, expense, liability or claim (including the reasonable cost of
investigating such claim) that the Company or any such officer, shareholder,
employee, director or controlling person may incur under the Act, the Exchange
Act or otherwise to the same extent as the provisions of Section 6(a) above,
but only insofar as such loss, expense, liability or claim arises out of or is
based upon any untrue statement or omission or alleged untrue statement or
omission made in reliance or in conformity with information relating to such
Underwriter furnished in writing to the Company by or on behalf of such
Underwriter, expressly for use in the Registration Statement or the Prospectus.
The Company agrees that the only information provided in writing by or on
behalf of the Underwriters to the Company, expressly for use in the
Registration Statement or the Prospectus, is that information contained in the
table and the second, third, sixth and tenth paragraphs in the section of the
Prospectus entitled "Underwriting" and the last paragraph on the cover page of
the Prospectus.
18
<PAGE> 19
(c) If any action is brought against an indemnified party under
this Section 6, the indemnified party or parties shall promptly notify the
indemnifying party in writing of the institution of such action (provided that
the failure to give such notice shall not relieve the indemnifying party of any
liability that it may have pursuant to this Agreement, unless and to the extent
the indemnifying party did not otherwise learn of such action and such failure
has resulted in the forfeiture of substantive rights or defenses by the
indemnifying party) and the indemnifying party shall assume the defense of such
action, including the employment of counsel and payment of reasonable expenses.
The indemnified party or parties shall have the right to employ its or their
own counsel in any such case, but the fees and expenses of such counsel shall
be at the expense of the indemnified party or parties unless (i) the employment
of such counsel shall have been authorized in writing by the indemnifying party
in connection with the defense of such action, (ii) the indemnifying party
shall not have employed counsel reasonably satisfactory to the indemnified
party to take charge of the defense of such action within a reasonable time
after notice of the institution of such action, (iii) such indemnified party or
parties shall have reasonably concluded that there may be defenses available to
it or them that are different from or additional to those available to the
indemnifying party or (iv) the use of counsel chosen by the indemnifying party
to represent the indemnified party would present such counsel with a conflict
of interest (in which case the indemnifying party shall not have the right to
direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses shall be borne by the
indemnifying party and paid as incurred. Anything in this paragraph to the
contrary notwithstanding, the indemnifying party shall not be liable for any
settlement of any such claim or action effected without its written consent,
which consent shall not be unreasonably withheld.
(d) If the indemnification provided for in this Section 6 is
unavailable to an indemnified party under subsection (a) or (b) of this Section
6 in respect of any losses, damages, expenses, liabilities or claims referred
to therein, then each applicable indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
expenses, liabilities or claims (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Underwriters on the other hand from the offering of the Shares or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company on
the one hand and the Underwriters on the other hand in connection with the
statements or omissions that resulted in such losses, expenses, liabilities or
claims, as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Underwriters on the
other hand shall be deemed to be in the same proportion as the total proceeds
from the offering (net of underwriting discounts and commissions but before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters. The relative fault of
the Company on the one hand and of the Underwriters on the other hand shall be
determined by reference to, among other things, whether the untrue statement or
alleged untrue statement of a material fact or omission or alleged omission
relates to information supplied by the Company or by the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The amount paid or payable by a
party as a result of the losses, expenses, liabilities and claims referred to
above shall be deemed to include any legal or other fees or expenses reasonably
incurred by such party in connection with investigating or defending any claim
or action.
19
<PAGE> 20
(e) The Company and the Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section 6 were determined
by pro rata allocation or by any other method of allocation that does not take
account of the equitable considerations referred to in Section 6(d) above.
Notwithstanding the provisions of this Section 6, no Underwriter shall be
required to contribute any amount in excess of the underwriting discount
received by it by reason of such untrue statement or alleged untrue statement
or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
SECTION 7. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY.
The respective indemnity and contribution agreements contained in
Section 6, and the covenants, representations and warranties of the Company
contained in this Agreement or contained in certificates of officers of the
Company submitted pursuant hereto, shall remain in full force and effect,
regardless of any investigation, or statement as to the results thereof, made
by or on behalf of any Underwriter or any of its respective officers,
employees, directors, shareholders or any person who controls any Underwriter,
or by or on behalf of the Company or any of the officers or directors or any
controlling person of the Company, and will survive delivery of and payment for
the Shares.
SECTION 8. DEFAULT.
(a) If any Underwriter or Underwriters default in their obligations
to purchase Shares hereunder on either the Firm Shares Closing Date or the
Additional Shares Closing Date and the aggregate number of Shares that such
defaulting Underwriter or Underwriters agreed but failed to purchase does not
exceed 10% of the total number of Shares that the Underwriters are obligated to
purchase on such Closing Date, the Representatives may make arrangements
satisfactory to the Company for the purchase of such Shares by other persons,
including any of the Underwriters, but if no such arrangements are made by such
Closing Date the non-defaulting Underwriters shall be obligated severally, in
proportion to their respective commitments hereunder, to purchase the Shares
that such defaulting Underwriters agreed but failed to purchase on such Closing
Date. If any Underwriter or Underwriters so default and the aggregate number
of Shares with respect to which such default or defaults occur exceeds 10% of
the total number of Shares that the Underwriters are obligated to purchase on
such Closing Date and arrangements satisfactory to the Representatives and the
Company for the purchase of such Shares by other persons are not made within 36
hours after such default, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter or the Company, except as provided
in this Section 8 (provided that if such default occurs with respect to the
Additional Shares after the Firm Shares Closing Date, this Agreement will not
terminate as to the Firm Shares). In the event of any such default which does
not result in termination of this Agreement, either the Representatives or the
Company shall have the right to postpone the Closing Date for a period not
exceeding seven days in order to effect any required changes in the
Registration Statement or Prospectus or in any other relevant documents or
arrangements. As used in this Agreement, the term "Underwriter" includes any
person substituted for an Underwriter under this Section. Nothing herein will
relieve a defaulting Underwriter from liability for its default.
(b) If the Company shall fail at any Closing Date to sell the
number of Shares that it is obligated to sell hereunder, then this Agreement
shall terminate without liability on the part of any
20
<PAGE> 21
nondefaulting party; provided that the provisions of Sections 5 and 6 shall
remain in full force and effect. No action taken pursuant to this Section
shall relieve the Company from liability, if any, with respect to such default.
SECTION 9. NOTICES.
All notices and other communications hereunder will be in writing and
shall be deemed to have been duly given if mailed or transmitted by standard
form of telecommunication. Notices to the Underwriters shall be directed to
the Underwriters in care of Jefferies & Company, Inc. at 11100 Santa Monica
Boulevard, Los Angeles, California 90071, attn: Jerry Gluck, Esq., with a copy
to Nick D. Nicholas, Porter & Hedges, L.L.P., 700 Louisiana, Suite 3500,
Houston, Texas 77002-2730; or, if sent to the Company, directed to Dailey
Petroleum Services Corp., 2507 North Frazier, P.O. Box 2866, Conroe, Texas
77305, Attn: William D. Sutton, with a copy to Robert F. Gray, Jr., Fulbright &
Jaworski L.L.P., 1301 McKinney, Suite 5100, Houston, Texas 77010-3095.
SECTION 10. PARTIES.
This Agreement shall inure to the benefit of and be binding upon the
Underwriters and the Company and their respective successors and legal
representatives. Nothing expressed or mentioned in this Agreement is intended
or shall be construed to provide any person, firm or corporation, other than
the Underwriters, the Company and their respective successors and legal
representatives and the controlling persons, officers, employees, directors and
shareholders referred to in Section 6 and their respective heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein or therein contained. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the Underwriters, the Company, and their
respective successors and legal representatives, and such controlling persons,
shareholders, officers and directors and their respective heirs and legal
representatives, and for the benefit of no other person, firm or corporation.
No purchaser of Shares from any Underwriter shall be deemed to be a successor
by reason merely of such purchase.
SECTION 11. GOVERNING LAW AND TIME.
This Agreement shall be governed by and construed in accordance with
the laws of the state of New York applicable to agreements made and to be
performed in such State. Specified times of day refer to New York time, unless
otherwise specified.
SECTION 12. COUNTERPARTS.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
21
<PAGE> 22
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement among the Company and the Underwriters in accordance with its terms.
Very truly yours,
DAILEY PETROLEUM SERVICES CORP.
By: __________________________________
Name: ________________________________
Title: _______________________________
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
JEFFERIES & COMPANY, INC.
SOUTHCOAST CAPITAL CORPORATION
As Representatives of
the Several Underwriters
By: Jefferies & Company, Inc.
By: ______________________________
Name: ____________________________
Title: ___________________________
22
<PAGE> 23
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
Number of
Firm Shares
Name of Underwriter to be Purchased
- ------------------- ---------------
<S> <C>
Jefferies & Company, Inc.
Southcoast Capital Corporation
---------
Total 4,000,000
=========
</TABLE>
23
<PAGE> 24
SCHEDULE II
SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction of Incorporation Percentage
Name or Organization Ownership
---- --------------- ----------
<S> <C> <C>
CTC-Empresa Tecnica E Commercial de Equipmentos LTDA . . . . Rio de Janeiro (Brazil) 100%
Columbia Petroleum Services Corp. . . . . . . . . . . . . . . Delaware 100%
Dailey de Venezuela, S.A. . . . . . . . . . . . . . . . . . . Venezuela 100%
Dailey Environmental Remediation Technologies, Inc. . . . . . Texas 100%
Dailey International, Inc. . . . . . . . . . . . . . . . . . Delaware 100%
Dailey International Sales Corporation . . . . . . . . . . . Delaware 100%
Dailey Regional Headquarters, S.A. . . . . . . . . . . . . . Venezuela 100%
GL/95 Servicios, C.A. . . . . . . . . . . . . . . . . . . . . Caracas (Venezuela) 100%
International Oil Tool Rentals Ltd. . . . . . . . . . . . . . Cayman Islands 100%
International Petroleum Services, Inc. . . . . . . . . . . . Delaware 100%
J.D. Investments Bonaire N.V. . . . . . . . . . . . . . . . . Bonaire (Netherlands Antilles) 100%
J.D.I. Tool Works B.V. . . . . . . . . . . . . . . . . . . . Spankeren (Netherlands) 100%
Worldwide Oil Tool Rentals Ltd. . . . . . . . . . . . . . . . Cayman Islands 100%
</TABLE>
24
<PAGE> 1
EXHIBIT 4.1
NUMBER SHARES
[DAILEY PETROLEUM SERVICES CORP. LOGO]
A
CUSIP 23380G 10 6
DAILEY PETROLEUM SERVICES CORP.
Incorporated Under the Laws of the State of Delaware
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS CERTIFIES THAT
Is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF CLASS A COMMON STOCK, PAR VALUE $.01
PER SHARE, OF DAILEY PETROLEUM SERVICES CORP.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney, upon surrender of this Certificate properly
endorsed. This certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
IN WITNESS WHEREOF, the Corporation has caused the facsimile signatures
of its duly authorized officers and its facsimile seal to be affixed hereto.
Dated:
Countersigned and Registered:
KeyCorp Shareholder Services, Inc.
Transfer Agent and Registrar
[SEAL]
By WILLIAM D. SUTTON JAMES F. FARR
Authorized Officer Secretary President
<PAGE> 2
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in
full according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ___________ Custodian ___________
(Cust) (Minor)
TEN ENT -- as tenants by the entireties under Uniform Gifts to Minors
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common Act ________________________
(State)
Additional abbreviations may also be used though not in the above list.
For value received, _________________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ----------------------------------------
| |
| |
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
----------------------------------------------
- ---------------------------------------------------------------------------------
Attorney to transfer the said stock on the books of the within named
Corporation with full power of substitution in the premises.
Dated
---------------------------------
X
---------------------------------
NOTICE: THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND WITH
THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
X
---------------------------------
-------------------------------------------
ALL GUARANTEES MUST BE MADE BY A FINANCIAL
INSTITUTION (SUCH AS A BANK OR BROKER)
WHICH IS A PARTICIPANT IN THE SECURITIES
TRANSFER AGENTS MEDALLION PROGRAM ("STAMP"),
THE NEW YORK STOCK EXCHANGE, INC. MEDALLION
SIGNATURE PROGRAM ("MSP"), OR THE STOCK
EXCHANGES MEDALLION PROGRAM ("SEMP") AND
MUST NOT BE DATED. GUARANTEES BY A NOTARY
PUBLIC ARE NOT ACCEPTABLE
-------------------------------------------
</TABLE>
The Corporation will furnish without charge to each stockholder who so requests
a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
- --------------------------------------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE> 1
EXHIBIT 4.9
PROMISSORY NOTE
$3,300,000 Conroe, Texas December 1, 1993
FOR VALUE RECEIVED, Dailey Petroleum Services Corp. (the "Maker")
hereby promises to pay to the order of Lawrence Industries, Inc. a Delaware
corporation (the "Holder"), at Conroe, Texas or at such other address as Holder
may designate in writing to Maker, the aggregate principal sum of THREE MILLION
THREE HUNDRED THOUSAND AND NO/XX DOLLARS ($3,300,000) together with interest
thereon at the annual rate of Eight percent (8%) commencing December 1, 1993
until maturity. All principal and interest due hereunder shall be paid in
lawful money of the United States of America. All past due principal of this
Note shall bear interest at the maximum rate allowed by the law from the
maturity date thereof until paid, but in no event shall interest exceed the
maximum nonusurious rate permitted from time to time by law or not in effect
or, to the extent permitted by law, as may hereinafter be in effect.
This Note shall be due and payable as follows:
Sixty (60) monthly installments of Fifty-five Thousand Dollars ($55,000) each,
plus accrued interest then due thereon, with the first installment due and
payable on January 1, 1994, and the remaining Fifty-nine (59) installments due
and payable in consecutive order on the first day of each month thereafter
until all principal and interest is paid in full.
It is hereby expressly stipulated and agreed to be the intent of Maker
and Holder to at all times comply with the usury and all other laws relating
to this Note and any instrument executed by Maker in connection herewith now or
hereafter in effect in the State of Texas. If such laws are ever revised,
repealed or judicially interpreted so as to render usurious any amount called
for herein or under any such other instrument, it is the Maker's and Holder's
express intent that all excess amount theretofore collected by Holder be
refunded to Maker forthwith, and provisions hereof and thereof be immediately
deemed reformed and the amount thereafter collectible hereunder and thereunder
reduced, without the necessity of the execution of any new document, so as to
comply with the then applicable law but so as to permit the recovery of the
fullest amount otherwise called for hereunder and thereunder. Without in any
way limiting the generality of the foregoing, Maker and Holder hereby agree
that the interest by law called for herein shall never exceed any amount in
excess of that permitted for a month calculated on the basis of the actual
number of days therein or a year calculated on the basis of three hundred
sixty-five (365) or three hundred sixty-six (366) days, whichever is
applicable.
If default is made in the payment of this Note at maturity, regardless
of how such maturity may be brought about, or is collected or attempted to be
collected by the initiation or prosecution of any suit or through any probate
or bankruptcy court, or by any other judicial proceeding, or is placed in the
hands of an attorney for collection, the Maker shall pay, in addition to all
other amounts owing hereunder, all court costs and
<PAGE> 2
reasonable attorneys' fees not to exceed twenty percent (20%) of the principal
and interest then owing hereon.
Maker reserves the right to prepay this Note in any amount at any time
prior to maturity, without premium or penalty. Each prepayment of principal on
this Note shall be applied to reduce the outstanding balance thereof and shall
be applied first to accrued interest, if any, and then to installments of
principal in the inverse order of their maturity.
This Note shall become immediately due and payable at the option of
any holder hereof, without presentment or demand or any notice to Maker or any
other person obligated hereon, upon default in the payment of any of the
principal hereof or any interest hereon when due, or if any event occurs or
conditions exist which authorize the acceleration of maturity hereof under any
agreement made by Maker.
Maker and all sureties, endorsers and guarantors of this Note waive
demand, presentment for payment, notice of nonpayment, protest, notice of
protest, and all other notice, filing of suit and diligence in collection of
this Note.
Lawrence Industries, Inc. hereby acknowledges and agrees that Maker's
obligations under this Promissory Note are subordinate to the Senior Claims of
First Interstate Bank of Texas as provided in the Amended and Restated
Subordination Agreement entered into as of December 1, 1993, by and among
Lawrence Industries, Inc., First Interstate Bank of Texas, and Dailey Petroleum
Services Corp.
IN WITNESS WHEREOF, Maker, intending to be legally bound hereby, has
fully executed this Note as of the day and year first above written.
MAKER:
DAILEY PETROLEUM SERVICES CORP.
By /s/ David T. Tighe
-----------------------------
David T. Tighe
Vice President
-2-
<PAGE> 1
EXHIBIT 5.1
[FULBRIGHT & JAWORSKI L.L.P. LETTERHEAD]
August 5, 1996
Dailey Petroleum Services Corp.
2507 North Frazier
P.O. Box 1863
Conroe, Texas 77305
Gentlemen:
We have acted as counsel for Dailey Petroleum Services Corp., a Delaware
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933 of 4,000,000 shares of the Company's common stock, $.01
par value, and up to 600,000 shares of the Company's common stock, which may be
sold in the event the underwriters for the offering elect to exercise their
overallotment option (the "Shares"), to be offered upon the terms and subject to
the conditions set forth in the proposed Underwriting Agreement to be entered
into between the Company and Jefferies & Company, Inc., as representatives of
the several U.S. underwriters named therein (the "Underwriting Agreement").
In connection therewith, we have examined originals or copies, certified or
otherwise identified to our satisfaction, of the Restated Certificate of
Incorporation of the Company, the Restated Bylaws of the Company, the records
of corporate proceedings with respect to the offering of the Shares and such
other documents and instruments as we have deemed necessary or appropriate for
the expression of the opinions contained herein. We also have examined the
Company's Registration Statement on Form S-1, as amended, covering the Shares
(the "Registration Statement") filed with the Securities and Exchange
Commission.
We have assumed the authenticity and completeness of all records,
certificates and other instruments submitted to us, the conformity to original
documents of all records, certificates and other instruments submitted to us
as copies and the correctness of all statements of fact contained in all
records, certificates and other instruments that we have examined.
Based on the foregoing, and having regard for such legal considerations as
we have deemed relevant, we are of the opinion that the Shares proposed to be
issued by the Company have been duly and validly authorized for issuance and,
when issued in
<PAGE> 2
Dailey Petroleum Services Corp.
August 5, 1996
Page 2
accordance with the terms of the Underwriting Agreement, will be duly and
validly issued, fully paid and nonassessable.
The opinions expressed herein relate solely to, are based solely upon and
are limited exclusively to the laws of the State of Delaware and the federal
laws of the United States of America, to the extent applicable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus included as part of the Registration Statement.
Very truly yours,
/s/ FULBRIGHT & JAWORSKI L.L.P.
Fulbright & Jaworski L.L.P.
<PAGE> 1
EXHIBIT 10.5
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "AGREEMENT") is entered
into by and between Dailey Petroleum Services Corp., a Delaware corporation
("EMPLOYER"), and ____________________ ("EMPLOYEE") on this __________ day of
_____________, 1996, but to be effective on the date on which the Offering (as
hereinafter defined is consummated.
W I T N E S S E T H :
WHEREAS, Employer desires to employ Employee and Employee desires to
be employed by Employer in the same capacity in which Employee currently
serves;
WHEREAS, in anticipation of consummation of the Offering in 1996,
Employer and Employee desire to formalize such employment relationship.
NOW THEREFORE, in consideration of the premises, mutual covenants and
agreements contained herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
hereby agree as follows:
ARTICLE 1
TERM AND NATURE OF EMPLOYMENT
1.1 TERM OF EMPLOYMENT. Subject to the terms and conditions of this
Agreement, Employer hereby employs Employee and Employee hereby accepts
employment with Employer for a term beginning on the date on which the Offering
is consummated through and including April 30, 1999 (the "INITIAL TERM"),
unless this Agreement and Employee's employment hereunder are sooner terminated
pursuant to Article 5. Upon expiration of the Initial Term, this Agreement
shall remain in full force and effect in a series of automatic renewals in
increments of one consecutive year (each such year term a "RENEWAL TERM") until
this Agreement and Employee's employment hereunder are terminated in accordance
with Article 5. The Initial Term together with each Renewal Term shall
hereinafter be referred to collectively as the "EMPLOYMENT PERIOD."
1.2 PRINCIPAL DUTIES. Employee's employment hereunder shall be in
the capacity of *_______________________________________. In such capacity,
Employee shall perform the duties for which he currently is responsible as an
employee of Employer. In addition, Employee shall perform other duties as may
from time to time be prescribed by Employer's Board of Directors or more senior
management and which are reasonably related or incidental to the capacity in
which
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<PAGE> 2
Employee serves Employer. Employee shall perform his duties hereunder in
accordance with any lawful instructions, rules, regulations or policies made or
adopted by Employer's Board of Directors, including those applicable to
Employer's employees generally. During the Employment Period, Employee shall
devote his full time, and best efforts and skills to the business and interests
of Employer during Employer's normal working hours, do his utmost to further
enhance and develop Employer's best interests and welfare, and endeavor to
improve his ability and knowledge of Employer's business, particularly as it
relates to his duties hereunder, in an effort to increase the value of his
services for the mutual benefit of the parties hereto. At all times during the
term of this Agreement, Employee shall project a positive and professional
image on behalf of Employer.
1.3 ACCOUNTING AND FIDELITY BOND. Employee shall truthfully and
accurately make, maintain and preserve all records and reports that Employer
may from time to time request or require. Employee shall fully account for all
money, records, goods, wares and merchandise or other property belonging to
Employer or its "AFFILIATES" (as that term is defined in Rule 405 under the
Securities Act of 1933, as amended) of which he may have custody and will pay
over and deliver the same promptly whenever and however he may be directed to
do so. Employee also shall make available to Employer any and all information
of which he has knowledge that is relevant to Employer's business, and will
make all suggestions and recommendations which he feels will be of benefit to
Employer. Employee shall, upon Employer's written request, furnish all
information and take any other steps necessary to enable Employer to obtain a
fidelity bond conditioned on the rendering of a true account by Employee of all
moneys, goods or other property which may come into the custody, charge or
possession of Employee during the Employment Period. The surety company
issuing the bond and the amount of the bond must be acceptable to Employer in
its sole discretion. Employer shall pay all premiums on any such bond.
1.4 EMPLOYEE DISHONESTY. If at any time Employee becomes aware or
believes that any other employee of the Employer is or appears to be (i)
removing or using the property or funds of Employer or its Affiliates for the
benefit of anyone other than Employer or its Affiliates, or (ii) providing
Confidential Information (as defined in Section 3.2) to any person not
authorized by Employer to receive such Confidential Information (any such
employee described in (i) or (ii) being referred to as a "DISHONEST EMPLOYEE"),
Employee shall immediately communicate his knowledge or belief as to such
matters to Employer's Board of Directors. Employee acknowledges and agrees
that he shall be conclusively presumed to be in complicity with such Dishonest
Employee if Employee does not so disclose his knowledge or belief as to such
matters to Employer's Board of Directors.
1.5 FIDUCIARY DUTIES OF EMPLOYEE. The obligations of Employee
expressed in this Agreement shall be in addition to any obligations imposed
upon Employee as an employee or officer of Employer or its Affiliates by the
law of the State of Texas applicable to employees, the General Corporation Law
of the State of Delaware applicable to corporate officers, or federal law which
limit the activities of an employee or corporate officer to those which will
not threaten, impair or usurp the goodwill, trade secrets, intellectual
property, business opportunities, and business relations of his employer.
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<PAGE> 3
1.6 PLACE OF PERFORMANCE. Employee shall perform his duties
hereunder at the principal executive offices of Employer at One Lawrence
Centre, 2507 North Frazier, Conroe, Texas 77305, at such other place where
Employer's principal executive offices subsequently may be located, or at any
other place as may be directed by Employer in order to enable Employee to
discharge his duties hereunder; provided, however, that Employee shall have no
obligation to permanently relocate to any location which is more than one
hundred (100) miles from Conroe, Texas. Employee acknowledges and agrees that
Employer may require Employee to travel and render services in different
locations from time to time incident to the performance of his duties
hereunder.
ARTICLE 2
COMPENSATION
For and in consideration of the performance by Employee of the
services, terms, conditions, covenants and agreements contained in this
Agreement, Employer shall pay to Employee at the times, in the amounts and in
the manner herein provided, the following:
2.1 BASE COMPENSATION. As the principal consideration for the
services to be performed by Employee hereunder during the Employment Period,
Employee shall be entitled to receive as base compensation from Employer a
salary of not less than * [TO BE PROVIDED ("TBP")] Dollars *($ [TBP] )
per month (the "BASE SALARY"), which shall be prorated for any partial
employment period and payable in the manner and on the timetable in which
Employer's payroll is customarily handled, or at such more frequent intervals
as Employer and Employee may hereafter agree to from time to time. No overtime
compensation shall be payable under this Agreement. Employer's Board of
Directors shall review Employee's performance at least annually and shall make
any adjustments to Employee's compensation which it deems, in its sole
discretion, appropriate, provided that at no time during the Employment Period
shall Employee's compensation be adjusted to an amount below the Base Salary.
Employer shall be entitled to withhold from all amounts of compensation payable
under this Article 2 such amounts on account of payroll taxes and similar
matters as are required by any applicable law, rule, or regulation of any
appropriate governmental authority. Such compensation shall continue to be
paid during any period of physical or mental incapacity unless and until
Employee's employment is terminated as herein provided.
2.2 STOCK GRANT AND OPTION. As additional consideration for
Employee's performance of his obligations under Article 3 and Article 4 of this
Agreement, Employer shall, upon consummation of the Offering, grant an option
to purchase *____________ shares of Employer's Common Stock, subject to the
terms and conditions of Employer's 1996 Key Employee Stock Plan. Employee
hereby acknowledges and agrees that Employer's grant to Employee of such
options, together with other compensation payable to Employee hereunder, is
reasonable and adequate independent consideration for Employee's performance of
his obligations under Articles 3 and 4 of this Agreement.
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<PAGE> 4
2.3 BONUSES AND BENEFITS. In addition to the Base Salary and stock
grant and option described above, Employer shall provide Employee with the
following during the Employment Period:
(i) any bonus if, when and based upon or subject to
such terms and conditions as Employer's Board of Directors, in its
sole and absolute discretion, may determine;
(ii) participation in any present or future disability,
medical, health, dental, insurance, pension, profit-sharing, thrift,
retirement, investment, and stock appreciation plans, and any other
benefit, bonus or compensation plans on the same terms generally
available to all of Employer's employees generally or its operating
officers in particular; and
(iii) payment or reimbursement, as the case may be, of
reasonable business expenses (within limits that may be established by
Employer's Board of Directors) incurred in connection with the
performance of his duties hereunder, such expense payment or
reimbursement being subject to, and made in accordance with Employer's
policies and procedures on employee expense payment or reimbursement
in effect from time to time.
2.4 VACATION. During the Employment Period, Employee shall accrue
paid vacation time in such amounts and at such times as determined by
Employer's Board of Directors, in its sole discretion; provided, however, that
the minimum amount of paid vacation to which Employee shall be entitled shall
be no less than that to which he is entitled as an employee of Employer
immediately prior to the effective date of this Agreement. If such vacation
time is not taken by Employee during the term of this Agreement, there will be
compensation payable in lieu thereof.
ARTICLE 3
CONFIDENTIAL INFORMATION; PROPERTY RIGHTS
3.1 NON-DISCLOSURE OBLIGATION OF EMPLOYEE. For purposes of this
Article 3, all references to Employer shall mean and include its Affiliates (as
defined in Section 1.3). Employee hereby acknowledges, understands and agrees
that whether developed by Employee or others employed by or in any way
associated with Employee or Employer, all Confidential Information, as defined
in Section 3.2, is the exclusive and confidential property of Employer and
shall be at all times regarded, treated and protected as such in accordance
with this Agreement. Employee acknowledges that all such Confidential
Information is in the nature of a trade secret. Failure to mark any writing
confidential shall not affect the confidential nature of such writing or the
information contained therein.
3.2 DEFINITION OF CONFIDENTIAL INFORMATION. "CONFIDENTIAL
INFORMATION" shall mean information, whether or not originated by Employee,
which is used in Employer's business and (1) is proprietary to, about or
created by Employer; (2) gives Employer some competitive business
4
<PAGE> 5
advantage or the opportunity of obtaining such advantage, or the disclosure of
which could be detrimental to the interests of Employer; (3) is designated as
Confidential Information by Employer, known by the Employee to be considered
confidential by Employer, or from all the relevant circumstances considered
confidential by Employer, or from all the relevant circumstances should
reasonably be assumed by Employee to be confidential and proprietary to
Employer; or (4) is not generally known by non-Employer personnel. Such
Confidential Information includes, but is not limited to, the following types
of information and other information of a similar nature (whether or not
reduced to writing or designated as confidential):
(a) Work product resulting from or related to work or
projects performed or to be performed for Employer or
for clients of Employer, including but not limited to
data bases, draft and other non-public written
documents, the interim and final lines of inquiry,
hypotheses, research and conclusions related thereto
and the methods, processes, procedures, analyses,
techniques and audits used in connection therewith;
(b) Computer software of any type or form in any stage of
actual or anticipated research and development,
including but not limited to programs and program
modules, routines and subroutines, processes,
algorithms, design concepts, design specifications
(design notes, annotations, documentation,
flowcharts, coding sheets, and the like), source
codes, object codes and load modules, programming,
program patches and system designs;
(c) Information relating to Employer's proprietary rights
prior to any public disclosure thereof, including but
not limited to the nature of the proprietary rights,
production data, technical and engineering data, test
data and test results, the status and details of
research and development of products and services,
and information regarding acquiring, protecting,
enforcing and licensing proprietary rights
(including, without limitation, patents, copyrights
and trade secrets);
(d) Internal Employer personnel and financial
information, vendor names and other vendor
information (including vendor characteristics,
services and agreements), purchasing and internal
cost information, internal service and operational
manuals, and the manner and methods of conducting
Employer's business;
(e) Marketing and development plans, price and cost data,
price and fee amounts, pricing and billing policies,
quoting procedures, marketing techniques and methods
of obtaining business, forecasts and forecast
assumptions and volumes, and future plans and
potential strategies of Employer which have been or
are being discussed;
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<PAGE> 6
(f) Names of customers and their representatives,
contracts and their contents and parties, customer
services, and the type, quantity, specifications and
contents of products and services purchased, leased,
licensed or received by customers of Employer;
(g) Information provided to Employer by any actual or
potential customer, government agency, or other third
party (including businesses, consultants and other
entities and individuals); and
(h) Contracts with, or developed by Employer for use
with, agents of Employer, including, without
limitation, the terms and conditions thereof.
3.3 EXCLUSIONS FROM CONFIDENTIAL INFORMATION. "CONFIDENTIAL
INFORMATION" shall not include information publicly known other than as a
result of a disclosure by Employee in breach of Section 3.1, and the general
skills and experience gained during Employee's work with Employer which
Employee could reasonably have been expected to acquire in similar work with
another company. The phrase "PUBLICLY KNOWN" shall mean readily accessible to
the public in a written publication, shall not include information which is
only available by a substantial searching of the published literature or
information the substance of which must be pieced together from a number of
different publications and sources. The burden of proving that information or
skills and experience are not Confidential Information shall be on the party
asserting such exclusion.
3.4 COVENANTS OF EMPLOYEE. As a consequence of Employee's
acquisition or anticipated acquisition of Confidential Information, Employee
will occupy a position of trust and confidence with respect to Employer's
affairs and business. In view of the foregoing and of the consideration to be
provided to Employee, Employee agrees that it is reasonable and necessary that
Employee make the following covenants:
(a) At any time during or after the termination of the Employment
Period, Employee will not disclose Confidential Information to
any person or entity, either inside or outside of Employer,
other than as necessary in carrying out duties on behalf of
Employer, without obtaining Employer's prior written consent
(unless such disclosure is compelled pursuant to court order
or subpoena, and at which time Employee gives notice of such
proceedings to Employer), and Employee will take all
reasonable precautions to prevent inadvertent disclosure of
such Confidential Information. This prohibition against
Employee's disclosure of Confidential Information includes,
but is not limited to, disclosing the fact that any similarity
exists between the Confidential Information and information
independently developed by another person or entity, and
Employee understands that such similarity does not excuse
Employee from abiding by his covenants or other obligations
under this Agreement.
(b) At any time during or after the termination of the Employment
Period, Employee will not use, copy or transfer Confidential
Information other than as necessary in carrying
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<PAGE> 7
out his duties on behalf of Employer, without first obtaining
Employer's prior written consent, and will take all reasonable
precautions to prevent inadvertent use, copying or transfer of
such Confidential Information. This prohibition against
Employee's use, copying, or transfer of Confidential
Information includes, but is not limited to, selling,
licensing or otherwise exploiting, directly or indirectly, any
products or services (including data bases, written documents
and software in any form) which embody or are derived from
Confidential Information, or exercising judgment in performing
analyses based upon knowledge of Confidential Information.
3.5 RETURN OF CONFIDENTIAL MATERIAL. Employee shall turn over to
Employer all originals and copies of materials containing Confidential
Information in the Employee's possession, custody, or control upon request or
upon termination of the Employee's employment with Employer. Employee agrees
to attend a termination interview with the Executive Compensation Committee of
Employer's Board of Directors to confirm turnover of such materials and to
discuss any questions the undersigned may have about his continuing obligations
under this Agreement.
3.6 INVENTIONS. Any and all inventions, products, discoveries,
improvements, copyrightable works, trademarks, servicemarks, ideas, processes,
formulae, methods, designs, techniques or trade secrets (collectively
hereinafter referred to as "INVENTIONS") made, developed, conceived or
resulting from work performed by Employee (alone or in conjunction with others,
during regular hours of work or otherwise) while he is employed by Employer and
which may be directly or indirectly useful in, or related to, the business of
Employer (including, without limitation, research and development activities of
Employer), or which are made using any equipment, facilities, Confidential
Information, materials, labor, money, time or other resources of Employer,
shall be promptly disclosed by Employee to Employer's Board of Directors, shall
be deemed Confidential Information for purposes of this Agreement, and shall be
Employer's exclusive property. Employee shall, upon Employer's request,
execute any documents and perform all such acts and things which are necessary
or advisable in the opinion of Employer to cause issuance of patents to, or
otherwise obtain recorded protection of right to intellectual property for,
Employer with respect to Inventions that are to be Employer's exclusive
property under this Section 3.6, or to transfer to and vest in Employer full
and exclusive right, title and interest in and to such Inventions; provided,
however, that the expense of securing any such protection of right to
Inventions shall be borne by Employer. In addition, Employee shall, at
Employer's expense, assist Employer in any proper manner in enforcing any
Inventions which are to be or become Employer's exclusive property hereunder
against infringement by others. Employee shall keep confidential and will hold
for Employer's sole use and benefit any Invention that is to be Employer's
exclusive property under this Section 3.6 for which full recorded protection of
right has not been or cannot be obtained.
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<PAGE> 8
ARTICLE 4
COVENANT NOT TO COMPETE; NON-INTERFERENCE
4.1 PROHIBITED EMPLOYEE ACTIVITIES. Employee agrees that except in
the ordinary course of his employment hereunder during the Employment Period,
Employee shall not during the Employment Period and for a period of two (2)
years thereafter (all references to Employer shall mean and include its
Affiliates as defined in Section 1.3):
(a) directly or indirectly, engage or invest in, own,
manage, operate, control or participate in the
ownership, management, operation or control of, be
employed by, associated or in any manner connected
with, or render services or advice to, any Competing
Business (as defined below) provided, however, that
the Employee may invest in the securities of any
enterprise (but without otherwise participating in
the activities of such enterprise) if such securities
are listed on any national or regional securities
exchange or have been registered under Section 12(g)
of the Securities Exchange Act of 1934;
(b) directly or indirectly, either as principal, agent,
independent contractor, consultant, director,
officer, employee, employer, advisor (whether paid or
unpaid), stockholder, partner or in any other
individual or representative capacity whatsoever,
either for his own benefit or for the benefit of any
other person or entity, solicit, divert or take away,
any customers or clients of Employer; or
(c) directly or indirectly, either as principal, agent,
independent contractor, consultant, director,
officer, employee, employer, advisor (whether paid or
unpaid), stockholder, partner or in any other
individual or representative capacity whatsoever,
either for his own benefit or for the benefit of any
other person or entity, either (i) hire, attempt to
hire, contact or solicit with respect to hiring any
employee of Employer, (ii) induce or otherwise
counsel, advise or encourage any employee of Employer
to leave the employment of Employer, or (iii) induce
any distributor, representative or agent of Employer
to terminate or modify its relationship with
Employer.
"COMPETING BUSINESS" shall mean any individual, business, firm, company,
partnership joint venture, organization, or other entity whose products or
services compete, in whole or in part, at any time during the Employment Period
with the products or services of Employer or its Affiliates in any domestic or
international market area.
4.2 ESSENTIAL NATURE OF ARTICLE 4. It is acknowledged, understood
and agreed by and between the parties hereto that the covenants made by
Employee in Section 4.1 are (i) an essential part of the acquisition by
Employer of its business from DPSC and that, but for the agreement of the
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<PAGE> 9
Employee to comply with such covenants, Employer would not have acquired its
business, and (ii) essential elements of this Agreement and that, but for the
agreement of the Employee to comply with such covenants, Employer would not
have entered into this Agreement.
4.3 NECESSITY AND REASONABLENESS OF ARTICLE 4. Employee hereby
specifically acknowledges and agrees that:
(a) Employer has expended and will continue to expend
substantial time, money and effort in developing (i)
its business in which the designs, plans, manuals and
specifications are valuable trade secrets, and (ii) a
valuable list of customers and agents, and
information about their technical problems and needs,
purchasing habits, idiosyncracies and internal
purchasing procedures;
(b) Employee will, in the course of his Employment, be
personally entrusted with and exposed to the trade
secrets of Employer;
(c) Employer, during the term of this Agreement and after
its termination, will be engaged in its highly
competitive business in which many firms, including
Employer, compete;
(d) A substantial portion of Employer's business is
conducted outside the United States;
(e) Employer, pursuant to acquiring certain patents,
technology and associated trade secrets and know-how,
will further develop its worldwide business;
(f) Employee could, after having access to Employer's
financial records, contracts, patents, technology and
associated trade secrets and know-how, perform his
obligations under this Agreement, and after receiving
further training by and experience with Employer, and
after reviewing Employer's trade secrets, become a
competitor;
(g) Employer will suffer great loss and irreparable harm
if Employee terminates his employment and enters
directly or indirectly, into competition with
Employer;
(h) the temporal and other restrictions contained in this
Article 4 are in all respects reasonable and
necessary to protect the business goodwill, trade
secrets, prospects and other business interests of
Employer;
(i) the enforcement of this Agreement in general, and of
this Article 4 in particular, will not work an undue
or unfair hardship on Employee or otherwise be
oppressive to him, it being specifically acknowledged
and
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<PAGE> 10
agreed by Employee that he has activities and other
business interests and opportunities which will
provide him adequate means of support if the
provisions of this Article 4 are enforced after
termination of his employment with Employer; and
(j) the enforcement of this Agreement in general, and of
this Article 4 in particular, will neither deprive
the public of needed goods or services nor otherwise
be injurious to the public.
4.4 JUDICIAL MODIFICATION. Employee agrees that if a court of
competent jurisdiction determines that the length of time or any other
restriction, or portion thereof, set forth in this Article 4 is overly
restrictive and unenforceable, the court may reduce or modify such restrictions
to those which it deems reasonable and enforceable under the circumstances, and
as so reduced or modified, the parties hereto agree that the restrictions of
this Article 4 shall remain in full force and effect. Employee further agrees
that if a court of competent jurisdiction determines that any provision of this
Article 4 is invalid or against public policy, the remaining provisions of this
Article 4 and the remainder of this Agreement shall not be affected thereby,
and shall remain in full force and effect.
4.5 SURVIVAL OF COVENANTS. The covenants and agreements of Employee
set forth in this Article 4 are of a continuing nature and shall survive the
expiration, termination or cancellation of the remainder of this Agreement
regardless of the reason for such therefor and shall survive the termination,
if any, of the Employee's employment.
ARTICLE 5
TERMINATION
5.1 EMPLOYER TERMINATION
(a) Notwithstanding any other provision of this
Agreement, at any time during the Employment Period,
including, without limitation, the Initial Term, this
Agreement and Employee's employment hereunder shall
terminate upon his death, and Employer shall have the
right, in its sole and absolute discretion, to
terminate this Agreement and Employee's employment
hereunder at any time by giving him written notice of
such termination (i) for "Cause" (as defined below),
(ii) if Employee shall fail to qualify for the
fidelity bond described in Section 1.3 within sixty
(60) days from the date of the Employer's written
request thereunder, or (iii) if Employee shall suffer
a Disability (as defined below).
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(b) "CAUSE" shall mean any of the following events:
(1) Employee's conviction or the entry of a plea
of guilty or nolo contendere or equivalent
plea in a court of competent jurisdiction of
any crime or offense involving moral
turpitude or any felony;
(2) Employee's commission of an act of fraud upon
Employer or any of its Affiliates;
(3) Employee's willful misappropriation of funds
or property of Employer or any of its
Affiliates;
(4) Employee's knowing engagement, without prior
approval by resolution of Employer's Board of
Directors, in any direct conflict of interest
with Employer or any of its Affiliates, in
any activity which would constitute a breach
of Employee's representations, covenants,
agreements and obligations under Articles 3
and 4 of this Agreement, or which would
otherwise result in substantial injury to
Employer's business or financial condition;
(5) Employee's refusal to perform his duties
under Article 1 of this Agreement; or
(6) Employee's habitual use of alcohol or drugs
which, in the reasonable opinion of Employer,
substantially impairs the performance of
Employee's duties.
(c) "DISABILITY" shall mean any mental or physical
illness, impairment or condition which, in the sole
opinion of Employer: (i) is of a nature that cannot
reasonably be controlled by Employee, (ii)
significantly inhibits or impedes Employee's ability
to perform the services required under this
Agreement, and (iii) is likely to be either long-
lasting in duration or recurring from time to time.
5.2 TERMINATION BY EITHER PARTY. Subject to the provisions of
Section 5.3(a), Employer may at any time, for any reason, with or without
Cause, terminate this Agreement and Employee's employment hereunder. After
expiration of the Initial Term, Employee may terminate this Agreement and his
employment hereunder without regard to any reason for such termination. Each
of Employer's and Employee's option to terminate this Agreement pursuant to
this Section 5.2 shall be exercised by delivery of a written notice to Employee
or Employer, as applicable, specifying the effective date of such termination
which in no event shall be sooner than expiration of thirty (30) calendar days
following delivery of such written notice.
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<PAGE> 12
5.3 EFFECT OF TERMINATION.
(a) If Employer terminates this Agreement for any reason
other than pursuant to the terms of Section 5.1, then
Employer shall pay to Employee an amount equal to the
greater of (a) his total Base Salary for the
remainder of the Employment Period, or (b) which
shall be the greater of (i)three months of his Base
Salary or (ii) one month of Base Salary for each full
year of service completed with Employer as of the
date of termination. Employer may, in its sole and
absolute discretion, make such payment in the manner
and on the timetable specified in Section 2.1, or in
one lump sum on the effective date of termination.
(b) Subject to the provisions of Section 5.3(a), upon
termination of this Agreement and Employee's
employment hereunder by either Employer or Employee,
Employee shall have no right to receive any
compensation or benefits for any period subsequent to
the effective date of such termination, or for any
period prior to such date which have not been earned
or vested as of such date.
(c) Employer's right of termination shall be in addition
to and shall not affect Employee's rights and
remedies under Articles 3 and 4, and Section 6.1 of
this Agreement, and such rights and remedies shall
survive termination of Employee's employment
hereunder.
ARTICLE 6
MISCELLANEOUS
6.1 INJUNCTIVE RELIEF. Because of the unique nature of the
Confidential Information, Employee acknowledges, understands and agrees that
Employer will suffer immediate and irreparable harm if Employee fails to comply
with any of his obligations under Articles 3 or 4 of this Agreement, and that
monetary damages will be inadequate to compensate Employer for such breach.
Accordingly, Employee agrees that Employer shall, in addition to any other
remedies available to it at law or in equity, be entitled to temporary,
preliminary, and permanent injunctive relief to enforce the terms of Articles 3
and 4 without the necessity of proving inadequacy of legal remedies or
irreparable harm.
6.2 INDEMNIFICATION. Employer shall indemnify Employee in the same
manner and to the same extent that Employer is obligated to indemnify its
directors pursuant to Employer's Certificate of Incorporation and Bylaws, as
each may be amended or restated from time to time.
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<PAGE> 13
6.3 ACTION BY AND CONSENT OF EMPLOYER. All rights and remedies of
Employer hereunder shall be exercised by the Employer solely by and through the
Compensation Committee of Employer's Board of Directors.
6.4 NOTICES. Any notice, instruction, authorization, request or
demand required hereunder shall be in writing, and shall be delivered either by
personal delivery, by telegram, telex, telecopy or similar facsimile means, by
certified or registered mail, return receipt requested, or by courier or
delivery service, addressed to the parties hereto at the principal offices of
Employer at the address indicated beneath its signature on the execution page
of this Agreement, and also to Employee at his home address indicated beneath
his signature on the execution page of this Agreement, or at such other address
and number as a party shall have previously designated by written notice given
to the other party in the manner hereinabove set forth. Notices shall be
deemed given when received, if sent by facsimile means (confirmation of such
receipt by confirmed facsimile transmission being deemed receipt of
communications sent by facsimile means); and when delivered and receipted for
(or upon the date of attempted delivery where delivery is refused), if
hand-delivered, sent by express courier or delivery service, or sent by
certified or registered mail, return receipt requested.
6.5 AMENDMENT AND WAIVER. This Agreement may be amended, modified or
superseded only by written instrument executed by all parties hereto. Any
waiver of the terms, provisions, covenants, representations, warranties, or
conditions hereof shall be made only by a written instrument executed and
delivered by the party waiving compliance. Any waiver granted by Employer
shall be effective only if executed and delivered by a duly authorized
executive officer of Employer other than Employee. The failure of any party at
any time or times to require performance of any provisions hereof, shall in no
manner effect the right to enforce the same. No waiver by any party of any
condition or provision, or the breach of any term, provision, representation,
or warranty contained in this Agreement in one or more instances shall be
deemed to be or construed as a further or continuing waiver of any such
condition or breach or a waiver of any other condition or the breach of any
other term, provision, covenant, representation, or warranty.
6.6 SUCCESSORS AND ASSIGNS. All of the terms, provisions, covenants,
representations, warranties, and conditions of this Agreement shall bind, be
enforceable by, and inure to the benefit of, the parties hereto, but this
Agreement and the rights and obligations hereunder shall not be assignable or
delegable by any party; provided, however, that this Agreement and all of
Employer's rights and obligations hereunder may be assigned or delegated by it,
in whole, but not in part, to, and shall be binding upon and inure to the
benefit of, any of its successors or assigns, but such assignment or delegation
by Employer shall not relieve it of any of its obligations hereunder.
6.7 DEFINITIONS, GENDER AND CERTAIN REFERENCES. As used in this
Agreement, each parenthetically or quoted capitalized term in the introduction,
recitals and other Sections of this Agreement shall have the meaning so
ascribed to it. Whenever the context requires, the gender of all words used
herein shall include the masculine, feminine and neuter, and the number of all
words shall include the singular and plural. References to Articles or
Sections shall be to Articles or Sections of this Agreement unless otherwise
specified. The headings and captions used in this
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<PAGE> 14
Agreement are solely for convenient reference and shall not affect the meaning
or interpretation of any article, section or paragraph herein, or this
Agreement. The terms "hereof," "herein" or "hereunder" shall refer to this
Agreement as a whole and not to any particular Section.
6.8 GOVERNING LAW AND SEVERABILITY. This Agreement has been executed
and is performable in Montgomery County, Texas. The validity, interpretation,
construction, and performance of this Agreement shall be governed by the
internal law, and not the law of conflicts, of the State of Texas, except to
the extent that the General Corporation Law of the State of Delaware or federal
law is explicitly made applicable by Section 1.5. Each party hereto hereby
acknowledges and agrees that it has had the opportunity to consult with its own
legal counsel in connection with the negotiation of this Agreement, and that it
has bargaining power equal to that of the other party hereto in connection with
the negotiation, execution and delivery of this Agreement. Accordingly, the
parties hereto agree that the rule of contract construction that an agreement
shall be construed against the drafter shall have no application in the
construction or interpretation of this Agreement. The invalidity of any
provision of this Agreement shall not affect any other provision of this
Agreement, which shall remain in full force and effect, nor shall the
invalidity of a portion of any provision of this Agreement affect the balance
of such provision.
6.9 EXPENSES. Each party hereto shall pay all of its respective fees
and expenses of attorneys, accountants and other persons employed by it in
connection with the resolution of any dispute between the parties hereto
arising out of or relating to this Agreement, except for any indemnification
obligations of Employer pursuant to Section 6.2.
6.10 ENTIRE AGREEMENT. No agreements or representations, oral or
otherwise, express or implied, have been made by any party hereto with respect
to the subject matter hereof that are not set forth expressly in this
Agreement. This Agreement supersedes and cancels any prior agreement,
arrangement or understanding entered into between Employer and Employee
relating to the subject matter hereof, except any agreement entered into
pursuant to Employer's 1996 Key Employee Stock Plan as contemplated by Section
2.2 of this Agreement.
6.11 COUNTERPARTS. The parties may execute this Agreement in any
number of counterparts, each of which is an original, but all of which together
constitute one and the same instrument.
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<PAGE> 15
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed on the date first above written.
EMPLOYER:
DAILEY PETROLEUM SERVICES CORP.
By: __________________________________
Name: __________________________________
Title: __________________________________
Address: One Lawrence Center
P. O. Box 1863
2507 North Frazier
Conroe, Texas 77305
EMPLOYEE:
___________________________________________
*Name:
*Address:
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<PAGE> 16
EMPLOYER ACKNOWLEDGMENT
STATE OF TEXAS )
)
COUNTY OF MONTGOMERY )
Before me, the undersigned authority, on this date personally appeared
__________________, ____________, of Dailey Petroleum Services Corp., a
Delaware corporation, known to me to be the person whose name is subscribed to
the foregoing instrument, and acknowledged to me that he executed the same for
the purposes and consideration therein expressed, in the capacity stated, and
as the act and deed of said corporation.
Given under my hand and seal this _____ day of _______________, 1996.
______________________________________
Notary Public in and for
The State of Texas
My Commission Expires: _______________
EMPLOYEE ACKNOWLEDGMENT
STATE OF TEXAS )
)
COUNTY OF MONTGOMERY )
Before me, the undersigned authority, on this date personally appeared
*___________________________, known to me to be the person whose name is
subscribed to the foregoing instrument, and acknowledged to me that he executed
the same for the purposes and consideration therein expressed.
Given under my hand and seal this ___ day of ____________, 1996.
______________________________________
Notary Public in and for
The State of Texas
My Commission Expires:________________
16
<PAGE> 1
EXHIBIT 10.12
OFFICER INDEMNIFICATION AGREEMENT
This Officer Indemnification Agreement is made and entered into on
this ____ day of _______________, 1996, by and between Dailey Petroleum
Services Corp., a Delaware corporation ("Dailey" or the "Company"), and
________________________, as an officer of Dailey (the "Officer");
WHEREAS, the Officer is or may from time to time serve as a member of
the Board of Directors and in such capacity is performing or will perform a
valuable service for the Company;
WHEREAS, Section 145 of the General Corporation Law of the State of
Delaware empowers a corporation organized in Delaware to indemnify persons who
serve as directors, officers, employees or agents of the corporation or persons
who serve at the request of the corporation as directors, officers, employees
or agents of another corporation, partnership, joint venture, employee benefit
plan, trust or other enterprise;
WHEREAS, the Company desires to have the Officer serve or continue to
serve as an officer of the Company, free from undue concern for unpredictable,
inappropriate or unreasonable claims for damages by reason of his being an
officer of the Company or by reason of his decisions or actions on its behalf;
and
WHEREAS, the Officer is willing to serve, or to continue to serve, or
to take on additional service for the Company on the condition that he be
indemnified as provided for in this Indemnification Agreement;
NOW, THEREFORE, in consideration of the premises and in order to
induce the Officer to continue to serve Dailey and its stockholders, the
parties hereto agree as follows:
1. Indemnification.
(a) Dailey shall indemnify the Officer if he is or was 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 Dailey) by reason of the fact that the Officer is or was a
director, officer, employee, or agent of Dailey or its subsidiaries,
or is or was serving at the request of Dailey as a director, officer,
employee, or agent of another corporation, partnership, joint venture,
trust, or other enterprise, against all expenses (including attorneys'
fees), judgments, fines, and amounts paid in settlement actually and
reasonably incurred by the Officer in connection with such action,
suit or proceeding if the Officer acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests
of Dailey, 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
<PAGE> 2
that the Officer 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
Dailey, and with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
(b) Dailey shall indemnify the Officer if he is or was 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 Dailey to procure a
judgment in its favor by reason of the fact that the Officer is or was
a director, officer, employee or agent of Dailey or its subsidiaries,
or is or was serving at the request of Dailey as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against all expenses (including attorneys'
fees) actually and reasonably incurred by the Officer in connection
with the defense or settlement of such action or suit if the Officer
acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of Dailey and except that no
indemnification shall be made in respect of any claim, issue or matter
as to which the Officer shall have been adjudged to be liable to
Dailey unless and only to the extent that the Delaware Court of
Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of
liability, but in view of all the circumstances of the case, the
Officer is fairly and reasonably entitled to indemnity for such
expenses as the Delaware Court of Chancery or such other court shall
deem proper.
(c) Dailey shall indemnify the Officer to the extent that
the Officer has been successful on the merits or otherwise in the
defense of any action, suit or proceeding referred to in paragraphs
(a) and (b) of this Section 1, or in the defense of any claim, issue
or matter therein, against all expenses (including attorneys' fees)
actually and reasonably incurred by the Officer in connection
therewith. For purposes of this Section 1(c), the phrase "successful
on the merits or otherwise" shall include, but not be limited to, any
favorable judgment, decision, declaration, finding or ruling (whether
based upon the merits of the case or on a procedural matter such as
the expiration of the statute of limitations, lack of standing or
latches) in favor of the Officer in the defense of any action, suit or
proceeding referred to in paragraphs (a) and (b) of this Section 1 or
in the defense of any claim, issue or matter therein, and shall also
include any settlement of such action, suit or proceeding, if in the
opinion of counsel to Dailey such settlement is in the best interests
of Dailey.
(d) Any indemnification of the Officer under paragraphs
(a) and (b) of this Section 1 (unless ordered by a court) shall be
made by Dailey only as authorized in the specific case upon a
determination that indemnification of the Officer is proper under the
circumstances because he has met the applicable standard of conduct or
circumstances set forth in paragraphs (a) or (b) of this Section 1.
Such determination shall be made by an independent legal counsel
("Special Counsel") retained by Dailey for the purpose of making such
determination. The Special Counsel shall be retained by Dailey within
ten days
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<PAGE> 3
from the receipt by Dailey of a written notice of claim by the Officer
for indemnification and must be reasonably satisfactory to the Officer
requesting indemnification. Dailey shall be solely responsible for
all fees and expenses of the Special Counsel.
(e) Expenses (including attorney's fees) incurred by the
Officer in defending a civil or criminal action, suit or proceeding
referred to in paragraphs (a) and (b) of this Section 1 shall be paid
by Dailey in advance of the final disposition of such action, suit, or
proceeding in the manner provided for in paragraph (d) of this Section
1; provided, however, that as a condition to such payment the Officer
shall undertake to repay such amount unless it shall ultimately be
determined that he is entitled to be indemnified by Dailey as
authorized by this Indemnification Agreement.
2. No Change In Bylaw Indemnification. Dailey shall cause to be
implemented and continued in effect for the benefit of the Officer the
indemnification provided for its officers under Section ___ of the restated
Bylaws of Dailey, as filed with the Securities and Exchange Commission on
_________________, 1996, with such changes as may be necessary to comply with
the Delaware General Corporation Law. In the event any Officer shall request
any indemnification from Dailey pursuant to such Bylaws, Dailey shall indemnify
the Officer in the manner set forth in and to the fullest extent permitted by
such Bylaws and the Delaware General Corporation Law.
3. Duration of Agreement; Subrogation.
(a) This Indemnification Agreement shall continue until
and terminate upon the later of: (i) ten years after the date that the
Officer shall have ceased to serve as an officer of the Company; or
(ii) the final termination of any action, suit, arbitration,
alternative dispute resolution mechanism, investigation,
administrative hearing or any other proceeding arising prior to the
end of such ten year period, whether civil, criminal, administrative
or investigative, that is pending, threatened or completed, or that
arises on or after the date of this Indemnification Agreement
(regardless of (a) when the Officer's act or failure to act occurred
or (b) whether such proceeding is internal or external to the Company)
in respect of which the Officer is granted rights of indemnification
or advancement of expenses hereunder. This Indemnification Agreement
shall be binding upon the Company and its successors and assigns and
shall inure to the benefit of the Officer and his heirs, executors and
administrators.
(b) In the event of any payment under this
Indemnification Agreement, the Company shall be subrogated to the
extent of such payment to all of the right of recovery of the Officer,
who shall execute all papers required and take all action necessary to
secure such rights, including execution of such documents as are
necessary to enable the Company to bring suit to enforce such rights.
(c) The Company shall not be liable under this
Indemnification Agreement to make any payment of amounts otherwise
indemnifiable hereunder
3
<PAGE> 4
if and to the extent that the Officer has otherwise actually received
such payment under any insurance policy, contract, agreement or
otherwise.
4. Successors; Binding Agreement. Dailey shall require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business or assets of Dailey, by
agreement in form and substance satisfactory to the Officer, to assume and
expressly agree to perform this Indemnification Agreement in the same manner
and to the same extent that Dailey would be required to perform it if no such
succession had taken place. Failure of Dailey to obtain such agreement prior
to effectiveness of any succession shall be a breach of this Indemnification
Agreement and shall entitle the Officer to monetary damages from Dailey in an
amount necessary to provide the Officer with the protections he would be
entitled to hereunder. As used in this Indemnification Agreement, "Dailey"
includes any successor to the business or assets of Dailey as defined above
that executes and delivers the agreement provided for in this Paragraph 5 or
that otherwise becomes bound by all the terms and provisions of this
Indemnification Agreement by operation of law.
5. Notice. For the purposes of this Indemnification Agreement,
notices and all other communications required by this Indemnification Agreement
shall be in writing and shall be deemed to have been duly given when delivered
or mailed, postage prepaid, to the respective addresses set forth beneath the
signatures attached to this Indemnification Agreement (provided that all
notices to Dailey shall be directed to the attention of the President of Dailey
with a copy to the Senior Vice President and General Counsel of Dailey) or to
such other address or addresses as either party hereto may have furnished to
the other.
6. Indemnity Not Exclusive. This Indemnification Agreement shall
be in addition to any rights which the Officer may be entitled to under any law
or other agreement, bylaw provision, vote of stockholders or disinterested
directors or otherwise, and shall enure to the benefit of the heirs, executors
and administrators of the Officer.
7. Choice of Law. The validity, interpretation, construction and
performance of this Indemnification Agreement shall be governed by the laws of
the State of Delaware, without regard to the principles of conflicts of law.
8. Validity. If any provision of this Indemnification Agreement
is found by the Delaware Court of Chancery or other court of competent
jurisdiction to be contrary to public policy or law, shall be construed to be
consistent with such public policy or law to the extent possible, and the
invalidity or unenforceability of any provision of this Indemnification
Agreement shall not affect the validity and enforceability of any other
provision of this Indemnification Agreement, which shall remain in full force
and effect.
9. Counterparts. This Indemnification Agreement may be executed
in several counterparts, each of which shall be deemed to be an original but
all of which together shall constitute one and the same instrument.
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<PAGE> 5
IN WITNESS WHEREOF, each of the parties hereto has executed this
Indemnification Agreement as of the date and year first set forth above.
Dailey Petroleum Services Corp.
By:____________________________________
Name:__________________________________
Title:_________________________________
Address:
2507 North Frazier
Conroe, Texas 77305
Officer:
________________________________________
Name:___________________________________
Address:
________________________________________
________________________________________
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<PAGE> 1
EXHIBIT 23.1
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated June 27, 1996, in Amendment No. 4 to the
Registration Statement (Form S-1 No. 333-04593) and related Prospectus of Dailey
Petroleum Services Corp., a Delaware corporation, (as further discussed in Note
1 to the consolidated financial statements included elsewhere in this
Registration Statement) for the registration of 4,000,000 shares of its Class A
Common Stock.
ERNST & YOUNG LLP
Houston, Texas
August 6, 1996
